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JOI 11111111110.11•111111111•1111 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis CONGRESSIONAL March 1983 ilk Collection: Paul A. Volcker Papers Call Number: MC279 Box 12 Preferred Citation: Congressional Correspondence, March 1983; Paul A. Volcker Papers, Box 12; Public Policy Papers, Department of Rare Books and Special Collections, Princeton University Library Find it online: http://findingaids.princeton.edu/collections/MC279/c459 and https://fraser.stlouisfed.org/archival/5297 The digitization ofthis collection was made possible by the Federal Reserve Bank of St. Louis. From the collections of the Seeley G. Mudd Manuscript Library, Princeton, NJ These documents can only be used for educational and research purposes ("fair use") as per United States copyright law. By accessing this file, all users agree that their use falls within fair use as defined by the copyright law of the United States. 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Mudd Manuscript Library 65 Olden Street Princeton, NJ 08540 609-258-6345 609-258-3385 (fax) email@example.com https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Congressional March 1983 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • of Go 'o - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER •sAL RES • CHAIRMAN March 31, 1983 The Honorable Paul Trible United States Senate Washington, D.C. 20510 Dear Mr. Trible: Thank you for your letter of March 29 requesting comment on correspondence you received from Virginia Delegate George P. Beard concerning the relocation of computer operations from Culpeper to Chicago. Naturally, we can understand the questions and concerns that arise when a change such as ours has been made. We hope the following comments will explain the rationale for our move, the extent of the change, the nature of the continuing role for our Culpeper Facility, and the steps that have been taken to consider the welfare of our employees. The Federal Reserve's Facility in Culpeper was opened for operation in 1969. There are several System functions carried out at this Facility. First, the Facility serves as a relocation site for the Board of Governors. This is one of the primary roles for this site and is one that is likely to continue. Second, Culpeper acts as a currency storage facility for several Reserve Banks, and we anticipate no change in this functional responsibility. Third, System high-speed currency sorting, research, and development is conducted in Culpeper-this too is planned to continue. Fourth, the Culpeper- Facility has been the hub of our FRCS-70 communications system and has played a supporting role in our new (FRCS-80) communications system. It is only this last part of the Culpeper operations that is being phased into our Chicago office. In total, approximately 30 to 35 of 120 employees will be affected by this move. In June 1982, the Federal Reserve implemented for operation the FRCS-80 packet switching network. We moved to this new network because our then existing (FRCS-70) network would not handle the volume of traffic that was projected for the 1980's. In establishing the new network, the development and certain operational aspects were split between our offices in Chicago and Culpeper. Following implementation of the new network, a study was undertaken to determine the relative cost-effectiveness of continuing to operate the communications system from two separate sites. The results of the study clearly demonstrated that significant savings could be obtained by merging the responsibilities at one location. The study further demonstrated that additional savings to the System The Honorable Paul Trible Page Two site would accrue if the site were relocated to a head office ized (a Federal Reserve Bank). The savings that will be real ity to from consolidation at a Reserve Bank result from the abil ady in share data processing hardware and software that is alre eper is place to support the operations of a Reserve Bank. Culp equipnot a head office and thus has no need for that level of phased ment and software. The move to Chicago will be on a FRCS-70 basis, will be tied in with the final removal of all d by the equipment in Culpeper, and is expected to be complete end of the year. The Federal Reserve System has made the following f affected arrangements to assist members of the Culpeper staf f in by this move. First, we are actively assisting the staf em-locating new positions within the Federal Reserve Syst mond including the Chicago Federal Reserve Bank, the Rich any other Federal Reserve Bank, the Board in Washington, or interoffice. Several Culpeper employees have already been ington. To viewed and some have been offered employment in Wash to continue date, these employees have announced their intent In addito reside in Culpeper while working in Washington. expertise tion, for a few essential employees whose technical oses, is needed in Culpeper through year-end for backup purp to continue substantial incentives are being provided to them unications working in Culpeper until the relocation of the comm cement program system is completed. Third, an active out-pla finding new has been designed to assist affected employees in Reserve System. employment either within or outside the Federal our I can assure you that the decision to consolidate made after communications network facilities in Chicago was impact on the very careful and thoughtful consideration of its rve's comefficiency and effectiveness of the Federal Rese valued employees munications network as well as on the System's d also began In this regard, I should mention that the Boar of locating other to study, several weeks ago, the possibility pursue these System functions in Culpeper and will continue to efforts over the next few months. I hope that this information is useful. know if I can be of further assistance. Sincerely, I https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (CWS:AFC):jes (V-60) bcc: Mrs. Mallardi (2) Please let me https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis tlnitcd States nate WASHINGTON, D.C. 20510 March 29, 1983 BOARD OF OF GOVERNORS THE FEDER AL RES'ERVC SYSIEN 8493 MAR 31 AM 11: 34 OFFICE OFRECEIVEO ThE CHAIRHAI'tt Honorable Paul A. Volcker Chairman, Federal Reserve System 20th Street and Constitution Avenue, N. W. Washington, D. C. 20551 Dear Mr. Chairman: Attached is a copy of a letter I recently received from George P. Beard, Jr., a member of the Virginia House of Delegates. As you will see, he is quite concerned over the proposal by the Federal Reserve to move its computer operation in Culpeper, Virginia, to Chicago. This facility is constructed in the side of a small mountain in solid rock at considerable expense in the event of a national emergency and seems to be the best place for this facility. It does not appear to be practical to move this facility from this well protected area and I would appreciate your rationale for proposing this move. Sincerely, Paul Trible mob F VIRGINIA EALTH O COMMONW EGATES HOUSE OF DEL D RICHMON March 8, 1983 EARD. JR ENTS ASSIGNM N L.UC Ak/ IO 'NANCE AGNICULI 1111 ` pc, H E COMMITTE A WO • DISTRICT Paul Trible le Honorable Senate mited States fice Bldg. f O e t a n e S t 517 Har 20510 . C. Washington, D laymen and e: s u l b i o r t T g r n o i t w a o n n operation Dear Se on unbek r s e a t e u r p e m m o o c s _ r e o at f e_th ow by now th kserve has decided to zu , I cannot understand n k t o n y a m You may or the Eederal_ ago. For the life of me , a e tion could r a a r e s p i o h t c s n i t i h i C s n o r i t d banke dollars have ck in Culpeper hose involve t e f y r o l e n s o n k o n d i a n l b a l i , m of 'ts is move in solid ro nd owever, that i h n h i e , a b t w n o e u n l o k a m n o o d l i l I t a e sm the ra feline of th e matter up. cility in the side of a i h l t r s a i e h l t c g y n l i a ac probab truct this f k or an all out war. Pl stand it, does not make s n o c o t t n e p r been s nuclear attac of the ground, as I unde a f o t n e v e op in the Chicago on t s concerned. i n i n o m i e t t c s e y t s o r entire ny wonderfar as p a m s a o s e s e n s e u s a f c o community be y and others are a whole lot e r i t n e e h t ft alread has upset e e l v o e m v ed not tell a e h g n n i s d I e n e e y p o . l o p g s m a i c h e Naturally, t going to Chi tion has gradually here. Seven d n a e h y t o l r p e m h e t a e r a r ful people we in different directions e the unemployment situ ed change t c e p x e n u c s s n i planning move oes to a rural area, si have made cutbacks. Th the imagination. s d ty ies here retch of r t t s s u y d n n you what thi a i ed top quali t y c r b a e r h y t t m t o o a n o e c s t e u i e ca increased be tainly will not help th ed here that ployed. They had very n e p o t s r i f r ty em by the Fed ce y well when this facili f whom were gainfully he state. t n i t s e b o he er I remember v e five county area, all morale here was among t h d people from t eputation an r e h t son with the u n i d b n o a R r e n v a o m n s r s Congre ee if yo little tu d s n a o t r e r n e r k a c W l o V tor tter to Sena ther and talk with Mr. it is an economy move e l r a l i m i s a f ge I am writing three of you can get to ve was necessary, and i it is a political move o e f hope that th first of all, why the m run- its tiTiIiness, but i you three fine men can find out- s to tell the Fed how to ts worth. Secondly, if e_sent here to replace i b en why an-ria-O in our two c artment of the Fed can_ o but come here for t u p o t t n a w t ep we certainly it. One has t is too good of a ng_or some_d i h e t t e a m i o c s -i _ T ) f T i o _ i ee y -j would also s mbers we would certainl acility to realize that status during this f y nu tude of this ly to leave in a limping are for any eventualit the missing i n g a m e h t e e p t a visit and s ell secured and too cos s trying its best to pre w i location, too lives when this country e community h t r o f period in our in the future. n o i t ua nto this sit hat this letter is i g n i that may come k o o l r t o goes to you f h the Fed are not aware n o i t s moves. a u i o c i e r r a p v p t a i s w t e i r d e e es ct My sinc people conne derstand why the Fed mak e h t s a e l o n as a wh who do not u d n a , n e t t urs, i being wr Sincerely yo GPBJ:mih https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Glenn English Chairman Subcommittee on Government Information, Justice and Agriculture Committee on Government Operations House of Representatives Washington, D.C. 20515 Dear Chairman Englisci: In accordance with the requirements of the Government in the Sunshine Act, I am pleased to submit the Board's sixth Annual Report covering the implementation of its administrative responsibilities under the Act during calendar year 1)82. Sincerely, Enclosure JM:PAV:smm bcc: Mrs. Marllardi (2) Mrs. Booth Mrs. Doying Identical letters also sent to: President of the Senate -- George Bush Speaker of the House of Representatiees Thomas P. O'Neill, Jr. Chairman, Committee on Government Affairs John C. Danforth https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "'NI HOUSE OF REPRESENTATIVES WASHINGTON, D. C. 20515 C-73 ...im --rN Cr., ao CiJ rn CD rvl ).- rn CD 0 -T-i ra ..--t CO ED BETHUNE 2ND DISTRICT, ARKANSAS — rn March 23, 1983 % r%)r-i-i co CO . rrt.7a - rr% c, - ii:=3 7..= l 5-71 c=, rrs —4 cp ..0 rn rii 7•1 ril Cp 1.7.3 ....4 Cl-.) rri 31.1 Dear Paul: Your visit with the folks from the Greater Little Rock Chamber of Commerce was the hit of their entire trip! I had hoped to join the crew at your office, but my flight from Little Rock was delayed and I returned to Washington only minutes before the meeting. The group's luncheon speaker that day was Chris Wallace of NBC -- you'll be amused to know that he joked about borrowing one of their name tags since he can't get in to see you on his own! Thanks again, Paul. I'm extremely grateful for the time you gave to the Chamber -- you really made their trip a success. Since Ed B hune Member of Congress The Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System Washington, D.C. 20551 CO c=> t=0 Co0 March 23, 1983 The Honorable Paula Hawkins Chairman Subcommittee on Consumer Affairs Committee on Banking, Housing and Urban Affairs United States Senate 20510 Washington, D. C Dear Chairman Hawkins: Recently, at the request of Chairman Cam, the Board's staff prepared a paper on the application of the Truth in Lending Act to mortgages. Chairman Carn asked that I also send the paper to you, and I am pleased to enclose a copy for you. In his letter to me, Chairman Cam n questioned the value of the annual percentage rate in mortgage transactions, particularly in view of the difficulty of calculation, as evidenced by a letter from one of his constituents. The staff paper prepared in response to the Chairman's letter discusses the utility and cost of calculating annual percentage rates in mortgages. It makes no specific recommendations, which I think would be premature at this point, but instead summarizes the available evidence on the complexity of the calculation for mortgage lenders and the value of the disclosure to consumers. I hope that the paper will be of interest and that it may be of some use to you and your staff. If you have any questions or need further information, please let me know. Sincerely, S/Paul A. lioluiec Enclosure MS:AFC:vcd (V-11) bcc: Ms. Stewart, Ms. Lowrey, Mr. Garwood Mrs. Mallardi (2) , https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 23, 1983 The Honorable Jake Camn Chairman Committee on Ranking, Housing and Urban Affairs United States Senate Washington, D. C. 2051n Dear Chairman Carn! As I promised you in my February 2 letter, I am pleased to enclose a paper prepared by our staff regarding the Truth in Lending Act. We have taken two slight liberties with the request made in your January letter, for reasons which I hone you will cafind acceptable. Rather than discussing the general appli tion of Truth in Lending to all simple interest transactions, we have focused the paper on the heart of the issue--the utility and cost of calculating annual percentage rates in ly mortgage transactions. This seemed to us to more specifical by address the concerns about real estate disclosures expressed Spencer Fccles in his letter to you, a concern echoed by other commenters over the years. Additionally, we have concentrated the discussion on the annual percentage rate, because both the problems and the benefits of Truth in Lending are most closely identified with that central disclosure. You will see that we have refrained from making any at specific recommendations, which would probably be premature able this point. Instead, we have tried to summarize the avail evidence on complexity of compliance and worth of the disand closure to the public. Any conclusions on this difficult and important issue should draw more directly on the experience knowledge of the industry and others through the legislative process. If there is anything further my staff or I can do to assist you in looking into this question, please let me know. As you requested, I am also sending a copy of the paper to Senator Hawkins. Sincerely, Enclosure MS:AFC:vcd (V-11) bcc: Ms. Stewart, Ms. Lowrey, Mr. Garwood Mrs. Mallardi (2) \, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Action assigned Mr. Garwood JAKE BARK UTAH, CHAIRMAN A V JOHN TOWER, TEX. JOHN HEINZ. PA. WILLIAM L.. ARMSTRONG, COLO. RICHARD G. LUGAR. 540. ALFONSE H. D•AMATO, N.Y. JOHN H. CHAFEE, R.I. HARRISON "JACK" SCHMITT, N. mrx. NICHOLAS F. BRADY, N.J. DONALD W. RIEGLE, JR., MICH. WILLIAM PROXMIRE. WIS. ALAN CRANSTON. GAUP*. PAUL S. SARBANES, MD. CHRISTOPHER J. DODD, CONN. ALAN J. DIXON, ILL. SSER, TENN. , JIM SA M. DANNY WALL, STAFF DIRECTOR ROBERT W. RUSSELL, MINORITY STAFF DIRECTOR https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis liCartiteb Ztafez Zenafe COMMITTEE ON BANKING. HOUSING. AND URBAN AFFAIRS WASHINGTON.D.C. 20510 / January 7, 1983 1 k/f ./y I A - Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System 20th & Constitution Ave., N.W. Washington, D.C. 20551 Ammo. Dear Chairman Volcker: Enclosed find a copy of a letter from Spence Eccles of First Security Corporation regarding the applicability of Truth in Lending disclosures to simple interest mortgage transactions. The issue that Spence raises is one which has concerned me for some time and which I believe warrants review. I am inclined to agree with his assessment that the disclosure of the annual percentage rate is of questionable utility to consumers in most mortgage transactions and that the complexities inherent in deriving an APR for the ever expanding types of alternative mortgage transactions outweighs the little benefit that might be derived from such a disclosure. Since Spence Eccles' letter does an excellent job of describing the problem and concerns, I am taking this opportunity to bring the issue to your attention. I would appreciate it if your staff could analyze the general issue of Truth in Lending's applicability to simple interest transactions, particularly mortgage transactions, and review the specific recommendation contained on page three of the enclosed letter. I look forward to receiving the benefit of your thoughts resulting from such a review and analysis.- In addition, I would appreciate it if you would send Senator Hawkins, who will be chairing the Consumer'Affairs Subcommittee, a copy of your response, as;i. have raped this issue with her in the hope that she may be interested in conducting a hearing on the matter. Thank you for your assistance. Sincerely, JG:bca Enclosure • LARGEST INTERMOUNTAIN BANKING ORGANIZATION POST OFFICE BOX 30006, 79 SOUTH MAIN STREET SALT LAKE CITY, UTAH 84130 SPENCER F. ECCLES • t " t: ( PRESIDEN'T AND CI.A/MIMAIN ,EXECUTIVE OFFICEP C.41E https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis October 25, 1982 The Honorable Jake Garn United States Senate 5207 Dirksen Senate Office Building Washington, D. C. 20510 Dear Senator Garn: With the passage of the Garn - St. Germain Depository Institutions Act of 1982, we felt the time might now be appropriate to broach another subject. October 1, 1982, has come and gone, and the financial world now finds itself under a revised Truth-in-Lending Act. Thanks to your endeavors we had an additional six-month period in which to comply with the revised Act and resulting Regulation. This additional time proved to be critical in organizing our compliance efforts. Retraining necessary to implement revised Regulation Z has again pointed out the greatest singular change needed in this regulation. This chanI•uld ameliorate the major problem which, all creditors have in trying to comply with Truth-in-Lending disclosures. Although fully enshrined as one of consumerisms greatest "sacred cows" the "annual percentage rate" (APR) is a meaningless and often confusing term which seldom benefits anyone. There is a substitute which has long been the only figure the average consumer could ever relate to. That is the simple annual rate of interest calculated on a 365 day year. One of the most popular mortgage programs in the country right now is the "Growth Equity Mortgage" (GEM). This is, of course, only one of many mortgage programs currently being offered to the public. It is the GEM program, however, which is one of the most difficult .to disclose. The new regulation (12 CFR 226.19(a)) now requires a Truth-in-Lending disclosure statement to be given °Lit within three days of receipt of application. If this e4.fly disclos).ire is off by more than 1/8 of one percent at closing, new disclosures must be given out again at that time. Until as we can complete the reprograming of our computer each GEM S. well as all others, will have to have the APR calculated by hand. It now https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jake Garn Page 2 October 25, 1982 takes a highly trained mortgage closing officer a minimum of 25 minutes to make this calculation and it usually must be made again at closing. Many of our older employees simply cannot make these calculations and have asked to be transferred to other departments. When our computer is fully reprogramed, access will still be a problem. In one branch alone we recently had 80 applications in one week. Multiply that by approximately 200 other offices of First Security which offer mortgage loans and computer access becomes an obvious, but needless problem. When you take a simple note rate which the customer understands and spend 25 minutes running it through a myriad of computational formulas to arrive at a different figure, you have long since lost the customer and consequently the value of a "meaningful" disclosure. Regardless of the amount of time that it takes to calculate thewhen this figure differs from the note rate you seldom, if ever, can make the consumer understand the reason why. "A Banker's Guide to APR Calculations" has recently been published by the American Bankers Association at a retail price of $44. This volume is over 300 pages in length and is already obsolete. GEM, Zero Interest and Graduated Payment Adjustable Rate loans, with or without buydowns, are just a few examples of loans not covered in this publication. Too much in terms of time, money and effort is being spent for too little. Presently, there is no federal or state regulatory agency wl-lich we know of that can give us a formula for calculating the APR on a set principal reduction loan ($200 per month plus interest). Seller's points, once thought to be on their way back into the calculation of the APR and finance charge are now gone for good, or at least for the time being. This further underscSres just how meaningless the APR has become when you realize some mortgages have seller points averaging between twenty five and forty percent of the purchase price of the home. This amount is not part of the APR calculation. It is, however, an obvious cost of credit. To support the sincerity of our proposal with fact, last August we sent our Corporate Compliance Officer to see an attorney on your staff. Beth Climo of new disclosure material which had was given an embarrassinSe been sent to us fr9m various state and federal agencies just this year. Two legal size sheets' of paper (double column) were provided showing the complex steps in calculating the APR for a GEM loan. We felt our timing was premature considering the mark-up sessions that your staff was involved • with. I hope that time will now allow the serious consideration of the following proposal. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jake Garn Page 3 October 25, 1982 First Security Corporation would like to formally propose that the Truthin-Lending Act be amended in the following manner. 1. Require the disclosure of only the simple annual rate of interest based upon a 365 day year for all loans on which interest is collected on that basis. In addition, require the disclosure of all prepaid finance charges both as a percentage of the total loan and as a dollar amount. 