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THE LION’S SHARE Are Markets Becoming Less Competitive? Federal Reserve Bank of Richmond 2018 ANNUAL REPORT Contents Message from the President............................. 1 Essay: Are Markets Becoming Less Competitive?............................................... 2 Fifth District Economic Report............................ 12 Message from the First Vice President................. 16 Page 2 Boards, Councils, Officers, and Senior Professionals.......................................... 18 Financials......................................................... 28 Page 16 About the Richmond Fed MISSION As a regional Reserve Bank, we serve the public by fostering the stability, integrity, and efficiency of our nation’s monetary, financial, and payments systems. VISION To be an innovative policy and services leader for America’s economy. KEY FUNCTIONS We contribute to the formulation of monetary policy. We supervise and regulate banks as well as bank and savings and loan holding companies that are headquartered in the Fifth Federal Reserve District. We process currency and electronic payments for banks and provide financial services to the U.S. Treasury. We also work with a wide variety of partners to strengthen communities in the Fifth District. Cover photo: Andy Gehrig, iStock by Getty Images Message from the President Market Power Affects Suppliers and the Broader Economy H ave markets become less competitive? It’s an important question to study, as Tim Sablik and Nicholas Trachter discuss in this year’s annual report essay, which begins on the following page. Firms that face less competition might charge more and produce less. They might pay lower wages or forgo productive investments. The question is also difficult to answer. For example, the increasing concentration of most industries in the United States would seem to be evidence that market power has increased. But, as Tim and Nico note, it’s possible that industries could become more concentrated because the most efficient firms are outcompeting their rivals. In addition, while concentration has increased nationally, in many industries concentration actually has decreased locally, suggesting that competition remains relatively strong in local markets. Looking through my lens as a former consultant, one aspect of market concentration that strikes me as particularly important is the effect on suppliers: when firms get large, they acquire more bargaining power. This may be easiest to see in the retail sector. In 2017, the five largest retailers in the United States accounted for more than 35 percent of the 100 largest retailers’ total U.S. sales. Manufacturers report being pressured to sell their products at lower prices lest they lose their places on stores’ shelves. And, as the costs of transportation and information have declined, it has become easier for retailers to develop new suppliers, both domestic and foreign, to take the place of suppliers who can’t meet their requirements. This increase in bargaining power is one reason why consumer goods inflation has been quite low over the past twenty years. One way this bargaining power has been put into practice is the shift toward “private label” goods. Long gone are the days of “generic” food sold in black and white cans. Today, large retailers have the scale to develop their own brands, and the products they can distribute range from gourmet chocolate to pet food to clothing. By one estimate, the dollar share of private label goods will account for more than 25 percent of U.S. sales within the next decade. Retail isn’t the only sector where bargaining power has increased. Beginning in the auto industry, companies across sectors have invested significantly in the capabilities and sophistication of their purchasing departments. Executives are incentivized to avoid price increases, so they look for creative ways to reconfigure their operations to reduce purchasing volume and capture margin dollars from suppliers. When these efforts are successful, they paint a different picture of how market concentration might lead to higher profits—a picture with far lower inflationary pressures. Understanding how market power affects suppliers, and in turn the economy more broadly, is a topic I’m continuing to study. The issues explored by Tim and Nico in this year’s essay are timely and relevant for both policymakers and consumers. I hope you enjoy reading their essay, as well as the other sections of this year’s annual report, including a message from our first vice president, Becky Bareford, and a review of the Fifth District’s economic performance in 2018. Tom Barkin President Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 1 Recently, policymakers in the United States and Europe have expressed concerns that firms in certain sectors have become too large and too dominant. 2 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Essay Are Markets Becoming Less Competitive? By Tim Sablik and Nicholas Trachter M any sectors of the U.S. economy seem to be increasingly dominated by a handful of large and powerful players. The tech sector offers a number of well-known examples. The vast majority of smartphones run software developed by one of two companies—Apple or Google. For 98 percent of consumers, the talk and data services that power those phones come from one of four providers—Verizon, AT&T, T-Mobile, or Sprint. And virtually all of the web-based searching on phones and computers flows through one of Google’s many platforms, to the point that “googling” has become synonymous with internet searching in general.1 Other industries are exhibiting signs of growing concentration as well. By one measure, concentration in the retail sector has increased by more than 400 percent since 1982, and concentration in finance has more than doubled since 1992.2 Some policymakers have argued that this growing concentration is a sign of weakening competition. A 2016 report from the Council of Economic Advisers (CEA) under former President Barack Obama highlighted this concern: “When there is little or no competition, consumers are made worse off if a firm uses its market power to raise prices, lower quality for consumers, or block entry by entrepreneurs.”3 The CEA report and other studies point to signs of rising market concentration and falling entry rates for new firms as evidence that markets are becoming less competitive. But while firms with market power are indeed more likely to operate in concentrated markets, concentration by itself is not necessarily a sign of market power. Markets could become concentrated because the most efficient companies outperform their less-productive competitors, for example. Such an outcome presumably would make consumers better off, not worse. Indeed, many sectors of the economy follow a life cycle in which the number of competitors gradually shrinks over time. Mature industries consolidate around the most efficient firms, and this consolidation is not necessarily the result of anticompetitive behavior.4 Thus, a key question for policymakers is whether market power, not simply market concentration, is on the rise. Researchers have been hard at work attempting to answer this question. But, as this essay will show, it may be too soon to reach a decisive conclusion. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 3 I t m i g h t b e n at u r a l t o i n fe r t h at h i g h e r m a r k u p s a l s o wo u l d r e s u l t i n h i g h e r i n f l at i o n , s o m e t h i n g t h at c e r t a i n l y wo u l d b e a c o n c e r n f o r t h e Fe d. H oweve r, t h e r e l at i o n s h i p b e t we e n m a r k u p s a n d i n f l a t i o n i s n o t e n t i r e l y s t r a i g h t fo r wa r d. Why Market Power Matters to the Fed The Federal Reserve is among the policy institutions keeping a close eye on competition. If firms’ market power is rising, that could result in a number of changes for the economy that matter for monetary policy. Monopolistic firms would tend to charge higher prices above their costs of production and underproduce compared with those in competitive environments. The ratio of price to cost is known as the firm’s “markup.” A recent study found that “the welfare costs of markups are large,” primarily because they act as a tax on output.5 Firms with more market power also may invest less, resulting in slower productivity growth.6 To the extent that this behavior is widespread across industries, it could lead to a general slowdown in productivity and, as a result, impair long-run economic growth. It might be natural to infer that higher markups also would result in higher inflation, something that certainly would be a concern for the Fed. However, the relationship between markups and inflation is not entirely straightforward. Inflation is a measure of rising prices generally, but markups measure how much individual firms set prices above their costs. Thus, it is possible for markups to rise because firms facing little competition are able to set prices high or because efficient firms have found ways to reduce their costs while keeping prices stable. In the latter case, prices and inflation could remain flat. Inflation also measures the rate of change in prices across a period of time (typically year-over-year). As a result, even if markups were rising because firms with market power were raising prices, they would need 4 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT to do so across time and across industries in order to have an impact on inflation. It also may be difficult to discern a connection between markups and inflation if the Fed is pursuing monetary policy that offsets inflationary pressure from markups. Rising market power also has implications for maximizing employment, the other component of the Fed’s dual mandate. Basic