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Federal Reserve Bank of Minneapolis Annual Report 1980 A N ew Law, A New Era Federal Reserve Bank of Minneapolis Annual Report 1980 Federal Reserve Bank of Minneapolis Annual Report 1980 A Message From the President By virtually any standard, the year 1980 was an ex traordinary one in terms of economic and financial developments. One of the more significant of the developments during the year was the enactment of “The Depository Institutions Deregulation and Monetary Control Act of 1980.” That legislation will, over a period of time, have major implications for the role and structure of the Federal Reserve and for the role and structure of our banking and related markets more generally. Because of this, most of the Annual Report of the Federal Reserve Bank of Minneapolis for 1980 is devoted to a consideration of some of the longer-term implications of this landmark legislation. However, there was much more to 1980 than the passage of this important new legislation. Early in the year a combination of events including sharply higher oil prices, indications of significant political disturbances in the Mid-East and elsewhere, and uncertainties about the course of fiscal policies here in the United States resulted in a pronounced acceleration of inflation and inflationary expec tations. Indeed, while memories are short, it was only a year ago when it seemed to some observers that the economy was on the threshold of a classical inflationary outburst. Fortunately, that situation was arrested and con tained, but at the expense of having to resort to credit controls and levels of interest rates that were unprecedented in this nation’s history. And there can be little doubt that the reactions of households and businesses to both credit controls and 20 per cent interest rates helped to trigger the very sharp— but short-lived—decline in economic activity that occurred in the second quarter. Over the second half of the year economic activity rebounded from the second-quarter drop and advanced sharply toward year-end. In fact, virtually all observers were surprised by the strength of the economy in the fourth quarter when real output ex panded at an annual rate of 4 percent. However, the resurgence of economic activity combined with sizable borrowing needs by the Treasury—coup led with the Fed’s policy of seeking restraint in the growth of money— interacted to produce strong pressures in the financial markets which reflected themselves in levels of interest rates that ex ceeded the peaks reached in late March and early April. Obviously, 1980 was a difficult year for monetary policy. Sharp swings in economic activity, highly volatile financial markets, and ever-sharpened and heightened expectational forces interacted to produce an environment in which market percep tions about the Federal Reserve’s performance and its intent were subject to recurring questions. Fundamentally, the Federal Reserve’s policy objec tive has been, and will continue to be, aimed at achieving a continuing reduction in the growth of money and credit. The year 1980 witnessed a fur ther measure of success in achieving that objective as the narrow measures of money (adjusted for deposit shifts arising from ATS and NOW account growth) increased at about a 6.5 percent annual rate, down from the 8 point growth in 1978. And for the year 1980 as a whole, narrow money growth was just a shade above the upper end of the growth targets established by the Federal Reserve for the year. However, growth patterns in both money and inter est rates during the year were subject to consider able short-run volatility. While much of that volatility can be explained by factors such as the imposition of credit controls, the transitory and often simul taneous swings in both money growth and interest rates serve to bring into sharp focus one of the policy dilemmas faced by the Federal Reserve. On the one hand, some would argue that the Fed should work to smooth out even very short-run swings in money growth—a goal that could be achieved only at the expense of even greater shortrun volatility in interest rates. Others argue that the Fed has permitted too much variability in interest rates, and in the process has “permitted” rates to reach levels that are unnecessary and have a very uneven impact on various sectors of the economy. Obviously, we can’t have it both ways. At the same time, there may be opportunities to improve the mechanics of policy with a view toward trying to minimize these short-run problems. The Federal Reserve is evaluating these enhancements, but as we proceed, I believe that it is important that market participants and others recognize that these transi tory developments should be kept in a proper perspective. In this regard, it is worth noting that the short-run variability of money growth in the United States over the past couple of years has been demonstrably less than is the case in other coun tries, including both Germany and Switzerland. iii The challenges faced by the Federal Reserve in 1980 will not subside in 1981. Our monetary policy objectives for this year call for a further reduction in the rate of growth in money—a step consistent with our longer-term goal of bringing the growth in money down to levels compatible with a noninflationary economy. Unfortunately, the popular money supply measures will, to an extent, mask the true rate of growth in money. That is, because of siz able shifts in deposits arising from the nationwide introduction of NOW-type accounts, the regularly published statistics on the money supply will give false signals. The Fed will, from time to time, make and publish adjustments in these series, but even so, the opportunities for confusion and misunder standing are great. On a more optimistic note, there are growing indi cations that fiscal policy may be brought to bear in a more decisive way in the fight against inflation. The new Administration has put forth an ambitious program of spending reductions and tax policy changes which, over time, offer some promise for achieving greater discipline in our fiscal affairs. That result, if achieved and maintained, can greatly assist in the difficult but necessary task of beating back inflation. Indeed, cohesive, coordinated, and credible fiscal and