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https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis From the Boardroom 2 TreJl\ds iJ11 Twel~h District BaJ11kiJ119 5 BaJ11kiJ119 SvtpervisioJ11 Meets JJ11dvtstry Cha1leJ119es 8 t-li9hli9hts of 1997 10 18 Directors 26 TraJ11sformiJ119 Federal Reserve Services https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Federal Reserve Bank of San Francisco is one of 12 regional Reserve Banks which, together with the Board of Governors in Washington, D.C. , comprise the nation's central bank. As the nation's central bank, the Federal Reserve is responsible for making and carrying out our nation's monetary policy. It also is a bank regulatory agency, a provider of wholesale priced banking services, and the fiscal agent for the United States Treasury. The Federal Reserve Bank of San Francisco serves the Twelfth Federal Reserve District, which includes the nine western states Alaska, Arizona, California, Hawaii, Idaho, Nevada, Oregon, Utah, and Washington - Guam, American Samoa, and the Northern Mariana Islands. To serve this expansive region, the San Francisco Reserve Bank has five offices: our headquarters in San Francisco and offices in Los Angeles, Portland, Salt Lake City, and Seattle. Each office provides financial services to the banking institutions in its locale. From left, Robert T Parry, President; Judith M. Runstad, Chairman (l 997); and John F. Moore, First Vice President. Cynthia A Parker, Deputy Chairman ( 1998); and Gary G. Michael, Chairman ( 1998). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis As we stand on the threshold of a new millennium, we in the Federal Reserve find ourselves looking forward to new, exciting ways of doing business. In addition to continuing to provide traditional financial and payments services to our customers here in the West, we are maximizing the potential of new technologies to improve and streamline our services. We continually study trends shaping and transforming the banking industry and look for ways in which we can facilitate the transition taking place from a paper--based payments mechanism to an electronic one. We see fundamental structural changes in financial institutions, changes in the mix of products and services they offer, and new ways of delivering these services. During 1997 the Board of Governors of the Federal Reserve System convened a committee under the direction of Vice Chair Alice Rivlin to take a comprehensive look at how we fit into the chang-ing payments mechanism and what our role should be. The Committee concluded that, while Reserve Banks should continue to provide their traditional services, they should also play an active, collaborative role in transforming the payments system. This Annual Report looks at what trends we have observed during 1997 at financial institutions in our District, how our supervisory processes have responded to these changes, and what initiatives the Federal Reserve System has undertaken with regard to the payments system. During the year we depend heavily on information and leadership from our directors with their special knowledge of areas and industries throughout our District. It is invaluable as we formulate monetary policy and manage the nation's financial system. We thank all Twelfth District directors for their wise counsel and service during 1997. In particular, we want to express our sincere thanks and appreciation to those directors who completed their terms of service during 1997 : on the Head Office Board, our Chairman of the Board, Judith M . Runstad (Partner, Foster, Pepper &- Shefelman, Seattle, WA) and Gerry B. Cameron (Chairman of the Board, U.S. Bancorp, Portland, OR) ; on the Los Angeles Branch Board, Antonia Hernandez (President and General Counsel, Mexican American Legal Defense &Educational Fund, Los Angeles, CA) and David L. Moore (President, Western Growers Associa-tion, Irvine, CA); on the Por~land Branch Board, John D. Eskildsen (President and CEO, Retired, U.S. National Bank of Oregon, Portland, OR); and on the Salt Lake City Branch Board, our Chairman, Gerald R. Sherratt (President, Retired, Southern Utah University, Cedar City UT). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 1Ye$ T. Gary G . Michael Chairman 7 Robert T Parry President BaJ11kiV\9 Looks DiffereJ11t https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis You can blame (or credit) the computer, but you can't deny it - the face of banking is changing. The three articles which follow look at these changes and focus on what they mean for the Federal Reserve, from three different perspectives. Our Research department studies western banking - shifts in market structure, trends in product mix and services, and new ways to deliver services. Banking Supervision reports on new techniques and talents they have developed to respond to the increased sophistication of the financial industry. In the Operations area the various Federal Reserve Banks are working in concert to streamline systems and to maximize technological applications to benefit the nation's payments system. Trends in Twel~h District Banking By Elizabeth Laderman and Jennifer Martinez Changes in Market Structure Recent trends shaping the banking industry over the past several years - changes in market structure, alterations in the mix of products and services banks offer, and innovations in delivery channels - continued in full force in the Twelfth District in 1997. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The banking industry in the Twelfth District remains dynamic, marked by both mergers and new entries. Notable mergers and acquisi-tions in the District last year were First Bank System, lnc. 