Abstract
This is the text of a speech delivered at a Conference on International Financing organized by the National Industrial Conference Board, New York, October 14, 1964.
A LARGE international money market in short-term dollars has developed outside the United States within the past six or seven years. This market is called the Euro-dollar market because the transactions in it concern U.S. dollars and because these transactions are negotiated and completed outside the United States. These transactions are made possible because U.S. and other corporations and individuals deposit dollars with banks, outside the United States, which have found profitable uses for them. Most of these dollars are deposited with banks in Canada and London, but a substantial amount is deposited with banks in continental European centers. These dollars are employed by the original bank depositary or, through a process of redepositing, by other banks. The original dollar deposits represent funds owned by monetary authorities, business enterprises, and individuals in many countries. Correspondingly, the final users of dollar funds may be commercial banks, business enterprises, and individuals in many countries and monetary authorities in a few countries.1
It may be estimated with some assurance that dollar deposits come from at least 25 countries and that the final users of dollars reside in at least 35 countries.2 About 400 commercial and private banks are in the Euro-dollar market. Many of these banks are in the market all the time, and they may be on one side or the other, depending upon profits that may be earned from interest rate differentials and arbitrage possibilities. Other banks are in the market irregularly in order to deal with the financing needs or the savings accumulations of particular clients. The Euro-dollar market knows no politics. The two large communist banks in Western Europe—the Moscow Narodny Bank in London and the Banque Commerciale de l’Europe du Nord in Paris—are important components of the market, sometimes to place deposits with other banks (lend) but more often to accept them (borrow). The state banks of most of the countries behind the iron curtain are in the market, and many of these regularly circularize commercial banks in the West in order to obtain deposit funds. Brokers play an important specialized role as intermediaries among banks, and two of them—one in Paris and the other in Lausanne—with their branches, do a large international business.3 The market in Euro-dollars is a wide and complicated one spread over six continents and bound together by a network of cable, telex, and telephone communication. The paper work in the market tends to confirm rather than to initiate transactions. The financial standing of the banks in the market is such that transactions are based on names and do not involve collateral and guarantees.
I
There are three major uses for Euro-dollars.
First, a large part of these dollars is used to finance external commercial transactions, i.e., exports and imports. Indeed, many countries in Europe and elsewhere try to limit Euro-dollar activities to those business enterprises that are engaged in foreign trade. These limitations operate through systems of capital controls, or exchange controls, or moral suasion by central banks. Even European countries with convertible currencies may restrict or prohibit business enterprises not engaged in foreign trade (e.g., hotels and department stores) from borrowing Euro-dollars, even though borrowing dollars may be cheaper than borrowing local currency. This is, for example, the situation in France. In the last two or three years, with the expansion of issues of long-term securities denominated in dollars in European capital markets, underwriters and syndicate members have used Euro-dollars to finance their inventory positions. Italy made a large and noteworthy use of the Euro-dollar market in 1962–63 when it borrowed more than $750 million from abroad; about half of this sum came from the Euro-dollar market. These funds were used to finance external transactions and to make possible a continuing increase in domestic liquidity, which, in effect, reduced the drain upon official reserves. Acting under instructions from the Bank of Italy, the commercial banks began to reduce their net external liabilities in the fourth quarter of 1963 and have since gone a long way toward reversing their position.
Second, some Euro-dollar funds are used to finance commercial loans and other domestic transactions, either in the form of dollars or in local currency purchased with dollars. There has been a large amount of such transactions in Germany, Italy, and Japan, and smaller amounts in many other countries, including Switzerland. In the United Kingdom, a substantial amount of Euro-dollars has been swapped into sterling and then placed with local authorities and installment finance companies. Belgium has, directly or indirectly, financed parts of some recent budget deficits with the local currency proceeds of Euro-dollar borrowings.
The third aspect of the Euro-dollar market is in some respects the most interesting one. The Euro-dollar deposit is a new and international money market instrument that makes it possible for hundreds of commercial banks to deal with each other continually in order to adjust their own liquidity positions. Each bank makes its own adjustments for this purpose by dealing in funds with different stated and implicit maturities, different interest rates, and different counterparties.
On an international scale, Euro-dollar deposits used in this way are analogous to the many kinds of domestic funds in the U.S. money market: federal funds,4 short-term government securities, certificates of deposit,5 and that recent newcomer, short-term unsecured promissory notes issued by a number of leading U.S. banks.6 European commercial banks can invest in Euro-dollar deposits with a broad range of maturities. This facility is the more important because few countries have short-term money markets that are as liquid, and investment media that are as broad, as those in the United States. For one reason or another, some industrial countries have only a small volume of money market instruments that can be traded, while others have domestic money market instruments that are available only in a controlled market, or at a regulated interest rate. It is, therefore, understandable that commercial and private banks in Europe should welcome an uncontrolled, flexible, and international money market instrument to facilitate their own operations. Moreover, Euro-dollar deposits help commercial and private banks to obtain funds outside the channels of their regular customers.
The role of Euro-dollars as a money market instrument has some important implications. A substantial part of the Euro-dollar pool circulates and recirculates endlessly among banks. To this extent, any discussion about using short-term Euro-dollar funds to finance long-term investments in plant, equipment, or inventory is beside the point. Furthermore, attempts to find the specific end-uses of particular Euro-dollar deposits are often quite vain. Euro-dollar funds and other banking funds are increasingly commingled. On the one hand, the sources and uses of Euro-dollars affect what the bank does with the rest of its funds; on the other hand, the funds that the bank has, and what it does with these funds, affect its operations in Euro-dollars. As banks have acquired more experience with Euro-dollar operations, they have modified their views on putting lending and borrowing operations in Euro-dollars in a separate compartment and treating them as an adjunct to their exchange operations. More and more banks look on their dealings in Euro-dollars as an operation run by senior officers to increase the profits of the bank as a whole in both the short run and the long run.
