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1993 Annual Report - Federal Reserve Bank of Chicago The Federal Reserve Bank of Chicago is one of 12 regional Reserve Banks across the United States that, together with the Board of Governors in W a s h i n g t o n , D.C., serve as the nation's central b a n k . The role of the Federal Reserve System, since its establishment by an act of C o n gress passed in 1913, has been to foster a strong e c o n o m y , s u p p o r t e d by a stable financial system. To this e n d , the Federal Reserve Bank of Chicago participates in the formulation a n d i m p l e m e n t a t i o n of national m o n e t a r y policy, supervises a n d regulates banks and bank holding companies, a n d provides financial services to depository institutions a n d the U.S. government. Through its h e a d o f f i c e in Chicago, b r a n c h in Detroit, a n d regional offices in Des Moines, Indianapolis, a n d Milwau- kee, the Federal Reserve Bank of Chicago serves the Seventh Federal Reserve District, w h i c h includes m a j o r p o r t i o n s of Illinois, Indiana, Michigan, a n d W i s c o n s i n plus all of Iowa. 1993 Annual Report Federal Reserve Bank of Chicago Message from Management 2 From Rust to Robust: The Midwest Responds 4 The Bank in 1993 10 Financial Statements 18 Directors and Advisory Councils 20 Officers 22 Executive Changes 24 Message from Management From left: Deputy Chairman Robert Healey, First Vice President William Conrad, President Silas Keehn, and Chairman Richard Cline. Congress constructed the System in a very meticulous way, combini of regional influences with a precise balance of public and private elements While it may not have always This rather exciting story of Other current structural issues felt that w a y 1993 was actually a very good the Midwest's p r o d u c t i v i t y / p e r f o r m a n c e relate to the Federal Reserve's organization, year. The economic news was largely pos- paradigm is the focus of the essay that fol- particularly with respect to questions of itive. Real o u t p u t growth accelerated. The lows in this Annual Report. accountability and the role of the regional rate of inflation c o n t i n u e d t o moderate. underlying element of this story, one not Reserve Banks a n d their presidents, w h o N e w j o b s were created and the u n e m p l o y - focused on directly, has to do with the type are not public officials in the strictest sense, ment rate declined. of people we find in the Midwest—people in the policy process. Congress construct- These positive trends were fu- who roll u p their sleeves and set their hands ed the System in a very meticulous way, eled in large part by a favorable financial and their imaginations to any challenge that combining a careful weaving of regional in- climate, conditions fostered in turn by real confronts them. Clearly, this industrious, fluences with a precise balance of public progress on the federal deficit a n d a very innovative quality has been key to the re- a n d private elements. This structure was accommodative m o n e t a r y policy. Within gion's resurgence. This same quality is also not meant to and indeed does not limit the An important the low interest rate environment, balance the u n s p o k e n message of the next section System's accountability. To the contrary, it sheets improved significantly across all sec- of this report, w h i c h spotlights the Bank's enables the System to be accountable to tors of the e c o n o m y — f o r consumers, busi- 1 9 9 3 accomplishments and a h a n d f u l of a n d to take account of a broad range of nesses, and governments alike. Conditions the m a n y employees w h o m a d e a few of public interests while insulating it from in the b a n k i n g industry likewise were in- those achievements possible. narrow partisan influences. It is a struc- creasingly positive, reflected by solid earn- The Federal Reserve Bank of ings performance, improving asset quality, Chicago a n d the entire Federal Reserve a n d strengthening capital positions. ture that has served the nation well for eighty years. System are fortunate to be able to attract a But in the final analysis, struc- The picture for this Reserve staff of exceptional quality a n d commit- ture only has m a d e possible what people Banks midwestern district was even bright- ment. The System is also fortunate to have have accomplished. Again, we wish to sa- er t h a n that for the n a t i o n as a whole. a structure a n d foundation that, while ad- lute the outstanding work of the entire staff O u t p u t gains within the region's all-impor- mittedly complicated, actually serve to fa- of the Federal Reserve Bank of Chicago's tant m a n u f a c t u r i n g sector exceeded the cilitate the w o r k of that staff in carrying five offices for m a k i n g 1993 an exception- U.S. growth rate. After nearly a decade of out the System's broad mission. al year. painful a d j u s t m e n t , the regions focus on While it is fair to reexamine productivity seemed to be paying off. With a n d debate the fine points of the System's the competitiveness of the Midwest's m a n - structure, it is important to remember a few ufacturing base restored, the District ap- of its basic attributes. O n e current struc- pears to be poised for even better perfor- tural question has to d o with the interrela- mance in the future. tions a m o n g the System's primary activities of m o n e t a r y policy b a n k supervision, a n d p a y m e n t s services. In our view a n d experience, these functions are integrally intertwined. Each s u p p o r t s the other a n d O u r deep gratitude also to the m e m b e r s of o u r b o a r d s of directors for their wise counsel, strong leadership, a n d c o n t i n u i n g support. We want to express particular appreciation to Beverly Beltaire and Daniel Smith w h o completed their service o n our Detroit Branch Board. all these individuals, we are confident that the years ahead will be as productive a n d satisfying as was 1993. all are fundamental to the Federal Reserve's broad mission as the nation's central bank. The current bank regulatory framework n o d o u b t can a n d should be improved. But careful weaving eliminating the Federal Reserve's h a n d s - o n involvement in the b a n k i n g system is neither necessary nor desirable for that purpose. Most i m p o r t a n t l y it could jeopar- dize the Federal Reserve's ability to carry out its f u n d a m e n t a l responsibility for assuring the ongoing integrity of the financial system, surely a risk we ought to avoid. Given the talents, creativity, a n d c o m m i t m e n t of Richard Cline, Chairman Silas Keehn, President From Rust to Robust: The Midwest Responds By the late 1970s the Midwest found itself with a new, and unwanted, sobriquet—the nation's Rust Belt The name was not entirely undeserved. Particularly in manufacturing—the core of the regional economy—the Midwest found itself at a competitive disadvantage. Due to its older and inefficient facilities as well as a number of other factors, the Midwest was unable to compete effectively with other regions, both in the U.S. and abroad. The region faced a major challenge: to improve its productivity or to continue to decline economically. After a painful period of adjustment, the Midwest responded in dramatic fashion. The region invested heavily in new technology and significantly improved its labor productivity, shedding its image as the nation's Rust Belt and emerging as a center of lean and agile manufacturing. Today, the Midwest is a much more aggressive competitor in the global marketplace. This article examines the Midwest's transformation in the 1980s, focusing on the manufacturing sector and its evolution from rust to robust. 