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CLEVELAND
ANNUA L REPORT 1985
Our 1985 Annual Report examines the March 1985
crisis of privately insured savings and loan associations in Ohio, outlines the history of the event,
and discusses its short- and long-term effects. The
crisis was a very important incident in the Fourth
Federal Reserve District during the past year, and
eventually proved to be the forerunner of private
deposit insurance disturbances elsewhere in the
United States. As of this writing, the importance of
the questions raised by the crisis has generally
diminished outside the Fourth District, but the unsettled condition of some financial institutions and markets elsewhere creates an ongoing possibility that
those questions could become important once again.
T H REE
The President's Forward
FI VE
Unto/dings in Ohio: 1985
T WENTY · F I VE
Directors
T W E N TY·SI X
Comparative Financial Statements
T WENT Y·E I G H T
Officers
Karen N. Horn, President
TWO
While 1985 provided the Federal Reserve System with many
challenges, the events surrounding the closing of 70 privately insured savings and loan associations
(S & Ls) in Ohio were unique for the Federal Reserve Bank of Cleveland.
Federal banking supervisory and regulatory agencies, including
the Federal Reserve, generally do not have direct supervisory responsibility for state-chartered,
nonfederally insured depository institutions. However, because of the Federal Reserve's concern
with financial markets, the Federal Reserve Bank of Cleveland was an active participant in the
resolution of the March 1985 Ohio S& L crisis. Throughout the crisis, the Federal Reserve Bank of
Cleveland assisted the state of Ohio and the federal supervisory and insurance authorities in
solving many problems. The 1985 Annual Report essay, "Unfoldings in Ohio: 1985," discusses the
events surrounding the crisis, the Federal Reserve's involvement, and some of the issues raised
by the crisis.
My most lasting impression of the crisis is how quickly depositors' confidence plummeted at the privately insured institutions. The Federal Reserve Bank and
commercial banks shipped currency to institutions that were experiencing heavy withdrawals, but
cash alone was not enough to restore confidence. The further public confidence fell, the more
difficult the problem became to solve. Without depositors' confidence, even the best-capitalized
financial institution can be severely affected.
The scenes of the crisis were constantly shifting and were
far-flung. The problem began in Cincinnati at Home State Savings Bank. The action soon shifted to
Columbus, where the Governor and state legislature grappled with legislative solutions to the crisis.
Cleveland was the site of discussions and negotiations among state officials, bankers, and thrift
industry representatives. When it became clear that federal insurance would be a part of the
solution, the focus of attention became the Federal Home Loan Bank Board, the Federal Savings
THREE
and Loan Insurance Corporation, and the Federal Deposit Insurance Corporation, all in Washington,
D.C. The events of March dominated the news in Ohio and also had a brief impact on world
financial markets.
Containing and solving the crisis required the cooperative efforts
of many individuals. The employees of the Federal ReseNe Bank of Cleveland worked many long
hours, and we received a great deal of support from the entire Federal ReseNe System. Every
Federal ReseNe Bank in the System sent bank examiners to Ohio to assist in the examinations
required to qualify the closed S&Ls for federal deposit insurance. Employees of the Federal
ReseNe System demonstrated creativity and responsiveness, and proved that they have the
knowledge and skills to deal quickly and effectively with complex, emergency situations. Throughout this period, the Federal ReseNe Bank of Cleveland worked closely with the Federal Home Loan
Bank of Cincinnati. We shared information and staff in a cooperative effort to deal with problems
and to fashion solutions.
The Bank also benefited greatly during 1985 from the collective experience and judgment of its outstanding group of Directors. Their broad-based experience and
judgment helped guide the Bank through a year of many accomplishments. I extend my special
appreciation to the Directors who completed terms of seNice in 1985: John W. Kessler and Lewis
R. Smoot, Sr. of our Cleveland Board; Clement L. Buenger of our Cincinnati Board; and A. Dean
Heasley and Robert S. Kaplan of our Pittsburgh Board. The Bank also will miss the seNices of
Milton G. Hulme, Jr., the Chairman of our Pittsburgh Board, who passed away on August 5, 1985.
finally, I want to take this opportunity to extend a personal thank
you to the officers and staff of the Federal ReseNe Bank of Cleveland. I am grateful for your efforts
and dedication during the Ohio S&L crisis and throughout the year.
Sincerely,
Karen N. Horn
President
April 11, 1986
F OU R
HtsTORY- ESM Government Securities, Inc., a Fort Lauderdale,
Florida, government securities dealer, closed its doors forever on March 4, 1985. As a result, Home
State Savings Bank of Cincinnati, Ohio, immediately faced approximately $145 million of potential
losses on its dealings with ESM. Those losses exceeded the combined value of Home State's
capital, plus the total $130 million of deposit insurance assets available for statewide use in the
Ohio Deposit Guarantee Fund (ODGF).
Home State was the largest member of ODGF, which was an
independent, private, mutual deposit insurance fund chartered under Ohio law. 1 Most of the ODGF's
funding came from deposits made by insured savings and loan associations equal to two percent of
1. The ODGF covered 70 institutions, two of which were
their insured deposits. These two percent deposits were reported as assets by the insured
Home State and its Dayton, Ohio, affiliate. Apart from
institutions in their statements of condition. Apart from Home State, the ODGF insured approxiHome State, there were 68 other ODGF-insured institutions.
mately $3.6 billion worth of deposits on a statewide basis. Home State had $672 million worth of
2. The ODGF emblem prominently displayed the legend "All
deposits insured by ODGF and had reported assets of $1.439 billion (December 31, 1984).
deposits guaranteed in full."