's (Minnesota) acquisition of U.S. Bancorp (Oregon) and Washington Mutual, lnc.'s (Washington) acquisition of Great Western Bank (California) . At the same time as mergers were tending to consolidate the industry, the formation of new banks worked in the opposite direction . In 1997 there were 35 new banks chartered in the District (including several by existing banking organizations), up from 26 in 1996 and 18 in 1995 . On net, the number of banks and thrifts (savings banks and savings and loans) in the District declined by 41 (about 5 percent) in 1997, following a decline of 229 (about 22 percent) over the preceding five years . The liberalization of branching laws is contributing to the increase in consolidation within bank holding companies. Last June Hawaii became the final state in the District to allow interstate bank branching under the Riegle--Neal Interstate Banking and Branching Efficiency Act. Texas and Montana are now the only states that do not permit interstate branching. Wells Fargo &- Company started the trend by making one of the first interstate consolidations in 1996. BankAmerica Corporation and First Security Corporation followed in 1997, combining most of their separately chartered subsidiaries, some located outside of the District, into one main bank. In addition, Keycorp, headquartered in Ohio, combined its Twelfth District banks with others into its Cleveland lead bank in 1997. In late 1997 First Bank System, Inc., acquired U.S. Bancorp, took the U.S. Bancorp name, and combined former U.S. Bancorp subsidiaries with its Minneapolis lead bank. Soon after acquiring Great Western Bank, Washington Mutual consolidated the Great Western offices into Washington Mutual' s American Savings organization, renaming the new entity Washington Mutual Bank, F .A With the consolidation of affiliated banks and thrifts in different states, well over half of the banking offices in the District are now part of interstate branching networks. In addition, the total number of bank branches in the Twelfth District declined by 967 (about 10 percent) in 1997. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Trends in Products and Services Shifts in market structure are accompanied by ongoing changes in the mix of products and services that District banks offer. The most important activities continue to involve credit-related services, such as derivatives, securities activities, and credit--scored small business loans. But banks are also acting as brokers for consumer financial investments, offering, for example, mutual funds and insurance. These activities are being added to and, to some degree, are displacing traditional bank products such as deposits and relationship--based loans. Derivatives contracts continue to be important risk--hedging tools for banks and bank customers. Total notional values for interest rate contracts at western banks stood at $ 7 trillion as of the third quarter of 1997. Foreign exchange contracts were $1 trillion . Modifications of the rules that apply to bank holding companies engaged in securities underwriting and dealing activities through securities subsidiaries became effective on October 31 , 1997. These modifications should improve operating efficiencies at such subsidiaries and increase options for their customers. BankAmerica Corporation, currently the only Twelfth District bank holding company with a securities subsidiary, expanded its securities brokerage and underwriting activities through the acquisition of Robertson, Stephens &- Company Group, L.L.C. in 1997. In addition, First Security Corporation has gained approval to engage in these activities for the first time through the formation of a new securities subsidiary. Credit scoring, a statistically based means of evaluating the expected repayment performance of a loan, is another relatively new development. First used in consumer lending, credit scoring has the potential to benefit small business customers by substantially decreasing the time, labor, and cost of reviewing small business loan applications, thus boosting small business lending. One of the strongest consumer trends in recent years is the shift of household financial assets out of deposits and into mutual funds. Banks are recognizing this trend and devoting more of their own resources to selling mutual funds as their deposit growth slows. In the Twelfth District, 23 percent of banks generated fee income from selling mutual funds and annuities in the third quarter of 1997. In addition to selling annuities, banks may also act as brokers in selling other types of insurance. Although most of these policies are used for backing up credit repayment, a few California state--chartered banks are beginning to venture into more traditional insurance products. New Delivery Channels New delivery systems for products and services are proliferating. For example, Internet banking continues to gain in popularity as a channel for banking services. By the end of 1997 the number of banks with a Web presence had grown to 26 percent in the District and 17 percent in the U.S. While some banks are moving toward providing business banking services through the Internet, others report significant growth in PC banking outside the Internet. New developments such as electronic bill presentment may increase the use of electronic banking: bills would be presented directly to consumers' personal computers, with an electronic payment option appearing on the screen at the same time . Some banking organizations are beginning to shift away from traditional brick and mortar offices to lower cost "supermarket" branches. These branches may offer the full range of teller transactions or may be more limited--service "banking centers." In the District, Wells Fargo Bank and Bank of America have increased their activity in this area substantially. Conclusion Today, a bank customer may log onto the Internet to inquire about her bank balance. Or, she may walk into a branch of her bank while traveling in a different state and at the same location buy groceries and mutual funds. A small business customer may receive a loan from a bank with far less paperwork than before, while a large business may turn to its commercial bank for securities underwriting services rather than to an investment bank. If 1997 trends are any indication, these scenarios will become more and more the norm in the future. Banks also are developing highly automated telephone centers to help consumers handle many of their banking needs without visiting a branch. Many bankers see the telephone center as a pivotal delivery channel because of the wide range of banking services, as well as technical support, that will be provided. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ■ Banking Supervision Meets Jndustry Challenges By Selma Meyerowitz Fewer - but larger and more complex banks, a broadening range of non--traditional activities, a move toward PC banking, and other new ways to deliver services to bank customers these trends characterize an industry that is evolving and becoming more complex each day. Banking Supervision has responded to the industry's increased complexity and sophistication by developing new techniques and new talent in order to improve our process and our people .. The supervisory process is more dynamic, more integrated, and more risk--focused. Supervision staff have developed new skills and competencies, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis emphasizing teamwork and adaptability. And training and technology - always important are now being stressed even more. The changes in the overall supervisory process are pervasive. As a start, significantly more effort is now placed on ensuring that the process is risk--focused . This involves tailoring the approach to the unique characteristics of the individual organization. It also entails placing additional emphasis on evaluating the organization's risk management processes, and on assessing its condition on a real--time basis. The entire process begins with developing an understanding of the organization, including its strategy and risk profile. A supervision plan and examination strategy which focus on the most important areas within the organization are then defined and updated periodically. Examinations must be carefully coordinated to reduce unneces-sary burden and to recognize that risks or issues in a particular area may have implications for other areas of the organization. Furthermore, the focus is on assessing the processes used to identify, monitor, and control risk, as opposed to detailed transaction testing. Although effective risk manage-ment always has been central to the safety and soundness of banking, it is even more important now, given new technologies and products, and the size and speed of financial transactions . To facilitate the risk--focused process, each banking organization is assigned to a staff member who oversees the development, implementation, and coordination of that institution's supervisory program. These staff members establish lines of communication with their assigned institutions, and coordinate closely with other regulators both in the U.S . and in other countries. They also coordinate with their counterparts throughout the Federal Reserve System to identify and share emerging issues and sound practices. All facets of the supervisory process, including applications processing, compliance, international and domestic examinations, and ongoing monitoring, are changing. For example, the applications process was streamlined for bank holding companies in 1997 when the Board of Governors made substantial changes to the implementing regulation . Furthermore, additional emphasis is placed on incorporating macro information into the supervisory strategy. Staff members follow international developments, as well as developments in the dynamic areas of trading, securities, and risk management. They also monitor applications of digital technology in banking to assess developments in securitization, risk modeling, and credit quality. These analysts keep the Bank properly positioned for evaluating evolving financial markets and the banking https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis industry's changing use of technology and delivery channels. The changes benefit the supervised organizations, as well as the Federal Reserve . The supervisory burden is reduced for well--run organi-zations because on--site examinations are shorter and more focused. The process adds greater value overall since it is more forward--looking. From the Federal Reserve Bank's standpoint, it makes better use of resources and facilitates earlier identification and resolution of issues. Clearly, superior performance depends on the talent of an organization, the quality of its people. Banking Supervision staff have met the challenges of the changing environment by developing new technical skills in a variety of areas, such as risk management, derivatives, and information technology. In addition, the compe-tency model for staff performance is focused on such skills as the ability to adapt, to coordinate, and to understand the big picture and how the individual pieces fit together. Application of these competencies ensures that staff are able to provide effective supervision as the industry continues to change. Both training and technology are being aligned to support this changing process. Training programs are being revamped, and training in risk assessment, management information systems, and internal controls has been expanded. More emphasis is placed on the use of technology with initiatives that include automating parts of the examination process, improving management information systems, and streamlining information access and storage. In summary, we are striving to enhance our flexibility and adaptability in this rapidly changing environment. The right supervisory techniques, talent, training, and technology are critical to effective supervision. Focusing on these areas ensures that the Bank continues to meet the challenges of today's dynamic environment and is prepared for tomorrow's as well. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 6122 2261 3391 1056 8832 4 9 6 2 4 Transforming Federal Reserve Services By Barbara Bennett The revolutionary changes in computer and telecommunications technology make it possible for financial services firms to operate on a nationwide basis and offer a broad array of new and traditional services. Open networks like the Internet are becoming a widely accepted way for U.S. households and businesses to obtain these and other services. In this high--tech and highly competitive environment, financial services firms increasingly are finding that their customers demand instantaneous and interactive access to customer--specific information. Although the U.S. financial services industry still is heavily reliant on "brick and mortar" and paper--based payments, things are changing, par-ticularly in the Twelfth District. A number of western institutions are leaders in the establishment of a nationwide presence and in the development of online delivery systems that offer customers up--to--the--minute information on the status of their investments and transactions. As in the rest of the country, western depository institutions are also reducing investment in physical processing and delivery infrastructures by consolidating