4 The Midwest's Challenge A vibrant m a n u f a c t u r i n g base traditionally has been crucial to the Midwest (defined here as the five states of the Seve n t h Federal Reserve District: Illinois, Indiana, Iowa, Michigan, a n d Wisconsin). Although the service sector accounts for the bulk of the regional economy, m a n u f a c t u r i n g still has a healthy 25 percent share of e m p l o y m e n t in the Midwest as compared to a 17 percent share nationwide. The Midwest's auto-steel-machine tool complex plays a particularly important role in the regional economy, with the Midwest's auto firms, for example, accounting for nearly half of U.S. car production. Although still vital to the region, the m a n u f a c t u r i n g sector is perceived by m a n y as being trapped in a slow and steady decline. This perception of the "deindustrialization" of the U.S. is s o m e w h a t misleading. True, the m a n u f a c t u r i n g sector's share of e m p l o y m e n t in the U.S. has decreased steadily for m a n y decades, most noticeably since the early 1970s. Nevertheless, real m a n u facturing o u t p u t — t h o u g h highly cyclical—has stayed relatively constant as a percentage of total o u t p u t since World War II. The "image problem" for m a n u f a c t u r i n g is Industrial Production and Employment due in part to its most significant achievement: it can do more with less. The manufacturing sector has become m u c h more efficient. Industrial production(rightscale) Manufacturing employment(leftscale) Thus, manufacturing employment has been stagnant since 1964 even U.S. industrial production has generally increased even though manufacturing employment has declined since 1979. though the a m o u n t of o u t p u t h a s s t e a d i l y i n c r e a s e d i n line with the economy. The m a n u f a c t u r i n g industry's increased efficiency in the 1980s a n d 1990s is evident i n labor productivity figures (labor productivity is c o m p u t e d by taking the dollar value of the year's o u t p u t , adjusting for inflation, a n d dividing by the h o u r s worked). Since 1979, U.S. m a n u f a c t u r i n g labor productivity has increased an average of 2.4 percent annually. The increase in productivity is reflected in p r o d u c t i o n a n d e m p l o y m e n t trends. Industrial p r o d u c t i o n in the U.S. generally increased from 1979 t h r o u g h 1993; m a n u f a c t u r i n g e m p l o y m e n t declined d u r i n g the same period (see graph 1). The ability to increase m a n u f a c t u r i n g o u t p u t while e m p l o y m e n t was declining was even more evident in the Midw e s t , i n d i c a t i n g that s u b s t a n t i a l p r o d u c t i v i t y i m p r o v e m e n t s occurred d u r i n g the 1980s. As in the U.S., Midwest industrial p r o d u c t i o n increased steadily in the 1980s. In fact, the region's growth in m a n u f a c t u r i n g p r o d u c t i o n has exceeded the nation's since 1987 (see graph 2). Despite this healthy growth, however, e m p l o y m e n t in the Midwest m a n u f a c t u r i n g sector actually decreased over the 1980s. 5 Investing in the Region Judging from manufacturing output growth, it appears that the Midwest became more productive in the 1980s as c o m pared to other regions. Yet, it is a difficult trend to verify because productivity growth is difficult to estimate at the regional level. Has the Midwest m a n u f a c t u r i n g sector become significantly more efficient? And, if so, how? O n e way that firms can affect productivity is to eliminate less efficient resources, or, in other words, close facilities a n d lay off employees (euphemistically referred to as "downsizing"). Another alternative is to invest in new or renovated equipm e n t a n d plants a n d introduce new, more efficient m e t h o d s of utilizing resources. H o w productivity gains are achieved is i m p o r t a n t for a regions growth. If the Midwest increased productivity only by shrinking its manufacturing base—closing inefficient plants—there w o u l d be little basis for future growth. Eventually other regions— b o t h at h o m e a n d a b r o a d — w o u l d increase their market share at the Midwest's expense. But if a firm closes an o u t d a t e d facility a n d then builds a n e w one nearby, it is eliminating less efficient resources as well as M a n u f a c t u r i n g Output investing in the region, therefore providing a firmer foundation for growth. Certainly, t h e Midwest closed m a n y inefficient or unprofitable facilities during the 1980s. The recession of 1981-82 triggered a painful shakeout, with m a n y The Midwest's growth in manufacturing output, as measured by the Chicago Reserve Bank's Midwest Manufacturing Index, has exceeded the growth of U.S. manufacturing output since 1987. companies going out of business or m o v i n g to the South or West. But h o w m u c h capital did Midwest m a n u f a c t u r e r s invest in the region? F r o m 1973 to 1985, according to a Federal Reserve Bank of Chicago s t u d y the Midwest's capital e x p e n d i t u r e s per w o r k e r increased at roughly the same rate as the rest of the nation, although investment t e n d e d to fluctuate. Midwest investm e n t relative t o the rest of the n a t i o n picked u p i n the late 1970s b u t slowed again with the onset of the 1981-82 recession. For the next few years after that recession, Midwest capital investment lagged the nation. Beginning in 1985, however, Midwest investment accelerated as c o m p a r e d to other regions. From 1986 t h r o u g h 1990, the average capital expenditure per w o r k e r in the Midwest was n i n e percent h i g h e r t h a n the rest of the nation (see graph 3). At first glance, it may be s u p p o s e d that the increased investment was d u e to the p r e d o m i n a n c e of industries in the Midwest, notably auto a n d steel, that require high degrees of capital investment. However, a closer look indicates that the Midwest's heavier investment was not d u e to industrial mix. Between 1986 a n d 1990, for example, investment per w o r k e r in 6 the transportation sector was 16 percent higher in the Midwest d e v e l o p m e n t process. than in the rest of the nation. In primary metals (the steel indus- Chrysler developed its recently introduced LH-cars in 39 m o n t h s U s i n g lean m a n u f a c t u r i n g t e c h n i q u e s , try), investment was 22 percent higher. In short, the region dis- with a technical staff of 740. played a high degree of c o m m i t m e n t to investment. m o n t h s a n d a technical staff of 2 , 0 0 0 to develop the K-cars in the In contrast, Chrysler required 5 4 late 1970s. It appears that this trend has c o n t i n u e d i n the past three years, although o u t p u t slowed in 1990-91 due to the reces- The Productivity Takeoff sion. Even with weakened d e m a n d for products, however, there still has been a strong desire on the part of p r o d u c e r s to improve W h a t was the result of these efforts to improve p r o d u c - efficiency. J u d g i n g from anecdotal evidence, Midwest p r o d u c e r s tivity? To help to measure the results of increased investment in have c o n t i n u e d to build on their earlier efforts, with, for example, the region, the Federal Reserve Bank of Chicago has developed es- steel a n d auto firms c o n t i n u i n g to invest in the region. In addi- timates on h o w m u c h Midwest m a n u f a c t u r i n g o u t p u t has increased tion, it appears that m a n y smaller a n d medium-sized firms have as c o m p a r e d to the growth that w o u l d have occurred using pre1986 technology b e g u n to increase their capital expenditures in recent years. To develop these estimates, the Bank projected o u t p u t for the Midwest using a model estimated on data from 1973 t h r o u g h 1985. This enabled the Bank to project o u t p u t for 1986 Implementing Lean Manufacturing t h r o u g h 1990 on the basis of p r e - 1 9 8 6 "old" technology and com- Efforts t o improve productivity i n the region have pare it to the actual o u t p u t p r o d u c e d between 1986 a n d 1990 us- also included the implementation of so-called lean manufactur- ing "new" technology. ing techniques. The advantages of lean m a n u f a c t u r i n g i n an era of According to these estimates, the efficiency gains in- accelerating global competition have been widely publicized. Lean dicated by the gap between "old" a n d "new" technology were 8 percent more in Midwest m a n u - manufacturing emphasizes quality a n d speedy response f a c t u r i n g sectors t h a n they to m a r k e t c o n d i t i o n s u s i n g were for corresponding sec- advanced tors in the rest of the nation e q u i p m e n t and a flexible between 1986 a n d 1990. In organization of the p r o d u c - o t h e r w o r d s , the Midwest's tion process. investment paid an important technologically d i v i d e n d — m o r e significant To a c h i e v e t h i s goal, lean increases in efficiency as com- manufacturing pared to rest of the nation. stresses teamwork and participatory management. T h e Productivity p u r p o s e of this m a n a g e m e n t gains—both in the U.S. a n d in the M i d w e s t — a p p e a r t o style is to encourage employees to focus on flexibility a n d quality have occurred largely in durable goods manufacturing. control, a change from the m a n u f a c t u r i n g approach originated by Durable Henry Ford, which emphasizes specialization and narrowly defined goods have traditionally played an important role in the Midwest j o b responsibilities. Low inventories and continuous improvement economy, with the transportation, metalworking, a n d machinery of operations are also central to the lean m a n u f a c t u r i n g philoso- sectors a c c o u n t i n g for approximately 65 percent of the region's phy, with most of the changes the result of suggestions from the manufacturing output. factory floor. Within durable goods, the Midwest's productivity gains To allow c o m p a n i e s t o be m o r e agile a n d flexible were most evident in the transportation sector, w h i c h is d o m i n