However, $670 million of these assets actually were claims for securities lent to ESM. By March
11, 1985 it became apparent that all remaining assets of the ODGF would have to be used to cover
the losses of Home State. This would deplete the entire ODGF insurance fund and would inflict
losses on each of the remaining 68 savings and loan associations that were members of ODGF.
Later, it became clear that loss of the two percent deposits that
these member institutions had made with ODGF would also exhaust the net worth and render
technically insolvent at least six of the 68 institutions. Approximately one-third of the composite
net worth of the 68 ODGF-insured institutions would also be eliminated. Thus, instead of reassuring
depositors as to the safety and availability of their deposits, the ODGF emblem became a signal to
many Ohio savings and loan depositors that funds should be withdrawn as quickly as possible. 2
FI V E
SI X
During the week of March 4-8, 1985, runs developed at Home
State, with net withdrawals of approximately $154 million.3 Home State offices were scheduled
to open on Saturday, March 9, but its officers decided not to reopen after Friday, March 8. A
3. For purposes of this essay, a "run " is defined as a loss (net
conservator for Home State was appointed on Sunday, March 10. Runs began at some other
withdrawal) of more than one percent of total deposits per
ODGF-insured institutions on Monday, March 11 . By Thursday, March 14, extensive runs were
banking day that cannot be explained by seasonal or other
reported at six Cincinnati-area ODGF-insured institutions. Moderate runs were also reported at
factors unrelated to depositors' confidence.
approximately six other Cincinnati-area institutions, at scattered locations throughout southern
Ohio, and as far north as the Columbus area.
The daily deposit outflows at the seven most affected Cincinnatiarea institutions were as follows: March 11 , $6 million; March 12, $13 million; March 13, $23
million; March 14, $60 million. The runs were limited to ODGF-insured institutions and never
materially affected deposit flows at federally insured savings and loans, credit unions, or commercial banks in Ohio during the critical two weeks in mid-March 1985.
/n an attempt to allay the fears of depositors at ODGF-insured
institutions, a bill was enacted on March 13 authorizing establishment of a new Savings
Association Guarantee Fund ("ODGF-11"), to be funded by a new levy on ODGF-insured institutions
equal to one percent of insured deposits. The new deposit with ODGF-II was expected to raise
approximately $40 million and was to be combined with an emergency loan of $50 million of state
funds. By Friday, March 15, when the remaining ODGF-insured institutions met in Columbus to
organize and fund ODGF-II, it was too late: the ODGF-insured institutions already were closed, and
the confidence of many depositors already was lost.
Governor Richard F. Celeste proclaimed a mandatory, 3-day
closing of all ODGF-insured institutions shortly after dawn on Friday, March 15. Two ODGF-insured
institutions in eastern Ohio, which previously had been unaffected during the crisis, remained open
for business. However, runs developed at both institutions, and they closed in the early afternoon
in response to direct requests from the Governor's office.
S EV E N
During the weekend of March 15-17, bankers met with state
officials at the Federal Reserve Bank of Cleveland to consider proposals for purchases of
ODGF-insured institutions. Those meetings were arranged with the hopes that a solution to the
crisis would emerge by Monday, March 18, and that the closing proclamation would not have to be
extended. Those hopes were not realized. Neither the state officials nor the bankers had access to
enough information about the current condition, and particularly about the quality of assets, of the
ODGF-insured institutions to make reasonably informed proposals for the purchase of any or all of
those institutions. The out-of-state bankers, in particular, might have been willing to pay premiums
for the right to enter Ohio, but not without a guarantee from the state against loss, and only with
sufficient knowledge of the asset portfolios of the ODGF-insured institutions. The lack of a state
guarantee and of sufficient knowledge of the asset quality of the ODGF-insured institutions also
had been an insurmountable obstacle to the sale of Home State a week earlier.
As a result of the failure to find a solution, the closing proclamation was extended for another two days, through Tuesday, March 19. By now, the lack of viable
proposals for the sale of ODGF-insured institutions made it difficult to assume that many of them
could reopen promptly. A prompt reopening would require that they either obtain their own federal
deposit insurance or reopen under the umbrella of another institution's federal deposit insurance. By
March 18, moreover, it was clear to state officials that federal deposit insurance had to be an
essential element of any lasting solution to the crisis.
The Ohio legislature helped resolve the crisis by enacting emer-
gency legislation during the night of March 19-20. Governor Celeste and the bipartisan leadership of
the state legislature assured the general public that ODGF-insured institutions were sound or would
be made sound with the assistance of the state of Ohio, that they would eventually reopen fully,
and that they would be converted to federal deposit insurance. At 3 a.m. on Wednesday, March
20, Governor Celeste signed into law the act that specified conditions under which an ODGF-
EI GH T
insured institution could reopen for business. On March 20, a few institutions reopened with federal
deposit insurance. The emergency act authorized partial reopenings for limited withdrawals not in
excess of $750 per month per depositor's account, which was later increased to $1,000 per month.
On Thursday, March 21, a few ODGF-insured institutions partially reopened for limited withdrawals.
By Monday, March 25, 59 of the 68 ODGF-insured institutions, other than Home State, were open
for at least partial withdrawals.
The generalized loss of depositors' confidence in the formerly
ODGF-insured institutions began to abate after the weekend of March 23-24. Apart from longerthan-normal lines of customers on the first day or two of the partial reopening of some institutions,
the difficult atmosphere that prevailed during the preceding two weeks disappeared.
Extensive efforts by state, Federal Reserve, Federal Deposit
Insurance Corporation (FDIC), and Federal Home Loan Bank examiners soon began to confirm that
a substantial majority of ODGF-insured institutions were fundamentally sound and could have
viable futures. Federal Reserve examiners played a key role in this effort; approximately 60
examiners from the Federal Reserve Bank of Cleveland and 100 examiners from all the other
Federal Reserve districts participated in this review. After March 22, the bulk of the qualifying
examinations for federal deposit insurance were conducted by
Federal Home Loan Bank examiners. During the last two weeks
of March 1985, 26 of the ODGF-insured institutions reopened fully,
having qualified, with minor changes in financial structure, for
federal deposit insurance. Most of the rest that required no state
financial assistance reopened fully during April 1985.