This has been the attitude of U.S. banks whose foreign branches have been and are major operators in the Euro-dollar market. The amount of deposits accepted by foreign branches, and the interest rates paid on them, are determined by or cleared with the head offices. A large part of the Euro-dollar deposits obtained by foreign branches of U.S. banks is made available to their head offices and commingled with other funds, although the proportion so made available has been decreasing for some time. Three or four years ago, most of these funds, perhaps 75 per cent or more, were handled in this way. But this percentage has fallen markedly with the overseas expansion of U.S. banking and industry. Foreign branches of U.S. banks have become more accustomed to making loans to foreign corporations as well as to foreign subsidiaries and branches of U.S. corporations. Managers of foreign branches of U.S. banks wish to show maximum profits for their branches by lending their own deposits—rather than the much lower profits that would accrue to them from putting Euro-dollars at the disposal of their head offices. In some cases, the percentage of Euro-dollar funds put at the disposal of head offices is now apparently well below 50 per cent.7
II
Virtually all commentators on the Euro-dollar market have warned of the possibilities of abusing it. And it is true that the facilities offered by that market may be abused in a number of ways. But it is also true that similar abuses are not unknown in commercial banking that does not make use of Euro-dollars.
Individual banks, or all the banks collectively, in the Euro-dollar market may obtain funds on short term and lend them on very much longer term. Though some of this is inherent in banking operations, too much of a spread between borrowing and lending maturities will impair banking liquidity. Also, the rapid expansion of Euro-dollar facilities, and the growing international competition among banks, can easily lead to undue reliance on the quality of “names.” Such reliance, when combined with a premium on quick decisions, can result in a relaxation of banking requirements for good and up-to-date information on assets and liabilities, profits, and the total of outstanding borrowings and contingent obligations. Losses within the past two years in several well-publicized cases have underlined the risks of such relaxation.
The rapid development of the Euro-dollar market, the facilities offered by a new money market instrument, and the increased, although gentlemanly, competition among banks on both the domestic and international scene, have been accompanied by a certain amount of exuberance. The recent losses in Euro-dollars appear to have curbed some of this exuberance and thus strengthened the market without interfering with its growth.
The international activities of banks have developed very rapidly. Many banks and their investment subsidiaries have been anxious to get in on the ground floor. They have tried to develop, even at some cost, new customer relationships that would be profitable in the long run. They have considered certain low-profit business as institutional advertising. It has taken somewhat longer, perhaps, to realize that every country differs from every other: in the number of sets of accounting records that it regards as good business; in the amount of disclosure that it regards as good for boards of directors, stockholders, and stock exchanges; in accounting standards and practices; and in views of tax morality.
Such a simple problem as determining how much a European corporation has borrowed, and from whom, may be very difficult when corporate structures are complicated, and when borrowings are made in many countries and from many banks that have traditionally refused to disclose anything to each other or to third parties. It is understandable, therefore, that there have been voices asking for better advisory and rating services on an international scale, and for more uniform accounting standards and disclosure along the lines of those administered by the U.S. Securities and Exchange Commission and encouraged by stock exchanges and accounting firms. There have recently been discussions in Europe advocating more uniform accounting practices, better reporting, and a European credit agency which would collect and consolidate data on corporate borrowings—what in Europe is called a centralization of risk service. For a number of years, the Bank of France has required banks in France to report all loans over stated minima to business enterprises; the Bank tabulates these reports to obtain and make available data on consolidated borrowings of various types. Italy has recently announced the formation of a similar official service. The United Kingdom has private facilities of this type. But most other industrial countries have neither one nor the other.
European and U.S. bankers would undoubtedly welcome a centralized system of reporting on the outstanding commercial credits of European corporations. But it will probably take a good deal of time to establish this; and M. Julien Koszul, Director-General of Foreign Services of the Bank of France, may well be right in thinking that a system of European scope will depend upon the development, first, by each major country of its own reporting system.8 If commercial banks in Europe will not collaborate voluntarily to report their larger loans to an independent private agency, so that they can all benefit from consolidated totals, information on outstanding loans and credits can then be collected only by official national agencies acting with mandatory powers.
The point of this discussion about credit reporting and accounting standards is that some of the possibilities of abuse in the Euro-dollar market are also inherent in the rapid internationalization of commercial banking. Many of the same banks, and many of the same banking officers, operate in both areas. Improvements made for Euro-dollar operations will flow over to more customary banking operations, and vice versa. In the process, the whole level of international banking will be raised.
A few words should be said about the supposed lack of liquidity and stability that may come in the Euro-dollar market from borrowing short and lending long, but with the caution that some of these words may apply to commercial banking generally.
In the first place, there are no over-all or consolidated data showing the distribution by maturity of Euro-dollar deposits and loans. Some banks may have developed statistics covering their own operations; and Japan collects data on the distribution by maturity of Euro-dollar deposits accepted by Japanese banks in order to improve its understanding of the balance of payments and the significance of its international reserves.
In the second place, there would be great difficulties in interpreting data on the maturity distribution of Euro-dollar deposits and loans, even if they were available. Things very often are not precisely what they seem. Euro-dollar deposits may be accepted as short term by a bank, and may so appear on its books, even though both the depositor and the bank know that the money will remain on deposit for substantial periods of time, perhaps for several years. The depositor may prefer to show his deposits as short term to comply with legal requirements or customary practice. For example, deposits by monetary authorities and insurance companies are often made with this understanding. When this is true, the depositor will, quite reasonably, expect to earn something more than the short-term rate, and actual interest payments may be renegotiated at intervals of, say, three or six months. In transactions involving several corporations in the same business family, the maturity of loans to one may be tied to the maturity of the deposits of others. In other cases, loans may be subject to termination, and longer-term loans may be subject to interest rate adjustments that may put pressure upon the borrower. The real or effective distribution by maturity of Euro-dollar deposits and loans may thus differ significantly from the distribution calculated from the banks’ records. Neither should it be overlooked that when banks accept risks of this kind, they expect to be compensated for them by charging higher rates.
