Full text of Annual Report of the Federal Reserve Bank of San Francisco : 1985 Annual Report

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1985
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From the Boardroom
Changing of the Guard
The National Economy
The Western Regional Economy
Western Banking
Supervision, Regulation and Credit
Bank Administration
Priced Payments Services
Governmental Services
Directors

2
4
6
8
10
14
18
20
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25

~1.derGI 181'-" Bank
rA
MAR 12 1986

LIBRAR~

The Federal Reserve Bank of San Francisco is one of
twelve regional Reserve Banks which, together with
the Board of Governors in Washington, D.C., comprise
the nation's central bank. The Federal Reserve Bank of
San Francisco serves the Twelfth Federal Reserve Dis­
trict, which includes Washington, Oregon, California,
Arizona, Nevada, Utah, Idaho, Alaska, Hawaii, Guam
and American Samoa.
As the nation's central bank, the Federal Reserve is
responsible for determining and carrying out our
nation's monetary policy. It also is a bank regulatory
agency, a provider of wholesale priced banking services,
and the fiscal agent for the United States Treasury.

1


FIOM THE IOllDIOOM

The pace of economic expansion in the u.s. and in the
Twelfth Dist r ict slowed in 1985 , bringing into sharp
relief the uneven growth patterns across different sec­
tors tha t have characterized t h is r ecovery since
m id-1984. On the one hand, the trade and service sec­
tors, as well as portions of the high technology sec­
tor, prospered in 1985 as a result of continued strong
consumer and defense spending. On the other hand, a
sizeable nu mber of industries, suc h as agricultu re, for­
est pr oducts, mining, manufacturing a nd transporta­
ti on , encount er ed di fficult ies in va ryin g degrees dur ing
the ye ar , despite the downwa rd trend in in ter est r ates
and a welc omed depreciation of the U.S. dolla r.

enhancements to Fedline, the Bank's m icro-computer­
based electronic access serv ice, to provide customers
with on-line access to accounting information.
Other pr ograms in 1985 also demonst rated the
Bank's comm itment to improved operations and service
delivery. The substa nt ia l pr ogress made on the con­
struction of the new Los Angeles Branch bui lding is but
one example. Another is the development and imp le­
mentation of a n umber of automated systems for the
Ba nk's accounting, banking statistics and operations
functions , all of which will en hance overall efficiency.
F inally, the Bank's efforts to develop disaster con­
tingency plans culminated in the comple tio n of a com­
prehensive master plan and a successful test at the
F ederal Reserve System's back-up da t a center in
Culpeper, Virginia.

The depressed condition of ma ny of t he nation's and
this Dist r ict's key industries was a reflection of a grow­
in g foreign trade imbalance ca used by the substantial
appr ecia t ion in the int ernational value of the dolla r
th rough 1984. The dollar 's strength into 1985, which
was an in dir ect consequence of the burgeoning feder al
budget deficit, contributed to a surge in imports a nd a
slump in exports that cont in ued th r oughout the year.
T he r esu lt a n t det er ior ation in the condition of the
industr ies tha t wer e most suscept ible to increased for­
eign compet itio n also sh owed up in t he banking indus­
t ry in the guise of det erior ati ng asset qu al ity and con­
tinuing ba n k fa ilures. In particular, this scenar io was
played ou t in the deepening farm credit cr isis during the
year.

Ma nagement benefited greatly du ring 1985 from the
bro ad-based expe r ience and judgment of the Ba nk's
Board of Directors at its headqua rters office and at it s
four bra nch es. The Direct ors pr ovided gu ida nce on
major management decisions and pla nning goals. In
addition, they su ppl ied infor mation a nd t heir own
views on economic cond itions and the form ulation of
monetary policy to support the Federa l Reserve in its
primary function as the nation's central ba nk .
We would like to extend our tha n ks and appreciation
to the Directors wh o completed terms of service in 1985 :
Bram Goldsmi t h (Cha irman a nd Ch ief E xecu ti ve
Officer , City National Ba nk, Beverl y Hills, Ca lifornia ),
J ohn A. Da h lstr om (Cha irma n of the Board, Tracy­
Coll i ns Ba n k and Trust Com pa n y, Salt Lake City,
Uta h), David Ni mkin (Pre sident a nd Ch ief Executive
Officer , Corporate Fund for Housing, Los Angeles, Ca l­
ifornia, and formerly from Salt Lake City, Utah), and
Lonnie G. Ba iley (Senior Vice President , U nite d Bank
Alaska, An ch or a g e , Alaska, a n d formerly from
Spokane, Washington ).

In spite of the difficult ies encountered in 1985, the
outlook for the year ahead contains some bright spots.
After three years of expansion, inflationary pressures
sti ll ha ve not resurfaced, largely as a result of persistent
Federal Reser ve efforts towar d long run price stability.
Reduced inflation sho uld provide a solid base for sus­
taina ble growth in the fut ure. Also, with the decline in
the va lue of the dollar from its peak last Februa ry ,
for eign in r oads in to U.S . markets should ease some­
wh at in 1986, providing re lief to some of the nation's
beleaguer ed indust r ies.

Finally, we wish to expre ss ou r ap preciat ion to the
officers and staff whose efforts and dedication made
1985 a successful year and placed the Ba n k, under its
new president, Robert T. Parry, in a strong position t o
meet new challenges in 1986.

Th e diver se requirements of the Twelfth Di st r ict
fina ncial community placed special demands on the
oper ations of the San Francisco Reserve Bank in 1985.
In it s rol e as a provider of payments services, the Ba nk
sought to improve the overall quality and efficiency of
its services. Moreover, Bank management placed par­
ticular emphasis on enhancing the reli ability and
safety of electronic funds transfer through the installa­
tion of a system to encrypt all electronic communica­
tions bet ween this Bank and its customers. The Bank
developed se veral new services in 1985, including a
Large-Dollar Return Item Notification Service, which
uses Fedwire to help banks meet the new notification
requirements for returned checks, and two new

John J. Balles
President

2


Ala n C. Furth
Ch airman of the Boar d

I,
I

J ohn J . Balles
Presid ent

Fred W. Andre w
Deputy Cha irma n

3


Ala n C. Furth
Chairman

CHANClue OF THE CUAID

The retirement of John J . Balles on February 1, 1986,
as he reached the Bank's mandatory retirement age for
top management, marked an important change in the
leadership of the Federal Reserve Bank of San Fran­
cisco. Mr. Balles has served this Bank in an outstanding
manner as its president and chief executive officer for
the past thirteen years, following earlier careers in
commercial banking and in academia. As his successor,
the Board of Directors has elected Robert T. Parry,
formerly executi ve vice president and chiefeconomist of
Security Pacific Corporation and its principal subsidi­
ary, Security Pacific National Bank of Los Angeles.

developed a warm spirit of personal friendship toward
him. Those feelings will not fade. For his innumerable
contributions during his thirteen years of service to this
Bank, I speak for all the Directors in extending sincere
thanks to John Balles and in wishing him well in his
retirement.
This Bank also looks forward to continued outstand­
ing leadership. To provide this, I welcome Robert Parry
as he assumes the position of president of this Bank. I
am confident that he will work in close harmony with
Richard T. Griffith, who will continue his strong perfor­
mance as first vice president and chiefoperating officer.

Wit h the support of the first-class management team
that he developed, Mr. Balles led the Bank through a
period of dramatic change for the economy and the
financial system which placed new demands on the
Federal Reserve System. During this challenging
period, Mr . Balles participated in the development of
monetary targeting and oversaw the implementation of
the far-reaching Depository Institutions Deregulation
and Monet a ry Control Act of 1980. That Act increased
the scope of the Federal Reserve in monetary control
and greatly broadened its role in offering direct pay­
ments services to all banks, thrifts and credit unions on
a fully priced basis in a competitive environment.

Prior to accepting the presidency of this Bank, Mr.
Parry served as executive vice president of Security
Pacific Corporation and in that capacity, was a member
of its management and finance committees. He has also
served as the chairman of the Economic Advisory Com­
mittee of the American Ba n kers Association, as a direc­
tor of the California Bankers Association, and as presi­
dent of the National Association of Business
Economists. Currently, he is a director of the National
Bureau of Economic Research. Before joining Security
Pacific Corporation in February 1970, he spent nearly
five years with the Federal Reserve Board in Wash­
ington, D.C. , as a research economist. A native of Penn­
sylvania, he holds Ph.D. and M.A. degrees in economics
from the University of Pennsylva nia .

This Bank, under Mr. Balles' direction, expanded to
meet these new responsibilities. The staff of the Bank
and it s four bra nches grew in bot h quality and number.
Mr. Balles led t he team which obtained approval for and
direct ed two new build ing pr ogra ms - the San Fran­
cisco headquarters completed in 1983, a nd the Los
Angeles branch building to be finished in 1986.

Hi s impressive background in ba nking indicates that
Mr. Pa rry ha s the management experience necessary to
head one of the nation 's largest Federa l Reserve Banks.
Moreover, his strong credentials as a professional econ­
omist make him well-qualified to represent the Twelfth
Federal Reserve Distri ct on the Federal Open Market
Committee, the key body in the formation of monetary
policy. We are pleased to ha ve found suc h an able
candidate and, on behal f of the directors and staff of the
Bank, I wish him well in hi s new position.

Mr. Balles was a ti r eless advocate of the Federal
Reserve's anti-inflation policies as well as an important
spokesman for the need to reduce the federal budget
de ficit t o foster sustainable economic growth and lower
real interest rates. His belief that the future of the
Twelfth District economy is closely tied to develop­
me n ts in the Pacific Basin also led him to take an active
ro le in de veloping closer ties to the other central banks
of that region through the Bank's Pacific Basin Program
which he initiated. Also, under his leadership, the Bank
greatly expanded its economic education and public
information activities, including the development of
The World ofEconomics, museum-quality exhibitions
designed for the lobbies of the Bank's new buildings in
San Francisco and Los Angeles.

