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San Francisco HG2567 S3A1 1986 Table of Contents From the Boardroom 2 Economic Research 4 Supervision, Regulation, and Credit 8 Bank Administration 12 The New Los Angeles Building 15 Priced Payments Services 19 Govenunental Services 23 Directors 25 The Fed er al Reserve Bank of San Francisco is one of twelve region al Reserve Banks which , together with the Board of Govern ors in Washingto n, D.C., com prise the nation 's ce nt ral bank. The Federal Rese rve Bank of San Francisco se rves the Twelfth Federal Reserve District, wh ich include s Wash ington , Oregon , California , Arizon a, Nevada, Utah, Idah o , Alaska, Hawaii, Guam and Ameri can Samoa . As the nation 's central bank , the Feder al Reserve is responsible for determin ing and carry ing out our nation's monetary policy It also is a bank regulatory agency, a provider of wholesale priced banking se rvices, and the fiscal agent for the United States Treasury. Fec:kHa. Reserve Bank 01 San Frandsco MAR 1 3 1987 LIBRARY From the Boardroom Last year was a period of significant change for the Federal Reserve Bank of San Francisco. Foremost among the cha nges was new leadership. John Balles, who served the Bank with distinction for mor e than 13 years as President and Chief Executive Officer, retired in January and was succeeded by Bob Parry. In August, Carl Powell was named First Vice Pres ident and Chief Ope rating Officer. Among other impo rtant management deve lop me nts, Tom Tho mson joined the Bank as a membe r of the Manage me nt Committee and Executive Vice President in charge of centra l ban k function s, which include Economic Research and Pub lic Information, Sta tistical and Data Services, and Super vision and Regulation. Finally, Tom Warren , also a membe r of the Man age me nt Committee and an Execut ive Vice President, moved to our Los Angeles Branch to lead the Bank's efforts in serving on e of the nation's largest financial cen ters . One important challenge to the Bank in 1986 was to contin ue provid ing high qu ality serv ice whi le contro l ling costs in accordance with the Federal Rese rves deci sion to embrace the spi rit of Gr-amm-Rud man budge t cuts. To achieve the objective of spending less than called for by the Bank's approved budget for 1986, we restructured seve ral func tions and stre ngthened their management by add ing individuals with proven expe r tise in cost controls. These moves, along with other initiatives that enhanced productivity, helped the Bank hold 1986 expe nses 2.4 pe rcent below budget. Another challe nge last year was the completion of seve ral innovative tech no logical projects that will form the foundation for bett e r payments ser vices fo r years to come. STAT, a pack age developed for the Federal Reserve System by the San Francisco Fed and now in place throu gh ou t the entire System, will process a broad spectrum of data provided by depository institu tions. A seco nd natio nally used system deve loped by San Francisco called SHARE was enhanced to handle new types of Treasury securiti es, including mortgage-backed securities. Two othe r systems implemented in 1986 - Treasury Direct and the Integrated Accounting System - advanced the Bank's capabilities to delive r service electro nically and to provide more infor mation in a timel y fashion to our institutional and individu al customers. In o ur pr iced payment services, expanded electronic access co ntinued to be a majo r the me as we introdu ced new electronic prod ucts improving our Fedwire and Automated Clearing Hou se capab ilities. Supe rvisory and regul ato ry respon sibilities were also conducted last year in a changing arena. District banking markets were substantially modi fied by the acquisition of Crocke r Natio nal Corporation by Wells Fargo - the largest ban king consolidation in U.S. history. Inter state banki ng became a promi nent issue as, by the end of last year, every state in the Distr ict except Hawaii had passed legislation authorizing inter state acquisitions. To play o ur super visory role mos t effectively, the Bank stepped up several aspects of its ongoi ng exam inations of state mem ber banks and bank holding companies. The heightened efficiency and ser vice capabilities afforded by advances in electronic banking are so me times accompanied by new types of risks as well. Last year, the Federal Rese rve System implemented new policies to restrict possible risks on large-dollar transfer s of funds . Bank staff worked closely with employees of District institutions to en sure that the imp le mentation of these po licies was effec tive and appropriate fo r each institutio n. Because of the large expanse of the Twelfth Fede ral Reserve District, the Fed er al Reserve Bank of San Francisco has developed a variety of ways to info rm a geographically dispersed public abo ut its policies and activities. Last year, the Bank expanded its pub lic outreach to the District th rough an exte nsive program of speec hes includi ng talks by the Bank's p resi de nt, senior management, econo mists, and othe r head office and branch staff. Econ o mic publicatio ns and videotapes produ ced by the Bank reached ten s of thou sands of peop le in the nation as well. Monetary po licy is ano the r vital area of respon sibility for the Bank. In 1986, changes at the inte rna tiona l as well as the domestic level created uncer tainties for the po licy environ ment. The large imp act of foreign trade on the U.S. economic ou tlook led Bank economists to focus particu lar attentio n on the slow reaction of the U.S. trade deficit to the dro p in the dollar. Uncertainties for the eco nomic outlook were also created by the federal budget deficit and mea sures to contro l it and by the passage of tax reform legislation . Banking deregulation made the mo netary aggregates a less reliable se t of guide posts for po licymake rs. These uncer tainties made the cond uct of mo netary pol icy mo re difficult than wo uld have been the case in a mo re stable environment. 2 The Bank's branch offices play a special role in providing se rvice to the District. Here, too, we saw a grea t deal of change - most notably in Los Angeles, where a new branch build ing to se rve the West's most populo us financial market neared completion . The new building will provide the ab ility to improve payments services to depository institution s in Southern Californ ia, Arizona, and Southern Nevada and will serve the publ ic in ot he r ways as we ll - by contri buting to the revitalizatio n of the surround ing South Park ne ighbo rhood , and by providing han ds-on econ omic ed uca tion th rou gh The World ofEconomics exhibition featured in the main lo bby. In meeti ng the challe nges of 1986, management was particu larly aided by the stro ng inv olvem ent and sup port of the Bank's Boa rd s of Direc tors at its he adquarter s office and its branches in Los Angel es, Portland, Salt Lake City, and Seattle. We especially wou ld like to extend o ur thanks and appreciation to the directors who completed their te rms of se rvice in 1986: Alan C. Furt h, Chairma n of the Head Office Board (Vice Chairman, Santa Fe Southern Pacific Co rpo ra tion , and President, Southe rn Pacific Co mpan y, San Francisco ), Harvey ]. Mitche ll, director of the Los Ange les Branch (Preside nt and Chief Execu tive Officer, Escon dido National Bank, Esco nd ido , Californ ia), Lola McAlpin Grant, director of the Los Angel es Branch (Attorney, Inglewood, Califor nia), William S. Naito, d irecto r of the Portl and Branch (Vice President, No r crest China Company, Po rtland, Oregon ), and Albert C. Giano li, direc to r of the Salt Lake City Branch (Pres i de nt and Cha irman of the Board , The First National Bank of Ely, Ely, Nevad a); as we ll as G. Ro bert Truex, jr. , o ur 1985-86 Federal Adv isory Cou ncil Mem ber (Chairman of the From left, Alan C. Furth, Chairman ( 1986 ), Fred \v. Andrew, Chairman Board and Chief Executive Officer, (1987), and Robert T. Parry, President. Rainier Bancorpo rtio n, Seattle, Washi ngto n). We also wish to than k the officers and staff of the Bank, who worked dil ige ntly to achieve a successful year. TIl e professionalism and dedicatio n of o ur almost 2,500 emp loyees were crit ical e lements in the Banks success d ur ing 1986. Because the active invol ve me nt of people is especially crucial in an environment of rapid and widespread change, this Annual Report highli gh ts the personal co m mitment of Bank employees in the ir role of serving the pe ople and institu tio ns of the Twelfth District. We fully recog nize that it is on ly thro ugh the efforts of all wh o wo rk he re that suc cess can be ach ieved . Ro bert T Parry President Fred W Andrew Chairman 3 Economic Research The staff of economists at the San Francisco Reserve Bank, like their counterparts elsewhere in the System, provide economic analysis to the Bank's directors and president to as sist them in carrying out their respon sibilities in monetary policy and bank regulatory and supervisory matters. Policy analysis is used mainly in regu lar economic briefings for directors and related special presentations, as well as extensive briefings for the president before his participation at the Federal Open Market Committee, or FOMC - the body within the Federal Reserve responsible for mak ing monetary policy. Foremost among those uncertainties was the influence of the trade deficit on economic growth. At the begin ning of the year, most observers thought the foreign trade balance of the United States would improve sub stantially in response to the sharp 35 percent depreciation of the foreign exchange value of the dollar since early 1985, and give economic growth a major boost. The expected improve ment did not take place, and a signifi cant part of the Bank's analysis concentrated on understanding why Whether the anomaly was permanent or temporary became a central issue in assessing the outlook for 1986-87. Deficit Reduction and Tax Reform The uncertainties surrounding the efforts of Congress to come to grips with deficit reduction also clouded the outlook for 1986-87. Public dis cussion had focused to an important extent on the direct contractionary effects of lower government spending on economic activity. Our research drew attention to an indirect offset ting effect. We noted that lower federal budget deficits would reduce the need for capital imports and thereby take upward pressure off the dollar. The resulting improvements in the trade balance would stimulate the economy At the core of the Bank's economic policy analysis is a program of basic research. By monitoring and analyz ing national and regional develop ments, this program seeks to identify and explain the key economic issues monetary and regulatory policy need to address. The results of this research and policy analysis also form the core of the Bank's public information pro gram, taking the forms of publica tions, speeches to outside groups, conferences, seminars, and audiovisual aids. Our analyses indicated that the dis appointing performance of the trade balance was due to an important extent to a failure of imported goods prices to rise as fast as historical expe rience would have predicted, given the decline in the dollar's purchasing power abroad. However, new esti mates of the relationship between the dollar and import prices, while not conclusive, suggested that import prices would at least partly catch up in subsequent years. In other words, an improvement of