operations wherever possible and centralizing functions such as funds management. As a major provider of financial and pay-ments services to depository institutions, the Fed is playing a pivotal role in this transition from a paper--based infrastructure to an electronic one. The Rivlin Committee's fundamental review of the Federal Reserve' s role in the payments mechanism confirmed that, while Reserve Banks must continue to provide traditional payments services for some time to come, they also must work in partnership with the industry to transform the payments system. To accomplish this transformation, Reserve Banks are engaged in three broad initiatives: developing a "common face" to Reserve Bank services nationwide; streamlining back office systems to keep costs down and deliver new products and services quickly and flexibly; and https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis applying new technologies to add value and encourage more efficient payments practices. Developing a Common Face The emergence of depository institutions with nationwide branch networks makes it essential that Reserve Banks offer standardized services and provide monitoring tools needed to facilitate management of these entities' operations on a nationwide basis. Especially significant is the development of a new structure for reserve accounts to enable depository institu-tions to maintain a single master account for all their Reserve Bank transactions. This new master/ sub--account structure became available in January 1998. It facilitates centralized funds management and offers depository institutions tools to monitor transactions by business line, region of the country, and/or type of transaction. To simplify depository institutions' service relationships with the Federal Reserve, moreover, in 1997 the Reserve Banks developed national operating circulars for every service line, including checks, cash, ACH, securities services, funds transfer, accounting, and credit. A common set of legal agreements and procedures make it easier for institutions that operate in more than one District to standardize their use of Federal Reserve ser-vices. In addition, Reserve Banks have imple-mented a national key account program that assigns to a designated national account manager responsibility for addressing many of these institu-tions' service needs and resolving issues that may arise in coordinating services provided across Districts. In this District, for example, Los Angeles Branch Vice President Sean Rodriguez has account management responsibilities for the region's two largest customers: Bank of America and Wells Fargo Bank. For these two prominent interstate organizations, he manages longer--term service initiatives and other matters on a Systemwide basis, ensuring that the Federal Reserve's services are consistent with the strategic priorities and needs of these organizations. Another important aspect of the effort to develop a common face for the Federal Reserve is the introduction of national products in service lines that traditionally have accommodated wide variations in product offerings across Districts, including checks, cash, and net settlement. In checks, Reserve Banks introduced an attractively-priced nationwide City Sort deposit in 1997 that generally improves funds availability on City items by allowing customers to deposit at their local Fed office items drawn on City endpoints anywhere in the country. In cash services, in early 1998 uniform service levels and access standards are being implemented that are modeled after the approach implemented in the Twelfth District. Our District is also pioneering a service that allows depository institutions to coordinate currency ordering for their ATM networks on a nationwide basis. Also, in late 1998 an enhanced national net settlement service will be available to depository institutions participating in private clearing arrangements . Designed to provide a file--based , automated mechanism for handling settlements, including those that involve participants located in multiple Federal Reserve Districts, this new service will improve finality and offer better risk management tools through source authentication, automated linkages to the Federal Reserve' s Account Balance Monitoring System (ABMS) , and timely information on the status of settlement transactions. Streamlining the Back Office Many of these new services would not be possible without the strides Reserve Banks have made in streamlining back office operations, including consolidating computer processing and centralizing major applications software for such systems as accounting, funds transfer, and ACH . These efforts are crucial in the Federal Reserve' s drive to provide the most efficient services possible and to develop and deliver new services in the https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis shortened time frames that the current and future financial services environments require. The recent centralization of ACH processing, for example, reduced by nearly half the cost of inter--District transactions and made possible the introduction of flow processing and flexible delivery times, all of which make ACH more attractive as an alternative to check payments for certain types of transactions . Likewise, central-ization of the funds transfer software reduced costs and permitted price reductions totaling 20 percent since 1996. Current efforts to establish a common check processing platform for Reserve Banks and to implement an "enterprise--wide" automated adjustments system are expected to yield comparable benefits in terms of operating efficiencies and enhanced check services. Applying New Technologies, Transforming the Payments System The application of information technology to existing processes is central to Reserve Banks' ability to streamline back office operations . But far greater benefits from these technologies lie in their ability to deliver vast amounts of information more quickly and in more useful and flexible forms than possible in a paper--based environment. When used to create new information services and delivery channels, these technologies have the potential to redefine the very nature of the payments mechanism . The Reserve Banks began to tap this potential some years ago with the introduction of electronic check presentment services, which enable