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Federal Reserve Bank
of Minneapolis




President’s Message
1
Summary
2
Essay: Are Banks Special?
5
Appendix
19
Statement of Condition
26
Earnings and Expenses
27
Directors
28
Officers
IBC




Federal Reserve Bank
of Minneapolis/Annual Report

1982

President's Message

It has, for some time, been the practice of the Federal Reserve Bank of
Minneapolis to devote its Annual Report to an essay on a banking,
financial, or an economic issue of particular importance. In keeping
with that tradition, this Bank's 1982 Annual Report examines a
seemingly straightforward but, in fact, very complex question: Are
banks special?
The subject of this year's essay is both timely and important in that it
goes to the core of issues that underlie the appropriate scope of
banking powers, bank ownership and control, and the structure of
banking organizations.
The essay does not, nor is it intended to, provide a roadmap for
legislative or regulatory actions. Rather, it seeks to provide a
perspective on the basics of banking; basics which should weigh
heavily in deliberations about the future of specific banking functions
and the special role of banking organizations.

President




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Federal Reserve Bank
of Minneapolis/Annual Report

1982

Are Banks Special? A Summary

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Absent a satisfactory understanding of what it is — or was — that
makes banks special in a functional sense, it is very difficult, with any
degree of consistency, to answer questions about the separation of
banking from other lines o f business, the scope of banking powers,
the ownership and control o f banks, and banking structure more
generally.
This essay seeks to shed light on these issues by stepping back from
current institutional, regulatory, and legal arrangements and
attempting to identify the essential functions of banks.

The essay suggests that banks perform three essential functions:
(1) they issue transaction accounts (i. e., they hold liabilities that are
payable on demand at par and that are readily transferable to third
parties); (2) they are the backup source of liquidity to all other institutions, financial and
nonfinancial; and (3) they are the transmission belt for monetary policy.
On close inspection, it becomes evident that these essential functions are highly
interdependent and that banks'ability to perform such functions dictates the need fora high
degree of public confidence in the overall financial condition of banks — and especially the
quality of banks' assets.
This dictate has been reinforced by a public safety net — deposit insurance and access to the
lender of last resort— which is uniquely available to "banks." The presence of that public
safety net implies unique public responsibilities on the part of banks and would further seem
to imply that if we are no longer willing or able to segregate essential banking functions into
an identifiable class of institutions, then the public safety net should be made universally
available to any institution that provides a banking function, or it should be eliminated
altogether.
Against this background, the essay goes on to suggest a definition of a bank. The definition is
deceptively simple: a bank is any institution that is eligible to issue transaction accounts. If an
institution meets this definition, it would (1) be eligible for government deposit insurance; (2)
have direct access to the discount window; (3) be subject to reserve requirements; and (4)
have direct access to Federal Reserve payment services, particularly the wire transfer system.
Four important implications emerge from the essays analysis of essential bank functions and
the associated definition o f a bank.
First, if preserving essential bank functions really does matter, it follows that banks must be
competitively viable.
Second, there is room for broader bank powers. The expansion of those powers must,
however, take place within a context that guards against excessive risk-taking by banks and
insures the impartiality o f the credit decision making process.




Federal Reserve Bank
of Minneapolis/Annual Report

Third, once agreement has been reached on appropriate banking
powers, questions about bank ownership and control become easier
to answer. Certainly logic would suggest that particular powers be
vested in banks only to the extent that there is a willingness to permit
another institution engaging in those same activities to own banks. By
the same token, nonbanking organizations would be permitted to
own banks only insofar as their activities match permitted banking
activities. And if they own a bank, they would become a bank holding
company
Fourth, while there is a powerful case for placing some subsidiary
banking activities into affiliates of bank holding companies on the
grounds o f segregating capital and providing greater protection
against self-dealing, the bank holding company is not a substitute for
prudent management nor is it a fail-safe device for containing risk.




3

1982

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Federal Reserve Bank
of Minneapolis/Annual Report

5

1982

Are Banks Special?

Introduction

The recent evolution of the financial structure in the United States has
produced two competing points of view regarding the proper
direction for further change. On the one hand, there is the view that
the "financial services industry" — encompassing banks, thrifts,
brokers, investment banks, and insurance companies — should be
looked at as a single entity. According to this view, efforts to
distinguish among kinds o f institutions are both futile and
unnecessary This view of the financial services industry is based on
the belief that many financial services offered by various classes of
institutions are so complementary to (or such close substitutes for)
one another that institutional distinctions are rendered useless.
Implicit in this view is the assumption that banks are not special. *

This "separation doctrine"
in banking grew out of
concerns about
concentration, conflicts of
interest, and appropriate
risks for institutions that
lend depositors' money.

The competing, if not opposing, view is that banks are indeed special. This view holds that
specialization o f financial institutions has worked well and, at least in some cases,
specialization may still be more efficient and also better serve the public interest. This view is
associated with the historical separation o f banking from commerce and from investment
banking. In general, this ”separation doctrine" in banking grew out of concerns about
concentration of financial power, possible conflicts of interest, and the appropriate scope of
risks banks should incur in the face of the special trusteeship falling on institutions that
engage in the lending o f depositors' money. In a shorthand way, as pertains to banks and the
banking system, these concerns are typically captured by the phrase, "safety and soundness."
These two points of view do not necessarily represent mutually exclusive approaches to
financial market structure. For example, in the context of a large financial services holding
company, banks could be legally separated from nonbanks, but it is not clear that such
separation would necessarily provide the kinds of protections that are currently built into
federal banking laws.
Thus, assessing the merits o f these two competing views must start with some very basic
questions: Are banksspecial" or are they simply another provider of financial services? Does
it matter what kinds o f risks banks incur? Does it matter who owns banks? Is "safety and
soundness" a cliche, or should it have genuine and substantial meaning for banks, for bank
regulators, and for the public at large?
While banking practices have naturally evolved over time, recently a combination o f events
has shifted that process to one of an almost revolutionary character. Amidst this process of
rapid change, with market innovation and new sources of competition, there is a perception
that banks' competitive position — and presumably their market share — has slipped. Casual
observation o f the growth o f the commercial paper market, the thrift industry, money market
mutual funds (MMMFs), and the de facto trend toward ownership of banks by securities firms
and commercial enterprises, tends to support that perception. Indeed, there are numerous
instances in which nonbanks have been able to provide "bank-like" services at a lower cost (or
a higher rate of return) to the individual or corporate customer, thereby drawing business
away from banking institutions.
*ln this essay, the term "bank" is used in a generic way that makes no effort to distinguish commercial banks from thrifts and other "depository
institutions." This is done merely to simplify the discussion. However, in considering the essential functions of "banks" in light of the Depository
Institutions Deregulation and Monetary Control Act of 1980 and the Garn-St Germain Depository Institutions Act of 1982, it is clear that in
substance there are no longer meaningful differences. To be sure, differences in powers, in regulatory treatment, and in tax status remain, but

the basic characteristics that distinguish banks from other classes of financial and nonfinancial enterprises now seem to apply to thrifts as well
http://fraser.stlouisfed.org/ as to commercial banks.
Federal Reserve Bank of St. Louis

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1982

High on the list o f reasons that are cited for this perceived shift of
market position from banks to nonbank competitors is the extra
burden of regulation on banks. The fact of a heavy regulatory burden
on banks is beyond dispute, but in some cases it is also true that
regulation — relating to, for example, deposit insurance or access to
the discount window— provides powerful incentives for individuals
and businesses to maintain relationships with banks. While it is
difficult to judge the net competitive results of differing degrees of
regulation, it does seem clear that of all the regulatory burdens on
banks, there have been two that stand out in terms o f their impact on
banks' competitive position over time: Regulation Q and limitations
on the scope of bank services. This is not to suggest that other
regulations on banks — ranging from reserve requirements to
community reinvestment— have not been costly. But, at the cutting
edge o f market position or market share, it is Regulation Q and service line restrictions that
have been the most critical restraints on banks.
Despite these regulatory restraints, banks have not stood still in the face of changing financial
markets and new sources of competition. By using the flexibility provided by the Bank Holding
Company Act, by developing sophisticated liability management techniques, by major
expansions abroad, and by creative and innovative adaptations of "conventional" banking
services, banks have actually fared rather well in terms of preserving their overall market
position. While it is not easy to measure what has happened to the relative position of banks
over time, the appendix to this report (pages 19-24) makes such an effort. Allowing for the
inherent measurement problems in such an exercise — to say nothing o f the data limitations
— the analysis simply does not bear out the perception noted earlier that banks have lost
ground in the domestic marketplace over the past three decades. (While not captured by the
data, banks have, of course, made major expansions abroad during this period.) The analysis
does not, however, imply that heavy regulation has not constrained the growth of banks and
their market share, for it is quite possible that absent such regulations, banks' position would
have risen rather than essentially held steady. Nor does the analysis indicate whether a rising
or falling bank share is good, bad, or indifferent from the perspective of the public interest. To
some extent these issues depend upon whether, in fact, there is something special about
banks that is worth preserving. Indeed, if banks are special, it would not be in the public
interest for the features or functions that make banks special to be eroded by competitive,
regulatory, or legislative forces. By the same token, if what is special about banks dictates a
relatively heavy dose of regulation, public policymakers should not be goaded into eliminating
necessary regulation simply because bank market share might grow to some higher level
without that regulation.




Federal Reserve Bank
of Minneapolis/Annual Report

7

1982

What Makes Banks Special?

Reduced to essentials, it would appear that there are three
characteristics that distinguish banks from all other classes of
institutions — both financial and nonfinancial. They are:
1.Banks offer transaction accounts.