Resolving the problems of Home State and approximately 20
other ODGF-insured institutions that were in poor financial condition required two more months of supervisory effort. This amount of time was required, in part, by
the lack of knowledge of their current financial condition. Some ODGF-insured institutions clearly
were in worse condition than at the time of their last state examinations prior to March 1985. Also,
NI NE
when it became clear that out-of-state bank holding companies could become a part of the solution
to the crisis, state officials then required more time than previously expected to discuss and debate
the implications of altering the nature of competition in Ohio banking markets.
On May 21, the legislature enacted a law that authorized out-ofstate acquirers of Home State, and other ODGF-insured institutions with a minimum aggregate
amount of $400 million of deposits, to operate those institutions under a commercial banking license.
Chase Manhattan Corporation acquired six ODGF-insured institutions with total deposits in excess
of $450 million and received an Ohio commercial banking license. Chemical New York Corporation,
parent of Chemical Bank, submitted what appeared to be the winning bid for Home State, but
American Financial Corporation, Cincinnati, parent of Hunter Savings Bank, outbid Chemical by $5
million on the seventh and final day allowed for consideration of bids on Home State from Ohio
institutions. Meanwhile, Home State's depositors had no access to their funds, not even for limited
withdrawals, until June 14, when the 33 offices of Home State were reopened.
As of this writing, one small formerly ODGF-insured institution
($58.6 million of deposits at year-end 1984) still has not reopened fully, but all other ODGF-insured
institutions, including Home State, were fully open by January 3, 1986. Forty-four ODGF-insured
institutions eventually received full or conditional approval for federal deposit insurance. Twentyfive institutions, including the two Home State entities, were merged into or acquired by other
institutions and disappeared as independent savings and loans. The smallest ODGF-insured
institution was authorized to reopen while applying for Federal Savings and Loan Insurance
Corporation (FSLIC) insurance. Of the merged institutions, Chase Manhattan acquired six, and
Home Savings of America, Los Angeles, California, acquired four.
During the crisis, some federal bank supervisory officials believed
that failure to contain the loss of thrift institution depositor's confidence in Ohio would have
adverse consequences in other states with private deposit insurance plans. In fact, the March 1985
TEN
ELEVEN
Ohio crisis did have serious repercussions for depositors' confidence in private deposit insurance
funds in other states. During March and April 1985, supervisory officials in other states with private
deposit insurance funds made public statements resisting the idea that "the Ohio problem" could
spread to their states because, they said, the circumstances in Ohio were unique. Ripples from the
crisis eventually reached another state (Maryland), and the crisis was a principal factor in
persuading officials in four states (Maryland, Massachusetts, North Carolina, and Pennsylvania) to
require federal deposit insurance to protect their own institutions. The Ohio crisis thus emphasized
the importance of federal deposit insurance, which proved to be a stable bulwark against a more
generalized loss of retail depositors' confidence.
BACKGROUND-As the March 1985 crisis unfolded, ODGFinsured institutions then included a large number of small institutions, most of which were
conservatively managed, as well as a small number of much larger institutions, most of which
were aggressively managed. Ohio savings and loan industry leaders organized the ODGF in 1957,
with the original purpose of providing deposit insurance protection for institutions that were
considered too small to require or, in some cases, even to qualify for federal deposit insurance.
Later, as the ODGF-insured institutions grew, it became convenient for some of the larger
institutions to maintain the ODGF as their only deposit insurer. ODGF insurance was superficially
less expensive than federal deposit insurance. This was because the ODGF-insured institutions
could (and did) report their two percent deposits with the ODGF as assets, while federally insured
institutions must report their deposit insurance premiums as current expenses. Also, operating
within the ODGF enabled its members to take advantage of a less-binding set of restrictions on the
powers of savings and loans than would have been possible under the supervisory structure of
federal deposit insurance.
T WELVE
for example, three ODGF-insured institutions offered 10 percent
for passbook savings accounts, while federal regulations limited the interest payable on such
accounts at FSLIC-insured institutions to 5.5 percent. Five other ODGF-insured institutions,
including Home State, were offering passbook rates of at least 8 percent when the March 1985
crisis began; 33 more ODGF-insured institutions were offering at least 5.75 percent. Thus, 41 of 70
ODGF-insured institutions were offering more than the maximum interest rate for FSLIC-insured
institutions for passbook savings accounts. This competitive edge had enabled some of the largest
ODGF-institutions to expand and, in some cases, to take imprudent risks.
One interesting question is raised by the March 1985 Ohio crisis:
should depositors who had the advantage of the extra returns offered by ODGF-insured institutions
have had the same protection as depositors whose federally insured institutions were prohibited
from offering comparable returns? Eventually, customers of all but three of the ODGF-insured
institutions received 100 percent availability of their deposits within six months after the crisis
began. Complete availability of deposits was achieved at two of those three institutions by
year-end. It may be said that the depositors of ODGF-insured institutions were exempted from the
discipline of the marketplace by receiving the benefits of federal deposit insurance, after the fact,
without having paid directly or indirectly, the costs of federal deposit insurance. Another interesting
question raised by the crisis is whether or not shareholders should suffer the discipline of the
marketplace. Most ODGF-insured institutions were mutual institutions, but several were stock
institutions. With the exception of Home State and two other stock institutions placed in
receivership in July 1985, shareholders of ODGF-insured institutions emerged from the crisis
enjoying the benefits of the same, free, federal deposit insurance as depositors.