monetary policies, working in tandem, are the key to our ultimate success in checking inflation and thereby restoring an overall economic and financial environment that is compatable with achieving sustained prosperity. E. Gerald Corrigan President Federal Reserve Bank of Minneapolis Federal Reserve Bank of Minneapolis Annual Report 1980 Contents A Message From the President A New Law, A New Era 1980 Operating Highlights Statement of Condition Earnings and Expenses Volume of Operations Directors Officers iii 1 8 10 11 12 13 14 Federal Reserve Bank of Minneapolis Annual Report 1980 1 A New Law, A New Era In recent years, a combination of factors, including technological change, inflation, high and variable interest rates, the increased financial sophistication of economic agents, large and small, and our regu latory structure have interacted to promote vigorous and rapid changes in the financial environment. For example, new markets, new institutions, and new financial instruments have sprung up, and the asset and liability management practices of households, businesses, and financial institutions have changed appreciably. Because of these changes, there was a growing realization as the 1970s drew to a close that our existing laws and regulations no longer served the purposes for which they were originally designed. This pattern of change was a major factor which prompted Congress to develop a series of changes in our national banking laws that were forged to gether into The Depository Institutions Deregulation and Monetary Control Act of 1980, which the Presi dent signed into law in March of that year. It had two main goals: one, to enhance the Federal Reserve’s ability to implement effective monetary policy and, two, to promote greater competition, less regulation, and greater efficiency in the provision of bankingrelated financial services. There can be no guaran tee that these goals will be wholly achieved, but there can be no doubt that the new legislation brought our laws into much better alignment with the current realities of our ever-changing financial environment. percentage of deposits that were subject to Fed reserve requirements. The shrinkage in Fed mem bership thus threatened to seriously undermine the already loose and fragile relationship between Fed policy actions and the behavior of money and credit—possibly even over long periods of time. The decline in the share of the nation’s deposit balances held by banks that were members of the The enactm ent o f the law gave a d e ar signal— both here and abroad— as to the importance we as a nation place on a strong and independent central bank. In that regard, it is noteworthy that m ost national banking and thrift industry trade groups supported these broadened powers for the Fed, even though in many instances their affiliated institu tions would be, for the first time, faced with the burden o f reserve requirements. That affirmation as to the need for a strong central bank represents, we believe, a recognition that solutions to our economic problem s while never easy would be considerably more difficult if m arket or other forces altered the "independence within government that has been a hallmark o f our central bank for alm ost seven decades. — — " Enhancing Monetary Control Key provisions of the new financial legislation will work to enhance the ability of the Fed to implement its monetary policies. This potential improvement in monetary control will result in large part from the broader and more uniform reserve requirements mandated in the legislation. This reverses a trend in the financial industry which had led to a dramatic deterioration in the number of institutions and the 2 Federal Reserve Bank of Minneapolis Federal Reserve System and hence subject to Fed reserve requirements reached alarming pro portions in the late 1970s. Ironically, the decline in the amount of reserves controlled by the Fed was aggravated by the existence of the Fed’s reserve requirements. Since member banks could not earn interest on their required reserves, they were sub jected to a cost that was often substantial. Their cost was the amount of interest earnings they had to forego on their reserve balances. Bankers who concluded that this cost was not offset by the bene fits of Fed membership would drop out of the Federal Reserve System. In recent years, the cost of Fed membership became increasingly heavy in the climate of high interest rates. This caused a growing number of banks to relinquish their Fed member ship, resulting in a decline in the amount of deposits subject to Fed reserve requirements. Another factor contributing to the unpredictability of the relationship between reserves and deposits was that reserve requirements for Fed members varied according to a bank’s deposit size and ac cording to the mix of deposits in individual insti tutions. If a bank had demand deposits of up to $14 million, it had to keep 7 percent of these de posits in reserve. The more demand deposits it had, the higher percentage it had to keep in reserve. If its demand deposits totaled over $280 million, it had to keep 1614 percent in reserve—this was the / highest reserve bracket. The reserve requirements for savings and time deposits were similarly grad uated, with further differences based on maturities. As deposits moved from bank to bank, or as they shifted from one class or maturity of time deposits to another, the amount of money that could be supported by a given amount of required reserves would also change. This was a further source of uncertainty or slippage in the relationship between Fed policy actions and the money supply. These developments were particularly relevant in view of the Fed’s recent decision to control money growth by placing more emphasis on the growth of reserves. That decision, which was made in October 1979 prior to the enactment of the new legislation, was made primarily because the earlier procedures for influencing the growth of money had proven progressively less reliable even over reasonably long periods of time. Money growth had to be ef fectively controlled; for while there is no universally accepted view of the precise way in which the money supply affects the economy, there is virtual unanimity among policymakers and scholars that restrained money growth is a