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H 2567










Table of Contents

From the Boardroom


Setting the Pattern


The Western Regional Economy


Western Banking


Supervision, Regulation and Credit


Bank Administration




of San Ft--.o
t~AR 111985


Priced Payments Services



Services to Government Agencies


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

From the Boardroom
pace in the first raised fears in some quarters that the
recovery would falter in 1985. However, the failure of
inflat ion in 1984 to acce lerate significantly as it typ ical­
ly does during an expans ion , and the shot-in-the arm
given the economy by the fall in interest rates in the
latter part of 1984, suggest that the economy will con­
tinue to expand in 1985.

The closing months of 1984 marked the end of the
second year of economic recovery for the United
States and Twelfth District economies. The robust 5.9
percent growth of the national economy in 1984 was
remarkably strong by historical standards for the
second year of an economic expansion. Equally im­
pressive was the failure of inflation to pick up despite
two years of healthy economic growth. To an important
extent, this success was due to the Federal Reserve's
continuing program of reducing growth in the monetary
aggregates over the last five years.

The diverse needs of the Twelfth District make special
demands on the operations of the San Francisco
Reserve Bank in its role in fostering an efficient pay­
ments mechanism. In 1984, the Bank implemented
Systemwide and District programs to improve the
qual ity and efficiency of its services. These programs
included changes in check-depositing deadlines and
check-sorting that resulted in an increased availability
of funds and a 75-percent reduction in internally gener­
ated float. FedLine , a microcomputer-based funds
trans fer service, was enhanced to allow customers to
place orders for currency and coin , while automated
clearinghouse services were enhanced on a System­
wide basis with an improved deposit and delivery
schedu le, automation of paper return items , and
expanded electron ic capabil ities.

The economic expansion has been surprisingly strong
given the persistence of high inflation-adjusted, or real,
interest rates that to an important extent cou ld be
traced to large ongoing federal budqet defic its. These
high interest rates , and the related strength of the U.S.
dollar overseas, showed up in an uneven pattern of
economic development in different sectors of the
economy, with industries vulnerable to either of the
two factors generally failing to share fully in the eco­
nomic recove ry. Such a pattern also held for parts of
the West and , in some instances, showed up in the
performance of western banks significantly involved in
lend ing to the affected industries, such as agriculture,
real estate, and forest products.

The Bank 's commitment to meet ing the future needs
of the District was represented by groundbreaking
ceremon ies for a new Los Angeles branch facility. The
new building will accommodate all existing operational
needs and their expansion in the foreseeable future.
In 1984, the Bank also expanded its efforts to develop
comprehensive disaster contingency plans to guard
against the risk of ser ious financial loss. The plans
provide detailed procedures for responding to and
recovering from short -term disruptions and for main­
taining minimum levels of customer service .

Cuts in personal taxes and added incentives for busi­
ness prov ided by the Econom ic Recovery and Tax Act
of 1981 helped to offset much of the impact of high
real interest rates on household spending on durables
and business expenditures on plant and equipment.
Indeed, plant and equipment spending enjoyed the
biggest boom since the Korean War , a boom that was
attr ibutable in part to a combination of new " high­
technology" investment opportunities and the efforts of
business to modernize in the face of greater competi­
tion from abroad and deregulation at home .

The Bank also pursued a cost-containment program
aimed at controlling the costs of certain employee
benefits and making broader use of automation .
Automat ion of some services has the added benef it of
improving serv ice delivery and meeting the chang ing
needs of depos itory institutions in innovative ways .
Together , cost-containment efforts held the Bank's
1984 expenses with in budget, and allowed the Bank to
propose a 1985 budget only 5.3 percent higher than
that of 1984.

To an important extent, the burden of high interest
rates fell heavily on industries strongly reliant on
export markets, or that faced sign ificant competition
from imports. The link was indirect: high interest rates
helped attract a large influx of foreign capital , push ing
up the value of the dollar on fore ign exchanges and
thereby reducing the international competit iveness of
U.S. business . As the year wore on, housing began to
show signs that it too felt the pinch of higher interest
rates , while agriculture struggled with the double
burden of a strong dollar, which depressed overseas
demand , and high borrowing costs.

Management benef ited greatly during 1984 from the
broad-based experience and judgment of the Bank 's
Board of Directors at its headquarters office and at its
four branches. The Directors provided guidance on
major management decisions and planning goals . In
addition, they supplied information and views on eco­

The significant deceleration in the rate of economic
activity in the second half of 1984 from the heady

John J. Balles

Alan C. Furth
Chairman (1985)

Caroline Leonetti Ahmanson
Chairman (1984)

nom ic and financial conditions to support the Federal
Reserve 's formulation of monetary policy.

Fred W. Andrew
Deputy Chairman (1985)

Jack W. Gustavel (President and Chief Executive Offi­
cer , The First National Bank of North Idaho , Coeur
D'Alene, Idaho), Wendell J . Ashton (Publisher, Deseret
News, Salt Lake City, Utah), and G. Robert Truex, Jr .
(Chairman, Rainier Bancorporation and Rainier Nation­
al Bank , Seattle , Washington); and to our Twelfth
District Member of the Federal Advisory Council,
Joseph J. Pinola (Chairman of the Board, First Inter­
state Bancorp , Los Angeles, California) .

We especially appreciate the contributions of Caro line
Leonetti Ahmanson , who retired as Cha irman of the
Board of Directors of the San Franc isco Headquarters
Office last year following 8112 years of service as a
Director in this District. Her energy and devotion to the
Federal Reserve System's goals provided an invalua­
ble source of counsel and inspiration to the Bank 's
management and to its five Boards of Directors. We
would like to extend our thanks and appreciation to
other directors whose terms ended in 1984: the
late Robert A. Young (Chairman of the Board and
President, Northwest National Bank, Vancouver,
Washington), Bruce M. Schwaegler (President,
Bullock's-Bullocks Wilshire, Los Angeles, California),

Finally , we wish to express our appreciation to the offi­
cers and staff whose efforts and dedication made 1984
an innovative and successful year.

John J. Balles


Alan C. Furth
Chairman of the Board

Setting the Pattern
To a large extent, economic events in the Twelfth Dis­
trict in 1984 mirrored the forces shaping the national
picture. Last year, the national economy was in the
second year of a recovery noteworthy for both its
overall strength and its very uneven pattern of devel­
opment across different sectors. The result of this un­
evenness was a dual economy in which export and
import-competing firms and heavy industry were hurt
by a strong dollar and high real interest rates. This
dual economy showed up in the Twelfth District where
the economic performance of regions with relatively
high concentrations of affected industries lagged be­
hind that of other areas. In addition, a tapering-off of
national economic growth in the second half of 1984
showed up in the District toward the end of the year.

The pressure on interest rates became particularly
acute in the first half of 1984 as robust 8.3 percent
growth in the economy sent many households and
businesses into the credit markets to borrow. However,
a slowdown in the rapid pace of expansion in the latter
half of the year, combined with actions taken by the
Federal Reserve to support the economy's transition to
a more sustainable rate of activity, allowed interest
rates to retreat by year-end to approximately the same
levels that prevailed at the beginning of the year.
The high interest rates that have been one of the hall­
marks of this economic expansion would, by them­
selves, have significantly displaced, or "crowded out,"
household and business expenditures sensitive to in­
terest rate costs were it not for some offsetting influ­
ences. Last year was the third year of a plan, provided
by the Economic Recovery and Tax Act of 1981, to
phase in personal income tax cuts that boosted per­
sonal disposable incomes. As a result, consumer
purchases of durable goods, such as automobiles, re­
mained strong despite high financing costs. Similarly,
there is evidence that tax incentives for business pro­
vided by the 1981 Act have more or less fully offset
the increased costs of issuing debt and equity caused
by higher interest rates.

Federal Deficits and High Real Rates
Between 1981 and 1984, the U.S. federal budget defi­
cit rose from 2.2 percent to 4.8 percent of GNP. By
1984, the deficit was absorbing over half of the net
savings of households, businesses, and state and local
governments. The failure of the government deficit to
shrink during the current economic expansion, which
began at the end of 1982, combined with strong pri­
vate credit demands meant that the aggregate demand
for funds greatly exceeded the supply of domestic
saving. The result was unusually high levels of real, or
inflation-adjusted, interest rates for this stage of a
business expansion.

Thus, it seems that the unusual strength in plant and
equipment spending in the last two years was more
likely due to the combination of new "high-technology"
investment opportunities, particularly in the area of
electronic equipment, and the need for business to
modernize in the face of a more highly competitive at­
mosphere. The result has been the biggest boom in
such spending of any economic expansion in the
post-war period.

High Employment Budget Deficit
vs. Real After-Tax 6-Month Commercial Paper Rate
Bi llions 01 Dollars

Percen1 3 .5

Real Alter-Tax 6-Mo nl h
Commercial Paper Rate '
(righ t sc ale)


Crowding out the Foreign Sector
Because of offsetting factors, business investment has
remained strong, at least in the aggregate. The sector
affected most adversely by the deficit's impact on real
interest rates has been the foreign sector, which con­
sists of industries that produce goods for export or that
compete with foreign imports. A large U.S. federal
budget deficit and high real interest rates, along with
this country's political stability and strong economy,
have attracted a large influx of foreign capital. The
consequent heavy demand for U.S. dollars in foreign
exchange markets has driven up the exchange value
of the dollar. As a result, U.S. companies have found it
difficult to compete abroad at the same time that
imported goods have made large inroads into U.S .




High Emplo yment •
Budget Deficu

(lett scale)






198 2





. uSing average margina l ta x rate fOI mdivrduats


Mer cha nd ise Trade Deficit vs.

Trade Weighted Value o f U.S Doll ar

Billions oj DollatS



Mercha nd ise
Trade Deficit

19130-82 • 100

The rate of inventory accumulation slowed to a more
sustainable pace in the second half of 1984 and con­
tributed to a slowdown in production. In addition , the
stimulatory effects of the Reagan Adm inistration 's
personal income tax cuts on consumption had largely
dissipated, while high real interest rates had started to
take their toll on purchases of consumer durables and
on residential construction. Furthermore, a tremendous
surge in imports relative to exports, especially in the
third quarter, reflected a substantial deflection of
demand away from domestically produced goods. This
switch in net foreign demand was four times as large
in absolute terms during 1984 as the stimulatory effect
of the change in the federal budget deficit.



Trade-Weighted Value of U.S. Dol lar
(r ight scale)


pen sc ale)







199 2



The weakening in overall demand , in conjunction with
the first stages of an inventory correction , reduced the
growth of real GNP from 8.6 percent in the first half of
1984 to 3.2 percent in the second half. By year-end ,
there was concern that the economic expansion was
ending prematurely. Several signs, however, indicated
differently. An increase in inflation typ ically has pre­
ceded the end of past recoveries, but, in the second
half of 1984, the inflation rate remained low at around
3.5 percent. Consequently, by year-end , long-term in­
terest rates had fallen approximately 150 basis points
from their highs in the summer, and promised to give
a boost to interest-sensitive spending, such as hous ing
and capital spending by business. In addition, new
building permits for private housing were on the rise,
while healthy growth in personal income at year-end
raised hopes that household spending would pick up
in the months ahead . Most important, growth in real
economic activity accelerated in the fourth quarter
from its third quarter slowdown .


The trade-weighted value of the U.S. dollar has risen
over 50 percent since mid-1980, and it rose 13 percent
in 1984 alone. As the dollar has risen, the U.S. mer­
chandise trade balance has deteriorated. Since
mid-1980, when the dollar started to rise, the decline
in the trade balance has been roughly $100 billion. For
1984, merchandise imports exceeded exports by $123
billion as a strong surge in imports outpaced a modest
gain in exports. In addition , demand for U.S. ex­
ports has been reduced by relatively weak economic
expansions abroad and by the debt burdens of lesser
developed countries, which have forced them to cut
back on their purchases from the U.S.
Overall, the economic expansion continued at an ex­
traordinarily strong pace through the first half of 1984.
The sharp rise in production was due mainly to a re­
plenishing of real business inventories depleted at a
record annual rate during the recession . In the begin­
ning of 1984, businesses were accumulating invento­
ries at a $30 billion annual rate , another record in the
post-World War II period. This sharp swing away from
a substantial run-off of inventories during the recession
accounted for about 30 percent of the increase in pro­
duction during this expansion. Final sales-that is,
GNP excluding inventory investment-have increased
at about the same pace in this expansion as in past


The Western Regional Economy

Overall Measures of Recovery
In keeping with its size and economic diversity, the
West as a whole enjoyed an unemployment rate
roughly equal to that of the nation. There was consid­
erable diversity in unemployment rates among western
states, but even so, all of the nine states in the Twelfth
District had unemployment rates at year-end below
their December 1982 recession levels. The lowest rate
at the end of the year was enjoyed by Arizona with 4.4
percent unemployment, while Alaska registered the
highest rate at 9.6 percent.

Like the national economy, the western economy
enjoyed a broad-based, although uneven, expansion in
the second year of the recovery. Economic develop­
ments in the Twelfth District, as in the nat ion, were
driven mainly by growth in consumer spending and
business investment. Highly expansionary fiscal policy,
together with its effects on interest rates and the U.S.
dollar, shaped the pattern of developments in the
District, as did the boom in high-technology cap ital
spending .
Differences in economic performance among the
states could be traced to an important extent to differ­
ences in their economic make-up. States with indus­
tries that relied heavily on government orders or that
were part of the high-technology sector generally fared
well , whereas states with industries significantly hurt
by high interest rates and the strong dollar often suf­
fered by comparison. Also following the national pat­
tern , rapid economic growth in the beginning of 1984
slowed to a more sustainable pace in the second half
of the year.

Employment growth also varied widely across the
states in the District. The most rapid employment
gains were made in Utah and Arizona with annual
growth rates of 9.6 and 8.1 percent respectively. In
contrast, employment continued to grow sluggishly in
Oregon and Washington . Growth in housing activ ity,
another important barometer of regional conditions,
also varied across states although it improved in most
instances over 1983. The number of housing perm its
issued increased most rapidly in Arizona and California
and registered the slowest growth in Oregon and Idaho.

Sources of Strength
As in 1983, the prominence of the aerospace and elec­
tronics industries added vigor to a state's recovery .
Both increased consumer spending and increased
defense spending have buoyed the demand for these
sectors' products. California, which received 23 per­
cent of all prime defense contracts in 1984, benefited
most from the continued strength of defense spending.
Employment in the aerospace industry in California
rose by 7.2 percent in 1984, and employment in the
electronics industries also increased sharply. The
economies of Oregon, Utah and Washington received
boosts from aerospace and electronics manufacturing
activity as well. In fact, the strength of these sectors
was crucial in offsetting some of the continued weak­
ness in the important forest products industry of the
Pacific Northwest region.

Unemployme nt Rates­
Twelfth Distri ct and the U.S.




-­ -


- -

-­ -


December 1982 •

i1 -

- -









December 1984 •






- -­ -

- -
















- -











Areas of Weakness
Despite the generally good health of the western
economy , there were some markedly weak areas. Agri­
culture, for example, suffered from the combined ef­
fects of continued high interest rates, the international
strength of the dollar, and domestic and worldwide
gluts in the markets for some products. Although
interest rates declined toward the end of 1984, many
western farmers were having difficulty with debt
burdens they had accumulated over the past several
years . The Federal Land Bank reported the highest
rate of farm loan delinquencies in California in thirty
years, and as many as 15 percent of California farmers
left the industry in the past year. Weak foreign markets
and the continued strength of the dollar overseas
sharply reduced the demand for many of the West's
key agricultural products. The value of California farm
exports in 1984 fell to $3.0 billion from $3.3 billion in
1982 and $4.2 billion in 1981.

Aerospace and Electronics Employment as a Proportion of
Total Man ufacturing Employment-U .S. and Twelfth District


Pe rce nt






12th District .