a t - competitors, lean m a n u f a c t u r i n g systems are designed to t u r n out ed, of course, by the auto industry. As measured by the "gap" be- small batches of customized p r o d u c t s on relatively short notice tween old a n d n e w technology, the transportation sector h a d effi- a n d at low costs. As part of this process, lean m a n u f a c t u r i n g incor- ciency gains of 7.9 percent between 1986 and 1990. In comparison, porates a short design cycle by taking an integrated approach to the rest of the nation h a d efficiency gains of 3.8 percent in the trans- the various steps of manufacturing. portation sector. Each s t e p — m a r k e t assess- m e n t , p r o d u c t design, engineering, c o m p o n e n t sourcing, a n d Achieving these gains in the Midwest was often painful. final assembly—is integrated into one decisionmaking unit. During the 1980s, automakers closed seventeen car and truck as- Although the evidence is anecdotal, lean m a n u f a c - sembly plants—six in the Midwest. At the same time, however, au- t u r i n g clearly h a s played a role i n i m p r o v i n g p r o d u c t i v i t y at tomakers constructed seventeen new plants, including seven in the some Midwest industries a n d firms, perhaps most notably in the Midwest. Some of the new plants were essentially replacements of auto industry. The recent experience of Chrysler Corporation, for existing Big Three facilities; others were n e w plants built by foreign e x a m p l e , illustrates the p o t e n t i a l a d v a n t a g e of a s t r e a m l i n e d auto companies, often in conjunction with a Big Three producer. 7 The Midwest's machinery sector also m a d e significant industries were displaced as c o m p a r e d to one in 75 w o r k e r s in strides between 1986 a n d 1990, achieving efficiency gains of 2 service industries. Estimates are not available o n a regional basis, percent as c o m p a r e d to 0.9 percent for the rest of nation. T h e b u t it seems plausible that Midwest workers were more adversely m a c h i n e r y sector, w h i c h is largely focused on the auto i n d u s t r y affected by displacement, given the region's relatively high con- a n d exports, faced stiff global competition in the early 1980s. The centration of m a n u f a c t u r i n g industries. efficiency of the sector improved d u e in part to an infusion of n e w The U.S. is not alone in c o n f r o n t i n g this trend; other capital, w h i c h , in some cases, was the result of a b u y - o u t by a highly industrialized countries have h a d to wrestle with declining foreign company. or stagnant m a n u f a c t u r i n g e m p l o y m e n t despite healthy growth A n o t h e r i m p o r t a n t c o n t r i b u t o r to the region's im- in p r o d u c t i o n (see graph 5). Canada, France, a n d the United King- proved competitiveness was the Midwest steel i n d u s t r y w h i c h d o m are a m o n g the highly industrialized countries that have ex- realized efficiency gains of 2.8 percent. After a m a j o r downsizing perienced declines i n m a n u f a c t u r i n g e m p l o y m e n t since 1979. in the early 1980s a n d an intense modernization effort, the Mid- Other countries have achieved somewhat better, b u t far from spec- west has state-of-the-art integrated mills capable of c o n t i n u o u s tacular, results since 1979: Germany's m a n u f a c t u r i n g employment casting as well as mini-mills featuring flexible a n d innovative pro- was flat; Japan's increased an average of 1.6 percent annually. The duction methods. U.S., by comparison, averaged a 1.1 percent decline. As a result, the region is n o w an effective global competitor in the p r o d u c t i o n of high-quality steel. In general, it does not appear that the highly i n d u s - Led by the i m p r o v e m e n t s in auto, steel, a n d m a c h i n - trialized countries can look forward to a long-term resurgence in ery, the Midwest's efficiency gains were most evident from 1986 m a n u f a c t u r i n g e m p l o y m e n t growth. t h r o u g h 1988, w h e n the nation was u n d e r g o i n g a m i n i - b o o m According to projections by the Bureau of Labor Statistics, U.S. (see graph 4). The gap be- The U.S. is n o exception. manufacturing tween old a n d n e w technol- employ- m e n t is expected to decline Efficiency Gains ogy o u t p u t i n the Midwest in the U.S. through the year percent differential (observed vs. predicted) flattened out i n 1989 and 1986 87 88 '89 2 0 0 5 . The implications of '90 declined in 1990, perhaps t h i s t r e n d are e s p e c i a l l y reflecting the more stagnant troublesome because m a n - economic growth at the e n d ufacturing j o b s tend to be of the decade. Even t h o u g h relatively high paying. its efficiency gains decreased at t h e e n d of t h e d e c a d e , however, the Midwest's gains still e x c e e d e d those of the While The Midwest's efficiency gains are indicated by the percent differential between observed and predicted output for the region as compared to the rest of the nation. it is clear that displaced w o r k ers suffer short-term earnings losses, it is m o r e diffi- rest of the nation. cult to determine the It appears that the Midwest has c o n t i n u e d to focus long-term consequences. O n e indication is provided by a study o n efficiency since 1990. As d e m a n d built slowly following the by a Federal Reserve Bank of Chicago economist, w h i c h assessed recession of 1990-91, Midwest p r o d u c e r s e x p a n d e d o u t p u t with- such effects. According to the study, there were substantial long- out significant growth in hiring, indicating that efforts to improve term consequences for high seniority workers that were forced to leave declining firms b e t w e e n 1 9 8 0 a n d 1986. efficiency have c o n t i n u e d in recent years. Even five years after they lost their jobs, the workers studied h a d average Implications for Employment annual earnings losses that were approximately 25 percent of their 1979 earnings. The region's improvements in manufacturing p r o d u c tivity have resulted in benefits in the long r u n for many. But w h a t Approximately 76 percent of those studied were dis- about the implications for those inevitably h u r t in the process? placed from the m a n u f a c t u r i n g sector. The study f o u n d that earn- Clearly, productivity i m p r o v e m e n t s have m e a n t that ings losses were particularly severe for m a n u f a c t u r i n g workers e m p l o y m e n t has not increased as rapidly as it w o u l d have in the unable to find a n o t h e r j o b in manufacturing. These w o r k e r s h a d past, given the same a m o u n t of o u t p u t . Some indication of the average a n n u a l losses of 3 8 percent of their 1979 earnings five upheaval in the m a n u f a c t u r i n g sector is provided by an estimate years after they lost their jobs. Workers w h o were able to regain by the Congressional Budget Office (CBO) that roughly 10 mil- j o b s in m a n u f a c t u r i n g fared s o m e w h a t better. lion U.S. workers in the g o o d s - p r o d u c i n g industries lost j o b s be- after their j o b loss, workers able to find a j o b in m a n u f a c t u r i n g , cause of p e r m a n e n t layoffs a n d plant closings d u r i n g the 1980s. b u t in a different industry, experienced losses of 19 percent of In the fifth year G o o d s - p r o d u c i n g workers were m o r e likely to be displaced than their 1979 earnings. service industry employees, according to the CBO. In 1990, for same m a n u f a c t u r i n g i n d u s t r y experienced losses that were 17 example, roughly one in 2 5 workers in goods-producing percent of their previous earnings. Overall, the study f o u n d that 8 Workers able to find e m p l o y m e n t in the workers in highly unionized durable-goods manufacturing industries experienced particularly large losses. High-seniority workers appear to have been particularly hard-hit by the effects of layoffs, j u d g i n g from the results of the Bank's study. It should be noted, however, that such workers have been a relatively small portion of all layoffs nationally, acc o u n t i n g for an estimated 18 percent of displacements from 1980 t h r o u g h 1986. A Brighter Outlook Like the other industrial countries in the world, the U.S. is u n d e r g o i n g w r e n c h i n g changes in its economic structure, particularly in the m a n u f a c t u r i n g sector. Nevertheless, the outlook is relatively bright for the Midwest, which has become significantly m o r e c o m p e t i t i v e since the recession of 1 9 8 1 - 8 2 . M a n u f a c t u r i n g e m p l o y m e n t may inevitably decline, b u t if the Midwest has a competitive advantage it will maintain or increase its market share as compared to other regions a n d retain more j o b s than it w o u l d have otherwise. An example can clarify the point. Say Manufacturing Employment average annual rates of change, 1979-92 Canada France Germany Japan U.K. the U.S. Heartland Widget Com- pany employs a large n u m ber of people w h o w o r k on one shift. As competition in the widget i n d u s t r y heats u p , Heartland changes production and becomes more The U.S. as well as most other highly efficient, thus industrialized countries have experienced stagnant or requiring fewer e m p l o y e e s to p r o d u c e declining manufacturing employment. the same a m o u n t . As a result, Heartland fewer workers. employs However, Heartland's increased efficiency may enable it to gain market share a n d eventually start a second a n d even third shift. The additional employees required to r u n these extra shifts may not equal the total n u m b e r of workers Heartland employed in the past. But certainly this is preferable to the alternative: n o j o b s at all because Heartland h a d to close or move. The Midwest will continue to face n e w challenges. The region still has a p r e p o n d e r a n c e of mature industries that are unlikely to experience rapid expansion. Yet, the region is m u c h more productive and has positioned itself for solid, sustainable economic growth that could continue to slightly exceed the rest of the nation d u r i n g the remainder of the 1990s. A decade ago, the region faced the prospect of a continual decline in competitiveness. Now, the Midwest can look to the next ten years with rediscovered optimism. The Midwest's investment d u r i n g the 1980s helped restore its m a n u f a c t u r i n g sector to a more competitive position, a change that will continue to have a ripple effect on the region. The Midwest today is more productive, more efficient, a n d better able to meet the challenges of the future. 9 The Bank in 1993 The Federal Reserve Bank of Chicago had another successful, productive year in 1993. Like the Midwest economy, the Bank has had to anticipate and respond to many changes. And, like the Midwest economy, the Bank has been able to rise to the challenge. That the Bank was able to respond to these changes was due entirely to the exceptional efforts put m E f f o r t s to a n a l y z e t h e D i s t r i c t e c o n o m y forth by employees in 1993. Many of the Bank's activities i n c l u d e d the increased u s e of i n p u t / o u t p u t were broad-based projects, bringing together employees m o d e l s to p r e d i c t r e g i o n a l activity a n d from a wide variety of functions and all the Bank's offices " E c o n o m i c R o u n d t a b l e s , " f e a t u r i n g local leaders familiar w i t h e m e r g i n g d e v e l o p m e n t s . to achieve an ambitious goal. In each case, management • The Conference on Bank Structure and and staff were more than equal to the task. C o m p e t i t i o n , FDICIA: An Appraisal, The following pages focus on the Bank's comple- m e n t e d research o n c o n t r o l l i n g financial sys- 1993 t e m risk. accomplishments, listing selected achievements and high• T h e Bank h o s t e d a n d p u b l i s h e d the pro- lighting just a few of the employees whose efforts enabled c e e d i n g s of a c o n f e r e n c e i n t e n d e d to e n c o u r - the Bank to accomplish its goals and successfully respond age d i s c u s s i o n o n m a r k e t - b a s e d a p p r o a c h e s to change. Hopefully, placing the spotlight on only a hand- to e n v i r o n m e n t a l policy. ful of the outstanding individuals who work at the Bank • T h e C h i c a g o F e d played a significant role will serve to pay tribute to all of their associates as well. in d e v e l o p i n g a h i g h s c h o o l t e a c h i n g p a c k age for n a t i o n w i d e u s e f e a t u r i n g f o u r videos o n the F e d e r a l Reserve. Training w a s e m p h a s i z e d to k e e p e x a m i n ers abreast of d e v e l o p m e n t s in the b a n k i n g i n d u s t r y (see page 12). • Bank staff c o n d u c t e d 9 0 6 e x a m i n a t i o n s , • T h e Bank again a c h i e v e d its b u d g e t goals a n d met a n a m b i t i o u s m a n a g e m e n t plan. i n s p e c t i o n s , a n d special reviews, a n d p r o cessed 5 2 6 applications, a m o n g the top w o r k l o a d s in the System. • Federal Reserve C h a i r m a n Alan G r e e n s p a n j o i n e d directors in c o m m e m o r a t i n g the Detroit • A u t o m a t i o n Services s u p p o r t e d the Bank's Branch's 75 years of service. t r a n s i t i o n in the c o n s o l i d a t i o n of the F e d e r a l Reserve's m a i n f r a m e d a t a - p r o c e s s i n g f r o m 12 During a particularly c o m p l e x year for d e t e r m i n i n g m o n e t a r y policy, sites to three. Economic Research e n h a n c e d t h e collection a n d analysis • The Bank hosted a public hearing on of i n f o r m a t i o n p r i o r t o m e e t i n g s of t h e CRA m o d e r a t e d by F e d G o v e r n o r L a w r e n c e Federal O p e n M a r k e t C o m m i t t e e (see page 14). Lindsey a n d o t h e r regulators. 10 • T h e District c o n t i n u e d to convert ins t i t u t i o n s to r e c e i v e a n d s e n d v a r i o u s s t a t e m e n t s a n d r e p o r t s electronically. • T h e District w a s a leader in c h e c k productivity, with three offices r a n k i n g a m o n g the t o p f o u r in the System. • T h e Bank e x p a n d e d A u t o m a t e d Clearinghouse (ACH) processing, providing • P r e p a r a t i o n s for t h e p r i c i n g of intra- c u s t o m e r s w i t h a m o r e flexible service. day "daylight" overdrafts were c o m p l e t e d , i n c l u d i n g a n e w m e t h o d for m e a s u r i n g overdrafts. T h e District successfully c o m p l e t e d the all-electronic A C H initiative in the Seve n t h District, converting more institutions • T h e Bank's N e t w o r k M a n a g e m e n t C o n T h e C h i c a g o Reserve B a n k b e g a n in- t h a n a n y o t h e r District (see page 15). trol C e n t e r c o n t i n u e d to oversee the curm T h e D i s t r i c t b e g a n to p h a s e - i n t h e stalling s e c o n d - g e n e r a t i o n c u r r e n c y pro- rent Federal Reserve c o m m u n i c a t i o n s net- cessing e q u i p m e n t , w h i c h involved exten- w o r k w h i l e p r e p a r i n g to p r o v i d e d a t a c o n s o l i d a t i o n of Seventh District savings sive staff t r a i n i n g a n d r e n o v a t i o n of the c o m m u n i c a t i o n a n d b a c k b o n e services o n b o n d o p e r a t i o n s at t h e C a s h D e p a r t m e n t (see page the n e w n e t w o r k , FEDNET. Reserve Bank. m T h e Bank c o n t i n u e d to participate in the • T h e Des M o i n e s Office k e p t o p e r a t i n g • N a t i o n a l I n f o r m a t i o n Center, a System da- s m o o t h l y d u r i n g t h e " G r e a t F l o o d of tise to o t h e r countries, travelling overseas tabase, a n d in the Shared N a t i o n a l Credit 1 9 9 3 , " h a n d l i n g c h e c k p r o c e s s i n g vol- on temporary assignments and hosting p r o g r a m , a c o o p e r a t i v e p r o j e c t to b e t t e r u m e s 47 percent h i g h e r t h a n usual. n u m e r o u s p r o g r a m s for foreign visitors. • Electronic c h e c k i t e m s soared to 250 • T h e B a n k c o n t i n u e d to o p e r a t e t h e 16). Minneapolis Chicago Fed staff p r o v i d e d their exper- evaluate i n s t i t u t i o n s ' large s h a r e d loans. m i l l i o n as t h e District i n t r o d u c e d n e w Securities Product Office, guiding Fed n e w m e d i c a l b e n e f i t s package i n t e n d e d to services s u c h as e n h a n c e d electronic cash securities activities t h r o u g h a particular- c o n t r o l costs while m a i n t a i n i n g e m p l o y e e letter, basic electronic c h e c k p r e s e n t m e n t , ly c h a l l e n g i n g period. flexibility. and check truncation. • H u m a n Resource Services d e v e l o p e d a • A s t a t e m e n t of values w a s d i s t r i b u t e d • T h e C h i c a g o F e d c o n t i n u e d to refine its • The District excelled in achieving check to e n c o u r a g e e m p l o y e e s to recognize a n d disaster-recovery capabilities, i n c l u d i n g en- quality goals, r a n k i n g first in the System discuss the Bank's core values—integrity, h a n c i n g its off-site relocation center. for fewest processing e r r o r s (see page 13). respect, excellence, a n d responsibility. • T h e Bank i n t r o d u c e d a n e n h a n c e d ac- • T h e C h i c a g o Fed p r e p a r e d for the im- • Bank staff c o n t i n u e d to play a leader- c o u n t i n g s t a t e m e n t a n d cash m a n a g e m e n t p l e m e n t a t i o n of s a m e - d a y c h e c k settle- s h i p r o l e by p a r t i c i p a t i n g in v i r t u a l l y p r o d u c t , part of n e w System-wide a c c o u n t - m e n t by c h a n g i n g o p e r a t i o n s , h o l d i n g every System g r o u p dealing w i t h issues ing services. s e m i n a r s , a n d d e v e l o p i n g n e w