economics implies that businesses with market power withhold at least some production in order to keep prices high. Thus, if firms produce less due to a lack of competition, they also may hire fewer workers, which could raise unemployment or, in the long run, reduce workforce participation. And, to the extent that firms have the power to set wages in labor markets, they may be able to pay workers less. The Fed tracks wage growth both as a sign of labor market health and as a signal of labor productivity. In a competitive environment, the largest portion of firms’ productivity gains should be passed on to workers in the form of higher wages. Firms compete for labor, and the most productive firms will pay more for workers to expand production. But if firms face less competition for workers, they can reap the rewards of higher productivity as pure profits rather than passing them on in the form of wage increases. Thus, market competitiveness matters for how the Fed interprets changes in the rate of wage growth. Slow wage growth in a competitive market could be a sign of slowing productivity and economic growth, which might bolster the case for expansionary monetary policy. But slow wage growth in an increasingly monopolistic environment may not be a sign of slowing productivity because gains from productivity could be going to firm profits. In this case, the argument for expansionary monetary policy is weaker. Higher market power also may reduce the effectiveness of the Fed’s traditional monetary policy tool of influencing short-term interest rates. As noted earlier, firms with more market power may produce and invest less, depressing aggregate productivity growth. There is also some evidence Three-fourths of smartphones are produced by Apple (46 percent) or Samsung (29 percent), according to Comscore, a market research firm. that weak investment on the part of firms may depress the natural rate of interest in the economy. In a 2016 paper, Callum Jones of the International Monetary Fund and Thomas Philippon of New York University’s Stern School of Business found that, given firm profitability, corporate investment in the United States has been lower than expected since the early 2000s. Had investment been more in line with expectations, they estimated that interest rates would have begun rising away from near-zero levels starting at the end of 2010 rather than in 2016, when rates actually did increase.7 To the extent that increased market power among industry leaders is contributing to lower investment and real interest rates, the Fed may encounter the zero lower bound more often. Firms with more market power also may be less responsive to monetary policy stimulus. One way that the Fed stimulates the economy during a downturn is by reducing the cost of capital by pushing interest rates down. But if firms are less inclined to invest because of market power and they have the ability to capture higher profits through markups, they may absorb some of the interest rate changes in the form of profits rather than investing more.8 This result would tend to make traditional monetary policy less effective. Clearly there are many reasons for the Fed to be concerned about a general increase in market power in the economy. But determining whether market power is actually going up is a challenge. Economists cannot directly measure changes in market power, but they can attempt to infer its presence by looking at other indicators, such as changes in industry concentration, markups, and firm profitability. Unfortunately for policymakers seeking clear guidance, the evidence in each of these cases has thus far been mixed. Are Markets Becoming More Concentrated? Increasing market concentration may be one of the most visible signs of rising market power. Firms with a large market share presumably face less competition than firms in markets with many players. Beyond the examples noted at the beginning of this Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 5 FIGURE 1: Average Industry Concentration Has Diverged Nationally and Locally since 1990 0.1 National Manufacturing Average Change in Concentration (HHI) 0.05 Local Manufacturing National Wholesale Trade 0 Local Wholesale Trade National Retail Trade -0.05 Local Retail Trade National FIRE -0.10 Local FIRE National Services -0.15 Local Services -0.20 -0.25 1990 1994 1998 2002 2006 2010 2014 SOURCE: Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter, “Diverging Trends in National and Local Concentration,” National Retail Trade National Services National Manufacturing Federal Reserve Bank of Richmond Working Paper No. 18-15R, September 2018. Local Manufacturing Local Retail Trade Local Wholesale Trade Local FIRE Local Services NOTE: Concentration is measured using the Herfindahl-Hirschman Index (HHI), which compares total sales for firms in an industry to the National FIRE National Trade number of firmsWholesale in that industry. essay, researchers have documented a general rise in concentration across industries. One striking finding comes from a paper by Gustavo Grullon of Rice University, Yelena Larkin of York University, and Roni Michaely of the Geneva Finance Research Institute. They found that concentration levels have increased in more than three-quarters of U.S. industries over the past two decades. Moreover, the market shares of the four largest firms in most industries have increased, and both the average and median size of public firms (which tend to be larger than private firms) have tripled.9 As noted at the outset of this essay, rising concentration alone does not necessarily mean that market power is going up. Firms with large market shares still may be subject to competitive pressures from new entrants, for example. But research showing that startup activity has fallen since 2000 suggests that firms may be facing less outside pressure today than in the past.10 Another way concentration could rise without a comparable increase in market power is if the 6 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT most efficient firms are capturing greater market share by outcompeting their rivals. Such a scenario would be less troubling for consumer welfare than monopolistic firms abusing market share. To address this point, Grullon, Larkin, and Michaely looked at data on stock market reactions to mergers and acquisitions. If firms are more profitable in concentrated markets because they face less competition, the authors reasoned that “the market should react more positively to announcements of transactions that further erode product market competition.” Indeed, they found that the market reaction to mergers was more positive when the merger involved firms in concentrated industries. While these findings seem to suggest that the recent rise in concentration is a sign that market power has been going up, such conclusions depend crucially on how one defines the market. Evidence presented by Grullon, Larkin, and Michaely, as well as others, shows concentration has gone up in national industry groups. But in many industries, competition happens locally not nationally. For example, Walmart Measuring Markups Rising markups could be another sign that firms are gaining market power. In a competitive environment, markups should be low. If firms tried to substantially raise their prices above their costs, new companies would enter the market to undercut them, driving the markups down. Thus, some researchers have pointed to evidence of higher markups as proof that markets have become less competitive. One of the leading studies in this area of research comes from Jan De Loecker of Katholieke Universiteit Leuven and Jan Eeckhout of the Barcelona Graduate School of Economics. In a 2017 paper, they found that markups increased substantially across all U.S. industries, from 21 percent in 1980 to 61 percent in 2016.13 (See Figure 2.) They found a similar increase in markups for firms globally in another paper, though the trend was strongest in North America and Europe.14 Tying these results to observations of rising FIGURE 2: Average Markups across the U.S. Economy 70 60 Percent above Marginal Cost may account for a large share of national retail sales, but in any given market, it may compete with other national chains as well as locally owned stores. One of the authors of this essay (Trachter) along with Esteban Rossi-Hansberg of Princeton University and Pierre-Daniel Sarte of the Richmond Fed highlighted this distinction in a recent paper.11 Using data from the U.S. National Establishment Time Series, they found that while national industry concentration rose on average from 1990 through 2014 across a variety of industry groups, local concentration in those same industries actually declined.12 (See Figure 1.) Moreover, these two trends appear to be strongly correlated: a large fraction of workers in the economy are employed by industries that had both rising national and falling local concentration. It would appear that rather than forcing the exit of local competitors when they enter a market, national brands such as Walmart or Starbucks simply add to the competition. To the extent that local competition determines market power, the findings that national industry concentration has been increasing may not be cause for alarm. 