After the closing of Home State, the Federal Reserve Bank of
Cleveland began to monitor depositors' activity at virtually all the ODGF-insured institutions. The
purpose of this activity was to be certain that up-to-the-minute, accurate information about runs
-+
~
THIRTEEN
FOURTEEN
always was available so that decisionmakers would not have to rely on rumors. Subsequently, to
acquire more information, the state requested that the Reserve Bank provide on-site examiners to
quickly evaluate the underlying financial condition of ODGF-insured institutions. Examiners from the
Federal Reserve Bank of Cleveland played a key role by helping to provide vital information to
state and federal officials.
Anot her role of the Federal Reserve Bank was to provide all the
currency that ODGF-insured institutions requested. The Reserve Bank made 174 currency deliveries
to Home State offices between March 6 and 8, and 77 currency deliveries to the other
ODGF-insured institutions between March 14 and 29. Also, commercial banks, particularly in the
Cincinnati area, were cooperative in providing currency shipments to the ODGF-insured institutions.
The Reserve Bank made daily telephone calls to all ODGF-insured institutions to make certain that
they would have sufficient currency on hand to meet any foreseeable runs. As the withdrawals
increased, however, state officials and representatives of the ODGF-insured institutions expressed
the reasonable concern that a prolonged effort to finance the runs would cause sound ODGFinsured institutions to suffer serious financial damage, along with the insolvent institutions.
Once Home State closed, a variety of new problems quickly
arose. For example, until adequate information became available, the supervisory authorities often
had to make decisions based on assumptions that later proved false. It was reasonably clear early
on, even prior to March 9, that Home State was insolvent. but no one had a reasonably accurate
estimate of the extent of Home State's insolvency until April 1985, when potential out-of-state
purchasers, particularly Chemical Bank, examined Home State's books and submitted estimates to
the state of Ohio regarding the assistance required to reopen the institution.
Consequently, throughout March and April, plans to reopen
Home State had to be constantly reevaluated and revised as more information became available.
This lack of knowledge extended, with similar consequences, to many of the other 68 institutions
besides Home State. If enough of them were insolvent, then their losses might exceed the
FIFTEEN
resources of ODGF-II, which was the remedy that the state initially proposed. In fact, later
examination of data provided to the Ohio Superintendent of Savings and Loans indicated that nine
ODGF-insured institutions, in addition to Home State, were insolvent on the basis of generally
accepted accounting principles. Another five institutions had net worth equivalent to less than 0.6
percent of assets. When the loss of those institutions' original two percent deposits with the ODGF
was taken into account, all five of the low-net-worth institutions, plus two more, were insolvent. In
all, 16 of the remaining 68 ODGF institutions were insolvent under generally accepted accounting
principles, once loss of the original two percent deposits with the ODGF was taken into account.
It federal deposit insurance was to be the answer for the ODGFinsured institutions, it became clear that they would have to meet the minimum net worth and
other requirements for FSLIC insurance. Many of the ODGF-insured institutions seemed unlikely to
be able to meet these requirements on their own. In any event, the process of qualifying for federal
insurance clearly was going to require additional time for thorough financial examinations. Also,
additional time clearly was going to be required for raising new capital and for making structural
changes necessary to comply with federal deposit insurance requirements.
As the confidence of depositors in ODGF-insured institutions deteriorated after March 4, 1985, the range of options available to state officials to deal with the crisis
narrowed. At the same time, the need to achieve some form of
containment of the crisis grew as the possible repercussions for
national and international financial markets became more worrisome. The news of the Ohio moratorium caused the dollar to
decline approximately two to three percent in the foreign
exchange markets on Monday, March 18, 1985. The decrease in
the value of the dollar followed national publicity on the Governor's proclamation of the moratorium, not publicity on the runs
that preceded the moratorium. Also, the price of gold increased three percent and the price of silver
increased five percent that day.
S I XTEE N
Ohio residents immediately were aware of the runs at ODGFinsured institutions because of coverage by Ohio newspapers, radio, and television. National news
media, however, did not report the runs in Ohio until Friday, March 15, after the emergency closing
4. In May 1985, the Maryland private deposit insurance fund
was proclaimed. The national news media probably considered runs on small thrift institutions in
covered 102 institutions with $7.2 billion of deposits.
Ohio unimportant until the entire ODGF system was closed. After all, bank failure was nothing new
- 120 commercial banks were closed in 1985 (most of them without runs of any kind) - but a
banking or thrift institution moratorium was a novelty.
/1 is worth noting that, in Maryland, much more time has been
required than in Ohio to formulate a lasting solution to the crisis of privately insured thrift
institutions. Those institutions in Maryland succumbed on May 14, 1985 to the same problems that
enveloped Ohio in March. As of this writing, approximately $1.15 billion of depositor's funds in
Maryland still are subject to limitation on withdrawal. Some of those withdrawal limitations have
been in effect since May 14. The principal reason for the continuation of the crisis on a
comparatively large scale in Maryland is that Maryland had more large, privately insured institutions than Ohio. 4 Also, some of the real-estate transactions in which the large, privately insured,
Maryland thrift institutions were engaged were at least as complicated and speculative as the
financial transactions between Home State and ESM. In any case, the underlying problems in
Maryland were similar to those in Ohio.
At the peak of the runs on ODGF-insured institutions (March 1114), it was not clear to the general public whether the state would or would not reimburse depositors' losses, because state officials stopped short of making outright commitments of state resources to protect depositors from loss. Statements intended to calm depositors did not calm them.