As long as banks issue
transaction accounts they
incur, by definition, "term
structure" risk.
structure

2. Banks are the backup source o f liquidity for all other institutions.
3. Banks are the transmission belt for monetary policy.
These three essential bank characteristics and the interrelationships
between them are discussed below. Of necessity, the discussion treats
each factor separately. However, it is clear that these essential
characteristics are highly complementary and furthermore that it is the relationship among
them that best captures the essence of what makes banks special.
Issuance o f Transaction Accounts

Only banks issue transaction accounts; that is, they incur liabilities payable on demand at par
and are readily transferable by the owner to third parties. The owner o f a transaction account
can demand and receive currency in the face amount deposited in the account; write a check
in the full amount o f the account; or, perhaps most importantly, the owner of the account
can transfer the full amount of the account to a third party almost instantaneously by wire
transfer. The liquidity, mobility, and acceptability of bank issued transaction accounts permit
our diverse economic and financial system to work with the relative ease and efficiency to
which we are accustomed. Moreover, in periods of financial stress, the capacity to quickly
move transaction account balances to third parties takes on special significance by providing
elements of flexibility and certainty in making and receiving payments that help to insure that
financial disruptions do not spread. Individual banks can also create these highly liquid and
mobile balances through their lending function. The capacity to "create" liabilities with these
characteristics is vital to the ongoing needs of commerce, but it takes on special significance
in periods of financial stress.
Because of the peculiarities of law and regulation, not all classes of transaction accounts have
the same precise legal or regulatory characteristics. The "demand deposit' is the purest form
o f transaction account, since, for example, negotiable order o f withdrawal (NOW) accounts
and some share drafts at mutual organizations have restrictions on the extent to which they
are payable on demand. However, from the perspective of both the issuing institutions and
their customers, these differences appear to be without substance since the accounts are
perceived and treated as transaction accounts both by the issuing institution and by the
public. For this reason, a contemporary definition of "transaction" accounts — at least for
purposes of identifying and defining special characteristics o f banks — should focus on
functional characteristics rather than existing legal or regulatory distinctions. If a financial
asset satisfies the functional test o f being payable on demand at par and readily transferable
to a third party, it should— for those purposes — be a "transaction" balance.
A case can be made that nonbank financial institutions incur liabilities that appear to have



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of Minneapolis/Annual Report

1982

some or all of the characteristics of a transaction account issued by a
bank. However, on close inspection it appears that such instruments
— whether MMMFs, retail repurchase (RPs) agreements, customer
credit balances with brokers, sweep accounts, etc. — do not, at least
in a technical sense, in fact possess the characteristics associated with
the bank issued transaction account. However, as is discussed later,
making the distinction is particularly difficult in the case of MMMFs. In
all o f these cases, including money market mutual funds, instruments
which appear to have bank transaction account characteristics take
on those characteristics in part because the acquisition or disposition
o f such assets involves, at some point, the use of a transaction
account at a bank. However, technology makes it possible to manage
these financial assets in a way in which their ultimate dependence on
a bank account is not apparent to the individual holder of the asset.
As long as banks issue transaction accounts they, by definition, incur a form of "term
structure" risk. That is, the presence o f transaction balances on the books of a bank makes it
difficult, if not impossible, to match the maturities of assets and liabilities, particularly in a
contemporary setting in which bank holdings of liquid assets have shrunk and in which some
assets, traditionally considered as liquid, may not, in fact, be all that liquid. Indeed, the asset
side o f the balance sheet for at least some banks provides a small margin of functional
liquidity that can readily be brought to bear to meet large and sudden deposit outflows. In
this setting, the inherent term structure mismatch on the books of banks is one of the realities
that gives rise to concerns about strains on bank liquidity and sudden drains on bank
deposits.
Banks and bank regulators have long since recognized the importance of banks acting in
ways that preserve public confidence in banks' capacity to meet their deposit obligations,
thereby minimizing the likelihood of large, sudden drains of bank deposits. Deposit insurance
and direct access to the lender of last resort are uniquely available to banks to reinforce that
public confidence. Indeed, deposit insurance and access to the lender of last resort constitute
a public safety net under the deposit taking function of banks. The presence of this public
safety net reflects a long-standing consensus that banking functions are essential to a healthy
economy. However, the presence of the public safety net— uniquely available to a particular
class of institutions — also implies that those institutions have unique public responsibilities
and may therefore be subject to implicit codes of conduct or explicit regulations that do not
fall on other institutions.
Experience suggests rather strongly that public confidence in a bank — with or without
deposit insurance and the Fed's discount window— is ultimately related to public perceptions
about the financial condition of banks and specifically about the quality of banking assets,
liquidity, capital, and the capacity to absorb short-run shocks. Sudden drains on bank deposits
occur when depositors conclude that loan losses or other circumstances might jeopardize a
bank's ability to meet its deposit obligations. The evidence is overwhelming, for example, that
most "problem" bank situations in recent years involved concerns growing out o f losses or
perceived losses associated with lending, securities activities, foreign exchange activities,
and/or poor management. In this regard, it should be noted that even when "problem" bank



Federal Reserve Bank
of Minneapolis/Annual Report

9

1982

situations have been resolved with a minimum o f costs to the
individual institution, these situations have, on occasion, involved high
costs in terms o f generalized financial market disruption. Thus, while
deposit insurance and access to the lender of last resort may rightly be
viewed as the public policy safety net under banks' deposit taking
function, the integrity of the deposit taking process and therefore the
strength of the public safety net process depend to a substantial
degree on the prudent management and control of risks on the part
of the banking system as a whole.

Public confidence in banks
is ultimately related to
public perceptions about
the quality o f banking's
assets, capital, and the
capacity to absorb
short-run shocks.

Looked at in this perspective, the critical difference between banks
and other classes of financial institutions rests with the capacity of
banks to incur (and to create) liabilities that are payable on demand at
par and that are readily transferable to third parties. The resulting
mismatch of the maturities o f assets and liabilities makes banks particularly vulnerable to
sudden drains on deposits that can jeopardize their solvency. In practice, depositors —
reinforced by the public policy safety net — have demonstrated tendencies to drain deposits
from particular banks only when confronted with the reality or the perception of losses
growing out of asset management problems and/or poor management of banking
organizations. Thus, while the deposit taking function of banks is what makes them unique,
the integrity of that process depends upon the risks, real and perceived, associated with the
lending and related activities of the banking system as a whole and its capacity to absorb
shocks in the short run.
Backup Sources o f Liquidity

As discussed above, the fact that banks issue transaction deposits is the key factor that
distinguishes them from other classes o f financial and nonfinancial institutions. However,
experience also suggests that public confidence in the ability of banks to meet their deposit
obligations is ultimately related to the quality of bank assets and to the overall financial
condition o f the bank. This relationship takes on additional importance when it is recalled that
banks can also create, through their lending activities, transaction deposits. Indeed, in a very
real way, banks are the primary source of liquidity for all other classes and sizes of institutions,
both financial and nonfinancial.
The extent to which banks play this role cannot be judged simply by looking at the number
and value of loans on the books of banking organizations. For these purposes, contingent
credit obligations o f banks, such as loan commitments and standby letters of credit, must be
considered in virtually the same light as direct loans. These standby credit facilities are, for
example, the arrangements which permit most financial markets and institutions to function
as they do. It is highly unlikely that the commercial paper market would function very well
were it not for the presence o f standby bank credit facilities obtained by those corporations
that issue commercial paper. Similarly, it is very difficult to imagine that even the best
managed and capitalized broker/dealers could handle their day-to-day business with the
efficiency that is now so common without ready access to bank lines of credit. The same, of
course, applies to nonfinancial corporations. Indeed, while all such institutions may, over time,
have access to a wide variety o f funding sources, direct or standby bank credit facilities are the
cornerstone upon which these alternative sources of credit rest. If there are problems in one



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of Minneapolis/Annual Report

In a very real way, banks
are the primary source o f
liquidity for all other classes
and sizes o f institutions,
both financial and
nonfinancial.

1982

segment of the credit network, institutions will simply shift their
borrowing activities elsewhere in the network. However, if the
problem is in the banking sector, banks must either turn to each other
or to the central bank.

Even in the "normal" course o f events, the direct and standby credit
facilities provided by banks are the foundation upon which other
credit markets depend for their vitality. This relationship takes on
special significance, however, in periods of selective or generalized
financial stress. For example, in virtually every case of "selective"
financial shock in the 1970s and early 1980s, troubled institutions —
financial and nonfinancial, bank and nonbank — turned to the
banking system to provide at least a bridge until more lasting solutions
to the problem could be worked out. A t the very least, these bridging
arrangements helped to contain problems and prevent them from spreading to other
institutions or to the financial system generally.

Banks' ability to supply credit and liquidity, particularly in situations where other institutions or
markets may be unwilling or unable to do so, arises because the deposit creating function of
banks (in tandem with banks' relationship with the central bank) provides an element of
credit and liquidity elasticity which is not immediately available to other institutions. In point
of fact, the extent and frequency with which banks have had to directly rely on extraordinary
funding by the central bank (either through the discount window or via open market
operations) have been quite limited. In the normal course and even in periods o f stress,
individual banks and the banking system as a whole are able to provide necessary liquidity
because of their ability to quickly fund loans through a variety o f market sources including the
domestic and foreign interbank market, RPs, the issuance of large certificates of deposit
(CDs), and so on. For many banks, access to these markets has become the primary source of
bank liquidity.
Banks' access to these markets — and by extension, banks' ability to function as backup
sources of liquidity— occurs in a context in which individual suppliers of such funds —
whether federal funds, CDs, Eurodollars, etc. — make judgments about the strength and
vitality of individual banks and the banking system as a whole. Experience is clear, for
example, that individual banks experiencing problems with classified assets, earnings, and so
on, often see that phenomenon first manifest itself in the form of having to pay a risk
premium over the "going" rate for federal funds and large CDs. Similarly, when concerns
about the banking system arose in 1974-1975 and more recently in 1982, an early
manifestation was a widening of the interest rate spread between bank and treasury liabilities
of comparable maturities. In the extreme cases o f severe problems with individual banks,
widening spreads ultimately result in these sources o f funding being cut off, with a
consequent need to either contract the size o f the bank, borrow from the Fed's discount
window or, in some cases, close or merge the bank.
The point is, o f course, that the ability of a bank to fulfill its role as a backup supplier of
liquidity to the financial and business communities depends on easy access not only to
traditional sources o f deposit liabilities, but also to markets for nondeposit sources of



Federal Reserve Bank
of Minneapolis/Annual Report

11

1982

funding. The same applies to the banking system as a whole, because
while one or a few banks can turn to the London market to fund
themselves in times of adversity, it is clear that the banking system as a
whole cannot. Thus, as with the preservation of the integrity of the
deposit taking function described earlier, experience clearly suggests
that the ability of banks to provide the essential function of a backup
source o f liquidity is ultimately dependent on market judgments as to
the quality of the banks'assets and overall financial strength.

