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Federal Reserve Bank of St. Louis

From the Boardroom


TreJl\ds iJ11 Twel~h District BaJ11kiJ119


BaJ11kiJ119 SvtpervisioJ11 Meets JJ11dvtstry Cha1leJ119es


t-li9hli9hts of 1997




TraJ11sformiJ119 Federal Reserve Services
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).
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).
Federal Reserve Bank of St. Louis

1Ye$ T.
Gary G . Michael


Robert T Parry

BaJ11kiV\9 Looks DiffereJ11t
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

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.
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.
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
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
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.

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.
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,
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
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
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.
Federal Reserve Bank of St. Louis



Federal Reserve
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
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
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,
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
Federal Reserve Bank of St. Louis

Vice President

Susan G. Porterfield
Vice President

Vice President

James M . Barnes

Kenneth R. Binning

Harold H . Blum

Eliot E. Giuili

John S. Hsiao

Ann Marie Kohlligian

John Y C. Lin

Michael J . Stan

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



-'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
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

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
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.
Federal Reserve Bank of St. Louis


of 1997

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.

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 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,
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).
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)




Custody Services
Cash Services
Currency notes paid into circulation
Food stamp coupons processed
Securities Services
Other Treasury original issues
Book-entry securities processed







67, 148

2, 188,856


20, 146












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

* Whole number (not in thousands)
Federal Reserve Bank of St. Louis
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 ,


Gold certificates
Special drawing rights certificates
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



3 ,270




$ 63,940

$ 63,995

$ 54,617

$ 56,905

3 ,676

3 ,612

$ 62,015

$ 62,250

$ 980

$ 880



$ 63 ,940

$ 63 ,995


Liabilities and Capital
Federal Reserve notes outstanding, net
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 paid--in
Total capital

Total liabilities and capital
Federal Reserve Bank of St. Louis

(in millions)
December 3 1,



Interest Income
Interest on U. S. government securities
Interest on foreign currencies
Interest on loans to depository institutions

Total interest income


$ 1,967












$1 ,599


$ 41






$ 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
Federal Reserve Bank of St. Louis

For the Years Ended:
December 31 , 1996, and December 31 , 1997
(in millions)
Capital Paid--in


Total Capital

$ 542

$ 542

$ 1,084

Net income transferred to (from) surplus



Statuatory surplus transfer to the
U.S. Treasury



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



$ 865

$ 1,745

Net income transferred to (from) surplus



Statutory surplus transfer to the
U. S. Treasury



$ 880

(17,593,453 million shares)

Net change in capital stock issued (redeemed)
(2 ,000,851 million shares)

Balance at December 31, 1997



$ 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 ://
Federal Reserve Bank of St. Louis

$ 1,925

'i=eder:gil_Reser•ve HaY\k of Sci .Yl



✓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
Federal Reserve Bank of St. Louis

David A. Coulter
Chairman and CEO
BankAmerica Corporation
San Francisco, California

Chairman of the Board
Anne Ledford Evans
Evans Hotels
San Diego, California

Linda Griego
Managing General Partner
Engine Co. No . 28
Los Angeles, California

Stephen G . Carpenter
California United Bank
Encino, California

Lonnie Kane
Karen Kane, Inc.
Los Angeles, California

Lori R. Gay
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
Federal Reserve Bank of St. Louis

Chairman of the Board
Carol A. Whipple
Rocking C Ranch
Elkton, Oregon

GaryT Duim
Vice Chairman
U.S. Bancorp
Portland, Oregon

Phyllis A. Bell
Oregon Coast Aquarium
Newport, Oregon

Nancy Wilgenbusch
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
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
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
Boise, Idaho

J. Pat McMurray
First Security Bank, N .A.
Boise, Idaho
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
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
Federal Reserve Bank of St. Louis

Bailey S. "Biff' Barnard
Senior Vice President
Allied Capital Corporation
San Francisco, California

Peter H . Parra
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


Barbara Bry
Co--Founder and Director
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
Salt Lake City, Utah
Lawrence S. Okinaga
Carlsmith Ball Wichman
Case & lchiki
Honolulu, Hawaii
Federal Reserve Bank of St. Louis

Peter H . van Op pen
Chairman and CEO
Advanced Digital
Information Corporation
Redmond, Washington
Bob L. Vice
BLV, Agribusiness Consultants
Fallbrook, California
Richard S. Walden
Farmers Investment Company
Sahuarita, Arizona
Don M . "Duff' Willey
Willey Motors, Inc.
Bountiful, Utah
Denice A. Young, C. P.A.
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:


San Francisco



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.

Federal Reserve Bank of St. Louis


printed on recycled paper