It is fair to observe that, after the ODGF-insured institutions were closed, depositors probably heard
and believed the information they wanted to hear and believe, and ignored information that contradicted their beliefs. The lack of accurate, current information on financial conditions of the ODGF-
S EV E N T E E N
insured institutions at the onset of the crisis hampered public officials in their attempts to describe
the true financial condition of those institutions to the public, and contributed to depositors'
confusion. To illustrate the public's confusion, some customers who withdrew funds from Home
State before March 8 redeposited those funds in other ODGF-insured institutions after March 11.
As the crisis unfolded, federal supervisory and insurance authorities, Ohio officials, and officials of some other states constantly had to reassess their objectives,
commitments, and abilities to protect depositors. By March 18, provision of 100 percent protection
5. Sections 4 and 5 of Article VIII of the Ohio constitution
to depositors by the state of Ohio became the underlying assumption and premise for the events
prohibit the use of tax receipts for private purposes, including
that followed. Up to $151 million of nontax receipts of the state initially were committed to the repayments to depositors of state-chartered banks.
opening of the ODGF-insured
institutions. 5
Part of those funds eventually might be regained from le-
gal actions against those involved in the collapse of Home State, or recovered from reimbursements
to loss reserves. Approximately $22 million of these state funds were appropriated for the Savings
and Loan Assurance Corporation, which provided assistance to seven ODGF-insured institutions during 1985. The remaining $129 million of state funds were allotted to the reopening of Home State.
OuR ROLE- In addition to its other roles, the Federal Reserve
Bank of Cleveland assured the integrity of the payments mechanism. As previously discussed, the
Reserve Bank arranged emergency shipments of currency to ODGF-insured institutions, provided
limited coordination for the activities of the federal bank supervisory authorities, provided meeting
space for state officials and bankers to consider proposals for the purchase of ODGF-insured
institutions, and gathered and analyzed current information on the ODGF-insured institutions. In
those roles, the Federal Reserve Bank of Cleveland acted as a facilitator in the containment and
eventual resolution of the crisis.
PAYMENTS MECHANISM- The closing of the 70 ODGFinsured institutions was unique in recent Federal Reserve experience because of the large number of
EI GHTEEN
institutions closed simultaneously and because of uncertainty about whether, when, and under what
conditions they would reopen. The closing required the Federal Reserve Bank of Cleveland to make
numerous decisions affecting the processing of negotiable orders of withdrawal (NOW drafts) drawn
on the ODGF-insured institutions and the processing and settlement of automated clearinghouse
(ACH) items. The Reserve Bank, in dealing with the situation, was guided by both its responsibility
to maintain the integrity of the payments system and its role as a collecting bank and clearinghouse.
Governor Celeste's March 15 closing order, later extended through
March 19, made the reopening of ODGF-insured institutions contingent on further orders of the Ohio
Superintendent of Savings and Loan Associations. The closing order appeared to prevent the
ODGF-insured institutions from opening for a banking day. The Federal Reserve Bank of Cleveland,
by analogy, applied to the NOW drafts the standard procedures used for depository institutions that
close on local holidays that are not observed by the Reserve Bank.
Accordingly, the Reserve Bank did not charge correspondent
banks' accounts for NOW drafts drawn on the closed ODGF-insured institutions. On March 19, the Reserve Bank determined that it would give written notice to institutions sending items to it for collection that it currently was unable to collect NOW drafts drawn on ODGF-insured institutions and that
it would return all such drafts coming into its possession until the institutions on which they were
drawn reopened. The returned NOW drafts were stamped, "Unable to Present at This Time."
The Reserve Bank determined that the March 15 closing of all
ODGF-insured institutions was a suspension of payments pursuant to the rules covering ACH
debits and credits. Accordingly, after March 15, the Reserve Bank did not make settlement for any
ACH payments received from or destined to the closed institutions. The Reserve Bank did not
return ACH transactions initially because it was not certain how long the ODGF-insured institutions
would be closed. The Reserve Bank wanted to do everything reasonable to assist the depositors of
these institutions and to encourage continued confidence in the payments system. Moreover, it
NINETEEN
was clear that a precipitous return of the ACH transactions would have inconvenienced depositors
if the institutions reopened within three days.
following the March 18 extension of the closing of ODGF-insured
institutions, the Reserve Bank determined that ACH debits and credits settling on or after March
18 would be returned. This action was necessary under the Reserve Bank's operating letters and
reflected concern that ACH payments soon to be made by the Department of the Treasury would
not be received by the depositors of ODGF-insured institutions if those institutions remained closed.
As April 1 drew near, with automatic, direct deposits of social
security payments destined for closed institutions via the ACH network, the Reserve Bank's staff
worked closely with the staff of the Board of Governors of the Federal Reserve System and the
Treasury to find alternatives for delivery of the ACH payments. The Treasury did not have sufficient
time remaining to modify its files so that checks could be issued in lieu of April direct social
security deposits. Consequently, contingency plans were established to deliver Treasury payments
electronically to other fully open depository institutions.
f very closed ODGF-insured institution agreed with the contingency plan, but it was not implemented. On March 23, the Ohio Superintendent of Savings and
Loans authorized all ODGF-insured institutions to receive ACH debits and credits. The Superintendent's action enabled the Reserve Bank to reinstate immediately all ACH service for ODGF-insured
institutions. The Superintendent's decision to allow the flow of ACH items to resume assured that
social security and other Treasury payments would be deposited in the normal way.
LENDER OF LAST RESORT-Because the ODGF-insured institutions generally were liquid, the peak amount of Cleveland Reserve Bank advances to those
institutions was only $44.9 million during the Thursday-to-Wednesday period ending March 27,
TWENTY
TWENTY·ONE
1985. The Reserve Bank was prepared to advance substantially more, if necessary, in accordance
with established procedures for advances in unusual circumstances.