Banks are able to provide
necessary liquidity because
o f their ready access to a
variety o f domestic and
foreign market sources.

Looked at in this light, the ability o f banks to fulfill their role as standby
sources o f liquidity and credit rests importantly on the quality and
consistency o f credit judgments made by banks. This is particularly
true in periods of stress when banks may be called on to supply credit
to borrowers who, for one reason or another, temporarily do not have
access to other sources of funds or to make the even more difficult decisions as to which
borrowers are experiencing problems of a fundamental or irreparable nature. It is in these
particular circumstances that banks must be in a position to make rigorous, impartial, and
objective credit decisions, because it is precisely in such circumstances that the potential for
compromise in the impartiality of the credit decision making process is greatest and the
potential for asset quality deterioration is the largest. It is in this light that considerations
about the commingling of banking and other interests and concerns about the ownership
and control of banks become compelling.
To summarize, virtually all other financial markets and other classes o f institutions are directly
or indirectly dependent on the banking system as their standby or backup source of credit
and liquidity. Banks can fulfill this function fora variety o f reasons, including their relative ease
of access to deposit and nondeposit sources of funding. However, experience suggests that
the capacity to provide this function or, more directly, to provide access to these markets and
sources o f funding — like the integrity of the deposit taking function — is ultimately related
to the overall financial strength of banks and the quality of bank assets. This role of banks as a
standby source of liquidity takes on special significance in periods of stress and in this light
underscores the importance o f rigorous and impartial credit judgments by banks. This, in
turn, provides a particularly relevant context in which concerns about the commingling of
banking and other interests should be evaluated.
Transmission Belt for Monetary Policy

As the preceding discussion suggests, there is a direct link between banks and the central
bank arising in part from the central bank's lender of last resort function. More broadly, the
fact that banks are subject to reserve requirements places the banking system in the unique
position of being the "transmission belt" through which the actions and policies of the central
bank have their effect on financial market conditions, money and credit creation, and
economic conditions generally. To put it somewhat differently, the required reserves o f the
banking system have often been described as the fulcrum upon which the monetary
authority operates monetary policy. The reserves in the banking system also serve the
complementary purpose o f providing the working balances which permit our highly efficient
financial markets to function and to effect the orderly end-of-day settlement of the hundreds
o f billions of dollars o f transactions that occur over the course of each business day.



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Banks must be in a position
to make rigorous, impartial,
and objective credit
decisions.

1982

Some have argued that neither monetary policy nor the payments
mechanism are dependent on the relationship between reserves and
the banking system. There have been, or are, schemes for conducting
monetary policy and operating a payments mechanism that do not
use bank reserves and the banking system in the way the U.S. system
currently operates. However, it is also true that any o f these alternative
arrangements would entail major institutional changes and run the
risk that they might not work as efficiently as the current framework
or the possibility that they might not work at all. In short, to justify
departure from the current arrangement the weight of evidence
should be overwhelming that the current system is not working or
that some alternative system would work decidedly better.

In fact, the current system seems to work rather well, although recent
developments may have introduced elements o f slack into the transmission belt. For example,
the proliferation o f close substitutes for bank-issued transaction accounts narrows the
effective scope of reserve coverage. The narrowed reserve coverage can introduce more
slippage into the process o f monetary control, and it also means that a relatively smaller
reserve base is supporting a larger flow o f payments. Similarly, the deregulation o f the liability
side of banks' balance sheets seems to imply that, in order to achieve a given degree of
monetary restraint, a higher level of market interest rates is required than might otherwise
have been the case. Further, increased leverage of banking organizations may work in the
direction o f introducing slippage into the monetary control process, in that a larger volume of
credit flows may be associated with some given rate of growth o f "money." Finally, higher
leverage and greater risk exposure may weaken the capacity of the banking system to adjust
to and to absorb the changes in credit market conditions that must accompany periodic
monetary restraint.
As suggested above, these and other forces may already be working to introduce a larger
margin o f slack into the transmission belt. While the slack evident today is of manageable
proportions, the future design o f the banking and financial system must leave intact a strong
yet adaptable mechanism through which monetary policy and the payments mechanism can
function. This imperative underscores the case for attempting to segregate essential banking
functions into an identifiable class of institutions and seeking to ensure that these institutions
have the financial strength and vitality to perform their essential functions and to absorb
changes in the credit market and economic conditions associated with periods of monetary
restraint.
Defining a Bank

From the previous discussion, it should be clear that there are in fact certain special and
unique functions o f banks and that they are essential to the functioning of an efficient and
safe financial and economic system. However, it also seems likely that if "banks" did not
provide these essential functions, someone else would — just as it is abundantly clear that the
process of market innovation has already produced services which are close substitutes for
essential bank services. Given these considerations, the threshold question that arises is
whether it is still desirable, from a public interest point of view, to attempt to segregate
essential banking functions into an identifiable class o f institutions and, if that is the case,



Federal Reserve Bank
of Minneapolis/Annual Report

1982

whether it is possible to define a bank in a manner that is both
functionally and intellectually satisfactory.

Banks are in the unique
position o f being the
transmission belt for
monetary policy. Recent
developments may have
introduced elements of
slack into that belt.

Putting aside for the moment practical problems of definition, it
would seem that the case for segregating essential banking functions
into an identifiable class o f institutions is every bit as powerful today
as it was in the 1930s. If anything, concerns regarding financial
concentration, conflicts o f interest, and the fiduciary responsibilities
associated with lending depositors' money may be more relevant
today than they were 50 years ago. To be sure, the lines of distinction
may not have to be drawn in the same way and in the same place that
they were in the past, but the earlier discussion of the essential
functions o f banks serves as a powerful argument for separation at
some point. Indeed, to reject the notion of separation would — as a
matter of logic — require that deposit insurance and access to the lender of last resort,
together with the associated supervisory and regulatory apparatus, either be done away with
altogether or be made universally available to any institution that provides essential banking
functions — irregardless of what other types of business or commerce it might be engaged
in. However, as a practical matter, the case for separation is only viable if we are able to
provide a satisfactory definition o f a bank.
Over time, a variety o f tests have been used for the purpose of defining a bank. These tests
ranged from a charter test to the functional test o f issuing demand deposits and_ making
commercial loans. Atone time, each o f these tests was satisfactory. However, currently
neither existing statutes nor regulations seem to contain a definition that is satisfactory.

A satisfactory definition of a bank must start with a clear recognition of the essential
functions provided by such institutions. From the earlier discussion, it is clear that the single
characteristic o f banks that distinguishes them from other classes of institutions is that they
issue transaction accounts; that is, accounts that in law, in regulation, or in practice are
payable on demand at par and are readily transferable to third parties. A powerful case can
be made that the definition of a bank should stop right there: a bank is any organization that
is eligible to issue transaction accounts. If an institution meets this test, it would (1) be eligible
for government deposit insurance; (2) have direct access to the discount window; (3) be
subject to the Fed's reserve requirements; and (4) have direct access to the Federal Reserve's
payments services, particularly the wire transfer system. For these purposes, an appropriate
statute would have to redefine transaction accounts. A t a minimum, such a definition would
have to include conventional demand deposits, NOW accounts, and share drafts. It might also
include the new money market deposit accounts (MMDAs) and, depending on the standards
of definition, perhaps even MMMFs or other nonbank institutional arrangements that
provide "check" writing capabilities.
On the surface, this definition o f a bank may seem inadequate because it contains no
corollary asset or lending test; it focuses only on the liability side o f the balance sheet. This
seeming inadequacy arises in part because the current Bank Holding Company Act's
definition requires that a bank issue demand deposits and make commercial loans. More
substantially, the absence of a lending test seems to fly in the face of arguments made earlier



14

Federal Reserve Bank
of Minneapolis/Annual Report

1982

concerning the critical link between the deposit taking function and
the lending or asset acquisition functions of banks. However, it is
precisely
because of the nature o f the relationship between deposit
To reject the notion o f
taking
and
asset acquisition that the essential definition o f a bank
separation would logically
should
be
couched
in terms o f its deposit taking function — without
require doing away with —
regard
for
the
particular
distribution or classification of its loans and/or
or making universally
investments.
Taken
by
itself,
there is nothing unique or special about
available — deposit
the
asset
side
of
a
bank's
balance
sheet, except for the limits on the
insurance, the discount
scope
o
f
asset
acquisition
powers
discussed below. Concerns about
window, and supervision/
the
nature
and
risk
characteristics
of
bank assets arise in the context of
regulation.
the unique nature of bank liabilities, the need to preserve the integrity
o f the deposit taking function, and the special trusteeship growing
out o f that function. Thus, while it may be appropriate from the
standpoint of public policy to limit the asset powers of banks to
certain less risky activities, the definition of a bank need only deal with the liability side of the
balance sheet.
The absence o f an asset test might, however, create a definitional loophole. That is, "banks"
could conceivably refrain from issuing transaction deposits while funding their asset
acquisition activities with insured time and savings deposits. However, this problem could be
minimized by reliance on such an institution's eligibility to issue transaction accounts. If so
eligible, it would be defined and regulated as a bank even though, in practice, it refrained
from issuing transaction accounts. An institution that was not eligible to issue transaction
accounts would not be a bank and would not be eligible for deposit insurance, access to the
Fed, and so on.
By this definition, existing commercial banks, thrifts, and credit unions would be considered
"banks" Similarly most of the "non bank" banks formed in recent years under the Bank
Holding Company Act (by not engaging in commercial lending) would be banks, as would,
depending on state laws, some "industrial" banks. Treating thrifts and certain other
institutions as "banks" raises a host o f difficult and politically charged issues relating to
regulatory treatment, tax status, divestiture, and grandfathering arrangements. However, for
purposes o f this discussion, the fact that certain"nonbank" financial institutions are, for a
variety of reasons, banks does not require immediate or perhaps even parallel regulation.
Rather, the suggestion would be that there is an essential core o f regulation that should apply
more or less equally to this broader class of institutions which provides essential banking
functions.
The issue o f whether money market mutual funds fit the definition o f a bank — even at a
conceptual level— is not so easy to deal with. Many such funds certainly appear to have all
the characteristics of bank transaction accounts. In the case of the money market mutual
fund, the critical distinction relative to a bank transaction account appears to be the extent to
which the liabilities in question are payable at par. In the case of a bank deposit, deposit
insurance, the capital o f the bank, and the bank's access to alternative sources of short-run
funding provide assurances that a depositor can withdraw dollar-for-dollar from the bank the
principal amount deposited — even when changes in interest rates may have reduced the
market value o f bank assets.