Ala n C. Furth
Chairman of the Board

During his period of service here, Mr. Balles earned
the highest professional respect from his colleagues and
industry associates . Members of the Bank's Board of
Directors who have worked closely with him have

4

Robert T. Parry (st a nding)
John J. Balles

5


THE NATIIMAL ECONOMY

The U .S. economy continued to grow in 1985, but at a
much slower pace than in the two preceding years of the
current economic expansion. Problems that began to
emerge after mid-1984 became sources of persistent
weakness in 1985. In particular, the large foreign trade
imbalance caused both an overall slowing and an
uneven pattern of growth across different sectors. This
occurred despite a decline in interest rates of some 300
basis points since mid-1984. Policy-makers sought to
redress these structural imbalances through legislation
to curb the growth in federal spending and through
international accords designed to lower the value of the
dollar. In the area of monetary policy , the Federal
Reserve's efforts to support noninflationary growth
were complicated by the aberrant behavior of the M1
monetary aggregate - an important indicator of the
thrust of monetary policy.

Uneven Expansion
Over the last three years the total volume of goods
and services produced by the U .S. economy advanced to
a level that is ten percent above the previous peak in
1981. At the same time, however, a number of indus­
tries have not shared in this overall prosperity. Such
industries as forest products, mining and some man­
ufacturing sectors have seen little or no employment
growth since 1982. Agriculture has been especially
hard-hit, with an actual loss of a half million jobs over
this period.
To a large extent, the emergence of this "dual econ­
omy ," in which some sectors such as trade, services and
machinery manufacture prospered while others
remained depressed, may be traced to the impact of
increased foreign competition resulting from the sub­
stantial appreciation in the international value of the
U.S. dollar through 1984. Industries producing goods
for export found that the dollar's rise made their prod­
ucts more expensive in foreign markets, while at home,
the high value of the dollar made imported goods
cheaper compared to those produced by U.S. firms. The
sharp run-up in the U.S. current account deficit to $120
billion in 1985 reflects this sluggish growth of exports
and surge in imports.

U .S. industries that are exposed to foreign competition.
This competition has led to growing demands for some
form of protection.
In an effort to remedy this situation, and perhaps
head off protectionist sentiments, Congress enacted the
Gramm-Rudman-Hollings bill in late 1985. This legis­
lation calls for a gradual reduction in the size of the
deficit until a balanced budget is achieved in 1991. The
legislation is intended to redress the major structural
imbalance in the economy and provide relief over time
to those sectors that have suffered from the indirect
effects of the budget deficit.

Policy Initiatives
It is now widely agreed that these developments have
a common cause: the burgeoning deficit in the federal
government's budget. Between 1981 and 1983, this defi­
cit almost tripled, and was a significant factor in the
sharp rise in real, or inflation-adjusted, interest rates,
which, in turn, helped to attract the massive inflow of
foreign capital needed to finance this deficit. This capi­
tal inflow has been the largest single factor driving up
the value of the dollar and producing the deteriorating
trade position noted earlier. In a sense, then, most of the
burden of financing the budget deficit has fallen on the

Of more immediate impact were the efforts of U.S .
and other central banks to bring down the value of the
dollar through substantial foreign exchange interven­
tion first in late February and again in the fall. The
second round of intervention followed the September
"Group of Five" Agreement among the U.S., the United
Kingdom, France, Germany and Japan. The agreement
aimed to encourage orderly depreciation of the dollar
through better coordination of these countries' eco­
nomic policies. These efforts and, more importantly, the
slowdown in the rate of growth of the U .S. economy and
subsequent declines in interest rates pushed down the
6

dollar's value by 17 percent between February and year­
end. Although the dollar's value remained nearly 35
percent above that in 1980, its depreciation in 1985
should set the stage for a significant improvement in
1986 in the trade balance and in the prospects for
industries which have been hurt by foreign competition.

the second half of the year. This target also was
exceeded by a significant margin as velocity continued
to fall.
Economists are divided as to the causes of this unex­
pected decline in velocity, but most agree that the
decline in market interest rates, declining inflation and
deregulation ofthe banking industry played roles. All of
these developments reduce the cost (in terms offoregone
earnings on alternative investments) of holding money,
thereby making the public more willing to hold Ml
balances than in the past. In view of this unexpected
behavior, as well as its concern to get the economy on a
sustained growth path, the Federal Reserve decided
that Ml growth above the target set at midyear would
be acceptable. In particular, the Federal Reserve paid
greater attention to other developments in the econ­
omy, the credit markets and the foreign exchange mar­
kets and less attention to movements in the monetary
aggregates. This decision apparently has not led to an
increase in inflationary pressures, contrary to the fears
of some observers.

Inflation
The transition to an environment of lower inflation
continued throughout 1985. Unlike past upswings that
saw inflation pick up along with real output, this expan­
sion has been characterized by a declining rate ofinfla­
tion. At its peak in 1980, the twelve-month rate of
change in the consumer price index registered an
alarming 14 .7 percent. By contrast, over 1985, the third
year of recovery, this index of inflation rose only 3.6
percent.
The lower rate of inflation provides a solid basis for
sustained economic growth over the long run. However,
the transition to this new environment has been painful
for certain sectors. With lowered inflation expectations,
investors no longer demand real assets as a hedge
against rising prices . During the 1970s, the annual
rates of price increases of real assets such as houses,
office buildings, and agricultural land were consistently
higher than the overall rate of inflation. But, in 1985
the situation was reversed . Farmers, in particular, who
also face stiffened foreign competition for their prod­
ucts, have been hurt severely by the decline in the value
of agricultural land.

The past year was one of transition. The overall
slowdown in growth brought the problems of individual
sectors into sharp relief, while monetary policy was
conducted with a view towards accommodating needed
adjustments. With declines in interest rates and the
international value of the dollar, the stage is set for
continued economic growth at a moderate pace in 1986
with perhaps only a mild rise in inflation.

Monetary Policy
In 1985, the principal concern of the Federal Reserve
in conducting monetary policy was to facilitate the
transition of the economy to a sustainable rate of
growth. In light of the problems caused by the budget
deficit and the worsening trade balance, the Federal
Reserve sought to guide the economy toward a "soft
landing" with full employment. At the same time, in
view of the costs already incurred in bringing inflation
down to a more tolerable level, the Federal Reserve
remained conscious of the risks of rekindling inflation­
ary pressures . The task of conducting monetary policy
was further complicated in 1985 by a breakdown in the
usual relationship between the growth rates of GNP
and the Federal Reserve's principal monetary target,
Ml, which comprises the stocks of currency and "check­
able" deposits in the hands of the public.

FED£.~AL G,OVE.l<NME.NT DE-Fie"

AND INTERNATIOMAl COMPHITNE.NES5
$B'llIlo1'\i'

197~'IOO

225

1'10

200
175
150
125
100

FEDERAL BuDGET-l

130

<J='

120
110

75

As the year began, M 1 was rising rapidly and by July
was well above the Federal Reserve's 4-7 percent
growth target for the year. Ordinarily, this would be a
signal that spending on goods and services and there­
fore prices would be rising rapidly as well. Instead, GNP
growth remained surprisingly sluggish as the velocity
ofMl- the rate at which Ml is spent-declined. Faced
with this decline in velocity and with some uncertainty
as to whether the decline would continue, the Federal
Reserve set a new and wider 3-8 percent Ml target for

50
25
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-25

7


100

90
50

'THE WESTEIN IECIOtiAL ICONOMY

The diverse economy of the western region, like the
nation's, experienced a slowdown in overall growth in
1985. The strength of the dollar into 1985 and the
resulting unevenness in economic performance across
sectors that produced slower growth nationally also
hurt parts of the Twelfth District. In addition, perhaps
ironically, a number of industries in the West struggled
to make adjustments to an environment of lower infla­
tion and declining real asset prices.

A VER A C;" VAL.UE P E R A C RE: OF

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1"7 ' 100

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Because of differences in industrial composition, this
slowdown has hit some states in the District harder
than others. Specifically, those states with economies
that depend more heavily upon agriculture, energy
production, forest products and/or mining posted poorer
results in 1985. By contrast, buoyant consumer confi­
dence, lower interest rates and strong defense spending
gave a boost to the economies of other states in the
District.

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Employment
One way to gauge the performance of this District's
economy is to compare various measures of employment
across the nine states that make up the western region.
For the District as a whole, unemployment stood at
close to 7.0 percent, down from 7.4 percent in 1984 and
similar to the nation's year-end rate of 6.9 percent.
Unemployment rates by state in the Twelfth District
ranged from a low of 5.4 percent in Hawaii to a high of
10.4 percent in Alaska, but most were clustered in the
6.5 to 7.5 percent range. California, the District's most
populous state, had a 6.5 percent unemployment rate in
December, down sharply from 7.7 percent two months
earlier. Another indication of diverse economic perfor­
mance is that unemployment rates were higher than
their year-earlier levels in three states, lower in four
states and unchanged in two states.

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non-agricultural employment in the Twelfth District,
grew by 3.7 percent.
Employment growth in construction also was strong,
as the decline in interest rates boosted the demand for
structures. Construction activity, however, was dis­
tributed unevenly across the District. Washington,
with a generally strong economy, saw almost a 10
percent increase in housing permits and a 42 percent
increase in the value of nonresidential contract awards.
In contrast, in Alaska, residential construction permits
declined 37 percent and the value of nonresidential
contract awards declined 8 percent.
Another source of strength in the Twelfth District in
1985 was the aerospace and defense industry. Twenty­
five percent of all prime defense contracts, or $37 bil­
lion, was awarded to firms in this District. These out­
lays, as well as improved demand for commercial air­
lines, kept the aerospace sector healthy and provided a
boost to the California and Washington economies, in
particular. In California, aerospace jobs accounted for
an estimated 35 percent of all manufacturing jobs and
almost 7 percent of total nonagricultural employment.

