View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

December 1989

THE
FEDERAL
RESERVE
RANK of
ST. IXHLS

Changes in A gricultural Com m odity P rocessing

■

Boom o r Bust: The C yclical N ature o f H ousing

.

t

*•*< jt*

O verhauling the T hrift Industry—FIRREA



'

......

.

.

-

‘

"'

■
'- '
....

1 .

V
, -'
- * /■
' i
a B a a S f f i *sE&

THE EIGHTH FEDERAL RESERVE DISTRICT

CONTENTS_____________________________________________ __________

- /-

y V ,: -

Agriculture
U.S. and Eighth District Food Processing and Tobacco Manufacturing.............................................................1
Business
The Nation and the Region: Home Building in the 1980s.................................................................................... 5
Banking and Finance
Resolving the Thrift C ris is ................................................................................ ........................................................ 9
Statistics .................................................................................................................................................................... 14
Pieces of Eight—An Economic Perspective on the 8th District is a quarterly summary of agricultural, banking and
business conditions in the Eighth Federal Reserve District. Single subscriptions are available free of charge by writing:
Research and Public Information Department, Federal Reserve Bank of St. Louis, Post Office Box 442, St. Louis,
MO 63166. The views expressed are not necessarily official positions of the Federal Reserve System.



1

U.S. and Eighth
District Food Process­
ing and Tobacco
Manufacturing
by Jeffrey D. Karrenbrock
David H. Kelly provided research assistance.

A

J L .^A g ricultural commodity processing is
one of the oldest economic activities in the United
States. While the technology used has changed
substantially over time, the industry’s role is still
to transform raw agricultural products into forms
that are usable by the consumer. Besides providing
food and other products to consumers, agricultural
commodity processing provides employment oppor­
tunities throughout the country.
The relative economic importance of the food
processing and tobacco manufacturing industries in
the United States and the Eighth Federal Reserve
District has changed during the past 25 years. The
relative importance of these industries has declined
in the United States; not all Eighth District states
have followed this pattern, however. This article
examines the role of these industries in both the
U.S. and Eighth District economies and offers
some explanations for the evolving patterns in the
District states.

Agricultural Commodity Process­
ing in the United States
Agricultural commodity processing encom­
passes various activities in the food processing and
tobacco products manufacturing industries. For ex­
ample, the food processing industry is composed
of all businesses involved in the processing or
making of meat, dairy, fruit and vegetables, fats
and oils, grain, sugar or beverages, while the
tobacco products industry consists of those firms
involved in the manufacturing of cigarettes, cigars,
chewing and smoking tobacco, and tobacco stemm­
ing and redrying.
The contribution of the food and tobacco pro­
cessing industries to the nation’s economy can be
analyzed in terms of real output (with the effects
of inflation removed) and employment. In 1986,
the food products industry accounted for 1.7 per­
cent of the nation’s real output, which made the




industry the ninth-largest of 53 narrowly defined
U.S. industries. Not only is the U.S. food process­
ing industry large relative to other U.S. industries,
but it is also large relative to the food processing
industries in other countries. A 1982 study found
that the U.S. food processing industry was the
largest among market economies and accounted for
about 27 percent of the food processing output of
all market economies.
Between 1963 and 1986, the food processing
industry’s share of real output declined from 2.0
percent to 1.7 percent. This decline occurred
because other industries grew more rapidly, not
because actual output has fallen in the industry.
Between 1963 and 1986, the real output of the
food processing industry increased about 69 per­
cent. This increase can be attributed to population
growth and an increase in the value of products
stemming from such processing activities as
precooking and premixing.
Furthermore, the increase in real output
reflects productivity increases within the food pro­
cessing sector, as employment in the food process­
ing industry fell from about 1.75 million people in
1963 to 1.62 million in 1986. Consequently, food
processing’s share of total U.S. non-agricultural
employment dropped from 3.1 percent in 1963, to
only 1.6 percent in 1986. Food processing employ­
ment remained at 1.62 million in 1987.
Similarly, tobacco manufacturers have also ac­
counted for a declining part of the nation’s total
output. In 1963, tobacco manufacturers accounted
for about 0.4 percent of the nation’s real output;
this figure had fallen to less than 0.2 percent by
1986. Unlike food processors, tobacco manufac­
turers have experienced a decline in their real out­
put after increasing for several years. Since 1963,
real output in the industry has declined more than
11 percent, including a drop of more than 29 per­
cent from its most recent peak in 1981. This drop
in real output can be attributed to declining per
capita consumption of tobacco products, which has
fallen from 11.82 pounds in 1960 to about 6.26
pounds in 1987. Similarly, employment in the
tobacco manufacturing industry has fallen from
88,600 in 1963 to about 45,100 in 1987.

Agricultural Commodity Process­
ing in the Eighth District1
Changes in the food and tobacco manufactur­
ing industries in the Eighth District, as a whole,
have paralleled the changes in these industries in
the U.S. economy. Over time, both industries have
accounted for smaller portions of the District’s real
output. In 1963, food processing and tobacco man­
ufacturing accounted for 3.4 percent and 1.4 per-

2

Table 1
Food and Tobacco Manufacturing Statistics1
Food Processing

Tobacco Manufacturing

1986
Real output
(millions)2

Percent of
total real
output

Employment
(thousands)3

1986
Real output
(millions)2

Percent of
total real
output

Employment
(thousands)3

$ 6 2 ,5 5 3

1 .7 0 %

1 ,6 2 0 .4

$ 6 ,9 9 4

.1 9 %

45.1

U n ite d S ta te s

5,921

2 .7 9

1 5 0 .9

878

.41

7 .9

A rk a n s a s

989

3.51

46.1

—

—

—

K e n tu c k y

1 ,4 2 8

3.01

1 9 .7

772

1 .6 3

6 .6

M is s o u ri

1 ,9 4 3

2 .6 8

4 5 .6

1

0

Tennessee

1,561

2 .4 3

3 9 .5

105

.1 6

E ig h th D is tric t

N .A .
1.3

'Derived from data obtained from U.S. Departments of Commerce and Labor
21982 constant dollars
3U.S. figures are 1987. All others are 1988.