the trade account in response to the lower dollar, while it might be postponed, ultimately would occur. TIle impact of tax reform on the national economic outlook also received considerable attention. The research staff estimated that the siz able shift in the burden of taxation away from households towards busi nesses embodied in the reform would have roughly no net effect on eco nomic growth over the two-year span 1987-88. However, tax reform would reduce economic growth in the first year by approximately one-half per cent, and the economy would grow somewhat more rapidly in 1988 to make up the difference. In addition, because of our unique position on the edge of the growing Pacific Basin economy, the Bank main tains a significant Pacific Basin pro gram. Through meetings and exchanges of visitors, we foster closer ties among the central banks and gov ernments of the region. We also pur sue studies in the economies of the region, and we serve as a clearing house for information provided by the region's central banks. Delay in Trade Improvements Briefings for bank directors and the president on monetary policy in 1986 focused on key areas of uncertainty in the outlook for the national economy The Bank's economic staff also ana lyzed the question of whether the increasingly important role played by imports to the U.S. from newly indus trialized countries (NICs) in the Pacific Basin (such as Korea and Tai wan) could account for the unex pected behavior of the trade balance. The dollar had depreciated very little against these countries' currencies compared to those of our nation's tra ditional major trading partners (for example, West Germany and Japan). Our analysis, however, suggested that the dollar had declined enough to generate improvement in the trade picture even with the changes in our trading patterns. 4 Continuing Inflation Concerns The forces shaping the inflation outlook in 1986 and 1987 also came under intensive scrutiny Relatively lackluster growth over the past two years meant no significant wage and cost pressures at home; unremarkable growth left international develop ments - the collapse in the price of oil in 1986 and the substantial decline in the value of the dollar since 1985 - to be the key determinants of the inflation outlook. I~.. I Our estimates indi cated that , in 1986, the upw ard COSt pressures from the weaker do llar, and co nseq uently mo re expens ive impo rts, had been large ly offset by the spectacular 58 percent decl ine in the price of o il between Nove mber 1985 and Jul y 1986. However, the sam e est imates showed that almost all of the defla tionary impact of a lowe r o il price would be ove r by 1987, whereas the decline in the dollar 's value thro ugh 1986 would continue to feed inflation ary pressures to the U.S. econo my duri ng 1987 Monetary Analysis TIle Bank 's economic research also focused o n analyzing regulatory issues and thei r effects o n the mo ne tary aggregates use d in making mo ne tary poli cy. During 1986, the final steps were taken to phas e out deposit inte rest ra te ce ilings at commercial banks and thri fts. TI1e removal of vir tua lly all de pos it inter est rate rest ric tion s over the past six years opened the way for mo re peop le to earn rates of return comparab le to mar ket rate s on the ir bank an d thr ift acco unts. At the same time, the key Ml mone tary ind icator (which includes all cur ren cy and fully checkable depos its hel d by the public) bega n to behave pecul iarly, g rowing rap idly desp ite lackluste r economic growth and mod erate inflation. Whet he r o r not deregul ation was largely respo ns ible, Ml's usefu lness as a mo netary target and indicator was seve re ly impaired. TI1e Fede ral Reserve con seq uently de e mp hasized the use of Ml as a gu ide to mak ing mo netary po licy. In this monetary pol icy enviro n ment, the question arose of wh ether de regulation had impaired the broade r monetary aggregates - M2 and M3 - wh ich encompass Ml bu t also inclu de o ther types of acco unts and instru me nts suc h as savings depos its and money market mutua l funds. The issue was crit ical beca use the mo netary aggre gates provide an "anchor" for the Federal Reserve 's lo ng-ru n strategy of bri nging down inflation and ach ieving reasonab le price stability. The Bank 's econo mic researc h indi cated that deregu lation had not sig nificant ly co mpromised M2 and M3. Much of the rapid growth in Ml rep resented the transfer of funds from acco unts and instruments that we re in the broade r M2 and M3 measures. Thus, whi le shifts of funds among var ious accounts had destab ilized Ml , they had left the broader totals rela tively unaffected. Th is "stability" sug gested that M2 and M3 were still use ful monetary targets. Deposit Insurance Comp lementi ng analytic work o n the eco nomic ou tlook and monetary po licy, the Ban k also stu dies develop me nts in the ban king ind ustry, with a particu lar focus o n issues in banking and reg ulatory and superviso ry po licy. One of the se issues has been the increased num ber of bank failures in the 1980s, made more pro mine nt last year by the high est number of failures since the Depress ion . We traced the increase in ba nk failure s mainly to unforeseen changes in regio nal and internati o nal econom ic cond itions, and co ncluded that the increase do es not appear to be a resu lt of deregula tion as some crit ics of that po licy have alleged. 5 Fede ral deposit insur ance was another primary focus of banking research. TIle nation has bee n wit ne ssing strong mark et pressu res fro m both inside and o utside the banking industry to erode the legislative walls that have se para ted commercial bank ing, investment bank ing, and com merce since the 1930s. Even with in the legislated bou nds of banki ng, banks incr easingly have so ught new mark ets throu gh so -called "off-balance sheet" activities, w hich incl ude loan commitments and lette rs of credit. And, with growing freq uency, bank loans are packaged into secu rities that can be traded in financi al markets. Altho ugh the public stands to gain from these devel o pments, the exten sive insurance guarantee of the Federal Dep osit Insurance Corpora tion raises the possibil ity that more and mo re financial activities coul d be insured e ither directly or indirectly by the federal government. More over, the ser ious fund ing pro ble ms of the Feder al Savings and Loan Insu rance Corpo ratio n (the govern me nt agency responsible for insuring savings and loan institutio ns) have made concerns about risks to the insur ance funds even more pertinent. Our research stud ies found that the present deposit insura nce syste m he lps protect aga inst bank run s, but that the system also creates an incen tive for insu red instituti o ns to lower their capit al ratios, to increase the risk of their asse ts, o r to choose other strategies that may increase the risk to the insurance funds. These stud ies also assessed p roposed deposit insur ance and banking regul atio n refo rms inte nded to avo id the adverse incen tives of our current system . Antitrust Policy Ongo ing research also exam ine d the e ffects of the structure of banking marke ts o n the co nd uct and pe rfo r mance o f ba nks - an im portant issue in banking antitrust poli cy. One resear ch project stud ie d the effects of the level of co m pe tition o n deposit rates paid by ba nks, and anothe r lo oked at the effec ts of ma rket co n ce ntratio n o n the entry of banks into new ge ographic ma rkets. These p ro jects fou nd evidence that ban ks tend to pay lower deposit rates, and new ba nk e nt ry ten ds to be gre ate r, in highl y concentra ted banking markets. This evidence suggests that pr ofits may be somewhat high er than the co mpetitive rate in these concen trated mar kets. Regional Research A uniqu e feature of the Federal Reserve System , with its network of reg ional Reserv e Banks, is its ability to accum u late and ana lyze statistical data and o the r informatio n o btaine d d irec tly fro m the var ious regional eco no m ies in the United States. Beca use of the uneven patterns of econo m ic activity across the nat io n d uring the 1 980~ , th is "g rass root s" information has proven to be par ticul arl y useful in recent year s in hel pin g the Bank form its views o n moneta ry poli cy. Last year, region al research fo cused o n the divergent pro blems facing spe cific industri es and states w ithin the West. Our stud ies showed a positive tu rn arou nd in the fores t prod ucts ind ustry, and an aerospace indust ry that was bolste red by a pick-up in air line orders and a leve lling of defense o rde rs at a histor ically high level. O n the negative side, the Alaskan eco n om y and part s of the central Califor nia valley were hit hard by the d ro p in o il p rices . Agri culture and agri cu ltural lender s co ntinue d to fare poorly as well. The valu e of farmland continued to slide and the volume of p robl em agr icu ltura l loans at com mercial banks and the Farm Credit Banks in the West gre w sizably. The semiconducto r indust ry also is imp ortant to many of the western states, and it has been o n a ro ller co aste r ride ove r the past few years. A key issue for U.S. se micond ucto r manufacturers is the intense com pe ti tion from Jap an . Our res earch sug ge sts that, give n the nature of the industry and, to so me extent , the COSt advantages of Japanes e prod ucers, U.S. firms can expect little re lief from stiff competition in the years ahead. Public Information Like other Reserve Banks, we have a public information program that strives to enhance public awareness and understanding of the purposes, functions, and activities of the Federal Reserve System. Our program tries to provide the public with the informa tion needed to understand and evalu ate the conduct of monetary poli cy, regulatory actions, and other Federal Reserve responsibilities. We also su p port the public information activities of Bank management and other departments. Information and Education The core of o ur public information prog ram has always been the publica tion of economic research o n imp or tant poli cy issues facing the U.S. economy and the Fede ral Reserve. Sho rt articles by research eco no mists o n topical subjec ts written for a broad audience appear in the Bank's \Veekly Letter; wh ich has a cir culati on of 21,600, and reaches a larger aud ien ce th rou gh freq uent newspaper citations an d reprin ts. Our quarterly Economic Retneu with 19,000 readers , comple i me nts the Letter by providing longer, more in-depth analyses. 