Federal Reserve Bank
of Minneapolis/Annual Report

15

1982

In the case of the money market mutual fund the ability to pay out
dollar-for-dollar the amount o f the initial "deposit' is less certain. The
fund itself does not have capital as such, and in the short-run it cannot
easily tap alternative sources of liquidity to pay out to some
shareholders thereby buying time for assets to mature or for interest
rates to reverse course. As a related matter, the fund is not insured so
that even though the risk o f loss to the individual shareholder is small,
it does exist. The fact that in recent months a number of money
market mutual funds have taken steps in the direction of securing
some form of private insurance would suggest that some fund
managers perceive that there is an important distinction to be drawn
between the fund shares and bank deposits. The irony of this, of
course, is that to the extent funds obtain insurance, they come even
closer to possessing bank-like characteristics.

To preserve essential bank
functions, banks must be
able to maintain
profitability, attract capital,
and hold a de facto
monopoly on transaction
accounts.

From a competitive viewpoint, the question of whether a money market mutual fund is a
bank is far less important today than it was before the introduction of MMDAs at banks.
Indeed, if being a "bank" is equated with deposit insurance, access to the Fed's discount
window, and payments services — the costs of reserve requirements notwithstanding —
some money funds might not object at all to being called a bank in the current market
setting. Moreover, if the power of banks or bank holding companies was expanded to
permit such institutions to offer mutual funds, the question, from a competitive point o f view,
would be even less pressing.
However, in terms of intellectual consistency, the question of whether money market mutual
funds (or similar arrangements which permit "check" writing) should fall within the definition
of a bank does not disappear simply because current competitive conditions render the issue
less compelling. On technical grounds, it would seem that the distinction arising from the
payment at par principle could justify treating money funds as nonbanks. On functional
grounds, however, and particularly from the perspective of the shareholder, the check writing
features of some funds simply may create too much of a "look alike" situation to make a
meaningful distinction on the technical grounds of payment at par. It may therefore be
necessary to place certain restrictions— such as limits on the number o f third-party transfers
(as with bank-issued MMDAs) and/or reserve requirements — on "nonbank" financial
instruments or institutions that provide check writing features. Of course, if MMDAs were
defined as transaction accounts, then the case for treating MMMFs as banks would become
powerful.
Bank Powers and Structure

If a bank can be satisfactorily defined along the lines suggested above, there are three related
questions which must be answered in order to sketch out a reasonable approach to the
future scope and structure o f banking activities and banks. They are: (1) What kinds of
subsidiary powers should banks have? (2) What restraints, if any, should be placed on the
ownership or control o f banks? (3) Is it important, from a public policy perspective, whether
the subsidiary activities of banks are performed in the bank, a subsidiary o f the bank, or in a
subsidiary o f a bank holding company?




16

Federal Reserve Bank
of Minneapolis/Annual Report

1982

The answers to each o f these questions must be guided by the earlier
discussion of what it is that makes banks special and the relationship
between the integrity of the deposit taking function, the financial
strength of the bank, and ultimately the strength of the financial
system. That discussion implied that in thinking about asset powers,
ownership, and the organizational structure of banks, substantial
weight needed to be given to safety and soundness considerations,
the special trusteeship of banks and the objectivity and impartiality of
the credit decision making process. This is not to suggest that other
factors such as concentration and public convenience and need are
not important from the perspective of public policy. Indeed, these
things may be very important, but their importance — in the context
of questions relating to banking powers, ownership, and structure —
is secondary to the safety and soundness factors.
Having said that, a case can be made that whatever weight safety and soundness and related
criteria have been given in the past, these factors should be given less weight in the future.
Better information and management systems, more efficient markets, greater disclosure,
improved supervision, and the presence of the public safety net, all seem to work in the
direction o f reducing public policy concerns about the safety and soundness of banks.
However, there are strong forces working in the opposite direction. Financial affairs generally
are much more complex and more interdependent than they once were. One consequence
of this is that when problems arise they are more difficult to isolate and contain than in the
past. Perhaps more importantly, the combination o f liability management techniques and
deregulation has significantly altered the overall liability structure o f banks. Stable and low
cost core deposits are virtually a thing of the past. These developments have, in combination
with more sophisticated and interest-rate conscious corporate treasurers and individuals,
increased the term structure risk at banks and made banks more susceptible to sudden
deposit shifts. A t the same time, "spread management' — whereby banks attempt to float
the rate o f return on assets in some reasonably fixed relationship to changes in the cost of
funds — may subtly but insidiously, be working to undermine the traditional disciplines of
both borrowers and lenders. Finally, the far-flung international activities of banks have
introduced new elements of risk into the equation. While it is a matter o f judgment as to
whether this crosscurrent of events is working to reduce or to increase the risks associated
with the activities of banks, it does seem prudent to conclude that they are working in the
direction o f creating greater risks.
Bank Subsidiary Powers

As suggested earlier, to preserve and protect the essential functions of banks, banks must be
competitively viable institutions. This means, among other things, that banks must be able to
offer a sufficiently wide and competitive range o f services to maintain profitability, attract
capital, and preserve a de facto monopoly on the transaction account business. Without
delving into the specific types o f powers banks should have, the preceding discussion is
suggestive o f the general criteria which should be used in making judgments about the scope
of banking powers. While a number of factors may be relevant in this regard, the essential
functions o f banks as described earlier suggest the primacy of two general criteria. They are:



Federal Reserve Bank
of Minneapolis/Annual Report

1982

17

subsidiary banking activities should not entail excessive risk of loss and
should not impair the impartiality o f the credit decision making
A particular set o f powers
process. This dual criteria, while conceptually useful, is operationally
should be vested in banks
ambiguous. To some extent, it becomes more clear in a context in
only if there is a willingness
which secondary criteria relating to competition/concentration
to permit another
considerationr are introduced. Similarly, as a practical matter, defining
institution engaging in
the extent of appropriate subsidiary banking powers can be guided by
those activities to own or
policies governing bank ownership. That is, logic would seem to
control banks.
dictate that a particular set o f powers be vested in banks only to the
extent that there is a willingness to permit another institution
engaging in those activities to own and/or control banks. For example,
if we are willing to permit banks to engage in commerce generally
(that is, the acquisition, manufacture, or distribution of goods and
nonfinancial services), then we should be prepared to say that firms
engaged in such business, whether oil companies or shoe stores, can own and control banks.
The converse also should follow: if we are unwilling to permit banks to engage in such
activities, then logic would seem to dictate that such commercial firms should not own banks.
The symmetry of this argument is important, for it lends weight to the apparent consensus
that the separation of banking from commerce generally is appropriate and should be
maintained in both directions.
Flowever, even in the realm of so-called financial services, the risk/impartiality criteria do not
provide unambiguous insights as to how far banking powers should be extended. For
example, if there is a consensus that the risk/impartiality test should not preclude banking
organizations from engaging in the sale and distribution of mutual funds shares or in the
distribution and brokerage of securities, it is by no means clear that such a consensus would
extend to activities relating to the underwriting of stocks and corporate bonds generally or to
taking positions in commodities. The point is, of course, that while it is a fairly easy matter to
conclude that a continued separation o f banking and commerce makes sense, it is not nearly
so easy to conclude — as a matter of public policy — that the full range o f financial services
should be fair game for banking organizations. A t the very least, the risk/impartiality criteria
suggested above and the bank ownership/control questions discussed below suggest that we
should not be indifferent to the scope o f financial services offered by banking organizations.
Bank Ownership

If there is some agreement (1) that the segregation of essential banking functions into
identifiable classes of institutions makes sense; (2) on the definition o f a "bank"; and (3) on
the appropriate scope o f powers to be housed within banking organizations, then dealing
with the question o f bank ownership becomes fairly easy That is, nonbanking organizations
would be permitted to own banks only insofar as the activities of such entities match the
activities in which banking organizations would otherwise be permitted to engage. For
example, a securities firm whose activities did not go beyond the activities directly permissible
to banks and bank holding companies could own a bank, but in the process that organization
would become a bank holding company. On the other hand, financial or nonfinancial firms
could not own a bank unless they were willing to divest those activities which fall outside the
list of permissible activities for banks and bank holding companies. Thus, depending on the
determination of the scope of banking powers — which, as noted earlier, should be



18

Federal Reserve Bank
of Minneapolis/Annual Report

management nor a fail-safe
device for containing risk.