2. Continue to require the disclosure of the "annual percentage rate" for all pre-computed loans (i.e. discount or add on loans) as presently exists within the Act and/or regulation. It was the latter type of loans which were generally found in automobile financing that justifiably called attention to the actual effective rates of interest consumers were being charged. No one at that time, however, envisioned that this regulation would become the reticular morass that it has since evolved into. We feel that the most meager survey of our industry or the public would show overwhelming support SSet back, where feasible, to the more common sense figures that the average consumer already understands. Customers calling in for mortgage rates only want to know one thing. We must nonetheless quote them the APR, although we are also allowed to quote the simple .nnual rate of inteirest. We know which rate the consumer is using to shop for credit because our competitors' simI-.nnual rates are often quoted back to us when our own rates are too hiSh. We believe it is time to more fully recognize how the marketplace actually works. Our consumer laws cannot continue to be allowed to grow into something that requires an attorney and a mathematician to understand. This does not constitute a "• • • meaningful disclosure" nor can it be considered to be an ". . . informed use of credit." I apologize for the length of this letter, but felt like a certain number of facts had to be presented in approaching such a sacrosanct subject. I do not know of a .4imilar proposal in the area of consumer law where the mutual benefits derived wourd approach the magnitude of the change suggested. The savings in time and loan costs alone would be significant. The resulting clarity would bring back meaning to disclosures, many of • which are currently too complex in their calculations to be understood. 4 . https://fraser.stlouisfed.org Federal IP Reserve Bank of St. Louis October 25, 1982 The Honorable Jake Garn Page 4 Jake, we support and appreciate the leadership that you have established in the Senate. We hope that the proposal we have made can benefit from the direction and insight that you can provide. Best regards, F. Eccles •ahairman and President Chief Executive Officer CC: Senator Orrin Hatch Senator Steven D. Symms Senator James A. McClure Representative James Hansen Representative Dan Marriott Representative George Hansen Representative Larry E. Craig M. Grant Snow March 22, 1983 The Honorable Ron Paul House of Representatives Washington, D.C. 20515 Dear Mr. Paul: As requested in your letter of March 1, I am pleased to enclose a copy of the so-called Basle Concordat. The Concordat was in fact a report by the Committee on Banking Regulations and Supervisory Practices of the Bank of International Settlements which was submitted in 1975. The report set forth general understandings on the several and joint responsibilities of bank supervisors with respect to the international operations of their own banks and the operations of foreign banks within their own territories. A major oblective was to ensure that no bank operating internationally would escape supervision. The central bank governors who meet regularly at the Bank for International Settlements endorsed the principles contained in the report as desirable goals for bank supervisors worldwide. I am also enclosing a copy of a paper given in 1981 by Peter Cooke of the Bank of England, who is the Chairman of the Basle Committee. The paper was authorized by the central bank governors as a means of making public the Concordat and other information about the Basle Committee's work. It should be noted that the Basle Committee is in the process of revising the Concordat. The revision is intended to have the document reflect experience since 1975 and to emphasize that it is concerned purely with supervisory responsibilities and not with lender of last resort responsibilities. Sincerely, SLPaUL A1 VqckeE rnclosures FRD:CO:pjt (#V-43) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Dahl Mr. Gemmill Mrs. Mallardi (2) Action assigned Mr. Truman DISTR ICT OFFICES RON PAUL 22nD Dirrnicr, TEXAS ROOM 1234 LONGWORTH HOUSE OFFICE BUILDING (202) 225-5951 • COMMITTEE ON BANKING, FINANCE, AND URBAN AFFAIRS 1110 NASA ROAD 1, SUITE 100 HOUSTON, TEXAS 77058 (713) 486-8583 Congrefs5 of tbe Einiteb MattsS 300115t of 1epre5entatiba 6711 BELLFORT AVENUE, SUITE 307 HOUSTON, TEXAS 77087 (713) 226-4636 Illatbington, 3D.C. 20515 101 OYSTER CREEK DRIVE LAKE JACKSON. TEXAS 77566 (713) 297-3961 RANKING REPUBLICAN SUBCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE "2 /) CONGRESSIONAL HOTLINESi Housrom,(713) 237-1550 ....19N:(713) 297-0202 LAKE JACK L.C3 cc) MEMBER, UNITED STATES GOLD POLICY COMMISSION March 1, 1983 Chairman Paul Volcker Board of Governors of the Federal Reserve System Twentieth St. and Constitution Ave. N.W. Washington, D.C. 20551 Dear Mr. Volcker: Basel Concordat The present international financial situation invests the of 1975 with renewed importance. cult As a member of the House Banking Committee, I find it very diffi crisis without to understand our government's role in handling the present you send full disclosure of the international agreements already made. Would the Basel Concordat? me, as soon as possible, the text and accompanying notes of Thank you very much for your cooperation. Sincerely, Ron Paul Member of congress RP/jr cc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Fernand J. St. Germain Chalmers Wylie JAMES T. BROYHILL DISTRICT OFFICES: 10TH DISTRICT, NORTH CAROLINA 318 SOUTH STREET GASTONIA, NORTH CAROLINA Room 2340 RAYBURN HOUSE OFFICE BUILDING WASHINGTON, D.C. 20515 202-225-2576 COMMITTEE: ENERGY AND COMMERCE RANKING MINORITY 28052 (704) 864-9922 Congrems of tit Ziniteb tate5 3/puck of Repregentatibel Ellatibington, 0.e. 20515 224 MULBERRY STREET. S.W. LENOIR. NORTH CAROLINA 28645 (704) 758-4247 Room 133 FEDERAL BUILDING HICKORY, NORTH CAROLINA 28601 (704) 328-8718 MEMBER March 21, 1983 The Honorable Paul Volcker Federal Reserve 20th and Constitution, N.W Washington, D.C. 20551 Dear Paul: I would like to take this opportunity to thank you again for taking time out of your busy schedule to speak at my National Issues Seminar last Thursday. You were the headline attraction for the Seminar. So many people from my district commented on their excitement at getting to see and hear in person the man they had heard so much about. I know of the tremendous demands on your time, and I am grateful that you were able to spend nearly an hour with my constituents. You did an outstanding job of convincing them that you cannot push a button and make all bad economic news suddenly turn into good news! I also want to thank Joe Coyne of your staff who assisted Ms. Nancy Barnes in arranging your part in our program, as well as providing her with your biography and other very helpful information. Again, Paul, on behalf of myself and my constituents, I appreciate your being a part of my Seminar. If I can ever be of any assistance to you in any way, please do not hesitate to call on me. Wit best regards, s T. Broyhill er of Congress JTB:nb https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Alt BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 March 21, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Carroll Hubbard House of Representatives Washington, D.C. 20515 Dear Carroll: This is in response to your recent letter, in which you ask for comments on an inquiry by one of your constituents about recent international financial difficulties and the involvement of U.S. banks. If I interpret the question correctly, it addresses the issue of the adequacy of supervision of bank lending activities, and in particular, past lending to countries which are now experiencing financial difficulties. I share this concern, and the issue is important since failure to deal successfully with international financial pressures would jeopardize our own economic recovery. In 1979, the three Federal bank regulatory agencies instituted a new system for assessing country risk for use by examiners in evaluating banks' portfolios. That system emphasizes diversification of exposure to individual countries as the primary method of moderating country risk in the international lending activities of banks. Its purpose is to call significant exposures to the attention of senior management and boards of directors of the banks, to raise questions, and to force careful consideration of lending policies. The objective of the examination procedure is to assure sound lending; it is not designed to instruct banks to which particular countries or for which particular projects it is or is not appropriate to lend. In light of recent developments, we are undertaking a reevaluation of our current approach toward supervision. My own preliminary judgement is that, while we need to consider possible improvements in implementation, the basic framework of the current system is constructive and sound. We do not want to substitute government credit judgements for those of the banks, and we don't want to curtail the necessary legitimate flow of bank credit internationally, where it supports our exports, or domestically. A sudden excess of caution would be damaging to this country and to the world economy, and our supervisory policies should not feed such overreaction. It is within those parameters that we are rethinking our approaches. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Carroll Hubbard Page Two Your constituent may also be suggesting that there is a tradeoff between lending abroad and lending domestically and that lending abroad reduces the amount of credit available to borrowers in this country. In this connection, one should note, first, that a substantial proportion--around two thirds-of foreign lending by U.S. banks is in effect funded by deposits from foreigners. Second, to address the implications of an increase in such net lending, one must trace through what happens when there is an outflow of funds from the United States. Such outflows would tend to lower the exchange value of the dollar, which would lead in time to larger net U.S. exports. But the effect on the trade balance would take some time to develop, and until it did the borrowed funds would have to be held, either by the original borrowers or by others, in U.S. credit markets. In the longer run, if there is a large persistent outflow of credit, the dollar's foreign exchange value will be lower, our net exports will be larger, and the effect on U.S. business as a whole would be essentially the same as if the credit had gone directly to U.S. exporters to finance their foreign sales. On the other hand, a sudden reduction in net foreign lending by U.S. banks could have negative effects on domestic credit availability. If the reduction was a reaction to the need to write off a large amount of foreign credits, which might occur because some banks had stopped lending, the resulting damage to banks' balance sheets might well constrain the volume and increase the cost of domestic as well as foreign lending. Moreover, if the debtor countries as a result had to reduce drastically their imports, there would be a contractionary effect on the whole U.S. economy. For example, about two-thirds of Mexico's imports are from the United States. I hope these observations are responsive to your constituent's question. Sincerely, SL bpi HB:EMT:AFC:pjt (#V-39) bcc: Ms. Brown Mr. Truman Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis dr CARROLL HUBBARD CONGRESSMAN Action assigned Mr. Truman; info copy to Mr. Dahl AT LARGE MAJORITY WHIP COMMITTEES BANKING. FINANCE AND URBAN AFFAIRS 1ST DISTRICT. KENTUCKY Congrezz of the Ztiniteb 1162 RAYBURN HOUSE OFFICE BUILDING WASHINGTON. D.0 20515 (202)225-3115 tato 11)outie of Repreckntatibto MERCHANT MARINE AND FISHERIES CHAIRMAN. SUBCOMMITTEE ON PANAMA CANAL/OUTER CONTINENTAL SHELF alaitington,31D.C. 20515 February Hon. Paul A. Volcker, Chairman Board of Governors Federal Reserve System Twentieth Street and Constitution Avenue, NW Washington, DC 20551 Dear Paul: I have been contacted by a constituent of mine who has inquired about our nation's economic problems, specifically about the recent international financial and economic problems and the involvement of U.S. banks. I would appreciate it if you would consider his inquiry about this matter. The specific question posed is, "Do you think that in this time of economic trouble at home and abroad we should seriously consider letting these big banks wander all over the financial map?" When I receive your response I will contact my constituent. Again, man thanks for your consideration of this request. With best wishes for you, I am --- Sincerely yours, Carroll Hubbard Member of Congress CH/l11 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis NINETY-EIGHTH CONGRESS JAMES 14 JONES, OKLA CHAIRMAN JIM WRIGHT, TEX STEPHEN J. SOLARZ, N.Y. TIMOTHY E WIRTH, COLO. LEON E PANETTA, CALIF RICHARD A GEPHARDT, MO. BILL NELSON. FLA. LES ASPIN, WIS. W. G (BILL) HEFNER, N.C. THOMAS J DOVVNEY, NY. BRIAN DONNELLY. MASS. MIKE LOWRY. WASH. BUTLER DERRICK. S.C. GEORGE MILLER. CALIF WILLIAM H GRAY III, PA. PAT WILLIAMS, MONT. GERALDINE A. FERRARO. N.Y. HOWARD WOLPE, MICH. MARTIN FROST, TEX VIC FAZIO, CALIF. No response r ggx,..r per Don Winn N.*. 3/)ouck of 1epre5entatitic5 COMMITTEE ON THE BUDGET 5111asjington, 3B.C. 20515 DELBERT L LATTA. OHIO B UD SHUSTER, PA BILL FRENZEL MINN JACK KEMP, N Y. ED BETHUNE, ARK PHIL GRAMM TEX LYNN MARTIN, ILL. BOBBI FIEDLFR. CALIF WILLIS D GRADISON. JR., OHIO TOM LOEFFLEFL TEX. CONNIE MACK, FLA. JOHN J O'SHAUGHNESSY. MINORITY STAFF DIRECTOR March 21, 1983 MACE BROIDE. EXECUTIVE DIRECTOR 226-7200 11101.3 The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 C/3 Dear Paul: C11 CO Thank you for your letter of March 17 regarding the language in the Committee's budget resolution that deals with the consistency between the assumptions used to estimate the Congressional budget and the economic objectives of the Federal Reserve. I appreciate very much your thoughts on this subject. Our intention in drafting the language was to carry forward the process of developing a better mechanism for the coordination of fiscal and monetary policy. The Chairman of the Committee on Banking, Finance and Urban Affairs, Mr. St Germain, and the Vice-Chairman of the Joint Economic Committee, Mr. Hamilton, both conveyed to the Budget Committee their views that it was appropriate and desirable to address this issue in the budget resolution. The "sense of the Congress" language in the budget resolution was framed to provide a general statement of the informational requirements of the Congress in writing a budget resolution. The Committee carefully avoided language which might suggest Congressional interference in the Federal Reserve's conduct of monetary policy, such as recent proposals to "target" interest rates or certain price indexes. I personally have not favored such proposals and would not wish to see them in a budget resolution. The approach taken in the resolution is one which has received support from witnesses before our Committee as well as from a number of liberal and conservative economists. Of course, it may be possible to improve upon the language in the Committee's resolution consistent with its overall purpose. Certainly, the House Committee on Banking, Finance and Urban Affairs may wish to give this matter close and serious attention, as you suggest, if they decide to address the issue in terms of substantive legislation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis With best wishes, Sincerely, NINETY-EIGHTH CONGRESS JAMES R. JONES, OKLA. CHAIRMAN JIM WRIGHT, TEX. STEPHEN J. SOLARI, N.Y. TIMOTHY E. WIRTH, COLO. LEON E. PANETTA, CALIF. RICHARD A. GEPHARDT, MO. BILL NELSON, FLA. LES ASPIN. WIS. W. G. MILL) HEFNER, N.C. THOMAS J. DOWNEY, N.Y. BRIAN DONNELLY, MASS. MIKE LOWRY. WASH. BUTLER DERRICK. S.C. GEORGE MILLER, CALIF. WILLIAM H. GRAY III, PA. PAT WILLIAMS, MONT. GERALDINE A. FERRARO, N.Y. HOWARD WOLPE, MICH. MARTIN FROST, TEK. VIC FAZIO, CALIF. DELBERT L. LATTA. OHIO BUD SHUSTER, PA. BILL FRENZEL, MINN. JACK KEMP, N.Y. ED BETHUNE, ARK. PHIL GRAMM. TEX. LYNN MARTIN, ILL. BOBBI FIEDLFR. CALIF. WILLIS D GRADISON, JR., OHIO TOM LOEFFLER, TEX CONNIE MACK, FLA. 41.01. jOottise of ileprefientatibez COMMITTEE ON THE BUDGET illacsbington, 30.e. 20515 JOHN J O'SHAUGHNESSY, MINORITY STAFF DIRECTOR March 21, 1983 MACE BROIDE, EXECUTIVE DIRECTOR 226-7200 cfn —n The Honorable Paul A. Volcker Chairman Board of Governors of the Federal Reserve System Washington, D.C. 20551 Z5 CP t...... z-- 55 3c c::, c•D __a, rri— c=2, -- rn 7%, * Dear Paul: '= 2 , Fi ,--..--, ....,,..rn _....“—.., ---:rei -111 rn rn (;) CD Thank you for your letter of March 17 regarding the language in the c° Committee's budget resolution that deals with the consistency between the assumptions used to estimate the Congressional budget and the economic objectives of the Federal Reserve. I appreciate very much your thoughts on this subject. Our intention in drafting the language was to carry forward the process of developing a better mechanism for the coordination of fiscal and monetary II licy. The Chairman of the Committee on Banking, Finance and Urban Affairs, Mr. St Germain, and the Vice-Chairman of the Joint Economic Committee, Mr. Hamilton, both conveyed to the Budget Committee their views that it was appropriate and desirable to address this issue in the budget resolution. The "sense of the Congress" language in the budget resolution was framed to provide a general statement of the informational requirements of the Congress in writing a budget resolution. The Committee carefully avoided language which might suggest Congressional interference in the Federal Reserve's conduct of monetary policy, such as recent proposals to "tarI-rest rates or certain price indexes. I personally have not favored such proposals and would not wish to see them in a budget resolution. The approach taken in the resolution is one which has received support from witnesses I- fore our Committee as well as from a number of liberal and conservative economists. 4 Of course, it may be possible to improve upon the language in the Committee's resolution consistent with its overall purpose. Certainly, the House Committee on Banking, Finance and Urban Affairs may wish to give this matter close and serious attention, as you suggest, if they decide to address the issue in terms of substantive legislation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis With best wishes, Sincerely, BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, O. E. 20E51 March 17, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Jack Kemp House of Representatives 20515 Washington, D.C. Dear Mr. Kemp? I welcome the chance to respond to your letter of March 10. I remain uncertain about the degree to which our approaches to monetary policy reflect real differences in substance and analysis, but I hope my response may at least clarify some issues in your mind. First of all, you refer to "fear" in markets of either continuing recession or renewed inflation with rising interest rates. I, and I suspect any sensitive observer, have been struck by the seemingly contradictory and extreme attituaes that seem endemic (and which are, in fact, reflected in some opinion surveys). Perhaps we should at least take comfort from the fact that the almost uniform expectation of rising inflation seems to have been dissipated. I would suggest that the prevailing uncertainty is I.sically a heritage of history and change. Inflationary expectations had become deeply ingrained over the previous ten or fifteen years, consciously or unconsciously motivating much economic and financial behavior. There is a common perception that earlier government programs adopted from time to time to contain inflation were not "carried through" in response to Against that background, it is natural, and other pressures. probably inevitable, that the current effort to restore reasonable price stability has met with rather deep-seated skepticism, despite the clear evidence of progress. At the same time, the long recession, the interest rate instability of recent years, and the evident financial strains that have accompanied the effort to restore stability have left a legacy of uncertainty on that score. Indeed, entirely apart from the strains associated with antiinflationary policies, I believe the financial and economic distortions associated with the inflationary process itself have produced a strong sense of uneasiness about the prospects for the "real" economy. I think we may have to recognize that those uncertainties can be fully dissipated only by time and the accumulation of more favorable evidence. At the same time, I certainly agree with your implicit concern that the process be https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Two • speeded to the full extent feasible by firm articulation of the methods to be followed to reach the goal of stability--by what you call "a clear, effective, long-term strategy." And we need to be careful in stating that strategy that we be realistic-neither promising too much or too little lest we end up aggravating the uncertainty. I would argue that is precisely what the Federal Reserve has been trying to do, recognizing at the same time that monetary policy is only one part of economic policy, and the effectiveness of the whole is dependent on all the parts. I have also argued that implementation of that strategy, in practical application, requires elements of flexibility and judgment in adapting our operating methods and approaches to changing conditions, most particularly at a time when both the institutional setting and the economic (and particularly inflationary) trend is changing. You suggest, in response to my comments about the need for judgment, that the Federal Reserve has "shifting positions," "unclear goals," and "no policy at all." I must take strong exception to those allegations. Indeed, the more usual comment I hear about our statements (sometimes meant critically, sometimes not) is that they "always say the same thing." In the broadest terms, we have emphasized again and again that a fundamental premise of our approach has been the need to turn the inflationary momentum and then to encourage restoration of reasonable price stability. We believe prospects for long-lasting expansion and lower interest rates, in very large part, rest on success in achieving that goal. In its most fundamental sense that is "policy"--it has been consistently stated and restated. I sense, at that general level, you are in agreement. I would also add, in practical effect, considerable progress is now evident. Your difficulty with our approach, as I understand it, is that either (1) we have been unable to articulate or provide a precise enough operational focus or target to be as convincing as we could be that the ultimate policy objective will be reached (at the expense of prolonging uncertainty and inhibiting smooth economic adjustment, such as a further decline in interest rates), or (2) we have picked the wrong operational target (i.e., the "money supply"), or (3) both. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Three We share a concern about making our objectives "credible"--and about disciplining ourselves. It is those considerations that contributed strongly to the emphasis placed on controlling the monetary aggregates. You object to that particular strategy and focus, presumably on the analytic and economic grounds that the connection between the more immediate goal--restraint on money and credit creation--and the ultimate objective of non-inflationary growth is too tenuous and unstable and has disturbing side effects. I won't take the time here to review all the evidence on that point. Suffice it to say there is a substantial body of analysis, widely held, that the nexus between money and inflation over time is relatively close; of course, the Congress, reflecting a broader body of opinion, has for some years required that we set out our operational objectives in that framework. At the same time, the relationships are not perfect, and more questions can arise during times of rapid institutional and economic change and dislocation. The depression years of the 1930s were one case in point; to a lesser extent, the current period could be another. Hence, we have been led to a view that in implementing our strategy--in deciding just how many reserves to supply, how much money growth to allow at specific times, when to "tighten" and when to "ease"--elements of pragmatic judgment are essential, taking account of analysis and evaluation of the incoming stream of information bearing on the performance of the money supply in relation to our ultimate objectives. You suggest a sharply different operating mode-targeting "sensitive" commodity prices now and ultimately fixed exchange rates with a gold numeraire--would provide greater certainty and confidence in reaching our longer-term objectives, without, by inference, the same need for "judgmental" adjustments and adverse side effects. In the end, we have to look to experience and economic analysis for evidence bearing on the point. In that connection, I have to point out that sensitive commodity prices historically, and for well known reasons, exhibit considerable cyclical swings, and over longer periods trends in commodity prices can deviate substantially from trends in the general domestic price level due to strong supply shocks," international developments, or other factors. Perhaps that can be minimized, but not eliminated, by careful selection of the prices to be included in an average. But the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Four imponderables are great; for instance, in recent years (and currently) a price collection that included oil--the most important of all commodities--behaved quite differently from one in which oil was excluded. Moreover, picking the "right" level of commodity prices to stabilize would be a difficult--I am tempted to say an almost impossible--decision. If, for instance, a good many commodity prices are below longer-run costs (assuming stability in those costs at current levels), "enforcing" stability in those commodity prices (on the average) would require declines in labor or other input costs. Fixing or targeting commodity prices at today's, or some other level, would necessarily imply a judgment on those relationships, or alternatively a conviction that other prices (including wages) would smoothly adjust to a new equilibrium. But we have little experience to suggest those adjustments would proceed smoothly, and controversy and uncertainty about the particular price chosen would likely ensue, undermining precisely the objective you seek. I could raise similar questions about the appropriate price of gold, or for that matter, key exchange rates. The decision of the British to restore the sterling gold parity in the 1920s (which many analysts have long considered a "wrong" price) is perhaps illustrative of the difficulties. Within our own experience, it was only a decade ago that a national (for all practical purposes, an international) decision was taken to abandon a fixed gold price (or fixed dollar exchange rates) as a reference point for policy. In my view, some of the reasoning behind that decision, which did reflect the prevailing views of most of the "economic establishment," was faulty in taking an unrealistic view of the degree to which the U.S. (or other open economies) could escape international "discipline" and an unduly optimistic view of the operations of a floating exchange rate system. From your point of view, and mine, insufficient attention may also have been paid to the psychological and expectational effects of dropping a "fixed reference point" in economic policy-making. Be that as it may, the fact remains that a credible long-term commitment to fixed exchange rates or a fixed price of gold--crucial to achieving the expectational effects you want--is dependent on a sense of conviction (not just in the U.S., but elsewhere) that the prices chosen should, can, and will be maintained, and are consistent with the basic goals of growth and stability. I doubt that such conviction exists today in nearly adequate degree to achieve the expectational effects you seek. After years of market turbulence, setting https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Five the "right" prices for precious metals would be at least as difficult as in the case of commodities generally, and I suspect you would agree that a "commitment" subject to early change under duress would complicate our problems further. We are in the unsatisfactory position, in your eyes and to sone extent in mine, of being left without a sufficiently powerful and practical "shorthand" method of indicating and reinforcing our commitment to stability--a "symbol" that is not just a psychological device, but in fact can encompass and encourage in a reasonably reliable way, as monetary policy is adapted to the objective, the stability we want consistent with growth. As I suggested earlier, the idea of expressing our operational goals in terms of the supply of money and credit, has seemed to us, for all its difficulties, to come closer to that objective than any other. In implementing our operations, we have, necessarily in my view, taken account of what evidence we have had that relationships between measures of money and economic activity are deviating importantly from past patterns (e.g., velocity is changing). We have also had to take account of other evidence about prices and economic activity, our fundamental responsibilities for the institutional stability of the financial system and other factors that I have explained in testimony and elsewhere. I take it you have no objection to that so far as it goes; in fact, welcome it from a perspective of wanting to move away from monetary targeting. But you want prompt substitution of another--I cannot refrain from saying simple-operating rule that can be stated essentially without qualification, and without flexibility and judgment in application, good for decades ahead. I know of no such rule now; I know of none that has worked, here or abroad, consistently in this century.* * You may cite the "Bretton Woods" era in refutation. The decades from the 1950s to the 1970s were, indeed, a glorious period in economic history for a variety of reasons. But I would also remind you convertibility of currencies in Europe and Japan was not restored until the late 1950s, the system was plainly strained by the late 1960s; faced with a clear choice, the major nations decided to turn to floating by the early 1970s, not least because some nations felt the Bretton Woods arrangements had become "an engine of inflation." All through the period considerable "discretion" was exercised in monetary policy here and abroad. The "spirit" of Bretton Woods was healthy, and I am so optimistic as to believe we could improve on the 1950s model; I once tried. But we won't do it by a quick, unilateral U.S. decision--and I should not imply you think so. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Six • Part of the practical problem we face, it seems to me, is that any "monetary standard" or arrangement designed to promote stability will be more difficult to implement and risks more "pain" in achieving its objectives, to the extent other policies are running in different directions. I do not apologize, in that context, for commenting on the problems I foresee in connection with the overall budgetary position of the Federal Government; indeed, I believe that I could not responsibly fail to respond to the urgently stated requests I get from the Budget Committees and others to offer some judgment on those matters. Perhaps it is a point of more fundamental disagreement between us, but I find it difficult to comprehend that any monetary arrangement would achieve stability and low interest rates irrespective of the position of the Federal budget. The extent to which it is appropriate for a Federal Reserve official to comment on specific revenue or expenditure measures is another matter, and I know that you are aware of my reluctance to respond to such questions, from you or others, because all budgetary measures involve a balancing of national priorities extending well beyond the responsibilities of the Federal Reserve and, indeed, of purely economic policy. While I may not always get the balance right between the general and the specific, I must take exception to your comment that I "have had no reticence in putting forth simple rules for the Congress to follow in its fiscal policy," or commenting on specific tax and spending measures. Any balanced reading of my testimony illustrates the opposite. But I also am aware--and don't disguise it--that the overall fiscal decisions will have a large bearing on the financial climate within which we must operate and the success of any policy or "rule" we set out for ourselves. My skepticism about the practical value and feasibility of a leap now to a "fixed price standard" of some sort does not mean, as we have discussed earlier in both public forums and privately, that I am not sympathetic to important strands in your thinking on monetary policy as best I understand them. In the most general terms, you seem to me to be seeking assurance that stability will have a clear priority in the hierarchy of goals for monetary policy and that that goal should be institutionalized in the conviction that, if fully credible, such stability will not only be compatible with, but help reinforce, prospects for lower interest rates today and stronger growth over time. I agree. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Seven Beyond that, I recognize the potential value of incorporating the general policy goal in more concrete and widely understood "operational" ob -iectives that can be widely observed, understood, and maintained over a long period even if I doubt that any rule can (or has) eliminated the need for judgment. That, to repeat, has been a basic consideration in our emphasis on several monetary and credit aggregates in stating our operational objectives, building on the established and widely perceived relationships between money and inflation. You object to that particular formulation; and our recognition that we have to be alert to the possibility of changes in the relationships, either temporarily or on a "trend" basis, apparently does not satisfy you. That is the case although I, for one, would recognize the relevance, in making such judgments, of factors such as sensitive commodity price indicators (not excluding prices of precious metals as a barometer of expectational considerations) and exchange rates, that you emphasize, among other pieces of evidence about the state of the economy. More fundamentally in terms of world monetary arrangements, I would repeat that, personally, "I am not at all allergic" to reforms of the international monetary system looking toward greater stability of exchange rates. Ultimately such a system may desirably be supported by some international unit of account, a particularly difficult issue analytically as well as practically. This is not the time or place to try to suggest more concrete steps in an area of national and international policy reaching beyond the responsibilities of the Federal Reserve, but my own conviction is that progress in that direction might usefully start modestly and pragmatically by efforts to dampen extreme swings in market exchange rates rather than by a full blown "plan"--even recognizing that at some point a more fully articulated sense of an appropriate goal would be helpful. I am conscious that none of this reduces monetary policy today to a fixed operational rule, and indeed, I believe an attempt to do so, at this stage, would be counterproductive. To put the point most directly, you yourself are a strong and vocal opponent of one such rule strongly urged by others--maintaining a preset growth pattern for one monetary aggregate over years ahead. Such a rule plainly, instead of inspiring your confidence and commitment, would invite your active opposition. By the same token, I have to suggest that https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Jack Kemp Page Eight it is doubtful that the particular rules you propose would inspire a sense of confidence and conviction by many others, and, as a consequence, would not likely achieve the dramatic expectational effects for which you hope. The risk would be quite the opposite: by claiming too much; by denying the possibility of a need to modify, adjust, or alter operational approaches in the light of emerging evidence; by leaving the policy vulnerable to abrupt overturn by political decisions, we would, out of the best motives in the world, leave ourselves vulnerable to greater uncertainty and strain. I regret you find our reports to the Congress "unenlightening," but I do not apologize for my inability to set down an operational "rule," however simple or complex, entirely free of elements of judgment and flexibility particularly during this period of transition and change. Our targeting of the monetary and credit aggregates plainly attempts to respond to the need. Your apparent sense of frustration on that point will not, I hope, obscure what seems to me more important--the conviction I believe we share that a sense of stability, within the U.S. and in our monetary relations with others, is essential to growth and low interest rates. That is the objective--only within such an agreed framework can we constructively consider and debate the means. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, deef JACZ. KEMP 31ST DISTRICT OF NEW YORK Congruis of the Unita t$tatts COMMITTEES: APPROPRIATIONS SUBCOMMITTEE: FOREIGN OPERATIONS RANKING MEMBER %oust of Representation Washington, B.C.=I WASHINGTON OFFICE: 2252 RAYBURN OFFICE BUILDING WASHINGTON, D.C. 20515 (2021 225-6265 DISTRICT OFFICES: 0 1101 FEDERAL BUILDING 111 WEST HURON STREET BUFFALO, NEW YORK 14202 (7161 546-4123 March 10, 1983 0 484 S. MAIN STREET 14456 BUDGET https://fraser.stlouisfed.org Federal 0 Reserve Bank of St. Louis PLEASE RESPOND O GENEVA, NEW YORK 1315) 765-3360 Hon. Paul Volcker Chairman, Board of Governors Federal Reserve System Constitution Ave. between 20th & 21st NW Washington, D.C. 20551 C.C) L4 =u • CZ) Dear Mr. Chairman: .11) ZiZ -13 --m.. I am very concerned about your recent statements on monetary policy. Just as last year's severe fall in commodity prices has ended and recovery is beginning, there are ominous hints that the Federal Reserve will return to the disastrous policy of mechanical monetarism abandoned only last year. The fall in.the financial markets on the report of your Budget Committee testimony makes it clear what effect such a shift would have on the recovery. The tragic experience of October 1979-June 1982 has proven that a heedless focus on the monetary aggregates as an end in themselves is not the answer to our problems. This merely replaced one form of dollar destabilization (inflation) with a new and equally pernicious form of dollar destabilization (deflation and excessively high interest rates). As you know, no one applauded more than I when you abandoned this policy last year. But as I made clear at the time, choosing a correct policy is just as important as abandoning an incorrect policy. The markets today do not know what to fear more -- a return to the financial and economic collapse of 1979-1982, or a return to the inflation and rising interest rates which preceded it. The shifting positions and unclear goals of the Federal Reserve are extremely troubling. All of us want to bring about price stability and a stable dollar, so that we can have low interest rates and put people back to work. But we cannot achieve any of these goals without a clear, effective, long-term strategy. The simple fact is that no one knows what to expect from the Federal Reserve, because the Federal Reserve has not made it clear what its new policy is to be. Until this occurs, the United States and the world will be wracked by the appearance of confusion, inconsistency, and indecision. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Hon. Paul Volcker Page Two My own views on what should be done are well know n to you: I b.elieve the Federal Reserve should observe a target based on sensitive commodity prices until we can restore a domestic and international mechanism like the Bretton Woods system, in which all currencies were tied to some thing of enduring value: gold. In your recent annual report to the Congress, you eschewed all "simple rules" for the conduct of monetary policy. Oddly enough, you have had no reticenc e in putting forth simple rules for the Congress to foll ow in its fiscal policy, down to the specific tax increases you desired and the year in which you would like to see them enacted. Insofar as it related to monetary policy, your test imony seemed to say that you would adopt a simple rule whic h you have criticized and abandoned in the past -- targeting the monetary aggregates but would place a "premium on judgment" as to when or if to follow them. This is no policy at all. Until now, I have 'been a staunch supporter of the independence of the Federal Reserve in the execution of its policy, and have headed off several attempts to change that relationship. As a creature of Congress, howe ver, the Federal Reserve does not enjoy the discretion to keep its policy a secret from its parent -- much less to offe r Congress free advice on its fiscal policy while repeatedly deflecting inquiries into the nature of its own monetary policy. I regret that I am forced to be so blunt, but unfortunately my earlier inquiries to you, particularly my letter of December 10 1982 e not been accorded the courtesy of a Lp.Ly. erefore, finding your annual reP57I to -crie—rong res unenlightening for the reasons stated above; and flatly rejectin the notion that the Federal Reserve will be boun d by no policy; I formally request that you outline the rule, however complex, by which the Federal Reserve is cond ucting its monetary policy. I would appreciate your prompt response. Sincerely ours, • BOARD OF GOVERNORS OF THE • • •fik .o • ••.1 FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 III ILl • PAUL A. VOLCKER CHAIRMAN • • : RAL OSV'Cr: March 17, 1983 The Honorable James R. Jones Chairman Committee on the Budget' House of Representatives Washington, D. C. Dear Jim: The language directing the Federal Reserve to report on economic objectives that is proposed for the Budget Resolution came to my attention last night. I recall the general approach was touched upon briefly in the recent hearings before your Committee. At that time, I indicated that the question deserved serious study and a considered response, and that I felt the need to consult with the members of the Board and the Federal Open Market Committee. I have not yet had a chance to do so; the next FOMC meeting will be held on March 29. I believe I sense something of the objective you have in mind in reaching economic assumptions for the Budget Resolution consistent with the totality of government policy. I can readily sympathize with your concern in that respect. However, the approach proposed may also raise much more basic questions about the economic objectives pursued by the Federal Reserve and the manner they should be determined and implemented. These issues -- if they are involved -- deserve a period of discussion and consideration so that the implications can be understood and a full range of approaches considered. I would, therefore, urge that, under the pressure of time, the current Budget Resolution is not an appropriate vehicle, and that instead the issues be studied in depth and carefully by the relevant committees of Congress. Perhaps you might wish to suggest that the House Committee on Banking, Finance, and Urban Affairs give this matter close and serious attention. Sin erely, PA'. t t,C_L https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •OARD OF SOVERNORS OF THE FEDERAL RESERVE SYSTEM S. IfSTILM 77ateArykee, ("aim -ad 1 e1 1 &4e,77,4ageg;/‘ /AYlo; biziklre aleag ceAeAi tfi,u ,AA ceig?, taitt? evvA, (7qA4 daydik (1-e; https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis In order to assist in the development of reasonable economic assumptions for the budget resolution and thereby assist in the coordination of fiscal and monetary policy, it is the sense ef the Eengress that menetary paiiey and the eeenemie assdmptiens in the bddget rese+dtien shell+ be eensistent with ene anether. 'Fe that end, it is the sense of the Congress that in the reports to the Congress required by the Full Employment and Balanced Growth Act of 1978, the Board of Governors of the Federal Reserve System shall report to the Congress on the ebeetives assumptions of the members of the Board of Governors and the Federal Open Market Committee with respect to the growth or diminution of gross national product in current and constant dollars,'inflation, and unemployment for the current and three following calendar years. In addition, the Board shall in the same report explain the differences, if any, between these ebeetives their assumptions and the economic assumptions of the most recent President's budget submission, the most recent projections of the Congressional Budget Office, and the economic assumptions of the most recent Congressional budget resolution. It is further the sense of the Congress that, if necessary, the Committee on Banking, Finance, and Urban Affairs of the House of Representatives and the Committee on Banking, Housing, and Urban Affairs of the Senate shall report legislation amending the Federal Reserve Act to require such reporting. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis le In order to assist in the development of reasonab eby economic assumptions for the budget resolution and ther policy, assist in the coordination of fiscal and monetary to the it is the sense of the Congress that in the reports nced Growth Congress required by the Full Employment and Bala ral Reserve Act of 1978, the Board of Governors of the Fede ons of System shall report to the Congress on the assumpti Open the members of the Board of Governors and the Federal nution of Market Committee with respect to the growth or dimi ars, inflation, gross national product in current and constant doll calendar and unemployment for the current and three following explain years. In addition, the Board shall in the same report the the differences, if any, between their assumptions and budget economic assumptions of the most recent President's ressional submission, the most recent projections of the Cong recent Budget Office, and the economic assumptions of the most sense of Congressional budget resolution. It is further the ing, the Congress that, if necessary, the Committee on Bank tatives Finance, and Urban Affairs of the House of Represen irs of and the Committee on Banking, Housing, and Urban Affa the Senate shall report legislation amending the Federal Reserve Act to require such reporting. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, 0. C. 20551 PAUL A. VOLCKER CHAIRMAN March 17, 1983 The Honorable James R. Jones Chairman Committee on the Budget' House of Representatives Washington, D. C. Dear Jim: The language directing the Federal Reserve to report on economic objectives that is proposed for the Budget Resolution came to my attention last night. I recall the general approach was touched upon briefly in the recent hearings before your Committee. At that time, I indicated that the question deserved serious study and a considered response, and that I felt the need to consult with the members of the Board and the Federal Open Market Committee. I have not yet had a chance to do so; the next FOMC meeting will be held on March 29. I believe I sense something of the objective you have in mind in reaching economic assumptions for the Budget cy. Resolution consistent with the totality of government poli I can readily sympathize with your concern in that respect. However, the approach proposed may also raise much more basic questions about the economic objectives pursued by ed the Federal Reserve and the manner they should be determin and implemented. od These issues -- if they are involved -- deserve a peri can of discussion and consideration so that the implications be understood and a full range of approaches considered. I would, therefore, urge that, under the pressure of time, the current Budget Resolution is not an appropriate vehicle, and that instead the issues be studied in depth and carefully by the relevant committees of Congress. Perhaps you might wish and to suggest that the House Committee on Banking, Finance, n. Urban Affairs give this matter close and serious attentio Sin erely, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 11, 1983 The Honorable Donald W. Riegle, Jr. United States Senate 20510 Washington, D.C. Dear Senator Riegle: I am pleased to enclose my response to your request for additional information during the hearing e. on February 24 before the Senate Budget Committe I e have furnished a copy of this material to the Committe for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosure CO:pjt bcc: Ms. Lepper Mr. Prell N\An ws\ Page 1330 (Hearing before Senate Budget on February 24, 1983) • Chairman Volcker subsequently furnished the following information for inclusion in the record of the hearing! The interrelationship of deficits, interest rates and persistent high structural unemployment is, at least, two sided. On the one hand, persistent high structural unemployment would probably be associated with a segmented economy in which resources could not move readily from one sector to another -e.g., from the automobile industry to the computer industry. In such circumstances, inflation could only be avoided if the aggregate level of spending and employment were sufficiently restrained to avoid bottlenecks in sectors where demand was strong. Viewed from this perspective, it would be appropriate to use a higher level of the unemployment rate as a benchmark for separating cyclical and structural components of budget deficits than would be the case if resources were more mobile. Using a higher unemployment rate as a benchmark implies that a larger proportion of any given budget deficit is structural rather than cyclical. Thus, a high level of structural unemployment does not provide an argument for a larger overall deficit but it may place a higher priority on using budget outlays or tax incentives where they can help to reduce the barriers to resource mobility. Viewed from a different perspective, high unemployment in exporting or import-competing sectors could appear to be "structural" when, in fact, it is not -- or at least, not https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S. 2- entirely so. This situation arises when a combination of monetary restraint and large deficits forces up interest rates and the exchange rate of the dollar, thereby making imports cheaper and exports more expensive. Thus, excessive deficits have adverse effects not only on obviously interest-sensitive sectors, such as housing, but also on sectors most sensitive to international trade developments. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 11, 1983 The Honorable Glenn English Chairman Subcommittee on Government Information, Justice, and Agriculture Committee on Government Operations House of Representatives Washington, D. C. 20515 Dear Chairman English: Thank you for your letter of February 22, in which you expressed your concerns regarding the Justice Department's recent memorandum on administration of the fee waiver provisions of the Freedom of Information Act. I have instructed our staff to keep in mind the concerns you have expressed in connection with our administration of these provisions. Sincerely, SLS:AFC:vcd (V-33) bcc: Mr. Bradfield (G.C.Log #60) Mr. Siciliano Legal Files (2) Mr. Wiles Mr. McAfee Mrs. Mallardi Action assigned Mr. Bradfield GLEFFIV. INGLISH. OKLA, CHAIRMAM STEPHEN L NEAL. N.C. f RONALD 0 COLEMAN. TEX. 140BERT U WISE, JR.. W. VA. 1:UOD 41 THOMAS N KINDNESS. OHIO LEWIS FLA. DAN BURTON,(ND, TOM NINETY-EIGHTH CONGRESS (202)225-3741 MAcKAY, FLA DOLPFIUS TOWNS, N.Y. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Congress of the United ei5tates tom of Rtpresentatioes GOVERNMENT INFORMATION, JUSTICE, AND AGRICULTURE SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS B-349—C RAYBURN House Orrice BUILDING WASHINGTON, D.C. 20515 #33 CO LAO February 22, 1983 -11 rn OD NJ Mr. Paul A. Volcker Chairman Board of Governors of the Federal Peserve Board Federal Reserve Building Washington, D.C. 20551 Dear Mr. Volcker: On January 7, 193, Jonathan C. Rose, Assistant Attorney General, Office of Legal Policy, Department of Justice, issued new guidance on the administration of the fee waiver provisions of the Freedom of Information Act. The FOIA assigns the Justice Department responsibility to encourage agency compliance with the Act, but the Department cannot issue binding guidance on FOIA administration. If Justice Department guidance is unwise, inconsistent with the law, or not in accordance with congressional intent, agencies are free to ignore it. I do not propose to provide a point-by-point refutation of the Justice Department guidance at this time. A review of relevant case law will show that significant cases favorable to the granting of fee waivers were not considered and important aspects of cited cases were ignored. It appears that the Justice Department selected its guidance from cases and pieces of cases chosen to provide as many different reasons for denying fee waivers as possible and to make the consideration of fee waiver requests as complex as possible. Because the Justice Department guidance is so biased, I offer my own views in order to point out some of its shortcomings and to indicate strong congressional support for a generous fee waiver policy. The fee waiver provision was enacted in 1974 because the Congress found that agencies used excessive charges to discourage requesters and to deny access to information. The Senate Report on the original version of the fee waiver provision stated: [The bill] allows documents to be furnished without charge or at a reduced charge where the public interest is best served thereby. This public-interest standard should be liberally construed by the agencies... https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis This policy of liberal construction is the single most important factor in the interpretation of the fee waiver provision and it has been cited approvingly by the courts. See, e.g., Eudey v. Central Intelligence Agency, 478 F. Supp. 1175 (1979); Rizzo v. Tyler, 438 F. Supp. 895 (1977). The Justice Department memorandum cites both of these cases, but not for this proposition In fact, the Justice Department has conveniently neglected to to mention the liberal construction policy enunciated by the Congress and relied upon by the courts. The Justice Department memorandum proposes five criteria to be used in making fee waiver determinations: (1) genuine public interest in the subject matter of the documents; (2) value to the public of the records themselves; (3) availability of the requested information in the public domain; (4) identity and qualifications of requester; and (5) personal interest of the requester. As described by the Justice Department, several of these criteria seem to invite an agency to substitute its own judgment for that of a requester. It is inappropriate to use fee waivers in this fashion. If a reporter seeks a fee waiver for information sought in connection with a news story, it is not the role of an agency to decide whether the reporter will understand the information that was disclosed, who might read the story, or whether the story is important. Editorial judgments are made exclusively by the press, and fee waivers are not to be used to second-guess or direct press activities. Similarly, an agency should not use fee waiver requests to substitute its own judgment for that of scholars and others whose work results in oversight of agency activities. For requests from the press for fee waivers, I would propose a much simpler and more straightforward rule: information provided to the press as part of newsgathering benefits the general public, and the press is entitled to a fee waiver. I hope that my comments on fee waivers will help to preserve a balanced policy. I expect to increase oversight of FOIA administration in general and of fee waivers in particular. Those who unreasonably deny fee waivers when the furnishing of information can be considered as primarily benefiting the general public can expect to be invited to explain their decisions at future hearings. Sincerely, . 4-tn 1(if 1 —5e(5/ thairma https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 11, 1983 The Honorable Charles E. Grassley United States Senate 20510 Washington, D.C. Dear Senator Grassley: I am pleased to enclose my response to your request for additional information during the hearing on February 24 before the Senate Budget Committee. I have furnished a copy of this material to the Committee for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosure CO:pjt bcc: Ms. Lepper Mr. Prell •(/ f' 1 Pages 1360-1361 1983) (Hearing before Senate Budget on February 24, Chairman Volcker subsequently furnished the following information for inclusion in the record of the hearing: The Federal Reserve Board staff does not have any studies of the effect on saving of the withholding on tax on interest income. The Treasury is still reviewing and modifying the regulations to implement this provision of the tax code. The effect on saving would occur through the effect on the after-tax rate of return. The after-tax rate of return for a law-abiding taxpayer would be lowered only due to withholding reducing interest income that would otherwise have been compounded before being subject to tax. This effect is likely to be small, especially in view of the current plan to permit withholding from accounts having transactions features, such as NOW accounts and money market deposit accounts, only at the end of the calendar year. These accounts are likely to be an important vehicle for saving (apart from pension plan saving) by moderate income households. Very high income households, whose saving would be much more likely to be in the form of financial market instruments are, of course, subject to the requirement of quarterly estimated tax payments. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 11, 1983 The Honorable Doug Barnard, Jr. Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Committee on Government Operations House of Representatives Washington, D. C. 20515 Dear Chairman Barnard: Thank you for your letter dated February 25 raising a number of questions concerning the Federal Reserve's role in the events surrounding the closing of the United American Bank of Knoxville, Tennessee. I am pleased to enclose a memorandum prepared by the staffs of the Board and the Federal Reserve Bank of Atlanta that responds to your questions. I hope this information is useful to your Subcommittee. Should you have any questions concerning the memorandum, please contact Mr. John E. Ryan, n Director of the Board's Division of Banking Supervisio and Regulation. Sincerely, Enclosure JER:CO:vcd (V-35) bcc: Mr. Ryan Mrs. Mallardi (2) ,v7 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis A Board Staff and Federal Reserve Bank of Atlanta Joint Memoxandum on Federal Reserve Lending to United American Bank, Knoxville, Tennessee (UAB) Question 1: Between January 1, 1976 and December 1, 1982, were there any incidents of heavy or unusual discount window borrowing by the United American Bank that suggested at that time, or were known to be the result of, liquidity or funding difficulties? If so, please provide the dates and amounts of and reasons for any such discount window borrowings. Please also provide details of Federal Reserve contacts with the FDIC regarding the circumstances of any such borrowings. Response: United American Bank was not a member of the Federal Reserve System. As a nonmember institution, it did not have regular access to Federal Reserve credit until March 31, 1980, when the passage of the Monetary Control Act conveyed regular access to the Federal Reserve discount window to nonmember banks and other depository institutions. the Federal Reserve until October 29, 1982. UAB did not borrow fram During the period between October 29, 1982 and December 1, 1982, eight secured loans due on demand to be paid the next-business-day, were made to assist the bank with overnight adjustment needs. The amounts of the advances ranged between $2 million and $3.5 million, very low borrowing for an institution of UAB's size and not indicative of any abnormal liquidity or funding difficulties. The Federal Reserve Bank of Atlanta informed the FDIC that UAB was borrowing from the Federal Reserve. No extensive discussions regarding the circumstances surrounding the borrowings by UAB were held at that time. Question 2: Since January 1, 1976, has the United American Bank of Knoxville been the subject of any Bank Holding Company Act application or filing? Alternatively, has that bank been the subject of any informal discussions with staff of the Board or the Federal Reserve Bank of Atlanta as a preliminary to a possible Bank Holding Company Act filing? If the answer to either question is in the affirmative, please provide details. Response: Since January 1, 1976, UAB has not filed any applications with the Federal Reserve Bank of Atlanta under the Bank Holding Company Act. Staff is aware of no discussions in this regard. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Page 2 Qpestion 3: What has been the week-by-week chronology of discount window borrowings by the United American Bank of Knoxville since December 1, 1982? Please provide dollar amounts, interest Charges, and schedules of collateral. Response: On February 3, 1983, UAB initially borrowed $10 million to replace the loss of a portion of their normal liquidity sources. The following data summarizes the day-to-day usage of the discount window by UAB from this initial date until full repayment was made by First Tennessee Bank on February 24, 1983. UNITED AMERICAN BANK, KNCWILLE, TENNESSEE AMOUNT OF BORROWINGS AND COLLATERAL DATE 1983 AMOUNT OF BORROWINGS 2-03-83 $10,000,000 38,000,000 2-04-83 9,182,000 2-07-83 17,000,000 2-08-83 33,000,000 2-09-83 55,000,000 2-10-83 80,400,000 2-11-83 80,400,000 2-14-83 2-15-83** 80,400,000 80,400,000 2-16-83 80,400,000 2-17-83 80,400,000 2-18-83 80,400,000 2-21-83 50,000,000 2-22-83 20,000,000 2-23-83 COLLATERAL FACE/ PAR AMOUNT TYPE Various Various Various Various Various Various Various Various Various Various Various Various Various Various Various Customer Customer Customer Custamer Customer Custamer Customer Custamer Customer Customer Customer Customer Customer Customer Customer Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes Notes $ 77,231,311 77,229,829 77,221,365 93,918,992 94,980,598 94,023,544 487,574,030 487,574,030 487,574,030 487,574,030 487,574,030 487,574,030 487,574,030 76,058,442 76,058,442 MARKET OR ASSIGNED VALUE $62,176,052 62,174,866 61,777,092 75,135,193 75,984,478 75,218,835 61,237,757 61,237,757 The collateral segregated up to this point was not sufficient to cover their borrowing needs late in the day. All commercial and real estate loans as well as a non-participated group of installment loans were taken under a field warehouse agreement dated February 7, 1983 at this point. ** Loan converted to a liability of First Tennessee Bank, Knoxville, Tennessee. 2 percent. / Interest rate on Above loans -- 81 Page 3 Question 4: Was this collateral all in the form of readily marketable securities? If not, what valuations did the Federal Reserve assign to any nonmarketable collateral, • and how were these valuations derived? Response: No readily marketable securities were available to use as collateral for borrowing at the discount window, as the securities portfolio was pledged to secure public funds. In anticipation of needing emergency credit, UAB deposited with the Federal Reserve Bank's branch in Nashville 312 notes with face amounts totaling $77.2 million by January 25, 1983. In https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis selecting the loans for transfer to Nashville, the Reserve Bank instructed UAB to submit nots which had not been classified during the latest examination. After confirming that this condition had been satisfied, a collateral value amounting to $62.2 million was placed on this group of notes. Because of the substantial increase in borrowings on Friday, February 4, 1983, Federal Reserve Bank of Atlanta staff members were sent to UAB to obtain and control additional notes on the premises of UAB. The bank provided 1,550 additional notes and underlying collateral in the approximate amount of $18 million for the Reserve Bank's review. Verification of these documents was completed on February 10, 1983. Pledged notes at this point amounted to $94 million, with a collateral value of $75.2 million (80 percent). Borrowings on this day amounted to $55 million. On Thursday, February 10, Discount staff initiated a review of the non-participated portion of the installment loan portfolio, which consisted of 712 loans totaling $4.9 million. By 3:00 p.m. on February 11, the loans under Reserve Bank control, including the installments, had a collateral value of $79.2 million. This segregated collateral was not quite sufficient, however, to cover UAB's ultimate requirement of $80.4 million on that day. To support this borrowing and to prepare for further possible borrowings in larger amounts, all remaining commercial and real estate loans were taken as collateral under a Field Warehouse Agreement dated February 7, 1983. Under this arrangement, the Reserve Bank was in a position to immediately provide the necessary funds to UAB and avoid a potentially disruptive situation. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Page 4 Question 5: Please describe in detail the Federal Reserve's role in the events of the weekend of February 12-14, including the following matters: 5.a. Response: Did the Federal Reserve, as reported in the press, refuse further discount window credit to the bank at this time? Did the Federal Reserve demand repayment in full of credit granted up to that point? If so, why? On February 14, 1983, the Federal Reserve indicated in a letter to Mr. W. C. Adams, Commissioner of Banking for Tennessee, that it intended to demand payment of the advance on that day. (See attached letter). The Federal Reserve Bank of Atlanta took this action because it believed that continued lending to UAB would not be in the public interest in view of the findings of the FDIC that the bank was insolvent by a substantial margin (see attached letter dated February 14, 1983), the absence of an acceptable capital injection, the erosion of public confidence in UAB, the escalating need for Federal Reserve credit assistance, and the apparent lack of prospects for returning UAB to a viable and safe and sound condition. This action was taken with the knowledge that plans for a merger were being actively pursued with the expectation that the bank would be reqpened with no loss to depositors and after discussions with the FDIC and the State Banking Authorities. The Federal Reserve believes that its action facilitated the most orderly resolution of the UAB matter under the circumstances. In what way did the Federal Reserve participate in the process of selecting a successor bank to assume the liabilities and purchase the assets of United American? Response: Prior to the contact of possible merger partners, the FDIC staff informally submitted a list of institutions identified by them as potential acquirers of UAB. FDIC staff was seeking the Federal Reserve's views on whether there were any supervisory problems that would, in staff's opinion, disqualify any of the institutions, most of which were bank holding https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 4 Page 5 companies that would need prior Federal Reserve approval to make the acquisition. This pre-clearance procedure is routinely followed by the FDIC in cases wh'ere Federal Reserve approval may he necessary. Apart from the statutory basis, it is normal for supervision authorities to consult in situations of this kind. 5.c. Response: What is the statutory basis for the Federal Reserve to have a role in the process of selecting a successor bank in this situation, where the bank being closed is a nonmeMber bank? As noted above, the list of potential merger partners prepared by the FDIC contained a number of bank holding campanies. Since UAB Knoxville was of sufficient size to qualify for an interstate acquisition pursuant to authority contained in the Cam-St Germain Act, the method by which such an acquisition would most likely occur would be through a bank holding company acquisition of a de novo bank. Section 3 of the Bank Holding Campany Act requires prior Federal Reserve approval of any such transaction by a bank holding company. As it turned out, ultimate resolution was effected through an intrastate merger with a nonmember bank and prior Federal Reserve approval was, therefore, unnecessary. 5.d. Response: Detail the Federal Reserve's exchanges of communication and information with the FDIC and the Tennessee State Banking Commission relative to the United American matter. The Atlanta Reserve Bank held informal discussions with the Memphis Regional Office of the FDIC since the November 1, 1982 commencement of the examination of UAB. As the initial impressions of the examination became available in January, 1983, these discussions increased in frequency and intensity. The Atlanta Reserve Bank was primarily concerned about the ability of UAB to maintain its funding sources and the possibility that UAB might require emergency assistance fram the discount window. Page 6 On January 11, 1983, senior staff of the Federal Reserve Board were invited to a meeting at the FDIC. Staff was informed at that meeting that the FDIC's preliminary findings indicated that UAB Knoxville was in very serious During the latter part of January and early February, there were frequent informal contacts between the Federal Reserve and the FDIC about UAB difficulty. am] its implications. On February 6, 1983, a meeting with senior Federal Reserve and FDIC officials and the Tennessee Banking Commissioner was hosted by the Federal Reserve Bank of Atlanta for the purpose of sharing information, coordinating our roles and addressing the emerging crisis, discussing the deteriorating funding position of UAB and the prospects for a solution to the bank's problems. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Subsequent to the meeting in Atlanta, frequent contact between the Federal Reserve, State Banking Commissioner and the FDIC was maintained. A FEDERAL RESERVE BANK OF ATLANTA ATLANTA, GEORGIA 30303 Orr!Ct Or PRESIDENT https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis February 14, 1983 Mr. W. C. Adams Commissioner of Banking James K. Polk State Office Building 505 Deaderick Street Nashville, Tennessee 37219 Dear Mr. Adams: This is to inform you that the Federal Reserve Bank of Atlanta intends to demand payment today of its $80 million loan to the United American Bank, Knoxville, Tennessee ("the Bank"). We note that the most recent examination of the Bank by the Federal Deposit Insurance Corporation ("FDIC") resulted in the classification of $60 million of assets as loss and an additional $90 million of assets as doubtful. The FDIC's report of examination notes the assets classified loss and 507. of assets classified doubtful, and estimated losses in contingent liabilities of $14 million, exceed the Bank's capital and reserves by $77 million. The FDIC has therefore concluded that the Bank is insolvent. We understand that the owners are attempting to raise $40 million by February 18. That, of course, is well below the $77 million deficiency in the Bank's capital account implied by the FDIC's examination findings. Present circumstances indicate the Bank will probably not survive until February 18 without enormous escalation of Federal Reserve credit assistance. The Federal Reserve began lending to the Bank on February 3 with a loan in the amount of $10 million. The loan went to $33 million on February 9, $55 million on February 10, and $80 million on February 11. During this period, the public's confidence in the Bank was eroded by extensive adverse publicity concerning the Bank's financial condition. On February 11, some Knoxville banks and other businesses refused to accept even small checks drawn on the Bank, further eroding public confidence in it. In view of the escalating Federal Reserve credit assistance and the absence of an acceptable capital injection, it is the opinion of the Federal Reserve Bank of Atlanta that continued lending to the Bank is not in the public interest. Moreover, there are no apparent prospects for returning the Bank to a viable and safe and sound financial condition in the foreseeable future. For these reasons, we intend to demand payment of our loan today. FEDERAL RESERVE BANK OF ATLANTA https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. W. C. Adams February 14, -2- We understand that plans for an Bank are being actively pursued. We will take place very shortly, that a that will fully protect the interest public interest. acquisition or merger of this further expect that a reopening solution will be provided of depositors and be in the rely, William F. Ford 4 ,. I' FEDERAL DEPOSIT INSURANCE CORPORATION, Washington, D.C. 20429 OFFICE OF DIRECTOR • DIVISION OF BANK SUPERVISION February 14, 1983 Mr. John E. Ryan, Director Division of Banking Supervision and Regulations Federal Reserve System 20551 Washington, D. C. Dear Mr. Ryan: You have asked that I give you a letter outlining the findings of our examination of United American Bank in Knoxville, Tennessee, Following is a recapitulation: conducted as of November 1, 1982. November 1, 1982 7,500,000 9,775,000 20,888,000 3,670,000 Common Stock Surplus Undivided Profits Reserve for Bad Debts $ Total Capital & Reserves $ 41,833,000 Less: $ 60,343,000 Assets Classified Loss 45,078,000 50% Assets Classified Doubtful 14,319,000 Estimated Loss in Contingent Liab. 119,740,000 $(77,907,000) These classifications show the bank to be insolvent by a substanWe know of no plan to cure this capital deficiency. tial margin. If the bank is closed today, we fully expect to consummate a merger Such a this evening and have the bank open on Tuesday morning. merger will protect alll depositors. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely, / James L. Sexton Director -11,11rwrar."5-0""Nr"?'"Vairwer4,7••"7— Action assigned Jack Ryan; info copy to Fred Struble NINETY-EIGHTH CONGRESS DOUG BAFIIINARD. JR., GA, CHAIRMAN RONALD 0 COLEMAN, TEX JOHN M SPRATT. JR., Sc JOHN CONYERS, JR., MICH. ELLIOTT H. LEVITAS. GA HENRY A. WAXMAN, CALIF. Congrefsti of tbe Inttebibtate5 otifse of ileprefientatibefs • JUDO GREGG. N.H. WILLIAM F CLINGER, JR., PA TOM LEWIS, FLA. MAJORITV —4202) 225-4407 COMMERCE, CONSUMER, AND MONETARY AFFAIRS SUBCOMMITTEE OF THE COMMITTEE ON GOVERNMENT OPERATIONS RAYBURN HOUSE OFFICE BUILDING, ROOM B-377 WASHINGTON, D.C. 20515 February 25, 1983 Hon. Paul Volcker Chairman Federal Reserve Board Washington, D.C. 20551 Dear Chairman Volcker: The Commerce, Consumer, and Monetary Affairs Subcommittee is investigating the circumstances surrounding the deterioration and ultimate closing of the Hearings on this subject are United American Bank of Knoxville, Tennessee. scheduled for March 15 and 16, 1983. While it will not_j_eol_neres_any_tp have testirEmy fro1n:1hp lesteral_REser_ve, we will require a brief memorandum or written report describing the Federal Reserve's participation in the events surrounding the closing of the bank. Please provide, therefore, at your earliest convenience, but no later than Friday, March 11, a report on Federal Reserve discount window lending to the United American Bank of Knoxville and the Federal Reserve's role in the last days of the bank, including answers to the following questions: 1. Between January 1, 1976 and December 1, 1982, were there any incidents of heavy or unusual discount window borrowing by the United American Bank that suggested at that time, or were known to be the result of, liquidity or funding difficulties? If so, please provide the dates and amounts of and Please also provide reasons for any such discount window borrowings. details of Federal Reserve contacts with the FDIC regarding the circumstances of any such borrowings. 2 Since January 1, 1976, has the United American Bank of Knoxville been the subject of any Bank Holding Company Act application or filing? Alternatively, has that bank been the subject of any informal discussions with staff of the Board or the Federal Reserve Bank of Atlanta as a preliminary to a possible Bank Holding Company Act filing? If the answer to either question is in the affirmative, please provide details. 3. 4. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis What has been the week -by-week chronology of discount window borrowings by Please the United American Bank of Knoxville since December 1, 1982? provide dollar amounts, interest charges, and schedules of collateral. Was this collateral all in the form of readily marketable securities? If not, what valuations did the Federal Reserve assign to any nonmarketable collateral, and how were these valuations derived? • • 2 5. Please describe in detail the Federal Reserve's role in the events of the weekend of February 12-14, including the following matters: a. Did the Federal Reserve, as reported in the press, refuse further Did the Federal discount window credit to the bank at this time? Reserve demand repayment in full of credit granted up to that point? If so, why? b. In what way did the Federal Reserve participate in the process of selecting a successor bank to assume the liabilities and purchase the assets of United American? c. What is the statutory basis for the Federal Reserve to have a role in the process of selecting a successor bank in this situation, where the bank being closed is a nonmember bank? Detail the Federal Reserve's exchanges of communication and information with the FDIC and the Tennessee State Banking Commission relative to the United American matter. ANA nar Doug Chairiah DB:dpt:v https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • Jr. March 7, 10R3 The Honorable Fernand J. St Germain Chairman Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Chairman St Germain! I am writing in reference to an amendment which I understand you plan to offer to H.R. 1330, "The Emergency Housing Assistance Act of 1983." The amendment would direct the Federal Reserve to give "special consideration" to institutions that have exercised forbearance in foreclosing on residential mortgages. As you understand from Vice Chairman Martin's testimony, the Board is sympathetic to Congressional concern about the mortgage loan foreclosure problem. While we expect any institutions using the discount window to observe certain criteria as to liquidity neels, the fact that an institution exercises forbearance on mortgage loans would not in any way hamper access to the discount window under current policy. If there is a concern that there might be a problem with regard to such access, I would want to assure you that the amendment is not necessary for that purpose. However, the amendment could convey the impression that it directs the Federal Reserve to do something more, perhaps by providing a specific subsidy through the discount window, or otherwise using the discount window to encourage credit allocation. As you know from Vice Chairman Martin's testimony, we believe such an approach would be unfortunate, and set a wrong precedent for the future. The discount window has not, and should not, be used as a means of credit allocation, and the attempt would compromise our ability to maintain appropriate control over money and credit growth would he increasingly threatened. Accordingly, I believe the amendment is not necessary achieve the stated purpose, as I interpret it, but carries to the danger that it might become a vehicle or precedent for use of the discount window as a special subsidy or assistance program. Accordingly, I do not believe that the amendment is desirable. Sincerely, FMS:PAV:pjt bcc: Mr. Struble Mrs. Mallardi (2) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis S/Paul 11, Volcker https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 7, 1983 The Honorable Paula Hawkins Chairman Subcommittee on Consumer Affairs Committee on Banking, Housing and Urban Affairs United States Senate Washington, D.C. 20510 Dear Chairman Hawkins': Thank you for your letter of March 1 regarding your Subcommittee's oversight hearing on consumer interest rates charged by financial institutions. I am pleased to let you know that Vice Chairman Preston Martin is looking forward to appearing before your Subcommittee on March 17 at 9:30 a.m. Sincerely, S/Paul A. Vo!cker CO:pjt (4V-40) bcc: Vice Chrmn. Martin Messrs. Prell and Seiders Mrs. Mallardi (2) v/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C The Honorable Thomas P. O'Neill, Jr. Speaker of the House of Representatives Washington, D.C. 20515 Dear Mr. Speaker: In accordance with the requireiv.eints of the Freedom of Information Act, I an pleased to submit the board's Annual Report covering the implementation of its administrative responsibilities under the Act during calendar year Via. Sincerely, Enclosure Speaker of the House of Representatives Received RLArnold:jes Vice Chairman will testify; Messrs. Prell and Seiders drafting statement UTAH CHAIRMAN JAKE GARN, •.• JOHN TOWER. TEXAS JOHN HEINZ, PENNSYLVANIA WILLIAM L ARMSTRONG. COLORADO ALFONSE U D AMATO, NEW YORK SLADE GORTON, WASHINGTON PAULA HAWKINS, FLORIDA MACK MATTINGLY. GEORGIA CHIC HECHT, NEVADA PAUL TRIBLE, VIRGINIA WILLIAM PROXMIRE, WISCONSIN ALAN CRANSTON CALIFORNIA DONALD W RIEGLE. JR., MICHIGAN PAUL S SARBANES. MARYLAND CHRISTOPHER J DODD,CONNECTICUT ALAN J. DIXON, ILLINOIS JIM SASSER, TENNESSEE FRANK R. LAUTENBERG. NEW JERSEY United e tats M DANNY WALL. STAFF DIRECTOR KENNETH A. McLEAN. MINORITY STAFF DIRECTOR https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis nate COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, D.C. 20510 March 1, 1983 Honorable Paul A. Volcker Chairman Board of Governors Federal Reserve System 20th & Constitution Ave., N.W. Washington, D.C. 20551 40dj A Dear Chairman Volcker: fy This letter confirms the invitation to you to testi at an oversight hearing before the Consumer Affairs Subncial committee on consumer.interest rates charged by fina March institutions. The hearing will be held on Thursday, Senate 17, 1983, at 9:30 a.m. in Room SD-538 of the Dirksen Office Building. reasons The purpose of the hearing is to inquire into the at inflation adjusted or real interest rates have remained be looking high levels. In particular, the subcommittee will institutions at whether lending rates charged by financial institutions' have been abnormally high relative to those ibuted to costs of funds. Other factors which may have contr inhigh rates, such as changes in the bankruptcy laws and inflationary expectations, will be investigated. We are ions terested in determining whether some financial institut ings to have held rates artificially high to generate earn portcover anticipated losses on foreign and domestic loan folios as has been charged recently. eEnclosed find a copy of the Banking Committee's guid would lines for witnesses. I would appreciate it if you of written carefully adhere to the rules regarding submission testimony. Sincerely, Paula Hawkins Chairman Subcommittee on Consumer Affairs Enclosure PH:bck JAKE GARP& UTAH. CHAIRMAN JOHN TOWER TEXAS JOHN HEINZ. PENNSYLVANIA WILLiAM L ARMSTRONG. COLORADO 0 NEW YORK . r 8.1,4A F(A: SLA:E CCATON. NASH'NC,YON PAjj.,-.AVVEINS. Ft °RID^ MACK FAA-TINGLY, GEORGLA CHIC HECHT, NEvADA PAUL TRIBLF_ VIRGINtA WILLIAM PROXMIRE. WISCONSIN ALAN CRANSTON, C.ALIFORNiA DONALD W RIEGLE. JFL. MICHIGAN PAJL S SARRANES, MARYLAND Ol!.;;STOPER J. Dc,or..CONNECTiCUT DIXON ILLINO:S ALAN ..FIFA SASSER, TENNESSEE FRANK R LALTTENSERG, NEW JERSEY M DANNY WALL STAFF DIR/CTOR McLF.AN. MINORrTY STAFF DIRECTOR KENo.ETH ciaii;k:zd eaatcs cant COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS WASHINGTON, D.C. 20510 GUIDELINES FOR WITNESSES 1. These guidelines apply to all hearing of the Senate Committee on Banking, Housing and Urban Affairs, unless otherwise indicated. 2. All hearings will begin at 9:30 a.m. in Room SD-538 Dirksen Senate Office Building, unless otherwise indicated. 3. Committee rules require that all witnesses submit at least 75 copies of their written statements (if witness desires copies be distributed to press and public, more copies are needed) 24 hours prior to their appearance. Sundays and holidays are not to be included in determining this 24-hour period. Statements should be delivered to Room SD-534 Dirksen Senate Office Building, Washington, D.C. 20510. Strict adherence to this rule is essential in order that Committee members may review the statements before the hearing, thus enabling the participants to more thoroughly discuss the issues involved. Statements will not be released to the news media prior to the day of your testimony. 4. Oral presentations must be limited to a brief summary not to exceed 10 minutes. Your complete statement will be printed iI the hearing record. 5. •bring it to Room SD-534 Please complete the attached card and Dirksen Senate Office Building prior to the hearing. You will be given copies of statements of those testifying with you at that time. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Your cooperation is appreciated. Jake Garn Chairman .• • ' • of GOVi BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 March 7, 1983 CHAIRMAN The Honorable Bruce F. Vento House of Representatives Washington, D. C. 20515 Dear Mr. Vento: comments February problems range of to cover Thank you for your letter of February 10 requesting on a series of questions related to my testimony on 2 before the House Banking Committee on the debt of developing countries. Your questions cover a wide issues connected with those problems, and I have tried them all, though with some reordering of your list. Your first four questions deal in one way or another with the process of adjustment in the borrowing countries. In my testimony, I noted that the programs being developed in the context of the arrangements between the International Monetary Fund (IMF), the commercial banks, and the borrowers were confined to limited periods during which the IMF could provide assistance. The IMF, under its Articles of Agreement, essentially functions as a revolving fund to smooth the adjustment process for members that face difficult financial situations. Typically, a country in such a situation will propose to the Fund a set of policies that will ameliorate the immediate problem over a time horizon that is fairly short. In coming to agreement with the country involved, the Fund may suggest modifications of the country's proposals, and will certainly take account of the world economic situation, but would not undertake to recommend changes in the social or political structure of that country. At present, the adjustment effects of borrowing countries are more difficult because of a world environment of sluggish activity and relatively high real interest rates. There is no doubt that the borrowers would benefit from greater external demand and lower interest rates. I believe that both of these benefits will come about as a result of reduction in current and expected rates of inflation, which will allow business and consumers in all .countries to plan their outlays with greater confidence. Once that is accomplished, the large borrowers, along with many other countries, will be much better able to deal with their structural problems. None of these countries needs to consider default as an option while the adjustment process is going forward. The whole history of post-war debt settlements illustrates that countries default very rarely, because the long-run damage to their economies from such an action would greatly exceed any temporary debt relief. In my view, the large borrowers do have the capacity, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • PAUL A. VOLCKER • The Honorable Bruce F.Vento Page Two given some time, to service their debts, hut are caught in a squeeze on their available liquidity that merits some flexibility on the part of the creditors. On the question of preserving U.S. export markets (question 4), several points should be kept in mind. These countries must adjust so that there is a better match between their current account balances and the financing available from normal sources. The changes in the economies of the borrowers that are necessary as part of economic stabilization programs often involve a temporary reduction in demand and, therefore, in imports. If there were no financial program worked out with the Fund, the adjustment required by countries would, of necessity, be more abrupt and radical. The reduction in U.S. exports to these countries that might be expected as they adjust is less, and certainly less abrupt, when there is a continuation of financing, at a reduced rate, in conjunction with an IMF program. Moreover, the IMF-approved programs do not in all cases envisage a reduction in imports. In connection with the enlargement and broadening of the General Arrangements to Borrow (GAB) (questions 7 and 8), there has been no change in the control by the participants in the GAB over the use of funds provided to the IMF by participants. As in the past, the Managing Director of the Fund may propose the activation of the GAB to deal with a threat to the stability of the international monetary system, and the participants will collectively decide on a response. There is no issue of IMF "supervision" involved in this process except to the extent that the IMF is charged generally with supervising the functioning of the international monetary system. As you note, some members who receive funds from the IMF, whether from ordinary or other sources, may use them in the public sector, which may cover more of the economy of the country than would be the case in the United States (question 10). The Fund is not allowed to propose changes in the basic social or political structures of member countries, but adjustment programs would involve some consideration of appropriate fiscal and monetary policies, with at least indirect effects on the shares of the public and private sector. The extension of additional bank financing that is part of the recent IMF-approved stabilization programs for several major borrowers has relatively minor direct effects on credit flows in the United States, but may make a substantial contribution to the maintenance of smoothly-functioning credit markets. I am enclosing a note on this subject that was prepared for the Joint Economic Committee. In general, the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Bruce F. Vento Page Three private institutions will be guided in their future lending in large part by their own judgments of the adequacy of the policies being followed by the borrowers. It is a major advantage of the role of the IMF in these situations that the program of action of the borrowing countries can be spelled out and generally made public, and that the IMF will maintain surveillance over the performance of the countries under these programs. The private lenders (question 9) welcome this role of the IMF since they have generally been unable to enforce the conditionality that they would like to see applied in such situations. With respect to the legal remedies in case of default (question 11), it should be emphasized that no IMF member country has defaulted on repayment of its drawings on the IMF in the organization's 38-year history. Nor is such a repudiation of a member's financial obligations in the Fund likely in light of: (a) the probable result that the country could not obtain, in the future, adequate levels of financing from other member countries or from private financial institutions; and (b) the serious damage that would result in that country's political relations with the governments of other IMF members. As a legal matter, should a member fail to meet its obligations in the Fund, the IMF Articles of Agreement specify a number of steps that can be taken with respect to the member, culminating in the member's compulsory withdrawal from the IMF. The Fund has never taken that measure in the past. Cuba to meet various of their oband Czechoslovakia, which failed ligations in the IMF—though neither of them repudiated their financial obligations in the Fund--each voluntarily withdrew from the IMF in the 1960's, and in so doing worked out an orderly schedule with the Fund for settlement of their net financial liabilities to the IMF. Further, it should be noted that the IMF's financial obligations to creditors under the GAB are not dependent upon members borrowing from the IMF, in connection with a GAB activation, meeting their repayment obligations to the Fund. Similarly, claims arising from use of an IMF member's quota subscription are claims on the overall assets of the IMF and are not linked to the financial obligations of any particular member drawing on the IMF. Overall, the IMF is managed so as to assure that its resources are adequate to meet reasonable contingencies. As to loans by private creditors to publicly-held enterprises or governments, total repudiation of sovereign https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Bruce F. Vento Page Four debts has been extremely rare in the post-war period. Generally, a country facing severe difficulties in meeting its debt obligations will work with its private and official creditors on an orderly rescheduling of its financial liabilities. As a technical matter, however, private creditors have several remedies available in the event of default. Suit can be brought against the debtor, and assets of the debtor located within the particular court's jurisdiction could be seized in satisfaction of court judgment. Normally a standard clause in private loan agreements is a waiver of the borrower's sovereign immunity. Should judicial remedies prove inadequate or should they be inappropriate, the U.S. Government could take suitable diplomatic action. In sum, the clearest deterrents