necessary condition for lower inflation, lower interest rates, and a healthy overall economy. However, under the new procedure, as under the old procedure, monetary control was further com plicated by the fact that the information the Fed received about the deposits of nonmember deposi tory institutions was based on a small sample of such institutions. Further, much of the information was received too infrequently—once a quarter— and too late to be useful—sometimes after it was six months out of date. Clearly, the Fed’s understand ing of developments relating to the growth of the money supply was hindered by such insufficient and belated data. Early in 1980, the problems of declining member ship in the Federal Reserve System, uneven reserve requirements, and inadequate information on changes in the money supply were addressed by the Depository Institutions Deregulation and Monetary Control Act. The far-reaching changes mandated by this act will be phased in gradually over the next eight years. To rebuild the declining portion of the nation’s deposits that were covered by reserves, this law created universal reserve re quirements. Now all deposits that can be used for transactions—checking accounts, NOW accounts, share draft accounts at credit unions, and other accounts — must be backed by reserves. Deposits in commercial or nonpersonal savings accounts must also be backed by reserves. Once the law is phased in, it won’t matter if these accounts are held by member institutions or not. To create more even reserve requirements and to make their impact more predictable, the new law makes reserve requirements not only universal but uniform. Financial institutions, regardless of their total deposits, will be required to maintain the same percentage of reserves. When the law is phased in, institutions must maintain reserves of 3 percent for transaction deposits that total $25 million or less and must maintain reserves of 12 percent for the portion of their total transaction deposits over $25 million. Institutions must maintain reserves of 3 percent for commercial or nonpersonal savings accounts, regardless of their total deposits. To ensure that adequate and timely information is available, the law requires all depository institutions to report their deposit levels directly and promptly to the Fed. From those institutions that weren’t directly reporting to the Fed before, the Fed will receive the information on a more timely basis. Institutions holding the majority of the nation’s deposits will report weekly, and the Fed will have useful infor mation on the deposits at nonmember institutions in a matter of weeks instead of months as was the case before. While attempts have been made to Annual Report 1980 minimize this reporting burden, especially for small institutions, the expanded information on the money supply and credit will help in the implemen tation of monetary policy. Over time, as more deposits are affected by reserve requirements, as reserve requirements become more uniform across depository institutions, and as the data on which it bases its decisions about pol icy will have been improved, the linkage between the level of reserves and the supply of money should tend to become more serviceable for the purposes of implementing Fed policy than other- the nation’s financial system is not fixed. It will respond to the new environment created by the law. With the passage of the new law, new competitive forces exist—and they will alter the investment decisions of consumers and businesses, perhaps creating new problems. For example, the huge in crease in the amount of financial resources flowing into money market mutual funds that has been observed since January 1981 could continue to gain momentum. Lack of a reserve obligation means returns on these funds can be set higher, thus attracting resources away from financial in stitutions to investment vehicles not subject to A t issue is not whether there w ill continue to be public constraints on risk within the total financial system, but whether there w ill be a t least an increm ental shift aw ay from regulation o f individual financial institutions in favor o f m arket-determ ined investm ent decisions. That seems to be the promise o f the new environment facing the financial system. System wide safeguards and regulations w ill con tinue to lessen risk for the financial system in total[ while individual institutions have more discretion to follow m arket-based signals for productive invest m ent As the transition to this n ew environment proceeds, we m ust remain vigilant and alert so as to ensure that new and perhaps even unforeseen problems are managed in an efficient and prudent m anner consistent with the overriding public in terest in a safe and sound banking system. wise. However, that result will not be achieved until the phase-in is largely completed. In the meantime, necessarily complex formulas for the phasing down of reserve requirements for current Fed members and the phase-in of reserve requirements for non members, coupled with the inevitable problems associated with new reporting requirements, will be sources of new uncertainties and “noise” in the relationship between reserves and money. While the new law should ultimately enhance the Fed’s ability to control the money supply as it is currently defined, its longer-term impact on mone tary control is by no means certain. The structure of Federal Reserve jurisdiction. In short, even before the ink is dry on the new act, new complications are presented to policymakers. The transitional problems and the new challenges should not, however, detract from the importance of the new legislation to the Federal Reserve. Indeed, its importance goes well beyond the manner in which it arrested a potentially sharp deterioration in the effectiveness with which monetary policy could be implemented. That is, the enactment of the law gave a clear signal — both here and abroad —as to the importance we as a nation place on a strong and independent central bank. In that regard, it is 3 4 Federal Reserve Bank of Minneapolis noteworthy that most national banking and thrift industry trade groups supported these broadened powers for the Fed, even though in many instances their affiliated institutions would be, for the first time, faced with the