1982

undertaken primarily within the context of the risk/impartiality criteria
— this approach would require that a number of existing situations
involving the ownership of "banks" by financial and nonfinancial firms
would have to be grandfathered or, perhaps in some cases, divestiture
arrangements would have to be worked out over a period of time.
Banking Structure

Finally, in this context, questions will inevitably arise as to whether it
matters, from the perspective of public policy, if particular subsidiary
activities of banks are carried out in the bank, in a subsidiary of the
bank, or in a subsidiary of the bank's holding company. Given the
earlier discussion about the importance of segregating essential
banking activities and the importance of the risk/impartiality criteria
for purposes of evaluating the appropriate scope of banking activities,
it would seem to follow that there is a powerful case for placing some subsidiary activities of
banking organizations into affiliates of bank holding companies. This case is reinforced by the
protections against self-dealing, which are made possible by certain provisions of the Bank
Holding Company Act and by the de facto segregation of capital that is made possible by the
holding company structure.
However, it does not follow from the above that we can be indifferent as to the degree o f risk
associated with such activities simply because they may be housed in a separately organized
and separately capitalized subsidiary of a bank holding company. To the contrary, experience
suggests rather clearly that in times of peril it may not be possible to insulate the bank from
the problems o f its sister organizations — even when such problems arise in affiliated
organizations, including subsidiaries of bank holding companies. While there are good and
sufficient public policy reasons for concluding that at least some "nonbank" activities of
banking organizations should be housed in subsidiaries of bank holding companies, such
organizational arrangements are not likely to produce a situation in which the bank is
immune from the problems, risks, or losses that might develop in such subsidiaries. In short,
the holding company structure is neither a substitute for prudent management nor a fail-safe
device for containing risk.
In Conclusion

This essay started out with a seemingly straightforward question: Are banks special? Having
answered that question in the affirmative, it does seem appropriate that the current debate
about the powers and structure of banks be framed in a context that gives greater weight to
the underlying issues of what banks are, and what, from the perspective of public policy, we
want them to be. Looked at in that light, and with a firmer grasp on what it is that makes
banks special, it becomes somewhat easier to grapple with the very difficult questions relating
to the definition o f a bank, the scope of banking powers, the ownership and control of
banks, and the structure of banking organizations. This approach — entailing as it does an
element o f going back to square one — can help to ensure that bankers, regulators, and
legislators approach successive steps in the reshaping of our financial system in a manner
which helps to preserve the unique functions and characteristics of banks while at the same
time encouraging those elements of competition and innovation that will permit the banking
system and the financial system more generally to safely and efficiently meet the needs o f a
growing and stable domestic and international economy. — E. Gerald Corrigan



Federal Reserve Bank
of Minneapolis/Annual Report

19

1982

Appendix to Annual Report

I. Introduction

This analysis investigates the market shares and relative
profitability of commercial banks and other financial
intermediaries. It focuses on banks and examines whether
they have gained or lost share and how their profits stack up
against those of their competitors. The time frame for this
investigation is three decades: 1952 through 1981 for most
of the data series considered. This relatively long horizon
has been chosen intentionally so as to look beyond shortrun, business-cycle related perturbations. To go back
another decade — to 1942 — might be desirable but would
cause problems of interpretation due to financial market
distortions during the war years.
One might ask why this topic is of special interest. The
answer is that the commercial banking industry has gone
through an enormous amount of change in recent years and
has been buffeted by forces from within and without. It is
worth studying how the industry has been affected by these
events: the ways it has benefited and the ways it has been
hurt.
More than a few recent developments have been
unambiguously negative for commercial banks — in
particular, the increasing presence of nonbank firms in lines
of business that were, traditionally, more or less the banks’
exclusive domain. Examples of such incursions abound
and would include credit card companies, which provide a
form of payments service; money market mutual funds,
which offer a low-risk savings and transaction vehicle for
businesses and consumers; and commercial paper, which
is a substitute (often a low cost one) for commercial loans.
Some commentators have focused their attention
exclusively on nonbank entry into bank markets, and in so
doing they have reached dismaying conclusions as to what
has happened (and what is likely to happen) to commercial
banks. But this group has cast its net too narrowly, it would
seem, because other developments were taking place over
the last several decades, too, and some of these were quite
favorable for commercial banking.
One example is the legislative and regulatory changes that
have permitted banks to broaden their service lines,
especially through bank holding companies. Today, bank
holding company affiliates are important participants in
consumer finance and mortgage banking, something that
was not true just a few decades ago. In addition, restrictions
on multi-office banking and on deposit interest rates have
lost much significance over the last several decades. This is
due partly to explicit deregulation and partly to industry
innovations that have gone around existing regulations so as
to render some of them largely ineffective.
Now, deregulation is not unambiguously good for the
banking industry, not even theoretically. On the one hand,
deregulation would be expected to increase competition
and reduce banks’ability to earn profits in some markets. (It
should be remembered that one of the original objectives of
Regulation Q and the prohibition of interest on demand
deposits was to protect banks from “excessive competition.")
On the other hand, deregulation has given banks a freer



hand to respond to
nonbank
competitors’
4 2 7 4
E L> A
attempted inroads
into their markets. In
some instances, in
fact, it was
precisely because
of regulation that
nonbank firms saw
a profit opportunity
in bank markets.
Money market
mutual funds are a
case in point. It can
be argued that, had
commercial banks
been permitted to
pay market rates of
interest all along, money market funds might never have
come into existence.
On the basis of these considerations, it seems likely that the
last several decades have been a mixed bag for commercial
banks, with some developments working to their advantage
and others to their disadvantage. The objective of this
analysis is to examine the net effect of these developments
and attempt to determine if commercial banks have gained
or lost — both in terms of market share and in terms of
profitability.
Methodology

Market share is measured in a number of ways, using data
from several sources including the Flow of Funds and
National Income Accounts. There are good reasons for
considering a multiplicity of measures and sources. First,
each of the data sources is imprecise in one way or another,
and each has its own set of biases. Some of these biases
are discussed in the following pages, but merely discussing
them doesn’t make them go away. In light of these biases, a
conclusion can be reached more confidently if there is
some consistency across a variety of measures.
Moreover, bank markets are, at best, an imprecisely defined
concept. In actuality, each commercial bank operates in a
variety of distinct markets, which may be defined spatially
and by product or service line. (Nor are U.S. banks’ markets
by any means confined geographically to the United
States.) For purposes of this study, commercial banks are
treated as a particular class of financial intermediary, and it
is assumed that they compete, directly or indirectly with all
other forms of financial intermediation. More precisely, it is
assumed that they compete with all other mechanisms for
borrowing and lending in the U.S.
With this definition, which is an extremely broad one, it
follows that the appropriate market concept is total
borrowing (or lending), and that can be measured in a
variety of ways — for example, by adding up all debt claims
held by lenders or by adding up all financial assets. The
market definition is restricted to funds that flow through the
United States, ignoring the fact that many U.S. banks truly

20

Federal Reserve Bank
of Minneapolis/Annual Report

1982

compete in a world intermediation market. Although the
world market concept might be preferable theoretically, it
defies measurement.
The remainder of the study proceeds as follows. Section II
presents an analysis of data from the Flow of Funds
accounts that are used to measure market share. Section III
turns to National Income Accounts data that give
information on the size of the banking industry as measured
by its total contribution to National Income and some
selected components of that contribution — total
employment, wages and salaries, and profits. In these
sections, five-year moving averages are employed in an
attempt to smooth out short-run fluctuations and
concentrate attention on long-run trends. Next, Section IV
looks at market indicators such as stock market
performance and borrowing costs. These measures have
nothing to do with market share per se, but they do indicate
how investors have viewed the prospects for commercial
banks. Finally, Section V provides a summary and
conclusions.

According to this measure, commercial banks lost market
share until 1967 and, after that, maintained a relatively
constant share of around 37 percent. The early loss of bank
share went primarily to thrift institutions and to pension
funds. During the 1950s and early 1960s, commercial
banks were funding a substantial proportion of loan
demand by reducing the proportion of financial assets held
as cash reserves and as government securities (partly due
to reductions in required reserves); thus, they did not
aggressively seek new sources of funds. The situation
changed in the mid-1960s and later, however, as banks
increasingly became aggressive liability managers. Over
the entire three-decade period, insurance companies lost
share, and pension funds gained.
Table 3 shows data for three specific loan markets important
to commercial banks: home mortgages, consumer credit,
and business loans. In the home mortgage market, banks
lost share until 1965, which was, of course, about when the
thrift institutions began experiencing difficulties. After that,
commercial banks gained share consistently up to 1982.

II. Flow of Funds Data

Table 1
Shares of Total Credit Market Debt Claims
Against Nonfinancial Sectors'/
Five-Year Moving Average^
1956-1982
Percent
Insurance
and
Other
Pension
Year- Commercial
Savings
Financials/ Nonfinancials
End
Banks3/ Institutions^
Funds
37.9
3.0
19.6
28.5
11.0
1956
37.0
3.2
1957
20.1
28.0
11.6
36.1
3.3
1958
12.3
20.5
27.8
3.4
35.6
20.8
1959
12.9
27.3
35.0
3.5
21.0
1960
27.0
13.5
34.3
3.6
14.1
21.2
1961
26.8
33.5
21.2
3.8
1962
14.7
26.8
32.7
4.0
15.4
21.2
1963
26.8
4.1
31.6
21.2
1964
27.1
16.0
30.5
21.1
4.3
1965
16.6
27.6
4.4
29.6
21.1
1966
27.9
17.0
29.0
4.5
1967
28.4
17.2
20.9
28.4
4.6
20.7
1968
29.0
17.3
28.2
4.7
20.5
1969
29.3
17.3
28.1
4.8
1970
17.2
20.3
29.6
27.9
4.9
17.4
1971
19.8
30.1
27.4
5.1
1972
17.7
19.3
30.5
26.8
5.4
18.7
1973
31.0
18.1
26.3
5.5
18.2
1974
31.7
18.3
26.1
5.5
1975
32.0
18.7
17.8
26.0
5.5
17.6
1976
32.0
19.0
26.1
5.4
1977
17.6
31.6
19.3
26.3
5.4
17.7
1978
19.5
31.1
26.5
5.5
1979
19.7
17.8
30.6
26.5
5.7
17.9
30.2
19.7
1980
26.5
6.3
18.0
1981
19.3
30.0
26.8
19827/
6.9
18.1
29.7
18.6
1/ Includes government securities, domestic and foreign corporate bonds,
mortgages, consumer credit, domestic and foreign open market paper, other
domestic and foreign bank loans, and other domestic and foreign debt
instruments.
2/ The year shown is the final year in the five-year moving average.
3/ Consists of U.S. chartered banks, domestic bank affiliates, Edge Act
corporations, domestic agencies and branches of foreign banks, and banks in
U.S. possessions. Does not include nonbank affiliates of bank holding companies
or foreign affiliates of U.S. chartered banks.
4/ Consists of savings and loan associations, savings banks, and credit unions.
5/ Consists of finance companies, real estate investment trusts, open-end
investment companies, money market funds, and security brokers and dealers.
6/ Includes households, businesses, governments, Federal Reserve Banks, and
all foreign entities.
7/ End of third quarter.
Source of basic data: Board of Governors of the Federal Reserve System,
Flow of Funds Accounts, Assets and Liabilities Outstanding.