Perhaps a better measure of economic well-being is
the employment growth rate . Because potential
workers tend to leave an area with few employment
possibilities, the unemployment rate in a given area can
fall even if the economy in that area is troubled. For the
District as a whole, employment grew 1.6 percent.
Washington posted one of the highest employment
growth rates in the Twelfth District, at 3.8 percent,
while Arizona's employment base fell 1.7 percent, the
largest drop in the District. These changes in employ­
ment compare to increases of 1.3 percent in California
and 1.9 percent for the nation as a whole.

A number of major industries in the West failed to
share in the prosperity created by strong consumer and
defense spending, however. Even though the interna­
tional value of the dollar declined throughout most of
the year, these industries, which include agriculture,
semiconductors and electronics, forest products, oil, and
mining, suffered from its still high value, as well as
from greater foreign competition , sagging world
demand, and, in some cases, high U .S. costs.

Sources of Strength
Consumer spending throughout the nation was
robust in 1985, and the western region was no excep­
tion. Consequently, employment in trade and services,
which together account for almost 50 percent of total

8


Agriculture
In the agricultural sector, increases in worldwide
production of many important crops reduced commodity
prices to exceptionally low levels. Despite its decline
since February, the continued high level of the
exchange value of the U.S. dollar hurt the industry as
well. Moreover, protectionist trade barriers and sub­
sidies granted by U.S. trade partners hurt sales of some
agricultural products. Consequently, net farm income
in California fell to around $3.0 billion in 1985 from the
already low level of $3.4 billion in 1984.
Farmland values throughout the District, as across
the nation, had been bid up during the late 1970s. Their
sharp decline in the last few years reflects the decline in
the profitability of agriculture as well as lowered infla­
tion expectations affecting real estate generally. The
Twelfth District experienced a 10 percent decline in
farmland values, compared to a 12 percent drop nation­
wide. Many farmers who borrowed against inflated
values of farm real estate during the late seventies
found themselves unable to service this debt in the
lower inflation and less prosperous environment of the
eighties. Resulting bankruptcies and foreclosures were
prevalent in 1985.

Electronics
The non-defense electronics industry, which was a
source of exceptionally strong growth in 1984, stag­
nated in 1985 primarily as a result of a slump in
semiconductor industry activity. Massive overproduc­
tion and intensified competition from Japanese pro­
ducers as well as slowing growth in the demand for
microcomputers all have contributed to the weakness in
this industry. Widespread layoffs, reduced work weeks,

and plant shutdowns were common throughout the
District in 1985. The down slide apparently lost momen­
tum over the course of the year, however, since the
volume of new orders for electronic components, a lead­
ing indicator for these firms, did not decline signifi­
cantly in 1985.

Resource-based Industries
Throughout the Pacific Northwest, the forest prod­
ucts industries continued to experience difficulties
stemming from increased competition from producers
in Canada and the southeastern United States as well
as relatively weak overall demand. However, there
were signs during the year that the shakeout was near­
ing its end. Price indices for various forest products no
longer fell as rapidly as they once did, and in some cases
even rose. Stumpage prices, which reflect expectations
of future profits in the industry, likewise appear to be
stabilizing. Also, looking ahead, the decline in the value
of the dollar since early 1985 is expected to result in
increased demand from Japan and China in 1986,
although producers continue to face Japanese import
restrictions.

198\ 1982 ''183 /98'+

Softness in oil prices, largely due to a lack of coopera­
tion among OPEC countries, created considerable
uncertainty in the District's oil producing areas.
Largely because of the oil outlook, Alaska's employ­
ment base stagnated in 1985. State and local employ­
ment in that state, which accounts for 20 percent of all

9

employment, was particularly hard-hit since state and
local government revenues depend heavily on oil tax
revenues. Another sign of the weakness in the oil mar­
ket was the decline in the price of drilling equipment,
particularly used drilling equipment.

WEST£IN IANKINe
The unevenness of the Twelfth District's economy
was reflected in the performance of its banking industry
in 1985. Lower interest rates, strong retail deposit
growth and the buoyant consumer spending that
characterized much of the western economy boosted
lending volume and earnings at many banks. At the
same time, however, continued weakness in certain
sectors of the western economy such as agriculture,
energy and mining translated into further deteriora­
tion in asset quality. At a handful of banks, moreover,
this deterioration was so great as to produce sizeable
losses for the year. On balance, aggregate bank earn­
ings in the West declined and trailed the results for the
nation as a whole.

A continuing excess supply of metals worldwide
resulted in lower prices and profits for the mining
industry. Foreign competition, especially in the copper
industry, forced many domestic firms to make signifi­
cant reductions in production and employment. One
major firm announced the indefinite shutdown in Sep­
tember of all of its Utah copper divisions. As a result,
the state lost nearly one-third of its mining employment
and an estimated 1,800 secondary jobs totalling approx­
imately 0.7 percent of total state employment. Parts of
Nevada and Arizona likewise suffered from a virtual
standstill in parts of the mining sector.

Deposit Growth
Western banks enjoyed strong deposit growth in
1985. In line with the surge in the Federal Reserve's M1
aggregate, which includes interest-bearing NOW and
Super NOW balances as well as zero-interest demand
deposits, checkable deposits at western banks grew
rapidly. The growth in Super NOWs and regular NOW
accounts accounted for $2.5 billion of the $6.5 billion
growth in checkable deposits. Small-denomination time
and savings deposits also were up, as a result of rapid
growth in money market deposit account (MMDA) bal­
ances, which contributed over $5 billion to bank deposit
growth . Moreover, even passbook savings balances
grew in 1985 - in contrast to previous years when
higher market interest rates made the passbook ceiling
rate of 5 1/ 2 percent relatively unattractive.

The Outlook
The Twelfth District economy had a mixed year in
1985. The dollar's phenomenal rise into early 1985,
increased foreign competition, declining asset values
and overproduction hurt a number of the region's indus­
tries and served to slow the overall rate of growth
substantially. In 1986, growth will likely continue to be
moderate, but for different reasons. The growth in con­
sumer spending is not likely to provide the boost to
growth that it did in 1985, but the decline in the value of
the dollar since February 1985 should begin to provide
significant relief in 1986 for many of the region's
beleaguered industries . Defense and construction
spending also will continue to bolster the economy.
Finally, the reduction in long-term interest rates that
occurred in 1985 should provide some further stimulus
to construction spending in 1986 .

The growth in deposits at western banks can be traced
to a number of factors which increased the attractive­
ness of bank deposits relative to other investments.
First, lower interest rates reduced the opportunity cost
(in terms of foregone interest on alternative invest­
ments) of holding checkable deposits, particularly since
many such accounts now pay interest. Moreover, the
continuing deregulation of the banking industry
enabled western banks to offer market-related yields on
a wider array of products in the time and savings
deposit categories. The downward trend in the rate of
inflation also may have had a salutary effect on overall
bank deposit growth by making financial assets in
general more attractive than real assets.

The reduced foreign exchange value of the dollar, and
the fall in interest rates, along with other factors , will
hopefully allow the agriculture, forest products, and
electronics industries to stabilize in 1986. Some
observers believe that the inventory adjustment in the
semiconductor industry is essentially over. If so, and if
recent declines in interest rates encourage a continua­
tion of the high level of business investment activity
seen in recent years, the electronics industry could
likewise resume its growth trend in 1986.
The outlooks for the mining and oil industries remain
clouded. The future of metals mining rests to a large
extent on the course of inflation. If inflation remains
low, demand will likely remain low, and metal prices
are unlikely to rise very much. The future of the oil
industry is even harder to predict since oil prices depend
not only on world demand, but also on the possibility of
agreement among OPEC members.

The growth in deposits from consumers and small
businesses, in particular, enabled banks in the West to
reduce their reliance on more expensive large
denomination ($100,000 and over) certificates of deposit
(CDs) and other managed liabilities such as eurodollar
borrowings. For example, the amount of large CDs
outstanding declined by 5.0 percent in 1985, compared
to an 8.3 percent rate of growth in 1984. This shift away
from large CDs and other managed liabilities towards

10


Sluggish business loan growth contrasted sharply
with the rapid growth in consumer loans and, to a
somewhat lesser extent, real estate loans. Again, small
and medium-sized banks recorded the largest percent­
age increases in these latter categories as some of the
larger banks moved to curtail asset growth and improve
capital ratios. Overall , consumer loans grew at a 17
percent annual rate, which was only slightly less rapid
than 1984's near-record pace of 19 .7 percent. Even
though credit card loan rates did not begin to decline
until late in the year, growth still was most pronounced
in the revolving credit category as a result of western
banks' aggressive marketing efforts and strong con­
sumer loan demand. Automobile loans grew almost as
rapidly, reflecting relatively strong auto sales during
the year. These growth rates, which were clearly well
above the growth in personal income, provided further
evidence of the strength of consumer confidence in 1985 .

S tTlA LL TIME. ANt> SAVIN <S S
(I NC.L\Jb IHG! M l'YlDA ",)

-,

120

CHEC K ABLE

!--.c-:>

"

... - ...... ,'

198 1

1982.

1~ 8 ,

I~B~

1985"

Declining mortgage rates during the year promoted a
continuing expansion in western banks' real estate
lending. Although not as rapid as the 8 .2 percent
growth recorded in 1984, real estate loans outstanding
grew at a solid 6 percent annual rate. Moreover, the
growth in outstanding balances does not reveal the full
extent of western banks' involvement in real estate
lending since many banks chose to sell the loans they
originated. Of the new loans banks kept in their port­
folios, a sizeable proportion was related to commercial
construction, reflecting the still surprisingly strong
demand for commercial str uct u res in many parts of the
District.

retail deposits undoubtedly helped to reduce western
banks' cost of funds in 1985 . Of course, the decline in the
overall level of interest rates also had a significant
impact on funding costs.
Lending Patterns
Western banks' lending patterns diverged sharply
during the year. For the most part, small and medium­
sized banks recorded sizeable year-over-year gains in
lending volume, while loans at the District's large
banks grew more slowly. Several factors accounted for
this divergence. First, the imposition of more stringent
bank capital standards by the federal bank regulators
tended to constrain growth at the large banks to a much
greater extent than at the smaller banks. As a group,
the small and medium-sized banks in this District had
capital-to-asset ratios well in excess of the new regula­
tory standards imposed in March. A number of the
larger banks, by contrast, had to raise capital and
reduce loan growth in order to increase capital-to-asset
ra tios sufficiently.