to a default by a foreign government on its private and official debts are the serious practical consequences that would result. There are, however, certain legal remedies that are available to creditors in the event of default. You refer to the role of the banks as conduits for OPEC money (questions 13 and 14), but, in fact, that flow is only a small part of the flow of savings through banks, and there is no necessary connection between that particular stream of funds and the extension of credit to any particular set of borrowers--apart from the fact, of course, that some of the developing countries would have much lower debts if they had not been required to pay more for oil and a few banks may have received significant OPEC deposits. The possibility of some special instrument to tie together OPEC deposits and hank loans to developing countries assumes a tight relationship between these sources and uses of funds that simply doesn't exist. Smaller banks were drawn into the process of lending to some of the developing countries primarily because it seemed to them to be an appropriate and profitable use of funds. By and large, the smaller regional banks have a much smaller commitment of capital involved in this lending. Regulators apply the same principles of risk assessment to these smaller banks as to the multinational banks that hold most of the loans in question. What specific responsibilities may exist between particular banks as a result of the syndication of these loans would depend finally on the nature of any agreements that may exist. Each bank is expected to make its own appraisal of the risks involved in each loan, syndicated or not. To the extent that smaller banks acted on incomplete information, any losses they experience, actual or potential, would be essentially their responsibility. This function, management control, is an https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Bruce F. Vento Page Five important aspect that is closely reviewed in the supervisory process. You have asked (question 12) whether a ranking order exists for the satisfaction of debts of less developed countries (LDCs) to various classes of creditors. There is no formal arrangement, as there would be in a domestic bankruptcy situation, but over the years an informal process has developed in the course of dealing with problems of sovereign debt. The terms of debt rescheduling on official bilateral debt have usually been negotiated between the debtor government and its official bilateral creditors within the Paris Club, an informal institutional arrangement used by major creditor governments for this purpose. The Paris Club over time has evolved a set of procedures and policies governing the rescheduling exercises. One important element of the traditional policy of the Paris Club, and of the United States Government, is that the debtor country should obtain debt relief on no less favorable terms from official creditors that have not participated in the Paris Club negotiations. Another element is that the debtor should seek "comparable treatment" from private creditors. These principles of nondiscrimination and comparability help to ensure that the burden of providing debt relief is shared equitably by all creditors. Debt to the IMP and multilateral development banks (MDBs), such as the International Bank for Reconstruction and Development (IBRD), has traditionally been excluded from renegotiation under the "comparability" principle. A standby or extended arrangement with the IMP is normally a precondition of official and private debt relief in order to provide assurances to the creditors that the debtor country will improve its economic situation and restore its capability for servicing its external debt. The credit provided by the IMF under these arrangements constitutes the IMF contribution to the alleviation of the country's debt problem. The traditional exclusion of MOBs from rescheduling exercises is perceived as being in the mutual interest of debtors and creditors. Since MDB lending typically remains stable or even increases to countries in debt rescheduling situations, and is made within the context of a longer-term economic perspective than is typically the case for other financing, such lending also contributes to the alleviation of the country's debt problem. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Bruce F. Vento Page Six • Your questions 5 and 6 deal with several aspects of the treatment that might be accorded to LDC loans on the books of U.S. banks. The Federal Reserve is currently reviewing its approach toward supervising foreign lending by U.S. banks, and I expect to report to Congress shortly on this matter. Some of the areas under study are the procedures banks use for accounting for troubled debt situations and the nature and level of reserves against foreign claims that should be maintained. As your question indicates, there are a number of factors that must be considered before arriving at a decision. Under present procedures, banks are expected to maintain loan loss reserves adequate to meet expected future losses on any loans, foreign or domestic. The exact level of reserves is determined by bank management. The reserves are also evaluated for adequacy by banks' outside accountants and by bank examiners. One factor banks are expected to take into consideration in determining the appropriate level of reserves is the amount of loans "classified" by bank examiners, including any loans to LOCs that have deteriorated to the point where classification is necessary. Any classification would apply to both old and new credits. However, to the extent that an IMF agreement, adoption of a sound economic adjustment program, and a debt restructuring improve the ability of a country to meet its external debt obligations, the basis for classification would be reduced. When credits are renegotiated, the creditors and the borrower normally reach agreement on some increase in interest (and/or fees) to reflect the increased risk and other costs, taking into consideration ultimate objectives. To the extent rates do increase, banks have more income with which to make provisions for any expected losses. In many cases, this income should clearly be used to supplement reserves or augment capital. As mentioned in the answer to question 5, the bank regulatory agencies are currently reviewing existing reserve policies as they apply to country risk to determine what changes need to be made. In many cases, fee income associated with extensions of credit may represent an adjustment of interest yields. In such circumstances, I believe that the fees should not be considered current income, but should be accrued over the life of the loan. The Federal Reserve and the other bank regulatory agencies are considering whether regulatory guidelines are needed in this area to supplement existing accounting standards. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis EL The Honorable Bruce F. Vento Page Seven On the question of penalties (6c), it is evident that credit to some countries expanded much too rapidly. That was an exercise of judgment by the banks in the course of business, and they will suffer the consequences if there are losses. Looking to the future, the supervisory agencies are considering the advisability of establishing stronger procedures for supervising sovereign risk. The augqestion that the IMF should condition further credits on some write-down of existing debt on the books of creditors would bring the IMF into an inappropriate supervisory role vis-a-vis the banks, and is far beyond any competence contemplated in the Fund's Articles of Agreement. The extension of some additional credits by the hanks, as part of a program worked out with the IMF, should help to preserve the value of all the credits by providing part of the basis for an orderly adjustment of borrowing countries' economies and a restoration of their ability to service their debts currently. I trust these comments will clear up the points on which you had questions. If we can be of further help, please let us know. I am convinced that it is in the best interests of the United States to provide additional resources to the IMF promptly. Sincerely, Enclosure (Insert p. 140 (JEC hrg. of 1/27/83) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis SP:vcd (I01-27) bcc: Messrs. Truman, Pizer, Dahl, Martinson; Ms. Jacklin )40/4P-4.4.444c4*4q Mrs. Mallardi (2)„- , BO https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 4, 1983 The Honorable William Proxmire United States Senate Washington, D. C. 20510 Dear Senator Proxmire: I am pleased to enclose my response to your request for additional informatim during the hearing on February 17 before the Senate Banking Committee. I have furnished a copy of this material to the Committee for inclusion in the record of the hearing. Please let me know if I can be of further assistance. Sincerely, Enclosure CO:vcd bcc: Ted Truman Mrs. Mallardi (2) ti https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Insert page 273 (February 17, 1983 hearing) Prospects for Debt Repayment, Commitments to Balance of Payments Adjustment, and Projections of Debt Burdens--Selected Latin American Borrowers For a transitional period, major Latin American borrowers are likely to require an increase in their outstanding indebtedness to foreign banks. In all cases, the overall external debt of these countries is expected to grow by less than ten percent annually in 1983 and 1984. However, within this period, each of the major borrowing countries can be expected to restore orderly, unrestricted payment of debt service to their foreign creditors on a loan -byloan basis. Brazil experienced a current account deficit of about $14-1/2 billion in 1982. Brazil has embarked on an IMF-approved program which is designed to reduce that deficit to $7 billion in 1983 and $5 billion in 1984. As a result, requirements for new foreign borrowing will fall to much lower levels, and Brazil's external debt will grow less than half as rapidly as the projected value of its exports. Taking account of declines in world interest rates that have already occurred, Brazil's debt service ratio (scheduled amortization requirements on medium- and long-term external debt plus total external interest payments divided by annual receipts from exports of goods and services and transfers) will fall from about .79 in 1982 to .62 in 1983 (which equals Brazil's average debt service ratio during 1978-81) and to a projected .55 in 1984. Mexico's current account deficit fell from $13 billion in 1981 to about $6-1/2 billion in 1982. In accordance with its recently adopted stabili- zation program, the current account deficit was expected to decline to about $4 billion in 1983 and 1984. Mexico's reduced needs for financing the current account, in addition to policy measures to halt the large outward capital flight witnessed in 1980-82, should reduce the growth of external debt to about https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6-8 percent annually during 1983 and 1984. Mexico's debt service ratio for 1982 is estimated to have been about .61, which was considerably higher than in 1980 or 1981 but lower than during the late 1970s. The projections underlying Mexico's IMF program imply debt service ratios of about .59 in 1983 and .50 in 1984. Argentina's current account deficit fell from $4-1/2 billion in 1981 to $2-1/2 billion in 1982 and is projected to fall to $1 billion or less in 1983 and 1984. While Argentina faces additional near-term financing needs to I.y off external arrears that have accumulated since April 1982, the massive capital flight of 1980-81 has subsided. Araentina's estimated debt service ratio rose sharply from about .50 in 1981 to about .95 in 1982. Because of a S unching of scheduled maturities in 1983, that ratio is likely to remain about .95 in 1983 but fall to about .60 in 1984. March 4, 1083 The Honorable Cordon J. Humphrey United States Senate Washington, D. C. 20510 Dear Senator Humphrey: Thank you for your letter of February 25 requesting a study of the likely effects of alternatives to an expansion of IMF resources. In particular, you asked for comment on the consequences of what might be termed a "hands-off" approach, under Which international debt problems would be allowed to run their course without official action by national governments or participation of the IMF, That issue was discussed in the Special Peport of the National Advisory Council on International ”onetary and Financial Policies on the Proposed Increase in the Pesources of the IMF; see pages 20-31 of the copy which is enclosed. The Report was prepared mainly by the staff of the U.S. Treasury with the assistance of Federal Reserve staff. The Federal Peserve is a member of the National Advisory Council. would emphasize that a strenathening of the IMP is a long-term investment in the stability of the international financial system--one that extends far beyond the present situation. By increasing the strength and role of the IMF, the United States and other countries will Oemonstrate that governments can and will work together to assure that the international financial system will be able to withstand strains and pressures over the years ahead, as well as in the current time of stress. Our own stake in the stability of the international financial system is too great to risk the consequences of severe shock to the system from a "hands-off" policy. Such a shock would present a major threat to recovery of output and jobs in this country. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis My enclosed testimony expands further on these important issues. Please let me know if I can be of further assistance. Sincerely, S/Paul Fnclosures RFG:CO:vcd (V-36) bcc : Mr. Genunill Mrs. Mallardi (2) V/ VAls ,GORDON.I. HUMPHREY Action assigned Mr. Trurnan; info copy to Mr. Dahl mmwrries ARMED SERVICES CHAIRMANi SUBCOMMrrnat PREPARE:DNESS NEW HAMPSHIRE • SH-831 HArcr SENATE OFFICE BUMMED (202) 224-2841 ENWRONMENTANDPUBLIC WORKS 2Cniteb Zfalez Zenate Nnv HAMPSHIRE TOLL FREI NUMBER 1-800-832-3714 LABOR AND HUMAN RESOUFtCES Ai.comousu CHAIRMAN: Suncoo.4kirrree AND Onus Amuse WASHINGTON, D.C. 20510 February 25, 1983 The Honorable Paul A. Volcker Chairman of the Board of Governors Federal Reserve System 20th and C Streets, N.W. 20551 Washington, D.C. Dear Mr. Chairman: In the midst of current discussions about the proposed increase in the U.S. commitment to the International Monetary Fund, I am concerned by an apparent lack of specific studies discussing alternatives to an additional contribution. At a time when our economy is beginning to show signs of a long-awaited recovery, I believe it would be prudent to examine in detail all responsible alternatives to a commitment which would require the Treasury to siphon over $8 billion from the credit markets. Specifically, I ask the Federal Reserve to undertake an immediate study to determine the likely effects of letting the marketplace sort out the problems between American banks and foreign borrowers. As Congress will be asked to act upon the increased quota authorization within the next few weeks, this issue is one of pressing importance. Consequently, I would appreciate a preliminary report in response to this inquiry within 10 days of your receipt of this letter, followed by a final report one week later. Any questions related to this inquiry may be directed to my Administrative Assistant, Frank Bray, at 224-8763. With warmest regards, I am incerely yours, Gordon Humphr US GJH/nhc ONE Pii.t.sounY STREET CONCORD, New HAMPSHIRE 03301 (603) 228-0453 https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Froewm. BuiLDING. ROOM 730 273 CHESTNUT STREET MANCHESTER, NEW HAMPSHIRE 03103 (603) 666-7691 FEDEltAL BUILDING. ROOM 109 80 DANIEL. STREET Porrsuoinw. New HAMPSHIRE 03801 (603) 431-8760 157 MAD+ Sumer BERLIN, New HAMPSHIRS 03870 (603) 752-2800 ••••••• • GOvitv BOARD OF GOVERNORS OF THE •430 •0 ▪ • '0• \ 2: 44iigf FEDERAL RESERVE SYSTEM r " WASHINGTON, O. C. 20551 March 4, 1983 PAUL A. VOLCKER CHAIRMAN The Honorable Ron Paul House of Representatives 20515 Washington, D.C. Dear Mr. Paul: I am replying to your letter of January 25 inquiring about Federal Reserve activities under provisions of the Monetary Control Act of 1980 relating to System holdings of foreign currencies. Three questions in your letter concern the amounts of System holdings of foreign assets and the dates and manner of their acquisition. As of December 31, 1982, Federal Reserve holdings of assets denominated in foreign currencies amounted to $5.8 billion equivalent, as shown in the enclosed table from the Federal Reserve Bulletin. (System holdings included $1.3 billion equivalent in funds warehoused for the Exchange Stabilization Fund.) Until October 1980 Federal Reserve foreign currency assets were held entirely in facilities provided by foreign central banks and the Bank for International Settlements (BIS). The Monetary Control Act of 1980 amended the authority of the Federal Reserve to permit the System also to purchase obligations of foreign governments and their agencies. The purpose of the amendment was to broaden the means whereby the System could earn interest on its foreign assets. System holdings acquired under the new authority amount to $1.4 billion equivalent of the $5.8 billion equivalent sum mentioned above. The legislative history of the MCA indicates that Congress intended the broadened authority to be used only in conjunction with the Federal Reserve's normal activities in the foreign-exchange market, and that limitation has always been and will continue to be scrupulously respected. As noted above, System foreign assets were acquired in the course of the Federal Reserve's normal foreign-currency operations, chiefly through intervention between October 1980 and February 1981. Small amounts were added through intervention on June 14, August 4, and October 4, 5, and 6, 1982; interest earnings have also been added to balances. Federal Reserve holdings are principally in German marks, Swiss francs, and Japanese yen, although there are also balances of Mexican pesos acquired in connection with the Bank of Mexico's drawings on its reciprocal-currency arrangements with the Federal https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Ron Paul Page Two rest-bearing Reserve. The peso holdings are invested in an inte d with the account with the Bank of Mexico and will be exchange originally Mexican central bank for the full amount of dollars granted provided when the swap is unwound. Under the authority ings of by the MCA, the System's $1.4 billion equivalent hold of short-term foreign debt obligations include only those Mexico of Germany, Switzerland, and Japan. No debt obligations ons have been purchased by the Federal Reserve. For the reas Federal indicated in my letter to you of December 3, 1982, the composiReserve does not publish information about the detailed form in tion of our foreign currency holdings and the precise which they are held. You also asked about the use of foreign currency ral assets including debt obligations as collateral for Fede s issued and Reserve notes. The amount of Federal Reserve note bank is deteroutstanding on the books. of any Federal Reserve the public for mined strictly by the demands placed on it by al for the currency. Federal Reserve assets used as collater normal operanote issue have been obtained in the course of demands at tions, and may not be closely related to currency e, four of the any particular Federal Reserve Bank. Therefor ateral assets Reserve Banks have from time to time used as coll course of the denominated in foreign currencies acquired in the in the enclosed System's foreign exchange activities, as shown the bank's table. The collateral represents a part of foreign currency undivided interest in the System's holdings of foreign government assets, which are held partly in the form of government securities and repurchase agreements secured by foreign central securities and partly as deposit placements at banks and the BIS. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis that led I am sorry for the apparent misunderstanding these matters to the inability of your staff to obtain data on information as needed. In the future, when you desire updated your staff contact on the matters discussed above, please have Donald J. Winn at 452-3457. Sincerely, 4 e 1 (e.4 r / Enclosures eakeA, 4(.1,4744 . Al2 Domestic Financial Statistics 0 January 1983 ve Note Statements 1.18 FEDERAL RESERVE BANKS Condition and Federal Reser Millions of dollars Wednesday End of month 1982 1912 Account Dec 29 Dec. 22 Dec. 15 Dec. Dec. 1 Dec. Nov. Oct. Consolidated condition statement A.ssrrs 1 Gold certificate account 2 Special drawing rights certificate account 3 Coin Loans 4 To depository institutions 5 Other Acceptances 6 Held under repurchase agreements Federal agency obligations Bought outright 7 Held under repurchase agreements 8 U.S. government secunues Bought outright Bills 9 Notes 10 Bonds 11 TotsJ 12 Held under repurchase agreements 13 14 Total U.S. government securities 15 Total loans aad securities 16 Cash items in process of collection 17 Bank premises Other assets Denominated in foreign currencies, 18 All other3 19 20 Total meets 11.148 4.418 434 11.148 4.41S 433 11.144 4,418 439 11.148 4.418 457 11.148 4.418 433 11.148 4.218 468 11.148 4.418 436 11,148 4,618 438 2,004 0 1.433 3.368 0 762 0 1.813 0 438 0 374 717 0 o 731 0 105 0 _ 1.410 8.943 0 8.943 8.937 301 1.937 0 8.937 511 8.943 0 8.943 0 8.937 518 54.759 62.626 18.556 135.941 0 135,941 52.505 62.626 18.556 133.687 0 133.667 56.471 62.626 18.556 137.653 577 138.2.30 54575 62.6:6 18.556 135.757 0 135,757 53.619 62.626 18.556 134.801 3.347 138.148 51.791 62.018 18.264 132.080 0 132.080 56.494 62.626 18.556 137.676 0 137.676 54.42.5 62.626 18.556 135,607 3.705 139.312 146,118 144,063 150.941 145,456 150.140 141,461 146,993 151.614 11.481 344 9.945 546 10.917 548 12.243 548 11.567 550 8352 544 11.893 546 9.307 549 5.653 3,478 5.655 3.161 5.586 3.450 5.640 3.674 5.54$ 3.855 5.325 4.262 5.649 3.490 5,764 3.577 184,044 179,369 187.457 113.584 117.659 175,7711 184373 186.935 140.003 140.760 141.693 142.771 143.263 136.048 139.989 141,990 26.619 3.321 217 1.101 22.079 3.850 118 703 29.469 2.918 - 385 514 24.970 2.226 NI•0 267 27.961 3.620 261 238 24.678 2309 327 449 26.533 2.247 387 716 26.489 5.033 328 1,033 31.258 26.820 33.216 27.743 32.100 27.713 29.1183 32.1113 7.827 1.793 6.635 2.153 7.650 1,849 8.314 1.737 7.519 1.784 7,114 1.669 9,492 1.799 7.072 2.272 180,881 176.368 184.476 180.525 184.666 172.664 181,163 114317 1.354 1.278 531 1.354 1.278 369 1.355 1.278 146 1.356 1.278 365 1.356 1.278 359 1.350 1.278 486 1.354 1.278 778 1.359 1.359 0 164.044 179.369 187,457 183.584 117.659 175,778 184,573 186.935 103.318 105.115 105.501 107.442 106.142 101.831 101.703 106.762 LIABILITIES 21 Federal Reserve notes Deposits Depository institutions 22 U.S. Treasury-General account 23 Foreign--Ofhcial accounts 24 Other 25 :6 Total deposits 27 Deferred availability cash items ZS Other liabilities and accrued dividends' 29 Total liabilities CAPITAL Accouters 30 Capital paid in 31 Surplus 32 Other capital accounts 33 Total liabilities and capital accounts 34 ME1.4o: Marketable U.S. government secunties held -in custody for foreign and international account Federal Reserse note statement 35 Federal Reserve notes outstanding (issued to bank) !Ass: Held by banks 36 Federal Reserve notes. net 37 Collateral for Federal Reserve notes Gold certificate account 38 39 Special drawing netts certificate account 40 Other eligible assets U.S. government and agency securities 41 159.588 19.585 140.003 160.379 19.619 140.760 161.122 19.429 141.693 160.753 17.982 142.771 160.245 16.982 143.263 157.348 21.300 136.048 159.408 19.419 139.989 159.979 17.989 141.990 11.148 89 124.348 11.148 4.418 221 124.973 11.148 4.418 10 126.117 11.148 4.418 174 127.031 11.148 4.418 262 127.435 11.148 4.218 14 120.668 11,148 4,418 0 124.423 11.148 4,618 107 126.117 140.003 140.760 141.693 142.771 143.263 136.048 139.989 141.990 42 Total collateral 4,418 ent securities I. Includes securities loaned-fully guaranteed by U.S. governm s sold and securitie any (if excludes ---and Banks Reserve with Federal pledged ions. transact chase sale-pur matched under back d to be bo.ight schedule se agreement 2. Includes U.S. government securities held under repurcha sed for the warehou es currenci foreign and es currenci against receipt of foreign at market exchange U.S. Treasury. Assets shown in this line are revalued monthly rates. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Treasury bills maturing 3. Includes special investment account at Chicago of within 90 days. monthly revaluation at 4. Includes exchange-translation account reflecting the market exchange rates of foreign-exchange commitments. the Reserve Bank 5. Beginning September 1980, Federal Reserve notes held by are exempt from the collateral requirement. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis as Days on Which Foreign Currency Assets Have Been Used Collateral for Federal Reserve Notes By Specific Reserve Bank Issuers (millions of dollars equivalent) Federal Reserve Bank of Boston Apr. 21 24 28 $ 12 38 17 5 7 12 13 27 18 37 64 97 9 9 10 23 30 45 109 1 27 1 10 13 14 18 49 49 76 7 7 Nov. 17 18 24 27 30 51 45 20 31 57 May June 1982 1981 1981 July Oct. Dec. 1 2 3 4 7 8 9 15 16 18 21 22 23 24 28 29 30 $ 82 64 28 36 31 5 55 8 45 15 104 71 106 102 121 73 22 Federal Reserve Bank of Richmond 1982 1981 5 6 7 8 106 196 Apr. 6 7 13 14 246 239 42 1 4 5 8 9 10 31 125 86 188 216 235 64 July 7 27 Oct. 1982 Mar. Jan. 6 13 19 $ 88 31 8 Mar. 8 9 10 9 77 90 AFT. 7 13 14 93 25 27 June 30 39 6 7 8 43 81 7 Nov. 9 10 11 15 16 15 18 18 25 5 July 2 Federal Reserve Bank of Kansas City 6 7 12 14 $ 76 183 31 51 Sept. 15 29 17 11 6 8 11 12 13 14 20 21 28 29 121 40 40 52 69 39 50 10 18 14 Apr. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Oct. Nov. 1983 1982 1982 1 2 3 4 5 8 9 10 11 15 16 18 19 23 24 25 26 29 Dec. 30 25 66 38 91 42 75 60 60 47 2 51 17 23 107 107 82 3 1 2 3 6 7 8 9 10 13 14 15 16 17 21 22 23 24 27 28 29 30 31 $ 89 82 13 75 213 191 108 14 77 45 10 66 44 85 153 133 134 87 187 205 143 107 Federal Reserve Bank of Philadelphia 1982 Dec. 8 22 28 29 30 30 21 36 57 12 Jan. 3 5 6 7 10 11 12 $ 74 4 49 96 57 61 46 Action assigned to Mr. Truman. DISTRICT OFFICES: RON PAUL 22ND DISTRICT, TEXAS ROOM 1234 LONGWORTH HOUSE OFFICE BUILDING (202) 225-5951 Congre55 of tbe Einiteb 'tate COMMITTEE ON BANKING. FINANCE, AND URBAN AFFAIRS jboute of Nteprei5entatibeg azbington, ri.e. 20515 RANKING REPUBLICAN SUSCOMMITTEE ON CONSUMER AFFAIRS AND COINAGE 1110 NASA ROAD 1, SUITE 100 HOUSTON, TEXAS 77058 (713) 486-8583 6711 BELLFORT AVENUE, SUITE 307 HOUSTON, TEXAS 77087 (713) 226-4636 101 OYSTER CREEK DRIVE LAKE JACKSON, TEXAS 77566 (7u.1 297$961 .4ONGRESILIONAL FOILINES: HOUSTON/(V 3) 237-1550 LAKE JACKs0r4r3713) 297-0202 MEMBER, UNITED STATES GOLD POLICY COMMISSION January 25, 1983 Mr. Paul Volcker Chairman: Board of Governors of the Federal Reserve System Twentieth Street and Constitution Ave., NW Washington, D.C. 20551 Dear Chairman Volcker: Until September of last year, my staff could call the Washington Fed to inquire about the Fed's activities under section 105(b)(2) of the Monetary Control Act and receive a prompt response. Since that time, however, my staff has been informed that all such requests must now be made in writing to you, and that the information will be provided in writing. This letter is written in order to comply with the policy. I would like to know the answers to the following questions: 1. The dates on which a foreign debt or currency (please specify which) has been used as collateral for issuing Federal Reserve notes. 2. The amounts of such notes issued and debts or currencies used as collateral. 3. The Federal Reserve Bank at which or for which such posting of collateral was performed. 4. The Fed's current holdings of foreign debts and currencies (please specify amounts as to country of origin). 5. The dates on which such currencies and debts were obtained. 6. The manner in which such currencies and debts were purchased. In the future, it would be most helpful if a member of my staff could telephone a member of yours to obtain this information on a periodic basis. In lieu of that, perhaps the Board would consider publishing this data on a timely and regular basis. Sincerely, Ron Paul Member of Congress RP/jr https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 404,1 ' On.:4 S. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis March 4, 1983 The Honorable Mack Mattingly United States Senate Washington, D. C. 20510 Dear Senator Mattingly: I am pleased to enclose my response to your request for additional information during the hearing on February 17 before the Senate Banking Committee. I have furnished a copy of this material to the Committee for .telusion in the record of the bearing. Please let me know if I can be of further assistance. Sincerely, Enclosure CO:vcd bcc: Ted Truman Mrs. Mallardi (2)/ Insert page 321 (February 17, 1983 hearing) Background Material on External Trade and Payments Restrictions in IMF Balance of Payments Adjustment Programs The major aim of an IMF-supported adjustment program is to assist a country to bring about a configuration of its balance of payments considered sustainable over time. In this context, what is known as "IMF conditionality" refers to the practice of providing financial assistance only when, in the IMF's judgement, the country involved has formulated and is committed to implementing adjustment policies designed to reestablish a viable balance of payments position. Depending upon circumstances of the individual country, the particular set of policies designed to achieve this objective is likely to contain measures to restrain aggregate domestic demand (through reducing fiscal deficits and restraining growth of money and credit), to improve the efficiency of domestic resource allocation and thereby lay the basis for higher growth in output (by reducing or eliminating price controls and subsidies, reducing external trade and payments restrictions, and moving toward the establishment of positive real interest rates), to improve and maintain external competitiveness (through appropriate exchange rate policies), and to foster net capital inflows (through maintenance of an adequate level of interest rates, appropriate exchange rates, and an overall mix of policies that will attract foreign funds and encourage the retention of domestic savings for use in domestic investment). If successfully implemented, such policies can be expected to bring about adjustment in the balance of payments through a reduction in the current account deficit (i.e., the net balance of exports and imports of goods and services) to a level that can be sustained through expected future net inflows of capital on terms compatible with the development prospects of the country https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 and without resort to trade and payments restrictions. Such adjustment may, but does not necessarily, entail a temporary reduction of imports. In fact, of the nine largest IMF-supported programs (involving more than SDR 500 million in IMF resources) currently in effect (Argentina, India, Mexico, Pakistan, Turkey, Yugoslavia, Chile, Peru, and Romania), the programs for the first six of these, when approved, anticipated an increase in the value of imports in the first year of the program compared with the prior year. in programs that anticipate a temporary Even decline in imports, IMF financial assistance and other financing that might not otherwise have become available without an IMF-supported propram help to cushion the adjustment process and to avoid an even larger decline in imports that might have otherwise occurred as a consequence of harsher and more abrupt adjustment policies. Moreover, the adjustment approach advocated by the IMF attempts to establish a basis for sustained growth of the economy and avoids strictly deflationary policies that may adversely affect investment and fail to stimulate the required shift of resources to the external sector. As part of conditionality, the IMF places strong emphasis on the reduction and elimination of external trade and payments restrictions. This aspect of conditionality is based upon Article I of the IMF Articles of Agreement which lists explicitly among the purposes of the IMF, the facilitation of "the expansion and balanced growth of international trade" and "the elimination of foreign exchange restrictions which hamper the growth of world trade." In fact, as one of the standard conditions for making drawings that are phased over the life of an IMF program, a member must agree not to impose new, or to intensify existing, trade and payments restrictions. But the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 IMF often goes beyond the proscription against imposing further restrictions by actively encouraging members to reduce or eliminate existing restrictions. In some cases (e.g., in the IMF programs of Pakistan and India approved in 1981), a substantial liberalization of restrictions on imports constitutes an explicit major element in approval of IMF-supported balance-of-payments adjustment programs. The IMF also encourages members to reduce or eliminate subsidies that tend to stimulate exports and/or imports because of their distorting influence on resource allocation and their contributions to budgetary deficits. In addition to the influence exercized through the provision of balance of payments assistance, the IMF actively encourages the reduction and elimination of restrictions or artificial incentives affecting current transactions or payments, or capital flows, through its surveillance over exchange rate policies of member countries, both for industrial and developing countries. These surveillance responsibilities flow from Articles I and IV of the Articles of Agreement which obligate member countries to maintain orderly exchange arrangements, to avoid competitive exchange depreciation, and to promote a stable system of exchange rates. a. March 4, 1983 The Honorable Doug Barnard, Jr. Chairman Subcommittee on Commerce, Consumer, and Monetary Affairs Committee on Government Operations House of Representatives Washington, D. C. 20510 Dear Chairman Barnard: Thank you for your letter of February 15 requesting that the Board's staff prepare a brief description of the steps necessary to stop payment of a bank cashier's check and issue a replacement for the check. You asked for this information so that your Subcommittee would have some background information on banking industry practice regarding these matters. I am pleased to enclose a memorandum prepared by the Board's staff which provides a brief analysis of the law regarding cashier's checks and a description of the practices of banks in issuing replacements for lost or stolen cashier's checks. The memorandum concludes that, because of the unique characteristics of cashier's checks, banks cannot be required to issue stop orders against their cashier's checks or to issue replacements for such checks if they are reported lost or stolen. Many banks will, however, issue replacement checks if the person seeking the replacement provides an indemnity, in the form of a bond or other guarantee that is satisfactory to the bank. The memorandum indicates the time frames that may be involved in this process. I hope this information is useful to you. me know if I can be of further assistance. Please let Sincerely, Fnclosure LM:GTS:vcd (V-28) bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Meeder Mr. Schwartz Legal Files (2) Mrs. Mallardi (2)/ -,-3M11FINIffffrgr"..r.".".^"r""MINWPFg • Federal Reserve Board Staff Memorandum The Honorable Doug Barnard, Jr., Chairman of the Commerce, Consumer, and Monetary Affairs Subcommittee of the House Committee on Government Operations, has requested a description of the steps involved in entering and implementing a stop payment order against a bank cashier's check, with an indication of how many days the intended recipient of the check might have to wait under routine circumstances before the average bank could issue a replacement check. The purpose of Mr. Barnard's inquiry is to provide back- ground information regarding normal banking industry practice in handling stop payment orders and duplicate checks. A bank cashier's draft is a check drawn by a bank on itself and signed by an authorized officer of the bank. The bank itself is both drawer and drawee of a cashier's check. A cashier's check thus constitutes an unconditional promise by the bank to pay the check on demand. It is therefore a primary obli- gation of the issuing bank, and if presented for payment by a holder in due course, / the bank will be required to pay, except in very limited circumstances. This characteristic of a cashier's check is the fundamental reason why some payees require that payment be made in the form of the bank's obligation rather than a personal check. 1/ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As a result, the general rule is that the person A holder in due course is a holder of a check who has taken it for value, in good faith, and without notice that it is overdue or has been dishonored or of any defense or claim to it. U.C.C. § 3-302(1). A holder in due course takes the check free from all claims to it and free of any defense of any party to the check except for five specific "real" defenses. U.C.C. § 3-305. -2- who obtains the issuance of a cashier's check may not compel the issuing bank to stop payment since he is not a party to the obligation. See Baily, Brady on Bank Checks, § 20.11 (5th Ed. 1979 and Supp. 1982). Since the bank generally cannot refuse to pay a cashier's check, the bank's primary concern in the event a person requests a stop payment will be to obtain protection in the event it is required to pay the cashier's check it originally issued. The bank may stop payment with little risk of loss only if a court enjoins payment or the person seeking to have payment stopped supplies an adequate indemnity. See3-603(1). The type of indemnity that a bank may request will depend on the relationship that it has with the person seeking the stop payment and his creditworthiness, the amount of the g the transaction. check, and the circumstances surroundin• If a bank is not famar with the person or if he is not creditworthy, the bank may require the person to obtain an indemnity bond. It may take as many as 15 days to obtain such a bond, dependin• g on the procedures used by the insurance company. If g a replacement is a customer who is well known the person seekin• to the bank or is a person with a high credit standing, the bank may be satisfied with a simple written agreement by the person to indemnify the bank. Once the bank is satisfied with the indemnity, it will immediately take steps to stop payment of the check. These steps are no different from those required to stop payment on an ordinary check. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis wr • https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 Once the bank is satisfied that it has been adequately indemnified, it may issue a replacement for a cashier's check that has been lost or stolen. The procedures for issuing the replacement check are the same as those used in issuing the original and can be accomplished virtually immediately. March 4, 1983 •• f https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • March 4, 1983 The Honorable Walter E. Fauntroy Chairman Subcommittee on Domestic Monetary Policy Committee on Banking, Finance and Urban Affairs House of Representatives Washington, D. C. 20515 Dear Chairman Fauntroy: Thank you for your letter of February 28 concerning your Subcommittee's hearing on Section 14(b)(1) of the Federal Reserve Act, as amended by Section 105(b)(2) of the Monetary Control Act of 1980, which authorizes the Federal Reserve to invest "in obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof." I am pleased to let you know that Governor J. Charles Partee will be appearing on Marah 10. Sincerely, CO:vcd (V-37) bcc: Gov. Partee Mr. Dahl Mr. Allison Mr. Bradfield Mr. Schwartz Mrs. Mallardi (2) t• Congra“s of tbe Ziniteb i§tateg PowSe of Ilepres5entatibui Utlassbington, ri.e. 20515 /4 February 28, 1983 The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System 20th and Constitution Avenue N.W. Washington, D.C. 20551 Dear Paul: On Thursday, March 10, 1983, the Subcommittee on Domestic Monetary Policy will meet to take testimony in exercise of its oversight authority on Section 14(b)(1) of the Federal Reserve Act as amended by Section 105(b)(2) of the Monetary Control Act of 1980 which authorizes the Federal Reserve to invest "in obligations of, or fully guaranteed as to principal and interest by, a foreign government or agency thereof." The Subcommittee has decided to review this provision because of concerns, which have been raised during hearings on the International Financial Markets and Related Problems, that the Federal Reserve could possibly use this authority to assist foreign governments in financial difficulties. While you have already testified that you are in agreement with the legislative history which indicates that this provision was intended to permit the Federal Reserve to earn interest on currencies it obtains when during the ordinary course of international finance, it intervenes in the foreign exchange markets, and that you do not believe the provisions would permit the Federal Reserve to assist foreign governments in financial difficulty, the Subcommittee has determined that this is an appropriate time to review this provision, assess how it has been used, examine the internal and external provisions governing its use, and provide additional guidance to the Federal Reserve in its continued use of this section. Accordingly, I would therefore like your or your designees' testimony to explain the need and use of this provision citing such examples as would be appropriate. I would like, further, to know the income earned by the Federal Reserve which is attributable to this provision, how the Federal Reserve operated prior to this provision, the list of countries with which the Federal Reserve has ever engaged in a transaction under this provision, the list of countries whose securities are presently eligible for purchase under this provision, the factors which determine https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Paul A. Volcker Page Two February 28, 1983 such eligibility, and the impact that repeal of this provision might have on the operations of the System. I am also interested in knowing the reasons that you do not believe this provision would not permit the Federal Reserve to assist or "bail out" foreign governments in financial difficulties. Any internal memorandum or opinions rendered by the General Counsel of the Board or of the New York Federal Reserve Bank should be included within such an attachment. You or your designees should also be prepared to comment upon the use of these securities to collaterize Federal Reserve Notes. It may be useful to prepare a separate attachment relating to the collaterization of Federal Reserve Notes which would be instructive of the process. Such a document could be an existing Federal Reserve print or an attachment to the testimony. A separate listing of each instance a foreign security was used to collaterize Federal Reserve Notes should also be provided to the Subcommittee staff. I would also like you to provide to the Subcommittee copies of all policy actions of the Federal Open Market Committee or the Board of Governors relating to procedural instructions with respect to foreign currency or security transactions, foreign currency directives, and authorizations for foreign currency operations, including all amendments thereto, dating back to the effective date of the amendment contained in Section 105(b)(2) to Section 14(b)(1) of the Federal Reserve Act. Any earlier directives of a similar nature which would have been controlling after the effective date of the enactment should also be provided to the Subcommittee. I would also appreciate a listing of all transactions made each first, third, sixth, ninth and twelfth month for 1980, 1981 and 1982 which took place under the authority of this provision. The listing should include the dollar amount of each transaction, the country, the length of time the securities were held, and the maturity and type of security involved. A listing of all currently outstanding transactions made pursuant to this provision should also be provided to the Subcommittee. That listing should be itemized in the same form as for the previous listing. In light of the short time before the hearing, I would appreciate your contact with the Subcommittee to make such arrangements or modifications to these requests as might be necessary to assure a productive hearing. I realize some information may not be fully available by the hearing date; nonetheless, I think we should proceed with an understanding that what can be made available by that time should be delivered with all other information to follow shortly thereafter. All questions concerning the information requested should be directed to the Staff Director, Howard Lee. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis . . The Honorable Paul A. Volcker Page Three February 28, 1983 The hearing will commence at 9:30 a.m. on Thursday, March 10, 1983, in Room 2220 of the Rayburn House Office Building. The Committee Rules direct that witnesses should provide 100 copies of their testimony at least 24 hours before the hearing. Witnesses should also bring with them additional copies if they want to be sure that member of the Press and the public who may be in attendance are to be provided with copies of their testimony. Inasmuch as this is a very small hearing room, I am requesting that all Members and Witnesses refrain from smoking as some Members of the Subcommittee are sensitive to tobacco smoke. I hope this is not an inconvenience to those who appear before this Subcommittee. It is a request that will, however, be made whenever the smaller hearing rooms of the Committee are used. In no way is this request directed at any particular individual. Any other questions concerning this oversight hearing may be directed to the Staff Director, Howard Lee, who may be reached at (202) 226-7315. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely yours, Walter E. Fauntroy Subcommittee Chairman March 3, 1q83 The Honorable Roger W. Jepsen Chairman Joint Economic Committee 20510 Washington, D.C. Dear Chairman Jepsen: Enclosed is a copy of a report on foreign exchange ing the operations by the Treasury and the Federal Reserve cover t will period from August 1982 through January 1'483. The repor Pulletin. be printed in the March issue of the Federal Reserve row morning's It is being released to the press for use in tomor newspapers. Copies of the report are also being sent to the s are Chairmen of other interested Committees. Additional copie ttee. enclosed for the use of members and staff of your Commi Sincerely, S/Paul A,Vogkeii Fnclosures (30 copies) Identical letters to Chrmn. Jake Garn, Senate Bkq., 20 copies Chrmn. St Germain, House Bkg., 50 copies https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis JRC:pjt bcc: Mrs. Mallardi (2) March 3, 1qP3 The Honorable John Heinz Chairman Finance Subcommittee on International and Monetary Policy and Committee on Banking, Housing Urban Affairs United States Senate 2n510 Washington, p.c. Dear Chairman Heinz: on foreign exchange Enclosed is a copy of a report the Federal Reserve covering the operations by the Treasury and will h January 1q83. The report period from August 19R2 throug the Federal Reserve Pulletin. be printed in the March issue of ss for use in tomorrow morning's It is being released to the pre newspapers. Sincerely, S/Paul A. Volcker Fnclosure https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis those on attached list. to t sen o als s ter let cal Identi 4- .* 4 Senate Chrmn. John Heinz Subcmte. on International Finance and Monetary Policy . Committee on Banking, Housing and Urban Affairs William Proxmire Ranking Minority Member Subcmte. on International Finance and Monetary Policy Committee on Banking, Housing and Urban Affairs House Chrmn. Jerry M. Patterson Subcmte. on International Development, Institutions and Finance Committee on Banking, Finance and Urban Affairs Douglas K. Bereuter Ranking Minority Member Subcmte. on International Development, Institutions and Finance Committee on Banking, Finance and Urban Affairs JEC Vice Chrmn. Lee Hamilton to main offc.) Chalmers P. Wylie (ranking minority of JEC, House side--sent to main offc.) Lloyd Bentsen (ranking minority of JEC, Senate side--sent i https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis • .•..,•,,7.:.,•.7,,,:0;..,,„:c..„,,,..•,.,:>_.,,•„7.•4„,.,:.0,.••..,•„,. „, :„F ) BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 205S1 I -,. t- ',1-1P.., •' ' •.:",-,;'-':::--;._-.---,-_. .• •• •ERAL , 1 1s'.• • •...• • • PAUL A. VOLCKER CHAIRMAN March 2, 1983 The Honorable John Melcher United States Senate 253 Russell Building Washington, D.C. 20510 Dear Senator Melcher: I have read with concern your letter transmitting the allegations of Capital Aero, Inc., concerning the activities of the Helena Branch of the Federal Reserve Bank of Minneapolis. This company has alleged that the Helena Branch gives favorable treatment to checks received through air transportation contracted for by that Branch and has called upon customers of Capital Aero Inc. concerning the use of the services of that company. The Monetary Control Act of 1980 requires the Federal Reserve Banks to price for their payments systems services and gives the Federal Reserve Board responsibility for overseeing this process. Quite aside from the allegations made by Capital Aero, Inc., I wish to assure you that it is the firm policy of the Federal Reserve System that all customers are eligible to receive the same services and pay the same prices for those services. Any contrary action would be inconsistent with System policy and appropriate corrective measures would be promptly taken. With respect to the facts of the complaint made by Capital Aero, Inc., the Federal Reserve Bank of Minneapolis has reviewed the situation and has concluded that there is no substance to the complaint. I am enclosing a copy of a memorandum prepared in the Bank for your consideration. In addition, I have asked the staff of the Board to make a separate examination of this matter. I would be pleased to provide you with the results of this review after it has been completed. Sincerely, Seaul A, Volcker Enclosure MB: marn_ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FOR it tt;9-C713 • Federal Reserve Bank of Minneapolis ovF ICE: MEMORANDUM Dee: To: From: Subject Fit February 28, 1983 Cud: E, Gerald Corrigan, President Thomas E. Gainor, First Vice President Leonard W. FernelAus, Senior Vice President al Counsel Sheldon L. Az-line, Vice President 6' Deputy Gener r•-• o ) c Capital Aero This is ry of the facts in response to your request for a brief summa Inc., a Montana surrounding the recent litigation filed by Capital Aero, corporation, against the Helena Branch. gement- (CCA)y As part of the Montana Expedited Check Clearing Arran Capital Aero was awarded A one year contract beginning iovember 30, 1981 to rcial banks in northeastern provide air delivery service to a number of comme Montana. al Aero to deliver The banks thetr:selves also contracted with Capit deposit items to the 'Helena Branch, In late August, 1982, John Patten, president that effective December 1, 1982 the of Capital hero, advised Branch management shipments to the banks and the price the Branch would have to pay for outgoing shipments to the Branch was to price the bank.s would have to pay for incoming be Increased approximately 5-30 percent. Mr. Patten also advised the banks that courier service on a Monday through although Capital Aero had been providing y service to the Branch. Friday schedule, it intended to terminate Frida their opinion the plan to Branch management advised Mr. Patten that in t on \.he banks and the proposed reduce service would have an adverse impac increases were not justified. Capital Efforts to discuss these concerns with tween Branch management and Capital Aero were unsuccessful, and negotiations \bc Aero officials ultimately broke contacted each of the banks in When this happened, Branch managernent h intended to rebid the route. the program and advised them that the Brac https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2 - Thereafter, bids were solicited from potential carriers ir,cludinz Capital Aero to provide the same basic air courier service, but on a five-day ri-,ther than a four-day basis. On September 17, 1982 Branch managenent, in response to a Septe7ber 15, 1982 letter that Capital Aero sent to each of the banks in the MECCA program, Branch did not wrote to each of the participating banks advising them that the believe Capital Aero's proposed increases were justified, that we recognized our obligation to ensure the IIECCA program WAS serviced in a cc, t effective manner, and that the banks should consider deferring renewal of their contracts with Capital Aero until they had an opportunity to evaluate the program the Branch intended to offer, On October 12, 1982 Branch manager,ent wrote to the banks again, this time advising them that the route had been rebid and a contract awarded to ng Richland Aviation to deliver items from the Branch to the banks beginni December 1, 1982. Thereafter, each of the banks that had been using Capital ve December Aero to deliver iterns to the Branch cancelled its contract, effecti 1, 1982, (the expiration date) and began using the services of Richland Aviation, On December 13, 1982 Capital Aero filed suit against us in state court. ent Based upon my review of the correspondence between Branc:h managem with and the participating banks as well as conversations that I have hsd there is any officials of the Branch regrading this matter, I do not believe officials substance to Capital Aero's allegations that Federal Reserve those threats, threatened Capital Aero customer8, and that as a result of Capital Aero lost over 90 percent of its customers. However, ;4-i you can nt and in appreciate, general allegations like those found in the complai ble to prove H, A, Carlsonls letter of 3anuary 13, 1953 are virtually impossi no specifics have or disproye prior to detailed discovery, simply because been provided. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 !MD Capital Aero officials also have Alleged that the Eranch is afford /Richland Aviation preferential treatment vis a vi s other couriers as respects our 12:01 a.m. deposit deadline. Ace()rding to Mr. Carlon's letter the Branch has been tilakirw, a habit of giving credit to the customers on their /Richland Aviation/ aircraft regardless of what time it gets in. We /Cap-ital Aero/ have documented their aircraft arriving as much AS one hour latk And the Federal Reserve still gives credit to their customers. In other words, the deadline applies to all but the Federal Reserve Aircraft. However, our records indicate that the Helena Branch has applied the 12:01 a,rn. deposit deadline in a consistent and evenhanded manner. Only once were its since December 1, 1982, when Capital Aero was 40 minutes late, . customers not given same day credit for items shipped to the Branch Capital each time its Aero was late on four other occasions (3-29 minutes late), but customers were given itamediate credit. Another courier was late (24 and 26 customers also were minutes, respectively) on two occasions, but each time its given immediate credit. way - immediate Richland Aviation and its customers were treated the same credit Was A,iiation. was twit given on several occasions ever though Richland ne. able to deliver Its items to the Branch by the 12:01 a.m. deadli However, it is impossible Richland Aviation has never been more than 18 minutes late, so ers same day credit on for the Branch to have given Richland Aviation's custom as charged a shipzent delivered by Richland Avistion "one hour late" Aero. by Capital evening of December 1, It is true that the inclement weather on the the Branch until 1962 prevented Richland Aviation frora delivering its items to the afternoon of December 2, 1982. But, in that instance Richland Aviation's following day. customers were not given credit for the items until the Branch personnel threatened As In the case of Capital Aero's charge that Capital Aero was its customers, no specific instances were detailed where treated differently from other couriers. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C.41 MAR , rol The Heoerable George H. W. Bush President of the U.S. Senate Washington, D.C. 20510 Dear Mr. Vice President: In accordance with the requirewents of the Freedom of Information Act. I am pleased to submit the akard's Annual Report covaring the implementation of its administrative resnonsihilities under the Act during calendar year 1982. Sincerely, Enclosure President of the U.S. Senate, received by RLArnold:jes 4 1 The Honorable Glenn English Chairman Subcommittee on Government Information, Justice and Agriculture Comittec on Governnent Operations House of Representatives Washington, 0.C. 20511; Dear Chairman Enclish: In accordance with the requirevents of the Freedom of Infomation Act, I an; pleased to subnit the Loard's Annual Report covering the implemntation of its adAnistrative responsibilities under the Act during calendar year 19C2. Sincerely, . Enclosure JO:jes https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis s14 , ip-isY https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C • The Honorable Charles L. Grassley Chaiman Subcoaoittee on Adwinistrative Practice and Procedure CourAttee on the Judiciary United States Senate Wash1n5ton, U.C. 2.1516 bear Chairman Grassley: In accordance with the requirements of Infuriation Act, I ao pleased to subit the War the Freedom of covering the iftipleentation of its administrati d's Annual Report ve responsibilities under the Act durin5 calendar year 19b2. Sincerely, Enclosure JO:cic -1fv\/3 IN\ca'1202_, (\I- ”y4_) • BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM WASHINGTON, D. C. 20551 PAUL A. VOLCKER CHAIRMAN March 1, 1983 The Honorable John H. Chafee United States Senate Washington, D.C. 20510 Dear John: Thank you for your letter concerning delayed funds availability, and I am pleased to report on the status of the Board's work in this area. In testifying for the Board last March, Theodore Allison, the Staff Director for Federal Reserve Bank Activities, stated that the Board and the Reserve Banks would be moving on two fronts to help find ways of improving the delayed funds availability situation. First, we would be undertaking a study of possible improvements in check collection procedures that would achieve faster handling of return items or faster confirmation of payment or nonpayment of checks. Second, we would be working with the American Bankers Association on ways that banks might improve customer awareness of their funds availability policies. We feel progress has been, and is being, made on both of these fronts. On February 24, 1983, we inaugurated a major change in Reserve Bank check collection schedules designed to speed check clearings. With this change, many checks that, under our previous operating schedule, would have required two days to clear between Federal Reserve offices will clear within a single day. This speedier service, which affects checks handled thoughout the Federal Reserve System, will work to reduce the period of uncertainty about checks deposited for collection. During much of 1982, the Federal Reserve Bank of Dallas also worked to develop an ambitious pilot test of a new return-item processing and notification procedure. On February 24, 1983, that pilot program was initiated. Essentially the procedure being tested provides for the direct return of dishonored checks from the paying institution through the Federal Reserve to the institution at which the check was first deposited. If the check is for more than $2,500, the Federal Reserve Bank will provide the institution of first deposit a wire or telephone advice of return on the day the Reserve Bank processes the item. The paying bank -- upon dishonoring and returning a check that had been presented for collection -- would be charged a fee for this service. There are a number of legal and operational issues that must be resolved before this procedure could be implemented permanently and expanded nationwide, one of which may require modifications to the Uniform Commercial Code. If this procedure can be implemented nationwide, it should substantially reduce the period of uncertainity for an institution about the status of checks sent for collection. This, in https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1 it PO 2 turn, should reduce the length of holds, since the reason cited most often by institutions for delaying customer access to funds is the uncertainty associated wtth the time required to receive returned checks under the present, often circuitous, system. Progress has been made, too, in our work with the American Bankers Association -- though, frankly, it has not been achieved as quickly as we would have liked. We are hopeful that concrete action by the Association will be taken soon. Following several discussions between Association staff and Board staff, we received the enclosed letter from the Association outlining a proposed series of very promising steps. The letter describes two operational changes being worked on in an attempt to speed up the return of dishonored items -- standardized check endorsements and automated processing of return items. However, full implementation of these changes is at least several years away. The Association stated that, in the meantime, the following actions will be recommended by their banker task force studying delayed funds availability in an effort to alleviate customer difficulties: 1. Distribution of sample written policies that may be used by banks as a basis for developing their own written "hole policies, and for communicating these policies to employees and customers. 2. Distribution of sample disclosures which will assist banks in providing customers with adequate information in this area; and an educational effort to encourage banks to voluntarily disclose their availability practices. 3. Improved customer education and broadened public understanding of this issue -- through press releases, speeches, prepared advertisements, statement stuffers, and articles in the press -- and encouragement of such methods of avoiding delays as direct deposit, wire transfer of funds and debit and check cashing cards. In anticipation of early action along these lines by the Association, we will ask several questions on delayed funds availability in the March 1983 consumer survey conducted for us by the University of Michigan Survey Research Center. The questions will deal -- as have past surveys in this area -- with consumers' awareness of delayed funds availability policies, and their experience, if any, with the practice. (A copy of the questions is enclosed.) This data will update our previous surveys and will establish a benchmark of consumer awareness by which to gauge the effectiveness of the industry's voluntary disclosure and consumer education efforts. In addition, we would expect to check on the effectiveness of the Association's efforts in getting banks to disclose their delayed funds availability policies to customers by including an inquiry on this area as part of some future examinations. In summary, we believe that progress is being made toward alleviating the causes of, and the problems caused by, the practice of delayed funds availability. Although the operational changes that have the greatest https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis •••• -3 potential for reducing the length of holds are not likely to be in place for a while yet, the disclosure and education efforts outlined by the Association -- including the incentive this may give banks to reexamine the appropriateness of their current policies -- could substantially improve the situation. With disclosures, customers would be better able to adjust to the impact of the practice on their personal circumstances -- for example, by seeking means of tranferring funds other than by use of checks -- or use the information in shopping for financial services. Thus, although the delayed funds practice is still with us, I an encouraged -- as I hope you will he -- that progress is being made in directions not involving government regulation. Sincerely, Enclosures G.HURST:aem 2/28/83 bcc: https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (V-32) Mr. Hurst Mr. Allison Mrs. Mallardi (2) CoL\\9 ROBERT J. DOLE, KANS., CHAIRMAN Action assigned Mr. Allison BOO PACKWOOD, OREG. WILLIAM V. ROTH, JR., DEL. JOHN C. DANFORTH, MO. JOHN H. CHAFEE, R.I. RUSSELL B. LONG, LA. LLOYD BENTSEN, TEX. SPARK M. MATSIJNAGA, HAWAII DANIEL PATRICK MOYNIHAN, N.Y. JOHN HEINZ, PA. -P, WYO. MALCOLM WALL. DAVID DURENBERGER, MINN. MAX SAUCUS, MONT. DAVID L. BOREN, OKLA. BILL BRADLEY, N.J. GEORGE .). MITCHELL, MAINE WILLIAM L. ARMSTRONG. COLO. SYMMS, IDAHO STEVEN CHARLES).. GRASSLEY, IOWA r , 'atnifeti Zfafez --Senate DAVID PRYOR, ARK. COMMITTEE ON FINANCE IS33 FEB 2_2 WASHINGTON, D.C. 20510 1:•••:;, " :• • •• ROBERT E. LIGHTHIZER, CHIEF COUNSEL MICHAEL STERN, MINORITY STAFF DIRECTOR February 18, 1983 ,5d The Honorable Paul A. Volcker Chairman, Board of Governors Federal Reserve System Twentieth and C Streets, N.W. Washington, D.C. 20551 Dear Mr. Chairuan:Z•••••••-12. • Last March, as Chairman of the Consumer Affairs Subcommittee the of the Senate Banking Committee, I held a hearing to examine g out problem of delayed funds availability. I called this hearin unof serious concern that some banking institutions were taking on fair advantage of their customers, by placing excessive holds ed their check deposits. The testimony the Subcommittee receiv confirmed my fear. I recognize there are legitimate reasons for placing holds on check deposits, and the banking witnesses described these in detail. An institution might understandably want to hold a check unalso til it has itself received credit for the funds. It might conimpose a hold to protect itself against risk of loss. What cuscerns me are those institutions that across-the-board deny bank the tomers the use of funds far beyond the time it takes for to receive credit for the check, and without regard to the size er of the check, the quality of the relationship with the custom risk or any other factors that would indicate there was little that the bank could be stuck with a bad check. Once a bank has itself received credit for a check deposit is mak(usually within 1-3 days), any further hold means the bank cusing money market rates on the customer's deposit, while the is tomer is denied the use of his or her money. When the hold this routinely extended, without indication of particular risk, at worst, practice, at best, becomes a hidden cost of checking and, a genuine consumer abuse. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis C4 The Honorable Paul A. Volcker / February 18, 1983 Theodore Allison, testifying for the Federal Reserve Board, cited a Fed authorized survey on the extent of the delayed funds problem. While Mr. Allison preferred to focus on the number of customers who did not have problems with check holds, the fact is that the Fed's own survey indicated 23 percent of those questioned had encountered some problem with a check hold. Mr. Allison also emphasized that relatively few of those individuals experiencing a problem had suffered serious damage. However, a closer look at the Fed's own study shows that the very vast majority of those affected were inconvenienced and angered by the holds placed on their checks. In my view, it is quite beside the point that there are more people who do not suffer check hold problems than there are people who do or that relatively few suffer severe monetary damage. The point is rather that with almost one in four customers affected by this practice, delayed funds availability is a pervasive problem. Moreover, that customers are angered by the practice indicates it is a genuine consumer concern. Indeed, the Subcommittee's examination seems to have touched a nerve as I received a great deal of mail and telephone calls from banking consumers expressing enthusiastic support for our efforts. It is critical that we find a way to ensure that customers are not unjustifiably denied access to their own money. At the same time, banking institutions must not be put at excessive risk of loss from bad checks. The fact that many institutions do have very brief hold policies indicates this can be done under the present check-clearing system, without undue risk to the banking institution. There are also a number of improvements which might be made in the process of check clearing to expedite notification of return items and further reduce the risk of loss to the depositing institution. Mr. Chairman, without direction from the regulators or Congress, there is little incentive for those institutions with long hold policies to revise their practices. The value of the float they enjoy--at their customers' expense--is simply too great. Mr. Allison informed the Subcommittee that the Federal Reserve Board was undertaking a study in coordination with the banking community to find ways of addressing this problem vol- https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 The Honorable Paul A. Volcker ' February 18, 1983 g, under the untarily. Realizing the study can be time consumin e time for the rebest of conditions, I have sought to allow ampl Fed promised sults. However, it is now almost a year since the efforts. the Subcommittee it would send up a report on its a genuine conI feel strongly that excessive bank holds are itted to achievsumer abuse that must be stopped. I have been comm anxious to ing banking deregulation in other areas, and I am not . While my impose additional legislation on these institutions ntary basis, volu preference is that changes be accomplished on a shed. most of all I wish that changes be in fact accompli g the progI would most appreciate hearing from you regardin ress you have made to this point. Sincerely, Joh H. Chafee Unit d States Senator JHC/xst https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis