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The main lobby of the Bank reflects
Italian Renaissance styling, with Sienna
marble walls and a hand-decorated ceiling
of ornamental plaster.
Flanking the main entrance of the
Federal Reserve Bank of Cleveland are
statues representing Security and
I ntegrlty, the essential characteristics of
a central bank. Security, the powerful
figure on the right, clutches a strongbox
with one hand and an upraised sword
with the other. To her left stands the
gentler figure of Integrity, bearing her
rolls of office and an up/lfted rod, as if to
swear to her worthiness of the trust
invested in her.
Contents
Letter to Depository Institutions
2
The Monetary Control Act-Mandate for Change
4
Financial Statements
24
Directors
26
Officers
28
To Depository Institutions in the Fourth
Federal Reserve District:
The past year has been exciting and
challenging for this Bank-indeed, for all
depository institutions. The passage of
the Depository Institutions Deregulation
and Monetary Control Act of 1980 has
accelerated developments that in time
may revolutionize our financial structure
and the role of the central bank, as described in this Annual Report. The comprehensive nature of this legislation and
the changes it has set in motion raise
a number of other issues that have not
been resolved. It seems appropriate to
mention them here, if only to call attention to the need for further discussion
and for public awareness.
The legislation has fundamentally
altered the relationships between Federal Reserve Banks and depository institutions. The entire concept of membership has lost much of its traditional
meaning. Our services will now be available to all depository institutions, on an
equal basis, regardless of membership in
the Federal Reserve System. The ownership of Federal Reserve stock is mandatory for national banks and optional for
other banks. None of the new depository
institutions that are now required to
report data and hold reserves owns stock
in this Bank, nor do they have any voice
in the selection of our board of directors.
Member banks elect six of the nine
members of each Reserve Bank's board of
directors; the Federal Reserve Board of
Governors selects the other three members. It may be desirable to broaden the
composition of the Reserve Banks'
boards to include the new depository
institutions. Whether this is best accomplished by enlarging the boards
of directors or increasing the number
of institutions eligible to select directors
or by enlarging membership are questions
that deserve discussion.
2
The sweeping changes enabled by the
Monetary Control Act will make depository institutions more and more alike.
This homogenizing process will also
have far-reaching ramifications for the
regulatory structure, which at present
is both complex and overlapping. Many
issues must be reconsidered. How many
different regulatory bodies or groups are
necessary? How should they be reorganized or coordinated? What is the proper
role of the Federal Reserve System if
such reorganization occurs? Although
opinions differ on these matters, it has
been our experience that the effective
performance of System monetary policy
and operations functions requires accurate and timely information and
important System participation in this
process. As depository institutions become more alike, differences in competitive criteria and merger standards
will become even more troublesome.
Future changes in state and federal
laws to permit wider branching-both
intra- and interstate-will accelerate
the process. The pressure to amend
regulations can only increase, as all
depository institutions move toward
competition on more equal grounds.
This in turn will force changes in the
regulatory structure and procedures.
The Federal Reserve System originally was designed for a unit banking
structure-a structure that has been
slowly eroding, and the rate of this
erosion has been accelerating. The payments mechanism responsibilities of the
Federal Reserve have already felt the
influence of this evolution, and additional
pressure will arise from the new pricing
environment. Pricing turns the spotlight on costs of each specific service,
which in turn raises questions about service territories and district boundaries,
as well as the appropriateness and location of physical facilities.
The Monetary Control Act was
designed primarily to achieve a specific
goal-the control of the money supply.
The legislation has accelerated the changes
that are occurring in that elusive concept
"money." Reserve requirements have
been extended to savings banks, savings
and loan associations, and credit unions,
as well as to all banks. But financial
initiative both in the creation and the
use of "money" is not limited to these
institutions, and already many gaps in
our network are recognized. We must
continue to modify and enlarge our definitions as needed, both for equitable
competitive conditions as well as adequate control of money.
Given the new operating environment mandated by the Monetary Control
Act, the need for uniform responses
throughout the Federal Reserve System
becomes more necessary. This Bank believes that such uniformity should not,
however, be equated with increased centralization of Federal Reserve decisionmaking at the Board of Governors. We
strongly believe that each of the Federal
Reserve District Banks should continue to
contribute to the total System, whether
in designing monetary policy or in administering new regulations. Decentralized contributions truly result in
the Federal Reserve System equaling
more than the sum of its 13 parts.
The Federal Reserve Bank of Cleveland is a service organization, providing
useful services in an efficient manner.
Certainly this Bank strives to excel in
the products and the services that it
offers, and it shall continue to do so.
This Bank shall continue to be flexible
in its response to the needs of customers,
while also seeking to assure the stable
environment necessary for the operation
new services should this Bank be prepared
to implement in view of changes in
market structure and demands? At what
level of service can (and should) this Bank
announce the discontinuation of a service? Which customers would be disadvantaged, and how? What other Federal Reserve objectives might suffer, or
what other service prices might come
under related upward pressure?
These are but a few of the questions
and issues that the evolution set in place
by last year's legislation will bring to the
forefront in the future. Although we have
ended the year 1980 with many questions
still unresolved, we are excited by the
new questions and the new operating
environment. The Bank and its staff
look to the future with enthusiasm
and dedication to serve our new public,
as well as the many institutions that we
have served in the past.
The many changes that th is Bank
has met in the past year reflect the diligence and capabilities of the Bank's
employees. We are proud of their accomplishments and appreciate their diligence.
We are also mindful of the continued
support of our member banks and the
interest of our new constituents, and to
all we express our sincere thanks .
.
Willis}. Winn (left) and J.L. Jackson.
of depository institutions in the
Fourth District.
One might question whether this
Bank can respond quickly to a large
volume increase in demand for its services. Others may be concerned about
unpredictable declines in demand that
would necessitate staff and equipment
reductions. Reduced volume may lift
unit costs and force shifts in the level
of services in particular areas or to
particular customers. Beyond these issues
are many more that arise in the competitive environment of pricing. What
J.L. Jackson
Chairman of the Board
Willis J. Winn
President
February 12, 1981
3
The Monetary Control Act-Mandate for Change
The past year marked the beginning
of sweeping changes for the Federal Reserve Bank of Cleveland and for depository institutions in general. The Depository Institutions Deregulation and Monetary Control Act of 1980, signed into law
in March, mandates far-reaching changes
in the regulatory framework governing
financial markets and depository institutions. The Monetary Control Act (MCA)
is also likely to be the impetus for further
changes in the structure of financial
markets. Already, the role of this Bank
in providing services to depository
institutions in the Fourth District has
been permanently altered. The institutions that use these services will be
noticeably different in terms of identity,
size, and even location. Some of the
changes wrought by the Monetary
Control Act are discussed in this Annual
Report-specifically the changes at this
Bank and the challenges and opportunities posed for the Federal Reserve System
and for depository institutions alike.
I. Pressures for Change
The ultimate impact of the reforms
mandated by the Monetary Control
Act cannot be known for some time.
However, the basic congressional
objectives underlying the legislation are
clear- to promote a more effective mone-
4
tary policy and to foster increased
competition in financial markets.
Monetary policy concerns were
prominent in the passage of the MCA,
especially as worsening inflation
brought monetary policy to the forefront of national attention. Reducing
inflation requires an effective monetary
control mechanism that can slow the
growth of the money supply over a
prolonged period of time. As this Bank's
7979 Annual Report indicated, market
forces and institutional changes had
created a number of significant problems for the monetary control mechanism. Within the fin ancial structure
of the United States, noninflationary
money growth requires the effective
control of bank reserves. This fact was
highlighted in October 1979, some
six months prior to the enactment of
the MCA, when the Federal Open
Market Committee adopted a new set of
techniques for controlling money. These
techniques focus more directly on
control of bank reserves than had the
previous control measures.
