VOLUME 71 • NUMBER 10 • OCTOBER 1985 FEDERAL RESERVE BULLETIN BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D.C. PUBLICATIONS COMMITTEE Joseph R. Coyne, Chairman • Stephen H. Axilrod • Michael Bradfield • S. David Frost • Griffith L. Garwood • James L. Kichline • Edwin M. Truman Naomi P. Salus, Coordinator The FEDERAL RESERVE BULLETIN is issued monthly under the direction of the staff publications committee. This committee is responsible for opinions expressed except in official statements and signed articles. It is assisted by the Economic Editing Unit headed by Mendelle T. Berenson, the Graphic Communications Section under the direction of Peter G. Thomas, and Publications Services supervised by Linda C. Kyles. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Table of Contents 743 FINANCIAL INNOVATION AND Comments requested on proposed change DEREGULATION IN FOREIGN in Regulation K; extension of comment INDUSTRIAL COUNTRIES period on proposed revision of bank holding company reporting requirements. Recent changes in foreign financial markets include the introduction of new financial Changes in Board staff. assets and markets, a greater reliance on Admission of two state banks to member- market-determined interest rates and in- creased competition among financial insti- ship in the Federal Reserve System. tutions. 780 RECORD OF POLICY ACTIONS OF THE 754 REVISED FEDERAL RESERVE RATES OF FEDERAL OPEN MARKET COMMITTEE CAPACITY UTILIZATION At its meeting on July 9-10, 1985, the Revised estimates of industrial capacity and Committee reaffirmed ranges for the year of capacity utilization for the period since 6 to 9 percent for M2 and 6 to 9V2 percent 1967, prepared in conjunction with the re- for M3. The associated range for total do- cent revision of the index of industrial pro- mestic nonfinancial debt was reaffirmed at 9 duction, show relatively slow growth of to 12 percent. With respect to Ml, the base capacity and relatively low rates of utiliza- was moved forward to the second quarter of tion. 1985 and a range was established at an annual growth rate of 3 to 8 percent. 767 SURVEY OF HOME-SELLER FINANCE, For 1986 the Committee agreed on tenta- 1983 tive ranges of monetary growth, measured from the fourth quarter of 1985 to the fourth This article highlights the main findings of a quarter of 1986, of 4 to 7 percent for Ml, 6 special survey of financing by home sellers to 9 percent for M2, and 6 to 9 percent for taken in late 1983. M3. The associated range for growth in total domestic nonfinancial debt was provi- 776 INDUSTRIAL PRODUCTION sionally set at 8 to 11 percent for 1986. Output increased an estimated 0.2 percent With respect to the implementation of in July. policy for the immediate future, the Com- mittee adopted a directive that called for 778 ANNOUNCEMENTS maintaining the existing degree of pressure on reserve positions. That action was ex- Meeting of Consumer Advisory Council. pected to be consistent with growth in M2 Interpretation of policy statement on large- and M3 at an annual rate of around IVi dollar wire transfer systems. percent during the period from June to September, and with a substantial slowing Information required from automated clear- of Ml growth to an annual rate of 5 to 6 inghouses before they may receive net set- percent. It was agreed that somewhat lesser tlement services. reserve restraint might be acceptable in the Results of priced service operations avail- event of substantially slower growth of the able. monetary aggregates while somewhat great- Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis er restraint would be acceptable in the A69 GUIDE TO TABULAR PRESENTATION, event of substantially higher growth. In STATISTICAL RELEASES, AND SPECIAL either case such a change would be consid- TABLES ered in the context of appraisals of the strength of the business expansion, pro- A70 BOARD OF GOVERNORS AND STAFF gress against inflation, and conditions in domestic credit and foreign exchange mar- A72 FEDERAL OPEN MARKET COMMITTEE kets. The intermeeting range for the federal AND STAFF; ADVISORY COUNCILS funds rate was retained at 6 to 10 percent. A74 FEDERAL RESERVE BOARD 789 LEGAL DEVELOPMENTS PUBLICATIONS Various bank holding company, bank ser- All INDEX TO STATISTICAL TABLES vice corporation, and bank merger orders; and pending cases. A79 FEDERAL RESERVE BANKS, BRANCHES, AND OFFICES Al FINANCIAL AND BUSINESS STATISTICS A3 Domestic Financial Statistics A80 MAP OF FEDERAL RESERVE SYSTEM A44 Domestic Nonfinancial Statistics A53 International Statistics Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis Financial Innovation and Deregulation in Foreign Industrial Countries J. David Germany and John E. Morton