cent of the District’s real output, respectively. In
1986, these figures stood at 2.8 percent and 0.4
percent, though they are higher than the 1.7 percent
and 0.19 percent figures for the U.S. economy.
Thus, the food and tobacco manufacturing indus­
tries are relatively more important to the District
than to the nation.
Also following the national trend, the
District’s food processing industry has increased its
real output since 1963, while the real output of
tobacco manufacturing has fallen after increasing
for several years. Between 1963 and 1986, the
food processing industry increased its real output
by 66 percent, while tobacco manufacturing output
dropped 40 percent. By 1988, employment had
risen by 17,600 since 1975 in the District’s food
processing industry, but had fallen by 6,300 in the
tobacco manufacturing industry.
While these industries have generally followed
the U.S. pattern, the aggregated District figures
disguise the divergent roles these industries are
playing in individual states. The remainder of this
article focuses on the role these industries play in
Arkansas, Kentucky, Missouri and Tennessee.
Arkansas
Among District states, the food processing in­
dustry is the most important in Arkansas in terms
of both real output and employment. In 1963, the
food processing industry accounted for slightly less
than 2 percent of Arkansas’ real output, but that
number had climbed to more than 3.5 percent by
1986. Real output in Arkansas' food processing




sector has increased by more than 300 percent
since 1963. Despite the industry’s significant in­
crease in output, Arkansas’ food processing output
is still the smallest in absolute terms among all
District states (see table 1). In terms of employ­
ment, the number of workers in the food process­
ing industry has increased from 18,800 in 1963 to
more than 46,000 in 1988. About 5.4 percent of
Arkansas’ total non-agricultural employment in
1988 was in food processing.
Expansion of poultry processing in Arkansas
has accounted for much of the industry’s recent in­
crease in real output. Since Arkansas leads the na­
tion in broiler production, the state was in an ideal
position as consumers started to shift from red
meat to poultry consumption. Between 1979 and
1987, U.S. red meat consumption fell 9.3 pounds
per capita, while chicken meat consumption in­
creased 12.4 pounds per capita. Arkansas poultry
producers responded to increased consumer de­
mand by expanding broiler production over 1.3
billion pounds, a 56.5 percent increase, between
1980 and 1988. Since poultry are generally
slaughtered near the place of production, the
poultry processing industry grew hand in hand
with broiler production.
Kentucky
In contrast to Arkansas, food processing in
Kentucky has experienced a sharp decline. Tobac­
co manufacturing has experienced a sharp decline
as well. In 1963, the food and tobacco industries
accounted for more than 12 percent of Kentucky’s

3

real output, with food processing accounting for
6.6 percent and tobacco manufacturing 5.5 per­
cent. By 1986, the share of real output from these
two industries had fallen to 3.0 percent and 1.6
percent, respectively. Output in the food process­
ing industry fell 16 percent between 1963 and
1986, while the output of tobacco manufacturers
fell 46 percent. Employment in these industries has
followed a similar pattern. From 1975 to 1988, the
food processing industry reduced its labor force by
about 2,500 to 19,700 people. At the same time,
tobacco manufacturers had cut their workforce by
almost 50 percent to 6,600 employees.
The fall in real output in tobacco manufactur­
ing is largely due to falling per capita consumption
of tobacco products. Meanwhile, declining per
capita consumption of distilled spirits and slow
population growth have contributed to Kentucky’s
falling real output in the food processing sector.
U.S. per capita consumption of distilled spirits has
fallen from a recent peak of about 2 gallons in
1978 to 1.59 gallons in 1987. Most of the distilled
spirits produced in Kentucky are whiskeys, and the
amount of whiskey produced in the state has drop­
ped from 84.6 million tax gallons in 1970 to 24.3
million tax gallons in 1988.
In addition to declining whiskey output, Ken­
tucky’s population has grown at an average annual
rate of only 0.7 percent between 1960 and 1988,
well below the national growth rate of 1.1 percent.
This slower population growth rate has meant that
the market for food processors, like bakeries and
meat packers, who sell mostly to local or regional
markets, has also grown slowly. Hence, slow
growth in staple food output has not been large
enough to offset declining output in the beverage
industry.
Missouri
The food processing industry has maintained a
relatively stable role in Missouri’s econom y since
the 1960s, and its output is the largest of all
District states. While real output from the industry
expanded almost 77 percent between 1963 and
1986, the industry’s share of Missouri’s total out­
put has remained at about 2.7 percent during this
period. Employment in the food processing in­
dustry has fallen from about 50,000 in 1972 to
about 45,600 in 1988, accounting for about 2.1
percent of the state’s total non-agricultural
employment.
In contrast to other District states, Missouri’s
food processing industry is relatively diversified.
The brewing industry accounted for the largest part
of total food processing output in 1982, followed
by cheese and soft drinks. The state has benefited
from increasing consumption of these goods as
U.S. per capita consumption of beer has increased
from 15.4 gallons in 1960 to 22.7 gallons in 1987,




