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Commercial Bank Liability Management and Monetary Control

Published online by Cambridge University Press:  19 October 2009

Ward Theilman
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Extract

In recent years, large commercial banks in the United States have turned to so-called “liability management” as a way to acquire additional funds. The use of Certificates of Deposit (CD's), Eurodollar balances, debentures, and recently the issuing of commercial paper through their holding companies represent an extension of the more traditional secondary reserve asset management approach to bank liquidity and reserve adjustment.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 5 , Issue 3 , September 1970 , pp. 329 - 339
Copyright
Copyright © School of Business Administration, University of Washington 1970

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References

1 Effective July 31, 1969, Regulation D was ammended so that gross demand deposits were to include drafts or “bills payable” to foreign branches. Effective September 4, 1969, Regulation M was ammended to impose a marginal reserve requirement of 10 per cent upon those net liabilities to foreign branches that exceeded a certain computational base. See the Federal Reserve Bulletin, August 1969, pp. 655–657Google Scholar for the texts of the ammendments to Regulations D and M. With changes in Regulation D, the demand deposit component of the reported money supply experienced a one-time jump. For a discussion of the revised money supply series, see Burger, Albert E., “Revision of the Money Supply Series,” Federal Reserve Bank of St. Louis, Review, October 1969Google Scholar; and the Federal Reserve Bulletin, October 1969, pp. 787–803.Google Scholar

2 This assumes that the public's marginal preference for currency relative to demand deposits remains unchanged. If it should fall, the ultimate impact is a currency inflow into time deposits with an increase in total and excess reserves for the banking system.

3 The limit to the banking system's ability to issue deposits and acquire earning assets is determined by the given level of R and the parameters d, t, c, and e. If d > t, a shift from D to T or N lowers the average legal reserve requirement.

4 Where financial institutions are selling off secondary reserve assets, the limit could come earlier if their holdings of such assets legally available for sale become used up before idle balances do.

5 See Appendix A.