Asset Quality
For banks in the West, as across the nation , the single
greatest problem in 1985 was the continuing deteriora­
tion in asset quality. Ordinarily, by the end of the third
year of an economic recovery, banks can count on a
significant improvement in asset quality as the finan­
cial conditions of their borrowers improve. However, a
number of the region's key industries, including agri­
culture, energy, mining and forest products, experi­
enced continuing difficulties, leading to a rise in bank­
ruptcies, loan foreclosures and problem loan workouts
in these areas. For the banking industry, the problems
associated with the poor financial conditions of these
industries were compounded by the decline in many
asset prices in 1985. Loans that were made sever al
years ago on the assumption that underlying asset
prices would continue to rise at a healthy clip became
problem credits in 1985 as lowered inflation expecta­
tions reduced the value of the loan collateral.

A second reason for the divergence in loan growth
patterns was that the overall slowdown in the economy
reduced the demand for business credit. Large banks
are affected more by such a slowdown because they
extend most of the business loans to the corporate
sector. At the same time, large banks also faced stiff­
ened competition, especially for their largest borrowers,
from other sources of business credit such as the com­
mercial paper market and the bond and equity markets.
Small and medium-sized banks, by contrast, did not face
such competition because they lend to smaller firms
that do not have access to national credit markets. As a
result, business loan growth at these banks was moder­
ately strong, offsetting some of the weakness in this
area at the larger banks.

The problems that banks experienced with agri­
cultural loans are a case in point. Many of the farmers
who borrowed against inflated land values in the 1970s,
a period of rising inflation, could not service their debt
when the markets for many agricultural commodities
turned soft in the 1980s. Bankruptcies and loan fore­
closures followed, and even though banks were able to

11


Weak Earnings
In 1985, as in the last three years, the aggregate
earnings of western banks were hurt by poor earn­
ings and even losses at some of the largest banks. As in
past years, the single most important factor influencing
earnings was the deterioration in asset quality and the
consequent increase in the provision for loan losses. In
the aggregate, expenses for loss provisions increased by
a third, reaching nearly $4 billion for the year. Such
expenses enabled banks to replenish capital reserves
following loan write-offs and to boost reserves in antic­
ipation of future write-offs against the growing volume
of non performing loans.

take possession of the collateral, losses still were enor­
mous because the value of that collateral had fallen in
line with the decline in farm prices and profits.
As a result of these developments, western banks
experienced a substantial increase in so-called "nonper­
forming" loans in 1985. Recorded loan losses also were
up sharply. By loan category (excluding foreign loans),
the loss rate was highest for banks' agricultural loans,
with business loans a close second. Banks in Idaho and
California were plagued by problem agricultural
credits, while banks in Oregon faced continued deterio­
ration in their portfolios of loans to the forest products
industry and banks in Alaska encountered difficulties
with energy credits. Moreover, large banks experienced
higher loss rates than did small banks, largely because
of their generally more aggressive business lending
activities in previous years. Continuing problems in
large banks' international loan portfolios also contrib­
uted to these banks' relatively poor loss experience in
1985. As a result, a number of banks in this District,
including some of the largest, posted very poor results
for the year.

Western bank earnings also suffered from the rela­
tively sluggish growth in business loans in 1985. Slower
loan growth meant reduced earnings from interest
income and loan fees. At the large banks, asset growth
and thus income growth were curtailed in part to meet
the regulators' new capital adequacy standards.
Despite these problems, many banks in the District
posted strong earnings gains of 10 to 15 percent for the
year. In states with strong economies such as Wash­
ington and even California, banks fared particularly
well. Overall, western banks enjoyed a modest improve­
ment in net interest margins, or the spread between the
return on assets and the cost of funds. The growth in
consumer deposits as well as the decline in the level of
interest rates since mid-1984 led to a larger decline in
banks' interest expense than in the yield on their assets.

The fact that fewer western banks reported losses
than banks elsewhere in the nation is of some consola­
tion. Bank failures, the ultimate measure of bank per­
formance, were up sharply on a nationwide basis, but in
the Twelfth District did not increase at all. The problem
of deteriorating asset quality was relatively less acute
in this District largely because of the greater di versity
of this region's economy and the greater asset diver­
sification of this region's banks.

Banks' earnings from fee-based income also
improved, as they sought to move toward more explicit
pricing of products. Relatively new fee-based products,
such as discount brokerage services and credit-related
insurance, along with the rising importance offees from
mortgage banking activities helped with the earnings
picture. More explicit pricing of checking account and
other deposit services, as well as the growing popularity
of commercial loan fees also added to bank revenues.

LOAN LOSS ElC!'Er-lSE.S PoND RESERVES

AS A PEi<CENTA,G£

QF

RS SETS

On balance, western banks made the most of a diffi­
cult year. While earnings were anemic compared to
what one would expect for the third year of an economic
recovery, most banks in the District dealt remarkably
well with the industry-wide problem of deteriorating
asset quality. Moreover, large loan write-offs taken
during the year, as well as growth in equity capital and
reserves now place the industry in a stronger position to
deal with problems in the coming year. With improve­
ments anticipated in some of the region's weaker sectors
such as forest products and agriculture, the western
banking industry should see some relief from the prob­
lems encountered in 1985 .

'"'i"'YJEL.FTH. ~'5TR \cr

.90

75
.60
.lf 5

.30
.1
5
.00

12


1111111111111111111111::::

.::::::::::.:::::::::uu

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111111 111111111111 111111

111 111111111111 11111111111

111111111111111 11111 111111

r 11 1111111 11111111111111

111111111111111111111111111

II 11111111 1111111 If1111111

1111111111 If III 11 1111 11111

111111 1111111111111111111

11111111111111111111111111

11111111111111111111111

11111111111111 1111111

11111111111111111111

111 111 111 111 111 11 11

1111 IIIJllIIIIIIII

11 111111111111111111

III II1111III! 11111 11

1111111 111 1111 111 111

II

Management Committee
J ohn J. Balles, Presid en t a nd Ch ief Exec u ti ve Officer (sea ted)

(Sta nding, fro m left to right)

Richard T. Gr iffith, First Vice President a nd Ch ief Operating Officer

Th omas C. Warren , Executi ve Vice Presid ent

Mich ael J . Murray, Senior Vice Presiden t


13


I


surEIVISIGN, IEC:ILATION AND CIEDIT

Although the general condition of Twelfth District
banking organizations improved slightly in 1985, per­
sistent weakness in certain sectors of the region's econ­
omy resulted in a deterioration in asset quality in many
areas. Particularly troublesome was the increase in the
level of problem real estate, agricultural and energy
loans. Some of the larger institutions also were con­
fronted with difficulties arising from their interna­
tional loan portfolios. As a result, some western banks
posted very poor earnings, or even losses for the year.

mated management system for supervision and regula­
tion which was completed during 1985.
Throughout 1985, the Bank continued to work closely
with other federal and state regulatory agencies in
coordinating examination and supervisory efforts. In
August and September, the longstanding cooperative
relationships with the state banking authorities in the
nine western states were made even stronger as a result
of meetings between Reserve Bank officials and each
state's banking supervisor. The purpose of these suc­
cessful meetings was to explore and establish new ways
in which the Reserve Bank and each state could coordi­
nate their efforts to enable each agency to meet its
responsibilities more efficiently.

Deteriorating conditions at a relative handful of
these institutions required special supervisory atten­
tion and the establishment of formal corrective-action
programs. As of year-end, supervisory actions were in
place or in process at 39 state member banks and bank
holding companies. This represents an increase over
1984 in the number of such actions, largely as a result of
the problem of deteriorating asset quality. At the same
time, however, notable progress was made toward
resolving serious problems at a number of institutions
for which corrective-action programs had been estab­
lished in previous years.

Regulatory Activities
Twelfth District banking organizations took a cau­
tious approach to expansion in 1985. Bank holding
company applications filed during the year clearly
reflected this. Overall, bank holding company applica­
tions ran slightly below the previous year's level and
formations, which primarily are changes in organiza­
tional form, constituted a larger share ofthe total. Even
nonbank applications, which focused on small acquisi­
tions and/or service-related activities, did not represent
a major diversion of resources into nonbanking activity.
Change in Bank Control Act applications exhibited the
strongest growth, but these tended to reflect changes in
ownership rather than expansion. Finally, the number
of state member banks increased, but at a slower pace
than in 1984.

In contrast to the increased number of supervisory
actions in 1985, the number of bank failures in the
District did not rise. During the year, federal and state
authorities closed 10 District banks with combined
assets of $400 million, compared to 12 banks with
combined assets of $600 million in the previous year.
This development compares with a 50 percent increase
in the number of bank failures nationwide from 1984 to
1985. Because of the diversity of the economy as well as
the multi-branch structure of the banking industry in
this District, this region's banks tended to have better
diversified portfolios than did their counterparts in
other regions, enabling banks in the Twelfth District to
cope better with loan losses in specific areas.

Lower court decisions halted the processing of
applications to form "nonbank" banks. These institu­
tions are not technically banks under the Bank Holding
Company Act because they do not offer both demand
deposits and commercial loans. For bank holding com­
panies, nonbank banks appeared to offer a means of
circumventing laws limiting interstate expansion. In
January 1986, a Supreme Court decision that centered
on the definition of "bank" may have opened the way, in
the absence of Congressional action, for a resumption of
nonbank bank expansion.