Prior to passage of the MCA, the
Federal Reserve was tightly enmeshed in a
vicious circle. Inflation, together with
efforts to restrict growth of bank reserves
and, ultimately, growth of money and
credit, resulted in high interest rates. High
interest rates in turn worsened the
inequities between member banks (whose
reserve balances were the basis for monetary control) and nonmember depository
institutions. Member banks understandably sought to avoid the burden of
high required levels of non-interestbearing reserve balances. Moreover, many
adjustments that the Federal Reserve
might have made to strengthen the link
between reserves and money, such as
restructured reserve requirements and
stricter administration of discount lending, would have further increased the
competitive disadvantages of member
banks and thus the incentive to leave
the Federal Reserve System.
Dwindling Federal Reserve membership clearly compromised the effectiveness of the monetary control mechanism.
A narrowing reserve base made it progressively more difficult to predict the
volume of member-bank reserves consistent with the targeted stock of money.
The growing proportion of financial
instruments outside Federal Reserve requirements and data-reporting systems
also added to the difficulty of interpreting the various money supply measures (see chart 1).
The Monetary Control Act addresses
these problems in several ways. First,
it requires reserves on transaction accounts and nonpersonal time deposits
for depository institutions. These institutions are required to provide data to
the Federal Reserve. The structure of
reserve requirements has been simplified
and the average level reduced significantly. Reserve requirements for member
banks will be gradually reduced to the
new levels over a 3½-year period, while
requirements for nonmember depository institutions will be increased to
the same new levels over an eight-year
phase-in period.
Other regulations also impinged on
the effectiveness of the monetary control
mechanism. Depository institutions were
precluded from explicitly paying interest
on transaction accounts, and inflation had
pushed interest rates far above Regulation
Q time deposit rate ceilings. The availability of computer and telecommunications technology at declining real costs
made it possible to avoid deposit rate
limits. Imaginative new accounts and
transfer arrangements offered by depository institutions and, more disquietingly,
by nondeposit financial institutions and
even nonfinancial business firms, became
increasingly attractive to consumers and
businessmen. Sharp periodic shifts in
flows of funds occurred whenever interest rates rose significantly above the
Chart 1 Rapid Growth of Close Money Substitutes
Billions of dollars
180
-
Government plus corporate savings deposits at weekly reporting banks
-
Other checkable deposits
-
Money market mutual fund shares
-
Overnight and term RPs
160
140
120
100
80
60
40
20
0
1973
1974
1975
1976
regulatory ceilings. Some comprehensive relaxation of deposit rate regulation was a requisite both for an effective
monetary-policy control mechanism and
for more meaningful measurement of
the money supply.
Second, the Monetary Control Act
authorizes all depository institutions to
1977
1978
1979
1980
offer interest-bearing payment accounts
to individuals effective December 31,
1980. In addition, the removal of the Regulation Q ceilings on time and savings
deposit rates was mandated as soon as
feasible but no later than March 31, 1986.
The task of overseeing the phase-out of
the Regulation Q cei lings was assigned to
the Depository Institutions Deregulation
Committee (DIDC).
The extension of reserve requirements to all depository institutions
5
The Bank's reception room features
panels of the seals of the four states of
the Fourth Federal Reserve District.
made it possible to deal with another
concern. Lack of open access to Federal
Reserve services and a lack of competition in the provision of these services had
led to inefficiencies in their delivery to
consumers and businesses. To correct
these inefficiencies, the third major
feature of the Monetary Control Act provides for direct access to Federal Reserve services for all depository institutions subject to reserve requirements
and requires that Federal Reserve services be explicitly priced. The result
should be expanded opportunities for
competition between Federal Reserve
6
Banks and private-sector suppliers of
services to depository institutions, particularly in the area of the payments mechanism. Eventually, enhanced competition
should lead to lower costs, more innovation in both services and equipment,
and thus greater efficiency and more
benefits for the public.
The exact impact of these competitive adjustments is impossible to
predict at this time. Greater competition
will force efficient and inefficient market
participants alike to adjust their operations and to redefine their role in the
marketplace. Given the large number of
depository institutions, more competition
may mean fewer and perhaps different
institutions. Nevertheless, the underlying
presumption is that increased competition is worth the price.
Efforts to reform the U.S. financial
industry are not new. Recognizing the
widening functions and growing competitiveness of financial institutions with
different charters, the 1961 report of the
Commission on Money and Credit recommended greater flexibility in the powers
of depository institutions and fewer restrictions on the "free flow of funds."
Public concern accompanying the
Penn Central collapse in 1970 was reflected in the presidential appointment of
the Hunt Commission in June 1970 to
study the nation's financial structure.
Some of the Hunt Commission's recommendations presaged the Monetary Control Act. For example, there were recommendations to abolish Regulation Q
restrictions on deposit interest rates and
to widen the availability of checking
account services and credit cards. The
report also recommended changes that
would have broadened reserve requirements. On the other hand, the
Hunt Commission report recommended
that the payment of interest on demand
deposits continue to be prohibited.
Throughout this period, rising interest rates and interest rate ceilings produced disintermed iation and threatened
The Law Itself
The Depository Institutions Deregulation and Monetary Control Act of 1980
consists of nine titles, five of which
are actually new laws; the remaining
titles are designed to amend existing laws
through "housekeeping" additions. A
brief description of the act follows:
Title/: Monetary Control Act of 7980
(new law)
Provides that all depository institutions holding transaction accounts or
nonpersonal time deposits submit
reports and meet reserve requirements
as set by the Board of Governors of the
Federal Reserve System within ranges
prescribed by Congress; the reserve requirements are to be phased in over a
period of years, except for types of
deposits or accounts authorized after the
effective date. Establishes permissible
ranges within which reserve ratios may be
set, but gives the Federal Reserve authority to exceed the ranges in extraordinary
circumstances and to impose supplemental reserves if necessary for effective
monetary policy; if imposed, the supplemental reserves could be held as vault
cash or in an earning account at the
Federal Reserve. Provides access to
the Federal Reserve discount window to
all depository institutions holding transaction accounts or nonpersonal time deposits. Directs the Federal Reserve Banks
to begin pricing their basic services within
18 months of enactment and to open
access to those services to all depository
institutions as pricing takes effect. Requires prices to be set with due regard
to competitive factors and to be based on
all direct and indirect costs; the determination of prices and their impact
shall be reported to Congress.
Title II: Depository Institutions Deregulation Act of 1980 {new law)
Title IV: Powers of Thrift Institutions
and Miscellaneous Provisions
Title VI: Truth in Lending Simplification
and Reform Act {new law)
Provides for the orderly phaseout
and ultimate elimination of ceilings on
interest rates on accounts and deposits
at depository institutions. Sets up the
Depository Institutions Deregulation
Committee and defines its membership as
the heads of the Treasury and the five
federal financial regulatory agencies, and
directs that they work toward providing all
depositors with a market rate of return on
their savings. Sets a maximum of six years
for the phaseout of ceilings and the subsequent expiration of the committee itself.
Increases lending and investing
powers of federal savings and loan associations; removes geographic restrictions on
their lending; and allows a higher loan-tovalue ratio, second mortgages, the exercise of trust powers, and credit card
services. Establishes a federal interagency
task force to study the impact of high
interest rates on thrift institutions.
Expands the lending powers of mutual
savings banks and their authority to
accept demand deposits.
Incorporates modifications, clarifications, and redefinitions into the Truth in
Lending Act ( 15 U.S.C. 1602). Requires
model disclosure forms and clauses in
readily understandable language. Covers
accuracy of annual percentage rates,
liability of credit cardholders, and advertising of open-end credit plans.
Title /II.: Consumer Checking Account
Equity Act of 1980 {new law)
Overrides state laws or constitutional
provisions that limit the rate or amount
of interest on residential mortgage loans
or on any accounts or deposits at depository institutions. Removes similar restrictions on large business and agricultural loans. Amends or repeals various
existing laws to enable the new provisions.
Permits the nationwide offering of
NOW accounts as of December 31, 1980.