50 40 30 20 10 0 1955 1965 1975 1985 1995 2005 2015 SOURCE: Jan De Loecker and Jan Eeckhout, “The Rise of Market Power and the Macroeconomic Implications,” NBER Working Paper No. 23687, August 2017. market concentration, De Loecker and Eeckhout found that the increase in markups has been driven by the top firms by market share in each industry. While this research has received a lot of attention, measuring markups across the entire economy and across time has historically proven difficult to do. It requires economists to model industry competition and to make assumptions about how firms behave in order to estimate their marginal costs, which typically are not publicly known. These constraints have tended to limit economists to studying markups only in specific sectors of the economy where good data were available. De Loecker and Eeckhout took a different approach in order to overcome these constraints, but their findings remain a source of ongoing debate among economists. For example, decisions about how to measure firm costs can change the result of markup estimates. Other researchers found that including the costs that firms face in marketing and delivering their products and services to consumers may largely account for the increase in markups.15 These indirect costs have Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 7 Large nationwide retailers enjoy economies of scale, including massive distribution centers, that help keep their profits up and their prices down. become a larger share of firms’ variable costs since 1980, and it may be these rising costs rather than rising prices that De Loecker and Eeckhout measured.16 Given these measurement challenges, it is not yet clear whether estimates of rising markups necessarily point to rising market power. Researchers also have looked at whether firms in concentrated markets have more pricing power over their inputs of production, such as labor. If so, that might also suggest a rise in market power. Multiple studies do find that firms in concentrated sectors are able to pay lower wages.17 But, again, to the extent that firms compete for labor locally in the same way that they compete for customers locally, it is important to study the ties between local concentration and wages. A 2018 paper by Kevin Rinz from the U.S. Census Bureau found that while firms in concentrated sectors are able to pay lower wages, local employer concentration actually has been falling since the 1970s (in line with the findings of Rossi-Hansberg, Sarte, and Trachter). This result would suggest that firms’ 8 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT pricing power in terms of labor is actually falling in the geographies that matter most for employees.18 Rising Profits, Falling Investment Some economists have looked at a third potential signal of rising market power: rising profits for the largest firms. As in the case of markups, measuring profits is challenging because they are typically not directly observable. Instead, researchers have proposed novel ways of inferring them from the data available. For example, the London Business School’s Simcha Barkai examined the share of production accruing to labor and capital costs, which are known, and reasoned that any remainder must be accruing to firms in the form of profits.19 He found that both the labor and capital shares have fallen over the past three decades, suggesting that the profit share has increased substantially over the same period. But, as with markups, the difficulty of measuring firm profits has sparked disagreements among researchers. One study extended Barkai’s methodology to the pre-1980 period and found that profits and productivity growth should have been much more volatile than what was actually observed over those decades if Barkai’s assumptions were correct.20 Economists also disagree over what may be driving the fall in capital and labor shares. David Autor of the Massachusetts Institute of Technology and his coauthors found that large firms in concentrated industries have higher productivity growth per worker than other firms, and this greater efficiency results in these “superstar” firms spending a smaller share of their total sales on labor income.21 Another dispute is whether capital investments have truly shrunk or whether they are being mismeasured. Nicolas Crouzet and Janice Eberly of Northwestern University’s Kellogg School of Management found that the rise of intangible assets since the 2000s can explain much of the capital investment shortfall.22 They found that intangible investments have been associated with productivity gains in some industries, such as the tech sector, suggesting that rising market concentration could be a symptom of greater efficiency and productivity. On the other hand, intangibles also can be used by large firms to defend their market power from competitors. Research and development are often nonrival and excludable, which means other firms could benefit from that knowledge without diminishing the ability of the originating firm to use it, but legal restrictions such as patents and copyrights can make those assets exclusive to the owner. Such exclusivity promotes investment in intangibles, but it also may contribute to industry concentration by allowing firms to benefit from economies of scale and solidify their market power. Additionally, as firms face less competition, they may have fewer incentives to invest in both intangible and tangible capital.23 Ultimately, as in the case of markups, the evidence on profits and investment remains inconclusive and evolving. An Unsettled Debate As the preceding survey of the literature on this topic shows, there is evidence both for and against the rise Many economists agree that national industry concentration has been rising. But is this because the economy is increasingly driven by firms that rely on network effec ts and other economies of scale that naturally produce large winners? of market power in the modern economy. In many cases, this conflicting evidence reflects different interpretations of phenomena that are inherently difficult to measure. Many economists agree that national industry concentration has been rising. But is this because the economy is increasingly driven by firms that rely on network effects and other economies of scale that naturally produce large winners? Or are large firms investing in assets protected by patents and copyrights to keep out competitors? Could both explanations be at play? Some of the apparent contradictions in evidence also may be explained by industry concentration trending up at the national level at the same time it is falling locally. This possibility raises another important question: Should policymakers be worried about higher national concentration when most markets for goods, services, and labor are local? Unfortunately, the research does not yet provide decisive answers to these questions. It also could be the case that these trends are being driven by other factors unrelated to market competition. A recent study argues that the decline in new firm creation and the rise in market concentration can be explained by the aging U.S. population. The authors argue that as baby boomers age and retire, labor force growth is shrinking, leading to less startup activity. Existing firms age and grow, leaving even fewer workers to fuel startups and driving the rise in industry concentration.24 Another study based on a model found that industry-leading firms have stronger incentives to invest in a low interest rate environment than laggard firms. To the extent that this is the case, the low interest rates of the Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 9 Four airlines—Delta, American, United Continental, and Southwest—account for more than three-fourths of the U.S. market, according to IBISWorld, a market research firm. past decade could have contributed to rising concentration as leaders continued to invest and pull further away from smaller competitors.25 In summary, there is no shortage of explanations for the observed phenomena of rising market concentration and markups, and not all of those explanations point to a commensurate increase in market power. In his own review of the evidence, University of Chicago economist Chad Syverson summarized the debate this way: “The macro market power literature has offered an immense service by documenting and emphasizing the potential connections between several trends: labor’s declining share of income, increasing corporate profits, increasing margins, increasing concentration, slower productivity growth, decreasing firm entry and dynamism, and reduced investment rates. … Where the literature, at this point at least, has not yet reached a conclusion is whether and to what extent increases in the average level of market power in the industry is responsible for each or all of these trends.”26 10 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Until that conclusion is reached, this topic will remain an important area of research in the years to come, and policymakers should weigh evidence carefully before deciding whether to respond to allegations of rising market power. n __________________________________________ Tim Sablik is a senior economics writer and Nicholas Trachter is a senior economist in the Research Department at the Federal Reserve Bank of Richmond. The authors are grateful to Kartik B. Athreya, Zhu Wang, John A. Weinberg, and Alexander L. Wolman for many helpful comments. The views expressed in this essay are those of the authors and not necessarily those of the Federal Reserve Bank of Richmond or the Federal Reserve System. Endnotes 1 For other examples, see Open Markets Institute, “America’s Concentration Crisis,” https://concentrationcrisis.openmarketsinstitute.org/. 14 Jan De Loecker and Jan Eeckhout, “Global Market Power,” NBER Working Paper No. 24768, June 2018. 15 James Traina, “Is Aggregate Market Power Increasing? Production Trends Using Financial Statements,” University of Chicago Booth School of Business New Working Paper Series, No. 17, February 2018; Loukas Karabarbounis and Brent Neiman, “Accounting for Factorless Income,” NBER Working Paper No. 24404, March 2018, revised June 2018. 