/n reviewing the actions of the Reserve Bank in its role as the
lender of last resort during the March 1985 Ohio crisis, a fundamental distinction must be made
between the provision of liquidity support to depository institutions, and the guarantee of the
solvency of depository institutions or of full repayment to depositors. Providing liquidity is the traditional lending function of the Federal Reserve Banks. In the United States, guaranteeing solvency,
however, is not a function of the Federal Reserve Banks. 6
The Federal Reserve Banks stand ready to provide liquidity assistance to all types of depository institutions through extensions of credit secured to the satisfaction
of the Reserve Banks, with due regard to the soundness of the assets presented as collateral.
Reserve Banks are not ordinarily prepared to act as either a liquidator of assets or as a
risk-assuming lender for the purpose of providing deposit insurance or a guarantee of solvency.
Other agencies or instrumentalities of the federal government, such as the FDIC, FSLIC or, during
the 1930s, the Reconstruction Finance Corporation traditionally have performed such a guarantor's
function for financial institutions. 7
On occasion, however, Federal Reserve Banks might extend
6. Many foreign central banks either make capital contribu-
credit to an insolvent institution, but such credit would be extended only for the purpose of
tions to particular enterprises or allow financial institutions to
facilitating an orderly closing or merger of the institution. The Reserve Bank would establish two
remain consistently indebted to the central bank. A Federal
conditions: first, the advances must be adequately secured, with due regard to the soundness of
Reserve System committee, in addressing this point, noted
the assets presented as collateral, and, second, the appropriate supervisory authority (in this case
that, in the United States, banks in recent decades have not
the state of Ohio) must have arranged, or be in the process of arranging, a solution to the problems
been and should not be permitted to remain continuously in
of the insolvent institution. Thus, the Reserve Bank would extend credit while expecting the
debt to the Federal Reserve (1971 ).
indebtedness to be assumed, or repaid, by a legal successor of the insolvent institution.
TWENTY•TWO
The Federal Reserve Bank of Cleveland was willing to make
advances to ODGF-insured institutions that were solvent, or, if insolvent, then with satisfactory as7. Some states, including Ohio, indirectly have achieved the
surances that a capable legal successor would be found. Concerns regarding the designation of an
effect of state guarantees of obligations of financial
acceptable legal successor were increased, and the overall problem of lending was complicated
institutions, not by pledging the full faith and credit of the
enormously, by the lack of accurate and timely information about the underlying financial condition
state for that purpose, but by chartering state-owned
of the ODGF-insured institutions, particularly Home State. Prior to March 15, 1985, the Federal Recorporations supported by streams of revenues, other than tax
serve Bank of Cleveland did not know which institutions were solvent or insolvent. In those circumreceipts, that could issue such guarantees.
stances, it was crucial that the Reserve Bank examine the collateral presented by ODGF-insured
institutions with great care because it was possible that the collateral would have to be liquidated.
/n order to obtain a large amount of collateral of acceptable credit
quality from ODGF-insured institutions in the most rapid time possible, the Reserve Bank undertook
a statewide field warehousing effort. Federal Reserve examiners were instructed to select mortgage
loans covering real property in Ohio and adjacent states for which the institutions had original loan
documents. Those documents were placed in sealed spaces (field warehouses) leased to the Reserve Bank at the premises of the ODGF-insured institutions. Federal Reserve examiners supervised the field warehouses. Later, as borrowings from the Reserve Bank were repaid, the mortgage
loans used as collateral were released, and the field warehouses were closed. As soon as was
practical, the mortgage loan collateral was brought into the Reserve Bank and the Reserve Bank's
lien on the collateral was recorded formally. Thus, eventually all the field warehouses were closed.
Despite the intricate legal and policy questions raised by the circumstances of the March 1985 Ohio crisis, the Federal Reserve Bank of Cleveland was able to
remain within the boundaries of traditional lending practices authorized by statute. It did this while
still providing all the currency and other financial assistance that was required to enable ODGFinsured institutions to cope with depositor's demands.
TWENTY·THREE
➔
➔
f NDNOTE- Many of the issues raised during the March 1985
Ohio crisis are not resolved definitively at this writing. However, the experiences of that crisis,
viewed in light of the history of prior banking crises in the United States, already tend to suggest
some answers to most of the principal questions.
The decision to close all ODGF-insured institutions reflected
several concerns regarding the public safety and welfare. After all, the runs in Ohio were spreading
8. For comparison , Jesse Jones , then chairman of the
rapidly between March 11 and March 14, and sound and unsound institutions alike were affected.
Reconstruction Finance Corporation, noted that the bank
The volume of withdrawals at the most severely affected institutions was doubling or tripling daily,
holiday proclamation of March 6, 1933, provided comparable
and the loss of confidence was spreading beyond the Cincinnati area. The closing of all ODGFopportunities for Federal officials to gain control of the
insured institutions also had at least three consequences: First, during the closing there was time
developing banking crisis and to propose sweeping reforms of
to assess the situation and to remedy the inadequacy of information. Second, the increasing pace
the banking system. Congress became convinced of the need
of withdrawals was stopped altogether and financial damage to many ODGF-insured institutions
for action during the holiday and voted for the Emergency
that later proved to be in sound condition was prevented. Third, the Governor and the legislature
Banking Act on March 9, 1933, without debate.
gained an opportunity to consider and prepare more sweeping reform proposals than state officials
previously had considered. 8
One lesson derived from the March 1985 Ohio crisis is that
prompt, effective responses to public concerns are necessary to contain a crisis of confidence in
the banking system. Another lesson is that several ingredients were required for a prompt,
effective response in the Ohio situation. Accurate information and understanding of the extent of
the problem, the ability to commit the state's resources, and a decision to do so were essential to
assuring depositors of protection from loss. In the early stages of the March 1985 Ohio crisis, none
of these ingredients was present.