Tables 1, 2, and 3 employ data from the Flow of Funds
Accounts. Overall, they suggest that banks have maintained
their share of total intermediation over the last three
decades and in some important submarkets have actually
gained market share.
Table 1 shows the percentage of total credit market debt
claims against nonfinancial sectors of the economy held by
various classes of financial institutions, as well as by
nonfinancial lenders such as governmental units,
businesses, and households. These series measure,
essentially, total lending to the nonfinancial sectors of the
economy including the government.
When total lending is measured in this way, commercial
banks are observed to have maintained a relatively stable
share of about 29 percent over the last three decades.
Nonbank savings institutions gained share substantially in
the 1950s and the first half of the 1960s, a period when
mortgage and housing markets were thriving and economic
conditions were favorable for thrifts. After that, their growth
flattened.1/Throughout the sample period, nonfinancial
lenders lost market share, reflecting the fact that an
increasing proportion of total U.S. credit flowed through
intermediaries rather than flowing directly from lender to
borrower.
Other evidence suggests that banks’share of total
intermediation would be even larger if the analysis were
carried beyond domestic boundaries. Commercial banking,
as defined in the Flow of Funds Accounts, excludes foreign
offices of U.S. banks but includes U.S. offices of foreign
banks. The former is several times larger than the latter.
Moreover, the Flow of Funds data do not include the
nonbank assets of bank holding companies under the
banking classification. Rather, they are included in the
"Other Financial" and "Nonfinancial" categories in Flow of
Funds. If these assets were put in the banking sector total,
banks’estimated share of total intermediation would rise by
several percent.
Table 2 shows total financial assets of all kinds held by
financial intermediaries, a somewhat broader credit
aggregate than in Table 1. These assets include holdings of
debt claims against nonfinancial sectors (as in Table 1) plus
holdings of currency, demand and time deposits, security
credit, corporate equities, and member bank reserves. The
data in Table 2, therefore, do not net out intermediaries’
credits to one another.

1/If the data were expressed in market as opposed to book values, a decline in the savings institutions’share beginning in the late 1970s probably would have been
observed.



Federal Reserve Bank
of Minneapolis/Annual Report

1982

In consumer lending, banks experienced a spectacular
gain in share until 1979, when they had nearly half the
market. Since then, their participation has declined a bit. It
is probably too soon to say, however, if this downturn in
banks’share of consumer lending marks the beginning of a
new trend.
Commercial banks also experienced an impressive
increase in their share of business lending that continued
until 1976, after which it declined. The reversal after 1976
undoubtedly reflects, among other things, the growth of
commercial paper as a substitute for bank loans.
Nevertheless, it is hard to infer from these data that banks
are being crowded out of the business loan market. Their
share of that market was substantially higher in 1982, at the
end of this period of study, than it was in 1956, at the
beginning.
III. National Income Accounts Data

The National Income Accounts indicate the contribution
made by each sector of the U.S. economy to Gross National
Product (sometimes referred to as the sector’s “valueadded”). This data source, therefore, reports real economic
variables, as opposed to the financial variables reported in
Table 2
Shares of Total Financial Assets Held by Financial Institutions'!/
Five-Year Moving Average^
1956-1982
Percent
Year- Commercial
Savings
Insurance
Pension
Other
End
Banks3/ Institutions^ Companies
Funds
Financials/
1956
45.9
16.1
25.2
6.1
6.7
1957
44.4
16.9
25.1
6.7
7.0
1958
43.0
17.5
24.9
7.3
7.3
1959
41.6
18.2
24.7
7.9
7.6
1960
40.5
18.8
24.4
8.5
7.8
1961
39.4
19.3
24.0
9.1
8.1
1962
38.6
19.8
23.5
8.4
9.6
1963
37.9
20.4
23.1
10.0
8.7
1964
37.4
20.8
22.5
10.4
8.9
1965
37.1
21.2
21.8
10.8
9.1
1966
37.0
21.4
21.3
11.0
9.2
1967
36.9
21.4
20.8
11.5
9.5
1968
37.1
21.1
20.2
11.9
9.8
1969
37.3
20.8
19.8
12.1
10.0
1970
37.5
20.6
12.4
19.5
10.0
1971
37.6
20.6
19.0
12.7
10.1
37.6
1972
20.8
18.6
13.0
10.1
38.0
1973
21.1
18.1
12.9
9.9
1974
38.8
21.6
17.7
12.5
9.6
39.1
1975
22.2
17.3
12.3
9.3
1976
39.2
22.7
17.0
12.1
8.9
1977
39.3
23.4
17.0
11.7
8.6
1978
39.1
23.9
17.0
11.7
8.4
1979
38.3
24.2
11.9
17.0
8.5
24.2
1980
37.8
17.1
12.1
8.9
23.7
1981
37.5
17.0
12.1
9.7
19826/
37.0
23.1
16.9
12.3
10.7
1/ Includes credit market debt claims against nonfinancial sectors (Table 1), plus
currency, demand and time deposits, security credit, corporate equities, member
bank reserves, and miscellaneous assets.
21 The year shown is the final year in the five-year moving average.
3/ Consists of U.S. chartered banks, domestic bank affiliates, Edge Act
corporations, agencies and branches of foreign banks, and banks in U.S.
possessions. Does not include nonbank affiliates of bank holding companies or
foreign affiliates of U.S. chartered banks.
4/ Consists of savings and loan associations, savings banks, and credit unions.
5/ Consists of finance companies, real estate investment trusts, open-end
investment companies, money market funds, and security brokers and dealers.
6/ End of third quarter.
Source of basic data: Board of Governors of the Federal Reserve System,
Flow of Funds Accounts, Assets and Liabilities Outstanding.




21

Flow of Funds. In this section, such real measures for the
commercial banking industry are compared to those for the
entire financial intermediary sector.
In the National Income Accounts, the financial intermediary
sector is referred to as FIR (Finance, Insurance, and Real
Estate). It includes all depository institutions; securities
brokers and dealers; life and casualty insurers; real estate
brokers, dealers, and agents; and a host of miscellaneous
financial institutions. The variables compared include:
aggregate wages and salaries, total number of employees,
and total contribution to National Income. Foreign
operations of banks and other intermediaries are not
included in these data. They do include, however, the
nonbank affiliates of bank holding companies that are
classified under banking.
Turning first to wages and salaries in Table 4, it can be seen
that, as a percentage of the FIR total, banks’ wages and
salary payments have increased very slightly over the
sample period — from around 25 per cent to around 27
percent. Their percentage of total employees in the FIR
sector increased somewhat faster — from about 24 percent
to nearly 30 percent. The difference in trends of these two
Table 3
Shares of Home Mortgages, Consumer Credit, and
Nonfinancial Business Credit Market Debt Held by Commercial Banks'
Five-Year Moving Average^
1956-1982
Percent
Nonfinancial
Business
YearHome
Consumer
Credit
End Mortgages3/
Credit 4/
Market Debts
1956
16.1
37.9
38.6
1957
15.4
38.1
38.3
1958
14.9
38.3
38.3
1959
14.4
38.8
39.0
1960
13.8
38.8
39.3
1961
13.2
39.9
38.5
1962
40.4
38.7
12.8
12.4
1963
41.0
39.3
1964
12.2
41.6
39.9
1965
12.2
42.2
41.2
1966
42.4
12.3
42.8
1967
12.5
43.5
43.2
1968
12.7
44.3
43.9
1969
12.9
44.9
44.3
1970
13.0
45.3
44.0
1971
13.0
46.0
43.7
1972
13.2
46.8
43.9
1973
13.5
47.4
44.8
1974
13.9
47.8
45.8
1975
14.1
48.1
46.3
1976
14.3
48.2
46.5
1977
14.5
48.1
46.1
1978
14.7
48.2
45.4
1979
14.9
48.3
44.4
1980
15.2
48.1
44.2
1981
15.4
47.5
44.3
1982&
15.6
46.7
44.2
1/ Consists of U.S. chartered banks, their domestic affiliates, Edge Act
corporations, agencies and branches of foreign banks, and banks in U.S.
possessions. Does not include nonbank affiliates of bank holding companies or
foreign affiliates of U.S. chartered banks.
21 The year shown is the final year in the five-year moving average.
3/ Consists of home and multifamily residential mortgage loans.
4/ Consists of installment and noninstallment credit.
5/ Includes bonds, commercial and farm mortgage loans, bank business and farm
loans, commercial paper, and finance company loans on receivables and
inventory.
6/ End of third quarter.
Source of basic data: Board of Governors of the Federal Reserve System,
Flow of Funds Accounts, Assets and Liabilities Outstanding.

22

Federal Reserve Bank
of Minneapolis/Annual Report

1982

ratios suggests that bank employees’compensation has not
increased as rapidly as the compensation of employees of
other financial intermediaries, at least not on average.
Either wages and salaries or total employment is a useful
indicator of the scale of operations of financial
intermediaries except that these measures ignore any
changes in capital/labor ratios that may have occurred over
time. Unfortunately, there is no simple measure of "output"
for financial intermediaries as there is for nonfinancial firms.
In fact, financial intermediaries have no sales as such.
However, a reasonable proxy measure of intermediaries'
output is their total contribution to National Income. This
variable measures the total factor costs of services
produced by financial intermediaries; it is composed
primarily of employees’compensation and profits. According
to this broad measure shown in Table 4, the banking
industry’s percentage of FIR also increased over the full
sample period. However, its highest level, 16 percent, was
recorded in 1973, and it has decreased somewhat since
then.
A comparison of profits between industries must be
interpreted very cautiously, due to differences in accounting
methods, changes in industry composition, and so on.

