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Demand Deposits: a Comparison of the Behavior of Household and Business Balances

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Demand Deposits: a Comparison of the Behavior of Household and Business Balances DEMAND DEPOSITS: A COMPARISON OF THE BEHAVIOR OF HOUSEHOLD AND BUSINESS BALANCES Bruce J. Summers Demand deposits held by households and non- ownership class. Section three analyzes sources of financial businesses account for nearly 70 percent of long- and short-run variation in household and non- all demand balances and about one-quarter of the financial business demand balances over the period commercial banking system’s total deposits. Since 1971-1978. Specific topics addressed in this section they represent an important source of bank funds, an include the trend-cycle behavior of demand deposits, understanding of the behavior of these two cate- differences in deposit behavior by bank size, and the gories of demand deposits is of great operational influence of seasonality. The final section sum- significance to liabilities managers. Short-run vari- marizes the article’s main conclusions. ation in these balances must be accommodated by adjusting the secondary reserve position of a bank HISTORICAL CHANGES IN BANK LIABILITIES or by engaging in offsetting transactions in the mar- ket for purchased funds. Moreover, applying knowl- Table I summarizes secular changes in commer- edge about the underlying trends in demand deposits cial bank liabilities starting in the late 1940’s and of different ownership classes can aid in forecasting extending through 1978. Over this period, net total future balance sheet changes. deposits of all commercial banks, defined as total Privately held demand deposits also represent a demand and time deposits exclusive of deposits due large part of the money supply. If there are signifi- to other commercial banks, increased from $132.4 cant differences in the behavior of balances owned billion to $918.9 billion, or at a compounded annual by households and businesses, then understanding rate of 7.16 percent. This growth rate, while sub- these differences could help in interpreting money stantial, nonetheless failed to match the compounded supply changes. Financial analysts interested in annual increase in total assets of 7.64 percent. Con- explaining money stock movements, therefore, also sequently, total deposits as a percent of total assets have reason to compare the behavior of household fell from nearly 86 percent in 1950 to about 76 and business demand balances. percent in 1978, as is shown in column 2 of Table I. The purpose of this article is to describe and ex- This erosion in the deposit share of total bank lia- plain some of the major types of variation in demand bilities was made up with nondeposit sources of deposit balances. It will be shown that there are funds, e.g., Eurodollars, Federal funds purchases significant differences in both the short- and long-run and repurchase agreements, and the like. These non- behavior of demand balances owned by households deposit sources of funds do not generally come under and businesses, and that these differences have impli- the Regulation Q limitations placed on interest pay- cations for the efficiency with which commercial bank ments. liabilities are managed.1 While total deposits were declining in importance The article is organized in four sections. The on the banking system’s balance sheet, the composi- first section briefly reviews changes in the composi- tion of deposit liabilities was also undergoing dra- tion of the banking system’s liabilities since the late matic change. This trend is reflected in columns 3 1940’s. Section two describes the survey data that and 4 of Table I, which show, respectively, the dollar provide information on private demand deposits by amount of IPC (individuals, partnerships, and cor- porations) demand deposits and such deposits as a 1 This analysis of demand deposits complements other percent of net total demand and time deposits. recent work [3, 4] dealing with the behavior of various Private demand deposits declined from almost 61 categories of bank and thrift institution time deposit liabilities. percent of net total deposits in 1950 to just over 30 2 ECONOMIC REVIEW, JULY/AUGUST 1979 percent in 1978. This large drop in the ratio of when an active secondary market opened for such private demand deposits to net total deposits reflects instruments. This institutional change helps explain a major shift in public preferences from noninterest- the acceleration in the rate of decline in the share of earning demand balances to time balances. Growth private demand to total deposits that occurred be- in other types of demand deposits, primarily govern- tween the decade of the 1950’s and the decade of the ment deposits, did not increase over’ this period. 