Supervisory Developments
The most important supervisory development during
the year was the decision in October by the Board of
Governors of the Federal Reserve System to adopt new
policies designed to strengthen the Federal Reserve's
supervision of state member banks and bank holding
companies. The San Francisco Reserve Bank imme­
diately began intensive efforts to implement these pol­
icies by early 1986. The new policies generally increase
the frequency and scope of examinations and
strengthen the communication of examination findings
to each institution's board of directors. Because these
initiatives will require a significant increase in exam­
iner resources, the Bank undertook an ambitious
recruiting and training program in the fourth quarter.
The establishment of procedures needed to implement
the new policies will be facilitated by the new auto­

In a 1985 decision, the Supreme Court confirmed the
constitutionality ofregional interstate compacts which
permit interstate expansion on a regional basis. This
decision opened an alternative avenue for interstate
expansion. As of year-end, five states in the District
(Oregon, Utah, Idaho, Nevada and Washington) had
passed laws permitting acquisitions by out-of-state
bank holding companies located in other specified west­
ern states. Alaska and Arizona had also passed inter­
state banking laws, but without any such regional
restrictions, and interstate banking legislation was

14


,

Discount Window
Borrowings from the discount window were moderate
throughout the year. The Bank extended loans to 149
depository institutions in 1985 . Among the borrowers
were a small number of institutions having severe
financial problems. These were accommodated under
the "other extended credit program." Moreover, the
Credit Unit implemented a special seasonal credit pro­
gram aimed at dealing with the farm credit problems of
agricultural banks. Also during the year, the Credit
Unit strengthened its relationships with other bank
and thrift regulators to provide a procedural foundation
that can effectively respond in the event liquidity needs
arise in the future. Total collateral pledged by institu­
tions in the District at the end of 1985 amounted to
$26 .3 billion, up from $25.4 billion in 1984 .

pending in California. During the year, the first
applications were processed to permit regional inters­
tate acquisitions of banks in Oregon, Utah and Nevada.
International economic conditions in 1985 restrained
overseas expansion by District banks. Applications for
new offshore activities by domestic banking institu­
tions fell by a third and typically involved only minor
changes to existing activities. Only two new export
trading companies were approved during the year, and
other bank holding companies which had previously
received approval for these companies either did not
open them or cut back such operations. (Congress
authorized export trading companies in 1982 to encour­
age U.S . exports, but to date, the results have been
disappointing because of the high value of the dollar.)
The number of District Edge Act corporations fell from
51 to 47 and the total number offoreign banks' branches
and agencies was almost unchanged.

Summary of Operations

Volume (t housa nds)
1982

1983

1984

1985

Custody Services
Cash Services

Currency paid into circulation

Coin paid into circulation


1,767,236
4,779,409

2,188,831
5,302,832

2,438,168
4,773,898

995
339,820
182
313,761

1,235
285,420
116
333,512

1,549
279,342
138
310,450

2,019
292,786
108
272 ,231

1,210,143
2,619,403
101,310
23,952

1,226,778
3,367,031
96,136
24,707

1,337,350
509,560
95 ,548
35 ,580

1,478,448
577 ,883
93,451
28 ,800

5,882
76,944

6,674
91,838

7,757
111,408

8,521
129,930

1,281
105

Securities Services

Savings Bonds original issues

Savings Bonds redemptions proce ssed *

Other Treasury original issues

Food coupons processed


1,925,085
5,078,150

1,234
108

2,348
136

1,818
149

Payments Mechanism Services
Check Processing Services

Commercial checks processed

Fine sort bundles processed'?

Government checks processed

Return items processed

Electronic Funds Transfer Services

Wire transfers processed

Automated clearinghouse transactions processed


Discounts and Advances
Total discounts and advances*

Number of financial institutions accommodated*

"Number (not in thousands)
-Reported in packages beginning in 1984 .

15

Board 01tnrecrcrs

ORGANIZATION CHART
February 4,1986
Jo hn J. Balles
President

RObert T. Parry
Presiden1
and

and
Ch1 Execuuve O'tcer
el

Ch ief Execv tive Officer

(Aelired February 4. 19B6
1

(February 4, 1986)

Eco nom ic Researc h
and Pub lic Information

Law and Secretary's Off ice

John L Scadding
Senior Vice Presidenl
and Direclor of Research

Jane W. Langhorne

--

t c ce E. Reilly
Seno r Vice President
and General Counsel

J

Ombudsman

Jo hn H. Be ete

Robe rt O. Mulfo rd
Depu ly

Vice President and
Assoc . Director of Research
John P. Judd
Vice Presroent
Domestic
Macroeconomic Stuotes

GeneralCounsel
INiliiam L. Cooper
Assoc iate
General Counsel

Adrian W. Throop
Research Officer

Douglas A. Shaw

Hang-Sheng Cheng
Vice Prestoent
International Studies

Vacant
Vice Presicem
Public In'ormation

Assoc iate

General Counsel
Elizabe th R. Prettyman

vene B. Johnston
Ass i. vee Presidenl

Vice PIe sice nt

and Secretary 01the Board

and Legi slative Analyst

RIchard T Gnftith
Fust Vice President
and
Chiel OperatingOfficer

'rnomas C. Warren
ExeclJ1ive Vice President

lip
Corporate Planning

Stati stic al and Data
Serv ices

Adelle A. Foley

VICe Presidenl
Corporate PI3M lng

Sara K. Garrison
Senior Vice President
Stattstica t and Data se rvices

Com puter Services

Finan ce and Product I

'w'Viniam VQn
Senior Vioe Presidenl
Computef Services

Catl E Powell

Judy A. Johnstone
Vice Presidenl
AW hcalions Systems

Gail A. Taylor
Assi. Vice Presroent
Monelary Aggregates
and Reserves

Seni()l'Vice President
Finance and Product Managem
Joseph B. Fuchs
Joan L. MoQhada
m Sandra E. Berggren Margaret A. Linderman
Asst. Vice President
Ass!. VIC President Systems Officer
e
Systems Officer
Applicalions Systems ApplicatIOnS Systems

JoM G!eason
Vrce President
Product Management

Laurence wasnnen
Vice President
Systems and Communications

Buftinglon Clay Miller
Vioe President
Product Management

Patrick Tong
President
co mputer Operations

Eliol E. Gluli
Asst. Vice Presidenl
International and DomestiC
Financial Repons

Sharon L. Reisdorf
Asst. Vice Presiden t
Accounting Automatio n

vee

Rot

Ass
Pn>

Thomas R Thaanum
Asst. Vice President
FinanC Accounling
ial

.•

Gregory 6 . V'lilliams
Asst. VICePresc ent
Financial Planning aec Control

~

"

San Francis co Branch

Seatt le Branch

Sa lt Lak e City Branch

Port land Branc h

David J. Christerson
VICe President
In Charge

Gerald R Kelly
Senior Vice Prescera
In Charge

E. Ronald Uggen
Vice President
in Charge

AngelOS. Carel<
a
Senior Vice President
in Charge

Douglas O. Knudsen

Kenneth L. Peterson
Asst. Vice President
Custody Services

Gerald A. Oalling
Asst. Vtre President
Analysis and Conlral

Ass!. Vice Pr9$rdent

Paymenl Services
Joseph J . Grimshaw
ASS VICE! President
l.
s ece-ees Services

Gayle P. Ansell
Asst. VICe Presroent
AnalYSISand Connor

Kerry Webb
Ass !. VIce Presloera
CUSlody Controt

H. William Pennll\gton

John H. Wong
Cash Services Officer

Edward A. Bonneur
Asst. Vice President
Payments Services

Robert A. RichardS
Asst. Vice President
Payments Services

Dean C. Gonnerman
Ass !. VIC President
e
Payments Services

\Niltiam C. Ferensen
Ass!. Vice President
Financial Services

Andrea P. Wolcott
Ass!. Vice President
FinanciaJServices

Susan L. Robertson
Asst. VfCePresrcem
Financial Services

Asst Vice President

Peter W. Homes
Financial Services Officer

16


M. T'imOlhy Can

Adminislrative services

Assi. veePresident
CUS
IOOy Conlro!

--1-----­

AUditing
Robert I. Gatchell
General Auditor

Peter K. C. Hsieh
Audit Officer

Gul Gidwani
Assistant
General Auditor

'''y

Bruce H. Thompson
Assistant
General Auditor

.m
veOttice
r

Charles O. Bowden
Audit Officer

Gary G. HOOlh
Audit Officer

,1
986)

t
(

Supervision, Regulation and Credit
Eugene A. Thomas
Senior Vice President
Supervision. Regulation and Credit

Wayne L Rickards
Asst. Vice President
Bank and Consumer Regulations

W. Gordon Smith
Vice President

Credit and Consumer Affairs
Merle E Borchert
Vice President

Thomas P McGrath
Asst. Vice President

Bank Examinauons

Donald R. Lieb
Asst. Vice President

Oetrtct Creon
Robert C. Johnson

Sail Lake City

Harry W. Green
Vice President
SHC and International Regulation

W. SIan-Seegmiller
Examining Officer

Robert A. Johnston
Director

Examining Officer

Kenneth R. Binning
Applications Officer

Applications and Analysis

Rodney E. Reid
Director
BHC and International Supervision

Philip M. Ryan
Examining Officer

Richard S. Campos
Examining Officer

Thomas J. Backer
Examining Otncer

3rifhth
'resident

!!i ngQfl:c er

--lip

and Product Management

ill

H. Peter Franzel
Senior Vice President
Distnct Operations

Personnel and Administrative Services

District Operations

President
Product Management

-


Michael J. Murray
Senior Vice President
Personnel and Aornlrustranve Services
Patricia K. Lang
Vice President
Corporate Personnel

lage menl

:lay Miller

snt
iaqernent

Robert S O'Donoghue
Asst. Vice President
Product Management
John F. Hoover
Vice President
District Financial Services

eisdor1

re siden t
Automat o n

C. Kenneth Arnold
Asst. Vice President
DataSecunty

wunarn K. Ginter
Vice President
Building and Property Management

Oren L. Christensen
Vice President
New Building Programs

Thaanu m

resident

:counting

Sallie H. Weissinger
Asst. Vice President
Employment, Employee Relations
and Training