services. facing the Fed. 1 1 Examiner Training Intensifies staff in 1993. Because FDICIA is such a complex a n d wide-ranging piece of legislation, employees were required to develop T comprehensive a n d i n - d e p t h programs. A he accelerating pace of change in the complicating factor was the ongoing nature b a n k i n g industry is challenging, not of the project as Bank staff n e e d e d to devel- only for practitioners b u t for examiners as o p n e w programs as each section of the leg- well. The challenges multiply w h e n Con- islation was i m p l e m e n t e d into regulation. gress passes a comprehensive piece of bank- While forces outside the b a n k i n g ing legislation such as the Federal Deposit system often initiate change, the Bank m u s t Insurance Corporation I m p r o v e m e n t Act also r e s p o n d to changes resulting f r o m in- (FDICIA). novation within the b a n k i n g industry. In The Federal Reserve Bank of Chicago, w h i c h is responsible for examin- 1 9 9 3 , Federal Reserve Bank of C h i c a g o ing state m e m b e r b a n k s a n d b a n k holding employees were System leaders in develop- c o m p a n i e s in the Seventh District, has tra- ing training p r o g r a m s on one of these im- ditionally provided extensive training t o p o r t a n t d e v e l o p m e n t s — t h e sale of m u t u a l examiners. In recent years, efforts in this f u n d s by banks. The Banks p r o g r a m s o n area have intensified to enable examiners m u t u a l f u n d s i n c l u d e d classes providing to stay abreast of the m a n y changes taking general b a c k g r o u n d as well as m o r e spe- place in the b a n k i n g industry. cific training o n examination guidelines. Training e x a m i n e r s o n the n u - These training p r o g r a m s proved to be so m e r o u s provisions of FDICIA was a signif- successful that they were a d o p t e d a n d ap- icant challenge for Chicago Reserve Bank plied elsewhere in the Fed System. Bank staff enhanced training programs in 1993 to help examiners keep pace with changes in the banking industry Working with employees throughout the Supervision and Regulation Department, D'Le Borg (pictured at right) teamed with Betty Starsiak and Marion Vicek to develop and coordinate training programs on new legislation such as FDICIA and industry innovations such as mutual fund sales. These training programs helped examiners keep pace with developments in the rapidly changing banking industry. 12 Check Quality Goals Achieved Seventh District employees achieved top ratings in the quality of check services E very year, the Federal Reserve Banks are engaged in a horse race of sorts. Each Federal Reserve office measures its performance in providing financial services, tracking its progress in meeting System goals a n d c o m p a r i n g its results to the other Fed offices. Measuring its performance in this way helps the Fed to continually improve its service to customers. Staff at the Federal Reserve Bank of Chicago a n d its offices focused, more t h a n ever, o n i m p r o v i n g the quality of check services in 1993. The efforts paid off: Seventh District e m p l o y e e s r a n k e d first in the System for m a k i n g the fewest processing errors. Bank staff improved quality in a n u m b e r of ways. To generate ideas, the Bank established a District-wide task force so that staff could meet periodically to discuss check quality efforts. O n e important initiative was developing a closer relationship with the c o m p a n y that services the Bank's check processing e q u i p m e n t . By w o r k i n g more closely with the servicing Improving quality was a District-wide effort. Among those c o m p a n y on an ongoing basis, employees contributing at the Chicago Office were (from left to right) were able to remedy problems more quickly Lynda Hatten, Gloria Jackson, Dovin Salmorin, Mike Gordon or prevent them from h a p p e n i n g in the first and Marsha Coleman. Jackson and Gordon work in check place. Staff also w o r k e d with fellow em- processing; Hatten and Salmorin work in the check adjust- ployees a n d customers submitting w o r k to ment function. Coleman, check processing manager, served let t h e m k n o w if an error occurred and to on the check quality task force. help t h e m prevent future problems. The result was a significant improvement in the quality of check services, not only providing better service for customers but helping to improve the efficiency of the payments system. 13 Briefing Process Enhanced T he process begins every six to eight weeks. Economic Research staff be- gin to prepare for the next meeting of the Federal O p e n Market Committee (FOMC), the F e d s most i m p o r t a n t policy m a k i n g body. Bank employees w o r k with infor- mation—collecting, u p d a t i n g , analyzing, discussing, sometimes arguing. This effort is all part of the briefing process, w h i c h provides President Silas Keehn with the information he needs to take part in F O M C deliberations. D e t e r m i n i n g m o n e t a r y policy was especially difficult in 1993 because of the structural changes taking place in the economy. In response, Bank staff focused their research studies on the effects a n d tradeoffs of m o n e t a r y policy a n d w o r k e d to improve the quantity a n d quality of information available for the briefing process. This effort included reformatting the "briefing b o o k " to allow for more continuity in the analysis of current conditions a n d to highlight in-depth studies on special issues. Research staff e n h a n c e d t h e i r expertise on the regional e c o n o m y by exp a n d i n g the use of "Economic Roundtables," featuring economists a n d business leaders familiar with emerging local developments. Among the employees involved in preparing for FOMC meetings are (from Staff also c o n t i n u e d t o s t u d y left to right) Paula Worthington, Mike Singer, Anthony Suh, Rick Mattoon, important regional developments that may and Argia Sbordone. Singer and Mattoon studied regional developments affect the overall e c o n o m y s u c h as the such as the effects of the "Great Flood of 1993." Worthington and Sbordone "Great Flood of 1993." The expertise of provided expertise on issues such as balance sheet restructuring and pro- Research staff in this area proved to be use- ductivity trends. Suh worked on further automating the flow of information ful, n o t only to those d e t e r m i n i n g m o n e - used for the briefing process. tary policy, b u t also to a n u m b e r of national a n d state g o v e r n m e n t officials. Economic Research staff worked to enhance the briefing process during a particularly complex year for determining monetary policy 14 operational, and technical s u p p o r t effort. First, Bank staff w o r k e d with depository All-electronic ACH Project Completed i n s t i t u t i o n s t o e x p l a i n the a l t e r n a t i v e s for setting u p an electronic connection. For most institutions the best option was F Fedline, the Federal Reserve's s o f t w a r e or m a n y years Automated Clearing- package for electronic access. Once an in- house (ACH) was an electronic service stitution signed u p for an electronic con- that was not entirely electronic. In fact, most nection, employees at the Chicago Reserve depository institutions received ACH trans- Bank and Detroit Branch conducted hands- actions on tapes or diskettes delivered via on training sessions. In 1993 alone, 700 courier or mail. To encourage a more effi- institutions attended training classes. To cient a n d reliable ACH, the Federal Reserve provide s u p p o r t for so m a n y n e w users, a n n o u n c e d in 1991 that it would accept and Bank a n d Branch staff set u p hotlines for deliver only electronic transmissions of ACH Fedline questions, w h i c h h a n d l e d some transactions, effective July 1, 1993. 2 0 , 0 0 0 customer inquiries in 1993. Chicago Fed employees faced a District e m p l o y e e s c o m p l e t e d m a j o r challenge. As one of the most active this ambitious project on schedule in 1993, participants in ACH, the Seventh District converting a total of 1,456 institutions to had the most non-electronic ACH receivers an electronic status. The result is an im- in the Fed System. Converting District in- proved ACH service for depository insti- stitutions t o an electronic alternative re- tutions and, on a m u c h larger scale, a more quired a massive educational, marketing, efficient and reliable payments mechanism. Bank staff completed the ambitious all-electronic ACH project on schedule in 1993 The ail-electronic ACH initiative was a broad-based effort, including staff from all five District offices. Among the key participants (from left to right) were Charles Textor, Automation Support; Ken Zvihra, Electronic Services, Detroit Branch; Lysette Bailey, Electronic Access; Eve Boboch, Automated Payments; and Ron Bogner, Banking Services. Other key participants not pictured here include Richard Jung, Des Moines Office; Fred Chafin, Indianapolis Office; and Pete Retsinas, Milwaukee Office. 