6 Anothe r way the Bank informs the public abo ut econo mics is throu gh 77Je World of Econom ics ex hibitio n, permanent lv install ed in the lobbv of , , o ur San Francisco office. Last year, this exhibition attrac ted abou t 14,000 visi to rs, includ ing nearly 7,000 stude nts who fo un d the ex hib ition to be fun and infor ma tive. In 1986, the Bank comp leted plans to make the co nte nt of the exhib ition access ib le to the pu blic in ot he r areas of the Twelfth District. In the Los Angeles Branc h , The World of Economics ex hibition has been rep licated almo st in its e nti re ty and will be ope n to the pub lic in 1987. Both o ur Seattle and Port land Bra nc hes have p lanne d to make two interactive co mp uter games from the ex hibitio n available to the public in po rtab le uni ts. Audiovisual mate rials co nstitute anot her e leme nt of the Bank's eco no mic information program. The mo nt hly Fed Views prog ram features interv iews with Bank econom ists o n majo r issues in the econo mv, and is des igne d pri marily for o u r Bran ch di rectors and man agement. Last yea r, we adde d two more units to Tbe \Vorld of Econom ics Audiovisual Edu cation Series specifically design ed fo r high schoo l use - o ne o n interna tio nal trad e and the seco nd o n the h istory of econo mic thou ght . Two ea r lier unit s focused on mon ey's ro le in the econo my and econo m ic decision makin g, res pectively. TI1e humorous app roach used in the Series attracted mo re than 1,200 requ ests in 1986, and an audie nce conservatively estimated at aro und 30,000 stude nts. When com pleted in early 1987, the Series will con sist of six Vide ota pes with match ing curriculum materi als. As mor e states mandate the study of eco nomics in high school, the dem and for educational materi als such as o ur Series will continue to grow. The Bank 's tour program add s a persona l dimension to our public information effo rts. In 1986, 14,000 visito rs toured the Bank's o pe ratio nal areas and viewed films and videotapes abou t the Fede ral Reserve and eco nomic issues. Vide otapes produced by the Bank that cover a wide range of economic issues also are shown reg ularly at open no o ntime scree nings in the lo bby aud itorium in San Franci sco. Other senior mana gement and Bank staff gave abo ut 120 sp eec hes thr oug hout the year, an increase of 10 percent from 1985. The g ro ups add ressed ranged from busi ness forums and university aud ie nce s to legislative committees . To pics included fiscal and monetary policy, regio nal economics, challenge s to de posit insurance, and the role of Federal Reserve Bank directors in sys tem policymaking. Media Outreach and Speeches TI1e media relati on s portion o f o ur public informatio n program both respo nds to inqu irie s from the press and suppo rts the Bank 's outreach to the public. During 1986 , the bu lk of media inq uiries con ce rned the ro le of the Federal Reserve in regu latory and ope ratio n matters, especially the acqu isition of Crocker Nationa l Bank by Wells Fargo , First Interstate's draft app licatio n to acquire Bank of Amer ica, an d the new Treasury Direct pro gr am. Toward the end of 1986, we expanded med ia supp ort for br ingin g the published writings and bri efing docu ments of o ur economists to the attention of the press by establish ing a program of direct contact with se lec ted press. Research Library To he lp meet the Bank's own infor matio n ne eds , our Research Library offers curre nt news and refe rence ser vices to Bank staff that range from cir cu lating a daily news packet and answering specific qu estions to providing in-de pth support for o ngo ing projects . In 1986, the Library responded to nearl y 1,800 in-house requests for informat ion . Autom ation is a key co mpo nent of this effort, and last year, the Library expanded both com puterizatio n of inte rn al o pe ra tio ns and use of o nline databases for reference searches . Last year, o ur new president under took an extensive public sp eaking pr ogram that re quired expanded media re latio ns support. In ab out 30 speeches throughout mos t of the Dis trict, the presid e nt ad d ressed bus iness and co mmunity leade rs, pol icy makers, and news med ia on to pics that included the ec on omic o utlook, ch alle nges to monetary policy, de posit insurance, and ba nkin g deregu lation . The Library also plays a key role in pub lic o utreach by providing informa tion abou t the Federal Reserve and its activities to audiences o utside the Bank , including financial institution s, bu siness and acade mic co mmunities, government agencies, the media, and other libraries. In 1986, o ur libr arians resp onded to abou t 3,400 suc h pub lic req uests. To answe r com mo n inte rest rate inqu iries, 19,000 of wh ich were recei ved last year, we provide a recorded telepho ne message updated wee kly. We also allow special use (by app ointment) of o ur co llect ion, wh ich is regarded as o ne of the finest in eco nomics and banki ng in the West and which inclu des un ique mater ials o n Pacific Basin cou ntries. 7 Branching Out O ur Branch offices play essent ial pa rts in the Bank 's o utreach to the Twelft h District by adapting District wide materials to their own special needs, as we ll as by pro ducing inn o vative programs of their ow n. In 1986, the Portland Branch co-sp on sored with the Oregon Governor 's Council of Econ omic Advise rs a two-day sym posium - "O rego n's Gre at Pos sibilities" - de signed to en courage current and future eco nomic growth in that state . The Salt Lake City Branch reg ularly invites representatives of var ious trade and business asso cia tio ns, such as members of Utah's import/exp ort community, to join the Branch board of directo rs for lunch and a presen tation by an ec onom ist o r member of senior mana gement fo llowin g regularly sched uled board meetin gs. In 1986, Seattle again offered "Inside the Fed ," in wh ich stude nts from local un iversities simu lated a meeting of the Bran ch board of direc tors with emp hasis o n the "eco no mic go-aro und " in which d irector s exchange their econ om ic views. Look ing ahead, Los Angeles has planned a multi-faceted pu blic information pro gram, whi ch makes use of The World cfEconomics lo bby exhibition , to se rve the most popu lous financ ial cente r in the West. Supervision, Regulation, and Credit Promoting a sound financial system by supervising and regulating state member banks and bank holding companies is the central activity of our Supervision, Regulation, and Credit department. This involves, pri marily, examining banking entities and processing applications for such activities as mergers and the establish ment of bank holding companies and their international and domestic sub sidiaries. Processing applications involves consultations with other Bank departments, especially Bank counsel and economic research, as well as meetings with the applicant and affected parties. General Improvement Our examiners evaluate banks' assets, liabilities, organization, sys tems, and internal controls, and assess their compliance with banking laws and regulations. Last year, we found that most banks in our District improved the quality of their assets and maintained their profit margins. Credit problems were confined to a few institutions whose portfolios were dominated by loans to weak sectors of the economy, such as agriculture and energy The number of commercial bank failures in our District increased to 13 (or about 10 percent of the national total) but involved a smaller volume of assets at $461 million than the $623 million high that resulted from 12 bank failures in 1984. The results of each examination are reported to the senior management of the bank examined, to that bank's directors, and to the Board of Gover nors of the Federal Reserve. Where problems are identified, examiners recommend corrective actions. We had formal corrective programs in place at 31 bank holding companies and state member banks, down slightly from the 39 total for 1985, and we continued to work closely with other federal and state agencies in coordinating examinations and other supervisory activities. We also fostered increased participation by personnel from state banking departments in various System examiner training pro grams conducted regionally. Enhanced Supervision The Bank implemented a major ini tiative to strengthen bank supervision in 1986. The initiative called for increasing the frequency and scope of state member bank examinations and bank holding company inspections, and for improving the communication of examination findings to each institution's board of directors. The required additional staff and training activities were phased in over the course of the year, and will allow us to meet the full 1987 schedule planned for the initiative. In another change implemented as part of the enhanced supervisory pro gram, we emphasized the internal sur veillance systems of bank holding companies and state member banks in evaluating their financial condition. The increased frequency of reports and the greater detail now available from regulatory reports filed by finan cial institutions permit us to incorpo rate more intensive analytical review into our pre-examination planning. In brief, we will be able to choose an institution whose reported data indi cate a deterioration in its condition for earlier examination, and an institution with strong financial indicators for less frequent examina tion. We will be able to identify potential problems earlier and make a better allocation of staff. Last year, we also incorporated changes in the formats of examination and inspection reports made by the Federal Financial Institutions Exam ination Council and the Board of Gov ernors in our automation of report preparation and processing procedures. Mergers and Interstate Banking The Bank processed a number of applications in 1986 that significantly altered the structure of major banking markets in the District. The most important was the application by Wells Fargo and Company to acquire Crocker National Corporation, which resulted in the largest consolidation of banking organizations in U.S. history. Another significant development affecting applications was the move ment of states to enact legislation per mitting interstate commercial banking. By the end of 1986, all states in the Twelfth District, except Hawaii, had passed legislation authorizing interstate acquisitions of banks by out of-state holding companies. We pro cessed eight interstate applications, four of which were to acquire Arizona banks as institutions from other states moved to participate in the growth of Arizona's economy. The number of interstate acquisitions is expected to increase in 1987 when the regional provisions of California's new inter state banking law take effect. The total volume of applications dropped slightly from that in 1985. The number of applications for new bank holding company formations decreased by almost 50 percent, con firming that the rapid movement dur ing the early 1980s toward this form of bank ownership has subsided. Largely offsetting this decline was an increase in applications by our Dis trict's 329 bank holding companies for acquisition of banks and nonbanking companies as well as entry into new lines of business. The character of these applications suggests, however, that most bank holding companies have a cautious, selective attitude toward expansion. International economic conditions in 1986 continued to restrain overseas expansion by District banks. The vol ume of international applications fell by one-third and most applications 8 GEORGE WESTERlvlAN and JO MALIN), Review Ana lysts, App lications Unit, Sup ervision, Regu lation, a nd Credit Dep a rtmen t. George Wester ma n processed the app lication by Wells Fargo & Company to acquire Crocker Nat ional Corp oratio n , the pro cessing f or this largest acqu isition in hanking history was completed in only 45 da ys [o Matins ba ndied the proposal by Lloyd 's Bank Pic to acqu ire Sta nda rd Chartered PLC tbe fo u rth and fifth largest hank ing organizations, resp ectively, in Great Britain - uhicb in volved holdings of domestic ba nks. How would yo u describe the Review Analyst's job? JM: I find the wo rk a lot like case wo rk in business schoo l. Y u o loo k for acceptable variations of financial, managerial, legal, and co mpe titive co mpo