16 De Loecker and Eeckhout addressed this concern in more recent work with Gabriel Unger of Harvard University. They acknowledged that while such overhead as a share of costs has gone up in recent decades, it still cannot fully explain the rise in markups they found. See Jan De Loecker, Jan Eeckhout, and Gabriel Unger, “The Rise of Market Power and the Macroeconomic Implications,” Manuscript, November 22, 2018. 17 José Azar, Ioana Marinescu, and Marshall I. Steinbaum, “Labor Market Concentration,” NBER Working Paper No. 24147, December 2017, revised February 2019; Efraim Benmelech, Nittai Bergman, and Hyunseob Kim, “Strong Employers and Weak Employees: How Does Employer Concentration Affect Wages?” NBER Working Paper No. 24307, February 2018. 18 Kevin Rinz, “Labor Market Concentration, Earnings Inequality, and Earnings Mobility,” U.S. Census Bureau CARRA Working Paper No. 2018-10, September 24, 2018. 19 Simcha Barkai, “Declining Labor and Capital Shares,” Manuscript, 2017. 20 Karabarbounis and Neiman (2018). 21 Autor et al. (2017). 22 Nicolas Crouzet and Janice Eberly, “Understanding Weak Capital Investment: The Role of Market Concentration and Intangibles,” Federal Reserve Bank of Kansas City Economic Policy Symposium Proceedings, Jackson Hole, Wyoming, August 24, 2018. 23 Germán Gutiérrez and Thomas Philippon, “Investmentless Growth: An Empirical Investigation,” NBER Working Paper No. 22897, December 2016, revised January 2017. 24 Hugo Hopenhayn, Julian Neira, and Rish Singhania, “From Population Growth to Firm Demographics: Implications for Concentration, Entrepreneurship, and the Labor Share,” NBER Working Paper No. 25382, December 2018. 25 Ernest Liu, Atif Mian, and Amir Sufi, “Low Interest Rates, Market Power, and Productivity Growth,” NBER Working Paper No. 25505, January 2019. 26 Chad Syverson, “Macroeconomics and Market Power: Facts, Potential Explanations and Open Questions,” Economic Studies at Brookings, January 23, 2019. 2 David Autor, David Dorn, Lawrence F. Katz, Christina Patterson, and John Van Reenen, “Concentrating on the Fall of the Labor Share,” American Economic Review: Papers and Proceedings 2017, May 2017, vol. 107, no. 5, pp. 180–185. 3 Council of Economic Advisers, “Benefits of Competition and Indicators of Market Power,” Issue Brief, April 2016. 4 Michael Gort and Steven Klepper, “Time Paths in the Diffusion of Product Innovations,” Economic Journal, September 1982, vol. 92, no. 367, pp. 630–653. 5 Chris Edmond, Virgiliu Midrigan, and Daniel Yi Xu, “How Costly Are Markups?” NBER Working Paper No. 24800, July 2018. 6 It’s also possible for this relationship to go in the opposite direction. Firms protected from competition may invest more knowing that they can reap all of the rewards of innovation themselves. This is the rationale behind patent protections in some fields, such as pharmaceuticals, where initial research and development is costly but replication is relatively cheap. Firms exposed to competition might choose to forgo costly research and instead free-ride on the efforts of other companies, resulting in fewer new drugs being developed. In theory, giving a firm temporary monopoly over a new drug provides an incentive to undertake costly research. 7 Callum Jones and Thomas Philippon, “The Secular Stagnation of Investment?” Manuscript, December 2016. 8 John Van Reenen, “Increasing Differences between Firms: Market Power and the Macro-Economy,” Federal Reserve Bank of Kansas City Economic Policy Symposium Proceedings, Jackson Hole, Wyoming, August 24, 2018. 9 Gustavo Grullon, Yelena Larkin, and Roni Michaely, “Are U.S. Industries Becoming More Concentrated?” Review of Finance, forthcoming. 10 11 12 13 Ryan Decker, John Haltiwanger, Ron Jarmin, and Javier Miranda, “The Role of Entrepreneurship in U.S. Job Creation and Economic Dynamism,” Journal of Economic Perspectives, Summer 2014, vol. 28, no. 3, pp. 3–24. Esteban Rossi-Hansberg, Pierre-Daniel Sarte, and Nicholas Trachter, “Diverging Trends in National and Local Concentration,” Federal Reserve Bank of Richmond Working Paper No. 18-15R, September 2018, revised February 2019. National and local banking also exhibit this trend. See Lawrence J. White, “Antitrust and the Financial Sector,” Money and Banking blog, January 21, 2019. Jan De Loecker and Jan Eeckhout, “The Rise of Market Power and the Macroeconomic Implications,” NBER Working Paper No. 23687, August 2017. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 11 Fifth District Economic Report Regional Economic Activity Expands in 2018 O verall, the economy of the Fifth Federal Reserve District expanded in 2018, and by some measures, economic growth picked up compared with the past several years. Labor markets continued to tighten, as evidenced by expanding payrolls and widespread declines in unemployment rates that coincided with strong survey measures of wage growth in the Fifth District. Business conditions generally improved in 2018, with strong activity coming from a wide variety of industries; however, there were new or increasing headwinds from labor shortages, rising input costs, and the trade environment. There were also a few shortterm disruptions during the year, such as severe weather events and a partial federal government shutdown. Residential housing markets continued to strengthen but at a slightly slower pace than in recent years, while commercial real estate activity remained strong and was largely on pace with 2017 growth. Labor Markets Overall, labor market conditions improved during the year. Total payroll employment in the Fifth District grew 1.3 percent from December 2017 to December 2018, but it lagged the national rate of 1.8 percent. Among jurisdictions in the Fifth District, year-overyear employment growth was weakest in the District of Columbia and in Virginia, at rates of 0.6 percent and 0.8 percent, respectively. Maryland and North Carolina came in slightly higher at 1.1 percent and 1.3 percent, respectively, while the strongest growth occurred in West Virginia (2.2 percent) and South Carolina (2.6 percent). In the Fifth District as a whole, the most jobs were added in the professional business services industry, followed by education and health services and leisure 12 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT and hospitality. In terms of percentage increase, the strongest growth of 3.2 percent occurred in the natural resources, mining, and construction sector, which was partially driven by considerable growth in construction employment in West Virginia. The information services industry, which is primarily print publications and other media, was the only industry in the Fifth District to contract in 2018, declining 0.4 percent (1,000 jobs) from December 2017 to December 2018. By the end of the year, the unemployment rate in the Fifth District rested at 3.8 percent, which was just below the national rate of 3.9 percent. Virginia’s unemployment rate remained the lowest in the Fifth District at 2.8 percent in December 2018, while the highest rates in December of 5.4 percent and 5.1 percent were reported in the District of Columbia and in West Virginia, respectively. Although D.C. had the highest rate, counties that are part of its surrounding metropolitan area had some of the lowest rates in the Fifth District. In fact, the lowest rate among all counties was in Arlington, Virginia, which had 1.7 percent unemployment in December. Meanwhile, some of the highest unemployment rates occurred in West Virginia counties, particularly around the middle of the state, where an unemployment rate of 12.4 percent was reported in Calhoun County. The only other county in the Fifth District to report an unemployment rate above 10 percent was Worcester County on the Eastern Shore of Maryland. (See Figure 1.) Compared with December 2017, jobless rates declined in every Fifth District jurisdiction, with the largest improvement occurring in South Carolina, where the rate fell 0.8 percentage points to 3.2 percent. At the local level, unemployment rates declined in all but eight counties of the Fifth District. Figure 1: Unemploym For December 2018 Figure 1: Unemployment Rates by For December 20181.7 - 3.0 3.1 - 4.0 Moreover, county unemployment rates were lower in December 2018 than they were just prior to the Great Recession in the vast majority (82 percent) of Fifth District counties. However, by the end of 2018, no county had yet reached a historic low. The tightening of labor markets also was evidenced by anecdotes from across the Fifth District. Throughout the year, a wide variety of firms indicated that finding and retaining workers was becoming increasingly difficult. A few firms, primarily in construction, even said that the labor shortage was constraining their growth. Many businesses increased starting wages to attract new hires and were giving existing employees raises to keep them from leaving, as turnover was also reportedly up. In addition to wage increases, there were many comments about enhanced nonwage incentives to attract and keep staff, such as signing bonuses, employee referral awards, and increased vacation time. The Federal Reserve Bank of Richmond’s survey data also indicated solid employment growth and rising wages in 2018. The Bank conducts monthly surveys of business conditions in the manufacturing and service sectors of the Fifth District. Among other questions, both surveys ask about changes in employment and wages. The Bank aggregates responses to these questions and creates diffusion indices in which positive values indicate that the share of firms reporting improvement exceeds the share of firms reporting decline. The indices for manufacturing and service sector employment remained positive throughout the year, with the manufacturing index hitting a record high in August. In the last few months of the year, however, both readings declined slightly but remained in expansionary territory. Meanwhile, the survey indices for wages were well above zero and generally increased over the course of the year, reaching