TWEN T Y· F OUR
Federal Reserve
Bank of
Cleveland
Directors
As of March 1, 1986
Cleveland
Cincinnati
Pittsburgh
Chairman and
Federal Reserve Agent
W. H. KNOELL
President and
Chief Executive Officer
Cyclops Corporation
Pittsburgh, Pennsylvania
Chairman
ROBERT E. BONI
President and
Chief Executive Officer
Armco Inc.
Middletown, Ohio
Chairman
JAMES E. HAAS
President and
Chief Operating Officer
National Intergroup, Inc.
Pittsburgh, Pennsylvania
SHERRILL CLELAND
President
Marietta College
Marietta, Ohio
CHARLES L. FUELLGRAF, JR.
Chief Executive Officer
Fuellgraf Electric Company
Butler, Pennsylvania
VERNON J. COLE
Executive Vice President and
Chief Executive Officer
Harlan National Bank
Harlan, Kentucky
LAWRENCE F. KLIMA
President
The First National Bank
of Pennsylvania
Erie, Pennsylvania
ROBERT A. HODSON
President and
Chief Executive Officer
1st Security Bank
Hillsboro, Ohio
JAMES S. PASMAN, JR.
Former Vice Chairman
Aluminum Company of America
Pittsburgh, Pennsylvania
Deputy Chairman
E. MANDELL DEWINDT
Chairman of the Board
Eaton Corporation
Cleveland, Ohio
J. DAVID BARNES
Chairman and
Chief Executive Officer
Mellon Bank
Pittsburgh, Pennsylvania
RAYMOND D. CAMPBELL
Chairman, President, and
Chief Executive Officer
Independent State Bank of Ohio
Columbus, Ohio
DANIEL M. GALBREATH
President
John W Galbreath Co.
Columbus, Ohio
JOHN R. HALL
Chairman of the Board and
Chief Executive Officer
Ashland Oil, Inc.
Ashland, Kentucky
RICHARD D. HANNAN
Chairman of the Board
and President
Mercury Instruments, Inc.
Cincinnati, Ohio
JOHN R. MILLER
President and
Chief Operating Officer
Standard Oil Co. of Ohio
Cleveland, Ohio
WILLIAM A. STROUD
Chairman and President
First-Knox National Bank
Mount Vemon, Ohio
TWENTY·FIVE
KATE IRELAND
National Chairman
Frontier Nursing Service
Wendover, Kentucky
G. R. RENDLE
President and
Chief Executive Officer
Gallatin National Bank
Uniontown, Pennsylvania
JERRY L. KIRBY
Chairman of the Board
and President
Citizens Federal Savings
& Loan Association
Dayton, Ohio
KARL M. VON DER HEYDEN
Senior Vice PresidentFinance and Chief
Financial Officer
H. J. Heinz Company
Pittsburgh, Pennsylvania
DON ROSS
Owner, Dunreath Farm
Lexington, Kentucky
MILTON A. WASHINGTON
President and
Chief Executive Officer
Allegheny Housing
Rehabilitation Corporation
Pittsburgh, Pennsylvania
Member
Federal Advisory Council
JULIEN L. McCALL
Chairman and
Chief Executive Officer
National City Corporation
Cleveland, Ohio
Comparative Financial Statement
For years ended December 31
1985
Statement of
Condition
1984
Assets
Gold certificate account .. ... .. ..................... .
Special drawing rights certificate account ......... .
Coin ................................................. .
Loans and securities:
Loans to depository institutions ................ .. .
Federal agency obligations bought outright ....... .
U.S. government securities:
Bills ......................................... .. .. . .
Notes .... ................................. ....... .
Bonds ...... ............... ..... .......... .. .. .... .
Total U.S. government securities .............. .
Total loans and securities .................. .. .. .
Cash items in process of collection ................ .
Bank premises ...................................... .
Other assets ............................ ............ .
lnterdistrict settlement account ........ ... .. ... .. .. .
$
635,000,000
270,000,000
32,826,806
$
617,000,000
302,000,000
34,730,126
153,376,400
480,954,538
1,202,000
464,506,387
4,993,731,997
3,954,442,018
1,445,438,895
10,393,612,910
11,027,943,848
431,748,745
28,367,930
660,983,418
215,098,992
3,933,137,910
3,612,081,955
1,270,765,897
8,815,985,762
9,281,694,149
193,118,962
27,639,546
422,751,603
707,143,437
$13,301,969,739
$11,586,077,,823
Federal Reserve notes ........ ... ......... . ......... .
Deposits:
Depository institutions ............. ............... .
Foreign ........................ ... .. .. ... ..... ..... .
Other deposits ....................... .. .. ... ... .. .. .
Total deposits .. .. ... .. ... .. ....... ........ .. ... .. .
Deferred availability cash items ..... .... ... ........ .
Other liabilities .................... ........ ......... .
$11,341,421,849
$10,124,974,843
1,125,625,795
9,600,000
43,575,363
1,178,801,158
434,129,847
133,616,285
882,847,789
10,350,000
24,114,558
917,312,347
189,147,400
146,723,933
TOTAL LIABILITIES ........................... .. . .
$13,087,969,139
$11,378,158,523
TOTAL ASSETS
Liabilities
Capital accounts
TWENTY · SIX
Capital paid in ............. ................. ........ .
Surplus ............................................. .
$
107,000,300
107,000,300
$
103,959,650
103,959,650
TOTAL CAPITAL ACCOUNTS .................... .
$
214,000,000
$
207,919,300
TOTAL LIABILITIES AND CAPITAL ACCOUNTS ..