while soft drink per capita consumption has risen
from 27 gallons in 1979 to 30.3 gallons in 1986.
U.S. per capita consumption of cheese has increas­
ed from 17.2 pounds in 1979 to 24 pounds in
1987.
Tennessee
The food processing industry in Tennessee has
expanded its role in the state’s economy as output
has grown more than 200 percent between 1963
and 1986. During this period, output in the in­
dustry increased from about 2 percent to 2.4 per­
cent of total output. Employment in the food pro­
cessing industry has increased by about 7,000
workers since 1963, standing at 39,500 in 1988.
Output from the tobacco manufacturing sector has
also jumped more than 200 percent, but its share
of the state’s real output has remained at about 0.1
percent. Tobacco manufacturers, however, have
gradually trimmed their workforce from 1,800 in
1963 to about 1,300 in 1988. The two industries
account for about 2 percent of Tennessee’s total
non-agricultural employment.
Like Missouri, Tennessee’s food processing
industry is not dominated by a single sector. The
beverage sector, which is dominated by production
of beer, whiskey and soft drinks, accounted for the
largest share of output in 1982. In addition, Ten­
nessee ranks second in the nation in soybean pro­
cessing and first in the processing of frozen
vegetables. The state’s industry has benefited from
specializing in these commodities, as U.S. con­
sumption of both frozen vegetables and soybean
oils has increased in the United States in recent
years.
Tennessee’s expansion in tobacco manufactur­
ing output can be largely attributed to increased
consumption of chewing tobacco and snuff during
the 1970s and early 1980s. The output of Ten­
nessee’s tobacco manufacturers, who concentrate
mainly on non-smoking tobacco products, was
relatively stable until the early 1970s when output
began to rise in response to increased total chew­
ing tobacco consumption in the United States.
When chewing tobacco output began to fall in
1981, snuff consumption picked up the slack.
Snuff is the only tobacco product whose consump­
tion rose each year from 1979 to 1985. In recent
years, output from Tennessee’s tobacco manufac­
turers has declined.

Conclusion
In general, the food processing and tobacco
manufacturing industries have declined in impor­
tance in Kentucky, remained stable in Missouri,
and grown in relative importance in Arkansas and
Tennessee. Changing consumption patterns in the

meat, beverage and tobacco sectors account for a
large part of the divergent roles these sectors are
playing in Eighth District states’ economies.
Continued changes in consumption patterns and
new agricultural products and technologies will
help determine the future role of these industries in

District states. As biotechnological advances both
increase agricultural productivity and attempt to
meet consumer demands for more healthful foods,
food and tobacco manufacturers will have to adjust
their processing procedures, product mix and perhaps
the geographic location of output production.

FOOTNOTES
’ While the Eighth Federal Reserve District actually
encompasses all of Arkansas and parts of Illinois,
Indiana, Kentucky, Mississippi, Missouri and Tennessee.

only
industries in Arkansas, Kentucky, Missouri and
Tennessee are discussed in this article.




5

The Nation and the
Region: Home
Building in the 1980s
By Thomas B. Mandelbaum
Thomas A. Pollmann provided research assistance.

A

JLm

J H L fte r bottoming out during the national
recessions of the early 1980s, residential construc­
tion rebounded strongly in the mid-1980s along
with the rest the U.S. economy. Since 1987,
however, the overall national economy has con­
tinued to expand, but new home construction has
weakened. In many ways, homebuilding in the
Eighth District’s four largest metropolitan areas
mirrored the national housing market. This article

reviews recent changes in homebuilding in the na­
tion and major District metropolitan areas and ex­
amines factors responsible for these changes.

The National Context
Homebuilding in the United States is cyclical.
As figure 1 shows, sharp residential construction
downturns have been associated with each of the
recessions (shaded areas), as defined by the Na­
tional Bureau of Economic Research. In the cur­
rent recovery, privately-owned housing starts rose
from approximately a 1.1 million unit annual rate
during the 1981 and 1982 recession years to ap­
proximately 1.75 million units per year from 1983
through 1986. Despite continued national economic
growth, homebuilding activity has declined in re­
cent years. For example, housing starts totaled ap­
proximately 1.5 million in 1988 and, based on the
first three quarters of the year, will total 1.4
million in 1989.

Figure 1

Homebuilding and the Business Cycle
Millions of units (log scale)

N ote: S h ad ed areas re p re sen t p eriods of business recessions.




6

Several factors contributed to housing’s strong
recovery through 1986. Rising incomes and lower
mortgage rates made housing more affordable. As
business activity expanded rapidly in 1983 and
1984 , unemployment rates fell and household in­
comes rose. Simultaneously, mortgage interest
rates fell. According to Federal Home Loan Bank
Board surveys, effective interest rates on conven­
tional first mortgages for new homes fell from
nearly 16 percent in late 1981 to 9.87 percent in
fourth-quarter 1986. In addition, adjustable-rate
mortgages (ARMs), with relatively low initial in­
terest rates, were increasingly available after 1981.
The overall impact of rising incomes and falling
interest rates was magnified because some house­
holds that were forced to postpone buying a first
home or a more expensive home during the reces­
sion found that the purchase was now possible.1
As figure 1 indicates, the building of
multifamily dwellings has been more volatile than
the building of single-family housing. Multifamily
starts rose from 378,800 in 1981 to an average of
649,025 for the 1983-86 period. Legislative
changes such as the 1981 Economic Recovery Tax
Act encouraged construction of multifamily hous­
ing by accelerating depreciation writeoffs, reducing
capital gains taxes and allowing opportunities for
sheltering income. This last feature allowed tax­
payers not regularly, continuously and substantially
involved in the housing market to use losses from
these investments to offset income from other ac­
tivities. In addition, a 1980 change in the Internal
Revenue Service Code stimulated greater use of
tax-exempt mortgage revenue bonds, issued by
state and local governments, to assist in the con­
struction of multifamily housing for lower- and
middle-income households.
Multifamily starts have fallen off substantially
since 1986, averaging 440,500 in 1987 and 1988
and 384,667 (annual rate) in 1989’s first three
quarters. Part of the weakening of multifamily
homebuilding is due to the reversal of 1981’s con­
struction incentives by the Tax Reform Act of
1986. This Act reduced depreciation writeoffs,
raised taxes on capital gains and eliminated the
passive loss deductions on rental activity. In addi­
tion, some rental markets were overbuilt, resulting
in rising vacancy rates and depressed rents.
Demographic forces also may have con­
tributed to this weakening in housing activity. Bet­
ween 1981 and 1985, the number of households
with heads 25 to 34 years old rose by an estimated
253,000 per year. In the 1986-90 period, this rate
is slowing to just 93,000 per year.2 Since younger
households are a primary home-buying group, the
slowdown in household formation may have
weakened the demand for for single-family houses
as well as for apartments.
One factor that seemingly works against the
recent declines in housing starts is that conven­