These reservations should be kept in mind when
commercial banking’s profits are compared with those of
other industries.
The banks’share of total FIR profits increased modestly in
the 1960s and early 1970s and then declined beginning in
the mid-1970s. Banks’share of financial intermediaries’
profits followed almost exactly the same pattern.2/ However,
the National Income Accounts do not include profits earned
abroad, and foreign earnings of commercial banks are
probably much more important than those of nonbank
financial intermediaries. When the data are adjusted, taking
into account the foreign earnings of banks, their share of
total financial intermediary profits was nearly flat throughout
the 1970s and declined very modestly in 1978 and 1979.
Much more striking than the commercial banks’
performance are the broader comparisons of the profit
performances of FIR and the financial intermediary firms
relative to all domestic corporations. Both the FIR share and
the financial intermediary share of total U.S. corporate profits
showed marked declines beginning in 1973 or 1974. These
declining shares, undoubtedly, reflect to some degree the
increased competition in the financial service industries.
However, they may also reflect (to some unknown degree)
differential effects of inflation on the profits of financial and

Table 4
Bank Share of Finance, Insurance, and
Real Estate Firms for Selected Measures of Economic Activity*®
Five-Year Moving Average3/

Table 5
Net Income as a Percent of Average Total
Assets (ROA) and Average Total Equity (R0E)1/ for Insured Commercial Banks^
Five-Year Moving Averages/

Profits Comparison

1956-1981

1956-1981

Percent

Percent

Wages and
Year
Salaries
1956
1957
1958
1959
1960
1961
1962
1963
1964

25.1
25.1
25.0
24.9
25.0
25.1
25.1
25.2

1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979

25.3
25.3
25.4
25.4
25.4
25.6
25.9
26.3
26.5
26.8
27.2
27.4
27.6
27.7
27.7
27.4

1980
1981

27.1
26.9

1965
1966
1967

Employees
23.9
24.1
24.2
24.4
24.7
25.0
25.3
25.5
25.8
26.0
26.1
26.3
26.5
26.9
27.4
27.8
28.2
28.6
28.9
29.3
29.5
29.7
29.8
29.7
29.7
29.7

National
Income*
13.5
13.6
13.7
13.8
14.1
14.1
14.0
14.0
14.0
13.8
13.7
13.7
13.9
14.5
15.3
15.6
15.9
16.0
15.7
15.3
14.9
14.5
14.3
14.2
14.2
14.5

1/ “Finance, Insurance, and Real Estate” is a division of the Standard Industrial
Classification. It includes banks and other depository institutions; security and
commodity brokers and dealers; life,health, fire, and casualty insurance
companies, agents, and brokers; real estate operators, developers, and agents;
open-end and other investment firms.
2/ Bank component of the "Finance, Insurance, and Real Estate” division includes
commercial banks, savings banks, and Federal Reserve Banks.
3/ The year shown is the final year in the five-year moving average.
4/ National income measures the total factor costs of producing FIR services. It
primarily includes compensation of employees and business profits.
Source of basic data: United States Department of Commerce/Bureau of Economic
Analysis, The National Income and Product Accounts of the United States. -

Year
1956
1957
1958
1959
1960
1961
1962
1963
1964
1965
1966
1967
1968
1969
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981

Return
on
Assets

Return
on
Equity

.59
.60
.64

8.2
8.3
8.6
8.3
8.7
9.1
9.2

.63
.68
.72
.74
.73
.74
.72
.70
.71
.71
.74
.78
.81
.83
.86
.85
.83
.80
.77
.76
.75
.76
.77

1/ Total equity consists of equity capital and subordinated notes and debentures.
2/ Includes foreign offices of domestic banks. Ratios after 1968 are not strictly
comparable to previous years because of changes in income reporting
requirements.
3/ The year shown is the final year in the five-year moving average.
Source of basic data: Federal Deposit Insurance Corporation, Annual Reports.

2/Financial intermediaries are a subsector of the FIR sector.This subsector includes commercial and savings banks, Federal Reserve Banks, credit agencies other than
banks, and brokers and dealers.




9.0
9.2
8.9
8.8
8.9
9.1
9.6
10.2
10.8
11.2
11.6
11.7
11.5
11.3
11.2
11.2
11.5
11.9
12.2

Federal Reserve Bank
of Minneapolis/Annual Report

23

1982

nonfinancial firms, since the last half of the 1970s was
generally a period of high and rising inflation.
It is also extremely difficult to compare rates of return in
commercial banking with those in any other industry due to
the unique nature of the banking business. Bank rates of
return on total assets are very low compared to other firms,
but this is compensated for by the fact that commercial
banks are very highly leveraged. In fact, the only other major
industry whose leverage is comparable is securities brokers
and dealers.3/
An alternate analytical method, the one adopted here, is to
examine the behavior of bank rates of return over time. Table
5 shows the after-tax rate of return on banking industry
assets (ROA) and on bank equity (ROE) over the sample
period. These data are from the FDIC, not the National
Income Accounts, and thus include all bank income,
domestic and foreign, but exclude the profits of nonbank
affiliates of bank holding companies. The ROA increased
secularly until 1973 when it turned down. Nevertheless, the
ROA at the end of the sample period in 1981 was
substantially higher than it was at the beginning in 1956.
This industry ROA trend was determined, of course, by a
multiplicity of factors, some positive and some negative.
One unambiguously positive factor was that banks
increased their reliance on fee income as opposed to
interest income. Between 1956 and 1981, fee income of
insured commercial banks rose from 11.3 percent of

operating income net of interest expense to 19.5 percent.47
The ROE also rose secularly through the mid-1970s, dipped
briefly, and then moved up again so that by 1981 it was at its
peak for the past quarter century.
IV. Market Performance

In this section, the market performance of debt and equity
securities issued by commercial banks is considered. This
analysis has nothing to do with market share or profitability
per se, but it is indicative of how securities market
participants have viewed the prospects of the banking
industry. Since only the largest banks have securities that
are actively traded, this analysis pertains specifically to that
group.
Turning first to the debt market, Chart 1 shows the spread
between rates of interest on large bank certificates of
deposit and U.S. Treasury bills of approximately the same
maturity. This spread measures the risk premium that banks
pay in excess of the risk-free government rate and is a useful
indicator of creditors’confidence in the banking industry.
The large spike that appears in 1974-75 occurred when the
problems of the Franklin National Bank and related financial
stresses caused temporary tremors in the debt markets.
Chart 1 indicates that from about 1976 to the middle of 1982
this risk premium rose substantially — approximately 150
basis points. However, this phenomenon was not confined to
commercial banks. If a similar risk premium iscomputed for

Chart 1
Risk Premium on Short-Term Bank Debt
1964:1-1982: 12
Percent

Note: Data are differences between the three-month Secondary CD rate and the three-month Treasury Bill rate. (Both rates are monthly averages of daily figures.)
Source: Federal Reserve Board

3/The term leverage means the ratio of debt to equity financing. Banks can use more debt financing than other firms due to their access to deposit insurance and the
discount window and also due to the regulated nature of the industry. In banking, a more commonly employed leverage measure than debt-to-equity is the ratio of capital to
assets (or capital to risk assets).
positive factor, mentioned in the preceding discussion of Table 2, is that banks began the sample period
Digitized4/Another
for FRASER
reduced proportional holdings of cash and investments (in favor of higher yielding loans) thereafter.


in an extremely liquid condition and then consistently

24

Federal Reserve Bank
of Minneapolis/Annual Report

1982

commercial paper issued by nonbank corporations, it
follows virtually an identical pattern. What the data seem to
suggest, then, is that risk premiums on all private short-term
debt have increased substantially since 1976 and, as
shown in Chart 1, have become extremely volatile. But
commercial bank securities have fared about the same as
those issued by nonbank firms.
Turning next to the market for equities, Table 6 shows the
performance of several bank stock indices, computed by
Standard and Poor’s (S&P), compared to the S&P 500
Index, a broad-based measure of stock prices. All three
indices have been rescaled so as to equal 100 in 1961, the
first sample year. Neither bank stock index performed as
well as the S&P 500 over the full sample period, although
the New York City banks outgained the S&P 500 over the
long subperiod 1961-1976.
These comparisons must be taken cautiously. For one thing,
the total return from holding an equity security depends on
dividend yields as well as price changes (capital gains and
losses), and it is not known if bank equities have exhibited
systematically different dividend yields than nonbank
equities. For another thing, it seems that various bank stock
indices move somewhat differently. For example, a
composite index of regional and money center bank stocks,
constructed by Goldman Sachs and Company, did about
as well as the S&P 500 over the period 1971-1982. So, too,
did a composite bank stock index produced by Merrill
Lynch. These performances are in contrast to the two S&P
bank stock indices in Table 6, both of which performed less
well than the S&P 500 over that time interval.
In summary, the risk-premium on short-term bank borrowing
seems to have widened in recent years, but so has the risk
premium on nonbank private debt. This phenomenon
Table 6
New York City Bank, Regional Bank, and
Standard & Poor’s 500 Stock Indices
Annual Averages
1961-1982
(1961=100)
NY City
Regional
S&P
Year
Banki/
Bank2/
500
1961
100.0
100.0
100.0
1962
94.1
99.9
92.7
1963
105.4
108.8
105.1
1964
117.3
122.8
108.9
1965
115.2
133.0
100.3
1966
89.7
128.7
98.6
1967
107.7
138.7
93.3
1968
132.4
114.9
148.9
1969
134.5
123.4
147.6
1970
129.7
108.1
125.6
1971
137.2
122.3
148.3
1972
169.8
164.8
148.5
190.8
1973
146.7
162.1
160.4
1974
118.0
125.0
1975
151.9
112.9
130.0
154.2
1976
137.5
153.9
1977
140.0
137.9
148.1
129.3
1978
144.9
141.8
131.7
1979
147.3
155.4
130.0
1980
144.3
179.2
155.2
193.2
1981
165.5
162.1
1982
134.7
180.6
1/ Includes Bankers Trust, Chase, Chemical, Citicorp, Manufacturers Hanover,
and Morgan.
2/ Includes Bank America, Continental, First Chicago, First Interstate, First
National Boston, InterFirst, First Pennsylvania, Mellon, NCNB, and Northwest
Bancorporation.
Source of basic data: Standard and Poor’s, The Outlook.