Aerospac e


As was true for the nation as a whole, the general in­
crease in consumer and business spending early last
year also was a source of strength in the western
economy. Employment in the serv ices and trade indus­
tries rose an average 5.0 percent from mid-1983 to
June 1984 and was particularly important to the
economies of Arizona, Utah and California. In Hawaii ,
for example , increases in tourism helped to offset
the depressed pineapple and sugar industries.

Farm problems have been compounded by unusually
large harvests for some crops , most notably raisins,
grapes and almonds. The combination of weak de­
mand and abundant supply of some crops depressed
net farm income in most of the states in the District. In
California, the deterioration in agriculture has caused
as much as a 40-percent decline in certain agricultural
land prices. In Idaho and Utah, however , net farm
income weathered the difficult economic conditions
and posted increases in 1984.

Rapid rates of spending on consume r durables and
new housing in the first half of 1984 also were sources
of strength in the western economy, as they were in
the national economy. In Arizona, construction activity
was a particularly important contributor to the state's
employment growth , which ranked as the most rapid in
the nation in 1984. Toward year-end, however, key in­
dicators such as automobile sales and housing starts
signalled that the economic slowdown observed
nationally was occurring in the West as well.

The wood products industry in the West also has re­
mained weak. Although home construction and other
uses of wood products have grown significantly since
the 1981-1982 recession , product prices remain de­
pressed because of weak export markets . Special
regional circumstances also limit the recovery of this
industry. Pacific Northwest producers face higher
stumpage, labor and transportation costs compared to
producers in the southeastern United States . They
also suffer from proximity to Canadian producers,
whose competitiveness has been helped by the weak­
ness of the Canadian dollar. As a result of these
competitive disadvantages, production of some wood
products at the end of 1984 remained below the levels
of 1979.

The boom in business capital spending nationwide
during this recovery also is reflected in the District's
economic performance . Districtwide employment gains
of 2.5 percent in manufacturing were registered over
the first half of the year, a rate only slightly below that
of 1983, and nonresidential construction activity
continued at high levels throughout 1984, particularly
in Hawaii, Idaho and Nevada .


The weakness in the wood products industry signifi­
cantly detracted from the economic performance of
Oregon and Washington in 1984. Despite strength in
other industries in these states, the overall perform­
ance in both was lackluster. Oregon and Washington
had the second and third highest unemployment rates
in the Twelfth District and the slowest overall growth in
employment during the year.

The decline in short-term and long-term interest rates
that occurred in the second half of 1984 will stimulate
spending in the interest-rate sensitive sectors of
consumer durables and housing. A strong revival in
housing demand would be particularly welcome in the
Pacific Northwest because it would provide the neces­
sary basis for a broad and sturdy recovery there.
Recent passage of federal legislation affecting timber
contracts on public lands also should help by reducing
the average cost of harvested timber.

The mining industry, concentrated mostly in the inter­
mountain states and Nevada, also was affected by low
prices and foreign competition. The decline in inflation
over the past two years has sharply reduced the de­
mand for the "inflation-hedge" metals, gold and silver.
The subsequent fall in their prices has made much
gold and silver mining in the West uneconomical.
Copper mining continued to be plagued by weak world
demand aggravated by a decline in international
competitiveness due to the strong dollar.

Disbursements from existing defense contract com­
mitments should strengthen the aerospace and
electronics industries through 1986. Other high
technology industries also can be expected to grow
through the next two years . But the U.S. dollar's con­
tinued high value in foreign exchange markets will
threaten to erode even the overseas demand for elec­
tronics products, and eventually cause some jobs in
these industries to be moved to other countries.

Despite the weakness in both mining and forest prod­
ucts, the economies of the intermountain states have
been among the best performing in the District. In
Utah, for example, the dampening effects of these
weak sectors were more than offset by broad-based
strength in the manufacturing and service industries
and the general stimulus provided by defense expendi­
tures. Indeed, Utah enjoyed the third highest rate of
employment growth in the nation during the first half of

Agriculture also should be health ier in 1985 as the
lower level of interest rates stemming from declines in
the latter half of 1984 help relieve the current debt
burden on farming operations. Export demand for agri­
cultural products would recover if foreign currencies
regained some of their strength in relation to the U.S .
dollar. Whether this occurs will depend importantly on
the outcome of efforts to reduce the federal budget
deficit. In any event, 1985 will be a critical year for
western farmers generally, and California farmers in
particular, as many farms already are in poor financial

The weakening of the OPEC cartel and the decline in
world demand for oil were major causes of the contin­
ued poor performance of the Alaskan economy. Alaska
depends strongly on oil revenues, to the extent that
each one dollar decline in the price of a barrel of
crude oil results in a decline of about $150 million in
state revenues. For the state as a whole, employment
growth in 1984 remained above national and District
averages, and the unemployment rate, although still
very high, remained stable in 1984.

The economy of the Twelfth District should remain one
of the most dynamic in the U.S. economy in 1985.
Unlike much of the country, the western region does
not depend on older, more vulnerable heavy industry.
Rather, it harbors the largest concentration of high
technology enterprise in the world and a diversity of
other manufacturing, agricultural and raw materials
industries. Such diversity gives the West the capacity
to continue to grow through 1985.

The Outlook
Because the western economy is highly diversified, its
overall performance next year should reflect that of the
nation. Recovery should therefore continue, albeit at a
slower pace . Some signs of a slowdown were evident
before the end of 1984, but they did not indicate that
the District's economy was heading toward a recession .
This interpretation is reinforced by healthy Christmas
retail sales activity and continuing declines in unem­
ployment rates at year-end.


Western Banking
Because much of international debt is denominated in
dollars, a stronger U.S. dollar means a higher debt
repayment burden to a borrowing country in terms of
its own currency.

As a group, western banks posted their first year-over­

year increase in aggregate earnings since 1980.

Nevertheless, just as in the last few years, their profita­

bility remained well below the national banking

industry because of large loan losses suffered by a few

large banks. Moreover, the unevenness of economic

expansion which has characterized the current nation­

al and regional recoveries showed up in mixed

performances across western banks in 1984.

This problem is particularly acute for lesser developed
countries (LDCs) with substantial amounts of interna­
tional debt. Because a solution to the economic prob­
lems of LDCs seems unlikely in the near future, large
banks probably will be plagued for some time by their
outstanding loans to these nations.

The major drag on earnings for the banking industry,

both nationally and in the West, continued to be relat­

ed to asset quality. A business expansion normally

brings an improvement in bank loan quality by the end

of its second year as it boosts the financial positions of

bank borrowers. But despite an economic expansion

that is strong by historical standards and which is now

entering its third year, a significant improvement in the

quality of bank assets does not seem imminent. One

of the key reasons for this is the unevenness of the

economic recovery in the District, a phenomenon

shared with the national economy and shaped by

some of the same developments-a reduction in infla­

tion, a persistence of high real interest rates and a

strong dollar.

The strong dollar also has contributed to weakness in
several important segments of the domestic economy
and thereby affected bank loan quality. It has curbed
the overseas sales of many domestic firms while creat­
ing stiff competition for domestic industries competing
against imported products. Reductions in international
competitiveness, attributable in part to the strong dol­
lar, have weakened many export and import-competing
industries in the West as elsewhere in the nation.
The strong dollar along with high real interest rates
have contributed to the unusually high default rates on
bank loans to the troubled steel, mining and manufac­
turing industries, as well as to the agricultural and
forest products industries. In a similar way, persistent
weakness in the markets for petroleum products will
continue to produce problems with loans to the energy
industry. Furthermore, in many of the areas dominated
by these depressed industries, both consumers and
smaller businesses have suffered as well. Even a
robust economy is not likely to improve the prospects
of repayment by some firms in these industries unless
the dollar loses some of its strength in international

High Interest Rates and a Strong Dollar
The current expansion's high level of real interest
rates has increased the real debt burden of many U.S.
firms and raised the likelihood of defaults. It also has
complicated the international debt repayment situation
both directly by adding to the interest cost of financing
debts and indirectly by being one factor that has
driven up the foreign exchange value of the dollar.

Problems with loan quality varied widely across banks
in the West. For many, increases in provisions for loan
losses due to bad loans resulted in weakened earn­
ings, while for some, they resulted in actual losses.
Size, composition of loan portfolios, and location each
played an important role in determining banks' loan
quality. Multinationals were hurt by their problem LDC
loans, while energy lenders continued to suffer from
over-investment in the domestic petroleum industry. In
California, some larger banks were also hurt by heavy
losses on real estate and agricultural lending. In Ore­
gon, the smaller banks, lending in local markets, were
hardest hit by the extended weakness in the forest
products industry. Also, loan losses related to real
estate were instrumental in the failure of several
small western banks.

Real Treasury Bill Rate














Deposit deregulation has had still another important
impact. Under the previous system of ceiling rates on
retail deposits, large banks with access to national or
international financial markets had substituted whole­
sale deposits, such as unregulated large CDs (that is,
those over $100,000), for retail deposits. This response
also was not as cost-effective in attracting deposits as
direct price competition for retail deposits would have
been. The shift from wholesale CDs to retail Money
Market Deposit Accounts (MMDAs) that followed
depos it deregulation appears to have had a beneficial
impact on the earnings of large banks . It improved
the ir competitive position for retail deposits in relation
to their unregulated competitors , such as the money
market funds, and allowed them to compete more
efficiently against other banks for deposits.

This recovery is the first in 50 years to occur during a
period in which depository institutions have been free
from interest ceilings on most deposit accounts. De­
posit-rate deregulation has come essentially in two
stages-first, on large-size business deposits in the
late 1960s and early 1970s, and second , on retail con­
sumer deposits in the late 1970s and early 1980s. This
deregulation has altered the way the financ ial and real
sectors are affected by the business cycle. For exam­
ple, deregulation of deposit rates means that regulated
depository institutions are no longer vulnerable to fi­
nancial disintermediation when market rates rise above
ceiling levels. Thus, deregulation has eliminated the
periodic shortages of loanable funds that used to oc­
cur when rates rose above ceiling levels , and thereby
has ensured a good availability of bank loans and
credit despite high interest rates. Not only has the
economy benefited from the increased availability of
bank credit during these episodes, but banks them­
selves are now able to compete much more effectively
with financial institutions not subject to interest
ceilings, such as money market funds, insurance
companies, and the U.S . Treasury.

The forces of deregulation were most evident in the
pric ing of MMDAs-ceiling-free, insured, short-term re­
tail accounts offering limited check-writing privileges,
and not subject to a reserve requirement on personal
accounts. With the MMDA , institutions were able to at­
tract large quantities of funds (currently over $400 bil­
lion nationally), thus allowing large banks in particular
to reduce their need for more expensive wholesale lia­
bilities, such as large CDs. During 1984, rates paid on
MMDAs, which total over twenty percent of western
banks' domestic deposits, were well below those paid
on large CDs and rates paid by competing money
market funds. While this pricing strategy for MMDAs
tended to limit the total quantity of MMDA balances, it
also resulted in a significant cost savings for many
banks. Thus, banks' overall deposit versus lending
interest margins widened as they took advantage of
the lower costs of deposits.

Under deposit-rate ceilings on retail accounts, banks
and thrifts attracted core deposits, such as passbook
savings, checking, and NOW accounts, by paying both
explicit interest at the ceiling rate and by offering
depositors a multitude of added conveniences and free
or underpriced services, such as free checking privi­
leges and extensive branch office networks. In theory,
this sort of noninterest or non price competition would
be less efficient than direct competition using interest
rates because depositors on average would value
these additional services at less than their cost. Thus,
under deposit deregulation, the explicit interest cost of
attracting retail deposits would rise while the non inter­
est cost would decline as banks and thrifts cut back on
some underpriced services and high-cost branches
and begin charging explicitly for other services .

Interest Rate s



30-0 ay CO Rate


Particularly in the competitive bank and thrift markets
that prevail in the West, it is likely that the rise in ex­
plicit interest costs actually would be less than the
decline in noninterest costs. The total combined
interest and noninterest costs might actually decline
with deposit deregulation, although there could be a
costly adjustment period. Therefore, a subtle but very
important impact of deposit-rate deregulation is that it
has offered the prospect of lowering the total cost of
attracting retail deposits, particularly in competitive



8 " - -.......,,,

Money Markel Fund Rat e



' 98 3



With the ability to engage in direct price competition,
banks reduced nonprice forms of attracting deposits.
They began to raise explicit fees for some previously
underpriced banking services and to eliminate or cut
back on others. The decline in some non priced ser­
vices resulted in cost savings that were supplemented
by increased fee income from the explicit pricing of
other services. Both changes contributed to lowering
the noninterest costs of attracting deposits.

Aggregate Net Income

Twelfth District Banks






One negative effect of deregulation on bank earnings
has been the adjustments some banks have had to
make in shifting from non price to price competition.
For example, deregulation reduced the value of
branches in attracting retail deposits and therefore im­
posed additional costs associated with reducing the
number of such offices on banks, especially those with
large branch networks. These losses associated with
adjusting to a deregulated environment may have had
short-run negative effects on some banks' earnings,
but there is little evidence that the costs of deregula­
tion have substantially offset deregulation's positive
effects on lowering total deposit costs and increasing
fee income. The upturn in bank earnings and the rate
at which new banks formed in the Twelfth District last
year suggest that deregulation has not had a wide­
spread or lasting adverse impact on the industry. On
the contrary, the impact appears to have been












In addition, declining interest rates during the second
half of 1984 had a positive impact on bank earnings
because loan rates temporarily lagged behind the de­
cline in funding costs and because some banks still
held substantial amounts of long-term fixed rate loans.
Together, these positive factors offset the continued
need to build up loan loss reserves, and resulted in an
increase of over 30 percent in western banks' aggre­
gate net income for 1984 (net of extraordinary gains or
losses). While earnings were well above 1983's de­
pressed $1.1 billion level, they were still far below the
record $2.0 billion earned in 1980. For western banks
in the aggregate, and for many individual institutions in
the West as well, returns on equity and assets still are
below the national averages. However, the turnaround
in profitability in 1984 is important considering that
banks probably will continue to face credit quality
problems despite the advanced stage of the recovery.
Improved earnings are essential if western banks are
to generate much needed additions to their capital,
and to continue to build cushions against potential

Much of the improvement in aggregate western bank
earnings resulted from a slight improvement in net in­
terest margins-the difference between interest earned
on assets and interest paid on liabilities. Moreover, in
the aggregate, dollar earnings also benefited from a
moderate expansion in banks' assets despite a slight
reduction in their foreign assets.
Because of the unevenness of the current economic
expansion, asset growth varied considerably across
banks. The most rapid expansions were in some small­
er institutions that chose to increase their real estate
and consumer lending. Consumers were eager to
borrow, even at historically high real rates, to finance
acquisitions of autos, other consumer durable goods
and housing that had been postponed over the last
several years. Weak loan demand from the corporate
sector during much of the second half of 1984 slowed
loan growth at the larger banks and led them to place
more emphasis on their lending to the household


Supervision, Regulation and Credit

Close cooperat ion with other federal and state regula­
tors remained a key element in this Bank's effect ive
. supervision of western depository institutions. The
Bank continued successfully to coordinate examina­
tions of state member banks and offices of foreign
banks on a joint or alternating basis with various state
banking authorities, and scheduled bank holding com­
pany inspections to coincide, where possible, with the
examination of the lead bank subsidiary by other fed­
eral agencies or the states. Cooperation extended to
the implementation of formal corrective actions and the
review of applications, and has resulted not only in
more effective superv ision , but also economies in
staffing and reduct ions in the burdens of examination
for institutions.