Allows all commercial banks to offer
ATS accounts and all federally chartered
savings and loan associations to operate
remote service units as of March 31, 1980.
Permits the Federal Home Loan Banks
to process and settle check-like instruments provided that the banks charge
for these services. Permits federally
insured credit unions to offer share
draft accounts. Permits the Central
Liquidity Facility to clear transactions
on such accounts and to charge fees for
clearing. Raises deposit and account insurance to $100,000 with associated increases in insurance rates. Awards additional lending authority to credit
unions, and raises their maximum loan
rate ceiling to 15 percent per annum.
Title V: State Usury Laws
Title VII: Amendments to the National
Banking Laws
Amends national bank powers to
hold real property. Authorizes Comptroller of the Currency to revoke the
trust powers of a national bank and to
proclaim a legal holiday for national
banks for emergency reasons. Defines
a bankers' bank. Terminates the national
bank closed-receivership fund.
Title VIII: Financial Regulation Simplification Act of 1980 {new law)
Requires for the next five years that
federal financial regulatory agencies review all existing regulations and plan all
new regulations to be clearly written,
necessary, efficient, and effective, avoiding costly burdens on the public.
Title IX: Foreign Control of U.S. Financial Institutions
Sets a three-month moratorium
(until July 1, 1980) on the takeover of
any domestic financial institution by a
foreigner unless necessary to prevent
insolvency or in the nature of an intrafirm
reorganization or an ordered divestiture.
NOTE: This summary is by no means complete
and should not be used for legal reference.
7
Chart 2 Growth of Nonmember Bank Deposits
and Decline of Federal Reserve Membership
Number of banks
Percent
Total deposits
held by non-
6200
25
6100
6000
Member banks
5900
20
5800
5700
15
5600
5500
5400
5300
10
1965
1970
the ability of financial institutions to
meet the demands for funds. Some fi.
nancial intermediaries, trapped between
relatively low interest rate ceilings and
high market interest rates, found themselves unable to compete with other
financial institutions and with new investment instruments, such as large negotiable CDs, Eurodollars, real estate
investment trusts, money market mutual
funds, and direct purchase of new U.S.
Treasury issues by the public. The dramatic expansion in the volume of assets
held in short-term, interest-paying arrangements with nondepository institutions continued.
Pressures for legislative reform were
mounting in many quarters. By 1975,
the House Banking Committee, in its
Financial Institutions and the Nation's
Economy (FINE) study, again turned
attention to the potential benefits of
8
1975
1980
reform. It soon became clear, however,
that comprehensive legislative action was
unlikely. Competing interests led to
stalemate rather than compromise on
most issues, as groups became entrenched
in defense of perceived vital interests.
Voluntary membership in the Federal
Reserve System was one of these issues.
As Federal Reserve membership continued to erode, the System became increasingly concerned about the effectiveness of monetary policy actions (see
chart 2). With the change in policy
emphasis in October 1979, the focus of
monetary policy shifted further toward
the direct control of bank reserves. At the
same time, the proportion of bank
deposits against which Federal Reserve
reserve requirements did not apply was
increasing. During the fourth quarter of
1979 and the first few weeks of 1980, for
example, 69 banks gave notice of withdrawal from membership-during a
period when the acceleration of prices
seemed to indicate that inflation was out
of control. Membership simply had become too expensive for a growing number of banks.
Although pressures for legislation to
deal with these problems were strong,
progress was slow. Constrained by an outdated, unchanging regulatory framework,
a complex structure of financial markets
had evolved, bringing with it many conflicting objectives and interests.
Early in 1980, acceleration of
inflation and continued loss of Federal
Reserve membership added impetus to
several pieces of legislation that had
been slowly moving through Congress.
One was the perennial bill to solve the
membership problem. Others were bills
to remove Regulation Q, relax lending
restrictions on thrift institutions, and
permit negotiable order of withdrawal
(NOW) accounts. Interest rates
had reached unprecedented levels, and
the implicit cost of membership increased. Two banks in Pennsylvania,
with combined deposits totaling over
$3 billion, announced their withdrawal
from membership. In testimony before
the Senate Banking, Housing, and Urban
Affairs Committee in February, Federal
Reserve Chairman Paul A. Volcker revealed that a Federal Reserve survey suggested an additional 670 banks were
considering withdrawal. Finally, longstanding differences were cast aside,
consensus emerged, and legislative
changes long advocated but just as long
delayed occurred with breathtaking
The Data Services Department of the
main office receives reports from institutions in the Fourth District.
speed. By March 23, a congressional joint
conference had agreed on a final version
of a bill, which was passed by Congress
and signed by President Carter on March
31, 1980. A new era had dawned for the
financial industry.
II. Impact on the Federal Reserve
Bank of Cleveland in 1980
The Monetary Control Act had a
marked impact on this Bank in 1980.
Many of our services, formerly provided
to member banks only, will be made available to all depository institutions that
hold reserves. The MCA contained new
definitions of deposits subject to reserve
requirements, applied them to all depository institutions, and stipulated access to
Federal Reserve services in a pricing environment for all depository institutions.
The legislation enacted in March would
begin to take effect in six months.
reserves. The data are also used in the
construction and interpretation of the
monetary aggregates. At the Federal
Reserve Bank of Cleveland, deposit
reports stream into the Data Services
Department at the main office and the
Accounting Departments at the Cincinnati and Pittsburgh offices. Many of the
Bank's accounting and data reporting
systems have been automated for several
years. Virtually all of the computer
programs for reserve accounting and
deposit data reporting were modified in
the second half of 1980 to meet the
requirements of the new legislation.
The data services function maintains the computerized "central file"originally a list of commercial banks
(member and nonmember) and branches
in the Fourth District. At the end of July
1980, the central file contained 664
banks. Under the Monetary Control Act,
the number of institutions to be contacted (if not serviced) in the Fourth
Data Reporting and Reserve Maintenance
Depository institutions with transaction accounts or nonpersonal time
deposits are required to report deposit
data for the calculation of required
9
Staff members of the Data Services
Department review reports.
District quintupled. Additions to the file
included two mutual savings banks, three
branches of foreign banks, five Edge
Act corporations, an estimated 600
savings and loan associations, and approximately 2,100 credit unions.
The final procedures for reporting
data were released by the Board of
Governors in September, with actual reporting scheduled to begin on October 30.
Within three weeks, about 1,400 depository institutions were invited to 60
meetings held by the Cleveland, Cincinnati, and Pittsburgh offices at 20 different
locations in the Fourth District. Representatives from more than 1,000 depository institutions attended the first series
of meetings.
10
In November a total of 990 depository institutions, with $15 million
or more in deposits, reported data weekly
under the new requirements (see table 1 ).
Over 600 institutions, with $2 million to
$15 million in deposits, began to report
data on a quarterly basis in January 1981.
Nearly 1750 District depository
institutions have not yet begun to report
data to the Federal Reserve. These are
certain nonmember institutions with less
than $2 million in total deposits-largely
credit unions and savings and loan associations. The entire question of their reporting and maintaining reserves has
been deferred at least until May 1981.
The immediate impact on reserve
balances held on deposit at this Bank was
modest in 1980 because of the phase-in
provisions of the legislation. Reserve
requirements of nonmember banks and
nonbank depository institutions will be
increased to the new levels over an
eight-year period. The first step was
instituted in November for institutions
with more than $15 million in total
deposits. Because the vault cash levels of
most nonmember institutions exceeded
the first phase of their reserve requirements, only a few new reserve deposit
accounts were established. Most memberbank reserve requirements will be reduced over a 3½-year period. The first
installment of those reductions occurred
in November 1980.
The Discount Window
The MCA provides all depository
institutions subject to reserve requirements with access to the discount window. Following passage of the legislation,
the Federal Reserve revised its regulations
governing the discount window to accommodate newly eligible institutions. A
booklet containing information on credit
services and the administration of the
discount window was prepared and distributed to all depository institutions in
the Fourth District.