nents. By acceptab le, I mean consistent with statute and with po licy set by the Board of Govern o rs. The analyst doesn 't do all of that, so the parallel to a "project man ager" is also re levant. We're exclusively responsible fo r the financial and manage rial ana lyses. GW: I ag ree with Jo. We act as the central po int in the coo rdina tion of all information flows, and p rodu ce the memo randum to the Board of Governors that co ntains the Bank's recommen dati on fo r action on an app lication . What do you loo k for in an applica tion? GW: We have specific information requirements that enable us to eval uate the many aspects that Jo has mentioned. But, in a general se nse, we review what an institution wants to do and e nsures that the way it proposes to go about doing it is funda mentally so und . JM: Often, the applicants respon ses raise new q uestions invo lving financial , legal, or po l icy iss ues that need to be pur sued and resolved. Can yo u philosophize abou t the applicat ions process ? JM: Certainly o ur man date is to ensure the safety and sou nd ness of banking, and, in that se nse, I can do what I do with a sense of purpose . Safe ty and so undn ess in the public interest . .. I can get behind that. Right now, bank holding com panies are really driven by an entrepreneurial spirit; they want to be co mpetitive with less regu lated p roviders of financial ser vices. We see pro posals that are highly innovative , but, of course, as regulators, o ur level of risk aversion is much different. GW: The app lication is basically a regulatory vehicle . We make sure that what happ e ns in the bank ing indust ry happen s in an o rde rly manne r - o ne that is 9 con sistent with banking law and System po licies and guidelines. However, the applications process is not adversarial, We're all in it together, and I feel we have a goo d rappo rt with the District:" vast cliente le. But i t ~" no t so much what we do for the specific applicant. I feel it's mostly what we do to maintain p ublic confidence in the banking system . I get satisfaction just from be ing involved. I can come in at 7:30 so me mornings and I'll alread y have a whole stack of phone messages because of the time difference with the East coast. That's the kind of stuff that reall y keeps me going. Crocker/ Wells was the largest consolida tion in U. S. banking history, and I was right there! involved only minor additi o nal invest ments or modifications to previou sly approved activities. No new export trading companies were approved during the year, and bank holding companies that had previou sly received approval for these co m panies continued to run them o n a relati vely small scale. Cong ress autho rized export tradi ng compan ies in ] 982 to e ncou rage U.S. exports, but the results to date have been disap pointing largely because of the loss of export markets since that time. Moderate Borrowing A key adjunct to o ur supervisory and regul ato ry responsibilities is the supply of neede d liqui dity to e ligible deposito ry instituti on s. Our Cred it Unit also has res pons ibility fo r ad min istering the Federal Rese rve's po licy on reducing the risk inhe rent in large-dollar transfer s. Borrowings for sh ort-t er m ad just ment credit and seasonal needs remained moderate through out] 986. The number of borrowers acco mmo dated at what is gener ally called the "discount wind ow " decreased to ] 30 from 149 in the previou s year. A num ber of smalle r institutio ns conti nued to experience se rious fi nancial prob lem s and rec eived advan ces und e r the "othe r extended cre d it prog ram" while the y took oth er steps to imp rove liquidity In se veral instances, advances from the discount wind ow provided the time need ed by regul a to rs to arrange an o rderly closu re of failing instituti on s. Total co llate ral pledged by Twelfth District institutions amounted to $21.0 billion at the end of 1986, down from $26.3 billion in 1985 due primarily to the me rge r of two large institutions and co nso lida tio n of their collateral. Consumer Affairs In San Franc isco, our Supervision, Regul ation , and Credit Department also ad ministers cons ume r credit laws and regul ation s and en courages co m mun ity develo pment and reinv est me nt throu gh a co mmunity affairs unit. Cons ume r Affairs co ntinued to prov ide advice to banks and informa tion to co nsume rs about the wide bo dy of co nsu me r protecti on laws and regulations . Our staff handled approxi mate ly 200 co nsume r co m plaints against state member bank s last year, abo ut the same number as in 1985. Nearly 20 percent of those co m plaints involved allegations of unauth orized withdrawals from auto matic teller machines. In a program begun in 1985, con sume r affairs examiners conducted their regular compliance examina tion s with an increased reliance on "off-site" analysis of documents and records. This procedure permitted more thorough reviews in advan ce of exam inations, especially at those banks gro wing quickly or experienc ing problems. 10 Community Affairs Our Com munity Aff irs functio n a promotes the goa ls of the Community Reinvestment Act by assisting co m munity groups and financial institu tion s in forming co mm unity development programs . This assis tance can take the form of education as in o ur sponso rship of a ma jor co n feren ce in 1986 to kee p co mme rcial bank comp liance officers and atto rneys info rmed of the standa rds expected und er the Commun ity Rein vestme nt Act. Assistance can a lso take the form of acting as a liaison o r facili tator in resolving di ffe ren ces. On sev e ral occas ions last year, Community Aff airs and Bank co unse l met with protest groups and applicants whe n bank merge r app lications raised co n trove rsial co mmunity issu es. Oth er ways in wh ich we assist the co m munity development process include information al me et ings with groups such as the Bay Area Urban Banker s Association and the provisio n of meet ing facilities wh ere planning for com munity de velopment can take place. Management Committee (Seated , from left ) Th omas D. Thomso n, Executive Vice Preside nt Robert T Par ry, Preside m 11 10m as C. Warren , Execut ive Vice President ( Stand ing, from left ) Carl E. Powell , First Vice President Michael J Murray, Senior Vice President 11 Bank Adtninistration The management of the San Fran cisco Reserve Bank continu ally strives to improve the efficiency and reliability of all Bank operatio ns. Each year, senior management sets new o bjectives designed to meet and antic ipate the developing needs of finan cial institutions, the federal gove rn ment, and the ge neral pub lic in innovative ways. During 1986, a new manage ment team d irec ted the co mpletion of sev era l major multi-year initiatives that will act as the fou nd ation fo r deliver ing reliable, cos t-effective serv ices for years to co me. These initiatives included auto mation efforts that embraced new software and new tec hno logy; the implem entatio n of a Federal Rese rve poli cy to red uce risk in the electronic tran sfer of large do l lar payments; expansion of d isaster contingency plans; and laying of new foundations in the form of a new building for the Los Angele s Branc h. Benefits from these initiatives will accrue to both the Bank and o ur customers. TIle Bank will benefit from greater flexibility and ease in its inter na l ope ratio ns. Our custo me rs and the pu blic will recei ve mor e depe nd able, sec ure, and higher quali ty se r vices. Alread y, the initiatives have helped the Bank hold 1986 expe nses 2.4 percent bel ow the budgeted level - a savings of nearl y $3.3 million as part of o ur progr am to co mp ly with the spirit of the Gra mm-Rud man Hollings balan ced budget legislation . Looking ahead, the g reater operating eco no mie s now available will e nab le us to tighten control over o ur expenses. Automation Efforts Over the last several years, the Bank has co mple ted a major automa tio n prog ram that has transformed the way we o rganize our operations, the services offered , and the technologies use d. In the area of software develop ment, we have focused primarily on developing and installing systems that were des igned for use throughout the Feder al Reserve Syste m. Our compu ter ope rations area has also changed sig nificantly. Whereas many functio ns involved batch p rocessing in the past, the y are now co nd ucted o n-line to p rovide be tte r service to o ur large , geograp hically dispersed custome r base. We have devoted a great deal of attent ion to upgr adi ng the Data Cen ter s in o ur Head Office in San Fran cisco and o ur four Branches using uniform up-to-date technology; we have impl em ented an intradistrict data communicatio ns network; and we have ce ntralized most major pro cessi ng functions in San Francisco. In many respects, we have reached a plateau in o ur efforts, having estab lished a stab le automation and com mun icatio ns env iro nme nt that meets curre nt and anticipated future needs. Software Applications TIle Bank staff that develops and supports business systems was par ticu larly active in 1986 with the crea tio n, installation , and maintenance of the e ight critical software applications co mmo nly used by the Fede ral R rve System. San Francisco was the ese developme nt site for two of tho se eight app lications. The Banking Statis tics Application (STAT), was com pleted in 1985 and installed in all o ther Reserve Banks and the Board of Govern or s in early 1986. STAT pro cesses a wide range of data collected from dep ository institutions, includ ing basic information some of which is used to co mpute the various money supply measures. The new system will signi ficantly reduce the costs of main taining the data and increase flex 12 ibility in respo nd ing to chang ing data collection needs. The auto mated sec urities handling system (SHARE) is the second appli ca tion develop ed in San Francisco. Major enhanceme nts to SHARE during 1986 included increas ing its capacity to supp ort the Treas ury in its new securities offe rings, such as mortgage backed sec urities and discount notes. In addition to de velop ing so ftware fo r the Federal Reserve System , San Francisco also installe d seve ral major so ftware app lications deve loped e lsewhe re. On e of these, the Inte grated Accounting System ( lAS) is the new standa rd acco unting app lication be ing installed throu gh out the Federal Reserve Syste m. Cu lminating a three -year e ffo rt, lAS was success fully implemente d on schedu le in all five offices of this Bank. Implementa tion was acco mp lished with no major disru ptio n to o ngo ing operations or custo mer servic es thanks largely to extensive planni ng, training, and pre testin g. The three modul es that make up the co re of the lAS - Data Entry, General Ledger, and Dep osit Account ing - are fully integ rated with o ne another, unlike the systems they replaced . As a resul t, lAS has ena bled the Ban k to ce ntralize and standa rdize the automate d acco unting fun ction s for the Distri ct and ther eby en hance o ur ab ility to inco rpo rate changes while afford ing greate r co ntro l of financial data. The use of lAS th rou ghout the Fede ral Reserve Sys tem will ens ure nation al co nsistency and co mpatib ility in custome r acco unti ng serv ices. lAS also provides the framewo rk for the future elec troni c de livery of accounting informa tion and will allow us to ce ntralize our accounting function s further in support of cos t-containme nt efforts. lAS will benefit depos ito ry institutions by helping the Feder al Reserve meet the evolving need s of an interstate banking enviro nme nt. TERRY IJ:.]A, Employm ent Administra tOI; Personnel. In 19 8 6, the Bay Area Urban Bankers Associa tion a warded the Federa l Reserve Bank of San Fran cisco its Bank ofthe Year Awardf or outstan ding tcorle with their organi z ation. 