record highs in November 2018. (See Figure 2.) The November survey also included a series of special questions on employment and wages, which showed that many businesses intended to increase employment in the near future and were using some FIGURE 1: Unemployment Rates by County 4.1 - 5.2 For December 2018 Figure 1: Unemployment Rates by County For December 2018 1.7 - 3.0 5.3 - 7.5 3.1 - 4.0 7.6 - 12.4 4.1 - 5.2 5.3 - 7.5 1.7 - 3.0 3.1 - 4.0 7.6 - 12.4 4.1 - 5.2 5.3 - 7.5 7.6 - 12.4 Source: U.S. Bureau of Labor Statistics SOURCE: U.S. Bureau of Labor Statistics, 2018 combination of higher wages, sign-on bonuses, and enhanced benefits to attract candidates. And although a majority of businesses reported challenges in attracting and retaining workers with the necessary skills, only a small portion of firms expected those challenges to become a considerable restraint on growth in 2019. Business Conditions Manufacturing activity generally expanded in 2018, according to the Bank’s survey of business conditions in the sector. The composite diffusion index for Fifth District manufacturing activity spent the majority of the year at elevated levels and hit a record high in September. In the last few months of the year, however, the index declined and dipped below zero in December—the first negative reading in more than two years. The December low was driven by a drop in new orders, with many comments indicating that the expected increases to tariffs on January 1, 2019, had a negative impact on business. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 13 FIGURE 2: Fifth District Survey Measures of Employment and Wages 40 30 Manufacturing Employment Index 20 Manufacturing Wages Index 10 Service Employment Index 0 Service Wages Index -10 -20 -30 -40 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Manufacturing Employment Index Service Employment Index Manufacturing Wages Index Service Wages Index 2017 2018 SOURCE: Richmond Fed Regional Surveys of Manufacturing and Service Sector Activity NOTES: Survey responses are represented by diffusion indices. In each index, values equal the percentage of responding firms reporting an increase minus the percentage reporting a decrease. Values are expressed in three-month moving averages. Overall, anecdotes from manufacturing contacts were positive across a diverse set of industries. Throughout the year, many firms reported strong growth, with some expressing plans to increase capacity through hiring, equipment investment, and/or plant expansions. At the same time, manufacturers also expressed concerns over staffing challenges, finding enough trucks to move goods, and rising raw materials costs. They attributed some of the rising materials costs to new or increased tariffs, such as those for steel and aluminum. A majority of manufacturing contacts said they were unable to fully pass these costs along to customers. Nonetheless, manufacturers were generally optimistic about their growth prospects for 2019. In the service sector, overall business activity expanded in 2018, according to the Bank’s survey measures. The index for revenues in the sector was fairly strong for most of the year, with notable exceptions in October and November, when the measure fell to negative one and negative five, respectively. Many of the comments in the surveys during those periods indicated that adverse weather, including hurricanes Florence and Michael, as well as 14 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT new and increasing tariffs, had some negative effects on business. Within the service sector, some of the strongest reports of growth in 2018 came from the transportation industry. Port activity was robust throughout the year with some record-setting volumes reported. Some of the import growth toward the end of the year was partially attributed to firms frontloading goods purchases ahead of expected tariff increases. Trucking demand was also strong in 2018, with reports of tight capacity and a shortage of drivers, which led to some increased demand for rail services. Positive reports also were given by firms ranging from engineering, law, and information technology to defense contracting, education, and hospitality. Most services firms expected growth to persist into 2019, but there were concerns about the pace of growth slowing in the near future. Real Estate On the whole, Fifth District housing markets grew moderately in 2018, with many metrics and comments echoing those from the past several years. House prices, according to CoreLogic Information Solutions, grew 3.3 percent on a year-over-year basis in the Fifth District, but trailed the national rate of 4.7 percent. Home prices rose most quickly in North and South Carolina at rates of 4.4 percent and 4.1 percent, respectively. Meanwhile, prices grew most slowly in Maryland (2.1 percent) and D.C. (2.3 percent). Anecdotes from residential real estate contacts broadly suggested that inventory levels remained low, with many homes both selling quickly and with multiple offers. New home construction generally expanded throughout the year but at a somewhat slower pace than in 2017. As was the case in 2017, growth reportedly was constrained by a lack of available lots, labor shortages, and rising raw materials costs. Raw materials cost increases were exacerbated in the beginning of 2018 due to tariffs on Canadian lumber and on imported steel and aluminum. In terms of building permits, Fifth District jurisdictions issued a combined 114,022 single-family building permits in 2018, which was an increase of just 1 percent over 2017 and the slowest pace of growth reported since 2014. Reports on the commercial real estate (CRE) sector were, on balance, more upbeat than residential reports. Although there were similar comments about difficulty finding workers and rising raw materials costs, CRE contacts generally reported solid to robust growth in 2018 across retail, industrial, office, warehousing, and multifamily subsectors. The robust growth in multifamily construction was evidenced by 7 percent growth in new building permits for structures with five or more housing units, which was about on pace with the 6.9 percent growth reported in the previous year. Banking Conditions Banking conditions continued to improve in 2018. Assets grew steadily through mergers and organic loan growth, and credit quality remained strong throughout the year. Rising interest rates drove record profits in 2018, but greater competition for deposits may hinder margin growth in the future if rates continue to increase. Interest rates have started to rise in recent years, and Fifth District banks began seeing increases in net interest margins in 2018. Higher interest income and lower income taxes drove earnings to ten-year highs throughout the year. As of the fourth quarter, median return on average assets was 0.92 percent and 1.1 percent for banks in the Fifth District and nation, respectively. During the year, median assets at Fifth District banks grew 4.3 percent, outpacing national median growth of 3.2 percent. Loans also grew steadily over the year in the Fifth District and nation, with median annual growth of 5.8 percent and 5.4 percent, respectively. In the Fifth District, particularly strong growth was observed in commercial and industrial portfolios (10 percent) and in non-owner-occupied commercial real estate portfolios (8.9 percent). The largest balance sheet concentration at Fifth District banks remained in commercial real estate, but those levels fell during the year. Net loan losses and median nonperforming loan rates remained low and decreased in 2018, both at the Fifth District and national levels; however, nonperforming loan levels in the Fifth District remained about 0.19 percentage points higher than the national average. Though credit-quality indicators are improving generally, as competition for loans and deposits heats up, banks may face pressure to loosen underwriting standards and rely more heavily on volatile funding sources to achieve higher earnings. Conclusion On the whole, the Fifth District economy strengthened in 2018. Payroll employment expanded, most local unemployment rates ended the year below prerecession lows, and wage increases were reported across a broad spectrum of industries. Overall, business activity picked up, with considerable growth reported across industries, most notably in transportation. The general outlook among Fifth District firms is for continued, although perhaps more subdued, growth in 2019. n Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 15 Message from the First Vice President Our Commitment to Diversity and Inclusion I n my inaugural year as the Richmond Fed’s first vice president and chief operating officer, I have been honored to partner with many talented individuals and groups within the Bank, the Federal Reserve System, and our communities. It’s clear our team is committed to our public service mission—fostering the stability, integrity, and efficiency of our nation’s monetary, financial, and payments systems. First, I would like to thank President Tom Barkin and our Board of Directors for supporting my appointment and partnering with me throughout the transition. I also want to thank my predecessor, Mark Mullinix, a model leader, who retired after an impressive 32-year Federal Reserve career. In 2018, Tom, Lyn McDermid—our System chief information officer—and I worked with the Bank’s employees to define the Richmond Fed’s strategy and priorities, leading our organization to act as one team to serve our communities and our customers. Our Bank’s culture is at the heart of this endeavor. We’re committed to doing the right thing, “leading from where we are” to make things better, and embracing differences and opportunities to grow that build upon our strengths and help us to improve continuously. Part of this strategy is continuing to build a workforce that represents the communities we serve and leverages the diverse skills and perspectives of our employees. Both diversity and inclusion strengthen our Bank and our communities. That’s why we focus on making advancements in attracting and retaining a diverse array of talent, increasing diversity within our leadership pipeline, sustaining a culture that embraces differences, and cultivating greater diversity among our suppliers and community partners. 