Two basic types of credit programs
are available to depository institutions.
The first- adjustment credit-is available
on a short-term basis, either to assist
depository institutions in meeting unforeseen temporary requirements for funds or
to cushion adjustment to more persistent
outflows. The second basic program
is extended credit, one form of which
is seasonal credit. Seasonal credit can be
provided to smaller institutions that lack
ready access to national money markets
or to special industry lenders. Adjustment credit and advances made under
the seasonal credit program are at the
basic discount rate, although the Federal Reserve retains the option to apply
a surcharge to the basic rate.
Extended credit is also available to
help meet difficulties arising from exceptional circumstances or problems at a
specific depository institution, where the
provision of such temporary assistance is
in the public interest. Extended credit
for these purposes would normally be at a
rate in excess of the basic rate.
Member banks have found the adjustment credit useful. A sizable share of
bank liabilities is in transaction accounts, which tend to be more volatile
than thrift accounts. As the provisions
of the Monetary Control Act become effective, nonmember depository institutions may also develop similar needs for adjustment credit. Adjustment credit is an
important buffer for individual depository
institutions against financial disruption.
Institutions eligible to borrow from
the Federal Reserve are expected to rely
Table 1 Deposit Reporting of Fourth District Depository Institutions
Ill. Preparing for the Future
Pricing and wider access may lead to
sweeping changes in demand for the
Deferredc entire range of services currently offered
Quarterlyb
Weeklya
Type of institution
by the Federal Reserve. Open access will
39d
greatly increase the number of institu0
382
Member ban ks
tions that can use Federal Reserve ser0
103
172
Nonmember banks
vices. On the other hand, the introduc0
0
2
Mutual savings banks
26
tion of explicit prices for those services
168
Savings and loan associations
398
1,717
may reduce the number of institutions
297
28
Credit unions
that actually use them. Although these
0
0
3
Branches of foreign banks
changes will not take place overnight, the
0
0
Edge Act corporations
5
MCA has set in motion a process that
1,743
607
could lead to a new market structure
990
Total
whose ultimate form is now uncertain.
a. As of November 12, 1980.
As the Federal Reserve prices its services
b. As of January 1981.
directly, banks-correspondent and rec. Deferred at least until May 1981.
alike-will compare costs and
spondent
d. Prior to the Monetary Control Act, all member banks reported weekly and continued to do so
own services and prices
their
change
eligibecame
throughout 1980. In 1981, 79 member banks with less than $15 million in deposits
in response. Each change is likely to
ble for quarterly reporting, yet 40 of these banks chose to continue weekly reporting.
prompt further adjustments. At present
the Reserve Banks have little solid indiControl A ct of J980 is an 18-page sumon other available sources of funds becation about what the ultimate sermary of the MCA. Federal Reserve
fore turning to the discount window.
vice demand will be.
Services describes services typical at
Institutions with access to credit proRegardless of the level of demand ,
Federal Reserve Banks. Federal Reserve
grams provided by Federal Home Loan
the Federal Reserve System has every
Fourth District Check Services discusses
Banks, credit union centrals, or the
intention of carrying out its basic service
the check-clearing relationships between
Central Liquidity Facility of the Naresponsibility-to maintain an efficient
depository institutions and the Federal
tional Credit Union Administration are
and effective payments mechanism for
Reserve System. Federal Reserve Fourth
expected to seek assistance from these
the nation. Over the years the Federal
District Funds Transfer Service describes
sources before requesting credit from
Reserve has played a major role in modFedwire (Federal Reserve communithe Federal Reserve.
ernizing the payments mechanism. A long
cations system) and how depository
series of innovations have enhanced
institutions can initiate or receive transservice, reduced costs, and handled
Communication with Constituents
fers of funds from other institutions in
volume increases in the payments mechTo implement the new requirethe System. These publications represent
anism. In recent years planning and
ments for deposit reporting and reserve
a continuing effort by this Bank to
implementation have centered on newer,
maintenance and to inform depository
disseminate information about Federal
more productive equipment and systems
institutions of the wider access to Federal Reserve services in a pricing environment.
designed to accommodate increased deReserve services, it was necessary to
mands. Significant increases in proestablish communication with nonmemductivity have been achieved at this
ber depository institutions. Information
Reserve Bank. The continuation of these
needed to be conveyed quickly and widely.
efforts will help the Federal Reserve to
This Bank and its offices received
remain competitive and retain a promithousands of telephone inquiries throughnent place in the payments mechanism.
out 1980 about the legislation and its
implications. To assist in communication
with constituents, several publications
were produced by this Bank. Depository
Institutions Deregulation and Monetary
11
Reeortin&
The Federal Reserve Bank of Cleveland
introduced a number of changes in 1980
that illustrate our ability to respond
successfully to the challenges of a competitive environment.
Currency Processing
The Reserve Banks act as agents for
the federal government in distributing
new and reusable currency, accepting
surplus cash, and replacing currency no
longer fit for circulation. Historically,
cash handling was a relatively high-cost
operation, because each note was inspected manually to determine currency
fitness and authenticity. There has been
a longstanding effort on the part of the
Reserve Banks to control currencyhandling costs. Increases in currency
volume in the 1960s precipitated the use
of sampling and weighing techniques and
increased dependence on machines1 such
as tickometer counting equipment and
medium-speed processors with counterfeit detection capabilities.
After extensive study, the Federal
Reserve System contracted for the competitive design and construction of a
prototype automated currency-processing system, known as CVCS (currency verification, counting, and sorting
Each of the Bank's high-speed currency-processing machines can handle up
to 67,000 notes per hour.
system). The equipment embodying this
new technology was installed in 1979 at
the Cleveland, Cincinnati, and Pittsburgh
offices, and additional equipment was
installed in 1980. Approximately 80
percent of the currency deposited in the
Fourth District is now processed on
high-speed equipment.
The CVCS system efficiently performs all of the basic currency-processing
functions. Each of the six machines
handles up to 67,000 notes per hour,
verifying each piece of currency for
denomination and identifying and rejecting improper notes. The machines
evaluate the physical condition of each
note against a quality level established for
notes fit for recirculation. Currency that
is determined to be fit is assembled in
packages ("straps") of 100. Currency detected by the machine's sensors as unfit for
reissue due to tears, repairs, soiling, and/or
a high degree of wear is shredded and destroyed as part of the processing operation.
The new technology has several
benefits. Foremost is an improvement in
the general quality of recirculated currency. Second, the number of fit notes
previously destroyed prematurely has
been reduced. In the past, packages of
unfit currency deposited by banks
invariably contained some fit notes, yet
the entire bundle was destroyed because it was not cost-effective to inspect each note. With the rising cost of
printing Federal Reserve notes, significant savings are realized in recovering
fit notes.
A third benefit of CVCS processing
is an improvement in counterfeit detection. Formerly, counterfeit notes
were discovered by "feel" or by simple
magnetic devices. Because the CVCS
equipment contains a sophisticated
counterfeit detector, most counterfeits
are now spotted.
13
High-speed check sorters read the
coding on each check, transmit the dollar
amount and routing number to a central
computer, and sort checks for delivery to
appropriate depository institutions.
Another benefit of the CVCS system
is the elimination of former laborintensive and costly currency destruction
procedures. Before 1980, the destruction
of unfit notes required extensive verification and cancellation procedures involving as many as six employees. Today
the CVCS equipment shreds unfit notes
on their first trip through the machine.
Although this first generation of
high-speed equipment has significantly
improved the currency-processing capabilities of this Bank, additional improvements can be made. Planning for a second
generation of machines has already
begun, to improve further the quality of
currency in circulation and reduce
currency-processing costs.
Check Clearing
In terms of dollar value, paper checks
are the primary means of payment for
ordinary transactions in the United States
14
today. The number of paper checks
written each year has been growing
rapidly. In 1973, the 12 Federal Reserve
Banks together cleared 10 billion checks;
by 1980, the number had grown to 16.5
billion, an average 7.4 percent annual rate
of increase (see chart 3). Now the huge
volume of checks drawn on banks is being
supplemented by orders for third-party
payments drawn on thrift institutions and
credit unions, especially since the MCA
extended NOW account powers to depository institutions nationwide.