George P. Galloway
Vice President
Dtstrict Secunty

'"
mt

James J. Tenge
Asst. Vice President
Administrative Services

Sylvia A. Cunningham
Procurement Services Officer

Williams
'resident
anning and Control

i
11

land Branch

Los Angeles Branch

)S.Careila

Robert M . McGill
Senior Vice President
in Charge

. VicePre
sident

Irge

c thy Carr

acePre
soent
isnatoeServces

lam Pe
nn.nqron

'tee Preside m
tyeoot ro:

Hector M. Martin
Vice President
Operations

Ross G. Ashman
Asst. Vice President

PaymentsServices

Richard L. Rasmussen
Vice President
Administration

Theodore A. Schroeder
Asst. Vice President
Securities Services

Brent M. Duxbury
Asst. Vice President
Administrative Services

Charles L. Huffstetler
Asst. Vice President
Cash Services

Marl Ellen Martin
Asst. Vice President
Financial Services

:;. Gonnerm an

rce P re
sdent

nts Servces
l. Robertso n

acePr s oent
e

:lal Services

17


David L. Nieto
Personnel Ottcer

Dawn B. Allen
Personnel Officer

Terry S. Scbwaxoot
Exarnlrnnq Officer

IAUK ADMINISTItA1'ION

During 1985, senior management sought to enhance
the Bank's ability to respond to current needs and to
anticipate new trends and challenges arising from a
changing regulatory, technical, financial and competi­
tive environment. To that end, the Bank's management
team established a new corporate planning function to
coordinate and integrate the key bankwide planning
processes. This integrated approach was evident in the
many planning and development initiatives under­
taken in 1985. Development and implementation of a
number of automated systems for the Bank's account­
ing, banking statistics and operations functions
received particular emphasis. At the same time, con­
struction of the new Los Angeles Branch building
moved forward, and preliminary planning for a sched­
uled occupancy date beginning in mid-1986 was com­
pleted. Progress in disaster contingency planning
included a successful test at the Federal Reserve Sys­
tem's back-up data center in Culpeper, Virginia, and
development of a comprehensive master plan for staff
safety and recovery of operations in the event of a major
earthquake, fire or other catastrophe. Finally, in the
payments area, the Bank moved to improve security
and reduce risk associated with funds transfer net­
works.

the number of manual entries and thus the chance for
error. Additional modules will expand the system to
include other accounting functions and provide
enhanced services over the next few years. Preparations
for lAS during 1985 included staff training and the
development of software to link lAS with the Bank's
other automated systems. Because an accounting sys­
tem must work in concert with many other functions,
this accomplishment involved creating automated links
to approximately 30 other systems, defining more than
15,000 accounting transactions and training the staffin
each of the affected areas.
In 1985 , the Bank also played a key role in the
Federal Reserve System Automation Program as a
development site for two of the program 's eight
resource-shared applications. This program standard­
izes the software for systems meeting common needs of
the twelve Reserve Banks, which share the costs of
development and maintenance. One such application is
the Banking Statistics System which was developed by
this Bank and is now being installed in all other
Reserve Banks and the Board of Governors. This system
provides the basis for automated processing of the wide
range of data that are collected from depository institu­
tions and used in the computation of the various money
supply measures. The system will result in significant
cost savings and increased flexibility in responding to
changing data collection needs.

Corporate Planning
As the economic and technological environment
becomes more complex, a systematic and integrated
approach to strategic planning is increasingly impor­
tant. In response to these requirements, the Bank's
Management Committee established a formal corpo­
rate planning department during the first quarter of
1985 . This new unit provides coordination and integra­
tion of District planning processes, offers consulting
services to Bank functions regarding the planning pro­
cess and supports Federal Reserve System planning
initiatives.

The Bank also serves as development site for the
Automated Securities Handling System. In this capac­
ity, the Bank modified existing software to support the
Treasury's ability to offer a broader range of securities.
Finally, the Bank implemented additional resource­
shared applications during 1985 which were developed
at other Reserve Banks. These include the new Transfer
of Funds System, Automated Clearing House System,
and Customer Information System. The successful com­
pletion of these programs will enable the Twelfth Dis­
trict to realize the long term automation program bene­
fits of improved operating controls, cost effectiveness
and ability to accommodate change.

Automation Efforts
Automation efforts encompassed a wide range of in i­
tiatives and programs in 1985 in support of the Federal
Reserve System's multiple roles in monetary policy,
regulation and supervision, and the nation's payments
system. A number of these initiatives involved the
development or implementation of standard applica­
tions suitable for use throughout the entire Federal
Reserve System. For example, the Bank took steps in
1985 to prepare for the March 1986 implementation of
the standard Integrated Accounting System (lAS ). Ini­
tially , three modules will be implemented - Data
Entry, General Ledger and Deposit Accounting. The
new system will replace processing at the Bank's five
offices with a centralized, uniform system which is
easier and less costly to change. lAS also will improve
control of the Bank's financial data by reducing sharply

Another important focus of the Bank's automation
program was in the electronic payments area. Along
with enhancements in the Bank's intradistrict com­
munications network, management improved the
security procedures involving the electronic transfer of
money. As a result, the majority of electronic connec­
tions with depository institutions are now encrypted,
with full encryption targeted for 1986.
The Bank's growing use of computer resources
resulted in the need for a computer upgrade in the San
Francisco Data Center. The complex acquisition process

18


for this computer was completed and the new central
processor will be operational early in 1986 . The new
computer, which represents the state of current technol­
ogy, should serve the Twelfth District's needs for the
next several years. As an extension of its large cen­
tralized computer complex, the Bank also seeks both to
exploit emerging microprocessor technology and to use
smaller computers capable of serving the needs of indi­
vidual departments.

In addition, the Bank published its "Disaster Con­
tingency Plans for Staff Safety and Recovery of Critical
Operations ." Its publication marks a significantly
increased level of emergency preparedness and aware­
ness, providing for recovery of critical business func­
tions from short term service disruptions. The docu­
ment also describes the Bank's newly established
emergency management organization and details
bankwide responsibilities and procedures for response
to an emergency. It includes provisions for executive
communications, backup power to critical building
work areas, medical care, and systematic search and
rescue after a major disaster.

New Building Program
During 1985, construction of the new building for the
Los Angeles Branch moved forward on schedule, with
completion expected before the end of 1986. In addition
to construction progress, the Bank initiated a program
for purchasing furniture and equipment to make the
building ready for the planned sequential move-in pro­
cess starting in mid-1986. Final designs were completed
and fabrication began on the World of Economics
Exhibition which will be featured in the main banking
lobby . This exhibition is a close replica of the exhibition
that has proven to be a highly popular and effective tool
for economic education in the head office building in San
Francisco . When completed , the new building will
provide the Los Angeles Branch with more space, vaults
and equipment critically needed to accommodate the
increasing demands for Reserve Bank services in south­
ern California, Arizona and sout hern Nevada . Looking
even farther ahead, the Bank made plans to hire a
developer to renovate the existing branch building and
lease it through an outside agent in order to retain the
space for expansion of the branch's operations, if needed
in the distant future.

Payments System Risk Reduction
In light of the substantial risk even a single institu­
tion's failure now poses for the payments system, which
moves trillions of dollars through national and interna­
tional electronic networks, the Federal Reserve Board
adopted a policy to reduce payments system risk. The
new policy, which will take effect March 27, 1986, calls
for the electronic transfer networks and individual
institutions to limit the amount of credit risk they pose
for the payments system. To remain eligible for Fed net
settlement services, private funds transfer networks
must control the level of risk incurred by participating
institutions. At the same time, each institution that
participates in a large-dollar funds transfer network,
including Fedwire, is encouraged to adopt a cross-sys­
tem net debit cap. The cap, which establishes the max­
imum net amount an institution can owe all other
institutions across all large-dollar payments systems at
anyone time, is based on each institution's evaluation of
its own creditworthiness, operational controls and
credit policies and procedures. The Federal Reserve will
review each institution's policy during regular financial
examinations.

Disaster Contingency Planning
In 1985, the Bank participated in the Systemwide
planning effort to develop the Contingency Processing
Center in Culpeper, Virginia, as a backup data center
for all twelve Reserve Banks. The site would be used in
the event of a long-term service disruption that might
occur after a major computer room fire or natural disas­
ter, such as an earthquake. A major accomplishment
was the successful testing of the Bank's ability to relo­
cate the operations of the San Francisco Data Center to
this site. This backup will enable the Bank to operate
critical functions at near normal service levels.

This Bank took several steps in 1985 to prepare for
the implementation of this new policy. In addition to the
necessary staff training in the operations, accounting
and examination functions, the Bank hosted a series of
educational seminars throughout the District to
acquaint depository institutions with this new policy
and the steps needed for implementation. The Bank also
installed the software necessary to monitor institutions'
net debit positions on an after-the-fact basis.

19


PllCEt PAYMEIITS SEIYICES

The Bank strives to promote the efficiency of the
payments system by exploring advances in automation
and by continually improving the quality of its services
in response to the needs of the financial community. To
understand the needs of thi s diverse marketplace, the
Bank conducts market research to assess customer
needs and to provide information to all institutions
concerning direct access to Federal Reserve Payments
Services. Of the approximately 3,600 depository institu­
tions in this District, over 1,700 now use one or more of
the Bank's services. Electronic access to these services
has proven particularly popular, with over 1,200 termi­
nals now in use at depository institutions. With the
growth in electronic access, the Bank has taken steps to
ensure that such access remains error-free and reliable
through encryption of all data electronically communi­
cated between this Bank and its customers.