Developments in this Reserve Bank 's supervisory,
regulatory and credit activ ities in 1984 confirmed the
generally improving, although still spotty, condition of
western banks and banking organizations. The
balance sheets and earnings of individual banks
reflected weaknesses in housing , energy, and certain
agricultural products, while international loans created
difficulties for multinational banks . Overall , most
institutions experienced rising earnings and higher
levels of capital, although poor loan quality and the
economic sectors that did not share fully in the
recovery harmed some institutions.
The majority of weaker banking organizations did not
warrant classification as problem institutions, but a
small number required special supervisory attention . At
the end of 1984, supervisory actions were outstanding
or in process at 27 state member banks and bank
hold ing companies out of a total of 350 such institu­
tions under this Bank's supervision . In addition, federal
or state authorities closed 12 District commercial
banks , compared to 10 in 1983. Most of these were
small banks that failed because of problem real estate
and agricultural loans.

The Supervision, Regulation and Credit Department
has a long-term objective, established in 1983, of
improving the efficiency and quality of internal adm inis­
trative functions . In 1984, it made significant strides to­
ward automating its admin istrat ion with the use of new
computer technology. On-line storage and retrieva l of
collateral information for the cred it function were
implemented , and automation projects affect ing the
planning of examinations, examination records , and
budgeting and management reports are in process .
Other programming enhancements exped ited the
processing of regulatory reports filed by District
institutions and strengthened financial surve illance and
analysis systems . These projects have improved the
Bank's access to data and its ability to analyze the
condition of supervised institutions.

The lingering effects of the recession also were
evident in record activity at the discount window. Dur­
ing 1984, both the number of loans granted and the
number of borrowers reached new highs . The Bank
extended 2,300 loans to 132 depository institutions,
compared to 1,234 loans to 108 institutions in 1983.
Furthermore, the number of institutions with liquidity
problems that borrowed under the extended credit pro­
gram increased to 25 from 18 in 1983. A discount rate
that was lower than market interest rates throughout
1984 also encouraged borrowers to seek temporary
accommodation at the Federal Reserve. With the pros­
pect that their borrowing needs would grow through
the year, institutions pledged $25.4 billion in collateral
by year-end-up from $18 .5 billion in 1983.


District banks also expanded their international opera­
tions more cautiously in 1984 in view of the unsettled
outlook for international lending. The applications for
new offshore lending activities fell both in number and
significance as banks exploited opportunities for
financing trade instead. The long-run economic poten­
tial of Pacific Basin trade encouraged growth in the
number of Edge Act international banking offices in
the Twelfth District. These offices specialize in trade­
related banking transactions. Foreign banks' opera­
tions in the District also continued to grow, with the
number of their branches and agencies increasing to
about 150. Trade prospects also encouraged the ex­
pansion of Export Trading companies . By year-end, 9
were operating in the District and another had been
approved . These companies were authorized by Con­
gress in 1982 to promote U.S. exports by providing
specialized trade support services and financing
beyond those permitted to Edge Act corporations
and U.S. banks.

Regulatory changes by the Federal Reserve System,
as well as simplified application procedures, facilitated
expansion by bank holding companies into such fields
as securities brokerage, foreign exchange services
and futures markets in 1984. Generally, banking orga­
nizations approached these activities with caution,
although there was one striking exception-they
rushed to form so-called "consumer banks." Such
banks have bank charters, but they do not offer both
demand deposits and business loans. By dropping one
or the other activity, they cease to be "banks" for pur­
poses of the Bank Holding Company Act and become
nonbank subsidiaries (hence the name "nonbank
banks"), free from the barriers against interstate bank
acquisitions. At year-end, this Reserve Bank had re­
ceived over 50 applications by District bank holding
companies to establish such limited-purpose banks in
21 states plus the District of Columbia. The Board of
Governors recently approved consumer bank applica­
tions in other Districts with expressed reluctance, but
the future of these subsidiaries is unclear because of
pending Congressional action , favored by the Board,
to restrict them.

The Federal Reserve's supervisory and requlatory re­
sponsibilities also include consumer education and
protection . In 1984, the San Francisco Reserve Bank's
consumer affairs staff continued its outreach activities
by hosting two conferences for Neighborhood Housing
Services and providing speakers for seminars and
classes on consumer regulation for consumer groups
and commercial bank training programs. Most con­
sumer complaints involving state member banks in
1984 concerned equal credit opportunities, although a
growing number involved allegations of unauthorized
withdrawals from automatic teller machines. To assist
examiners in future evaluations of member bank pro­
grams under the Community Reinvestment Act, the
Bank began to prepare a series of Community Profiles
in 1984. These profiles are studies of demographic,
ethnic, and housing patterns in metropolitan areas in
the Twelfth District. Information from them will be
made available to banks, governments and develop­
ment groups for use in their own planning . Profiles of
Phoenix and Salt Lake City were completed in 1984.

The composition of bank holding company applications
reflected this push to form nonbank banks. In addition,
there was a sharp jump in the number of notices filed
under the Change of Bank Control Act. This Act
requires individuals or groups of individuals to obtain
approval prior to purchasing shares in banks or bank
holding companies that affect the control of those
organizations. In 1984, 25 change of control notices
were processed, compared to 4 the previous year. In
contrast, fewer new bank holding companies were


Bank Administration
The program to restructure the Bank 's telecommun ica­
tions network, begun in 1980, was completed in 1984.
This project resulted in the consol idation and shar ing
of telephone lines between the District's five offices
and on-line depository financial institutions, thereby
substantially reducing telecommunications costs asso­
ciated with current and future growth of the network.

During 1984, the Federal Reserve Bank of San
Francisco consolidated the delivery of certa in whole­
sale banking services and internal operations with the
goal of improving their quality and efficiency. In addi­
tion , it developed and refined several products to meet
the continually changing needs of the bank ing indus­
try. A cost-containment program was directed primarily
toward controlling the costs of certain employee
benefits and implementing an extensive
automation strategy.

Overall, the San Francisco Bank's cost-containment
efforts held 1984 expenses to $120 .5 million (within
budget) and allowed the Bank to propose a 1985
budget only 5.3 percent higher than that of 1984.

The Bank continued a multi-year project of disaster
contingency planning to ensure that critical customer
services are maintained in emergencies. Perhaps the
most prominent example of the Bank 's commitment to
the efficient delivery of financial services was the start
of construction on a new building for the Los Angeles
Branch . The new fac ility is planned to meet the needs
of the surrounding financial commun ity for decades to
come .

Disaster Contingency Planning
In 1984, the Twelfth District expanded its major multi­
year effort to develop practical , well-tested, and com­
prehensive disaster cont ingency plans. These plans
will promote staff safety and ensure that valuable
items are protected. In addit ion, they guard against the
risk of serious financ ial loss both to the Bank and
Bank customers by specifying procedures to maintain
minimum levels of customer service.

In 1984, the Bank developed a cost-conta inment
strategy based on a reconfiguration of emp loyee bene­
fits and an intensified drive toward efficiencies from
automation. The long-term strategy adopted for con­
trolling employee benefit costs emphasizes treatment
alternatives and encou rages preventive health care .
Treatment alternatives such as outpatient surgery and
home health care should reduce the frequency and
length of hospital admissions and thereby enable the
Bank and its employees to realize lower medical
premium costs.

Operating departments with critical Reserve Bank
functions have specified deta iled procedures for re­
sponse to and rapid recovery from short-term service
disruptions. The overall Bank plan also will establish
procedures for recovery from an emergency, such as
provisions for emergency communications, back-up
power for essential banking and building services,
emergency medical care, and food storage . Twelfth
District contingency plans for recovery from long-term
service disruptions affecting the computer center (such
as might be experienced during a major earthquake)
will be initiated in 1985 in conjunction with Systemwide
automation cont ingency efforts .

The District's automation strategy exploits economies
of scale by standardizing and centralizing large pro­
duction systems for several services. Furthermore, it
stresses the use of microcomputers with in operating
departments as complementary alternatives to higher
cost data center fac ilities. For example, the conversion
of check processing to identical systems in all five
Reserve Bank offices in 1984 reduced prog ram main­
tenance costs and allowed for stronger contingency
backup. Processing for the Automated Clearing House
facilities at the Portland, Salt Lake City and Seattle
offices will be centralized in San Franc isco in early
1985. In the Accounting area , both General Ledger
and Billing Processing have been centralized in San
Francisco in preparation for the new Integrated
Accounting System which will be installed in all
Federal Reserve Banks beginning in late 1985.