77.Je Bank teas also n ominated f or the Gocernor s Award/or Employ ment of the Handicapped. What purp oses does co mmu nity out reach se rve? 11.: It se rves two pur po ses. First, the Pe rson nel Departm e nt is co n tinuall y seeking ways to incre ase our presen ce in the com munity in orde r to e ncourage people, especially minori ties, females and the handicapped , to apply for po sitions at the Bank. One way we can do this is thro ugh our invo lve men t with local organizations. Second, it is our way of pro viding sup po rt to the co mmunity, espec ially for stu dent groups and co mmunity organization s that need profes sio nal and admi nistra tive assistance. Basically, we want to be a good corporate citizen . Would yo u give so me examp les? 11.: We've worked with the Bay Area Urban Banke rs Associatio n - a mino rity ban king group that hel ps their adu lt member s deve lop p rofessiona lly and pro vides college scholarships fo r higl school students. We hosted their scholarship reception last year at which Mr. Parry, the Bank's President, gave the keynot e add ress. We were also a spons or for the ir national affiliates' con feren ce in the summe r. We helped organize the conference, made our confe re nce facilities available, and participated in a job fair. In recognition of this sup POrt we received the "Bank of the ear" award. I se rve on the Job Forum , which is a Chamber of Commerce panel made up of professionals in the Bay Area who give advice to job seekers . The Bank will be pa r ticipating in the Bay Area Urban League job Fair, wh ich focuses on emp loying minority stud ents in high school and college . Members of the Personnel Department also serve on seve ral employers advisory boards for local co lleges . I serve o n San Francisco State iniversirvs Board, as a member of the wo rkshop committee - assisting students in transferring the ir liberal arts degrees to the bus iness world, \Ve also seek to create a more positive image of the libe ral arts degree in the emp loyer 's mind . Another comm ittee I'm involved with is the Community V lunt eers o Cons ultants Com mittee, affi liated with the No rthe rn Californ ia Human Resources Counci l. We provide voluntee r consulting se r vices to nonprofit groups. For 13 examp le, we helped an Indian triba l group resolve some organi zation issues that subsequently helped them obtain fund ing, How are you personally committed to what you do? Tl.. One of the nice things about what I do is that I can take som e per sonal feelings, personal commit ments , and put them into action . 111e Bank asks a lot from the com munity, and after all, the Bank is com posed of people who live he re, who work here, and who send the ir children to schoo ls in the Bay Area. 111e people he re at the Bank abso rb a lot of the resources from the com mun ity: it is our resp o nsibility to rep lenish som e of these resou rces through our out reach effort s. New Technology To meet the gro wing use of co mpu ter resources, the Bank upgraded its compute r in the San Francisco Data Center with a ce ntral processor that ma kes use of state-of- the-art techno l ogy and which sho uld serve the Twelfth Distri ct's needs for the next seve ra l years. Along with deve lo ping new soft ware an d upgrading our data centers, the Bank has a lso emphasized the innovative use of co mp uter-re lated te chn ology. Fo r exa mple, we have esta b lished a substantial base of mic roco mpu te rs that wo rk in co ncert with our large ma inframe processor s. We are also expanding the use of so mewhat large r co mputers dedi cated to serving the ne eds of ind ivid ual departments. The new Cash Automation System is o ne examp le of the successful use of suc h technology. Payments Systems Risk The growing electro nic sophistica tion of the financ ial indu stry has also posed so me major risks to the natio n's payme nts system. Last year, the Bank comp leted implem entation of the Federal Reserve Board 's po licy to redu ce risks on systems that tran s fer large-dol lar payme nts. The new policy, which took effect March 27, 1986, calls for electro nic transfe r net wo rks and individu al instituti on s to limit the amou nt of cred it risk the y pose to the payme nts system. Each institutio n that participates in a large -dollar funds transfe r network , including the Fede ral Reserve's Fed wire serv ice, is encouraged to adopt a cross-system net deb it cap. The cap esta blishes an institutio n's maximu m intra-day overdraft amo unt. An over d raft occurs when an institution wires o ut mor e fund s tha n it has in its account with the Fede ral Rese rve o r when it sends mo re funds over a p ri vate funds transfer networ k than it has received. The cap is based o n each institution's evaluatio n of its own cre ditworthiness, operationa l co n trols, and cred it po licies and pro cedures. The Fede ral Rese rve, and other superviso ry age ncies, then review each institutio n's evaluation file during regu lar financial exam inatio ns. Dur ing the year, the Bank wor ked with institutions throughout the Dis tr ict to e nsure that ap propriate steps were being take n to con d uct evalua tions and to esta blish caps limiting the level of intra-day overdrafts. We also incorpora ted a review of each institution's evaluat ion file into the Fed eral Reserve's regul ar financial exami nat ion program. Disaster Contingency Planning A crucial part of any sound bus i ness prac tice is providing backup capabi lity in case disaste r disrupts regular operat ions. In 1986, thro ugh r igorous testing and documentation, we enha nced d isaster continge ncy plans that ca ll for locating the San Francisco data ce nter to the Federal Reserve Syste m's computer co n tingen cy site at Culpeper, Virginia and moving some cr itical operations to other Twelfth District Branch offices. 14 In San Francisco, the addi tion of tech no logical improveme nts in ser vice of the disaster co ntingency plan improved the Bank's emergency read ine ss. A new generato r will allow the Head Office building to beco me e ne rgy se lf-sufficie nt sho u ld the re be a local power o utage. A Crisis Hotline, installed in San Francisco, wil l provide emp loyees and thei r families current informatio n on the status of Bank operatio ns afte r a disast e r. Finally, an emergency rad io system will enable senior manage rs to com munica te with the Bank and one another fro m their hom es duri ng any local te leph o ne failure . The contingency planning effort also was expanded to include the four Branch offices , wh ere co mprehensive plans were deve loped to provide crit ical services with efficient recovery fro m e mergencies and lon g-te rm computer o utages. Through its par ticipatio n in the Earthquake Recovery Task Fo rce of the Californi a Bankers' Clearinghou se Association , the Los Angeles Branch joined a Bank emer ge ncy radio network in the Los Angeles Basin. Together, these efforts e nab le us to mini mize business interruption s and related costs and ensure the o ngo ing delive ry of critical services to Bank custo mers in the eve nt of sh ort-ter m or lo ng-te rm se rvice disruption s. IJ The NeW" Los Angeles Building After a decade of planning and three years of construction, the Bank neared completion of a new building for the Los Angeles Branch. Services provided by the Los Angeles Branch make it among the largest units in the Federal Reserve System; they include check processing, cash and fiscal operations, and bank supervision. The building will be fully occupied and dedicated in March 1987 in conjunc tion with the joint meeting of the Twelfth District Head Office and Branch Boards of Directors. Within the District, the Los Angeles Branch serves about 4,000 depository institutions and their branches, hand ling the largest volume of federal tax deposits and processing over a billion dollars daily in its automated clearing house activities. The savings bonds operation in Los Angeles is the regional processing center for the Twelfth District in original issues over the counter, reissues, and redemp tions. This operation puts the Los Angeles staff in contact with more U.S. savings bonds agents in a larger pop ulation base than any other District in the System. The move into the new building began toward the end of the summer of 1986 with installation of computer equipment followed shortly by the relocation of check processing and related activities in October. Cash operations occupied the vaults and basement area prior to December. In the short time that these large operating departments have occupied the new facility, the quality of services has improved dramatically. Adequate vault space, expanded operating areas, and up-to-date equipment have increased the efficiency of Branch operations and boosted the morale of Branch employees. Service reliability also has been vastly improved by the installation of a second computer that backs up the Branch's data processing capacity. In addition, service continuity during power outages was assured with the installation of emergency generators and an uninterruptable power supply. The new facility plays a major role in the program of the Los Angeles Community Redevelopment Agency to revitalize the surrounding 100-acre South Park area. Designed by 15 Dworsky and Associates, the structure stands out as a fine example of con temporary architecture. An undulating granite wall in the front of the build ing defines a graceful pedestrian arcade, and bows out toward the street to enclose a multi-storied skylit atrium containing the Branch's lobby The World ofEconomics, a major exhibition explaining economic prin ciples and the workings of the u.s. economy, is featured in the main lobby. Open to the public, the perma nent exhibition is a replica of one that has proven to be a highly popular and effective educational tool in the Head Office building in San Francisco. 6<xu'd o (Uln: l1o n Organization Chart Robc; r l T. P:uTy Pre-sl d cnc February 1, 198 7 ",d ChId b«UUvl: O fficer C. l E. Pa.-eU u flnl Vic e Prni d e·f U and Chl t.-fOpcnUng Oflke r Tb' e", CO' Statistical and Data Servi ces Super Sara K. Garrison Se ni or vlc e Pn::s ldcm SlaU5Ua\l an d 02tI 5e rricc:5 Eu ge n e , Sl.:nlO t \' SUPCf"\U Ro bert O. M,ull o rd vr ee Pn::oIdcnt l (i2lI A . Ta )'lor :'ll1d Cou~ 1 .\t oll c ClTy ~ l es '&.Gotd. vice 10t: f Cr,: di l )J law Loub E. Rc Wy Sco a r VIce' PTold e n l Ri ~d ~oe lOl1 J am : W. lAoghomc : Om butb man Do ugb." R. Cou PKl Ass t. \- (" Prcsllknl 1 (" an d RQC,", 'c Rtpor ts Stu_ .\ tc-r1e E. ",« P re sldC'fl1 Elio t E. GiuUI and Co Wl.. ,<1 , W UlUm L Coo pe r fLoand.d vl cc lor'1;': .~. v jcc Pn.:S.l e n l d ln lc nu d oJUJ and Oo OloC'1'UC ."'" Ex ~portl As5IOCUlc Ce DcDI Coun.....,1 Computer Services Perso. ",,Jor Vice Presldenl "'" Sot A Co m pu te r Accounting and Finance Sharon L. R,ell;do rf Vic e:' lOn.. ...Idem Elfzabeth R. ~ rc n Vice Pre stdent DJ.. rl C1Accounting n ~Udud Secretary's Office and 5ecreClt')' or d i e Boar d Se n lo r \ ' ~ rv:lC C!lo Pc rso nn Judy A. }o lvutone ~ p b8. f udu Vic e Preside DI A.~ f . 