seems to reflect a general shift in lender preferences in favor
of quality, not a relative deterioration in the position of bank
securities. When bank equity performance is compared
with that of the overall stock market, results depend heavily
on the choice of indices and also on the choice of end
points for the sample period. It is fair to state that over the
last 20 years or so, the price performance of commercial
bank equities hasn’t been radically better — or worse —
than that of stocks in general. In recent years though — say,
since 1974 — bank stocks may not have done as well as
stocks generally. Moreover, it is apparent that bank stocks
that once commanded book value or higher are now selling
below book values. These recent developments aren’t
entirely surprising, however, because increased competition
in banking would be expected to lead to poorer market
performance.
V. Summary and Conclusions

In light of the many and varied developments in commercial
banking in recent years, a remarkably stable picture
emerges from an analysis of these data. It appears that
commercial banks have maintained or even slightly
expanded their share of total intermediation, a conclusion
supported by analyses of both the Flow of Funds and
National Income Accounts. In important submarkets such
as mortgage, consumer, and commercial lending, they have
gained share over the long run. And bank profits have held
up reasonably well, given that many of the markets in which
they operate have become increasingly competitive. There
is no evidence of a generalized loss of investor confidence
in the banking industry, although bank equities may not
have performed as well as the overall market in recent years.
It is also true that some of the data suggest a modest
deterioration in the banks’ position, beginning in about the
mid-1970s. But even with this deterioration, the same data
indicate that banks were in better condition at the end of the
sample period than at the beginning. Thus, these trends
may merely reflect a return to conditions consistent with past
history.
The data do indicate that, since the early 1970s, profits of
financial firms have not kept pace with those of nonfinancial
firms, a development that undoubtedly reflects everincreasing competition in the financial services industries.
This is not, in itself, a matter for undue concern as more
competition in financial services is probably beneficial to
society. And commercial banks have not, apparently, been
substantially disadvantaged (or advantaged) in the
transition from more to less regulation and less to more
competition.




Statement of Condition
Earnings and Expenses
Directors
Officers

26

Federal Reserve Bank
of Minneapolis/Annual Report

Statement of Condition/In

1982

Thousands

As of December 31

1982

1981

Assets

Gold Certificate Account
Interdistrict Settlement Fund
Special Drawing Rights Certificate Account
Coin
Loans to Depository Institutions
Securities:
Federal Agency Obligations
U.S. Government Securities
Total Securities
Cash Items in Process of Collection
Premises and Equipment — Less: Depreciation
Assets Denominated in Foreign Currencies
Other Assets
Total Assets

154,000 $
(275,293)
61,000
19,333
8,500

189,000
(210,818)
48,000
16,503
10,650

$

112,605
1,708,669
1,821,274 $
687,718
36,711
213,268
52,408
2,778,919 $

136,502
1,910,771
2,047,273
450,834
34,694
160,736
45,738
2,792,610

Federal Reserve Notes, Net
Deposits:
Depository Institutions
Foreign
Other Deposits

$

1,758,265 $

1,463,096

Total Deposits
Deferred Availability Cash Items
Other Liabilities
Total Liabilities

$

$

$

Liabilities

414,348
7,770
21,898

$

763,654
10,208
2,858

444,016 $
451,113
27,557
2,680,951 $

776,720
420,025
39,083
2,698,924

48,984 $
48,984
97,968 $
2,778,919 $

46,843
46,843
93,686
2,792,610

Capital Accounts

Capital Paid In
Surplus
Total Capital Accounts
Total Liabilities and Capital Accounts




$
$
$

Federal Reserve Bank
of Minneapolis/Annual Report

Earnings and Expenses

27

1982

In Thousands

For the Year Ended December 31

1982

1981

Current Earnings

Interest on Loans to Depository Institutions
Interest on U.S. Government Securities and Federal Agency Obligations
Earnings on Foreign Currency
Revenue from Priced Services
All Other Earnings
Total Current Earnings

$

$

5,720 $
203,166
15,911
21,181
277
246,255 $

7,440
228,187
17,957
9,097
373
263,054

26,109
4,999
1,003
1,394
1,808
4,410
958
818
3,520
1,631
46,650
2,189
44,461
201,794
4,474

23,462
4,473
846
1,275
1,702
3,450
852
639
2,716
1,211
40,626
2,022
38,604
224,450
11,579

Current Expenses

Salaries and Other Benefits
Postage and Expressage
Telephone and Telegraph
Printing and Supplies
Real Estate Taxes
Furniture and Operating Equipment — Rentals, Depreciation, Maintenance
Depreciation — Bank Premises
Utilities
Other Operating Expenses
Federal Reserve Currency
Total Current Expenses
Less Expenses Reimbursed
Net Expenses
Current Net Earnings

$

$
$
$

Net Deductions
Less:
Assessment for Expenses of Board of Governors
Dividends Paid
Payments to U.S. Treasury
Transferred to Surplus

$

$
$
$

2,252
2,889
190,038
$

2,141

2,091
2,737
199,274
$

8,769

46,843 $
2,141
48,984 $

38,074
8,769
46,843

Surplus Account

Surplus, January 1
Transferred to Surplus — as above
Surplus, December 31




$
$

28

Federal Reserve Bank
of Minneapolis/Annual Report

Directors/January

1982

1 , 1983

Federal Reserve Bank
of Minneapolis

William G. Phillips

Chairman and
Federal Reserve Agent

John B. Davis, Jr.

Class A

Elected by Member Banks

Class B

Elected by Member Banks

Appointed by Board of Governors

Vern A. Marquardt/1983

President
Commercial National Bank
L’Anse, Michigan

Chairman
Blandin Paper Company
Grand Rapids, Minnesota

Harold F. Zigmund/1983

John B. Davis, Jr./1983

Dale W. Fern/1984

William L. Mathers/1984

William G. Phillips/1984

Curtis W. Kuehn/1985

President
Chairman and
Mathers Land Company, Inc. Chief Executive Officer
Miles City, Montana
International Multifoods
Minneapolis, Minnesota
Richard L. Falconer/1985
Sister Generose Gervais/1985
District Manager
Administrator
Northwestern Bell
Bismarck, North Dakota
Saint Marys Hospital
Rochester, Minnesota

Helena Branch

Gene J. Etchart

Vice Chairman

Appointed by
Board of Directors
Federal Reserve Bank
of Minneapolis

Appointed
by
Board of Governors

Roger H. Ulrich/1983

President
First State Bank
Malta, Montana

Gene J. Etchart/1983

Past President
Hinsdale Livestock Company
Glasgow, Montana

Harry W. Newlon/1984

Vice President and
General Manager
Champion International Corp.
Timberlands-Rocky
Mountain Operations
Milltown, Montana

President and Chairman
First National Bank
Baldwin, Wisconsin
President
First National Bank
Sioux Falls, South Dakota

President
First National Bank
Bozeman, Montana

Seabrook Pates/1984

President and
Chief Executive Officer
Midland Implement
Company, Inc.
Billings, Montana
Federal Advisory Council
Member

Chairman

Ernest B. Corrick/1984

E. Peter Gillette, Jr.

Vice Chairman
Northwest Bancorporation
Minneapolis, Minnesota

Terms expire December 31 of indicated year.



Deputy Chairman

Class C

President
Macalester College
St. Paul, Minnesota

Ernest B. Corrick

Federal Reserve Bank
of Minneapolis/Annual Report

1982

Officers/January 1,1983

Federal Reserve Bank
of Minneapolis

E. Gerald Corrigan

President

Thomas E. Gainor

Senior Vice Presidents

Vice Presidents

Assistant Vice Presidents

Assistant Vice Presidents

Senior Vice President
and General Counsel

Melvin L. Burstein

Vice President and
Deputy General Counsel

Sheldon L. Azine

Assistant Vice President

Robert C. Brandt

Assistant Vice President

James U. Brooks

Senior Vice President

Barbara J. Cox

Vice President

Assistant Vice President

Theodore E. Umhoefer, Jr.

Leonard W. Fernelius

Marilyn L. Brown

Lester G. Gable

Assistant Vice'President

Joseph R. Vogel

Michael J. Pint

Evelyn F. Carroll

Phil C. Gerber

Assistant Vice President

Assistant Vice President

Bruce J. Hedblom

Assistant Vice President
and Assistant Secretary

Senior Vice President
and Chief Financial Officer

Vice President

Gary H. Stern

Vice President

Senior Vice President
and Director of Research

Vice President

First Vice President

Richard K. Einan

Caryl W. Hayward

Vice President

Douglas R. Hellweg

Assistant Vice President

Vice President

Ronald E. Kaatz

Assistant Vice President

Howard L. Knous

William B. Holm

David R. McDonald

Assistant Vice President

Preston J. Miller

Assistant Vice President

Vice President
and General Auditor
Vice President

Monetary Adviser

Richard C. Heiber

Assistant Vice President
Ronald O. Hostad
Roderick A. Long

James M. Lyon

Clarence W. Nelson

Secretary and
Assistant Counsel

Arthur J. Rolnick

Assistant Vice President

Vice President
and Economic Adviser
Vice President and
Deputy Director of Research
Colleen K. Strand

Vice President

James R. Taylor

Vice President

Robert W. Worcester

Gerald J. Mallen

Susan J. Manchester

Assistant Vice President
Ruth A. Reister

Assistant Vice President
Charles L. Shromoff

Assistant General Auditor

Vice President
Helena Branch




Robert F. McNellis

Vice President

G. Randall Fraser

Assistant Vice President

Kenneth C. Theisen

Assistant Vice President
Chief Examiner

William G. Wurster




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