Business demand for larger and longer-term financing has been met through new lending techniques and arrangement of participations among groups of banks and other lenders. Since 1963, banks have bought motor trailers, jet airliners, executive aircraft, computers, machine tools, and other equipment for leasing to customers. The number of banks establishing factoring departments or acquiring factoring firms has recently been increasing, possibly leading toward the automated accounting, analysis, and receivables financing described by Governor Mitchell.
Means for speeding the collection and transfer of cash have been offered in ever more ingenious forms. Several banks have recently entered the credit card business, also, foreshadowing the giro system Governor Mitchell has just described.
Probably the most remarkable change, from the viewpoint of bankers, is the sharp rise in the proportion of funds on which banks pay explicit interest, from about one-third of total liabilities in 1960 to about half in 1965. In addition to substantially increasing their share of all savings-type deposits, banks have developed new money market instruments, have expanded the federal funds market, and have engaged in long-term borrowing for the first time since the 1930’s.
Negotiable certificates of deposit, or CD’s, were introduced in February, 1961.More than 16 billion are now held by corporations, state and local governments, foreign central banks, international agencies, and individuals. Negotiable CD’s did not spring fullblown to their present eminence, however. A secondary market had to be developed. Banks and customers had much to learn about the uses and limitations of CD’s, and indeed are still learning.
The new bank promissory notes are much like CD’s, from the viewpoint of the holders, but they are exempt from reserve requirements and deposit insurance assessment. Consequently, funds secured through promissory notes yielding 4.5 percent to the holders would have an effective interest cost to banks almost one-quarter of a percentage point less than the cost of funds raised through 4.5 percent CD’s. The promissory notes are also free from Regulation Q ceilings on rates. Just before the December, 1965, increase in Regulation Q ceilings, some bank promissory notes were being issued at rates above the maximum 4.5 percent permitted on CD’s.