recipients to begin "check" processing well before they actually receive the physical items, if they still receive the items at all. With the introduction more recently of digital image capture and retrieval services and the forthcoming provision of national archive services, there is even greater opportunity to speed the conversion of the check collection system from a paper--based process to an electronic one. Depository institutions and their customers are beginning to see digital images as superior to the physical items in many respects . With the Reserve Banks' ability to deliver CD--ROMs containing digital images of checks drawn on a specific account number, depository institutions are able to meet corporate cash managers' demand for faster, more convenient, and more useful access to information on their paid items. In addition, depository institutions are using Reserve Banks' digital image services to reengineer their back offices, replacing microfilm technology and implementing retrieval systems that improve customer service and research capabilities by providing online access to copies of items. Reserve Banks are using digital technology to improve cash services, as well. The Twelfth District developed an application that enables depository institutions to train their staffs in the authentication of the new series $50 and $100 notes. This interactive software is currently available on CD--ROM and will be available on the Federal Reserve's World Wide Web site. Transactional applications are also being developed to tap the online delivery capabilities of digital technology. In early 1998 the Twelfth District is piloting two important web applications: cash services and check image retrieval. The cash services module will enable depository institutions to access Reserve Banks' cash ordering and deposit notification systems using web technology. This will greatly enhance depository institutions' ability to manage ATM supply operations on a nationwide basis. The image retrieval application will enable depository institutions to interactively query the Federal Reserve' s archive for checks that meet criteria the institution specifies, including account number, processing date, dollar amount range, etc. The system will then search the archive and return a list of checks that meet those criteria. By clicking on the specific check it would like to view, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis the depository institution will be able to examine the front and back of the image and zoom in on endorsements and other fields of interest. The images can be sent to a printer or saved on the institution's desktop . This path--breaking appli-cation clearly has the potential to change the way depository institutions offer checking account services by providing instantaneous and interactive delivery of customer--specific information. The evolution toward an electronic payments mechanism that is more convenient, efficient, secure, and reliable than the current paper--based system is a challenge that requires the combined energies and cooperation of many parties, including financial services firms , software developers, businesses, and the Federal Reserve . The initiatives in which the Sa_n Francisco Fed and all the Reserve Banks - are engaged represent a significant step forward in this transformation. Robert T Parry Douglas R. Shaw President and Chief Executive Officer Vice President and Counsel John F. Moore W . Gordon Smith First Vice President and Chief Operating Officer Jack H. Beebe Senior Vice President and Director of Research Elizabeth K. Christensen Senior Vice President Sara K. Garrison Deborah S. Smyth Vice President Susan A Sutherland Vice President Sallie H . Weissinger Senior Vice President Vice President and Director of Public Information Michael J . Murray Patricia A Welch Senior Vice President Terry S. Schwakopf Senior Vice President D. Kerry Webb Senior Vice President John Parrish General Auditor Barbara J . Contini Vice President Frederick T Furlong Vice President William K. Ginter Vice President Reuven Glick Vice President John P. Judd Vice President and Associate Director of Research Donald R. Lieb Vice President Elizabeth R. Masten Vice President and Secretary of the Board Ronald E. Mitchell, Jr. Vice President Robert D. Mulford Vice President, General Counsel and Ethics Officer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Vice President Susan G. Porterfield Vice President Vice President James M . Barnes Director Kenneth R. Binning Director Harold H . Blum Director Eliot E. Giuili Director John S. Hsiao Director Ann Marie Kohlligian Director John Y C. Lin Director Michael J . Stan Director Bonnie R. Allen Assistant Vice President Sylvia A Cunningham Assistant Vice President Gail A Garvey Assistant Vice President Elaine Geller Assistant Vice President Louis "Skip" George Assistant Vice President . Bank Offic,e~s (c11s of De-cer11/\be~ 31 \ 1 -'l 997) Todd Glissman Angela D'Alessandro Assistant Vice President Financial Planning and Control Officer Beverley~Ann Hawkins Lee Dwyer Assistant Vice President Wholesale Payments and Fiscal Services Officer Peter K. C . Hsieh Ellen Hamilton Assistant Vice President Audit Officer Lelia M. Jones Michael E. Johnson Assistant Vice President Applications Officer Kenneth M . Kinoshita Joseph P. Mattey Associate General Counsel Research Officer Craig B. Knudsen Joy Hoffmann Molloy Assistant Vice President Community Affairs Officer Mark Levonian Brian Motley Assistant Vice President Research Officer Ellsworth E. Lund, Jr. Gary P. Palmer Assistant Vice President Financial Analysis Officer Elizabeth M . O 'Shea Darren S. Post Assistant Vice President ACH, Business Development, and Customer Support Officer Philip M . Ryan Assistant Vice President Glenn D. Rudebusch Research Officer W . Starr Seegmiller Assistant Vice President Dan Shaw EUC, LAN/Administration and Operations Officer Wendy Selbert Assistant Vice President James J . Tenge Assistant Vice President Thomas R. Thaanum Assistant Vice President David W . Walker Assistant Vice President Elizabeth L. Wood Assistant Vice President Barbara J . Beckman District Procurement Services Officer Armen Beylerian Information Technology Officer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Jim Callahan Audit Officer Mark Spiegel Research Officer Gordon Tannura Support Function