tional mortgage rates in 1987 through the first half
of 1988 remained relatively low and are currently
well below those of the first half of the 1980s. A
recent study, however, found that the respon­
siveness of housing starts to declines in long-term
interest rates has weakened since 1983 compared
with earlier decades, largely because of financial
deregulation and innovations in housing finance.3
In other words, a given rise (fall) in interest rates
causes a smaller decline (rise) in housing starts
since the mid-1980s than previously.
Prior to financial deregulation, rises in in­
terest rates would tend to reduce the loanable
funds available to conventional housing lenders,
such as thrifts. Due to limits on the interest rates
that conventional lenders could pay to attract
deposits, high interest rates would induce deposi­
tors to place their funds elsewhere. Consequently,
housing lenders were unable to make as many loans.
Regulatory changes in 1978 and 1980 eliminated
or began phasing out limitations on interest rates
paid on deposits. In addition, innovations in hous­
ing finance—such as lenders making ARMs more
available and broadening the definition of house­
hold income to include the income of a second
wage earner—made the affordability of homes less
sensitive to rises in long-term interest rates.
Other explanations have been offered for the
gradual decline in single-family homebuilding.
Some analysts suggest that part of the decline in
single-family homebuilding is because the construc­
tion boom in the mid-1980s satisfied the pent-up de­
mand from the recession years of the early 1980s.
Thus, part of the decline is simply a return to nor­
mal construction levels. Single-family housing
starts were issued at a 1.02 million rate in 1989’s
first three quarters, just slightly higher than the
1.01 million average rate of the 1959-88 period.
Another possible explanation is that rapidly
rising home prices may have dampened the quantity
of homes demanded. Except for in the Northeast,
however, increases in new home prices since the
mid-1980s mostly reflect increases in the quality of
homes; homes built in recent years tend to be larger
with more amenities than in the past.4 As measured
by a housing price series developed by the U.S.
Department of Commerce that adjusts for many
qualitative factors of new homes (such as lot size
and house size), new home prices rose at a mere 1.9
percent annual rate between the first half of 1986
and the first half of 1989, a rate less than the rise in
overall consumer prices. There is no comparable
series for the prices of existing homes, however.

Housing Trends in District Cities
Homebuilding trends in the Eighth District
generally followed national trends during the first

six years of the 1980s. Figure 2 shows the cyclical
pattern of housing permits in the District’s four
largest metropolitan areas.5 As in the nation, homebuilding activity bottomed out in 1981 in Little
Rock, Memphis and St. Louis, while Louisville’s
homebuilding trough was a year later. Homebuild­
ing activity rebounded strongly in the early years
of the recovery in Little Rock, Memphis and St.
Louis, before leveling off at relatively high levels
through 1986. Louisville’s homebuilding recovery
has been more gradual, and has not yet matched
the levels of 1977 and 1978. Since 1987, the num­
ber of housing permits has declined in Little Rock
and St. Louis, following the national pattern, while
remaining steady in Louisville and trending upward
in Memphis.
Since mortgage rates faced by consumers in
District cities are similar to those offered national­
ly, rising rates in the early 1980s contributed to
declines in homebuilding while declining rates until
1988 were a positive factor. Income changes in the
District also contributed to the pattern of housing
starts. Between 1979 and 1982, real personal in­
come fell at a 0.4 percent annual rate in the

I

United States and declined in the four District
metropolitan areas at rates ranging from 0.9 per­
cent in Little Rock to 1.8 percent in Louisville. In
the recovery, between 1982 and the first half of
1989, real income has grown at rates of 3.6 per­
cent in the United States and risen in the Little
Rock, Louisville, Memphis and St. Louis metro­
politan areas at rates of 3.3 percent, 2.6. percent,
4.2 percent and 3.2 percent, respectively.
Nationally, the lack of substantial growth in
residential construction after 1986 was partially
due to declines in the multifamily sector. Similar­
ly, declines in multifamily construction activity
after 1986 pulled down total homebuilding activity
in the District. In St. Louis, for example, multi­
family permits averaged approximately 6,700 in
1983 through 1986, more than double the rate of
the early 1980s. The number of multifamily per­
mits has declined each year since 1986 and in the
first half of 1989, only 2,725 were authorized
(seasonally adjusted annual rate). Louisville and
Little Rock experienced similar trends, with rela­
tively high levels of multifamily homebuilding be­
tween 1983 and 1986, followed by declines.

Figure 2

Housing Permits in District Metro Areas
Number of units (log scale)

Note: 1989 data are seasonally adjusted annual rates based on the first half of the year.




8

The number of multifamily homebuilding per­
mits authorized in Memphis rose rapidly in 1984,
and stayed at that relatively high level in 1985
before declining in 1986. Unlike the other three
areas, however, the number of multifamily permits
in Memphis rose slightly in 1987, 1988 and in the
first half of 1989. This strengthening may reflect
Memphis’ smaller boom before 1986 and its more
rapid economic expansion since 1986. Memphis’
real personal income rose at a 4.1 percent annual
rate since 1986, compared with a 3 percent growth
rate or less in the other three metropolitan areas.
Its population also has grown substantially more
rapidly in recent years.
Anecdotal information suggests new home
prices are rising in the metropolitan areas, but no
data are available for the four areas that measures
home prices, after adjusting for changes in quality.
There is no reason to think, however, that new
home price increases in the District substantially
exceed the moderate increases indicated by the na­
tional data. A study which implicitly controls for
changes in housing quality indicated that increases
in existing home prices in the St. Louis metro­
politan area have been moderate in recent years.6
By studying price increases of homes sold in 1986
and sold again in 1989, it was determined that the
average house price increased 15 percent. This
gain is just slightly higher than the rise in the Con­
sumer Price Index. Thus, unless price increases of
new homes in the St. Louis area deviate substan­
tially from those of existing homes, it is unlikely
that the recent slowdown in home construction in
St. Louis is due to changes in housing prices.