burden of reserve requirements. That affirmation as to the need for a strong central bank represents, we believe, a recognition that solutions to our economic problems—while never easy— would be considerably more difficult if market or other forces altered the “independence within government” that has been a hallmark of our central bank for almost seven decades. Economic Efficiency Through Competition In addition to arresting the potential deterioration in the effectiveness of monetary control, the Deposi tory Institutions Deregulation and Monetary Control Act of 1980 fosters increased efficiency in the nation’s financial system. One important way it does this is by reducing the regulatory and legal barriers that prevented one type of institution from compet ing with another type. These barriers tended to in hibit the free flow of funds to their most productive uses. Thus, by increasing the opportunities for competition, powerful new forces will be working to help us get the most out of our available financial resources. In the past, the barriers to competition that were created by government regulations and laws were formidable. Classes of financial institutions were restricted to specific types of activities. Savings and loan institutions could not compete with commer cial banks in the market for checking accounts. Commercial banks couldn’t pay as much interest on saving accounts as savings and loan institu tions. In addition, interest rate ceilings effectively prevented institutions of the same class from com peting for deposits and loans. The new banking law allows financial institutions to compete more freely. It expands the lending powers of thrift institutions in order to give them more flexibility in managing their assets. It permits all depository institutions to offer interest earning checking-type accounts to households and certain kinds of businesses. Finally, it phases out, over six years, ceilings limiting the interest that may be paid on time and savings deposits at all depository insti tutions.Thus, the nation’s 15,000 banks — large and small —are in competition with 5,000 savings and loan associations, 500 mutual savings banks, and 22,000 credit unions, all having increasingly similar powers. A basic principle of economics is that expanded competition will, in time, result in a more efficient use of resources. For instance, as interest ceilings are phased out, rates paid to savers will more accurately reflect the value of the investment uses to which those funds will be put. Thus, rates paid to depositors will be better able to attract funds and direct them to their most productive uses. Because of the new competition, every depository institution will soon be feeling the pressure to be more efficient so that it can offer its customers better service and lower prices than the institution down the street. Exactly how the financial system will evolve under this fresh competition is difficult to foresee, but some speculations are possible: • The rates that financial institutions pay to deposi tors will probably go up. The pressure to pay higher rates will exist because institutions can now pay interest on checking accounts and other accounts on which checks can be drawn and because some interest rate ceilings are being phased out. Such a development, it might also be noted, is compatible with the need to increase saving on a national basis. • Operating margins at depository institutions may narrow. As competition increases, the spread between interest rates on deposits and interest rates on loans—that is, the operating margin — may be squeezed. This could reduce profitability or alter the amount of capital needed in deposi tory institutions. • The number of financial institutions may be re duced through merger, acquisition, or perhaps even liquidation. In a more competitive market place, only the more efficient financial institutions will prosper. • If the number of financial institutions is reduced, the Federal Reserve and other regulators will have to consider modifying regulations and practices that might impede the orderly consoli dation of institutions. Prohibitions against open ing branch offices— both within and across state lines—will have to be reconsidered. Similarly, prohibitions that prevent banks and thrift insti tutions from consolidating may have to be re considered. • In the future, financial institutions could look more alike than different. As banks, savings banks, and savings and loan associations all gain similar powers to choose their assets and liabilities, they will be able to enter the same mar ket arena. Many of these inslitutions will continue Annual Report 1980 to specialize by type, location, and size, but all institutions will be better able to compete with others within the markets they have chosen. • The competition facing depository institutions from money market funds, brokers, and large merchandisers will remain intense. Such busi nesses, free of much of the regulation governing depository institutions, have been innovative in the past. They will no doubt continue to compete for balances in the future. Deregulation will mean that financial institutions will, in some cases, be subject to new and different forms of risk. Thrifts, for example, might face higher risk than they used to, particularly during the period when lending officers are acquiring expertise in making types of loans other than mortgages. Simi larly, as some interest rate ceilings are phased out, small and medium-sized institutions might face higher risk as they acquire expertise in setting the prices and the maturities of their time and saving deposits. But if there is higher risk, there is also more oppor tunity for competitive forces to direct financial resources to the most productive uses. So the new environment brings into clearer focus the trade-off between the benefits of market-directed investment and the costs of added risk for the financial system. This trade-off has always existed, and society has rightly designed safeguards to control and limit risks in the financial system. Because we as a na tion have agreed that market discipline alone can’t be the sole guide for financial system functions, the financial system has been, and will continue to be, guided in part by publicly imposed safeguards such as supervisory