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Dal llng k..~I . Vice Pn. ... d c:nl . l Admln b lr;u i\'(' xrvl«:.s A6ut}~'b :u1d DOUIlU " 0. Kn u d.<\C o If . \l'Wlun PCl\olnglo n As.. . L "1« Prn ld \-n t . SpccW A.... l gnna-n 1 ~ D . Ke rry \l'ebb A.... 1. VIC<"Pn. .... dl ·nl " i $US3l1 L. Ro b cr bO n A» I. Vice Presl d e nl Roberl R. RlchMd.... A.s.. I. Vice Pr e" id c m ~ P"lymcn ts Sc:n ico . gdward A. Bonhc:u r A.. 1. Vic e' P ~ ld c nl .... Andrc:;J,P. \\oU 1(Vn A....I. VI«. " PR.osld l:OI . FilunctaJ S~..nicc~ Ga.1t: P.Anso.- U As..<iI vi ce Prnldt: ft l . AI;st . vtee Paym c n~ josep h lO n. ~ldc-ol Sot.'n'lca J. Grbn..~w "-..,... vice Presld e DI S«'urit:iCli X f"\j c..., ' A~1 . VI«: PTnid cn l FinancWx rvt c~ '" """,. Cu.~1 ody C.on U'O I s.:,...C\"$ ; Seattle Branch ~ ra ld 1 Los An gel Th orna..~ R. Kelly Sc.: Jo r vlcc Prc-,;lden C n inCh :l. 8'-· " C. \1, : E."( \·("Uti~·c Vl c '" in C harg c Kcnn\'t h L. PClt"'I'WO A..... L VIce: Pf'C \:n l ... lild CUl'IOdy Sc rvl ('C'S xe.. wunam C" ~R' n.,,<" n HI"ClOr M. .\1:1 .\.\oJJ,( . \'I «,· ~ l de'nl Vrcc P rn id rm Flrtancta l Pnym\:n LJi Sc f"\i~ Sc: ,... i~-s RJchard L Ib Viet: Prcsldu DulldJn~ Opc t:l tJo n.~ -'bf)' Ell e n \1,; Dtrecto r Fln anc bl Sc .., .'Uld Pu b Uc I n }o hD H. 'I 'On a <b.~ I . VIc e Prn ld e n l Ca.~b k rvlc:c ... [k~ J~L C. Gonncnn.-m Vlcc P n: , lde' n l P:aymenl!i krvlce'fi U lOU C R. W:lUcn; ClL~ l od y Sc rvl ctS ODi c!,'r 16 An..... ly!u an d Co n tro l Audi ting Robert I. G:uchcU Ge n e ral Audho r Gul Gid'o\-:rnJ As.,l<mml GeJ:Ic rn.l ,Au dJtor Pel e r K.C. Hstc h Audi t Offie.:r Bruc e: H . 111omp>ou A.... bt.·U1 t ~ G<:nc ral A udiCQf Qu.r ks 0. BO'I~.. cn d Audh O ffice r G:tr)' G. Hoe m Audi t OffiC\:f r l Tb ofD..;ol.s D . Tboauon ExiK"U dYc Vi ce Pre sJdcn! Cent:r3.1Bank f unttlo ns Economic Research and PubUc Information Su pe rvis io n, Regulation and Credit John £.ugc:nc A. TbOtn.a.1o Senior Vic e Prelildcn l Sup<-rvt:<Ion . RC1fUlalio n and Credit '11 Gordon Smi th '. l. Scad dlnK Senior Vice Pre:$ldenl ao d J)lre(:tor of ~ Onld )-l. Van dre Do culd R. U c b ,","SI. VIce Pre!'ld c nl A$$L Vice Pn:sldcn l and Co n.'iumc r AftLIrs D b U'l C1Cn:dJl E. Borchert Vice Presid eD I and A.. "SOC. Direaor o f Research Bank an d Coru>umcr Rc1ubtion ~ c r lc John Co ns u m e r Afbln; Offittr t . RJcka«l"! Vlcc Pffsid col C~dJl Vlcc P~dc!u B. \k EumJ.natlons V Harold H. Blum 4 ..1. Vice PlTs ld cnl Bank Examinations H"'tT)' ~Grec n W 3 }'1l C Th o mas P. Mc(in lh Asst. vlce Prc,s; dcnt l Bank EumlnalJo ns . S.LC. Rob ert C. johnson ~ g O fti C'C"r Kt:nn cth R. Blnning 'rbo roas H . Gordon E."Ulninl.ngOfficcr W. StarT Scl :'gDllll c r E:x;un1n1ng O ffitt r }ohn P. j ud d Adrl:1JI W. Throop Vice: PresJden t ~~ch Offi Cf:r Domestic M.1Cf'OC'OOOomJe Studies lboma J. Backer u E:cuninlng Officer \ 1... .: PTc,.ldenl 1 Rober t A. Johns ton Director A.....I. vtcc P ~ I dl;:nl ~ Rodn ey E. Reid OI" ;(lor BH C OI.ndInlcnul':l.onal Regulation Reports :LO Ao a.lysls d Ap p ll cauo ns H . Beebe RJ ducd S. Campos Pblllp M. Ry.m E.u.mlnlng Offi ett S He an d tmem auo car Supcrvtston ExamlnlngOfli~r Hang-Sbe eg Ch C:OK vtce Pn::sld eJll lnlt.."C'D3tional SD.ldJ es john M.L. GrueDSLein VICf:Prcsldem and DJ:reetot" PubUc InfonnaLlon Personnel and Administrative Services District Financial Services ,\fJd1.ad J . Mu rray x nJo r Vice Pn:..\.Idc n l Pc: ~ nn d and AdmlIW.traLlve Services john F. Hoover Se nio r Vice P'tT3old l cn O ls lrl C1FlnancJaJSc: f'\i c\' lJ ~e P3ttlda K. Un8 vlce Presid e nl Corponte Penonnel A. ~q . H. Wclsslngc r V ice P~slcknl Dawn S. All en PCnoOlU'Id O ffice r Bobby A. JclJct')' w. Gleason v ice PresJ dcnl Ptod UC'lM:uugcm c n l John Pl;n;Qoncl Offi(e r Corporate Pcr.-oo.ocl C. tu:nnelh Arnol d vt cc P1T$ldcnl OlstrlclSt;eu rl ry 8uffmgt oo Cla y MUler Vice Pre :< eDI ld produc t ManaK em c n! \lo 'lIlbmK.. Glnler VIC\: Presldenl 8uJJdinit an d Prope rty M3I:1a e mcnl g Stcpben A. K;ruIman B.vban J. Cool1n.l As$L Vice Preslden l zrceeomc P;,yme n b Produ ct PetcrW. Homes Fl~eW scectces O ffice r Ad eUe Fo ky vl ce Pru ld e n t Corpof';llIC Plannlng j ohn A. 'rrcccoe Manning Officer );UIU ;5j. Tens e Moo vtce P ~Jdcnl r. AdlTl ln.l~trative Se evlccs \ SyJvia A. Cunningham seocurcmcm scevtccs Officer Los Angel e s Branch l Palge B. ScoI1 Dab security an d Contingency PbP-ning O ffi« r ln Charg..· Tbonu." C. \l ': un:n Uct\l.Ih'l." Vice PrcYldeol Rlchald L. Ra.!.mu.<;.Sf:n V1 Pr,,-:<Idl;nl ('(' N("W8 uiJdinR Henor ~ . ," b:rtin Charl~ L Hu ffsl eLl"'r 'VI« P~i dc n l Dteeceor Optf';ll lJon'\ ~h Servtces, Accounting Bren t M. OU.''l ury b vj ce Pr C$id cnl 'n wcccee AS. . ~I '\''''-; 1. Adrn tnksu-atfv e services 1. \ Scneocdcr vtcc P rC"l'ld enl G. 8 r.1dJc y Snodgrass Checks O ffice r V:a(2Jl( Securtucs Serv lco Electronic Payments Officer an d Ad.minis tr vc sco-rces .ut ."t;ary EUenM.ar1in Olrc n o r FirumeiaJ Sc n· l«s. ~r.a.lb lJon Man.1gt:mcnl :tnd Pu blic Jnf omuLlon :LO Protocol d 17 Mansgem~l Oftitt r Branch Operations (Fro m left) Angelo S. Carella , Senio r Vice Preside nt in Charge, Portland Thom as C. Warr en , Executive Vice President in Charge, Los Ange les Gerald R. Kelly, Sen ior Vice President in Cha rge , Sea ttle H. Peter Franzel , Senior Vice President in Cha rge, San Francisco (No t available fo r ph otograph ) E. Ron ald Liggett, Se nior Vice President in Cha rge, Salt Lake City 18 Priced Payments Services The Fede ral Reserve in its role as a provid er o f wh olesale bank ing ser vices strives to promote the efficiency, safety, an d sou nd ness of the nation's payments syste m. To the average depositor, an efficient payments sys tem me ans rea dy access to cash as nee ded and a sh orter hold o n depos ited checks. To de pository instituti on s, an efficient payments syste m me ans mu ch the same: cash as needed to meet customer demands and the q uick and re liab le transfer of fund s between acco unts . As required by the Monet ary Con trol Act of 1980 , man y of o ur pay ments se rvices a re priced to e nco urag e competition, and thereby greate r e fficie ncy, in the mar ket for finan cial se rvices . Approximately 1,500 deposito ry instituti on s in the San Francisco Reserve Bank 's Distri ct use on e o r more of the Bank 's se r vices . Electroni c access to those se r vices has proven particularly popular ; we have over 1,200 terminals now in use at custo me r sites. Check Services The Fede ral Reserve Bank of San Francisco handl es the large st chec k volume of any District in the Federal Reserve System. In 1986, the number o f ind ivid ual checks processed for co llec tion exceed ed 2.5 billion . More ove r, moving checks in our nine-state district, which is rou ghly o ne-third the geogra phica l size of the United States and spans fi ve time zo nes, requires a highly so phisticated check transportation system . Give n the sub stantial volume and co mplexity of o ur check co llectio n syste m, we co n tinually seek opportunities to improve service levels and qu ality. Our success in meeting the needs of our diverse mark et is parti ally the result of exte nsive market research and listening and responding to custo me r conce rns. During this past year, Bank re presentatives parti cipat ed in nume rou s industry meetings and se m inars to discu ss curre nt issues in che ck co llection, two of which stoo d out: the slow processing of dish on o red o r returned chec ks and the del ayed availability of fun ds . "Delayed availability" is simply the number of days a bank hold s a check befor e making the fun ds available to the depositor. mic rofilm. Digital image processing could be a cost-e ffective and rel iable means of transmitting, sto ring, and rece iving check information. Studying the feasibility of new technologies helps us estab lish the methods that will lead to further efficiencies in the payments syste m. Return Item Notification Late in 1985, as part of o ur effort to resp ond to these payments system issue s, we implemented the Large Dollar Return Item Notification Ser vice. This new se rvice, which ap plies to checks in the amo unt of $2,500 o r more, provides a means of noti fying the instituti o n whose custo me r first deposits a "bad " check that the chec k has be en disho nored. Beca use th is notification must now take place within 48 hou rs, the new se rvice has sub stantially improved the timeliness and reliabili ty of the return item process. Electronic Payments Our electronic payments serv ices provide the means for transferring funds (o r payments) from inst itution to institution o r accou nt to acco unt via telephone lines and computers. O ne of the se se rvices is Fedwi re, which is the Federal R eserve's fu nds transfer system providing same-day transfer of funds and settleme nt of payments. 111e Autom ated Clearin g Hou se (ACI- also provide s for the !) electronic exc hange and deli very of payments , but ACH payments transac tion s are processed in batch es twice daily and se ttle me nt is made o n a next-day basis. ACH has traditi on ally bee n used fo r high volume payme nts of low doll ar amo u nts, such as payro ll dep osits o r Social Security payments. Fedwire is more often used fo r high dollar tran sfers. Both the Fedwire and ACH se rvices can be accessed in a variety of ways, including per sonal telephone co ntact, delivery of a mag neti c tape, and co mpute r co nnection. In add itio n, we are developing autom ated systems to repl ace ob solete equipment used to process return items and checks rejected by high-speed so rte rs. The new system s will be o pe rational in all o ur check processing centers by Septe mbe r 1987. Finally, to help depository institu tions understand o ur check collection process better, we have updated and simplified both o ur "Guide to Making Dep osits" and " justme nts" manuals. Ad Thes e newly designed pu bl ication s will be ready fo r d istribu tion earl y in Janu ary 1987. Much of the success in o ur curre nt che ck process ing se rvice is the result of o ur long-standing commitment to identifying the future ne eds of deposi tory instituti on s. In this regard , we are a principal parti cipant in a Syste m wide effort to exp lore new tech nologie s for che ck and return item trun cation. On e new techn ology, called digital image cap ture, wo uld enable us to reco rd che ck informa tion o n co mpute r files rather than 19 Fedwire For our pri ced electronic payments se rvices, we have put the emphasis o n improving security and reliability, and have co ntinued to promote the use of electronic access meth ods. Last yea r, we installed a new rele ase of the Funds Transfer software that supports Fedwire, and nearly co mpleted the e ncryption of o ur co mmunications connections with all Fedwire customers. The encryption proj ect, wh ich started in the fourth qu arter of 1984, will be completed in early Janu ary 1987. Our installation mana ge me nt team has made over 1,000 trips to deposito ry instituti on s to deli ver en cryption boards and help with their installation. BARBARA TARRAN Analyst, Installa T, tion Managem ent. One of tbe major projects of Installation Management last rear iniolied insta lling encryp tion fo r Fedl.ine, On -line and compu ter interface con n ections in tbe District and con ducting some limited on-site training at Fediine terminals. Barbara Tarra nt was part oftbis group effon . In addition, sbe partici pated in tbe Bank 5 project team tbat deceloped tbe Fediine Check Retu rns produ ct, resolied custo mer problems, and tested n ew softtoare in supp ort of the Bank's produ cts. Describe wha t you do. BT: I work with customers who use ou r micro computer products, training them in the use of the products and helping them over the phone as well as on location when problems arise. Also I help develop new products; we give input to the design and testing of new products, and develop cus tomer-oriented documenta tion, Installation Management is basically a support group to our customers and, internally, a development group. Can you descr ibe your relat ionship with the customers? BT: Most of the time , we're dealing with people who use funds trans fers - our main product. When they run into a prob lem transfer ring large sums of money they can panic , wh ile we have to remain calm in helping them. To us, working with our products has become automatic, but we have to keep the customers per spective in mind. We also keep in mind that people with a wide range of expertise use our programs: anyone from clerks to \>1)5, depending on the size of the bank. In some small banks, five people make up the operations staff and everybody does everything. 