Officer Bharat Trehan Research Officer Los Angeles Branch Northern Region Mark Mullinix Gordon R. G. Werkema Senior Vice President Executive Vice President Sean J. Rodriguez Vice President and Assistant Branch Manager Robert Wiley Vice President Darcy J. Coulter Director Marla Borowski Assistant Vice President Robert C. Johnson Assistant Vice President Jimmy F. Kamada Portland Branch Raymond H . Laurence Senior Vice President Mary E. Lee Assistant Vice President Robert D. Long Assistant Vice President Robin A. Rockwood Assistant Vice President Assistant Vice President Roger W . Replogle Assistant Vice President Salt Lake City Branch Dale L. Vaughn Andrea P. Wolcott Assistant Vice President Linda Westerschulte Assistant Vice President Mark E. Koegel Payments Services Officer https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Vice President Jed W. Bodily Assistant Vice President Gerald R. Dailing Assistant Vice President Richard B. Hornsby Assistant Vice President Thomas P. McGrath Assistant Vice President Seattle Branch Gale P. Ansell Assistant Vice President Kenneth L. Peterson Assistant Vice President Mark Gould Check Product Officer Lynn Jorgensen Human Resources/ Check Officer From left, Jack H . Beebe, Senior Vice President and Director of Research; Robert T Parry, President; Terry S. Schwakopf, Senior Vice President; John F. Moore, First Vice President; Gordon R. G . Werkema, Executive Vice President; and Elizabeth K. Christensen, Senior Vice President. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis t-li9hli9hts of 1997 By Karen Flamme As the payments system of the country evolves technologically, regional Reserve Banks respond to the needs of their constituencies and look for innovative ways to achieve efficiencies, through both technology and an integration of Federal Reserve services across Districts. The District Business Development office in Portland served as the national logistics coordinator for the important Rivlin study conducted during 1997, planning five national forums and eight regional meetings held in our District. During these meetings representatives of financial institutions were invited to discuss five hypothetical scenarios for the future role of the Federal Reserve in retail payments services. These alternatives ranged from exiting check collection and ACH services altogether to adopting a leadership role in spurring innovation and market acceptance of new payments services and products. ■ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis With information from these sessions, as well as from internal studies, the Rivlin Committee reached two major conclusions: first, it is important for the Federal Reserve to remain a provider of check collection and ACH services with the goal of enhancing the efficiency, effectiveness, and convenience of both systems, while ensuring access for all depository institu-tions; and second, the Federal Reserve should play a more active role, working closely with providers and users of the payments system, both to enhance the efficiency of check and ACH services and to help evolve strategies for moving to the next generation of payment instruments. To further encourage the transition from paper to electronic payments, the District conducted a highly successful ACH Direct Payment campaign targeted initially at utility customers in portions of the San Francisco Bay Area, encouraging them to pay their utility bills through automatic deduction . The program was a partnership between our Bank, Western Payments Alliance, the utilities, and their financial institutions. More than l 00,000 sign--ups were received, exceeding expectations based on similar projects in other Districts. Additional campaigns are planned for the Pacific Northwest and South-em California areas in 1998. A variety of check imaging services were made available Districtwide during 1997. And our customers can now go to a page on the Bank's web site at http://www.frbsf.org and browse through our check product offerings. To remind us of our roots and the ever--present demand for currency, in spring 1997 the Bank opened a stellar exhibition of American Currency in the lobby of the San Francisco headquarters. Featuring a premiere collection of historical currency, the exhibition is a resource for educators, numismatists, and the public through our tour program, as well as on a walk--in basis. A web version of the exhibition will be on--line by mid--1998 . Economic Research Establishing and implementing the nation's monetary policy is one of the primary functions of Reserve Banks. Ongoing research is essential to providing a strong foundation for supporting this Bank's monetary policy recommendations . Research conducted during 1997 focused on various policy--related issues. Among them were studies examining the merits of alternative policy rules for targeting inflation; the effects on economic performance of policies to reduce inflation; and the key features of the different policy regimes in place under Federal Reserve Chairmen Burns, Volcker, and Greenspan . Several articles were written on labor markets. Staff economists examined job insecurity in the U.S. and the effects of welfare reform, https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis health insurance, and family structure on the labor force. The banking unit studied financial modernization, including implications for efficiency, risk, and profitability in banking. Other research dealt with consolidation in banking and examining evidence on contagion effects from bank mergers, as well as the effect of bank mergers on the pricing of retail deposits and interstate banking in the District. The Bank continued to serve as a focal point for analysis of Pacific Basin issues through the activities of our Pacific Basin Center. Research staff examined the causes and lessons of the 1997 East Asian financial crisis. International studies analyzed monetary policy issues in selected countries, including Korea, New Zealand, and Singapore. Research staff also looked at the implications of trade agreements and of budget and trade imbalances in the region . The department co--hosted an academic conference with the Center for Economic Policy Research at Stanford University. The conference featured papers by eminent academic and System economists on "Recent Developments in Macroeconomics." The department