In the third place, many of the world’s largest and best regarded banks are in the Euro-dollar market. Not one of these banks thinks that it is taking any undue or uncompensated risks, though it may be willing to concede or even to affirm that its competitors are doing so. Nothing in the Euro-dollar market is equivalent to the odd-lot investor buying five shares of stock. The chips in this game are high, and transactions run to six or seven figures. Everybody who operates in the market knows the risks, as well as the potential profits, of arbitrage of loans and deposits of different maturities. No one wishes to be caught in a squeeze that is too tight or in an increase in interest rates that is too costly. Hence, behind the network of Euro-dollar deposits and redeposits, behind the network of lendings and relendings, there is a network of stand-by agreements, lines of credit, and banking guarantees. Business enterprises may have these second-line defenses with banks, and banks may have them with other banks. Exposure in the Euro-dollar market is thus both direct and indirect. Some commercial banks and central banks may have a larger stake in the market than they suspect.
Despite all these qualifications, there is no doubt that some aspects of the Euro-dollar market can be improved. The fact that individual risks may be smaller and more widespread than appears at first glance does not reduce the total risks of everybody. Indeed, to the extent that the network of reinsurance, in the form of lines of credit and stand-bys, is largely concentrated in the United States, the exposure of this country may be larger than that based only on the Euro-dollar deposits and loans of the U.S. banks that operate directly in the market. Hence steps to improve the information available in and about the Euro-dollar market are more than desirable; they are necessary.
III
Interest rates on Euro-dollars are determined by very broad competitive forces. These forces include interest rates on loans and deposits in the U.S. market; interest rates on loans and deposits in such major currencies as sterling, deutsche mark, and Swiss francs; and spot and forward exchange rates of each of these currencies relative to the dollar. Since there is extensive arbitrage by commercial banks among all the major currencies, the covered interest rate paid on, say, Euro-sterling deposits is, except in very unusual circumstances, approximately equal to the interest rate paid on Euro-dollar deposits. Thus, in 1962, interest rates on Euro-dollar deposits averaged 3.77 per cent, while the cost of dollars obtained through swapping sterling deposits into dollars was equal to 3.83 per cent. This cost of dollars obtained indirectly was equal to an interest rate of 4.95 per cent on Euro-sterling deposits less the forward discount of sterling, with respect to the dollar, of 1.12 per cent. In the first eight months of 1964, interest on 90-day Euro-dollar deposits averaged 4.22 per cent, while the cost of dollars obtained via Euro-sterling was 4.15 per cent: 4.81 per cent on Euro-sterling deposits minus 0.66 per cent forward discount on sterling (Table 1).
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on Other Investments, 1961-August 1964
(In per cent per annum)
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin. Data for January and February 1961 were estimated independently.
Rate in last week of month; from Federal Reserve Bulletin.
Rate on new issues, last week of month; from Federal Reserve Bulletin.
Tenders, last week of month; from Deutsche Bundesbank, Monthly Report.
From Bank of England, Quarterly Bulletin.
Based on data from International Monetary Fund, International Financial Statistics. Computed from end-of-month rates (average of buying and selling) for spot and 90-day forward exchange, the resulting percentage being expressed as an annual rate.
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin.
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on Other Investments, 1961-August 1964
(In per cent per annum)
| End of Period |
Euro- Dollars1 (1) |
U.S. Bankers’ Acceptances2 (2) |
U.S. Treasury Bills3 (3) |
U.K. Treasury Bills4 (4) |
U.K. Local Authorities5 (5) |
Sterling Forward Discount6 (6) |
Euro- Sterling7 (7) |
||
|---|---|---|---|---|---|---|---|---|---|
| 1961 | |||||||||
| Jan | 3.86 | 2.86 | 2.23 | 4.15 | 4.75 | 0.80 | … | ||
| Feb | 3.60 | 2.81 | 2.50 | 4.40 | 5.06 | 0.98 | … | ||
| Mar | 3.69 | 2.88 | 2.39 | 4.49 | 5.50 | 2.14 | 6.00 | ||
| Apr | 3.66 | 2.78 | 2.19 | 4.41 | 5.38 | 1.88 | 5.38 | ||
| May | 3.66 | 2.68 | 2.35 | 4.44 | 5.38 | 1.88 | 5.38 | ||