15 New Currency Machines Installed The team that received special training and subsequently operated the first ISS3000 currency processor in Chicago consisted of (from left to right) Mary Lehnerer, Robbie Alleyne, Dianne Gray, Maria Pyzalski, Cristelle Wertelka, Dorothy Johnson (hidden), and Irena Lasota. Dianne Gray is one of two "District trainers" who work with employees making the transition to the new equipment. Bank employees began installing a new generation of cash-processing machines in 1993 Installing the m a c h i n e s has been a broad-based effort involving staff in Cash, Protection, Facilities Planning, a n d H u m a n Resources. following extensive preparations Because the n e w processors have more sophisticated capabilities that place a d d e d d e m a n d s o n operators, the A Bank has provided extensive training. Be- m o n g its m a n y other functions, the fore t h e m a c h i n e s w e r e i n t r o d u c e d i n Federal Reserve Bank of Chicago is Chicago, eight Bank employees travelled a m o n e y factory of sorts, constantly receiv- to a n o t h e r Fed District to w o r k with the ing a n d s h i p p i n g out large quantities of n e w e q u i p m e n t . Two of these employees currency. Bank staff processed some $29 became "District trainers" w h o helped train billion in 1993 using sophisticated high- other staff in Chicago. Another effort re- speed equipment, which counts and lated to the installation of the machines was sorts, detects potential counterfeits, shreds the renovation of the Bank's second a n d w o r n - o u t money, a n d b u n d l e s n o t e s t o third basements. be recirculated. Planning a n d Cash w o r k e d closely to co- Employees in Facilities In 1 9 9 3 , Bank e m p l o y e e s in- ordinate the renovation, which will provide stalled two n e w ISS3000 c u r r e n c y p r o - for a more efficient a n d secure w o r k area. cessors, b e g i n n i n g the transition to a n e w Staff at the Chicago Office a n d generation of high-tech e q u i p m e n t . T h e Detroit Branch will i m p l e m e n t nine more n e w p r o c e s s o r s , w h i c h will b e u s e d machines over the next two years. The en- t h r o u g h o u t the Fed System, are more effi- h a n c e d capabilities of the ISS3000 m a - cient, provide a higher quality of notes for chines will enable Bank employees to effi- recirculation, a n d have improved counter- ciently meet the public's currency needs for feit detection capabilities. years to come. 16 Operations Volumes dollar amount 1993 number of items 1992 1993 1992 Check & Electronic Payments Checks, N O W s , & share d r a f t s p r o c e s s e d 1.3 t r i l l i o n 1.2 t r i l l i o n 1.9 b i l l i o n 1.9 b i l l i o n Fine sort & p a c k a g e d checks h a n d l e d 261.7 b i l l i o n 261.6 b i l l i o n 614.6 m i l l i o n 620.7 m i l l i o n U.S. g o v e r n m e n t checks p r o c e s s e d 48.9 billion 50.8 b i l l i o n 51.4 m i l l i o n 52.8 m i l l i o n Automated Clearinghouse 1.9 trill ion7" 482.0 million 419.7 million'' (ACH) i t e m s p r o c e s s e d 2.3 t r i l l i o n Transfers o f f u n d s 31.4 trillion 32.8 t r i l l i o n Currency received & c o u n t e d 28.9 b i l l i o n 27.9 b i l l i o n 2.2 b i l l i o n 2.2 b i l l i o n U n f i t currency d e s t r o y e d 6.5 b i l l i o n 7.5 b i l l i o n 720.6 m i l l i o n 733.9 m i l l i o n Coin received & c o u n t e d 700.2 million 691.9 m i l l i o n 6.3 b i l l i o n 5.9 b i l l i o n 13.5 m i l l i o n 13.0 m i l l i o n Cash Operations Securities Services for Depository Institutions Safekeeping balance December 31: securities 7.5 b i l l i o n 6.3 b i l l i o n Book-entry securities Definitive 437.3 billion 360.0 billion Purchase & sale 2.5 b i l l i o n 3.1 b i l l i o n 8.3 t h o u s a n d 11.8 t h o u s a n d 500.0 million 700.0 million 91.0 t h o u s a n d 119.8 t h o u s a n d 1.6 b i l l i o n 1.7 b i l l i o n 53.6 t h o u s a n d — 145.4 t h o u s a n d — Collection of securities & other n o n c a s h i t e m s Loans to Depository Institutions Total loans m a d e d u r i n g year 763 870 Services to U.S. Treasury and Government Agencies Issues, r e d e m p t i o n s & e x c h a n g e s : U.S. savings bonds 3.0 b i l l i o n 3.8 b i l l i o n Definitive government securities 900.0 million 400.0 million Book-entry government securities 4.8 t r i l l i o n 3.3 t r i l l i o n ' ' G o v e r n m e n t c o u p o n s paid Federal t a x d e p o s i t s processed 142.7 b i l l i o n Food s t a m p s r e d e e m e d r 93.5 m i l l i o n 142.6 b i l l i o n 2.5 b i l l i o n 2.4 b i l l i o n = Revised 17 91.0 m i l l i o n 8.0 m i l l i o n 12.3 t h o u s a n d 1.1 m i l l i o n 8.5 m i l l i o n 9.2 t h o u s a n d 1.1 m i l l i o n 40.7 t h o u s a n d 59.3 t h o u s a n d 858.1 t h o u s a n d 884.4 thousand 477.9 m i l l i o n 473.0 million Statement of Condition 12/31/93 12/31/92 Assets Gold certificate account $ 1,186,000,000 $ 1,270,000,000 Interdistrict settlement account 1,743,124,989 (3,443,626,096) s e r v e B a n k a s s e t s a n d liabilities largely Special drawing rights certificate account 1,036,000,000 1,036,000,000 reflect general e c o n o m i c d e v e l o p m e n t s a n d Coin 32,338,258 29,757,418 Loans 500,000 1,950,000 Federal agency securities 539,045,358 670,355,724 U.S. government securities 38,584,498,535 36,537,178,964 Y e a r - t o - y e a r c h a n g e s i n Re- System m o n e t a r y policy actions. By pur- Loans and securities: c h a s i n g securities in t h e o p e n m a r k e t a n d m a k i n g loans to depository institutions, the Federal Reserve increases reserves, p r o v i d i n g a base for m o n e t a r y e x p a n s i o n in accord with the national economy's growth Total loans and securities 39,124,043,893 37,209,484,688 n e e d s . T h e Bank's total assets rose in 1993, Items in process of collection 674,167,146 922,908,474 p r o v i d i n g t h e basis for a n increase in cur- Bank premises 113,379,859 112,034,234 Other assets 3,490,675,049 3,380,201,671 r e n c y o u t s t a n d i n g a n d d e p o s i t s of District institutions. T h e overall increase i n t h e Total assets $ 47,399,729,194 $ 40,516,760,389 Federal Reserve notes $ 41,540,669,371 S 35,484,730,443 Bank's assets a n d c u r r e n c y o u t s t a n d i n g w a s also in p a r t a t t r i b u t a b l e to d a y - t o - d a y interdistrict f l u c t u a t i o n s . Liabilities Deposits: Depository institutions 4,021,546,173 3,422,357,347 U.S. Treasury—general account 0 0 Foreign, official accounts 15,748,700 16,819,000 Other 80,694,358 49,357,129 4,117,989,231 3,488,533,476 Deferred credit items 679,010,501 620,709,248 Other liabilities 282,329,891 230,600,822 Total deposits Total liabilities s 46,619,998,994 $ 39,824,573,989 Capital paid in $ 389,865,100 $ 346,093,200 Capital Accounts Surplus Total capital Total liabilities and capital 18 389,865,100 $ $ 346,093,200 779,730,200 $ 692,186,400 47,399,729,194 s 40,516,760,389 Statement o f Income 1992 1993 Current Income Interest on loans $ 351,679 $ 403,053 Interest on government securities 1,988,279,841 2,145,434,724 Interest on investments of foreign currencies 142,291,217 257,123,513 largely a b y - p r o d u c t of m o n e t a r y policy Service fees 101,646,876 99,463,226 r a t h e r t h a n the p u r s u i t of profit. Most of 790,056 952,994 the Bank's i n c o m e is interest o n its share of 2,503,377,510 the System's O p e n M a r k e t A c c o u n t p o r t - A R e s e r v e Bank's i n c o m e i s All other Total current income $ 2,233,359,669 $ folio of securities, a n d , appropriately, t h e vast m a j o r i t y of this i n c o m e is t u r n e d over Current Expenses to the U.S. Treasury each year. C u r r e n t inOperating expenses $ Other current expenses Total current expenses 198,076,414 $ 176,999,479 32,414,846 Less reimbursement for certain fiscal agency and other expenses 230,491,260 205,964,270 19,478,772 $ 28,964,791 19,557,478 c o m e d e c l i n e d c o m p a r e d to 1 9 9 2 , p r i m a rily d u e t o l o w e r m a r k e t i n t e r e s t r a t e s . O p e r a t i n g e x p e n s e s rose, largely reflecting t h e c o n t i n u e d c o s t of r e s p o n d i n g t o Current net expenses $ 211,012,488 Current net income $ 2,022,347,181 $ $ 186,406,792 2,316,970,718 increased supervisory responsibilities m a n d a t e d b y legislation. E x p e n s e s also i n c r e a s e d b e c a u s e of the costs associated w i t h t h e i m p l e m e n t a t i o n of Financial Ac- Additions to (or Deductions from) Current Net Income Net profit (or loss) on sales of securities c o u n t i n g S t a n d a r d (FAS) 1 0 6 , S 4,626,090 $ 15,087,036 Net profit (or loss) on foreign exchange transactions 30,081,072 (130,523,858) Assessment for Board of Governors