The Twelfth District also is a principal participant in
a Systemwide effort to explore new procedures and
technologies related to check safekeeping and image
processing. Safekeeping of checks could result in sub­
stantial cost-savings over the current system in which
all checks are returned to their makers. The Bank is
currently working with other Federal Reserve System
representatives to manage the development of a demon­
stration safekeeping system that would enable the U.S.
Treasury to retrieve check images using digital image
technology rather than microfilm. Management is par­
ticularly interested in exploring digital image process­
ing as a cost-effective and reliable means of storing and
retrieving check-initiated payment instructions.
Funds Transfer
Use of the Bank's Funds Transfer service (Fedwire)
continued to grow at a healthy rate in 1985 . A major
step was taken during the year to improve this service
by installing a new processing system that eventually
will be used by all Reserve Banks across the country.
This new automated system provides customers with
improved security. Its flexibility will enable all Reserve
Banks to add enhancements to this service.

Check Services
The San Francisco Reserve Bank handles the largest
volume of checks of any Reserve Bank in the Federal
Reserve System. Moreover, the large geographic size of
this District and time differences from eastern financial
centers, require a highly sophisticated check transpor­
tation system. Given the substantial volume and com­
plexity of its check transportation system, the Bank
continuously seeks opportunities to improve service
levels and quality. In 1985, the Bank implemented mid­
year price reductions, as well as some later check
deposit deadlines to improve the availability offunds to
its customers. Similarly, the reliability of interdistrict
check transportation was greatly improved through
expanded use of direct commercial shipments and char­
ter air service. This resulted in improved credit avail­
ability and substantially reduced float to depositors.

Another enhancement to the Bank's funds transfer
service is the extension of Fedwire operating hours,
effective January 1, 1986. An earlier opening hour and
a later interdistrict third party closing hour will provide
addi tiona I processing time for West Coast financial
institutions and allow them to manage their intra-day
funds positions better.

FedLine Service
FedLine is a family of products that provides elec­
tronic access to Bank services via a microcomputer
electronically linked to this Bank's computer. FedLine
was introduced in 1982 to allow a wider range of deposi­
tory institutions direct access to the Bank's funds trans­
fer service. The FedLine funds transfer service con­
tinues to be highly attractive, with the number of
customers growing from 800 to nearly 950 in 1985 . In
1983, a second service was introduced, called FedLine
Cash, which allows customers to place orders for cur­
rency and coin. It also has proven successful with
approximately 400 customers now using this product.

As part of a Systemwide program, the Bank imple­
mented the Large-Dollar Return Item Notification Ser­
vice associated with an amendment to Regulation J ,
which established new notification requirements for the
return of dishonored checks of $2,500 or more . This
enhancement provides the payor institution with the
opportunity to notify (through the Fedwire network)
the institution where the check was first deposited that
a large dollar item is being returned. Moreover, in an
effort to improve service quality and to increase opera­
tional efficiency, the Bank is developing automated
systems to replace obsolete equipment used to process
return-items and checks rejected by high-speed sorters.
Based on the success of a 1985 pilot project which
automated the low speed check processing operation,
the Bank will expand this automation program to check
processing service centers throughout the Twelfth Dis­
trict in 1986.

In 1985 , two new services were added to the FedLine
family . FedLine Update Checks provides customers
with detailed accounting information on the current
day's check processing activity. Five hundred customers
already are using this new service. The FedLine Update
Statements service followed , providing electronic access
to the previous day's Statement of Account early in the
following morning. Over 300 customers now are using
this service as well.

20


I@G

G

G~

[8 13 B B

I~

A1 PROCESSOR

'!l ll S 8 B O D Eli

GROWTH Of' PAYJV1E:.NTS SER VICES

CLEARIN(,HooSE

30

20
10

o
-10

- 20

1981

Automated C le a r in g House
The Bank's Automated Clearing House (ACH) ser­
vice, which provides for the exchange and delivery of
electronic payments, is undergoing tremendous growth
and change in respon se to market needs. The number of
transactions processed in the Twelfth District in 1985
grew more than 16 percent over 1984. At the same time,
the Bank worked closely with representatives of Cal­
western ACH as it prepared to begin operation as a
private sector processor late in the year.

1982 /983 /98'+ 19B5

Cash Transportation and Securities Services
In 1985, the Bank's objectives for cash transportation
services focused on improved service levels and cost
effecti veness, with particular attention paid to institu­
tions at remote distances from a Reserve Bank office.
Toward this end, plans were completed late in the year
to establis h a cash terminal in Phoenix which will
improve access and service levels to those customers
and contain the ri se in cash transportation costs.
In 1985 , this Bank prov ided , on a priced basis, a
variety of securities ser vices to finan cial institutions in
the Twelfth District, including safeke eping and tran s­
ferring of book-entry securit ies and collection of non­
cash items. In October , however, the U.S. Tr easu ry
determined that the Reserve Banks should pr ovide U.S.
Treasury securities se r vices as fiscal agents of th e
United States, rather than offering them as priced
services. Moreov er, in an effor t to improve the efficiency
of the noncash collection service, which involves the
collection of maturing municipal notes and bonds and
interest coupons, the Securities Services staffs of this
Bank and the Federal Reserve Ba nk of Minneapolis
participated in a year-l ong pilo t program aimed at
consolida ti ng this ser vice in Min nea polis.

Installation of new st a n da r dized ACH soft wa r e
throughout the Federal Reserve System improved pro­
cessing efficiency and provided the foundation for
enha ncements to the ACH service planned for 1986 .
With in the Twelfth District, much of 1985 was spent
developing and testing new products to be introduced in
early 1986 which will enable customers to originate and
receive ACH transactions, or send ACH returns, elec­
tronically . Through these new products, customers of
all siz es can have a direct electronic ACH connection
with th e Federal Reserve .

21


COVEIIMENTAL SEIYICES

The Federal Reserve Bank of San Francisco is an
important provider of fiscal and financial services to the
United States Government and to the public on behalfof
the U.S. Government. The primary fiscal services
provided to the United States Treasury include the
issuing , servicing and redemption of government
securities and savings bonds, and the distribution of
cash and coin to depository institutions. Additional
financial services provided to government agencies
include check collection and funds transfers, and the
processing of electronic payments and food coupons.
Major activities in 1985 supported the System's efforts
to provide more efficient, better quality and
increasingly automated payment services to the U.S .
Treasury, which is the single largest user of Federal
Reserve payments services.

GROWTH OF CASH AND

SECURITIE SE.RVI CES
S

Cha" ge. ( %)

30

25
20

15
10

Securities Services
During 1985, the Securities Services staff throughout
the Twelfth District prepared for the mid-1986 installa­
tion of the new TREASURY DIRECT Account Book­
Entry System. Developed by the Federal Reserve Bank
of Philadelphia, this U.S. Treasury project will offer
domestic issues of marketable notes a n d bonds
exclusively in book-entry form and will complete the
Treasury's transition to full book-entry of all issues.
TREASURY DIRECT will also provide a new auto­
mated system for establishing, maintaining, and servic­
ing accounts for over two million individual investors in
marketable government securities throughout the
country. The new system includes a direct deposit fea­
ture through which interest and redemption payments
are transferred electronically and credited to investors'
accounts on the day the payment is due.

5

o

~ SAVINGS

BONDS

155UE.D

5
10

1983

19BLf 1985

Bureau of the Public Debt to reduce the cost of govern­
ment financing.
Federal Reserve Banks are the chief agents for relay­
ing Government transfer payments, such as Social
Security payments, to individuals. These payments are
made primarily through electronic transfers or Treas­
ury checks. Electronic payments through the Auto­
mated Clear ing House (ACH) and Fedwire continued
an upward trend, with Government payments con­
stituting 68 percent of the Twelfth District's ACH vol­
ume. Reserve Banks also collect, sort, cancel, and store
Treasury checks for safekeeping after circulation.
Within the System, the San Francisco Bank is the
largest processor of Government checks in the United
States, handling over 90 million such checks in 1985.

In line with the move to book-entry securities, the
Bank took several steps to improve the efficiency of
handling remaining Treasury obligations available in
bearer form . In 1985 , the Twelfth District consolidated
the inventory of un issued Treasury securities stock in
San Francisco. This centralization of the remaining
issues of Treasury obligations still available in bearer
form has reduced costs without diminishing services to
the financial community and the public. A similar effort
to improve the attractiveness and service of the Bank's
savings bond programs fostered a 30 percent increase in
the number of bonds issued.

Cash
Another major government service provided by
Reserve Banks is the distribution and recirculation of
currency to depository institutions. Cash requirements
throughout the Twelfth District were substantial in
1985 , despite the growth of alternative payment ser­
vices. This District, with the second highest cash pro­
cessing volume in the System, uses high-speed process­
ing machines to count, sort a n d verify currency

This Reserve Bank also has supported implementa­
tion of the Treasury's new program to facilitate the
Separate Trading of Registered Interest and Principal
of Securities (STRIPS). This marks the first time that
the market was given the opportunity to trade separate
principal and interest coupons, or "zero-coupon" instru­
ments in book-entry form as direct obligations of the
United States. The success of this effort has assisted the

22


deposits. High speed currency machines have dramat­
ically increased the efficiency of processing large vol­
umes of cash and have contributed to higher quality of
currency in circulation. An additional unit was
installed in the San Francisco Branch during 1985.
Looking ahead, the Bank is currently working with
other Reserve Banks to develop more efficient and effec­
tive "second generation" currency processing equip­
ment.

A new Cash Automation System was designed and
developed in 1985. By automating the record-keeping
requirements of Cash Services at each branch, this new
system will improve operational efficiency and ensure
the integrity and auditing needs of cash operations.
Following a pilot and test phase of the San Francisco
working model, the Cash Automation System will be
installed in all branches during 1986.