The Fourth District Federal Reserve offices receive, sort, and dispatch
4.2 million checks daily. To process such
an enormous number of checks within a
few hours of receipt, accurate high-speed
equipment is essential. High-speed reader/
sorters are used to read the MICR (magnet ic ink character recognition) coding
printed on each check, transmit the
amount and routing numbers on each
check to a central computer, and sort
each check for delivery to the appropriate
depository institution. At the same time,
the computer processor compiles the information necessary to credit the depositing
institutions that honored checks for their
customers and to charge the paying
institutions that in turn will charge their
customers who wrote the checks.
During 1980, the Federal Reserve
Bank of Cleveland began planning to replace its current high-speed check
reader/sorters with faster, more reliable
equipment. The new check-sorting equipment will significantly reduce preparation
time, increase through-put to more than
90,000 checks per hour, and reduce the
number of mis-sorted items. Another
major improvement will be a reduction in
the number of items rejected, due to an
improved double-reading feature for all
documents on the new equipment. Fewer
rejects will significantly reduce the costly
man-hours required to process nonreadable items.
The new check-processing equipment
can accommodate future operations improvements and new services for depository institutions. The equipment may
make it possible to exchange magnetic
tapes containing the images of items, thus
enabling depository institutions to
"image-match" items for easier reconciling and processing. Various geographic
sort patterns, commingling of endpoints
during sorting, deposit analysis, and larger
cash letters are some additional features
and services that will be possible.
Another productivity improvement
in check processing during 1980 was the
introduction of new sorters for less
labor-intensive processing of rejected
checks. The new machines automatically
Chart 3 Checks Processed
by the Federal Reserve System
Millions
----------------
15,902
feed each document and read as many of
the MICR characters as possible; a display
screen informs the operator of the characters that are not readable (amount or
routing number) for each check. The
operator uses a keyboard to enter the
correct amount or routing number, and
the check is then sorted automatically
to the correct pocket. Currently, over onehalf of all reject items are being fully read
and sorted without operator assistance.
Transportation Services
1973
1977
1979
In an ongoing effort to improve
services, the Bank is attempting to reduce
costs in its check-delivery and armoredtransportation networks. Significant operations savings have been achieved at all of
the Fourth District offices. Transportation represents about one-third of the
Federal Reserve costs of check processing. Many of the Fourth District's
interdistrict check-transportation networks have been competitively bid in
the last year or two, resulting often in
lower costs and sometimes in a change
in carrier.
The Bank also has elected to employ
"rate protests" before public utilities
commissions when no competitive alternative source of supply was available.
These initiatives have required extensive
legal and consultative support because of
the "expert" testimony required by
public utilities commissions in ratemaking decisions. Recent decisions handed
down by the Public Utilities Commission
of Ohio, for example, have resulted in
substantial rate reductions for intrastate check shipments.
Selected intra- and interdistrict
armored-transportation networks were
also bid competitively among contract
carriers in 1980. Major rate reductions
have enhanced service and offset rapid
15
cost increases in these areas. Additional
armored networks will be selected for
bidding in 1981.
Over the past two years, transportation services in the Fourth District
have become much more competitive
as new carriers have entered the marketplace. If this trend continues, there will
be less need for rate protests before
regulatory bodies.
Because of the MCA, new depository
institutions are entering the paymentservice marketplace, adding new endpoints to the Fourth District's checkdelivery network. The cost of transportation services is expected to increase
as labor, energy, and capital costs accelerate. Faced with increasing demand and
costs, depository institutions may welcome the check-and-balance environment
provided by multiple transportation
vendors. As the cost differential between
over-the-road and electronic-delivery networks narrows, electronic rather than
paper payment alternatives also may
become more attractive to depository
institutions and the public.
Federal Reserve Communications System
While checks are currently a more
common form of payment in the United
States, massive transfers of funds are
made electronically. On an average
business day, approximately $256 billion
is transferred by Fedwire (Federal Reserve communications system). Fedwire
has been used for years to transfer funds
between participating institutions in
virtually every part of the country.
Checks and EFT payments delivered
during the night are processed by the
following morning.
Transfers to and from the accounts of
businesses and consumers result in
immediate debits and credits to memberbank reserve or clearing accounts held at
Federal Reserve Banks.
Over the years, the Federal Reserve
communications system has been expanded to accommodate a huge increase
in both funds and securities transfers. The
volume of messages is currently increasing at a rate of more than 25 percent
per year. Since the Federal Reserve and
the U.S. Treasury instituted a computerized "book-entry" system for U.S.
government securities, ownership of the
securities is electronically transferred
without the risk and cost of physically
moving securities. This is especially advantageous when large denominations
are transferred.
The Federal Reserve Bank of Cleveland has encouraged other applications of
electronic funds transfer (EFT). These
include the formation of local and
regional automated clearinghouses (ACHs)
for the exchange of government and
commercial payments in computer format. Not only does EFT produce significant economies in paper handling, but the
system also reduces risks of loss and theft
in the transfer of funds. The direct
deposit of Social Security payments is a
well-known application of EFT.
This Bank is continuing its efforts
to simplify and enhance the operations
of depository institutions through electronic communications. An inexpensive,
durable communications terminal for
low volumes of wire transfers was
developed, tested, and installed in
several institutions in 1980. In 1981, the
system's capacity will be expanded to
numerous institutions by the installation of additional terminals throughout
the District. The terminals will provide institutions with on-line capability
to initiate and receive funds transfers
and to confirm transactions immediately. In the future this Bank will
17
Approximately $256 billion is transferred by Fedwire on an average business
day.
18
continue to evaluate expanded uses
for these and other more advanced
terminals. In addition to the installation of low-volume terminals, this Bank
is reassessing the possibility of upgrading the equipment currently used
for high volumes of wire transfers.
The basis for this EFT activity is
a computerized communications network
established in 1969. The network links
over 500 direct-access endpoints and 12
separate Federal Reserve intra-District
systems. Realizing that access to Federal Reserve services would broaden
during the 1980s and that the volume
of electronic payments would increase,
the Federal Reserve System began to
plan in 1975 for a new network with
greater capacity, flexibility, and security than the one currently in use.
Known as FRCS 80 (Federal Reserve
communications system of the 1980s),
the system will replace the current
network with one standardized system
that can accommodate present and
future needs. Complex in design,
the project may well serve as a model
for advanced computer-based
business communications.
The conceptual design of FRCS 80
is that of a distributed packet-switching
network augmented by circuit-switching
facilities. A packet is a small set of
data, and packet switching is the relaying
of data from one processing center to
another. Instead of depending on a
central switch, FRCS 80 consists of a
series of inter-connected processors or
"nodes." The network can expand to
meet volume increases, and it can accommodate multiple connections with
terminals and/or other communications
systems. Most importantly, FRCS 80 will
reduce restrictions on how and where
data can be processed in the Federal
Reserve System. Each node is in direct
contact with at least two others in
the network, making it possible for
another Federal Reserve Bank, for
example, to receive and process communications for this Bank if our computers were inoperative.
FRCS 80 will be implemented in
phases, starting with bulk data transmission within the Federal Reserve
System. The information to be transferred will automatically be translated
by "interface modules" to a form acceptable by the receiving computer
both before and after conversion to
FRCS 80. Thus, information will continue to flow without any apparent
interruption due to conversion. The
FRCS 80 equipment and communications lines will be phased in starting in
late 1981 or early 1982. Some of the
pilot testing for the new system will be
carried out at th is Bank. The conversion
project team responsible for guiding
implementation of FRCS 80 is located at
the Federal Reserve Bank of Chicago.