Proposed new Los Angeles building


Facilities Planning
Constructing a new building for the Los Angeles
Branch was the chief focus of facilities plann ing efforts
in 1984. The outdated Los Angeles facility, built in
1929 and expanded in 1953, cannot accommodate
all existing operations, some of which are housed in
nearby rented spaces .

leading role in the System's resource-sharing automa­
tion program. This role dates back to the Bank 's devel­
opment of the first resource-shared application,
SHARE, for automated securities handling. In 1984,
the SHARE system was installed at three additional
Reserve Banks , bringing the total to seven Banks at
year-end; it is expected to be in production System ­
wide (except at the New York Reserve Bank) in 1985.
Direct participation in System automation efforts was
complemented by the continued active participation of
senior management in two national committees that
set the long-range direction of Federal Reserve
automation programs.

The Board of Governors approved the conceptual de­
sign for the Los Angeles bUilding project in December
1983; the project architect is Daniel L. Dworsky. Con­
struction funding was approved in July 1984, and Swi­
nerton and Walberg, Inc. was engaged as the general
contractor. Groundbreaking ceremonies were held last
September on the building site adjacent to the existing

Other Systemwide automat ion efforts included imple­
mentation of Contemporaneous Reserves Reporting
(CRR) in early 1984 and extensive systems planning
and testing to support the installation of new Funds
Transfer, Customer Information, Automated Clearing
House (ACH) and Integrated Accounting System (lAS)
software in 1985. The trans ition to new lAS software
constitutes a multi-year, Systemwide effort that will
standardize accounting systems at the same time that
it centralizes the District's accounting system in the
San Francisco headquarters office . The result should
be improved accounting integrity over the Bank's
assets and liabilities.

The new building, scheduled for completion in 1986
will accommodate all existing operational needs and
their expansion in the foreseeable future. It will have a
back-up source of power and other systems critical to
maintaining the delivery of services during emergen­
cies . In sum, the new facility will help the Branch meet
the challenges of supplying efficient banking services
to one of the nation's fastest growing communities.

Automation Efforts
The strategic objectives of the Bank's automation
program support the Federal Reserve's multiple roles
in making and implementing monetary and regulatory
policy and in improving the efficiency of the payments
mechanism through cost-effective services. Automation
efforts therefore fall into several categories, including
contributions to Systemwide efforts, internal enhance­
ments to make service delivery both more effic ient and
responsive, and innovative programs to satisfy the
changing needs of depository institutions.

A second undertaking of the Bank's automation
program has been to support Bank efforts to upgrade
and expand electronic access for customers through­
out the Twelfth District. The basic components of this
project are the increased use of microcomputers and
the use of updated communications technology. In
1984, the Bank completed the new state-of-the-art
intrad istrict communications network, SPINE, which
expands electronic access capabilities and allows the
Bank to contain communications costs. During the
latter part of 1984, a major project was begun to up­
grade data communications, software and security fea­
tures for the Bank 's micro-computer based "FedLine"
service, including the implementation of more compre­
hensive and reliable data encryption. In addition, the
Bank prepared to provide electronic access to its Auto­
mated Clearing House services via dial-up telephone
connection by early 1985. A major computer upgrade
program for the Branch offices of the San Francisco
Reserve Bank and a project to standardize the pro­
cessing of commercial checks throughout the District
were other efforts successfully completed in 1984.

Resource sharing efforts within the Federal Reserve's
Systemwide automation program involve planning,
testing, developing and implementing standard auto­
mated systems, the costs of which are shared by
Reserve Banks. As represented by the Bank's involve­
ment in the joint development (with the Board of Gov­
ernors) of the Banking Statistics (STAT) application,
these efforts continued to command a significant share
of Bank resources last year. STAT, with initial availa­
bility planned for 1985, is an automated system
designed to process data collected from depository
The choice of the San Francisco Bank by the Board of
Governors to co-develop STAT testifies to the Bank's


Boar d 01 Di rectors


JOhn J . Balles
Chie l Ell6Cutive Officer

March 1, 1985

Supervision, Regulation and Credit

Law and
Secretary's Office

Eug ene A . Thomas
Se nior Vic e President
Superv ision. Regulation and Credit

Louis E. Reilly
Seni or Vice Presidant
and Ge neral Cou nse l

W. Gordon Smith
VI~ President
Credit and Co nsume r Al1airs

Wayne L. Rickards
Bank and Consumer

Harry W. Green
Vice President
SHe and International Reg ulation

Mer1e E. Barchan
Vice President
Bank Examlnaflons

Donald R Lieb
District Credit Oftlcer

Robert D. M ullo rd
General Cou nsel

Regulation Offi cer

Rod ney E. Reid
Direc tor
SHe and Interna tional Supervision

Roben A. Johnston
Ass!. Vice President
Appl ica tiOns and
Financial AnalysIs

Kenneth R. Binning


William L. Cooper
Assccrat e
General counset

A p plicat io ns 0111cer

Thomas P. McGrath
Supervising O«icer
Salt Lake City


Dou glas R. Sha w
Assccra te
Genera! Counsel

Eliza belh Fl. Pranymen
Ass t. Vice Preeide nt and
secreterv otme Boa rd

Richard T. Griffith
First VICe Prasrcant

Chief Operahng Officer

Thom as C. War re n
Executive Vice Pres iden t


Statistical and
Data Services

Computer Serv ice s

Finance and Product Manager

Sara K. Garrison
Vice President
Statistical and Data Serv ices

Wi llla mV. Ott
Senior Vice Preside nt
Computer Servi ces

Car l E Pow ell
Senior vlce President
Fina nce and
Produ ct Management

G all A. Taylor
Asst . vrc e Pr esident
Monalary Aggr agat as
and Reserves

Lau rance Wash11en
Vice President
Systems and Communications

Jud y A . Johnstone
Vice Presiden t
App lica tions SYSlems

Eliot E. Gi uli
Asst . VI~ Presic ent
Intern ation al and Dom estic
Financial Repo rts

John Gleason
Vice sreercent
Prod uC1Managemen t

Joan L. Moghad am
Asst . vee Pres-den t

Jceech B. Fuchs
Ass!. V~ s reeroent
Syst ams

Sa ndra E. Barggran
Systems Officer


Pat rick Ton g
Vice President
Co mpuler Ooe reuo ne

Rab en B. 0'0<

Vice Presidem
Product Management

Asst . Vice Pr e s

Adelle A . FOley
Vice Presid ent
Accou nt ing

Electronic PaY'

Tom Th aanu m
Asst. VICe President
Acco unting

Gregory B. Wil liams
ASS . Vice President
Fina ncial Plenn lng and Con trol

San Franci sco

Portl l

David J . c tmste-ecn
Vice PreSiden t


Seattle Branch

Salt Lake City Branch

Gerald R. Kelly
Senior vrce Presid ent

E. Flonald Uggen
Vic e President

Kenn eth L. Peterson
Ass t. vrce President
Custody services

Ger ald R. Dalhng
Ass t. Vic e President
An alysis and Control

Asst. Vice Pres ident
Payme nt setvcee

M Tim

Gale P. Ans ell
Asst. Vice preercem
Analysis and Control

Don W. Shee ts
Asst. vee Pr esid ent
Custody Control

Manha F. Pen)'
Asst . Vice President
Financial Services

Dean C

Willia m C. Feran sen
Assi . Vice Presiden t
Fina nc ia l Serv ices

Robert Fl . Richards
Asst. Vice Pres idan t
Paymen ts services

Bruce H . Th ompson
Ass t. Vic e Presidenl
secwmes Services


Edwar d A. acone ur
Check Office r

And rea P. Wo lcott
Finan cial Services Off ic er

John H. Wo ng


Fm anc



Dougl as O. Knuds en



BoaId a t Directors

Roben l. Gatchell

Genera l Audil or


Alan Blument hal
Gener al Audito r

Chiel ExecutIVe Office r

cna rtes O . eowc en
Audit Officer

Gary G. u oein
AudJl Offic er

Economic Research
and Public Inlormatlon
Joseph R. Bisig nano
Semoe Vice Presid ent
eno Direct or ot Research