| Jun | 3.50 | 2.75 | 2.22 | 4.54 | 6 12 | 3.68 | 7.38 | ||
| Jul | 3.38 | 2.75 | 2.24 | 6.69 | 7.56 | 4.11 | 7.75 | ||
| Aug | 3.31 | 2.88 | 2.32 | 6.70 | 7.32 | 3.92 | 7.25 | ||
| Sep | 3.38 | 2.75 | 2.23 | 6.53 | 7.56 | 3.82 | 7.56 | ||
| Oct | 3.44 | 2.75 | 2.32 | 5.73 | 6.62 | 2.75 | 6.25 | ||
| Nov | 3.63 | 2.75 | 2.61 | 5.39 | 6.25 | 2.67 | 6.38 | ||
| Dec | 3.88 | 3.00 | 2.59 | 5.36 | 6.68 | 2.58 | 6.69 | ||
| Average | 3.58 | 2.80 | 2.35 | 5.24 | 6.18 | 2.60 | 6.60 | ||
| 1962 | |||||||||
| Jan | 3.44 | 3.00 | 2.71 | 5.24 | 6.38 | 2.49 | 6.19 | ||
| Feb | 3.50 | 3.00 | 2.66 | 5.55 | 6.38 | 2.66 | 6.00 | ||
| Mar | 3.66 | 3.00 | 2.72 | 4.45 | 5.75 | 2.04 | 5.75 | ||
| Apr | 3.41 | 3.00 | 2.74 | 4.05 | 5.00 | 1.51 | 5.13 | ||
| May | 3.81 | 2.88 | 2.70 | 3.82 | 4.56 | 0.80 | 4.31 | ||
| Jun | 3.75 | 2.98 | 2.79 | 3.92 | 4.56 | 0.80 | 4.50 | ||
| Jul | 3.84 | 3.13 | 2.89 | 3.89 | 4.56 | 0.62 | 4.50 | ||
| Aug | 3.78 | 3.13 | 2.84 | 3.77 | 4.38 | 0.62 | 4.38 | ||
| Sep | 3.94 | 3.13 | 2.75 | 3.64 | 4.50 | 0.62 | 4.38 | ||
| Oct | 4.13 | 3.00 | 2.69 | 3.86 | 4.25 | 0.36 | 4.38 | ||
| Nov | 4.00 | 3.00 | 2.80 | 3.74 | 4.50 | 0.45 | 4.44 | ||
| Dec | 3.94 | 3.00 | 2.86 | 3.72 | 4.62 | 0.45 | 4.38 | ||
| Average | 3.77 | 3.02 | 2.76 | 4.14 | 4.95 | 1.12 | 4.86 | ||
| 1963 | |||||||||
| Jan | 3.38 | 3.07 | 2.91 | 3.49 | 4.18 | 0.80 | 4.44 | ||
| Feb | 3.50 | 3.13 | 2.92 | 3.43 | 4.25 | 0.80 | 4.19 | ||
| Mar | 3.63 | 3.13 | 2.90 | 3.76 | 4.50 | 1.34 | 4.88 | ||
| Apr | 3.72 | 3.13 | 2.91 | 3.71 | 4.50 | 0.80 | 4.50 | ||
| May | 3.81 | 3.13 | 2.92 | 3.64 | 4.43 | 0.71 | 4.50 | ||
| Jun | 3.88 | 3.24 | 2.99 | 3.70 | 4.25 | 0.54 | 4.44 | ||
| Jul | 4.00 | 3.41 | 3.14 | 3.76 | 4.31 | 0.36 | 4.38 | ||
| Aug | 4.00 | 3.59 | 3.32 | 3.72 | 4 12 | 0.18 | 4.13 | ||
| Sep | 4.19 | 3.63 | 3.38 | 3.68 | 4.18 | 0.18 | 4.31 | ||
| Oct | 4.13 | 3.63 | 3.45 | 3.75 | 4.18 | 0.27 | 4.38 | ||
| Nov | 4.25 | 3.71 | 3.52 | 3.74 | 4.31 | 0.18 | 4.38 | ||
| Dec | 4.25 | 3.63 | 3.52 | 3.72 | 4.56 | 0.18 | 4.31 | ||
| Average | 3.90 | 3.36 | 3.16 | 3.68 | 4.31 | 0.53 | 4.40 | ||
| 1964 | |||||||||
| Jan | 4.06 | 3.70 | 3.53 | 3.72 | 4.38 | 0.36 | 4.31 | ||
| Feb | 4.19 | 3.75 | 3.52 | 4.31 | 5.12 | 0.72 | 4.94 | ||
| Mar | 4.25 | 3.75 | 3.55 | 4.30 | 5.38 | 0.72 | 4.88 | ||
| Apr | 4.19 | 3.80 | 3.48 | 4.30 | 5.00 | 0.80 | 5.00 | ||
| May | 4.25 | 3.75 | 3.48 | 4.38 | 5.00 | 0.80 | 4.94 | ||
| Jun | 4.31 | 3.75 | 3.48 | 4.46 | 5.00 | 0.54 | 4.75 | ||
| Jul | 4.25 | 3.75 | 3.48 | 4.65 | 5.09 | 0.72 | 4.88 | ||
| Aug | 4.25 | 3.75 | 3.51 | 4.65 | 5.00 | 0.63 | 4.75 | ||
| Average | 4.22 | 3.75 | 3.50 | 4.35 | 5.00 | 0.66 | 4.81 | ||
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin. Data for January and February 1961 were estimated independently.
Rate in last week of month; from Federal Reserve Bulletin.
Rate on new issues, last week of month; from Federal Reserve Bulletin.
Tenders, last week of month; from Deutsche Bundesbank, Monthly Report.
From Bank of England, Quarterly Bulletin.
Based on data from International Monetary Fund, International Financial Statistics. Computed from end-of-month rates (average of buying and selling) for spot and 90-day forward exchange, the resulting percentage being expressed as an annual rate.
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin.
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on Other Investments, 1961-August 1964
(In per cent per annum)
| End of Period |
Euro- Dollars1 (1) |
U.S. Bankers’ Acceptances2 (2) |
U.S. Treasury Bills3 (3) |
U.K. Treasury Bills4 (4) |
U.K. Local Authorities5 (5) |
Sterling Forward Discount6 (6) |
Euro- Sterling7 (7) |
||
|---|---|---|---|---|---|---|---|---|---|
| 1961 | |||||||||
| Jan | 3.86 | 2.86 | 2.23 | 4.15 | 4.75 | 0.80 | … | ||
| Feb | 3.60 | 2.81 | 2.50 | 4.40 | 5.06 | 0.98 | … | ||
| Mar | 3.69 | 2.88 | 2.39 | 4.49 | 5.50 | 2.14 | 6.00 | ||
| Apr | 3.66 | 2.78 | 2.19 | 4.41 | 5.38 | 1.88 | 5.38 | ||
| May | 3.66 | 2.68 | 2.35 | 4.44 | 5.38 | 1.88 | 5.38 | ||
| Jun | 3.50 | 2.75 | 2.22 | 4.54 | 6 12 | 3.68 | 7.38 | ||
| Jul | 3.38 | 2.75 | 2.24 | 6.69 | 7.56 | 4.11 | 7.75 | ||
| Aug | 3.31 | 2.88 | 2.32 | 6.70 | 7.32 | 3.92 | 7.25 | ||
| Sep | 3.38 | 2.75 | 2.23 | 6.53 | 7.56 | 3.82 | 7.56 | ||
| Oct | 3.44 | 2.75 | 2.32 | 5.73 | 6.62 | 2.75 | 6.25 | ||
| Nov | 3.63 | 2.75 | 2.61 | 5.39 | 6.25 | 2.67 | 6.38 | ||
| Dec | 3.88 | 3.00 | 2.59 | 5.36 | 6.68 | 2.58 | 6.69 | ||
| Average | 3.58 | 2.80 | 2.35 | 5.24 | 6.18 | 2.60 | 6.60 | ||
| 1962 | |||||||||
| Jan | 3.44 | 3.00 | 2.71 | 5.24 | 6.38 | 2.49 | 6.19 | ||