IV. Challenges for the Federal
Reserve in 1981
Efforts to reduce costs and improve
productivity allow this Bank to begin
1981 with cost-effective processing and
delivery capabilities. Nevertheless, further
operations-area improvements will be
needed to meet competition under
pricing if this Bank is to fulfill its role
in maintaining an efficient payments
mechanism. The second challenge is
monetary policy. The central bank
must control money more effectively
in 1981 and beyond.
Maintaining an Efficient Payments
Mechanism
Pricing represents a major shift for an
institution that has offered services
to a specific clientele for almost 70 years.
The MCA pricing mandate is quite clear,
listing the services to be priced, as well as
the basis for setting prices. The MCA also
Chart 4 Federal Reserve Payments to the U.S. Treasury
Billions of dollars
12
10
8
6
4
2
0
1969 1970 1971
1972
1973 1974 1975
requires reductions in Federal Reserve
Bank operating budgets "commensurate
with any actual or projected decline in
the volume of services to be provided .... "
One objective of the legislation is to
assure that particular services are provided throughout the nation at the lowest
aggregate cost "without constraining the
adequacy of the level of the services."
Another objective is to use revenues from
pricing to offset an expected decline
in revenues due to reduced reserve requirements and thereby maintain Federal
Reserve payments to the Treasury (see
chart 4). The largest influence on Federal
Reserve earnings is, of course, the current
level of interest rates. An overwhelming
1976 1977 1978 1979
1980
proportion of Federal Reserve earning
assets are held as short-term U.S. government securities. Changes in market
interest rates carry through quickly to
Federal Reserve earnings. Federal Reserve
revenues have nearly quadrupled since
1969. Payments to the U.S. Treasury
rose 20 percent in 1980 alone, totaling
$11.7 billion.
The Federal Reserve System is designing price schedules in good faith,
based on periodic re-evaluation and
consultation with the financial industry.
Indeed, the first proposals that were
issued for public comment in August
1980 were significantly altered in response to such comments. The final
schedule itself will be but the first step in
an evolutionary process, with fee schedules and levels of service modified over
time in response to changing market
19
Table 2 Federal Reserve Services - Pricing and Access
Service
Schedule
Local check clearing at RCPCs
Fu 11 access, December 31, 1980
Wire transfer
Access and pricing, January 29, 1981
Full pricing, March 26, 1981
Net settlement
Access and pricing, January 29, 1981
Full pricing, March 26, 1981
Automated clearinghouse services
Full access and pricing, August 1, 1981
Check collection and clearing
Full access and pricing, August 1, 1981
Purchase, sale, safekeeping, and
transfer of securities
Access and pricing, October 1981
Noncash collection
Access and pricing, October 1981
Coin and currency transportation
services
Access and pricing, January 1, 1982
Coin wrapping
Access and pricing, January 1, 1982
Float
Three phases:
1. Operation improvement, under way
2. Change availability, September 1981
3. Explicit pricing, no date established
conditions and user demand (see
table 2). The pricing process must be
both adaptive and ongoing in order to remain competitive. The challenge for 1981
and for the next few years will be to
adapt both our operations and our
prices to the unforeseeable market
adjustments that will result from the
MCA. The nation must be assured of a
fair test of price competition, after an
absence of nearly 70 years.
The MCA requires that services be
priced competitively and explicitly, based
over the long run on all direct and
indirect costs actually incurred in providing the services. The fees must include
"an allocation of imputed costs which
takes into account the taxes that would
have been paid and the return on capital
that would have been provided had the
services been furnished by a private business firm." For a number of years, the
Federal Reserve Banks have followed a
uniform cost-accounting system that
captures all direct and indirect expenses
of each major service provided. The required allocation of imputed costs led to
development of a "private sector adjustment factor." This factor was derived
from estimates of the value of Federal
Reserve fixed assets used in producing the
priced services. In addition, the estimates
incorporated an assumed capital structure
that would approximate a private business providing the full range of payment services, plus estimated average
debt, equity, and tax costs in 1980 based
on a sample of large commercial banks.
The latest estimates resulted in a private sector adjustment factor of
16 percent.
20
Anticipating legislation that would
mandate pricing, the Board of Governors
appointed a Pricing Policy Committee in
May 1978 to analyze the costs of Federal
Reserve Bank services and to draw up
a tentative price schedule. Some services
vary from one Reserve Bank to another,
while other services are uniform throughout the Federal Reserve System. Costs of
some services vary widely from one Federal Reserve District to another, usually
reflecting differences in geographic size
and the degree of competition in each
region's transport industry, while costs of
other services appear to be similar
throughout the Federal Reserve System.
Charges would be nationwide for services
that are uniform throughout the Federal
Reserve System, District-wide where the
costs vary significantly from District to
District and competition tends to be
regional, and only office-wide where the
market for services is local and significant
office-to-office cost differences exist
(see table 3).
Tri-level pricing, reflecting geographic differences in service design, demand, and cost, is a first step toward
assuring that pricing is consistent with
competition. Beyond that, however,
some very difficult problems remainproblems whose solution will be of
fundamental importance to the
payments mechanism. As expressed in
this Bank's 7979 Annual Report, the
Federal Reserve must operate as a public
utility, guaranteeing service to all users,
including those who would be abandoned
by private suppliers because of the high
cost of serving them. If the Federal
Reserve were to face competition passively from the private sector, many
lower-cost users of Federal Reserve
services would gravitate to private suppliers offering similar services. Federal
Reserve costs and fees would rise as
volume declined. Unless cost-based
pricing is adapted to emerging competitive conditions in each identifiable
market, competition could produce a payments mechanism that is not consistent
with congressional intent or with the availability of a basic lowest-common-denominator level of services across the nation.
The pricing requirement of the
Monetary Control Act is intended to
improve performance of the payments
mechanism. In particular, there is no
intent in the MCA to precipitate the reemergence of undesirable banking practices, such as non-par checking, remote
disbursement of checks, or lack of acceptance of checks drawn on distant
banks. The Federal Reserve Banks will
have to respond to ·changing demands for
services in different markets by different
users. Only by actively meeting the challenge of competition can the Reserve
Banks avoid becoming last-resort providers of service for high-cost locations
and needs.
and interest rates reflected this turbulence. During the first half of 1980, the
aggregates fell short of the target ranges,
and interest rates, following the peak in
March, plummeted. In the second half of
Monetary Policy
the year, a surprisingly resilient economy
The second major challenge for the
and strong demands for money and
Federal Reserve in 1981 is clear. The
credit restored interest rates to the
central bank must control money and
peak levels of the first quarter. Only the
credit more effectively than in 1980, the
December decline in the money supply
first full year under the new operating
measures pulled the aggregates back to
procedures. Monetary policy generally
their target ranges. At least two difficult
succeeded in 1980 in limiting the growth
conclusions can be drawn from the rollerof money supply. By late in the year, the
coaster pattern of 1980.
narrowly defined transactions aggregates,
The brief but sharp decline in ecoafter adjustment for unanticipated shifts
nomic activity in 1980 did not even dent
into automatic transfer savings (ATS)
the upward march of the price indexes.
accounts, were within or close to the
The carryover effects of past price and
upper bounds of their target ranges. That cost increases, working their way through
is, of course, far from the whole story.
the price structure, simply overwhelmed
The year was marked by turbulence in
the price dampening effects of the slack
the economy and in the financial marthat developed in many product, labor,
kets, and both the monetary aggregates
and capital markets. Inflation is deeply
ingrained into our economic structure
and widely expected to continue. A
Table 3 Basis for Pricing Federal Reserve Services
successful effort to lower inflation must
Nationwide
District-wide
Office-wide
be founded on a believable commitment
to prolonged action. Such an effort
Characteristics of Similar long-run
Significant regional Significant local cost
will require painful adjustments and
services
costs
cost differences
differences
steady commitment to accept the costs of
Capital intensive
Local service market
these adjustments.
Uniform in nature
For monetary policy to make a
Services involved
Wire transfer
Coin wrapping
Currency and coin
successful contribution to a sustained
Net settlement
Securities services
shipments
anti-inflation program, money supply
ACHa
Noncash collection Check collectionb
growth must be lowered gradually, over a
On-line securities
Check collectionb
prolonged period of time. These are the
transfer
objectives of the Federal Reserve. The
MCA has broken the vicious circle that
a. Except for Second Federal Reserve District.
was sapping the strength of monetary
b. At option of each Federal Reserve Bank.
policy and has provided greater assurance
that an anti-inflation policy actually is
feasible. As stated by Chairman Volcker
in his recent testimony before Congress,
the Federal Reserve seeks to reduce
further the growth of the money supply
in 1981. The target ranges announced for
narrowly based M-1 A and M-1 B aggregates for the next four quarters have been
21
reduced by a half percentage point from
the 1980 target ranges. High rates of current inflation, continued expectations of
future inflation, and basic uncertainties
involving movements in economic activity
this year will make these objectives
difficult to accomplish. Monetary policy
must focus more on the requirements of
a non-inflationary environment for private
decisions and less on the uncertain feedback effects of money growth on the economy over the next two or three quarters.
The effort to contain inflation is
unlikely to succeed unless supported
by fiscal policy changes. First, a less
expansive federal budget is essential for
the credibility of any anti-inflation
program. Moreover, the growing volume
of federal financing needs has meant stiff
competition in the capital markets and
higher interest rates for private borrowers. If the Federal Reserve is successful in its efforts to contain growth of
money and credit, then federal borrowing
at recent levels would continue to absorb
capital resources that could better be
used in the private sector. We are hopeful
that the efforts now under way to curb
growth of federal outlays will succeed.
Otherwise, the tax reductions that have
been proposed wil I be offset by future
inflation, higher interest rates, and
further diminution in rates of productivity growth.
Another lesson to be drawn from
the events of 1980 is that it is very
difficult to control money growth closely
over short periods of time. Many factors
outside the control of the central bank,
including credit restraints and sharp shifts
in business activity and in credit demands, can strongly influence money
growth for short periods of time. Last
year began with a surge of inflation
and a much stronger level of business
activity than most forecasters anticipated.
Inflation and expectations of still more
22
inflation had begun to affect consumerbuying patterns and credit use. Amid
growing concern about inflation, on
March 14 President Carter imposed a
sweeping set of direct controls on the use
of credit and assigned the responsibility
for administering these to the Federal
Reserve System.
In retrospect, economic activity and
overall credit demands probably had
peaked prior to the imposition of the
controls. The immediate impact of the
controls was dramatic. Installment credit
use nearly ceased, economic activity fell,
and interest rates declined sharply.
Bankers and businessmen re-examined
their projections for the year, and credit
expansion quickly subsided to moderate
levels. The sharpness of the decline in the
second quarter owed much to the imposition of credit controls, which also
added greatly to the always present
difficulties of interpreting the basic
trends of economic activity and of
money and credit growth.
This litany of special events is not
offered as an excuse, either for last year's
uneven money growth or abrupt shifts in
interest rates. Simply stated, these were
the events with which monetary policy
had to contend. The procedures adopted
in October 1979 were extremely useful in
this volatile situation. First, as money
growth fell below the target ranges in the
second quarter of the year, the procedures operated to force bank reserves into
the system- to support the growth of the
money supply. In retrospect, much of the
weakness in the economy and in money
and credit growth was due to the credit
controls. In these circumstances, the
Federal Reserve may well have overreacted in trying to counteract the sag in
money supply growth. In similar fashion,
removal of controls in the third quarter
of the year presented another discontinuity for the money control procedures
to absorb. Few observers expected the
rebound in activity to be as .robust as
eventually proved to be the case. Again,
the procedures were extremely useful, as
the Federal Reserve moved to limit the
growth in bank reserves.
The importance of controlling
money supply growth more closely
over short periods of time is both an
open and a hotly contested issue. Several
points deserve note, even while recognizing that the conclusions are open to
debate. Closer control of money over
fairly short time periods can be achieved.
There will be a cost involved, however,
and that cost is likely to be sharper
movements in short-term interest rates
than otherwise would occur. It is also
worth noting, however, that closer
control of the money supply in the short
run is not of critical importance to efforts
to lower inflation. Virtually all of the
evidence continues to suggest that shortterm variations in the money supply
around a longer-term trend are unlikely
to feed back in any significant degree
into future changes in total spending or
prices. Variations that are corrected
within a two-month to four-month
period are tolerable, especially if businessmen, consumers, and investors
believe that the variations will be corrected. The current procedures provide
a useful mechanism for adapting reserve growth to changing events and
circumstances in a manner that is consistent with the longer-term money
supply objectives.
Shifts in deposit holdings resulting
from the MCA have already complicated
the interpretation of monetary aggregates in 1981. Any definition of money is
by necessity somewhat arbitrary. In
practice, a good definition must change
to reflect changes in what people use as
money. The introduction of NOW
accounts and share drafts nationwide
has caused large movements of funds
into these new accounts from demand
deposits, savings deposits, and other
sources. The shifts can be factored into
monetary targets and procedures. However, the sharp changes in the money
measures add to the difficulty of assuring
the public of the unchanged commitment
of policymakers to steady reduction in
money growth.
In seeking closer control of money
over short periods of time, there are a
number of refinements in the money
control mechanism that are being considered. The refinements would serve to
tighten the link between reserves and
money supply growth, but each of the improvements would involve other costs.
At present, depository institutions
hold reserves based on deposits two
weeks previous. Essentially, the level of
required reserves in any week is predetermined. The open market desk, by
changing the level of nonborrowed
reserves, forces depository institutions
to alter the level of their borrowing
at the discount window. The resulting
Guards stationed at the Bank's Superior A venue entrance ensure security and
assist visitors.
alteration in money market conditions
and rates then feeds into money demand
and supply, eventually altering money
growth rates. Depository institutions
would adjust their deposit and asset totals
more quickly if reserves were held against
current deposit totals. Offsetting this gain
would be increased volatility of money
market rates and larger information
systems costs to depository institutions
and the System. More timely information
flows will be necessary to estimate
required reserves under a more contemporaneous reserve accounting system.
A second possible area of improvement would be in the discount mechanism. At the time the new procedures were
adopted, the Federal Reserve announced
its intention to make more frequent adjustments in the discount rate. Keeping
the discount rate more closely aligned
with market rates would make borrowing behavior more predictable. This
has been achieved during 1980 to some
extent, particularly with the imposition
of the surcharge of large bank borrowings. However, there were still periods
during the year when there was a large
spread between the discount rate and
other money market rates. Reducing
that spread would influence bank use
of the discount window and tend to
smooth out borrowings and thereby
tighten the link between bank reserves
and money supply. Similarly, administration of lending may require refinements to improve consistency over time
and among the many institutions eligible
to use the discount window. Both of
these measures would probably add to
the volatility of money market rates.
The fundamental improvements in
the monetary control mechanism contained in the MCA are welcome- indeed,
they are long overdue. They will become
fully effective only over a lengthy
phase-in period. Yet, the legislation
should not be viewed as final. Neither
the procedures of October 6, 1979, nor
the legislative mandate to control money,
and ultimately inflation, can succeed
without public support. Controlling inflation must have a high priority
for everyone. Success in promoting competition in payment service markets and
in controlling inflation will not come as
an immediate result of the MCA. Only
long and costly adjustments- by the public
and by the Federal Reserve, to pricing
and to slowing money growth-will
secure the future benefits envisioned in
the passage of the Monetary Control Act.