$13,301,969,739
$11,586,077,823
Income and
Expenses
1985
1984
2,106,227
964 ,682,089
14,566,789
36,425 ,345
498 ,154
$1 ,018 ,278 ,604
2,863 ,929
939 ,311 ,393
15,021,379
34 ,310,795
459 ,292
$ 991 ,966,788
Current operating expenses ................... .......
Cost of earnings credits •••••••••••••••••••••••• •••••
58 ,961,748
8,534 ,049
55,450 ,346
9,195,430
CURRENT NET INCOME .. .. .............. ... .......
$ 950,782,807
$ 927 ,321 ,012
77 ,442 ,770
5,627 ,610
5,239
83 ,075 ,619
$
2,779 ,521
3,801
2,783,322
Current income
Interest on loans •••••••••••••••••••••••••• •••••• •••·
Interest on government securities ..... .......... . ...
Earnings on foreign currency ...... ........... .......
Income from services .......................... . .. ...
All other income .. ..... ...... .. ..... ..... .... .... ....
Total current income •••••••••••••••••••••••• •••••••
$
$
Profit and loss
Additions to current net income
Profit on foreign exchange transactions .... .......
Profit on sales of government securities ...... .....
All other additions •••••••••••••••••••••••••••• ••• ••
Total additions ..... ..... ........ ..................
$
$
Deductions from current net income
Loss on foreign exchange transactions ............
All other deductions .... ........... .. .......... .....
Total deductions ......................... .........
$
-0-
$
$
434,824
434 ,824
$
31 ,382 ,265
395,929
31 ,778,194
Net additions or deductions .............. ........ .. .
$
82 ,640,795
($
28 ,994 ,872)
$
4,902,500
10,450,559
15,353 ,059
$
5,637 ,400
9,137,397
14 ,774,797
Assessments by Board of Governors
Board of Governors expenditures ....................
Federal Reserve currency costs •••• ••• ••••••••••••••
Total assessments by Board of Governors .... .....
$
NET INCOME AVAILABLE FOR DISTRIBUTION
$1 ,018,070 ,543
$
$ 883 ,551 ,343
Distribution of net income
Dividends paid ......................... ..............
Payments to U.S . Treasury
(interest on Federal Reserve notes) .. ....... .. .. .
Transferred to surplus •••••••••••••••••••••••••••••••
Total distributed ......................... ...........
TWENTY·SEV EN
$
6,349 ,649
1,008 ,680,244
3,040,650
$1 ,018 ,070,543
$
6,177,578
874,781 ,466
2,592 ,300
$ 883 ,551 ,343
Federal Reserve
Bank of
Cleveland
OffiCBrS
As of March 1, 1986
KAREN N. HORN
President
MARTIN E. ABRAMS
Assistant Vice President
BURTON G. SHUTACK
Assistant Vice President
WILLIAM H. HENDRICKS
First Vice President
OSCAR H. BEACH, JR.
Assistant Vice President
LEES. ADAMS
Senior Vice President
& General Counsel
MARGRET A. BEEKEL
Assistant Vice President
PETER D. SKAPERDAS
Assistant Vice President
& Assistant Director of Research
RANDOLPH G. COLEMAN
Senior Vice President
JOHN M. DAVIS
Senior Vice President
& Director of Research
LESTER M. SELBY
Senior Vice President
& Secretary
DONALD G. VINCEL
Senior Vice President
ROBERT F. WARE
Senior Vice President
ANDREW J. BAZAR
Vice President
PATRICK V. COST
Vice President
& General Auditor
CREIGHTON R. FRICEK
Vice President
JOHN W. KOPNICK
Vice President
EDWARD E. RICHARDSON
Vice President
JOHN J. RITCHEY
Vice President &
Associate General Counsel
SAMUEL D. SMITH
Vice President
MARKS. SNIDERMAN
Vice President &
Associate Director of Research
ROBERT VANVALKENBURG
Vice President
JOHN J. WIXTED, JR.
Vice President
TERRY N. BENNETT
Assistant Vice President
JAKE D. BRELAND
Assistant Vice President
EDWARD J. STEVENS
Assistant Vice President
& Economist
ANDREW C. BURKLE, JR.
Assistant Vice President
WALKER F. TODD
Assistant General Counsel
& Research Officer
THOMASJ.CALLAHAN
Assistant Vice President
& Assistant Secretary
ANDREW W. WATTS
Assistant General Counsel
JILL GOUBEAUX CLARK
Assistant General Counsel
LAWRENCE CUY
Assistant Vice President
JOHN J. ERCEG
Assistant Vice President
& Economist
ROBERT J. FAILE
Assistant Vice President
ROBERT J. GORIUS
Assistant Vice President
Cincinnati Branch
CHARLES A. CERINO
Senior Vice President
ROSCOE E. HARRISON
Assistant Vice President
DAVID F. WEISBROD
Assistant Vice President
JERRY S. WILSON
Assistant Vice President
NORMAN K. HAGEN
Assistant Vice President
Pittsburgh Branch
HAROLD J. SWART
Senior Vice President
DAVID P. JAGER
Assistant Vice President
RAYMOND L. BRINKMAN
Assistant Vice President
RAYFORD P. KALICH
Directing Officer
LOIS A. RIBACK
Assistant Vice President
R. CHRIS MOORE
Directing Officer
ROBERT B. SCHAUB
Assistant Vice President
SANDRA PIANALTO
Assistant Vice President
ROBERT W. PRICE
Assistant Vice President
JAMES W. RAKOWSKY
Assistant Vice President
DAVID E. RICH
Assistant Vice President
SUSAN G. SCHUELLER
Assistant Vice President &
Assistant General Auditor
TWENTY·EIGHT
WILLIAM J. SMITH
Assistant Vice President
Columbus Office
CHARLES F. WILLIAMS
Vice President
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