expenditures (15,939,100) (15,443,600) Cost of Federal Reserve currency (37,898,065) (33,248,750) All o t h e r — n e t (58,169,054) Net additions (or deductions) Net income available for distribution $ $ (77,299,057) 1,945,048,124 (3,272,441) $ $ (167,401,613) 2,149,569,105 Distribution of Net Income Dividends paid $ 22,248,839 $ 19,888,623 Payments to U.S. Treasury (as interest on Federal Reserve notes) 1,879,027,385 2,104,451,832 Transferred to surplus 43,771,900 25,228,650 Total income distributed which r e q u i r e d c h a n g e s i n t h e a c c o u n t i n g for s 1,945,048,124 $ 19 2,149,569,105 p o s t - e m p l o y m e n t benefits. Directors and Advisory Councils 1993 Board of Directors, Federal Reserve Bank of Chicago, from left to right: Robert Healey, Richard Cline, Stefan Anderson, Charlene Sullivan, Arnold Schultz, David Fox, Donald Schneider, Thomas Dorr, and Duane Burnham. Board of Directors Federal Reserve Bank of Chicago Reserve Bank directors have a general governance responsibility for the m a n a g e m e n t of operations, a p p r o v i n g Chairman budgets, expenditures, a n d official a p p o i n t m e n t s . In addition, Richard G. Cline C h a i r m a n , President, a n d Chief Executive Officer N I C O R Inc. Naperville, Illinois directors provide advice a n d counsel t o the Reserve Bank president o n the state of the e c o n o m y and financial system. Reserve Bank directors also determine, subject to review by Deputy Chairman the Board of Governors, the Bank's discount rate. The Chicago Robert M. Healey President Chicago Federation of Labor a n d Industrial U n i o n Council, AFL-CIO Chicago, Illinois Reserve Bank a n d Detroit Branch directors are selected t o represent a variety of interests a n d activities within the District a n d bring to their diverse duties as directors a broad range of expertise a n d experience. Stefan S. Anderson C h a i r m a n , President, a n d Chief Executive Officer First M e r c h a n t s C o r p o r a t i o n Muncie, Indiana The Federal Advisory Council, consisting of one representative f r o m each District, meets quarterly with the Board of Governors to discuss economic conditions. T h e Duane L. Burnham Chairman and Chief Executive Officer Abbott Laboratories Abbott Park, Illinois Chicago Reserve Bank's advisory councils o n small business and agriculture provide a vital c o m m u n i c a t i o n link between the Bank a n d these i m p o r t a n t economic sectors. Thomas C. Dorr President a n d Chief Executive Officer Dorr's Pine Grove Farm Company Marcus, Iowa 20 David W. Fox Chairman and Chief Executive Officer The N o r t h e r n Trust C o r p o r a t i o n Chicago, Illinois Donald J. Schneider President Schneider National, Inc. Green Bay, W i s c o n s i n Arnold C. Schultz C h a i r m a n a n d President GNB Bancorporation G r u n d y Center, Iowa A. Charlene Sullivan Associate Professor of M a n a g e m e n t Krannert G r a d u a t e School of M a n a g e m e n t P u r d u e University W e s t Lafayette, Indiana 1993 Board of Directors, Detroit Branch, from left to right: Norman Rodgers, Daniel Smith, William Odom, John Forsyth, Beverly Beltaire, Charles Allen, and J. Michael Moore. Board of Directors Detroit Branch Federal Advisory Council Representative Chairman Eugene A. Miller C h a i r m a n and Chief Executive Officer Comerica, I n c o r p o r a t e d Detroit, Michigan J. Michael Moore Chairman and Chief Executive Officer Invetech C o m p a n y Detroit, Michigan Charles E. Allen President a n d Chief Executive Officer Graimark Realty Advisors, Inc. Detroit, Michigan Beverly Beltaire President P.R. Associates, Inc. Detroit, Michigan John D. Forsyth Executive Director University of Michigan Hospitals A n n Arbor, Michigan William E. Odom Chairman Ford Motor Credit C o m p a n y a n d G r o u p Vice President Ford Motor C o m p a n y D e a r b o r n , Michigan Norman F. Rodgers President a n d Chief Executive Officer Hillsdale C o u n t y National Bank Hillsdale, Michigan Daniel R. Smith Chairman and Chief Executive Officer First of America Bank Corporation Kalamazoo, Michigan (director to August 1993) Scott E. VanderVeen Clinton, W i s c o n s i n W i s c o n s i n Pork P r o d u c e r s Jerry L. Vandeveer F r a n k e n m u t h , Michigan Michigan Agri-Business Association Advisory Council on Agriculture Donald B. Villwock E d w a r d s p o r t , Indiana Member-at-Large Glen Balbach W a r r e n , Illinois Wisconsin Milk Marketing Board Peter J. Wenstrand Essex, Iowa Iowa C o r n G r o w e r s Association Leland E. Behnken Altona, Illinois Illinois C o r n G r o w e r s Association Advisory Council on Small Business Marion L. Butler Blandinsville, Illinois Illinois Beef Association Phyllis L. Apelbaum Chicago, Illinois National Association of W o m e n Business O w n e r s Chicago C h a p t e r Jon D. Caspers Swaledale, Iowa Iowa Pork P r o d u c e r s Association Fernando Chavarria Rolling Meadows, Illinois U.S. Hispanic C h a m b e r of C o m m e r c e Richard E. Leach Saginaw, Michigan Michigan Farm Bureau Noelle A. Clark Lansing, Michigan National Federation of Independent BusinessMichigan Barry A. Mumby Fulton, Michigan Michigan Soybean Association Merlin D. Plagge W e s t Des Moines, Iowa Iowa Farm Bureau Susan E. Funk Detroit, Michigan National Association of W o m e n Business O w n e r s Michigan C h a p t e r Kenneth G. Stremlau Mendota, Illinois National Farmers Organization 21 J. Paul Jordan Milwaukee, W i s c o n s i n Milwaukee Minority C h a m b e r of C o m m e r c e Susan M. Larson Chicago, Illinois National Association of W o m e n Business O w n e r s Illinois C h a p t e r Eleanore A. Levy W e s t Des Moines, Iowa National Association of W o m e n Business O w n e r s Iowa C h a p t e r D. Larry Sherman Birmingham, Michigan Michigan Retailers Association Toby B. Shine Spencer, Iowa Iowa Association of Business and I n d u s t r y Robert J. Stevens C o l u m b u s , Indiana Member-at-Large Jude M. Werra Brookfield, W i s c o n s i n Wisconsin Manufacturers and Commerce Silas Keehn President William C. Conrad First Vice President Central Bank Activities Charles L. Evans Senior Research Economist and Research Officer Kenneth N. Kuttner Senior Research Economist a n d Research Officer Economic Research and Information Services Robert H. Schnorbus Senior Business Economist a n d Research Officer Karl A. Scheld Senior Vice President and Director of Research Daniel G. Sullivan Senior Research Economist a n d Research Officer Economic Research Officers William A. Testa Senior Regional Economist and Research Officer David R. Allardice Vice President a n d Assistant Director of Research Gary L. Benjamin E c o n o m i c Adviser a n d Vice President A p p o i n t m e n t s to a n d p r o m o t i o n s within the Federal Reserve Bank's official staff are m a d e by the Bank's board of Information Services Nancy M. Goodman Vice President Statistics, directors. The board a p p o i n t s the Bank's president (chief exec- Larry R. Mote E c o n o m i c Adviser a n d Vice President Jean L. Valerius Vice President Steven H. Strongin E c o n o m i c Adviser a n d Vice President utive officer) a n d first vice president (chief operating officer) to Supervision and Regulation and Loans five-year terms, subject to approval by the Board of Governors. The primary activities of the Chicago Reserve Bank are divided into eight functional areas, overseen by senior vice Anne Marie L. Gonczy Senior Economist a n d Assistant Vice President presidents w h o report t o the Bank's president a n d first vice president. An additional function, the Auditing D e p a r t m e n t , reports directly to the b o a r d of directors' Audit Committee. The Douglas D. Evanoff Senior Research Economist and Research Officer Bank's senior officers together form the Management Committee a n d determine the Chicago Reserve Bank's strategic direction. Franklin D. Dreyer Senior Vice President Supervision and Regulation Barbara D. Benson Vice President James A. Bluemle Vice President David S. Epstein Vice President Roderick L. Housenga Vice President Federal Reserve Bank of Chicago Management Committee, from left to right: Silas Keehn, Richard Anstee, William Conrad, Karl Scheld, William Gram, George Coe, Charles Furbee, Jerome John, Roby Sloan, Franklin Dreyer, Carl Vander Wilt. 22 Geoffrey C. Rosean Vice President A. Raymond Bacon Assistant Vice President William A. Barouski Assistant Vice President Services to Depository Institutions Electronic Services Wayne R. Baxter Vice President Operations and Cheek Services Stephen M. Pill Vice President a n d Data Security Officer Charles W. Furbee Senior Vice President Cash and Fiscal Agency Robert A. Bechaz Assistant Vice President John L. Bergstrom Assistant Vice President George M. Gregorash Assistant Vice President Douglas J. Kasl Assistant Vice President Barbara T. Kavanagh Assistant Vice President William H. Lossie, Jr. Assistant Vice President James