examinations, Federal Reserve discount lending, and deposit insurance. At issue, however, is not whether there will continue to be public constraints on risk within the total financial system, but whether there will be at least an incremental shift away from regulation of in dividual financial institutions in favor of marketdetermined investment decisions. That seems to be the promise of the new environment facing the financial system. Systemwide safeguards and regu lations will continue to control and limit risk for the financial system in total, while individual institutions have more discretion to follow market-based sig nals for productive investment. As the transition to this new environment proceeds, we must remain vigilant and alert so as to ensure that new and perhaps even unforeseen problems are managed in an efficient and prudent manner consistent with the overriding public interest in a safe and sound banking system. Economic Efficiency Through M arket Pricing The new legislation will move in the direction of promoting efficiency, not only by encouraging competition among private financial institutions, but by compelling the Federal Reserve to set prices for its services in much the same way as any other business. For the first time, the services of an agency in the public sector will be priced and offered in competition with those of private firms. Fees will be charged for check clearing and collec tion, wire transfer of funds and securities, automated clearinghouse activities (electronic payments), settlements of financial institutions’ debits and credits, the safekeeping of securities, and the transportation and insurance of currency and coin. Because of these fundamental changes, the alloca tion of resources between the public and private sectors will ultimately be governed more by market forces. These two sectors will — based on relative efficiency—allocate the available resources differently. This new allocation of resources is probable be cause the incentives now facing depository insti tutions are quite different than the ones that used to face them. Under former laws, when the Federal Reserve offered its services at no explicit charge, member banks benefited themselves and their customers the most by using the Fed’s services even when the services’ value fell below the value of the resources that were used in providing them — below the real costs imposed upon the Fed and the nation. This sometimes meant that member banks used the Fed’s services even when competing services that used less labor, better technology, or fewer physical resources were available. Now depository institutions have more incentives to choose the most efficient provider of services. Since most Federal Reserve services will be offered to all depository institutions at explicit prices, these institutions may choose whether to obtain such services from the Fed or from a private correspon dent bank. Previously, a nonmember depository institution did not—for all practical purposes— have this choice, since it was not able to receive services directly from the Fed. Thus, under the new arrangements, all institutions will have the incentive to use the service that imposes the least real cost on society because this service will have the lowest price. Consistent with its congressional mandate to pro mote efficiency, the Federal Reserve will set its 5 6 Federal Reserve Bank of Minneapolis prices so that a truly competitive framework for the delivery of financial services is established. The general pricing guidelines provided in the new legislation plus the more detailed guidelines estab lished by the Board of Governors of the Federal Reserve System require the Fed to determine its prices in the same fashion as a private, competing firm. Its prices must fully cover its costs, including overhead. To avoid unfairly undercutting its com petitors’ prices, the Fed must even set its prices to cover taxes, profit, and other costs of doing busi ness like a private firm— although it pays no federal taxes and does not try to earn a profit. plated by the drafters of the legislation requires, among other things, that institutions will make rational choices among alternative suppliers of like services. Thus, one of the Fed’s major responsibili ties in this environment will be to ensure that all depository institutions have a good understanding of the nature of Fed services, their prices, and the operating rules under which they will be available. In order to promote that understanding, we at the Federal Reserve Bank of Minneapolis have estab lished an advisory council comprised of a cross section of bankers, officials of savings institutions The Federal Reserve has contributed and can con tinue to contribute to achieving the goal o f an efficient payments system. The Fed w ill be a source o f constructive competition, both as an active and as a potential participant in the m arket even if we, o f necessity, define our role in som ewhat different terms than would a wholly private entity. In short, while the trappings m ay differ, we in the Federal Reserve are fully com m itted to the efficiency goal, and we have every intention o f moving forward in a manner consistent with that objective. The shift from the old system of providing services only to members at no explicit charge to the new system of providing services to all depository insti tutions at an explicit price entails some major chal lenges for the Fed. It must formulate rules for billing its customers, establish new accounting systems, and decide the size of the balances it will require for those who use its services. Once it has laid this detailed groundwork, it must effectively communi cate it to its potential customers. Every depository institution, large or small, bank or thrift, must have this information in order to select the best alter native for obtaining needed services. Achieving the market discipline and the efficiencies contem and credit unions, and representatives of trade associations and bank regulatory agencies to assist us in better anticipating the needs of all depository institutions in the context of the various require ments of the Monetary Control Act. It is difficult, at this early date, to foresee how events will unfold in this new environment of priced Fed services. Change will