1A study by the Joint Center for Housing Studies
estimated that 800,000 prospective first-time home
buyers delayed the purchase of a home between 1979
and 1983 because the costs of owning a home were
high, particularly relative to the costs of renting.
2The estimates of changes in the number of households
were computed by DRI/McGraw-Hill based on U.S. Cen­
sus Bureau population projections.
3See Randall J. Pozdena, “ Housing and Interest Rates:
A Weaker Link?” FRBSF Weekly Letter, Federal Reserve
Bank of San Francisco, (August 11, 1989).
4See Randall J. Pozdena, “ Are Housing Prices Too
High?” FRBSF Weekly Letter, Federal Reserve Bank of
San Francisco (January 20, 1989) and Jesse M.




Summary
Homebuilding in the Eighth District’s largest
metropolitan areas followed national trends in the
1980s, falling sharply in the early part of the decade
before rebounding as interest rates declined and
general economic activity boomed. Favorable tax
regulations and banking innovations instituted in the
early 1980s also helped stimulate homebuilding ac­
tivity in the District as well as in the nation.
In the 1990s, the aging of the American
population may result in fewer households being
formed than in the 1980s and a consequent slight
easing in the demand for housing. According to
estimates by DRI/McGraw-Hill, for example,
homebuilding activity will slow slightly as net
household formation will fall from 1.22 million
per year in the 1981-90 period to 1.09 million per
year in the 1991-2000 period.
The aging of the populations in the District
metropolitan areas will likely have similar depress­
ing effects on their rates of household formation.
This factor, however, may be less influential in
Little Rock and Memphis which have slightly
younger populations than the other areas or the na­
tion. Likely to be more important in all four areas
will be how rapidly their overall economies and
populations expand, facts which remain uncertain
at this time.

Abraham, “ The Myth of High Home Prices,” Construc­
tion and Real Estate Review, F.W. Dodge (April 1989)
pp. 9-15.
5Housing permits, rather than housing starts data are us­
ed because housing starts data are unavailable for the
metropolitan areas, with the exception of St. Louis since
1986. Despite changes in the size of the national
surveys for permits in 1972, 1978 and 1984, the U.S.
permits series closely tracks the U.S. housing starts
series, as figure 1 shows. For the periods for which
starts data are available, St. Louis housing starts and
permits also follow similar trends.
6The study was conducted by Gentry Real Estate and Ur­
ban Analysts in 1989.

9

Resolving the Thrift
Crisis
by Lynn M. Barry
Thomas A. Pollmann provided research assistance.

T

^ ■ ^ h e year just ended marked the largest
overhaul of America’s financial institution industry
since the Depression, when the Glass-Stegall Act,
the Federal Deposit Insurance Act and the Home
Owners Loan Act of 1933 were enacted. On
August 9, 1989, President Bush signed the Finan­
cial Institutions Reform, Recovery and Enforce­
ment Act of 1989. This legislation restructures the
American financial system and affects all savings
and loan associations and federal savings banks in
the United States.
A fundamental cause of the nation’s thrift
crisis has been a mismatch in the maturities of
assets and liabilities. In the early 1980s, with ad­
justable rate mortgages recently authorized, most
savings institutions had large portfolios of lowyielding, long-term mortgages. With market rates
for depos­
its, which tended to be of much shorter maturity,
exceeding the rates of return for their existing
portfolios, the decline in earnings at savings and
loans (S&Ls) was inevitable.
To counteract their earnings problems, the
1982 Banking Act allowed S&Ls to invest up to
40 percent of their assets in commercial real estate
lending. While the returns were potentially more
lucrative, S&Ls were generally inexperienced in
this type of lending. In addition, the returns from
this lending failed to materialize. The fall in oil
prices in 1986 led to large declines in commercial
property values in the Southwest. S&Ls from other
regions were not immune from the adverse earn­
ings effect of these problems because many had
bought into southwestern deals.
Figures 1 and 2 summarize two indicators of
S&L performance in the 1980s. As shown in the
first figure, thrift after-tax earnings declined dra­
matically in the 1980s. During the 1970s, annual
profits for the S&L industry averaged $2.2 billion.
Except for 1985, annual profits thus far in the
1980s are well below the average in the 1970s. In
1988, S&Ls lost $13.4 billion and through Septem­
ber of last year had already recorded losses of
$9.2 billion.
These losses have led to large numbers of
thrift failures and shrinking reserves that insured
deposit accounts up to $100,000. Figure 2 shows




the rapid increase in the number of insolvent S&Ls
during the 1980s. In 1980, only 43 S&Ls were
declared insolvent based upon generally accepted
accounting principles (GAAP). In 1987, the
number rose to 520. By the following year,
measures were in place to resolve or restructure
these insolvent institutions so that by year-end
1988 insolvencies totaled 372. The closing or
restructuring of these institutions placed an enor­
mous financial burden on the Federal Savings &
Loan Insurance Fund (FSLIC). By the end of
1988, the fund’s liabilities exceeded its assets by
$75 billion, up from a $13.7 billion deficit in 1987
and significantly larger than the $6.3 billion deficit
in 1986. As a result, the U.S. government is
now burdened with billions of dollars of losses,
repossessed real estate and bad debts it must re­
cover to ensure the safety of depositors’ assets.
Clearly something had to be done. The legislative
response was the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 (FIRREA).
Cost estimates of this legislation over the next 10
years range from the $166 billion used by the
drafters of FIRREA to more than $500 billion by
some private sector analysts. The $166 billion
estimate represents $50 billion to close the savings
institutions that are now insolvent, $40 billion to
cover the costs of rescues undertaken in 1988, $33
billion to cover future failures and $43 billion in
interest payments. Over 30 years, including in­
terest, the cost is estimated at nearly $300 billion,
with taxpayers paying about $225 billion and the
healthy portion of the S&L industry paying the
balance.