| Feb | 3.50 | 3.00 | 2.66 | 5.55 | 6.38 | 2.66 | 6.00 | ||
| Mar | 3.66 | 3.00 | 2.72 | 4.45 | 5.75 | 2.04 | 5.75 | ||
| Apr | 3.41 | 3.00 | 2.74 | 4.05 | 5.00 | 1.51 | 5.13 | ||
| May | 3.81 | 2.88 | 2.70 | 3.82 | 4.56 | 0.80 | 4.31 | ||
| Jun | 3.75 | 2.98 | 2.79 | 3.92 | 4.56 | 0.80 | 4.50 | ||
| Jul | 3.84 | 3.13 | 2.89 | 3.89 | 4.56 | 0.62 | 4.50 | ||
| Aug | 3.78 | 3.13 | 2.84 | 3.77 | 4.38 | 0.62 | 4.38 | ||
| Sep | 3.94 | 3.13 | 2.75 | 3.64 | 4.50 | 0.62 | 4.38 | ||
| Oct | 4.13 | 3.00 | 2.69 | 3.86 | 4.25 | 0.36 | 4.38 | ||
| Nov | 4.00 | 3.00 | 2.80 | 3.74 | 4.50 | 0.45 | 4.44 | ||
| Dec | 3.94 | 3.00 | 2.86 | 3.72 | 4.62 | 0.45 | 4.38 | ||
| Average | 3.77 | 3.02 | 2.76 | 4.14 | 4.95 | 1.12 | 4.86 | ||
| 1963 | |||||||||
| Jan | 3.38 | 3.07 | 2.91 | 3.49 | 4.18 | 0.80 | 4.44 | ||
| Feb | 3.50 | 3.13 | 2.92 | 3.43 | 4.25 | 0.80 | 4.19 | ||
| Mar | 3.63 | 3.13 | 2.90 | 3.76 | 4.50 | 1.34 | 4.88 | ||
| Apr | 3.72 | 3.13 | 2.91 | 3.71 | 4.50 | 0.80 | 4.50 | ||
| May | 3.81 | 3.13 | 2.92 | 3.64 | 4.43 | 0.71 | 4.50 | ||
| Jun | 3.88 | 3.24 | 2.99 | 3.70 | 4.25 | 0.54 | 4.44 | ||
| Jul | 4.00 | 3.41 | 3.14 | 3.76 | 4.31 | 0.36 | 4.38 | ||
| Aug | 4.00 | 3.59 | 3.32 | 3.72 | 4 12 | 0.18 | 4.13 | ||
| Sep | 4.19 | 3.63 | 3.38 | 3.68 | 4.18 | 0.18 | 4.31 | ||
| Oct | 4.13 | 3.63 | 3.45 | 3.75 | 4.18 | 0.27 | 4.38 | ||
| Nov | 4.25 | 3.71 | 3.52 | 3.74 | 4.31 | 0.18 | 4.38 | ||
| Dec | 4.25 | 3.63 | 3.52 | 3.72 | 4.56 | 0.18 | 4.31 | ||
| Average | 3.90 | 3.36 | 3.16 | 3.68 | 4.31 | 0.53 | 4.40 | ||
| 1964 | |||||||||
| Jan | 4.06 | 3.70 | 3.53 | 3.72 | 4.38 | 0.36 | 4.31 | ||
| Feb | 4.19 | 3.75 | 3.52 | 4.31 | 5.12 | 0.72 | 4.94 | ||
| Mar | 4.25 | 3.75 | 3.55 | 4.30 | 5.38 | 0.72 | 4.88 | ||
| Apr | 4.19 | 3.80 | 3.48 | 4.30 | 5.00 | 0.80 | 5.00 | ||
| May | 4.25 | 3.75 | 3.48 | 4.38 | 5.00 | 0.80 | 4.94 | ||
| Jun | 4.31 | 3.75 | 3.48 | 4.46 | 5.00 | 0.54 | 4.75 | ||
| Jul | 4.25 | 3.75 | 3.48 | 4.65 | 5.09 | 0.72 | 4.88 | ||
| Aug | 4.25 | 3.75 | 3.51 | 4.65 | 5.00 | 0.63 | 4.75 | ||
| Average | 4.22 | 3.75 | 3.50 | 4.35 | 5.00 | 0.66 | 4.81 | ||
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin. Data for January and February 1961 were estimated independently.
Rate in last week of month; from Federal Reserve Bulletin.
Rate on new issues, last week of month; from Federal Reserve Bulletin.
Tenders, last week of month; from Deutsche Bundesbank, Monthly Report.
From Bank of England, Quarterly Bulletin.
Based on data from International Monetary Fund, International Financial Statistics. Computed from end-of-month rates (average of buying and selling) for spot and 90-day forward exchange, the resulting percentage being expressed as an annual rate.
Rate on last working day of month, as reported in Bank of England, Quarterly Bulletin.
In general, interest rates on deposits of all currencies that command a forward premium over the dollar tend to be lower by the amount of this premium than interest rates on Euro-dollar deposits, while interest rates on deposits of currencies that stand at a forward discount relative to the dollar tend to be higher by the amount of this discount than interest rates on Euro-dollar deposits. All these rates are mutually self-determining, but the foreign markets for dollars are so much more important than the foreign markets for all other currencies combined—perhaps in the order of three to one—that the interest rates on all non-dollar Euro-currencies tend to be adjusted to the interest rate on Euro-dollars.
The rate of interest on Euro-dollar deposits is thus truly an international rate that reflects the interplay on demand and supply factors in many countries, so that a change in any one element is unlikely to change the nature or the course of the Euro-dollar market in any decisive way. It was often assumed, for example, that if commercial banks in the United States could compete, free from the restraints of Regulation Q, for the time deposits of foreign governments and foreign monetary authorities, they would attract large amounts of such deposits.9 After these restraints were removed in October 1962, foreign time deposits increased from about $2.2 billion to $3.2 billion at the end of 1963 and to $3.8 billion in August 1964.10 Interest rates on all other time deposits were increased at the beginning of 1962 and again at the beginning of 1964,11 and the development of certificates of deposit has had the practical effect of raising interest rates on the short end, despite the restrictions of Regulation Q. Nevertheless, the Euro-dollar market is still here, stronger and bigger than ever.
