Citi Turns 200: Negotiable Certificates of Deposit
August 24, 2012 12:00 PM
In celebration of Citigroup's 200th Anniversary, we are sharing stories from our rich history here on this blog. The 23rd installation below covers how National City Bank became the leading bank in the New York metropolitan area and overseas. Read the 22nd installment on how emerging technologies in the electronics and aircraft sectors lead to the establishment of a specialized aerospace division on the west coast, here.
Negotiable certificates of deposit
Riding the "wave of the future," First National City Bank becomes the leading bank in the New York metropolitan area, and top bank overseas
By 1965, Fortune magazine was describing First National City Bank as the "wave of the future" for U.S. banking. It had surpassed its rivals in terms of local branch network; with 150 branches, it was the leading bank in the New York metropolitan area. In terms of assets, it was now America's second largest bank after Bank of America. It was the top bank overseas, with 163 branches and affiliates in 55 countries. What was more, earnings had kept on growing too. What was the explanation for such a breathtaking growth performance?
The magazine noted that the bank had been well placed to expand its domestic retail business with higher-yielding products such as consumer mortgages and personal installment loans. It had pioneered consumer loans as early as 1928 and had been the most aggressive in nourishing the new postwar mass market, helping to develop markets for both car and student loans.
First National City Bank was also the only major New York commercial bank with a national charter. Applications to open new branches were processed by the comptroller of the currency at the Federal Treasury Department, which was eager to grant rapid approvals. Banks with state charters had to be approved by the New York State Banking Department and by either the Federal Reserve or the Federal Deposit Insurance Corp.
While it had also moved into long-term corporate lending, aircraft leasing, and factoring, First National City Bank's biggest coup was to pioneer the negotiable certificate of deposit (CD) in 1961. Walter Wriston and John Exter, the former Federal Reserve official, noticed that European banks had been issuing such instruments with maturities of three to five years, but they were non-marketable and non-negotiable.
Wriston and Exter realized that a marketable time deposit that paid interest would be attractive to corporate investors. And so, by adapting the European idea, the bank found a way to reverse the steady outflow of funds from corporate checking accounts that had begun in the late 1950s. In effect, it was now offering to pay interest to get back funds it was previously getting interest-free.
As Fortune noted, "the new instrument took the banking community by storm," with the value of outstanding negotiable CD issues reaching $15 billion by 1965. For First National City Bank, negotiable CDs were now the biggest source of funds after savings deposits.