Senior Management Staff Functions
(From left to right)
Robert I. Gatchell, General Auditor
William V. Ott, Senior Vice President, Computer Services
Louis E. Reilly, Senior Vice President and General Counsel
John L. Scadding, Senior Vice President and Director of Research
Eugene A. Thomas, Senior Vice President, Supervision, Regulation and Credit
Sara K. Garrison, Senior Vice President, Statistical and Data Services
Carl E. Powell, Senior Vice President, Finance and Product Management

23


Branch Operations
(Fr om left to r ight)
Ange lo S. Carella, Senior Vice President in Charge, Portla nd Bran ch
Gera ld R. Kell y, Senior Vice P residen t in Cha rge, Seattle Br a nch
E. Ron ald Liggett , Vice P resident in Cha rge, Sa lt Lake City Br an ch
Rober t M. McGill , Se nior Vice P r esiden t in Cha rge , Los An geles Br anch
H. P eter Franzel, Senior Vice President , Distri ct Operations
Da vid J. Ch riste rso n, Vice P r esid en t in Cha rge, Sa n Fran cisco Br an ch

24


DIRECT'IS

Head Office
Chairman of the Board and Federal Reserve Agent
Alan C. Furth
Vice Chairman
Santa Fe Southern Pacific Corporation
and President, Southern Pacific Company
San Francisco, California

Directors of the Federal Reserve bring management
expertise to the task of overseeing Reserve Bank opera­
tions . They provide information on key economic
developments in various areas of the District, comple­
menting the Bank's internal research . In addition,
Board members give advice on the general direction of
monetary policy , especially with regard to the Bank's
discount rate.

Deputy Chairman
Fred W. Andrew
President
Apex Orchards, Inc.
Bakersfield, California
Carolyn S. Chambers
President and Chief Executive Officer
Chambers Cable Com ., Inc .
Eugene, Oregon
Rayburn S. Dezember
Chairman, President and Chief Executive Officer
Central Pacific Corporation
and Chairman, American National Bank
Bakersfield, California
Spencer F . Eccl es
Chairman, President and Chief Executive Officer
First Security Corporation
Salt Lake City, Utah

Furth

Andrew

Chamber s

Dezember

Eccles

Gehb

Hampton

Tanaka

Weyerhaeus er

Donald J . Gehb
President and Chief Executive Officer
Alameda Bancorporation and
Alameda First National Bank
Alameda, California
John C. Hampton
President
Willamina Lumber Company
Portland, Oregon
Togo W. Tanaka
Chairman
Gramercy Enterprises, Inc.
Los Angeles, California
George H . Weyerhaeuser
President and Chief Executive Officer
Weyerhaeuser Company
Tacoma , Washington

Federal Advisory Council Member
G. Robert Truex, Jr.
Chairman
Rainier Bancorporation and
Rainier National Bank
Seattle, Washington

25


Los Angeles
Chairman of the Board
Richard C. Seaver
President
Hydril Company
Los Angeles, California

Thomas R. Brown, Jr.
Chairman of the Board
Burr-Brown Corporation
Tuc son , Arizona
Robert R. Dockson
Chairman of the Board
CalFed, Inc .
Los Angeles, California
Lola McAlpin-Grant
Attorney
Inglewood, California

Howard C. McCrady
Chairman of the Board
Valley National Bank
of Arizona
Phoenix, Arizona
Harvey J . Mitchell
President and Chief Executive Officer
Escondido National Bank
Escondido, California

William L. Tooley
Chairman
Tooley & Company,
Investment Builders
Los Angeles, California

26


Portland
Chairman of the Board
Paul E. Bragdon
President
Reed College
Portland, Oregon

Herman C. Bradley, Jr.
President and Chief Executi ve Officer
Tri-County Banking Company
Junction City, Oregon
John A. Elorriaga
Chairman and Chief Executive Officer
United States
National Bank of Oregon
Portland, Oregon
William S. Naito
Vice President
Norcrest China Company
Portland, Oregon

G. Johnny Parks
Former Northwest Regional Director
International Longshoremen's &
Warehousemen's Union
Portland, Oregon
Sandra A. Suran
Partner in Charge
Peat, Marwick, Mitchell & Co.
Beaverton, Oregon

G. Dale Weight
Chairman and Chief Executive Officer
Benjamin Franklin Savings and
Loan Association
Portland, Oregon

27


Salt Lake City
Chairman of the Board
Don M. Wheeler
President
Wheeler Machinery Company
Salt Lake City, Utah

Gerald R. Christensen
President
First Federal Savings
& Loan Association
Salt Lake City, Utah
Lela M. Ence
Executive Director
University of Utah
Alumni Association
Salt Lake City, Utah
Albert C. Gianoli
President and Chairman of the Board
The First National Bank of Ely
Ely, Nevada

Fred C. Humphreys
Chairman, and
Chief Executive Officer
The Idaho First National Bank
and Moore Financial Group
Boise, Idaho

Robert N. Pratt
President
Moriah Enterprises, Inc.
Bountiful, Utah

D. N . "Nick" Rose
President and Chief Executive Officer
Mountain Fuel Supply Company
Salt Lake City, Utah

28


Seattle

J


Chairman of the Board
John W. Ellis
President and Chief Executive Officer
Puget Sound Power & Light Company
Bellevue, Washington

Carol Birkholz
Managing Partner
Laventhol & Horwath
Seattle, Washington
H. H . Larison
President and Chief Executive Officer
Columbia Paint Co.
Spokane, Washington
Byron 1. Mallott
Chief Exec ut ive Officer
Sealaska Corporation
Juneau, Alaska

John N. Nordstrom
Co-Chairman of the Board
Nordstrom, Inc.
Seattle, Washington
W. W. Philip
Chairman of the Board and President
Puget Sound National Bank
Tacoma, Washington

William S. Randall
Chairman, President and Chief
Executive Officer
First Interstate Bank
of Washington, N .A.
Seattle, Washington

29


Comparative Statement of Account
(Thousands of Dollars)
December 31 ,
1985

1984

Assets
Gold certificate account
Special Drawing Rights certificate account
Other cash

.
.
.

$ 1,361,000
590,000
83,682

$ 1,318,000
518,000
94,148

Loans to depository institutions

.

41,840

23,700

Federal Agency obligations

.

1,103,353

1,075 ,682

United States Government securities:

Bills

Notes

Bonds


.
.
.

11,456,076
9,071,851
3,3 15,969

9,108,176
8,364,689
2,942, 780

Total United States Government Securities
Total loans and securities

.
.

23,843,896
24,989,089

20,415 ,645
21 ,515,027

Items in process of collection

Bank premises

Operating equipment


.
.
.

1,607,278
128,015
27,785

692,624
110,613
31,319

Other as sets:

Denominated in foreign currencies

All other


.
.

1,101 ,355
443,219

589 ,744
690,995

Interdistrict Settlement Account

.

1,333,364

1,368,923

Total assets

.

31,664,787

26 ,929,393

24,210 ,803

21 ,048 ,999

Liabilities
Federal Re serve Notes
Deposits:
Total depository institutions-reserve accounts
Foreign
Other deposits

.
.
.

4,979,368
23,550
106,447

4,412,694
24,600
57,996

Total deposits

.

5,109,365

4,495 ,290

Deferred credit items

Other liabilities


.
.

1,479,492
304 ,181

517,175
356,949

Total liabilities

.

31,103,841

26,418,413

Capital paid in

Surplus


.
.

280 ,473
280,473

255,490
255.490

Total liabilities and capital accounts

.

31 ,664 ,787

26,929 ,393

Capital Accounts

30


Earnings and Expenses
(Thousands of Doll ars)
Decem ber 31,
1984

1985

Current Earnings
Discounts a nd advances
United State s Governmen t sec ur it ies
Foreign currenc ies
Income from ser vices
All other

. $
4,106
.
2,219,340
.
35 ,859
.
69 ,524
.
1,740

$

6,44 6
2,122,735
35,618
63,526
1,865

2,330 ,569

To ta l current ea rnings

2,230,190

Curren t Expenses
Tot al current expen ses
Less: re im bu rsemen t for certain fiscal agency a nd other expenses

.
.

128,391
10,589

120,473
8,979

Net expens es
Cost of earnin gs credit

.
.

117,802
7,711

111,494
8,799

2,205 ,056

2,109,897

Curre nt net earnings

Profit an d Lo ss
Additions t o curren t net earnings
Pr ofit on sales of U nited St at es Govern ment secu rities (net )
Profit on foreign exchange transactions (net )

.
.

12,967
189,977

6,207

Total additi on s

.

202 ,944

6,207

Ded uct ions fro m current net ea r ni ngs
Loss on fore ign exchange transa cti ons (net )
All ot her

.
.

1,268

74,590
447

Tota l deducti ons

.

1,268

75,037

+ 20 1,676

-68,830

Ne t add iti o ns ( +) d e duc ti o n s ( - )

°

°

Asse ssmen ts by Boa rd of Governors
Boa rd ex pendit ures
F ederal Reserve cur re ncy costs
Ne t ea rni ngs before paym ents to t he U ni ted States Treasu ry
Di vid ends pa id
Payments to t he U nite d States Treasu ry (interest on Feder a l Reserve notes)

.
.
.
.
.

-1 2,150
- 21 ,726
2,372 ,856
16,237
2,331,636

- 13,406
- 20,624
2,00 7,037
14,816
1,977,523

Transfer red t o surplus
Surplus, J anua ry 1
Surplus, Decem ber 31

.
.
.

24,983
255 ,490
280 ,473

14,698
240,792
255 ,490

31


San Francisco Office
P.O. Box 7702 , San Francisco, Ca liforn ia 94120
Los Angeles Branch
P.O. Box 2077 , Terminal Annex, Los Angeles, California 90051
Portland Branch
P .O. Box 3436, Portland, Oregon 97208
Salt Lake City Branch
P.O . Box 30780, Salt Lake City, Utah 84125
Seattle Branch
P.O. Box 3567, Terminal Annex, Seattle, Washingt on 98124

This report was prepared by the staff of t he Federal
Reserve Bank of San Francisco: produced by Karen
Ru sk ; graphi cs designed by Willi am Rosenthal; edi ted
by Barbara Bennett. Assist ance pr ovided by Economic
Research ; Supervision, Regulation and Credit; and Cor­
pora te Planning, which coordinated the contributions of
Distri ct Operations, Computer Services, Finance and
Product Management, Statistical and Data Services
and Personnel.

32

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BuLK RATE IPOSTA~E:
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C A L I FOR-N' A

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