also hosted a conference with the American Committee on Asian Economic Studies on "Financial Liberaliza-tion and Development in the Pacific Basin." Banking Supervision and Regulation Risk--focused initiatives were the hallmark of activities in the Supervision and Regulation area during 1997. Risk--based functional reviews were implemented at the District's largest institutions, procedures were developed and tested for conducting risk--focused compliance examinations, and mergers and acquisitions regulations were revised to speed the applications process for organizations that are well--managed and well--capitalized. Federal Reserve Banks have primary responsibility for supervising all bank holding companies, their nonbank and foreign subsidiaries; state member banks and their foreign branches and subsidiaries; Edge Act and agreement corporations through which U.S. banking organizations conduct operations abroad; and U.S . activities of foreign banking organizations. At year. . end there were 60 state member banks in the District. There were also 203 holding companies with assets of 51 l billion, l 03 agencies and branches of foreign banks, l 7 Edge and Agreement corporation offices, and 40 representative offices. Overall applications activity declined by 39, approximately 13 percent, compared to the same period in 1996. This was partially offset by an increase in bank acquisitions, continuing the industry's trend of expansion and consolidation. Applications to form bank holding companies increased by 9 (from 26 to 35). https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Community Affairs expanded its role of providing outreach and education on community reinvestment topics. Staff hosted a series of training sessions for Community Reinvestment Act (CRA) officers throughout the District to introduce them to local community reinvestment opportunities and provide education on technical CRA aspects . A conference announced recommendations of the San Francisco Mortgage Credit Partnership task forces , which had been convened to identify barriers that exist for low . . income borrowers in the home purchase process. In addition, staff provided a week of intensive hands . . on credit training for 60 community development professionals and community lenders in partnership with the University of Washington at the National Community Development Lending School. In Hawaii, meetings were held to assist in the creation of a micro . . Ioan pool for low. . income entrepreneurs. To complement that effort, meetings were also held with representatives of local community. . based organizations, a local bank, and the Department of Rehabilitation to discuss self. . employment opportunities for people with disabilities . Volume (in thousands) 1995 1996 1997 Custody Services Cash Services Currency notes paid into circulation Food stamp coupons processed Securities Services Other Treasury original issues Book-entry securities processed 4,298,035 753,589 4,317,704 748,535 4,626,649 654,068 201 894 125 829 105 751 2,082,513 67, 148 30,569 2, 188,856 61,741 32,767 2,313,792 54,466 35,251 20, 146 22,113 24,058 525,549 404,974 428,564 482 461 478 66 83 86 Payments Services Check Services Commercial checks collected Government checks processed Return items processed Electronic Payments Services Wire transfers processed Automated clearinghouse transactions processed Discounts and Advances Total discounts and advances* Number of financial institutions accommodated* * Whole number (not in thousands) https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Top left: Gordon R. G. Werkema, Executive Vice President, Northern Region (facing camera); Raymond H . Laurence, Senior Vice President--in--Charge, Portland; Lower left: Mark Mullinix, Senior Vice President--in--Charge, Los Angeles; and Andrea P. Wolcott, Vice President--in--Charge, Salt Lake City. (in millions) December 31 , 1997 1996 Assets Gold certificates Special drawing rights certificates Coin Items in process of collection Loans to depository institutions U.S. government and Federal agency securities, net Investments denominated in foreign currencies Accrued interest receivable Prepaid statutory surplus transfer to the U.S. Treasury lnterdistrict settlement account Bank premises and equipment, net Other assets Total assets $ 1,420 $ 1,067 1,241 69 2,210 335 957 74 1,873 15 54,604 3 ,270 517 33,393 2,631 301 0 0 218 56 23,441 220 23 $ 63,940 $ 63,995 $ 54,617 $ 56,905 3 ,676 32 1,893 55 1,658 70 14 3 ,612 22 1,575 49 0 70 17 $ 62,015 $ 62,250 $ 980 $ 880 945 1,925 865 1,745 $ 63 ,940 $ 63 ,995 NIA Liabilities and Capital Liabilities Federal Reserve notes outstanding, net Deposits Depository institutions Other deposits Deferred credit items Statutory surplus transfer due U.S. Treasury lnterdistrict settlement account Accrued benefit cost Other liabilities Total liabilities Capital Capital paid--in Surplus Total capital Total liabilities and capital https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (in millions) December 3 1, 1996 1997 Interest Income Interest on U. S. government securities Interest on foreign currencies Interest on loans to depository institutions Total interest income $2,877 70 1 $ 1,967 61 1 2,948 2,029 85 19 (497) 2 6 82 18 (228) 3 6 (385) (119) 147 16 19 5 82 86 143 16 19 5 58 70 355 308 $2,208 $1 ,599 56 100 $ 41 338 0 852 2,052 368 $2,208 $ 1,599 Other Operating Income Income from services Reimbursable services to government agencies Foreign currency gains (losses), net Government securities gains, net Other income Total other operating income (loss) Operating Expenses Salaries and other benefits Occupancy expense Equipment expense Cost of unreimbursed Treasury services Assessments by Board of Governors Other expenses Total operating expenses Net Income Prior to Distribution Distribution of Net Income Dividends paid to member banks Transferred to surplus Payments to U.S. Treasury as interest on Federal Reserve notes Payments to U.S. Treasury as required by statute Total Distribution https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis For the Years Ended: December 31 , 1996, and December 31 , 1997 (in millions) Capital Paid--in Surplus Total Capital $ 542 $ 542 $ 1,084 Net income transferred to (from) surplus 338 338 Statuatory surplus transfer to the U.S. Treasury (15) (15) Balance at January 1, 1996 (10,833 , l 00 million shares) Net change in capital stock issued (6,760,353 million shares) Balance at December 31 , 1996 338 338 $ 865 $ 1,745 Net income transferred to (from) surplus 100 100 Statutory surplus transfer to the U. S. Treasury (20) (20) $ 880 (17,593,453 million shares) Net change in capital stock issued (redeemed) (2 ,000,851 million shares) Balance at December 31, 1997 100 100 $ 980 $ 945 (19,594,304 million shares) These statements are prepared by Bank management. Copies of full and final financial statements, complete with footnotes , are available by contacting the Bank's Public Information Department at 415,974,2163 or on our web site at http ://www.frbsf.org. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis $ 1,925 'i=eder:gil_Reser•ve HaY\k of Sci .Yl . .. _-_ Fy•cmdsco ✓1998 Bocu•d of DIJ',edcn's Chairman of the Board and Federal Reserve Agent Gary G . Michael Chairman and CEO Albertson's, Inc. Boise, Idaho Deputy Chairman Cynthia A. Parker Executive Director Anchorage Neighborhood Housing Services, Inc. Anchorage, Alaska Warren K. K. Luke Vice Chairman, President and CEO Hawaii National Bank Honolulu, Hawaii John V. Rindlaub Group Executive Vice President Bank of America N .W . Group Seattle, Washington Robert S. Attiyeh Senior Vice President and Chief Financial Officer Amgen, Inc. Thousand Oaks, California Nelson C . Rising President and CEO Catellus Development Corporation San Francisco, California E. Lynn Caswell Chairman and CEO Pacific Community Banking Group Laguna Hills, California Stanley T Skinner Chairman and CEO (Retired) Pacific Gas and Electric Co. San Francisco, California Krestine Corbin President and CEO Sierra Machinery, Inc. Sparks, Nevada Federal Advisory Council Member https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis David A. Coulter Chairman and CEO BankAmerica Corporation San Francisco, California Chairman of the Board Anne Ledford Evans Chairman Evans Hotels San Diego, California Linda Griego Managing General Partner Engine Co. No . 28 Los Angeles, California Stephen G . Carpenter Director California United Bank Encino, California Lonnie Kane President Karen Kane, Inc. Los Angeles, California Lori R. Gay President Los Angeles Neighborhood Housing Services, Inc. Los Angeles, California Liam E. McGee Group Executive Vice President Bank of America Los Angeles, California John H . Gleason Senior Vice President Del Webb Corporation Phoenix, Arizona https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman of the Board Carol A. Whipple Proprietor Rocking C Ranch Elkton, Oregon GaryT Duim Vice Chairman U.S. Bancorp Portland, Oregon Phyllis A. Bell President Oregon Coast Aquarium Newport, Oregon Nancy Wilgenbusch President Marylhurst College Marylhurst, Oregon Patrick Borunda Executive Director ONABEN - A Native American Business Network Portland, Oregon Thomas Cook Young Chairman, President and CEO Northwest National Bank Vancouver, Washington Martin Brantley President and General Manager KPTV-12 , Oregon Television, Inc. Portland, Oregon https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman of the Board Richard E. Davis President and CEO Salt Lake Convention and Visitors Bureau Salt Lake City, Utah Nancy Mortensen Vice President--Marketing Zions Cooperative Mercantile Institution Salt Lake City, Utah R. D. Cash Chairman, President and CEO Questar Corporation Salt Lake City, Utah Roy C. Nelson President Bank of Utah Ogden, Utah Maria Garciaz Executive Director Salt Lake Neighborhood Housing Services, Inc. Salt Lake City, Utah Barbara L. Wilson Regional Vice President U.S. WEST Boise, Idaho J. Pat McMurray President First Security Bank, N .A. Boise, Idaho https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ■ Chairman of the Board Richard R. Sonstelie Chairman of the Board Puget Sound Energy, Inc. Bellevue, Washington Tomio Moriguchi Chairman and CEO Uwajimaya, Inc. Seattle, Washington Boyd E. Givan Senior Vice President and CFO The Boeing Company Seattle, Washington Constance Leigh Proctor Partner Alston, Courtnage, Proctor & Bassetti, LLP Seattle, Washington James C. Hawkanson Managing Director and CEO The Commerce Bank of Washington, N .A Seattle, Washington Helen M. Rockey President and CEO Brooks Sports, Inc. Bothell, Washington Betsy Lawer Vice Chair and COO First National Bank of Anchorage Anchorage, Alaska https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman Bailey S. "Biff' Barnard Senior Vice President Allied Capital Corporation San Francisco, California Peter H . Parra Member Board of Supervisors Fifth District, County of Kern Bakersfield, California Vice Chairman Karla S. Chambers Vice President Stahlbush Island Farms, Inc. Corvallis, Oregon Walter F. Payne, Jr. President and CEO Blue Diamond Growers Sacramento, California Members Barbara Bry Co--Founder and Director ATCOM/INFO San Diego, California Paula R. Collins Chief Executive Officer WDG Ventures, Inc. San Francisco, California Paul Ecke 111 Chairman and CEO Paul Ecke Ranch Encinitas, California Ed P. Mayne President Utah AFL--CIO Salt Lake City, Utah Lawrence S. Okinaga Partner Carlsmith Ball Wichman Case & lchiki Honolulu, Hawaii https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Peter H . van Op pen Chairman and CEO Advanced Digital Information Corporation Redmond, Washington Bob L. Vice President BLV, Agribusiness Consultants Fallbrook, California Richard S. Walden President Farmers Investment Company Sahuarita, Arizona Don M . "Duff' Willey President Willey Motors, Inc. Bountiful, Utah Denice A. Young, C. P.A. President Young Real Estate Services Torrance, California =cwelfrh .-Fed er'Cl I -Reser•ve :Dis+r•i c+ San Francisco Office P.O. Box 7702 San Francisco, California 94120 Salt Lake City Branch P.O. Box 30780 Salt Lake City, Utah 84130 Los Angeles Branch P.O. Box 2077, Terminal Annex Los Angeles, California 90051 Seattle Branch P. 0 . Box 3 567, Terminal Annex Seattle, Washington 98124 Portland Branch P.O. Box 3436, Portland, Oregon 97208 Twelfth District web site: http://www.frbsf.org I San Francisco HAWAII \. This Report was produced by Karen Flamme. It was written by Elizabeth Laderman, Jennifer Martinez, Selma Meyerowitz, Barbara Bennett, and Karen Flamme. Design and illustrations were created by William Rosenthal. Color photography by Paul Schulz. ■ https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis ~ printed on recycled paper