M. Rudny Assistant Vice President William A. Bonifield Vice President Federal Reserve System Securities Product Office Dara L. Hunt Assistant Vice President a n d Securities Product Manager Office of the General Auditor Valerie J. Van Meter Assistant Vice President Guadalupe Garcia O p e r a t i o n s Officer Robert M. Casey Assistant General Auditor Support Functions Lawrence J. Powaga Assistant Vice President Jerome F. John General Auditor Kathleen H. Williams Assistant Vice President Jerome D. Nicolas Assistant Vice President Office of the General Counsel Check Services Automation and Communications Services Diane S. Noble Assistant Vice President George E. Coe Senior Vice President William H. Gram Senior Vice President, General Counsel, and Secretary Operations Administration James A. Nelson Assistant Vice President Patrick J. Tracy Assistant Vice President Barbara A. Van Den Bossche Assistant Vice President Daniel L. Westrope Assistant Vice President Automation Support Legal Services Angelina S. Chin Assistant Vice President R. Steve Crain Assistant Vice President Erich R. Mueller Operations Officer Elizabeth A. Knospe Assistant Vice President and Assistant General Counsel Brenda D. Ladipo Assistant Vice President Regional Offices Frank S. McKenna Assistant Vice President David R. Starin Vice President Yurii Skorin Assistant Vice President a n d Assistant General Counsel Des Moines Gay Whiting Assistant Vice President Alicia Williams Assistant Vice President Kathleen E. Benson Examining Officer Karen L. Rosenberg Assistant Vice President Anna M. Voytovich Assistant Vice President a n d Assistant General Counsel L. Edward Ketchmark Assistant Vice President Network Management Control Center Office of the Rank Secretariat Indianapolis Thomas M. Matsumoto Assistant Vice President Joan M. De Rycke Assistant Vice President and Assistant Secretary Donna M. Yates Assistant Vice President Milwaukee David E. Ritter Assistant Vice President Anthony J. Tempelman Assistant Vice President Robert J. Sandusky Systems Officer Detroit Rranch and Electronic Services Financial and Management Services Roby L. Sloan Senior Vice President a n d Branch Manager Carl E. Vander Wilt Senior Vice President a n d Chief Financial Officer Robert D. Lauson Vice President Detroit Rranch Accounting Services Kenneth R. Berg Assistant Vice President Yvonne H. Montgomery Vice President Richard P. Bush Vice President Gerard J. Nick Vice President Patrick A. Garrean Assistant Vice President Maria Semedalas A c c o u n t i n g Officer William J. O'Connor Assistant Vice President Joseph R. O'Connor Assistant Vice President Ranking Services Betty P. Chow Staff D e v e l o p m e n t Officer Maureen A. Cummings I n f o r m a t i o n Processing Officer Michael R. Jarrell E x a m i n i n g Officer John M. Montgomery Examining Officer John A. Valenti I n f o r m a t i o n S u p p o r t Officer Loans and Reserves Glen Brooks Vice President Richard L. Simms, Jr. Assistant Vice President Theodore E. Downing, Jr. Assistant Vice President F. Alan Wells Assistant Vice President Management Services Brian D. Egan O p e r a t i o n s Officer Glenn C. Hansen Vice President Robert M. Marable O p e r a t i o n s Officer Margaret A. Koenigs Assistant Vice President Jeffrey B. Marcus Assistant Vice President 23 Support Services Richard P. Anstee Senior Vice President Administrative and General Services Kristi L. Zimmermann Assistant Vice President Tyler K. Smith O p e r a t i o n s Officer Check Adjustment Richard F. Opalinski Assistant Vice President Human Resource Services Thomas G. Ciesielski Vice President Sheryn E. Bormann Assistant Vice President Angela D. Robinson Personnel Officer Executive Changes Directors David W. Fox and A. Charlene Sullivan Members of the Federal Reserve Bank of Chicago's board of directors are selected to represent a cross section of the Seventh District economy including consumers, in- • James A. Nelson to Assistant Vice Presi- elected to second three-year terms as dent, Supervision and Regulation. directors. Anna M. Voytovich to Assistant Vice • J. Michael Moore redesignated Branch President and Assistant General Counsel. Chairman. Daniel L. Westrope to Assistant Vice dustry, agriculture, services, labor, and vary- Florine Mark (President and Chief Exec- President, Supervision and Regulation. ing sizes of commercial banks. The nine- utive Officer, The W W Group in Farm- m e m b e r b o a r d i n c l u d e s three b a n k e r s ington Hills) and Charles W. Weeks and three nonbankers elected by member (President and Chief Executive Officer of banks. Three additional nonbankers are Citizens Banking Corporation in Flint) appointed by the Board of Governors, which appointed directors, replacing Beverly also designates the Reserve Bank chairman Beltaire and Daniel R. Smith. and deputy chairman from among its three appointees. Similarly, the Board of Governors appointed to second three-year terms as Branch directors. meets quarterly to discuss business and The Branch board selects its own chairman financial conditions with the Board of each year. All Reserve Bank and Branch Governors in Washington, D.C., is com- directors serve three-year terms, with a prised of one m e m b e r from each of the two-term maximum. 12 Federal Reserve Districts. Branch effective in 1993 were: Each year the Chicago Reserve Bank's board of directors selects a representative to this group. Eugene A. Miller, who served as the Seventh District's representative in • Richard G. Cline redesignated Chairman and appointed to a second three-year 1992 and 1993, was reappointed by the Chicago board for 1994. term as a director. Robert M. Healey redesignated Deputy Chairman. Donald J. Schneider and Arnold C. Schultz elected directors. • J. Michael Moore redesignated Branch Chairman and appointed to a second three-year term as a Branch director. • N o r m a n F. Rodgers appointed to a sec- councils, w h o are selected from nominations by Seventh District small business and agriculture organizations, served the third year of their terms in 1993. T h e councils provide a vital communication link between the Bank and these important sectors. Officers pointments and elections to terms beginning in 1994 were announced: Richard G. Cline redesignated Chairman. Robert M. Healey redesignated Deputy Chairman and appointed to a second three-year term as a director. Economist and Research Officer, Eco- nomic Research. Kenneth N. Kuttner to Senior Research Economist and Research Officer, Economic Research. Robert M. Marable to Operations Officer, Detroit Branch. Daniel G. Sullivan to Senior Research Economist and Research Officer, Economic Research. Frederick S. Dominick, Vice President and Assistant Branch Manager, Detroit Branch, retired in 1993 after 41 years of Members of the Bank's two advisory ond three-year term as a Branch director. At year-end 1993, the following ap- m Douglas D. Evanoff to Senior Research Economist and Research Officer, Eco- lected by the Chicago Reserve Bank board. at the Chicago Reserve Bank and its Detroit Brian D. Egan to Operations Officer, Charles L. Evans t o Senior Research Advisory Councils The Federal Advisory Council, which Director appointments and elections President, Electronic Services. nomic Research. Four additional directors are se- Branch. Valerie J. Van Meter to Assistant Vice Detroit Branch. • Charles E. Allen and William E. O d o m selects three n o n b a n k e r s to serve on the seven-member board of the Bank's Detroit New officers appointed by the board in 1993 were: The Bank's board of directors acted on the following promotions within the official staff during 1993: •i Yvonne H. Montgomery to Vice President, Detroit Branch. Barbara T. Kavanagh to Assistant Vice President, Supervision and Regulation. 24 service to the Bank. From Rust to Robust: The Midwest Responds Data Sources—Graphs 1-5 U.S. Industrial Production Index, Federal Reserve Board; Midwest Manufacturing Index, Federal Reserve Bank of Chicago; U.S. and foreign employment, U.S. Department of Labor, Bureau of Labor Statistics; capital expenditures, U.S. Department of Commerce, Bureau of the Census, Survey of Manufacturers and Census of Manufacturers, various issues; estimated efficiency gains, Federal Reserve Bank of Chicago. Head Office 2 3 0 S o u t h La Salle Street P.O. Box 8 3 4 Chicago, Illinois 6 0 6 9 0 - 0 8 3 4 Detroit Branch 160 W e s t Fort Street P.O. Box 1059 Detroit, Michigan 4 8 2 3 1 - 1 0 5 9 Des Moines Office 6 1 6 T e n t h Street P.O. Box 1903 Des Moines, Iowa 5 0 3 0 6 - 1 9 0 3 Indianapolis Office 8 3 1 1 N o r t h P e r i m e t e r Road P.O. Box 2 0 2 0 B Indianapolis, Indiana 46206-2020 Milwaukee Office 304 East State Street P.O. Box 3 6 1 Milwaukee, Wisconsin 53201-0361 FEDERAL RESERVE BANK OF CHICAGO For a d d i t i o n a l copies of this r e p o r t , c o n t a c t the Public I n f o r m a t i o n C e n t e r , Federal Reserve Bank of Chicago, at 3 1 2 - 3 2 2 - 5 1 1 1 .