16 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT In 2018, we enhanced our recruiting practices by requiring a diverse talent pool for all stages of our hiring process. We recruited from a more diverse range of colleges, universities, and professional organizations while leveraging our existing employee networks to broaden our candidate pools. In 2018, the Bank made 188 external hires, including 44 percent minorities and 40 percent women, up 8 percentage points and 1 percentage point, respectively, since 2014. Also in 2018, we maintained our Bank’s overall representation of women at 38 percent, with an 11 percent increase of women in senior executive roles, while increasing our overall minority representation by 2 percentage points to 34 percent. In addition to developing a more representative workforce, we are fostering a culture of inclusion that enables each of us to bring our best self to work every day. I am pleased to share that we have high employee engagement—in fact, our recent employee-engagement index indicates the Bank is nine points above global norms when compared with other organizations that use the same survey. During 2018, we continued to strengthen our inclusive culture through a number of initiatives, including our eight employee resource networks and a discussion series that encourages dialogue about a variety of tough topics, including recent events that have highlighted racial tensions in our region, how to navigate change, and the impact of power and privilege. Our employee engagement is further supported by efforts to develop our workforce by providing experiential-learning opportunities for employees that widen the Bank’s succession pipeline and prepare talent for critical roles. In June 2018, more than 100 employees created a “human pride banner” that highlighted the Bank’s inclusive workplace and increasingly diverse workforce. We also are committed to partnering with minority- and women-owned businesses across our District. We increased our expenditures with diverse suppliers in 2018 by 34 percent. And to help maintain that momentum in 2019, we are strengthening our longer-term procurement forecasts to deepen our supplier pipelines and identifying opportunities to increase diverse supplier response rates to requests for proposals. Last, but not least, we continue to collaborate with many diverse partners across our community. For example, we work with teachers, students, and the public to enhance our community’s understanding of economics, personal finance, and the Federal Reserve System. In 2018, we directly reached 230 educators who potentially will influence more than 17,000 students from inner-city, majority-minority, and girls’ high schools. Our employees also supplement the Bank’s financial education efforts by using their sixteen hours of paid volunteer leave to support community programs such as Junior Achievement Finance Park and Boys and Girls Clubs. I am proud of our team’s dedication to and passion for achieving our public service mission and driving a positive impact within our communities. To learn more about our diversity and inclusivity initiatives, how to become a supplier for our Bank, or how to access our financial education programs and resources, I encourage you to visit us at richmondfed.org. Becky C. Bareford First Vice President and Chief Operating Officer Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 17 Boards, Councils, Officers, and Senior Professionals Federal Reserve Bank of Richmond Board of Directors The Bank’s Board of Directors oversees management of the Bank and its Fifth District offices, provides timely business and economic information, participates in the formulation of national monetary and credit policies, and serves as a link between the Federal Reserve System and the private sector. Six directors are elected by banks in the Fifth District that are members of the Federal Reserve System, and three are appointed by the Board of Governors. Directors who are not affiliated with financial institutions appoint the Bank’s president and first vice president with approval from the Board of Governors. The Bank annually selects the Fifth District’s representative to the Federal Advisory Council, which consists of one member from each of the twelve Federal Reserve Districts. The council meets four times a year with the Board of Governors to consult on business conditions and issues related to the banking industry. Baltimore and Charlotte Branches Boards of Directors The Bank’s Baltimore and Charlotte branches have separate boards that oversee operations at their respective locations and, like the Richmond Board, contribute to policymaking and provide timely business and economic information about the District. Four directors on each of these boards are appointed by the Richmond directors, and three are appointed by the Board of Governors. Community Depository Institutions Advisory Council Created in 2011, the Bank’s Community Depository Institutions Advisory Council advises the Bank’s management and the Board of Governors on the economy, lending conditions, and other issues from the perspective of banks, thrifts, and credit unions with total assets under $10 billion. The council’s members are appointed by the Bank’s president. Community Investment Council Established in 2011, the Community Investment Council advises the Bank’s management about emerging issues and trends in communities across the Fifth District, including low-income and moderate-income neighborhoods in urban and rural areas. The council’s members are appointed by the Bank’s president. Payments Advisory Council Created in 1978, the Payments Advisory Council serves as a forum for communication with financial institutions about financial services provided by the Federal Reserve. The council helps the Bank respond to the evolving needs of its banking constituency. Council members are appointed by the Bank’s payments executives. Thank You Thank you to the directors who completed their service in 2018: Christopher J. Estes and Austin J. Slater Jr. of the Baltimore Board and Michelle A. Mapp and Laura C. Meagher of the Charlotte Board. In January 2019, the Bank welcomed Eugene A. Woods to the Richmond Board and Tom Geddes to the Baltimore Board. Lists of boards and councils on the following pages include members, titles, and affiliations as of December 31, 2018. 18 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Board of Directors – Federal Reserve Bank of Richmond From the left: Kathy J. Warden, Thomas C. Nelson, Susan K. Still, William A. Loving Jr., Margaret G. Lewis, CHAIR Margaret G. Lewis Retired President HCA Capital Division Richmond, Virginia DEPUTY CHAIR Kathy J. Warden President and Chief Executive Officer Northrop Grumman Corporation Falls Church, Virginia Ángel Cabrera President George Mason University Fairfax, Virginia Robert R. Hill Jr. Chief Executive Officer South State Corporation and South State Bank Columbia, South Carolina William A. Loving Jr. Ángel Cabrera, Robert R. Hill Jr., and Catherine A. Meloy Catherine A. Meloy FEDERAL ADVISORY COUNCIL REPRESENTATIVE President and Chief Executive Officer Pendleton Community Bank Franklin, West Virginia President and Chief Executive Officer Goodwill of Greater Washington and Goodwill Excel Center Washington, D.C. Thomas C. Nelson Brian T. Moynihan Chairman and Chief Executive Officer Bank of America Charlotte, North Carolina Chairman, President, and Chief Executive Officer National Gypsum Company Charlotte, North Carolina Susan K. Still President and Chief Executive Officer HomeTown Bankshares Corporation and HomeTown Bank Roanoke, Virginia List includes members, titles, and affiliations as of December 31, 2018. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 19 Board of Directors – Baltimore Branch From the left: Christopher J. Estes, Laura L. Gamble, Kenneth R. Banks, Susan J. Ganz, Wayne A. I. Frederick, and Mary Ann Scully Not pictured: Austin J. Slater Jr. CHAIR Susan J. Ganz Chief Executive Officer Lion Brothers Company, Inc. Owings Mills, Maryland Kenneth R. Banks President and Chief Executive Officer Banks Contracting Company Greenbelt, Maryland Christopher J. Estes Vice President, Business Development and Advocacy Rebuilding Together of Washington, D.C. Laura L. Gamble Regional President Greater Maryland PNC Baltimore, Maryland Mary Ann Scully Chairman, President, and Chief Executive Officer Howard Bancorp Baltimore, Maryland Austin J. Slater Jr. President and Chief Executive Officer Southern Maryland Electric Cooperative, Inc. Hughesville, Maryland Wayne A. I. Frederick President Howard University Washington, D.C. List includes members, titles, and affiliations as of December 31, 2018. 20 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Board of Directors – Charlotte Branch From the left: Michael C. Crapps, R. Glenn Sherrill Jr., Laura Y. Clark, Michelle A. Mapp, Michael D. Garcia, and Jerry L. Ocheltree Not pictured: Laura C. Meagher CHAIR Laura Y. Clark President and Chief Executive Officer United Way of Central Carolinas Charlotte, North Carolina Michael C. Crapps President and Chief Executive Officer First Community Bank Lexington, South Carolina Michael D. Garcia President, Pulp and Paper Division Domtar Corporation Fort Mill, South Carolina Laura C. Meagher Vice President, General Counsel, and Secretary VF Corporation Greensboro, North Carolina Jerry L. Ocheltree President and Chief Executive Officer Carolina Trust Bank Lincolnton, North Carolina R. Glenn Sherrill Jr. Chairman and Chief Executive Officer SteelFab, Inc. Charlotte, North Carolina Michelle A. Mapp Chief Executive Officer South Carolina Community Loan Fund Charleston, South Carolina List includes members, titles, and affiliations as of December 31, 2018. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 21 Community Depository Institutions Advisory Council CHAIR Robert A. DeAlmeida* President and Chief Executive Officer Hamilton Bank Towson, Maryland Dabney T.P. Gilliam Jr. President and Chief Executive Officer Bank of Charlotte County Phenix, Virginia L.E. Griffin President and Chief Executive Officer Home Federal Savings and Loan Bamberg, South Carolina Mark D. Harrell Theresa B. Mann William L. Hedgepeth II Gary R. Mills President and Chief Executive Officer CNB Bank Berkeley Springs, West Virginia President and Chief Executive Officer Select Bank and Trust Company Dunn, North Carolina James L. King President and Chief Executive Officer The Bank of Monroe Union, West Virginia President and Chief Executive Officer The Partnership Federal Credit Union Arlington, Virginia President and Chief Executive Officer First Community Bank Bluefield, Virginia Ronald D. Paul Chairman and Chief Executive Officer EagleBank Bethesda, Maryland R. Arthur Seaver Jr. Chief Executive Officer Southern First Bank Greenville, South Carolina Community Investment Council CHAIR Deborah McKetty President and Chief Executive Officer CommunityWorks Greenville, South Carolina Oswaldo Acosta Director of Small Business Services Latino Economic Development Center Washington, D.C. Michael D. Atkinson Senior Vice President, Manager of Community Development First Citizens Bank and Trust Company Raleigh, North Carolina David Dodson President MDC Durham, North Carolina 22 Vince Ford Jody Keenan Earl F. Gohl John Maneval Senior Vice President for Community Health Palmetto Health Columbia, South Carolina Former Federal Co-Chair Appalachian Regional Commission Washington, D.C. Rochelle S. Goodwin Senior Associate Vice President for Academic and Public Strategy West Virginia University Morgantown, West Virginia Thomasina Hiers Director, Baltimore Civic Site The Annie E. Casey Foundation Baltimore, Maryland Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT State Director Virginia Small Business Development Center Fairfax, Virginia Deputy Director, Multifamily Housing and Business Lending Maryland Department of Housing and Community Development Lanham, Maryland Thomas M. Watson Executive Director Rural Support Partners Asheville, North Carolina List includes members, titles, and affiliations as of December 31, 2018. Robert F. Shuford Jr. President and Chief Executive Officer Old Point National Bank Hampton, Virginia Judy R. Tharp President and Chief Executive Officer Piedmont Advantage Credit Union Winston-Salem, North Carolina *In 2018, Robert A. DeAlmeida served as the Fifth District’s representative on the Community Depository Institutions Advisory Council at the Board of Governors of the Federal Reserve System. List includes members, titles, and affiliations as of December 31, 2018. Payments Advisory Council CHAIR Karen Buck Executive Vice President, Commercial, Retail, and Payment Operations TD Bank Mount Laurel, New Jersey Todd Bogdan Chief Operating Officer NewDominion Bank Charlotte, North Carolina Bill Bunn Executive Vice President, Retail Banking First Bank Southern Pines, North Carolina Kim Bunn Senior Vice President and Operations Executive Bank of America Jacksonville, Florida Richard Chin Senior Vice President and Treasurer Pentagon Federal Credit Union Alexandria, Virginia Sheryl Colleton Senior Vice President and Operations Director United Bank Chantilly, Virginia John Kevin Cranford Senior Vice President BB&T Corporation Charlotte, North Carolina Robert E. Dael President and Chief Executive Officer MACHA—The Mid-Atlantic Payments Association Hanover, Maryland Jeff W. Dick Chairman and Chief Executive Officer MainStreet Bank Fairfax, Virginia Kathy Dye Devon Marsh Senior Vice President, Payment Industry Relations Office Wells Fargo Bank Winston-Salem, North Carolina Vice President, Information Technology West Virginia Central Credit Union Parkersburg, West Virginia Avery Miller Margo D. Foust Tracy J. Nelms Senior Vice President, Operations and Process Improvement American National Bank and Trust Company Danville, Virginia Terry Garner Senior Vice President, Deposit Operations Southern First Bank Greenville, South Carolina Martha J. Haymaker President and Chief Executive Officer Calhoun Banks Grantsville, West Virginia Jamin M. Hujik Executive Vice President CresCom Bank Charleston, South Carolina Adrian S. Johnson Senior Vice President and Chief Financial Officer MECU of Baltimore, Inc. Baltimore, Maryland E. Stephen Lilly Chief Operating Officer First Community Bancshares, Inc. Bluefield, Virginia Alison Lyewski Senior Vice President, EIS Transaction Operations SunTrust Bank Orlando, Florida Laura Steele President and Chief Executive Officer ePayResources Dallas, Texas Eric Tichenor Senior Vice President and Chief Financial Officer MVB Bank Fairmont, West Virginia Director of Enterprise Payments Capital One Bank Richmond, Virginia Chris Tolomeo Executive Vice President TowneBank Suffolk, Virginia Senior Vice President, Banking Services M&T Bank Amherst, New York Holly Pingatore Paul Trozzo Senior Vice President and Director of Deposit Operations South State Bank Charleston, South Carolina Melissa A. Quirk Senior Vice President PNC Bank Pittsburgh, Pennsylvania Tynika Wilson Senior Vice President, Debit Card and Funds Services Navy Federal Credit Union Vienna, Virginia President and Chief Operating Officer Provident State Bank Preston, Maryland Scott P. Young Rick Rhoads Director of Payments and Card Services Bank-Fund Staff Federal Credit Union Washington, D.C. Senior Vice President, E-Services State Employees’ Credit Union Raleigh, North Carolina Gayle Youngblood Susan G. Riel Senior Executive Vice President and Chief Operating Officer EagleBank Bethesda, Maryland D.J. Seeterlin Assistant Vice President, Product Management State Employees Credit Union of Maryland Linthicum, Maryland List includes members, titles, and affiliations as of December 31, 2018. Chief Information Officer Chesapeake Bank Kilmarnock, Virginia Woody Shuler Vice President, Finance SRP Federal Credit Union North Augusta, South Carolina Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 23 Management Committee From the left: William O. Riley, David E. Beck, Becky C. Bareford, Kartik B. Athreya, Lisa A. White, Thomas I. Barkin President and Chief Executive Officer Becky C. Bareford First Vice President and Chief Operating Officer Kartik B. Athreya Executive Vice President and Director of Research David E. Beck Senior Vice President and Baltimore Regional Executive Goutam R. Gandhi Senior Vice President and Chief Information Officer Michelle H. Gluck Executive Vice President, General Counsel, and Chief Risk Officer Matthew A. Martin Senior Vice President and Charlotte Regional Executive William O. Riley Senior Vice President and Chief Technology Officer, Currency Technology Office Michael D. Stough Senior Vice President and General Auditor Lisa A. White Executive Vice President, Supervision, Regulation, and Credit List includes members of the management committee and titles as of December 31, 2018. 24 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Thomas I. Barkin, Michelle H. Gluck, Michael D. Stough, Goutam R. Gandhi, and Matthew A. Martin Management Committee From the left: William O. Riley, David E. Beck, Becky C. Bareford, Kartik B. Athreya, Lisa A. White, Thomas I. Barkin President and Chief Executive Officer Becky C. Bareford First Vice President and Chief Operating Officer Kartik B. Athreya Executive Vice President and Director of Research David E. Beck Senior Vice President and Baltimore Regional Executive Goutam R. Gandhi Senior Vice President and Chief Information Officer Michelle H. Gluck Executive Vice President, General Counsel, and Chief Risk Officer Matthew A. Martin Senior Vice President and Charlotte Regional Executive William O. Riley Senior Vice President and Chief Technology Officer, Currency Technology Office Michael D. Stough Senior Vice President and General Auditor Lisa A. White Executive Vice President, Supervision, Regulation, and Credit List includes members of the management committee and titles as of December 31, 2018. 