1960’s. The IPC demand deposit share declined by While not shown here, the ratio of private demand only 6.1 percentage points in the 1950’s but then by deposits to total demand deposits net of interbank 14.8 percentage points during the 1960’s. Also, balances remained fairly constant at around 80 to 83 Regulation Q deposit rate ceilings were increased by percent between 1950 and 1978. steps beginning in the early 1970’s [4], further help- The increase in IPC demand deposits in column 3 ing explain the continued, although somewhat slower, of Table I from $80.7 billion to $279.8 billion repre- erosion in the demand deposit share. The IPC de- sents a compound annual rate of increase of only mand deposit share declined 9.6 percentage points 4.54 percent, versus 9.39 percent for total time de- during the eight-year period 1970-78. posits. It should be noted that total time deposits Ownership of private demand deposit balances at include all time deposits, ranging from regular commercial banks is dominated by two groups, house- savings to negotiable certificates of deposit (CD’s). holds and nonfinancial businesses. Together, they The growth rates on these different types of time accounted for about $230 billion or 82 percent of total deposits have varied depending, among other things, private demand deposit balances in 1978. The last on market interest rates relative to Regulation Q four columns of Table I summarize the behavior of interest rate ceilings and bank innovations in the household and nonfinancial business balances from deposit area. For example, the negotiable CD became 1947-49 through 1978. A consistent data series on a major source of bank funds only in the early 1960’s, demand deposits by ownership class is available only FEDERAL RESERVE BANK OF RICHMOND 3 from 1970. These data are shown in columns 5 and 7 survey and its relationship to published money stock for households and nonfinancial businesses, respec- data.2 tively. Households account for roughly one-third of The DDOS, begun in June 1970, is based on a total private demand deposits, while nonfinancial nationwide sample of banks stratified by size. These businesses account for roughly one-half. The remain- sample data are used to develop estimates of demand ing proportion of total private demand deposits, deposits by ownership class. Large weekly reporting something between 15 and 20 percent, is owned by banks report daily data for each month, while the various other groups, e.g., financial businesses and smaller banks report daily data for the last month of each quarter. Using these reports, it is possible to foreigners. make daily average estimates of monthly IPC deposit The shares of private demand deposits owned by ownership at large banks, and daily average estimates households and nonfinancial businesses, shown in for the last month of each quarter of IPC deposit columns 6 and 8 of Table I, have not been steady ownership at all banks. These estimates are pub- over time. Household deposits have been growing lished in the Federal Reserve Bulletin. It has been relatively faster than business deposits for a number noted [6] that the first 6 months of data collected of years. In fact, the compound annual rate of under the survey may be unreliable due to start-up growth of household demand deposits over the eight- reporting and editing problems. year period 1970-78 is 8.32 percent, about a third greater than the 6.17 percent rate for nonfinancial DDOS reporting banks classify IPC demand de- posits into five ownership categories : financial busi- business deposits. In the last three years of this period, however, the growth rate of household de- nesses, nonfinancial businesses, consumer, foreign, mand deposits decelerated to 7.49 percent while the and all other domestic depositors. The nonfinancial nonfinancial business demand deposit growth rate business and consumer data for June of each year are listed in Table I. These two categories are the remained steady. This change in relative growth rates is reflected in the stabilization of the household largest of the five. The nonfinancial business cate- share of IPC demand deposits at about 33.2 to 33.3 gory includes both industrial and professional ac- percent starting in 1975. counts. The consumer category includes individual and family accounts, as well as personal trust ac- counts not under the control of bank trust depart- THE DEMAND DEPOSIT OWNERSHIP SURVEY ments. Detailed information on the classification of pri- DDOS data differ from published money stock data vately owned commercial bank deposits is, with one in three important respects. First, M1 includes not exception, not available from the regular reports only demand deposits but also currency. Second, required of all banks. Schedule F of the Consolidated the demand deposit component of M1 includes not Report of Condition requires separate reporting of only IPC deposits but several other categories as savings balances owned by “individuals and nonprofit well, e.g., state and local government demand de- organizations” and “corporations and other profit posits and demand deposits of foreign banks. Fi- organizations.” Separate reporting of demand and nally, and most important, the demand deposit com- time deposits by ownership classification is not re- ponent of M1 is adjusted to exclude cash items in quired.
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