Jane W . Langhorne

John H. Beebe
Vice President and
Assoc . Duector 01 Research


John P.Judd
Vice President
Macroeconomic Srudie s


eng Cheng
Vic e Presldenl
Intern at ional Studies
Aldtard T. GriNith
FIl'l t VICe Pres ident

John L Scad ding
VICe Presiden t
Publi c Inlo rmatlOn

Chiel Operating Offic e r




Rober1 B. O'ucncc nue
Asst. Vice Preslden l
Electroni c Paymenls

Tom Tha anum
A. S!.Vice Presid ent

Sharo n Reisdo rf
Asst. Vice President
Accounnn c


District Operations
H. Peter Fran zel
Senior Vice Pra ident
Dist rict Opera Uons

John F. Hoover
Vice President
Distr ict Financial Services

Patricia K. Lang
Vice Presldenl
ccrporeie Perso nnel

C. Kenneth Arnold
Asst. Vice preetcerrt
Data secu rity

Sallie H. W eissinger
Personn el Officer

Oren L.Chri sten sen
Vice President
New BUilding Programs

William K. Ginw
Vic e PresIdent
BUilding and Property Man agement

J am es J. Tenge
Asst . Vice Pres ident
Admin istrat ive Servic es

~a nn i ng and Control


Personnel and Administrative Services

e ec rqe P. Ga lloway
Vice President
District securitylBtdg. note.on



v ene B. .rcnnstcn
Asst . vice Presid ent
Legi slative Analyst

Mic hael J. Murra y
Sen.or VICe Preside nt
Personnel and Admini stratrve Services

and Product Management

, Presidenl


Pe10 K. C. Hsieh
Audit ottcer

John J. Balles



Gul Gidwan i
Gene ral Au ditor

SylVia A. Cu nningh am
Procur ement serviCes Office r

Portland Branch

Los Angeles Branch

Ang elo S. Ca rella
Senior VI«l Presid ent

RIchard C . Dunn
Senior Vice Presid ent

Rebert M. McGlII
Senior Vice Presid 901

Mary Ellen Martin
Asst. Vice President
Financial Services

Richard L. Rasmussen
Vic e President
Adm inistral lon

M . Timoth y Carr
Ass!. V1C e Presiden t
Administretive Service s

Dean C. Gonnerman
Ass!. Vice Presiden t
Payment s Service s

Hector M . Manin
Vice Presid ent
Operation s

Brent M. Duxbury

Aut. Vice Pres ident
AdministratI ve Servic eS

Charles L. Huttst euer
Asst . Vice President
Cash Services

Ross G. Ashman

Ass\. Vice Presidem
Paymerns Servi ces

H. Willie m Penni ng ton
Aser. Vice Preside nt
CustOdy Cont rol

susen L. acbert son
Asst . Vic e President
FinanCial Services


Theodore A. Schr oeder
Securtties Servic es Officer

Management Committee
(From left to right)
Michael J. Murray, Senior Vice President
Richard T. Griffith, First Vice President and Chief Operating Officer
Thomas C. Warren , Executive Vice President
John J. Balles, President and Chief Executive Officer


Services to Government Agencies

The Federal Reserve Bank of San Francisco is an
important provider of fiscal and financial services to
the United States Treasury and the public. Fiscal
services include issuing government securities and
savings bonds, and financial services include check
collection and funds transfers for government agen­
cies, the processing of electronic payments and food
coupons, and securities safekeeping .

Another major government service provided by
Reserve Banks is the distribution and recirculation of
fit currency to depos itory financial institutions. The San
Francisco Reserve Bank, with the second highest cash
processing volume in the Federal Reserve System,
uses high-speed processing machines to count, sort,
cull and verify currency deposits. The Bank currently is
working with other Reserve Banks to develop even
more efficient and effective " second generation " cur­
rency processing equipment. In addition, the District is
studying ways to automate various administrative and
clerical cash operat ions, and is exploring more efficient
ways to dispose of residue from destroyed unfit curren­
cy. For the cash customer, the San Francisco Bank
published a Cash Services Customer's Guide to help
Twelfth District depository institutions prepare currency
orders and shipments, and joined with other Reserve
Banks in establishing standards that would accommo­
date a wider range of cash orders.

With branches in Los Angeles , Salt Lake City, Portland
and Seattle, the San Franc isco Reserve Bank provides
fiscal agent services to nine western states, including
Alaska and Hawaii. Relat ively high interest rates in
1984 increased the attractiveness of Treasury secur i­
ties and led to a 35-percent increase in the commercial
book-entry Treasury bill sales . In addition, the Bank 's
intensive efforts to improve the efficiency of its savings
bond services fostered an increase in the number of
bonds issued that included a 14-percent increase in
the number issued for corporate payrolls.

In 1984, the unique circumstances surrounding the
Games of the XXIII Olympiad created the need to meet
increased currency demands in the Los Angeles area.
The Los Angeles Branch of the San Francisco Reserve
Bank formed a Task Force working with local banks
and government agencies to ensure sufficient supplies
of high quality currency for automated teller machines
near the Olympic Stadium and the Olympic Village.
The Task Force also worked with the Olympic Organiz­
ing Committee to study requirements for armored
cash transportation and security precautions. These
cooperative efforts successfully met the needs of the
international event.

The Federal Reserve Banks are the chief agents for
relaying government transfer payments, such as social
security payments, to individuals. These payments are
made primarily through electronic transfers and/or
Treasury checks. Electron ic payments through the Au­
tomated Clearing House (ACH) and "Fedwire" have
grown in recent years and the upward trend continued
in 1984. Last year, government payments constituted
38 percent of the Systemwide ACH volume. Reserve
Banks also collect, sort, cancel, and truncate Treasury
checks after circulation. Within the System, the San
Francisco Bank is the largest processor of government
checks in the United States, handling nearly 100
million such checks in 1984.


Priced Payments Services
Growth of Payments Service s

Through the Monetary Control Act (MCA) of 1980,
Congress sought to promote greater competition in
financial markets through deregulation and greater effi­
ciency in the payments mechanism. It did the latter by
requiring all Federal Reserve Banks to provide open
access to payments services at explicit prices for all
depository institutions subject to reserve requirements
and to set prices to fully recover the direct and indirect
costs of these services. The Federal Reserve Bank of
San Francisco has responded to the mandate by pur­
suing efficiencies from automation and by continually
improving the quality of its services in response to the
needs of the financial community in the nine western
states it serves.

Change (%)



Aut omated Clearinghouse




The Twelfth District encompasses a highly populous
and diverse area with a population of 38 million people
spread over five time zones. To learn of and respond
to the needs of more than 4,000 depos itory institu­
tions, the District Financial Services unit conducts
market research and Districtwide service information
programs. The District Product Management group,
working with operations and automation staff, trans­
lates these needs into new or enhanced products. As
a direct result of this program, a net increase of about
300 new customer relationships were established in
1984, and approximately 1,000 institutions in the
Twelfth District now use Reserve Bank services.

_ 20









By emphasizing improvements in the quality of check
services that, for example, reduced internally generat­
ed float by 75 percent, the San Francisco Reserve
Bank was able to hold the cost of check services
steady throughout 1984. This commitment to price
stability and rigorous cost-control will ensure a
continuation of current product prices through 1985 with
no more than minor adjustments.
The Twelfth District's broad range of demographic and
geographic conditions, in conjunction with its time dif­
ferences from eastern money markets, has dictated
the most complex check transportation requirements in
the System. In 1984, the Bank extended its transporta­
tion capability by joining with the System's Interdistrict
Transportation Service (ITS) in delivering check collec­
tion services. The use of ITS charter service improved
the availability of funds on many checks payable in
other Federal Reserve Districts.