of the cantly faster and cheaper, so that financial insti- Board's Division of International Finance pre- tutions have incentives to furnish a wider and pared this article. more competitive range of services. Finally, the increased speed and lower cost of communica- The process of financial innovation that has tion have been important to the development and taken place in the United States over the past expansion of international markets. decade has also been evident in other industrial Technological developments alone could ac- economies. Although the forms the innovations count for some recent financial innovations, but have taken have differed among countries, there changes in the economic environment over the have been some prominent common elements, past decade have probably been of greater im- among them the introduction of new financial portance. Although the form and degree have assets and markets, a greater reliance upon mar- differed in individual cases, the patterns of eco- ket-determined interest rates, and increased nomic change in most of the major industrial competition among financial institutions. countries have been parallel, largely because Changes in the regulatory environment have their policy responses have followed a broadly influenced the extent and form of financial similar sequence in the wake of global economic change in individual countries as has the in- disturbances, in particular the two periods of creased internationalization of financial markets. sharply rising oil prices in the 1970s. Financial innovation has, in turn, had an impact The movement of average short-term interest on the conduct of monetary policy and the super- rates and inflation rates in the major foreign vision and regulation of financial markets. industrial countries since 1970 is shown in chart 1. Both interest and inflation rates started to move sharply higher in 1973, receded temporar- SOURCES OF INNOVATION ily later in the decade, then surged to new peaks about 1980 before falling back again in recent It is difficult to determine the exact source of a years. While magnitude and timing have varied, particular innovation in financial markets. Usual- these upsurges in interest and inflation rates have ly factors have interacted with each other and been widespread. Higher nominal and real inter- with the unique regulatory and financial struc- ture in each country. Nevertheless, several 1. Average inflation and short- term interest rates broad categories of factors are discernible. The in major foreign industrial countries most important are technological change, high Percent and variable interest rates, bigger government deficits, and the growing internationalization of financial markets. Technological change, particularly the ad- vance in computer technology, has altered the environment of financial markets in several ways. It has made possible new types of financial assets and transactions, such as cash manage- ment or sweep accounts. More important, nearly Geometric weighted averages of three-month interbank interest all financial transactions have become signifi- rates or closest equivalent and of change in consumer prices. Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis 744 Federal Reserve Bulletin • October 1985 est rates have stimulated financial innovation by 2. Ratio of government fiscal balance to widening the gap between regulated and freely gross national product, average for determined market interest rates. Asset holders major foreign industrial countries have been motivated to economize on non-inter- Percent est-bearing transactions balances and, in general, to shift out of deposits yielding below-market interest rates. Financial institutions have been forced by competitive pressures to offer market rates on deposits where regulations allowed and to push for an easing of such restrictions where they did not. Along with a generally higher level of nominal interest rates have come periods of heightened Weighted average of surpluses and deficits as a fraction of gross variability of interest rates and other financial national product. variables such as exchange rates. These in- creases in variability and the resulting rise in uncertainty and risk have generated a demand capital between countries have been lowered in for new types of financial instruments, such as the postwar period, financial flows have grown. loans and securities with variable rates and With this growth has come increasing competi- shorter maturities, and they have stimulated the tion between financial institutions in different development of financial futures and options countries and the consequent development of markets as a means of managing risk. international