Since 1961, short-term interest rates have risen in the United States, in the Euro-dollar market, and in virtually all the major countries in Europe. Euro-dollar rates have gone up less than U.S. Treasury bill rates, so that the difference between the two has become much narrower. In the last three years, the absolute difference has decreased from 123 to 72 basis points, with the result that the rate on 3-month Euro-dollars, which was 52 per cent higher than U.S. Treasury bill rates in 1961, was only 21 per cent higher in August 1964 (Table 2).
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on New Issues of U.S. Treasury Bills, 1961–64
(Average of rates at end of each month)
Through August.
From Table 1, page 9.
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on New Issues of U.S. Treasury Bills, 1961–64
(Average of rates at end of each month)
| 1961 | 1962 | 1963 | 19641 | ||
|---|---|---|---|---|---|
| Euro-dollar deposits2 (per cent) | 3.58 | 3.77 | 3.90 | 4.22 | |
| U.S. Treasury bills2 (per cent) | 2.35 | 2.76 | 3.16 | 3.50 | |
| Difference, basis points | 123 | 101 | 74 | 72 | |
| Difference as percentage of yield on Treasury bills | 52 | 37 | 23 | 21 | |
Through August.
From Table 1, page 9.
Rates of Interest on Three-Month Euro-Dollar Deposits in London and on New Issues of U.S. Treasury Bills, 1961–64
(Average of rates at end of each month)
| 1961 | 1962 | 1963 | 19641 | ||
|---|---|---|---|---|---|
| Euro-dollar deposits2 (per cent) | 3.58 | 3.77 | 3.90 | 4.22 | |
| U.S. Treasury bills2 (per cent) | 2.35 | 2.76 | 3.16 | 3.50 | |
| Difference, basis points | 123 | 101 | 74 | 72 | |
| Difference as percentage of yield on Treasury bills | 52 | 37 | 23 | 21 | |
Through August.
From Table 1, page 9.
The United States has been trying for several years to increase domestic short-term interest rates without increasing long-term rates, which might limit the current economic expansion before full employment is reached. Debt and monetary policies have been keyed to this objective. In the last few years, the shortest-term interest rates have risen the most, while long-term rates have been remarkably steady and mortgage rates have been under pressure downward. The structure of interest rates in the United States has thus become considerably flatter. But the same development can be observed in the Euro-dollar market, within the range of maturities dealt with there, as well as in the major countries of Europe.
Can one conclude that short-term interest rates in the United States have risen solely for domestic reasons and that interest rates on Eurodollars have increased sympathetically? The chain of causation is much more complicated than that. Interest rates on Euro-dollars have clearly been an important factor in pulling up short-term interest rates in the United States. But a broader international perspective on interest rate movements is necessary. Short-term interest rates in the major continental European countries have also increased. The pressures of full employment and rising prices in these countries are increasing the demand for money, and the monetary authorities are reacting to these pressures with a tighter monetary policy. A number of European countries would probably prefer, other things being equal, even higher interest rates. But these would encourage larger inflows of foreign capital, as well as larger repatriations of funds by residents. The authorities would not like to add the need to deal with larger capital inflows to the tasks they already have.
Interest rate developments may be interpreted in a number of ways. The increases in interest rates in the United States and in the Eurodollar market may be regarded as permissive, in that they made it possible for many European countries to follow a policy of higher interest rates without the danger of augmenting inflows of capital. Or, the increases in interest rates in Europe may be regarded as initiating, in that they tended to pull up rates in the United States and in the Eurodollar market. Or, increases in European interest rates may be regarded as offsetting, in the sense that higher short-term rates in the United States would have had greater international effects if European countries had not seized the opportunity to tighten domestic credit. On this last interpretation, U.S. monetary policy would have been more effective if European countries had made greater use of fiscal policy and less use of monetary policy.
This paper does not present a brief for any of these interpretations; rather, it aims to emphasize the interaction and mutual determinateness of short-term capital markets in the major industrial countries. Such international money market instruments as Euro-dollar deposits knit national markets closer together. They should, in the long run, considerably reduce interest rate differentials on short-term funds, on commercial loans, and on money generally. The United States has been learning to live with this greater amount of internationalism, but it is not surprising that learning to live in this more interdependent world may create considerable difficulties from time to time.
IV
The preceding discussion may be summarized as follows: The larger international money market in short-term dollars that has developed outside the United States since 1957 is based on dollar deposits from, and loans to, many countries. The core of the market consists of 400 commercial banks, including foreign branches of U.S. banks. Commercial and industrial borrowers use Euro-dollars to finance imports, exports, and domestic transactions; banks use this new international money market instrument to adjust their liquidity positions and to increase their lending capacity.
Many large participants protect their short-term positions with stand-by agreements, lines of credit, and banking guarantees. To the extent that these are concentrated upon U.S. banks, the exposure of the United States in the Euro-dollar market is larger than that suggested by the Euro-dollar loans and deposits of its banks.
The pressure to obtain a foothold in the Euro-dollar market, combined with the impersonal and short-term character of most transactions in it, may lead some participants to borrow short and lend long, to reduce credit standards, or to rely too much upon the security of prime names and too little upon the careful analysis of systematic and up-to-date financial data. But despite these possibilities, there have not been marked evidences of abuse. Furthermore, these problems are inherent in all banking operations and are not confined to those conducted in Euro-dollars.
The yield on dollar deposits and the cost of dollar loans are determined on an international and competitive basis; they are generally more favorable than the comparable rates on local currency transactions in national markets. Since 1961, the differential between short-term rates in the United States and in the Euro-dollar market has narrowed; moreover, short-term rates have increased relative to long-term rates in both of these markets, as well as in most of Europe. The Euro-dollar market is important in bringing the national markets closer together.
APPENDIX
Foreign Time Deposits
Beginning October 15, 1962, for a period of three years, maximum interest rates may not be imposed under Regulation Q on time deposits of foreign governments, monetary and financial authorities of foreign governments when acting as such, and international financial institutions of which the United States is a member.12 Total foreign time deposits of member banks of the Federal Reserve System are shown in Table 3. Since October 1962, these deposits have increased by 75 per cent. The part of the increase that can be attributed to the removal of interest ceilings under Regulation Q must be much less than this, since time deposits at all commercial banks increased by about 33⅓ per cent.