certainly occur— perhaps even major change— but it seems that the process will be gradual. Market pricing and service compe tition will yield substantial rewards for innovation, good management, and technological advance by competing service providers, including the Fed. For Annual Report 1980 wholesale-level customers, including banks and other depository institutions, there will be the im portant flexibility to match their service needs with market options. In this setting, Federal Reserve people look forward to pricing, competition, and resolution of the public service obligation issues. There is promise of a new era where market forces will challenge and per haps change long-standing systems that, however worthy, have nonetheless been shielded from the rigorous testing of the marketplace. Now the sys tem is opened—with risks for all players — but also with promise of efficient allocation of resources, which is the pervasive order of the day. Moreover, in those instances where it is deemed necessary to publicly support the financial system to guarantee minimum service, the public costs will be visible. The bottom line of this process is clear. We must recover our costs and act in a fashion that is con sistent with the goal of promoting efficiency in the payments mechanism. The Federal Reserve has contributed and can continue to contribute to achieving the goal of an efficient payments system. The Fed will be a source of constructive compe tition, both as an active and as a potential partici pant in the market, even if we, of necessity, define our role in somewhat different terms than would a wholly private entity. In short, while the trappings may differ, we in the Federal Reserve are fully committed to the efficiency goal, and we have every intention of moving forward in a manner consistent with that objective. M eeting the N ew Challenges The Federal Reserve will, in the 1980s, face new and difficult challenges as the financial system — and the economy more generally—respond to the new forces for change unleashed by the Monetary Control Act. These forces carry with them great promise that our financial system will become even more dynamic, more competitive, and more ef ficient. But those same forces also bring with them the potential for greater risk and greater uncertain ties. Indeed, even the most clairvoyant among us can, at best, foresee only the fuzzy outlines of how events will unfold. Those uncertainties and that inherently fuzzy view of the future must temper our attitudes and our actions as we navigate through previously uncharted waters. Indeed, the drafters of the legislation —sensitive to the need to balance caution with deliberate speed — built into the legisla tion phasing provisions and elements of regulatory flexibility with a view toward ensuring that the evolu tion proceeds in an orderly fashion. While there are many areas of uncertainty associ ated with this evolution to the new era, one thing is very clear. That evolution will proceed far more smoothly and effectively in an environment of re duced inflation. For example, if inflation were reduced, interest rates would almost certainly be lower and Regulation Q, which sets interest rate ceilings, could be eliminated much more easily— with fewer economic dislocations and with fewer problems for those affected by this regulation. If interest rates were running below the ceilings es tablished in Regulation Q, few would care whether it was gradually abolished or not, and its elimination would have virtually no impact on the financial sys tem. The inevitable conclusion is that economic efficiency cannot be pursued in a vacuum; it must be pursued along with price stability. 7 8 Federal Reserve Bank of Minneapolis 1980 Operating Highlights Planning and implementing an effective response to current and future service demands of the Upper Midwest financial community is the challenge of the 1980s for the Federal Reserve Bank of Minne apolis and its Helena branch. That process began in earnest during 1980 with the installation of ser vice capacity improvements at the Minneapolis office. Changes were needed to assure continued high-quality Fed service in response to expanded business volume in recent years. In addition, management and staff began intensive planning efforts to prepare the Minneapolis and Helena offices for legislatively mandated new service func tions and possible requests from the financial community for additional service volume in the future. Provisions of the Depository Institutions Deregu lation and Monetary Control Act of 1980 greatly expanded business contacts between Ninth District financial institutions and the Minneapolis Fed. Some new business relationships—such as de posit reporting and reserve maintenance—are mandated. In addition, Federal Reserve payment services will become available to all financial insti tutions in the district according to a specified time table. Services to be affected include wire and securities transfer, check clearing, coin and cur rency supplies and transportation, safekeeping of securities, and net settlement services. All deposi tory institutions in the district—some 2,400—will have access to Federal Reserve services. Previously the bulk of Fed services were directly available only to the 515 member banks in the district. It is not known how many nonbank financial institutions or nonmember banks will utilize Fed services more intensely, but managers of Fed service departments must analyze and weigh potential changes in ser vice volume and adequately prepare. Quite apart from the need to prepare for possible service demands from new customers, recent pat terns of expanded use have in themselves required a comprehensive update of service capabilities at the Minneapolis Bank. For instance, the volume of checks processed has increased an average of 8 percent per year since 1974, or a cumulative in crease of about 50 percent in that period. By yearend 1980, the M inneapolis office was processing about 3.2 million checks a day, which placed it as the second largest check handling office in the entire Federal Reserve System. This growth has brought pressure for expansion and, more impor tantly, modernization of operating capacity to realize the gains in productivity associated with fast-moving technological changes. New