The Federal Reserve Board moved yesterday to shut off the latest major loophole bankers have found to get around the central bank's efforts to control the expansion of bank credit.
In the last six months, total loans and investments by commercial banks have risen more than $41 billion, to a total of $988.1 billion. About 20 percent of that increase was financed by two types of borrowing-repurchase agreements and federal funds loans-that the Fed feels may not be adequatley controlled.
Yesterday, it proposed applying a 3 percent reserve requirement against such borrowings unless the lender is another financial institution also subject to reserve requirements set by the Feb.
Banks like the repurchase agreements, or RP's, precisly because they obtain funds to lend that are not subject to reserve requirements. On ordinary deposits, a bank that is a member of the Federal Reserve system must deposit a certain proportion in a non-interest-bearing Fed account.
RP's involve the borrowing bank "selling" a U.S. government or federal agency security to the lending bank, with a firm agreement to buy it back at a higher price at some time in the future. The difference in price substitutes for interest that would be paid on a loan.
Federal funds historically were reserves that member banks lent to each other, usually on an overnight basis. They now include other direct borrowings by commercial banks from most other financial institutions.
The Fed estimated that about $42-billion-worth of RP's that would be subject to the new reserve requirement was outstanding at the end of March. The amount of federal funds involved was put at $23 billion.
The Fed invited public comment on its proposal until May 18.