24 Federal Reserve Bank of Richmond • 2018 Annual Report Thomas I. Barkin, Michelle H. Gluck, Michael D. Stough, Goutam R. Gandhi, and Matthew A. Martin Bank Officers and Senior Professionals Eliana Balla Financial Economist and Senior Manager Steven T. Bareford Assistant Vice President Ronald G. Barnes Assistant Vice President Jeremy B. Caldwell Vice President Niranjan Chandramowli Vice President Christy R. Cleare Vice President Kerri A. Coard Vice President Cary B. Crabtree Assistant Vice President Jeffrey B. Deibel Assistant Vice President Natalie A. DePasquale Assistant Vice President grey gordon Laura H. Mayer Michael J. Seifert William H. gregg Andrew S. McAllister Fred E. Shuford Jr. Borys M. grochulski Diane H. McDorman Brielle M. Stanley Jennifer J. Hall Sonya Y. Mills-Harvey Group Vice President and Chief Human Resources Officer Aaron B. Moody Assistant Vice President Cheryl R. Moore Assistant Vice President Christopher W. Murphy Vice President Urvi Neelakantan Assistant Vice President Lisa T. Oliva Senior Economist Kerri R. O’Rourke-Robinson Vice President Raymond E. Owens III Assistant Vice President Christopher J. Palumbo Senior Economist and Policy Advisor Hemangini R. Parekh Senior Economist Christin L. Patel Assistant Vice President Senior Economist Assistant Vice President Senior Economist Assistant General Counsel Donovan o. Harper ii Senior Vice President Mattison W. Harris Vice President Ann S. Harrison Assistant Vice President James R. Hart Assistant Vice President Charles A. Hodges CTO Senior Professional Kimberley Fuller Homan Assistant Vice President Andreas l. Hornstein Todd E. Dixon Senior Advisor Cathryne C. Doss Vice President Vice President Kathleen R. Houghtaling Vice President and Chief Data Officer Cathy i. Howdyshell Adam M. Drimer lawrence S. Hull Huberto M. Ennis leonard g. Johns Gregory J. Ewald Assistant Vice President Group Vice President Vice President and Deputy General Counsel Kevin W. Fergusson Vice President and Medical Director Vice President CTO Senior Professional Matt S. Steiger Assistant Vice President Kelly J. Stewart Assistant Vice President Markus A. Summers Vice President Alexander T. Swartz Assistant Vice President Nicholas Trachter Senior Policy Economist James Trotta Group Vice President Vice President Christopher E. Tunstall John R. Walter Senior Economist and Policy Advisor Zhu Wang Assistant Vice President Large Bank Principal Examiner Lauren E. Ware Patricia A. Perry Roy H. Webb Vice President and Assistant General Auditor John Bailey Jones Senior Economist and Research Advisor Joan T. Garton thomas A. lubik Jeffrey R. Gerlach Ann B. Macheras Richard B. Gilbert D. Keith Maglinger Vice President Vice President Nicole N. Girardin Jody B. Martin Assistant Vice President Assistant Vice President Rebecca Goldberg Jonathan p. Martin Vice President Assistant Vice President Keith R.G. Goodwin Christian Matthes Assistant General Counsel Vice President gregory A. Johnson D. Keith larkin Vice President Assistant Vice President Phillip C. Watts Gina E. Friese Vice President CTO Senior Professional Assistant Vice President Diane R. Knapp Assistant Vice President Assistant Vice President Assistant Vice President and Corporate Secretary Craig W. Frascati Large Bank Principal Examiner Vice President Assistant Vice President Assistant Vice President Senior Advisor Group Vice President Senior Economist Assistant Vice President Assistant Vice President Santiago M. Pinto Senior Economist and Policy Advisor Stanley F. Poszywak Policy Advisor William C. Robinson Senior Vice President Melanie M. Rose Assistant Vice President Todd M. Ryan Vice President Steven D. Sanderford Assistant Vice President Pierre-Daniel G. Sarte Vice President Jason C. Schemmel Group Vice President Karen J. Schettino Vice President John A. Weinberg Senior Policy Economist Large Bank Principal Examiner John M. Wiatt III Assistant Vice President Michael L. Wilder Assistant Vice President Large Bank Principal Examiner Large Bank Principal Examiner Senior Advisor Assistant Vice President Vice President and Chief Financial Officer Felipe F. Schwartzman Senior Economist Richard F. Westerkamp Jr. Meghan F. Wlaz Alexander L. Wolman Terry J. Wright H. Julie Yoo List includes officers, senior professionals, and titles as of December 31, 2018. Federal Reserve Bank of Richmond • 2018 Annual Report 25 National IT Management Council From the left: Devon A. Bryan, Kristi A. Coy, Kathryn K. Smith, Robert I. Turner, Lyn McDermid, Lyn McDermid System Chief Information Officer David N. Alfano Senior Vice President and Chief Administrative Officer Devon A. Bryan Executive Vice President and Chief Information Security Officer Kristi A. Coy Senior Vice President for End User Services Scott C. Furman Senior Vice President for Organizational Excellence Tamera S. Hornsby-Fink Senior Vice President and Deputy Chief Information Security Officer Ghada M. Ijam Senior Vice President for Program and Project Services Kathryn K. Smith Executive Vice President for Treasury Services Robert I. Turner Executive Vice President and Chief Operating Officer List includes members of the management council and titles as of December 31, 2018. 26 Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT Scott C. Furman, Ghada M. Ijam, Tamera S. Hornsby-Fink, and David N. Alfano National IT Officers and Senior Professionals Abigail T. Baker Albert M. D’Avanzo Darren L. Knutson John W. Rhodes Ian W. Beirnes Sonny Dua Vicki L. Kosydor Paul R. Sans Nicole E. Bennett Ellisha T. Ellison Paul R. Kowalenko Michael T. Shaughnessy Joshua T. Bruch Michael S. Everett Shrawan Kumar Reginal L. Bryant William H. Fenerty Malissa M. Ladd Cynthia S. Bullington Pedro E. Fong Donald H. Larmee Peter Burkhardt Valerie A. Freund John T. Lines Melissa E. Butler Devin D. Gordon Randy C. Manspile James A. Caulfield Lisa Marie Gravely S. Craig Minyard Leigh Chan Mark A. Hamilton Ellen D. Mitchell Gerry P. Collins M. Scott Hannah Mahnaz Moosa Gwendolyn Collins M. Polly Helm Keith Morales Tracy L. Conn Kristofer K. Hogan Howard Morgasen William C. Conway II Christine M. Holzem A. Vinton Myers III Michael E. Cortese M. Brannon Howle Artie Papa Nell M. Cote David W. Jeter Leigh Lammert Parker John F. Crabtree Frederick B. Johnson Heidi R. Patterson Assistant Vice President Business Architect Vice President Assistant Vice President Group Vice President Vice President Business Architect Assistant Vice President Assistant Vice President Assistant Vice President Vice President Information Security Architect Assistant Vice President Assistant Vice President Vice President Assistant Vice President Assistant Vice President Vice President Assistant Vice President Assistant Vice President Assistant Vice President Assistant Vice President Business Architect Vice President Business Architect Assistant Vice President Vice President Business Architect Assistant Vice President Vice President Vice President Vice President Assistant Vice President Vice President Business Architect Vice President Vice President Assistant Vice President Vice President Business Architect Assistant Vice President Assistant Vice President Vice President Assistant Vice President Vice President Vice President Vice President Vice President Assistant Vice President Vice President Vice President Kevin J. Craig Bradley M. Joiner Susan L. Perlmutter Jeffrey F. Crow Carie L. Kelleher Irina V. Piven Bary M. Dalton Robert B. Klank Kevin A. Reed Group Vice President Senior Vice President Vice President Assistant Vice President Vice President Business Architect Information Architect Information Security Architect Group Vice President Chief Application Integration Engineer Stephanie T. Shetterly Assistant Vice President Hunter R. Shomo Vice President Joshua N. Snell Group Vice President Eric B. Stanley Information Architect Christopher T. Szymonik Assistant Vice President Scott C. Thomas Assistant Vice President Sherri L. Thorne Group Vice President Christopher A. Tignor Vice President Michael T. Trenkle Assistant Vice President Gregory C. Waehner Business Architect Thomas J. Weber Assistant Vice President Jeanette L. Willette Group Vice President Fritz Zeigler Operational Stack Engineer List includes officers, senior professionals, and titles as of December 31, 2018. Assistant Vice President Assistant Vice President Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT 27 Financials Audited Financial Statements and Notes T he audited annual financial statements of the Federal Reserve Bank of Richmond as of and for the years that ended on December 31, 2018, and December 31, 2017, are incorporated here by reference. They are available from the Board of Governors of the Federal Reserve System at www.federalreserve.gov/ aboutthefed/files/richmondfinstmt2018.pdf. That public disclosure also provides: Notes to Financial Statements, Management’s Report on Internal Control over Financial Reporting, and the Independent Auditor’s Report. The Federal Reserve Board’s Statement of Auditor Independence is provided below. Statement of Auditor Independence The Federal Reserve Board engaged KPMG to audit the 2018 combined and individual financial statements of the Reserve Banks.1 In 2018, KPMG also conducted audits of internal controls over financial reporting for each of the Reserve Banks. Fees for KPMG services totaled $7 million. To ensure auditor independence, the Board of Governors requires that KPMG be independent in all matters relating to the audits. Specifically, KPMG may not perform services for the Reserve Banks or others that would place it in a position of auditing its own work, making management decisions on behalf of the Reserve Banks, or in any other way impairing its audit independence. In 2018, the Bank did not engage KPMG for any non-audit services. __________________________________________ 1 28 In addition, KPMG audited the Office of Employee Benefits of the Federal Reserve System (OEB), the Retirement Plan for Employees of the Federal Reserve System (System Plan), and the Thrift Plan for Employees of the Federal Reserve System (Thrift Plan). The System Plan and the Thrift Plan provide retirement benefits to employees of the Board, the Federal Reserve Banks, the OEB, and the Consumer Financial Protection Bureau. Federal Reserve Bank of Richmond • 2018 ANNUAL REPORT The Federal Reserve Bank of Richmond 2018 Annual Report was produced by the Research Department, Publications Division. Managing Editor: Karl Rhodes Design: Janin/Cliff Design, Inc. Staff Photography: Michael Batts and Larry Cain Essay Photography: John M. Lund Photography, Inc., Getty Images Printing: Worth Higgins & Associates Special thanks to Lisa Kenney, Elizabeth Marshall, Joseph Mengedoth, Jessie Romero, and Margaret Vadas. The 2018 Annual Report also is available on the Bank’s website: www.richmondfed.org. Fifth Federal Reserve District Offices RICHMOND 701 East Byrd Street Richmond, Virginia 23219 (804) 697-8000 www.richmondfed.org BALTIMORE 502 South Sharp Street Baltimore, Maryland 21201 (410) 576-3300 CHARLOTTE 530 East Trade Street Charlotte, North Carolina 28202 (704) 358-2100