Foreign Time Deposits1 of Member Banks of Federal Reserve System, 1962-August 1964
(In millions of dollars)
Deposits of foreign governments and official institutions, central banks, international institutions, banks in foreign countries, and foreign branches of U.S. banks other than the reporting bank.
Foreign Time Deposits1 of Member Banks of Federal Reserve System, 1962-August 1964
(In millions of dollars)
| In New York City | Outside New York City | Total | ||
|---|---|---|---|---|
| 1962 | ||||
| Mar | 1,619 | 618 | 2,237 | |
| Jun | 1,599 | 642 | 2,241 | |
| Sep | 1,551 | 665 | 2,216 | |
| Dec | 1,782 | 739 | 2,521 | |
| 1963 | ||||
| Mar | 1,969 | 775 | 2,744 | |
| Jun | 2,052 | 842 | 2,894 | |
| Sep | 2,165 | 892 | 3,057 | |
| Dec | 2,222 | 966 | 3,188 | |
| 1964 | ||||
| Mar | 2,457 | 1,003 | 3,460 | |
| Jun | 2,598 | 1,072 | 3,670 | |
| Aug | 2,677 | 1,123 | 3,800 | |
Deposits of foreign governments and official institutions, central banks, international institutions, banks in foreign countries, and foreign branches of U.S. banks other than the reporting bank.
Foreign Time Deposits1 of Member Banks of Federal Reserve System, 1962-August 1964
(In millions of dollars)
| In New York City | Outside New York City | Total | ||
|---|---|---|---|---|
| 1962 | ||||
| Mar | 1,619 | 618 | 2,237 | |
| Jun | 1,599 | 642 | 2,241 | |
| Sep | 1,551 | 665 | 2,216 | |
| Dec | 1,782 | 739 | 2,521 | |
| 1963 | ||||
| Mar | 1,969 | 775 | 2,744 | |
| Jun | 2,052 | 842 | 2,894 | |
| Sep | 2,165 | 892 | 3,057 | |
| Dec | 2,222 | 966 | 3,188 | |
| 1964 | ||||
| Mar | 2,457 | 1,003 | 3,460 | |
| Jun | 2,598 | 1,072 | 3,670 | |
| Aug | 2,677 | 1,123 | 3,800 | |
Deposits of foreign governments and official institutions, central banks, international institutions, banks in foreign countries, and foreign branches of U.S. banks other than the reporting bank.
Euro-dollars : nouveaux commentaires1
Résumé
Le vaste marché monétaire international de dollars à court terme qui s’est développé en dehors des Etats-Unis depuis 1957 repose sur les dépôts et les prêts en dollars en provenance et à destination de nombreux pays. Ses activités gravitent essentiellemente autour de 400 banques commerciales, dont les succursales étrangères de banques américaines. Les entreprises industrielles et commerciales qui y ont recours utilisent des Euro-dollars pour le financement des importations, des exportations et des transactions effectuées dans le cadre de leurs pays respectifs; les banques se servent de ce nouvel instrument du marché monétaire international pour ajuster leur position de liquidité et pour accroître leur capacité de prêt.
De nombreux participants importants protègent leur position à courtterme au moyen d’accords de “stand-by”, de lignes de crédit et de garanties bancaires. Dans la mesure oú ces moyens de protection sont concentrés sur des banques américaines, les risques auxquels s’exposent les Etats-Unis sur le marché de l’Euro-dollar sont plus grands que ne le laisseraient supposer les prêts et dépôts de leurs banques en Eurodollars.
Le désir des banques de prendre pied sur le marché de l’Euro-dollar, associé au caractère impersonnel et à court terme de la plupart des transactions qui s’y effectuent, peuvent amener certaines d’entre elles à emprunter à court terme et à prêter à long terme, à assouplir leurs critères d’octroi de crédit, ou encore à se fier trop à la réputation des grands noms et pas assez à une analyse attentive des données financières systématiques les plus récentes. En dépit de ces diverses possibilités, on n’a cependant pas noté de signes marqués d’abus. De plus, ces problèmes sont inhérents à toutes les opérations bancaires, et ne se limitent pas à celles qui sont traitées en Euro-dollars.
Le rendement des dépôts en dollars et le coût des prêts en dollars sont déterminés à l’échelon international et sur une base compétitive; ils sont en général plus favorables que les taux d’intérêt comparables afférents aux opérations en monnaie locale sur les divers marchés nationaux. L’écart entre les taux à court terme du marché américain et ceux du marché de l’Euro-dollar a diminué depuis 1961; en outre, sur ces deux marchés comme sur la plupart des marchés européens, les taux à court terme ont augmenté par rapport aux taux à long terme. Le marché de l’Euro-dollar joue un rôle important dans le rapprochement des marchés nationaux.
Comentarios adicionales sobre el mercado de Euro-dólares1
Resumen
El gran mercado internacional de dinero en forma de dólares a corto plazo que se ha desarrollado fuera de Estados Unidos a partir de 1957 se basa en los depósitos y los préstamos en dólares que provienen de y se destinan a muchos países. El núcleo de ese mercado consiste en 400 bancos comerciales, con inclusión de las sucursales en el extranjero de bancos estadounidenses. Los prestatarios de los sectores comercial e industrial utilizan los Euro-dólares para el financia-miento de importaciones, exportaciones, y transacciones internas, y los bancos, a su vez, emplean este nuevo instrumento del mercado monetario internacional para ajustar sus posiciones en materia de liquidez e incrementar su capacidad como fuente de préstamos.
Muchos de los principales participantes de ese mercado recurren a acuerdos de crédito contingente, líneas de crédito, y garantías bancarias para defender sus posiciones a corto plazo. En la medida en que esos arbitrios se concentran sobre los bancos estadounidenses, los riesgos a que está expuesto Estados Unidos en el mercado de Euro-dólares superan a lo que cabría inferir de los préstamos y los depósitos de sus bancos en Euro-dólares.