A Look at FIRREA
FIRREA not only changes who regulates
what, but adds new agencies to its hierarchy. As
shown in figure 3, the supervisory and regulation
function, the deposit insurance function and the
credit function are now three separate bodies, each
with distinct responsibilities and reporting struc­
tures. The new law divides the Federal Home
Loan Bank System into three separate parts: 1) the
Office of Thrift Supervision, under the general
oversight of the secretary of the Treasury; 2) the
Savings Association Insurance Fund, an agency of
the Federal Deposit Insurance Corporation; and 3)
the Federal Housing Finance Board which oversees
the credit function activities of the 12 district
Home Loan Banks.
Office o f Thrift Supervision
In a radical break from past legislation affec­
ting thrifts, FIRREA overhauls the industry’s regu-

10

Figure 1

Savings and Loan Industry Profits
Annual after-tax profits
(billions)

Average
SOURCE: United States League of Savings Institutions

latory system. It abolished the Federal Home Loan
Bank Board (FHLBB) as the primary regulator of
the thrift industry and established the Office of
Thrift Supervision (OTS). The office is within the
Treasury Department and is responsible for the ex­
amination and supervision of all S&Ls. The new
legislation outlines numerous changes to the super­
vision and regulation of S&Ls. For example, FIRREA encourages S&Ls to do more home mortgage
lending and prohibits risky investments like
speculative commercial real estate and junk bonds.
The new law severely restrains an institution's
portfolio investment mix through the use of a
qualified-thrift-lender test. Effective July 1, 1991,
for an institution to qualify as a thrift, it must hold
70 percent of its assets in “ qualified” thrift in­
vestments, essentially, residential loans and mor­
tgage securities. This is up from the current 60




percent requirement. Thrifts that fail the test will
be converted into commercial banks and denied the
branching rights unique to thrifts, thrift powers
and access to Federal Home Loan Bank advances.
The law also limits nonresidential real estate
lending by savings institutions to four times
capital. In addition, FIRREA limits loans to one
borrower to 15 percent of capital, the limit applied
to national banks.
Under FIRREA, thrifts are subject to new
capital requirements that will require them to hold
tangible net worth equal to 1.5 percent of assets by
June 1, 1990, and 3 percent by the beginning of
1995. Both savings institutions and banks that do
not meet minimum capital standards are prohibited
from accepting funds, directly or indirectly,
through a deposit broker. The FDIC can waive the
prohibition on a case-by-case basis upon determi-

11

Figure 2

Savings and Loan Insolvencies
Number of insolvent
savings and loans

NOTE: Number of insolvencies based on generally accepted accounting principles (GAAP)
SOURCE: Office of Thrift Supervision

nation that the acceptance of a brokered deposit
does not constitute an unsafe or unsound practice.
Institutions not meeting minimum capital require­
ments are also prohibited from offering interest
rates significantly higher than prevailing rates of­
fered by similar institutions in the same market
area. To curtail excessive risk-taking, thrifts are
barred from investing in corporate debt securities
that do not carry one of the four highest invest­
ment ratings from at least one nationally recognized
rating agency.
With a yearly budget of $75 million until
1992, the Justice Department will seek to uncover
and prosecute fraud at S&Ls and banks. FIRREA
gives federal bank and thrift regulators greater en­
forcement powers and the ability to impose stiffer




civil and criminal penalties, including fines against
individuals. In the past, most fines in civil cases
were assessed only against institutions, not in­
dividuals. For criminal offenses, jail terms were
increased to 20 years for most crimes, up from
two to five years. Fines can range from $1 million
a day up to a total of $5 billion per violation. The
new law empowers federal prosecutors to seek
penalties against a wider circle of individuals
employed by federally-insured financial institu­
tions, including attorneys, accountants, appraisers
and consultants, for allowing violations to continue
unchecked. FIRREA also eliminates those state
laws exempting officers and directors of financial
institutions from liability resulting from breach of
duty or gross negligence.

New Structure o f the Federal Home Loan Bank System

Figure 3




Federal
Housing
Finance
Board

Liquidation
Proceeds

Bond
Proceeds

Bonds

Cash

13

Savings Association Insurance Fund
FIRREA also restructures the deposit in­
surance fund. It creates a new deposit insurance
fund for thrifts, known as the Savings Association
Insurance Fund (SAIF), an agency of the Federal
Deposit Insurance Fund (FDIC). The law also
creates an insurance fund for commercial banks,
the Bank Insurance Fund (B1F) which receives in­
surance payments previously directed to the FDIC.
FIRREA raises the premiums for this deposit in­
surance for both S&Ls and commercial banks.
SAIF will have a new logo and a statement that in­
sured deposits are protected to $100,000 and backed
by the full faith and credit of the U.S. government.
Bank premiums will jump from 8 cents per
$100 of deposits to 12 cents in 1990 and finally to
15 cents in 1991. Thrift premiums will rise to 23
cents per $100 in 1991, from 20.8 cents and will
fall back to 18 cents in 1994 and 15 cents in 1998.
The target level for the two insurance funds is
1.25 percent or $1.25 of reserves for each $100 of
deposits. Rebates will be denied until the SAIF
and the BIF hold reserves equal to the targeted
level.
FIRREA also mandates a broad study of the
deposit insurance system which must be submitted
to Congress by early 1991. The results of this
study could become the basis for major legislation
in the coming years.
Federal Housing Finance Board
While FIRREA dissolved the FHLBB, it left
in place the 12 Federal Home Loan Banks. The
Federal Home Loan Bank System, owned by the
nation’s S&Ls, will be governed by a separate, in­
dependent agency, the newly created Federal Hous­
ing Finance Board. The five-member Federal
Housing Finance Board includes the secretary of
the Department of Housing and Urban Develop­
ment and four others appointed by the President
with the advice and consent of the Senate. The
primary function of the board is to oversee credit
allocation by district banks to member and
nonmember institutions.
The 12 Federal Home Loan Banks are no
longer responsible for supervising and regulating
member institutions. Their purpose is to provide
credit in the form of advances for mortgage lend­
ing. The law states that the earnings from the
Federal Home Loan Banks should be contributed
to the government to help cover the cost of taking
over insolvent S&Ls.
Resolution Trust Corporation
When President Bush signed FIRREA into
law, the FDIC was put in charge of the Resolution
Trust Corporation (RTC). This new federal agency