reader/sorters and computers are being installed to increase peak load processing capacity by 70 percent, and the check processing system has been segregated into two distinct operating units. Thus, if equipment failure plagues one of the units, the other can con tinue to effectively serve customers. The new sys tem also provides greater flexibility in workflow management during periods of heavy volume. The result of this investment will be more effective and efficient service. The process of converting to new check processing equipment amid a climate of continued rapid growth in volume has proven difficult and was accompanied by some significant operating problems. These problems appear to be coming under control, and during 1981 we expect to regain the timely and high-quality check opera tion that has characterized the Minneapolis Fed for many years. Major improvements in the Bank’s general data processing hardware and software were made in 1980 in response to ongoing increases in work volume and the added workload associated with provisions of the Monetary Control Act. Changes also were part of the Federal Reserve System’s long-range automation program calling for stan dardization of data processing at Reserve Banks in order to facilitate future resource sharing among districts. In October 1980, a high-speed currency processor was installed at the Minneapolis office. This equip ment permits automated, high-speed processing of 50,000 notes per hour, determines individual note fitness, checks for counterfeits, and destroys unfit currency automatically and securely. The equip ment will permit improvement in the quality of the currency stock circulating in the district without inordinate cost increases. Another notable operational improvement in 1980 was the effort to develop a new Federal Reserve communications network for the transfer funds and securities between financial institutions throughout the country. The new communications system will employ the most advanced technology, replacing the current network by the end of 1981. It will combine the flexibility and increased capacity necessary to meet the expanding requirements of the financial community through the 1980s. More over, safety enhancements built into the new sys tem minimize the risks of service disruption. Bank operating costs increased nearly 20 percent in 1980, as the accompanying charts indicate. This reflects a sharp departure from the five-year trend of expense growth averaging about 5 percent per year. The sharp acceleration in expenses during Annual Report 1980 1980 was, in part, associated with a series of “one time” programs and initiatives. Included among these were: (1) the conversion and expansion of check processing facilities and the associated efforts to reduce levels of float; (2) the conversion and upgrading of the Bank’s general data process ing computer facilities; and (3) the initial costs associated with the implementation of the Mone tary Control Act. Once the major thrust of these initiatives is behind us—which should occur in mid-1981 —the Bank fully expects that the rate of growth in its expenditures will fall back to ap proximate more closely that experienced from 1975 to 1979. Bank management is confident that these opera tional changes represent important investments in the ability of the Federal Reserve Bank of Minne apolis and the Helena branch to accommodate current demand for Fed services and future growth in demand, if that should materialize. At the same time, the quality of service will be maintained or improved. Thus, planning efforts and new invest ments will bring improved operating efficiency to Federal Reserve services offered to financial insti tutions of the Upper Midwest. Total Expense Total Output Unit Costs 1974 = 100 1974=100 1974=100 Labor Productivity Employment 1974=100 1974=100 Federal Reserve Bank of Minneapolis Statement of Condition (In Thousands) December 31, December 31, 1980 1979 Assets Gold Certificate Account..................................... Interdistrict Settlement Fund.............................. Special Drawing Rights Certificate Account ... C oin....................................................................... Loans to Depository Institutions......................... Securities: Federal Agency Obligations..................... U.S. Government Securities....................... Total Securities............................................ Cash Items in Process of Collection.................. Premises and Equipm entLess: Depreciation of $10,988 and $9,538 ... Other Assets......................................................... Total Assets.................................................. Liabilities Federal Reserve Notes....................................... Deposits: Depository Institutions................................ U.S. Treasury—General Account.............. Foreign......................................................... Other Deposits............................................ Total Deposits.............................................. Deferred Availability Cash Item s....................... Other Liabilities................................................... Total Liabilities............................................ Capital Accounts Capital Paid In ..................................................... Surplus.................................................................. Total Capital Accounts................................ Total Liabilities and Capital Accounts $ 225,000 (447,588) 42,000 12,028 34,200 156,091 2,130,773 $2,286,864 696,147 33,495 238,084 $3,120,230 $ 231,534 (765,306) 32,000 16,741 31,440 182,625 2,585,043 $2,767,668 994,364 30,644 156,101 $3,495,186 $1,807,068 654,858 11,392 4,293 $ 670,543 526,940 39,531 $3,044,082 $1,908,623 678,014 175,017 9,568 18,820 $ 881,419 571,747 60,885 $3,422,674 $ 38,074 38,074 $ 76,148 $3,120,230 $ 36,256 36,256 $ 72,512 $3,495,186 Annual Report 1980 Earnings and Expenses (In Thousands) For the Year Ended December 31 Current Earnings Interest on Loans to Member B anks................ Interest on U.S. Government Securities and Federal Agency Obligations..................... All Other Earnings................................................ Total Current Earnings................................ Current Expenses Salaries and Other Benefits................................ Postage and Expressage................................... Telephone and Telegraph.................................. Printing and Supplies......................................... Real Estate Taxes................................................ Furniture and Operating Equipment— Rentals, Depreciation, Maintenance.............. Depreciation— Bank Premises........................... U tilities.................................................................. Other Operating Expenses.................................. Federal Reserve Currency.................................. Total Current Expenses.............................. Less Expenses Reimbursed or Recovered .... Net Expenses.............................................. Current Net Earnings......................................... Net Deductions................................................... Less: Assessment for Expenses of Board of Governors.................................. Dividends Paid............................................ Payments to U.S. Treasury......................... Transferred to Surplus................................ Surplus Account Surplus, January 1 .............................................. Transferred to Surplus—as above..................... Surplus, December 31......................................... 1980 1979 $ 5,049 237,725 4,139 $246,913 $ 6,356 226,908 2,300 $235,564 $ 20,893 3,837 651 1,186 1,603 2,275 832 522 2,394 1,348 $ 35,541 2,368 $ 33,173 $213,740 1,367 $ 17,516 3,238 572 1,041 1,325 1,672 873 466 2,010 993 $ 29,706 2,409 $ 27,297 $208,267 3,621 1,975 2,244 206,336 $ 1,818 1,593 2,121 198,716 $ 2,216 $ 36,256 1,818 $ 38,074 $ 34,040 2,216 $ 36,256 12 Volume of Operations (Minneapolis and Helena Combined) Number For the Year Ended December 31 Loans to Member Banks................. Currency Received and Verified___ Coin Received and Counted.......... Checks Handled, Total..................... Collection Items Handled............... Issues, Redemptions, Exchanges of U.S. Government Securities___ Securities Held in Safekeeping....... Transfer of Funds............................. 1980 1,156 159 million 383 million 832 million .4 million 10.2 million 509,108 1,356,427 1979 1,904 157 million 352 million 770 million .3 million 9.8 million 520,955 1,133,182 Dollar Amount 1980 1979 $ 3.3 billion $ 2.4 billion 1.5 billion 1.4 billion 66 million 65 million 298 billion 281 billion .7 billion .5 billion 83.6 billion 99.4 billion 2.7 billion 3.1 billion 1.569 trillion 1.1 69 trillion Federal Reserve Bank of Minneapolis Annual Report 1980 Directors of the Federal Reserve Bank of Minneapolis Terms expire December 31 of indicated year January 1,1981 Stephen F. Keating Chairman and Federal Reserve Agent William G. Phillips Deputy Chairman Class A Elected by Member Banks Class B Elected by Member Banks Class C Appointed by Board of Governors Zane G. Murfitt(1 981) President Flint Creek Valley Bank Philipsburg, Montana Henry N. Ness(1 982) Senior Vice President Fargo National Bank and Trust Company Fargo, North Dakota Vern A. Marquardt(1 983) President Commercial National Bank L’Anse, Michigan Russell G. Cleary (1981) Chairman and President G. Heileman Brewing Company, Inc. LaCrosse, Wisconsin Joe F. Kirby (1982) Chairman Western Surety Company Sioux Falls, South Dakota Harold F. Zigmund (1983) President Blandin Paper Company Grand Rapids, Minnesota William G. Phillips (1 981) Chairman International Multifoods Minneapolis, Minnesota Sister Generose Gervais (1 982) Administrator Saint Marys Hospital Rochester, Minnesota Stephen F. Keating (1 983) Retired Chairman Honeywell Inc. Minneapolis, Minnesota Directors of the Helena Branch Norris E. Hanford Chairman Ernest B. Corrick Vice Chairman Appointed by Board of Directors Federal Reserve Bank of Minneapolis Appointed by Board of Governors Lynn D. Grobel(1981) President First National Bank Glasgow, Montana Harry W. Newlon (1982) President First National Bank Bozeman, Montana Jase O. Norsworthy (1982) President The N R G Company Billings, Montana Norris E. Hanford (1981) Wheat and Barley Operator Fort Benton, Montana Ernest B. Corrick (1982) Vice President and General Manager Champion International Corporation Timberlands-Rocky Mountain Operations Milltown, Montana Member of Federal Advisory Council Clarence G. Frame Vice Chairman First Bank System, Inc. Minneapolis, Minnesota 13 14 Federal Reserve Bank of Minneapolis Annual Report 1980 Officers of the Federal Reserve Bank of Minneapolis January 1, 1981 E. Gerald Corrigan President Thomas E. Gainor First Vice President Senior Vice Presidents Vice Presidents Assistant Vice Presidents Melvin L. Burstein Senior Vice President and General Counsel John P. Danforth Senior Vice President and Director of Research Leonard W. Fernelius Senior Vice President John A. MacDonald Senior Vice President Sheldon L. Azine Vice President and Deputy General Counsel Lester G. Gable Vice President Phil C. Gerber Vice President Gary P. Hanson Vice President Bruce J. Hedblom Vice President Douglas R. Hellweg Vice President Howard L. Knous Vice President and General Auditor David R. McDonald Vice President Clarence W. Nelson Vice President Arthur J. Rolnick Vice President and Deputy Director of Research James R. Taylor Vice President Robert W. Worcester Vice President Robert C. Brandt Assistant Vice President James U. Brooks Assistant Vice President Marilyn L. Brown Assistant Vice President Richard K. Einan Assistant Vice President and Assistant Secretary Richard C. Heiber Assistant Vice President William B. Holm Assistant Vice President Ronald 0. Hostad Assistant Vice President Ray L. Hulett Assistant Vice President Ronald E. Kaatz Assistant Vice President Gerald J. Mallen Assistant Vice President Preston J. Miller Assistant Vice President Officers of the Helena Branch Betty J. Lindstrom Vice President G. Randall Fraser Assistant Vice President Robert F. McNellis Assistant Vice President James L. Narragon Assistant General Auditor Ruth A. Reister Assistant Vice President and Secretary Charles L. Shromoff Assistant Vice President Colleen K. Strand Assistant Vice President Theodore E. Umhoefer Assistant Vice President Joseph R. Vogel Chief Examiner Norma J. Wuertz Assistant Vice President
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