111e training we provide must be appropriate for different levels of personnel. Usually, our customers do not have a technical background. So in all our traini ng programs we assume that the customer has never seen a PC before. Depend ing on the product, customers may come here to be trained or we send the product out with documentation. For the most part , the customers are anxious to learn and enjoy solving their own problems once they feel comfortable with our electronic services. How do you want your customers view you' to BT: r think the name "Federal Reserve Bank" scares a lot of people ini tially - they think it's a very for mal orga nization. We represent 20 the Federal Reserve to a lot of these institutions, and for some of them, we're the only people at the Fed thev ever deal with. So thev come to us for help in areas not'related to our electronic products too. We joke with them , try to be friendly, not stuffy, and hope they see us as "real" people. I've been in Installation Management for four years and the number one rule is that the customer comes first. When a call comes in, its answered at that time. We follow up on equipment problems even when it means going to different departments throughout the Bank. I think our customers feel we are thinking about them and meeting their nee ds. Because service reliability must include predictable o pe rating hours, we have made a co nce rted effort to reduce the number of days when Fed wire closing times are extended. We also cont inue to test and refine our co ntinge ncy plan to ensure that the funds transfer system will op er ate even in the event of a crisis or natur al d isaste r. ACH Improvements Automa ted is the key word in ACH. Our consolidation in San Francisco of ACH process ing for the Seattle, Port land and Salt Lake City branches gives us the oppo rtunity to make so me sig nificant automa tion improveme nts to ou r services. For instance, our ACH staff in San Francisco and each of our consolidated Branches now has on line access to informat ion about customer transactions . This method of retr ieving infor matio n mea ns that we can respond more quickl y to custome r inquiries. In 1986, Los Angeles benefited from the installa tion of a new release of Systemwide ACH software. The biggest improvements to our ACH service are those gained by customers who choose to access ACH electronically In 1986, we introduced th ree e lectronic access products: FedLine ACH Retu rn Items, FedCom, and Bulkdata. In ea rly 1987, deposi tory institutions will also be ab le to receive daily ACH transactions o n FedLine. FedLine ACH Return Items enables a customer to enter retu rn items into a microco mp ute r and transmit the m to us through a telecommu nications connection. This meth od eliminates the phys ical paper return and associ ated item fee, and, since the delivery me thod is electro nic, gives the custome r more process ing time to meet the ACH deadline. FedCom and Bulkdata, bo th elec tro nic access me thods, e nab le a custo me r to send to or receive ACH transactions fro m us using a com municat ions connec tion. Because we offer a range of electron ic access prod ucts, depository institutions of vario us sizes and varying degrees of computer sophistication can choose the access me thod that best suits their needs. transportation needs of a numbe r of depository institutions in one region. We are thus ab le to maintain favorable transportation costs and improve ser vice to our customers , particularly those located in remote areas . FedLine, a microcomputer system introduced in 1982 to allow a wider range of de pos itory institutions direct access to the Bank's funds transfer sys tem, cont inued to attract more customers. At the end of 1986, we had over 1,000 FedLine customers. Fedl.ines tremen dou s acceptance has enab led us to handle 99.8 pe rcent of all funds transfer messages e lectro nically. In early 1986, we established a cash terminal in Phoenix to co nsolidate cash shipments for many institutions, and thereby red uce costs and imp rove service levels for institutions throughout Arizona. Cash Transportation and Securities Services We also provide priced transporta tion services for currency and coin as a means of foster ing efficient and safe access to cash. Because we act as a liaison between contracted carriers and depository institutions in the des ign of armored car routes, we are in a pos ition to coordinate the cash The Bank also offers a variety of securities services to depository institutions, includ ing the safekeeping and transfer of book-entry (elec tro nically recorded) sec ur ities issued by government age ncies. These pr iced safekeeping services co ntinue to grow at a fast pace. In 1986, we made improvements to the secur ities transfer service to handle mo rtgage backed sec ur ities issued by Fannie Mae and Freddie Mac. We also developed several other features to improve our customers' backroom operations. Summary of Operations V olume (tho usands) 1983 1984 1985 1986 Custody Services Cash Services Cur rency paid into circu lation Co in paid into circulation 1,925,085 2,188,831 2,438,168 2,651 ,545 5,078,1 50 5,302,832 4,773,270 4,980,392 Securities Services Savings Bonds original issues Savings Bonds rede mptions proce ssed Other Treasury origi nal issues Food Coupons processed 1,235 285 116 333,512 1,549 279 138 310,450 2,019 293 108 272,231 2,821 231 63 265,921 Payments Services Check Services Comme rcial che cks collected Government checks processed Return items processed 1,997,022 2,140,020 2,431,129 2,690,145 96,136 95,548 93,451 91,458 24,707 35,580 28,800 31,239 Electronic Payments Services Wi re transfers processed Automa ted clearinghouse transaction s processed 8,671 10,361 11,457 12,632 91,838 111,408 129,930 150,272 1,234 2,348 1,818 1,074 108 136 149 130 Discounts and Advances Total disco unts and advances' Number of financial institutions accommodated' *Whole num be r (not in thou sands ) 21 MARY CARRuTH PATRICK, Produ ct Pla n n ing Ana lyst, Product Manage men t. A, a product pla n ning a na lyst, Man' Patrick coordinates tbe decelop ment of n ew electronic access prod ucts that co nnect our customers to tbe Bank's Fedl.in e products, iobicb in clude Fu n d, Tra nsfer; Cash Order ing, Uplrate Statements, UpDate Cbecles, ACH, and Cbeck Returns. Ma ry Patri ck lead , the proj ect team f or FedCom ACIJ, one of the n ewest electronic access methods. What do you co nsid e r the most important part of what you do? MP: Commun ication is the mos t impo rtant part of my job because if I'm not co mmunicating with pe op le, the produc t we come o ut with may not fit anyone's needs or expectation s. So I'm o n the phone a lot - as yo u can see by the photo! ; :; To deter mine what the custo me r wants, we start with data from custo me r surveys and informa tion from Branch Financial Ser vices staff who visit o ur custo me r institution s regu larly. Som etimes we rece ive ideas directly from custom er s. In fact, custome r feed back has resulted in bu ilt-in "help" screens and tutorials in the newer products. O nce we gather this informat io n together, the Bank's Compute r Services Group gives us a ge neral u nde rstand ing of the tec hnical imp lications of potential pro d ucts, and the various operating de partme nts let us know how the p rod uct can be delive red. Installa tion Manage me nt, wh ich provides custome r train ing and on-go ing tec hnical support, and Product Manage me nt work closel y on new product de velop me nt and o n enhancing curre nt products. If o ur commu nicatio n process is succ essful, both inte rnally and with ou r customers, we find that each new product is a little bet te r than the last. What kinds of new products might we see ? MP: There is a big growth in the demand for tools which provide our customers timely, usable info rmation about their activity with the Fed. Products that handle transaction data, such as a return item not ification or a wire trans fer, will still be imp ortant, but the need for ready access to informa tion al services will increase rapid ly. Right now, we are taking a critical look at the FedLineJFedCom products we currently offer to ide ntify any gaps in our prod uct linc and to determine if the re are area s that may need imp rove- 22 me nt. And we are cont inually looking at the technologies avail able to us fo r prov iding these pro du cts; these tech no logies may allow us to provide be tte r, mo re timely information to our custo me rs. Now is a good time for o ur custo mers to think abo ut what types of information they nee d that cou ld be delive red ele c tron ically. And the y should com municate that information to us. Governmental Services The Ban k is an imp ortant provider of fiscal and financial se rvices to the United States govern me nt and to the publi c o n behalf of the government. O ur pr ima ry fiscal services to the U.S. Treasu ry include the issuing, serv ic ing, and re demption of Treasu ry secu rities (Treasury biJJs and no tes) and savings bon ds, an d the d istr ibu tion of cash and co in to depos ito ry institutio ns. Addition al financial se r vices provided to gove rn me nt age n cies inclu de check collection and fund s transfer s, and the pr ocessing of elec tron ic payme nts and food coupons. Securities Services We achieved an important m ilesto ne in 1986 with the impl em en tatio n of the Treasury Direct system in a ll five Twelfth Distri ct offices . Treas u ry Direct, developed jointl y by the U.S. Treasu ry and the Fede ral Rese rve System, allows indi vidu als to hold thei r Treasu ry sec ur ities in their ow n book-ent ry safekeeping acco un ts. A book-entry acco unt is simply an elec troni c record of transactions. The new system, whi ch will ultimately maintain acco unts fo r ove r two million inves tors through out the country, provide s comprehensive statements of acco unt transactions. Principal and interest payments are made d irectly - e lec tronically - to the investors' acco unts at parti cipatin g deposito ry instit ution s. Und er Treasury Direct, engraved ce rtificates will no longer be issued. All future U.S. Treasury marketable bills, notes, and bonds will exist o nly in book-entry form. Advantages to the Treasury Direct book-entry system inclu de accurate and curre nt tra nsac tion infor mation, faster tracing of items, and no lost o r misplaced Treas u ry certificates. Most people will recall