is responsible for managing and disposing of bank­
rupt thrifts and for selling the repossessed real es­
tate, once valued at more than $300 billion, ac­
quired by the FSLIC from its takeovers of bank­
rupt thrifts. The RTC must liquidate or otherwise
dispose of institutions that were once FSLICinsured and which are placed in conservatorship or
receivership in the three-year period beginning
January 1, 1989. The RTC is expected to max­
imize recovery on assets it obtains without depress­
ing existing real estate markets. For example, if
the RTC tried to liquidate all its assets immediate­
ly, real estate prices, especially in Texas, would
drop and healthy institutions would be forced to
write down the value of their real estate.
The policymaking powers of the RTC are
concentrated in a five-member oversight board,
while daily operations are handled by the FDIC.
With its new and expanded powers, the FDIC
board has been enlarged from three to five
members: the Comptroller of the Currency, the
director of the Office of Thrift Supervision and
three independent members appointed by the Presi­
dent and confirmed by the Senate. The FDIC’s
work will be overseen by a board consisting of the
chairman of the Federal Reserve Board, secretary
of the Treasury, secretary of Housing and Urban
Development and two other members appointed by
President Bush. The RTC Oversight Board will
review and have overall responsibility for the
RTC’s activities, but it will not become involved
with specific institutions, specific asset dispositions
or day-to-day RTC operations.
The RTC is scheduled to end on December 31,
1996. It will have $50 billion available to fund its
operations, of which $30 billion will be raised by
the Resolution Funding Corporation (Refcorp). A
quasi-private agency created by Congress, Refcorp
will sell $30 billion in 30-year bonds during fiscal
1990 and 1991. Zero coupon Treasury bonds will
be purchased in an amount sufficient to guar­
antee $30 billion at maturity.

Conclusion
FIRREA is unlikely to resolve completely the
main issues that contributed to the thrift crisis.
Still to consider or to reconsider are a host of
issues. Among them are capital adequacy, riskbased deposit insurance premiums, market-value
accounting for banks and thrifts, the nature of
deposit insurance and the qualified-thrift-lender
test, which is central to the definition of the S&L
industry. Thus, the future course of the thrift in­
dustry, to a large degree, remains uncertain.




14

E ighth D is tric t B usiness
Level
111/1989

Payroll Employment ( t h o u s a n d s )
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis
M anufacturing
Employment ( t h o u s a n d s )
United States
District
Arkansas
Kentucky
Missouri
Tennessee
District Nonmanufacturing
Employment ( t h o u s a n d s )
Mining
Construction
FIRE2
Transportation3
Services
Trades
Government
Real Personal Income4 ( b i l l i o n s )
United States
District
Arkansas
Kentucky
Missouri
Tennessee

Unemployment Rate
United States
District
Arkansas
Little Rock
Kentucky
Louisville
Missouri
St. Louis
Tennessee
Memphis

Compounded Annual Rates of Change
11/1989111/1989

111/1988111/1989

1988’

1987’

108,914.0
6,626.9
885.2
242.6
1,398.8
455.9
2,264.0
1,153.8
2,078.9
440.0

2 .1%
1.2
1.6
0.3
3.2
0.4
0.3
1.0
0.6
- 0 .7

2 .8 %
1.5
2.9
2.3
1.8
1.1
1.4
1.4
0.7
1.5

3.3%
2.5
2.8
3.2
3.2
3.1
1.8
1.5
2.7
2.7

2.70/0
3.5
2.8
2.0
4.2
3.9
2.6
1.9
4.3
4.8

19,616.3
1,457.1
233.7
280.7
431.6
511.1

- 0.9%
- 0.6
- 1.0
-1 .4
-1 .4
0.7

0.9%
1.0
2.0
1.6
0.6
0.6

2 .0 %
2.6
4.0
4.5
1.3
2.2

0.3%
1.7
3.7
3.4
- 0.1
1.4

- 4.2%
- 1.8
0.7
1.3
2.9
1.1
2.4

-4.40/0
-1 .4
0.5
3.5
4.5
2.4
1.7

- 4 .O0/0
3.2
4.1
4.5
5.6
4.4
1.9

50.0
276.7
338.6
385.8
1,444.3
1,578.0
1,095.7

- 5.4%
0.7
1.4
0.3
0.8
- 0.8
7.0

11/1989

1/198911/1989

11/198811/1989

$3,511.6
194.2
25.7
41.4
68.5
58.6

2 .0%
- 1.2
- 7 .4
- 2.8
0.6
0.7

3.2Q/0
2.5
2.4
3.0
2.1
2.6
Levels

111/1989

11/1989

1988

5.2%
5.4
6.6
5.9
6.2
6.1
5.3
5.2
4.5
4.0

5.3%
6.0
8.3
7.3
6.7
5.9
5.2
5.2
5.4
5.2

5.5%
6.5
7.6
6.4
7.8
6.3
5.7
6.0
5.8
5.1

19881

1987’

3.40/o
2.8
2.9
2.8
2.1
3.6

3.20/o
3.0
1.3
2.6
2.2
4.9

1987

1986

6 .20/0
7.2
8.1
7.2
8.7
6.9
6.3
6.5
6.6
5.7

7.0%
7.8
8.8
6.9
9.3
7.1
6.1
7.0
8.0
6.8

Note: All data are seasonally adjusted . On this page only, the sum of data from Arkansas, Kentucky, Missouri and Tennessee
is used to represent the District.
1Figures are simple rates of change comparing year-to-year data.
2Finance, Insurance and Real Estate
transportation, Communications and Public Utilities
4Annual rate. Data deflated by CPI-U, 1982-84 = 100.