23
Comparative Statement of Condition
ASSETS
December 31, 1980
December 31, 1979
$847,000,000
201,000,000
48,558,688
$646,050,000
149,000,000
42,406,758
202,420,000
660,240,170
54,700,000
660,000,825
3,300,547,733
4,436,095,439
1,276,210,128
3,634,652,454
4,538,501,435
1,169,091,069
Total U.S. Government Securities
9,012,853,300
9,342,244,958
Total Loans and Securities
9,875,513,470
10,056,945,783
478,639,333
23,994,150
708,326,686
(321,784,244)
662,390,056
23,224,790
370,470,917
(627,877,934)
$11,861,248,083
$11 322,610,370
$9,462,594,235
$9,026,664,652
1,528,685,121
-029,548,000
17,373,141
1,101,192,467
358,145,019
25,415,000
73,075,781
1,575,606,262
1,557,828,267
435,038,138
197,629,548
375,999,179
172,330,472
$11,670,868,183
$11,132,822,570
$95,189,950
95,189,950
$94,893,900
94,893,900
$11,861,248,083
$11,322,610,370
Gold Certificate Account
Special Drawing Rights Certificate Account
Coin
Loans to Member Banks
Federal Agency Obligations - Bought Outright
U.S. Government Securities:
Bills
Notes
Bonds
Cash Items in Process of Collection
Bank Premises
Other Assets
Interdistrict Settlement Account
Total Assets
UABI Lill ES
Federal Reserve Notes
Deposits:
Depository Institutions
U.S. Treasurer - General Account
Foreign
Other Deposits
Total Deposits
Deferred Availability Cash Items
Other Liabilities
Total Liabilities
CAPIT Al ACCOUNTS
Capital Paid in
Surplus
Total Liabilities and Capital Accounts
24
Comparison of Earnings and Expenses
Total Current Earnings
Net Expenses
Current Net Earnings
Additions to Current Net Earnings:
Profit on Foreign Exchange Transations (Net)
All Other
Total Additions
1980
1979
$974,469,886
48,768,768
$823,249,108
44,108,648
925,701,118
779,140,460
7,977,852
-0-
-0- '
634,945
7,977,852
634,945
15,589,711
12,540,229
310,439
29,006
Deductions from Current Net Earnings:
Loss on Sales of U.S. Government Securities (Net)
Loss on Foreign Exchange Transactions (Net)
All Other
-0-
1,506,064
Total Deductions
Net Deductions
,,,
Assessment for Expenses of Board of Governors
Net Earnings before Payments to U.S. Treasury
Dividends Paid
Payments to U.S. Treasury (Interest on F.R. Notes)
Transferred to Surplus
Total
<
''
17,095,775
12,879,674
9,117,923
12,244,729
5,119,700
4,288,000
911,463,495
762,607,731
5,666,775
905,500,670
296,050
5,622,240
753,871,891
3,113,600
$911,463,495
$762,607,731
,,
25
'
Directors
As of February 12, 1981
FEDERAL RESERVE BANK OF CLEVELAND
Chairman
J.L. JACKSON
Executive Vice President and President-Coal Unit, Diamond Shamrock Corp., Lexington, Kentucky
Deputy Chairman
WILLIAM H. KNOELL
President and Chief Executive Officer, Cyclops Corporation, Pittsburgh, Pennsylvania
JOHN W. ALFORD
Chairman of the Board and Chief Executive Officer, The Park National Bank, Newark, Ohio
JOHN D. ANDERSON
Senior Partner, The Andersons, Maumee, Ohio
J. DAVID BARNES
President, Mellon Bank, N.A., Pittsburgh, Pennsylvania
E. MANDELL de WINDT
Chairman of the Board, Eaton Corporation, Cleveland, Ohio
JOHN W. KESSLER
President, John W. Kessler Company, Columbus, Ohio
EVERETT L. MAFFETT
President and Chief Executive Officer, Eaton National Bank and Trust Co., Eaton, Ohio
JEFFERY A. ROBB
Managing Partner-Audit Division, Proctor, Robb & Company, Granville, Ohio
MEMBER, FEDERAL ADVISORY COUNCIL, FOURTH DISTRICT
MERLE E. GILLIAND
Chairman of the Board and Chief Executive Officer, Pittsburgh National Bank, Pittsburgh, Pennsylvania
26
CINCINNATI BRANCH
Chairman
MARTIN B. FRIEDMAN
Director, Formica Corporation, Cincinnati, Ohio
OLIVER W. BIRCKHEAD
Chairman of the Board and Chief Executive Officer, The Central Trust Company, N.A., Cincinnati, Ohio
O.T. DORTON
President, Citizens National Bank, Paintsville, Kentucky
LAWRENCE C. HAWKINS
Senior Vice President, University of Cincinnati, Cincinnati, Ohio
SISTER GRACE MARIE HILTZ
President, Sisters of Charity Health Care Systems, Inc., Cincinnati, Ohio
ELDEN HOUTS
Chairman of the Bo.ard and President, The Citizens Commercial Bank and Trust Company, Celina, Ohio
PITTSBURGH BRANCH
Chairman
MILTON G. HULME, Jr.
President and Chief Executive Officer, Mine Safety Appliances Company, Pittsburgh, Pennsylvania
R. BURT GOOKIN
Director, H.J. Heinz Co., Pittsburgh, Pennsylvania
ROBERTS. KAPLAN
Dean, Graduate School of Industrial Administration, Carnegie-Me/Ion University, Pittsburgh, Pennsylvania
ERNEST L. LAKE
President, The National Bank of North East, North East, Pennsylvania
THOMAS V. MANSELL
President and Chief Executive Officer, The First National Bank of Western Pennsylvania,
New Castle, Pennsylvania
WILLIAM D. McKAIN
President, Wheeling National Bank, Wheeling, West Virginia
27
OFFICERS
ANDREW J. BAZAR
As of February 12, 1981
Assistant Vice President
WILLIS J. WINN
OSCAR H. BEACH, Jr.
President
Assistant Vice President
WALTER H. MacDONALD
MARGRET A. BEEKEL
First Vice President
Assistant Vice President
JOHN M. DA VIS
THOMAS J. CALLAHAN
Senior Vice President and Economist
Assistant Vice President and
Assistant Secretary
WILLIAM H. HENDRICKS
Senior Vice President
JOHNJ.ERCEG
Assistant Vice President and Economist
GEORGE E. BOOTH, Jr.
Vice President
CREIGHTON R. FRICEK
Assistant Vice President
RANDOLPH G. COLEMAN
Vice President
ROBERT J. GORIUS
Assistant Vice President
ROBERT E. SHOWALTER
Senior Vice President
CHARLES A. CERINO
Vice President
JEAN H. DEAN
Assistant Vice President
ROSCOE E. HARRISON
Assistant Vice President
DAVID F. WEISBROD
Assistant Vice President
JERRY S. WILSON
Assistant Vice President
PITTSBURGH BRANCH
HAROLD J. SWART
PATRICK V. COST
General Auditor
CINCINNATI BRANCH
NORMAN K. HAGEN
Vice President in Charge
Assistant Vice President
DONALD G. BENJAMIN
HARRY W. HUN ING
Vice President
JAMES W. KNAUF
Vice President
Assistant Vice President
PAUL E. ANDERSON
JAMES H. NASH, Jr.
Vice President and General Counsel
CATHY L. PETRYSHYN
Assistant Vice President
Assistant Vice President
JOSEPH P. DONNELLY
THOMAS E. ORMISTON, Jr.
Vice President
BURTON G. SHUT ACK
Assistant Vice President
LESTER M. SELBY
Vice President and Secretary
CHARLES F. WILLIAMS
Assistant General Auditor
Assistant Vice President
ROBERT VANVALKENBURG
Assistant Vice President
ROBERT F. WARE
Assistant Vice President and Economist
28
COLUMBUS OFFICE
WILLIAM J. SMITH
DONALD G. VINCEL
Vice President
Assistant Vice President
For additional copies of the 7980 Annual
Report and other Federal Reserve publications, please contact:
Federal Reserve Bank of Cleveland
Public Information Center
P.O. Box 6387
Cleveland, OH 44101
Federal Reserve Bank of Cleveland
Research Department
P.O. Box 6387
Cleveland, Ohio 44101
@FedFRASER