television news stories in late October 1986 of lon g lines of customers in cities throughout the country waiting to buy United States savings bon ds just before the guaranteed interest rate was lowered from 7.5 perce nt to 6 pe rce nt. We too had o ur share of custo me rs as we accepted appli ca tion s for nearly 300,000 bonds in less than three days. That total was nearly four years' worth of normal vol ume! Ten weeks later, we co mpleted pro cessing all application s. The new reduced guaranteed rate o n savings bonds has not lowered the po pularity of savings bonds as an investm ent alternative for many peo ple. To accommodate the increasing vo lume of bonds pu rchased thr ough payroll savings plans, the Bank has purchased add itional eq uipme nt and is preparing to centra lize the issuance of all payro ll bonds o n magneti c tape from the San Francisco office begin ni ng in early 1987. Payments Services The Federal Reserve is the largest processor of government chec ks in the United States and handled over 90 million of them in 1986. The San Francisco Reserve Bank co llects, so rts, pays, and cancels all U.S. gove rn me nt chec ks deposited in financial institu tion s in the nine western states . We provide the Treasury Depart ment with microfilm and magnetic tape records of a11 checks - a process known as truncation - and ship the cance11ed item s to a storage facility The Federal Rese rve also se rves as the chief agent for relaying e lectro nic transfer payments, such as Social Security payments, from the govern ment to individuals and business. We issue Treasu ry chec ks assoc iated pri marily with gove rnment securities transactio ns. As part of a Systemwide program to reduce the cost of pro cess ing government payments, we are preparing to use Federal Reserve checks in place of govern me nt checks for payments made o n be half of the U.S. Treasury. Our checks will be known as fiscal agency checks since we will be functi oning as an agent for the U.S. government. This new pro gram will be in place in all offices early in 1987. Cash Services The San Francisco Reserve Bank is resp on sible for distributing and rec ir culating currency and coin to deposi tory instituti on s thr o ughout the nine western state s. As SUCh, we have the second highest cash processing vol ume in the System. To acco mmodate this high volume, we use high-speed equipment to count, SOrt, and ver ify currency deposits. These h igh -speed machines have dram atically increased the efficien cy of o ur o pe ratio ns and raised the quali ty of curre ncy in circulatio n. During 1986, the Bank developed and installed a new Cash Automation System in all Branche s. This minicom puter-based system provides auto mated record-keeping and acco unting of a11 processing activities. Looking ahead, we are working with other Reserve Bank s to de ve lop imp roved "seco nd ge ne ration" cur ren cy processing equi pment, and will co ntinue to enco urage the use of ele ctronic systems. 23 Hawaii Twelfth Federal Reserve District 24 Directors D irecto rs of the Federal Reserve brin g management expertise to the task of ove rseeing Reserve Bank oper atio ns. TIley provide information on key eco no m ic devel opmen ts in vari o us areas of the D istr ict, comple me nt i ng the Ban k 's inte rn al research. In additio n, Bo ard members give adv ice o n the gene ral direction of mon etary policy, especiall y w ith regard to the Bank's di sco unt rates. Head Office Chairman of the Board and Federal Reserve Agent Fred W. Andrew Partner An drew & Willi am son Sales Co. Bakersfie ld , Cal iforn ia Deputy Chairman Robe rt F. Erburu Chairman of the Board and Chief Executive Officer Th e Times Mirro r Company Los Ange les, California Caro lyn S. Cham bers Preside nt and Ch ief Executive Officer Cham bers Com mu nications Cor p. Eugene, Oregon Rayb urn S. De zember Chairman, President and Chi ef Executive O ffice r Cent ral Pacific Corp oration and Chai r man American Nationa l Bank Bakersfield , Cali fornia Andrew Erbu ru Spencer F. Eccles Chai rma n, and Ch ief Executive O fficer First Security Co rpo ration Salt Lake City, Utah Donald J Gehb Presid ent and Chief Executi ve O fficer Al am eda Banco rpo ration and Alam eda Fir st National Bank Alameda, Cali fornia Chambers Dezernber Eccles Jo hn C. Hampto n Presid ent Wil lam i na Lumber Company Port land , Oregon Gehb Togo W. Tanaka Chair man Gramercy Ente rp r ises, In c. Los Angeles, Califo rn ia Hampton George H . Weyerhaeu ser Preside nt and Chief Executi ve Offi cer Weyer haeuser Com pany Taco ma, Washi ngto n Federal Advisory Council Member John D. Mangels Chairman Rainier Nation al Bank and President Rainier Bancorporation Seattle, Washi ngto n ..-/. j Weyerhaeuser Mangels 25 Los Angeles Chairman of the Board Rich ard C. Seaver Cha irman Hyd ril Company Los Angeles, California Seaver Thomas R. Brown, Jr. Chairman of the Board Burr-Brow n Corporatio n Tucso n, Arizona Yvonne Brath waite Burke Se nio r Partner Burke, Robinson , Pearma n Atto rneys at Law Los Ange les , Califo rn ia · Brown Burke Ro bert R. Dockson Chair man CalFed, Inc Los Angeles, California Fred D. Jensen Chairman of the Board, President and Chief Exe cutive Office r National Bank o f Long Beac h Long Beach , Californ ia Do ckson Howard C. McCrady Chairman of the Board Valley National Bank of Arizo na Phoe nix, Arizona Jensen McCrady Tooley 26 William L Tooley Cha irma n Toole y & Company Investment Builders Los Angel es, California Portland Cha irman o f th e Board Paul E. Bragdon Presid ent Reed Co lle ge Po rt land, Oregon Herman C. Brad ley,Jr. President and Chief Executi ve Offi cer Tri- Cou nty Bank ing Company Ju nction Ciry, Oregon Bragd on John A. Elorr iaga Chair man and Chief Executi ve Offi cer Uni ted States Natio nal Bank of Oregon ortland , Oregon P G. John ny Parks For mer No rt hwest Region al Di rector Internation al Lo ngsho remen's & Wareho usem en's Unio n Po rt land, Oregon Bradl e y Elorriaga Wayne E. Phil Jips, Jr. Vice President Phill ips Ra nch, I nc. Baker, Oregon Sandra A. Suran Parm er Peat, Marw ick, Mitchell & Co. Po rt land , Oregon Parks Phillips G. Dale Weight Chair man and Chief Executive Officer Benjam in Frank li n Savings and Loan Association Po rt land, O regon Su ran Weigh t 27 Salt Lake City Cha irman of th e Board Do n M. Wheeler Presid ent Wheeler Mach inery Company Salt Lake City, Utah Whee le r Ge rald R. Chr istensen Presid ent and Chair man First Federal Savings & Loan Associati on Salt Lake City, Utah Lel a M. Ence Executi ve Director Un iversity of Utah Alumni Association Salt Lake City, Utah Ch ris te nsen Ence Rona ld S. Hanson Preside nt Zi on s First Nation al Bank Sa lt Lake City, Utah Fred C. H um phreys Di recto r Moore Financial Group Bo ise, Idaho Han son Rob ert N. Pratt Presid ent Moriah Enterprises, In c. Bountiful, Utah Hu m ph reys Pratt Rose 28 D. N. "N ick" Rose President and Chief Executive Officer Mountain Fuel Supply Company Salt Lake City, Utah Seattle Ch airman of th e Board John W. Ellis President and Chief Executi ve Officer Puget Sou nd Powe r & Light Company Bell evue, Washington H . H. Lari son Ellis President Columbia Paint Co. Spokane, Washington Byro n 1. Mallott Chief Executive Officer Sealaska Corporatio n Juneau , Alaska Jo hn N. Nordstrom Co-Chairman of the Boa rd Nordstro m, Inc. Seattl e, Washington Mallott Carol Nygren Managin g Partner Laventhol & Horwath Seattl e, Washington Nor ds tro m w. W. Philip Chair man of the Board and President Puget So und National Bank Taco ma, Washington William S. Rand all Chairman, Pres ident and Chief Exec utive Officer First Interstate Bank of Wash ingto n, N.A. Sea ttle, Washi ngton Ph ilip Randall 29 Comparative Statement of Account (Tho usands of Dollars) December 31 1986 Assets 1985 s 1,470,000 $ 1,361,000 670,000 106,026 590,000 83,682 21,050 41,840 1,091,697 1,103,353 14,470,075 9,499,237 3,586,854 11,456,076 9,071,851 3,315,969 27,556,166 28,668,913 23,843,896 24,989,089 1,544,691 153,781 31,503 1,607,278 128,015 27,785 . 1,496,892 451,117 1,101,355 443,219 . 154,261 1,333,364 34,747,184 31,664,787 . 23,371,204 24,210,803 . . . . 9,037,467 23,700 81,595 9,142,762 4,979,368 23,550 106,447 5,109,365 . . 1,390,792 300,946 1,479,492 304,181 . 34,205,704 31,103,841 Capital paid in Sur plus . 270,740 270,740 280,473 280,473 Total liabilities and capital accounts . 34,747,184 31,664,787 Gold ce rtificate acco unt Spe cial Drawing Rights certificate account Other Cash . . . Loans to depository institutions . Federal Agen cy o bligations . United States Gove rnm ent sec urities: Bills Notes Bonds . . . Total United States Government Securities Total loans and securities . . . . . . . . . . . . . . . . . . . . . . . . Items in p rocess of collectio n Bank prem ises Operating equ ipment . . . Other assets: Denomi nated in fo reign currenc ies All othe r . . . . Inte rd lstrict Settlement Acco unt Total assets . Liabilities Fed e ral Rese rve notes Dep osits: Total depository institutions-reserve acco unts. . . . . . . . . . Foreign O ther deposits Total deposits . Deferred cre dit item s . . . . . . . ................... . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . Capital Accounts . 30 Earnings and Expenses (Thousands of Dollars) Dece mber 31 1986 1985 Current Earnings s 4,106 " 2,219,340 35,859 69,524 1,740 Discounts and advances United States Government securities Foreign currencies Income from se rvices Allother . . . . . Total current earnings . 2,345,266 2,330,569 Total current expenses Less: reimbursement for certain fiscal agen cy and other expenses Netexpense s . . . 136,643 12,314 124,329 128,391 10,589 117,802 Cost of earnings credit . 7,853 7,711 Currentnet earnings . 2,213,084 2,205,056 . . . 9,193 311,360 320,553 12,967 189,977 202,944 Allother Total deduction s . . 5,692 5,692 1,268 1,268 Net additions ( +) deductions (-) . + 314,861 + 201,676 Assessment s by Board of Governors Board expenditures Federal Reserve currency costs Net earnings before payment s to the United States Treasury Dividends paid Payme nts to the United States Treas ury (interest on Federal Reserve notes) . . . . . - 14,937 - 24,121 2,488,887 16,343 2,482,277 - 12,150 - 21,726 2,372,856 16,237 2,331,636 Transferred to sur plus Surplus,January 1 Su rpl us, December 31 . . . - 9,733 280,473 270,740 24,983 255,490 280,473 2,447 2,205,867 62,188 72,767 1,997 $ Current Expenses Profit and Loss Additions to cur rent net earn ings Profit o n sales of United State Government secur ities (net) Profit on fore ign exchange transactio ns (net) To tal additions Deductions from current net earnings 31 San Francisco Office PO Box 7702, San Francisco, California 94120 Los Angeles Branch PO Box 2077, Terminal Annex, Los Angeles, California 90051 Portland Branch PO Box 3436, Portland, Oregon 97208 Salt Lake City Branch PO Box 30780, Salt Lake City, Utah 84125 Seattle Branch PO Box 3567, Terminal Annex, Seattle, Washington 98124 This report was prepared by the staff of the Federal Reserve Bank of San Francisco: produced by Karen Rusk; graphics designed by William Rosenthal; edited by Gregory J Tong. Assistance provided by Economic Research; Supervi sion, Regulation and Credit; and Corporate Planning, which coordinated the contributions of District Operations, Computer Services, Finance and Product Management, Statistical and Data Services and Personnel. 32 Federal Reserve Bank of San Francisco P.O . Box 7702 San Francisco, California 94UO BULK RATE MAIL U.S. POSTAGE PAID PERMIT NO. 752 SAN FRANCISCO, CALIF.