15

U. S. P rices
Level

Compounded Annual Rates of Change

111/1989

11/1989111/1989

111/1988111/1989

19881

19871

124.2
125.9

2.9%
3.6

4.5%
5.3

4.0%
4.1

3.6%
4.1

144.3
159.3
128.7

-8 .9 %
9.6
-28.0

0.7%
5.5
-4 .9

8.8%
2.7
18.3

3.1%
5.6
-0 .8

165.0
178.0

0.0%
2.3

3.8%
3.5

6.9%
4.4

1.9%
1.9

Consumer Price Index
(1982-84 =

100 )

Nonfood
Food
Prices Received by Farmers
(1 977 =

100 )

All Products
Livestock
Crops
Prices Paid by Farmers
(1 977 =

100 )

Production items
Other items2

Note: Data not seasonally adjusted except for Consumer Price Index.
’ Figures are simple rates of change comparing year-to-year data.
2Other items include farmers’ costs for commodities, services, interest, wages and taxes.

E ighth D is tric t B anking
Changes in Financial P osition fo r the y e a r ending
June 30, 1989 (by Asset Size)
Less than
$100 million

SELECTED ASSETS
Securities
U.S. Treasury &
agency securities
Other securities
Loans & Leases
Real estate
Commercial1
Consumer
Agriculture
Loan loss reserve
Total Assets
SELECTED LIABILITIES
Deposits
Nontransaction accounts
MMDAs
$100,000 CDs
Demand deposits
Other transaction accounts2
Total Liabilities
Total Equity Capital

- 3.6%

$100 million $300 million

11.4%

-0 .5
-1 3 .9
-1 .2
-0 .5
63.9
-0 .3
-4 .2
-3 .5
-3 .4

18.8
-3 2 .2
15.2
17.6
5.6
19.1
37.8
23.0
12.8

-3 .7 %
-2 .1
-2 3 .7
6.7
-6 .7
-9 .4
-3 .6
-1.1

12.6%
14.8
-1 0 .7
19.4
5.0
8.9
12.8
12.6

$300 million $1 billion

More than
$1 billion

9.7%
17.4
-37.1
20.0
33.9
17.4
7.6
6.9
34.5
17.3
17.2%
20.0
6.3
24.0
10.7
11.3
17.3
17.6

Note: All figures are simple rates of change comparing year-to-year data. Data are not seasonally adjusted.
includes banker’s acceptances and nonfinancial commercial paper
includes NOW, ATS and telephone and preauthorized transfers




11.4%
16.7
-2 8 .6
5.8
18.1
3.3
1.2
-4 .9
16.8
8.3
6.9%
10.5
2.2
-0 .2
0.7
-0 .9
9.8
9.3

16

P erform ance Ratios (b y A sset size)
U n it e d S t a t e s

E ig h th D is t r ic t

EARNINGS AND RETURNS
Annualized Return on Average
Assets
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Annualized Return on Average
Equity
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
Net Interest Margin1
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks
ASSET QUALITY2
Nonperforming Loans3
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

11/89

II/88

II/87

1.14%
1.08
1.03
.74

1.06%
1.04
1.04
.84

1.00%
.97
.97
.45

II/87

II/89

II/88

.710/0
.85
.65
.69
.64
1.00

.65%
.78
.58
.46
- 2 .0 3
.76

1.23

1.14

.91

.88%
.99
.91
.85
.91
1.14

12.23%
13.06
13.05
11.24

11.66%
12.66
13.13
12.74

11.27%
12.08
12.36
6.94
—
9.69

9.62%
12.41
12.64
13.08
17.57
11.71

8.05%
10.89
9.45
10.87
14.03
10.57

7.53%
10.25
8.08
7.35
-4 8 .8 8
8.25

4.02%
3.97
4.11
3.70

4.22o/o
4.20
4.13
4.03
3.34
4.03

4.31 %
4.24
4.21
4.00
3.29
4.01

—

—

12.45
4.04%
4.06
4.13
3.66

—

—

11.85

3.95

3.83

3.86

4.370/0
4.54
4.47
4.20
3.41
4.17

1.66%
1.76
1.49
2.19

1.99%
1.78
1.48
2.29
—
2.26

2.49%
2.12
2.10
2.46
—
3.29

2.16%
1.95
2.29
2.06
4.80
2.29

2.48%
2.07
2.28
2.23
5.12
2.85

3.05%
2.47
2.51
2.53
5.69
4.13

1.49%
1.37
1.41
1.96
—
1.83

1.560/0
1.47
1.63
1.73
3.34
2.08

1.630/0
1.51
1.63
1.79
4.25
2.09

1.62o/o
1.53
1.66
1.89
4.33
2.09

.29%
.31
.32
.30
—
.42

.29%
.27
.32
.41
.53
.22

.36%
.31
.39
.56
.54
.32

.47%
.36
.41
.34
.41
.58

—

—

1.87

3.92%
3.92
3.98
3.67

—

—

Loan Loss Reserves
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

1.45%
1.45
1.47
1.72
—
1.82

1.50%
1.33
1.32
1.93

Net Loan Losses4
Less than $100 million
$100 million - $300 million
$300 million - $1 billion
$1 billion - $10 billion
More than $10 billion
Agricultural banks

.14%
.21
.17
.33
—
.12

.18%
.18
.19
.56
—
.16

—

1.81

—

Note: Agricultural banks are defined as those with 25 percent or more of their total loan portfolio in agriculture loans.
interest income less interest expense as a percent of average earning assets
2Asset quality ratios are calculated as a percent of total loans.
3Nonperforming loans include loans past due more than 89 days, nonaccrual, and restructured loans.
4Loan losses are adjusted for recoveries.





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102