El afán de lograr un asidero en el mercado de Euro-dólares, conjuntamente con la índole impersonal y de corto plazo que caracteriza a la generalidad de las transacciones que se efectúan en dicho mercado, puede inducir a algunos de los participantes a tomar préstamos a corto plazo y concederlos a largo plazo, a aminorar sus exigencias en cuanto a las normas crediticias, o a dejarse llevar excesivamente por la seguridad que brindan las firmas de primera categoría y, en cambio, demasiado poco del análisis cuidadoso de datos financieros que estén al día. No obstante, pese a la posibilidad anotada, no se han observado muestras claras de abusos. Por otra parte, estos problemas son inherentes a cualquier transacción bancaria y no se concretan únicamente a aquellas realizadas en Euro-dólares.
El rendimiento de los depósitos en dólares y el costo de los préstamos se determinan sobre una base internacional y competitiva; por lo general son más favorables que las tasas comparables que rigen para las transacciones efectuadas en moneda local en los mercados nacionales. Desde 1961, ha disminuido el margen entre las tasas de interés a corto plazo del mercado estadounidense y las del mercado de Euro-dólares, y, además, tanto en esos dos mercados como en la mayor parte de Europa, las tasas de interés a corto plazo han aumentado en comparación con las de largo plazo. El mercado de Euro-dólares resulta importante para establecer un vínculo más estrecho entre los mercados nacionales.
Mr. Altman, Deputy Director of the Research and Statistics Department, and Fund Historian, is a graduate of Cornell University and of the University of Chicago. He taught economics at Ohio State University and was on the staff of the National Resources Planning Board and of the French Supply Council. He was Director of Administration of the Fund until 1954. He is the author of Savings, Investment, and National Income and of a number of papers published in technical journals.
For earlier discussions of Euro-dollars by the author, see “Foreign Markets for Dollars, Sterling, and Other Currencies,” Staff Papers, Vol. VIII (1960–61), pp. 313–52; “Canadian Markets for U.S. Dollars,” Staff Papers, Vol. IX (1962), pp. 297–316; “Recent Developments in Foreign Markets for Dollars and Other Currencies,” Staff Papers, Vol. X (1963), pp. 48–96.
Complete data have not yet been made available on these points. Indeed, there would be difficulties in interpreting data on the countries from which Euro-dollars are reported to come, since many suppliers act through nominees or agents in other countries.
Nine members of the Foreign Exchange Brokers’ Association have recently formed a new company, FEBA (London) Ltd., to arrange Euro-dollar and other foreign currency deposits between banks in London and those in overseas centers (The Economist, September 19, 1964, p. 1155).
U.S. banks have long used the market in federal funds to acquire reserves to meet their reserve requirements. Since federal funds are an alternative to redis-counting, the interest rate on them does not exceed the rediscount rate. But in October 1964, one large New York City bank twice borrowed federal funds at a premium, explaining that “it chose to pay the higher rate for Federal funds in order to feel free to lend or invest the money without any questions asked by the Federal Reserve officials. Ordinarily, banks that borrow at the ‘discount window’ of the Federal Reserve banks are expected to use the funds chiefly to tide themselves over a temporary deficiency of reserves rather than to use the money to invest or lend at a higher rate” (The Wall Street Journal, October 6, 1964).
In the few years since their introduction, outstanding certificates of deposit—a new monetary instrument designed to meet the competition of foreign markets and the domestic competition of savings and loan associations and other corporations—have increased to more than $12 billion.
The Wall Street Journal, September 3 and September 25, 1964. These promissory notes increase bank assets but do not create a legal reserve requirement, as do certificates of deposit.
It may be noted in passing that this development is technically good for the U.S. balance of payments. When the foreign branches of U.S. banks lend to a foreigner dollars that have been deposited by a foreigner, the balance of payments of the United States is not affected. But when the head offices of U.S. banks lend to a foreigner dollars which have been deposited by a foreigner (directly or via a foreign branch), there is an increase in the balance of payments deficit as currently calculated.
“Euro-dollar, Euro-devises,” Banque (Paris), No. 218, August 1964, pp. 513–14.
The relationship of Regulation Q to the Euro-dollar market is discussed in O. L. Altman, “Recent Developments in Foreign Markets for Dollars and Other Currencies,” op. cit., pp. 78–84. The view was expressed there that the effect of Regulation Q upon the development of the market was generally much overstated.
See Appendix, page 14. In 1962, Mr. Roosa, Under Secretary of the Treasury, when testifying in favor of the bill to exclude foreign time deposits from Regulation Q, estimated that foreign governments and international agencies held more than $2 billion of time deposits and that, with higher interest rates, this amount might gradually be doubled. Ibid., p. 79.
Maximum interest rates (in per cent) that could be paid by member banks of the Federal Reserve System on time and savings deposits were changed from the dates shown, as follows:
| Jan. 1,1957 | Jan. 1, 1962 | Jan. 17,1964 | |
|---|---|---|---|
| Savings deposits held for 1 year | 3 | 4 | 4 |
| Less than 1 year | 3 | 3½ | 3½ |
| Other time deposits payable in 1 year or more | 3 | 4 | 4 |
| 6 months to 1 year | 3 | 3½ | 4 |
| 90 days to 6 months | 2½ | 2½ | 4 |
| Less than 90 days | 1 | 1 | 1 |
| Jan. 1,1957 | Jan. 1, 1962 | Jan. 17,1964 | |
|---|---|---|---|
| Savings deposits held for 1 year | 3 | 4 | 4 |
| Less than 1 year | 3 | 3½ | 3½ |
| Other time deposits payable in 1 year or more | 3 | 4 | 4 |
| 6 months to 1 year | 3 | 3½ | 4 |
| 90 days to 6 months | 2½ | 2½ | 4 |
| Less than 90 days | 1 | 1 | 1 |
See Federal Reserve Bulletin, October 1962, pp. 1279–80.
Voir Staff Papers, Vol. VIII (1960–61), pages 313–52; Vol. IX (1962), pages 297–316; et Vol. X (1963), pages 48–96.
Anteriores consideraciones sobre este tema aparecen en Staff Papers, Vol. VIII (1960–61), págs. 313–52; Vol. IX (1962), páges. 297–316, y Vol. X (1963), pages. 48–96.