Check Services
The San Francisco Reserve Bank handles the largest
volume of checks of any Reserve Bank in the Federal
Reserve System. As a result, it aggressively pursues
improvements in service levels and quality. In 1984, as
part of a Systemwide plan, the Bank implemented later
check deposit deadlines to improve the availability of
funds . In addition, the Bank implemented the High Dol­
lar Group Sort service as part of a Systemwide effort
to accelerate the collection of checks and offer cus­
tomers significant opportunities to obtain improved
check availability and reduce transportation costs.
Also, an enhanced national monitoring system to track
delivery and credit performance on individual cash let­
ters improved the Bank 's ability to optimize check
transportation arrangements as well as to assign
check float to institutional depositors.

Funds Transfer
The Reserve Bank's online Funds Transfer service
continued to grow in 1984 especially with the increas­
ing popularity of its microcomputer-based service­
FedLine. The total number of customers using FedLine
doubled in 1984 to approximately 800.


Initially, the major goal of FedLine was to allow a wider
range of subscribers to transfer funds directly through
the Federal Reserve's communications system­
Fedwire. During 1984, the Bank expanded FedLine 's
capabilities further to allow customers to place orders
for currency and coin. In addition, the terminal device
used for leased line electronic access was changed to
a microcomputer for compatibility with FedLine and to
provide better service. In early 1985, depository finan­
cial institutions will also have the option to receive
electronic information on cash letters, debits, credits
and adjustments, as well as daily accounting informa­
tion, through a new service, "FedLine-UpDate."

Growth of Cash Services
Change (% )




Automated Clearing House
The bank's Automated Clearing House (ACH) facility
remained an important and rapidly growing service in
1984. ACH consists of the exchange and del ivery of
electronic payments items. While incentive pricing has
been employed as a means to encourage rapid growth
in this electronic service, the cost recovery target for
this service has increased annually. In 1984, the ser­
vice was priced to recover 60 percent of expenses. By
1986, the Federal Reserve System plans to have
phased in full cost recovery for ACH service. In coop­
eration with local Automated Clearing House Associa­
tions, the Bank continues to identify opportunities for
stimulating wider acceptance of efficient electronic
payments and for facilitating the entry of private sector
processors into ACH service.




• Does not inc lud e weighed

CO in,





so 1977 figure is not com parable.

•• Change in mint shipments.

fit currency. The improved quality of currency helps
accommodate the cash dispensing requirements of
automated teller machines now abundant in the
Twelfth District .
Many Reserve Banks have elected to terminate their
direct involvement in cash transportation. The San
Francisco Bank , however , has opted to continue offer­
ing the service in the Twelfth District in response to
increased customer demand. Since the inception of
cash transportation pricing in 1982, the number of
locations reached by the San Francisco Reserve
Bank's cash delivery network has grown continuously.

On a national scale, the ACH service was enhanced
significantly by an improved SystemWide deposit and
delivery schedule, new ACH software, the automation
of paper return items, and substantially expanded
electronic capab ilities.

This Bank provides a variety of secur ities services to
financial institutions in the Twelfth District, including
transferring of book-entry securities, purchase and sale
of government securities, and collection of noncash
items. The pricing of System services for book-entry
securities has prompted continuinq initiatives to reduce
costs, including an evaluation of the effectiveness of
centralizing the Twelfth District's service at San Fran­
cisco. In 1984, the bank's securities services staff
collaborated with the Federal Reserve Bank of Minne­
apolis in an effort to improve the payment process for
noncash collect ions sent to paying agents in the
Twelfth District. This joint effort resulted in greater
efficiency and a reduction of float.

Cash and Securities Services
Despite growth in alternative payments services, cash
requirements throughout the Twelfth District were sub­
stantial in 1984. The Federal Reserve circulates new
Federal Reserve notes, withdraws unfit bills from circu­
lation, and accommodates transfers of currency among
financial institutions. Coin also is collected, counted
and redistributed by the Federal Reserve System.
While the transportation of currency and coin is priced,
processing and related activities are provided as a
government service. The quality of currency has been
improved through the use of new high speed Currency
Verification, Counting and Sorting (CVCS) machines
that not only increase sorting speed but also provide
for consistent control and adherence to standards for


Branch Operations
(Shown from left to right, standing)

David J . Christerson , Vice President, San Francisco Branch

E. Ronald Liggett, Vice President, Salt Lake City
Gerald R. Kelly , Senior Vice President , Seattle
Richard C. Dunn, Senior Vice President, Los Angeles
Angelo S. Carella, Senior Vice President, Portland
H. Peter Franze l, Senior Vice President , District Operat ions
A. Grant Holman , Senior Vice President (Retiring), Salt Lake City


Summary of Operations
Volume (thousands)


·· 1984

4,649 ,901

1,767 ,236

5,078 ,150

. 5,302,832

402 ,885

339 ,820

285 ,420
333 ,512

· 1,549
279 ,342




1,337 ,350
509 ,560
. 95 ,548



91 ,838











Custody Services
Cash Services
Currency paid into circu lation
Coin paid into circulation
Securities Services
Savings Bonds original issues
Savings Bonds redemptions processed "
Other Treasury orig inal issues
Food coupons processed

Payments Mechanism Services

Check Processing Services

Commercial checks processed
Fine sort bundles processed " !
Government checks processed
Return items processed
Electronic Funds Transfer Services
Wire transfers processed
Automated clearinghouse transactions processed

Discounts and Advances
Total discounts and advances"
Number of financial inst itutions accomrnodated '
• Number (not in thousands)
, Reported in packages beg inning in 1984.


Twelfth Federal Reserve District


.. -





Directors of the Federal Reserve bring management ex­
pertise to the task of overseeing Reserve Bank opera­
tions. They provide information on key economic devel­
opments in various areas of the District, complementing
the Bank's internal research. In addition , Board mem­
bers give advice on the general direction of monetary
policy, especially with regard to the Bank's discount

Head Office
Chairman of the Board and Federal Reserve Agent
Alan C. Furth
Vice Chairman
Santa Fe Southern Pacific Corporation
and President, Southern Pacific Company
San Francisco, California
Deputy Chairman
Fred W. Andrew
Chairman of the Board, President and
Chief Executive Officer

Superior Farming Company

Bakersfield, California

Carolyn S. Chambers


Chambers Cable Com., Inc.

Eugene, Oregon

Rayburn S. Dezember
Chairman, President and Chief Executive Officer
Central Pacific Corporation
and Chairman, American National Bank
Bakersfield, California










Spencer F. Eccles
Chairman , President and Chief Executive Officer
First Security Corporation
Salt Lake City, Utah
Donald J. Gehb
President and Chief Executive Officer
Alameda Bancorporation and
Alameda First National Bank
Alameda, California



John C. Hampton
Chairman, President and Chief Executive Officer
Willamina Lumber Company
Portland, Oregon
Togo W. Tanaka
Gramercy Enterprises, Inc.
Los Angeles , California

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

George H. Weyerhaeuser
President and Chief Executive Officer
Weyerhaeuser Company
Tacoma, Washington


Los Angeles
Chairman of the Board
Richard C. Seaver
President and Chief Executive Officer
Hydril Company
Los Angeles, California

Thomas R. Brown, Jr.
Chairman of the Board
Burr-Brown Corporation
Tucson, Arizona
Robert R. Dockson
Chairman and Chief Executive Officer
CalFed, Inc.
Los Angeles, California
Bram Goldsmith
Chairman and Chief Executive Officer
City National Bank
Beverly Hills, California

Lola McAlpin-Grant
Inglewood, California

Harvey J. Mitchell
President and Chief Executive Officer
Escondido National Bank
Escondido, California

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


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

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


G. "Johnny" Parks
Northwest Regional Director
International Longshoremen's &
Warehousemen's Union
Portland, Oregon
Sandra A. Suran
Suran and Company
Beaverton, Oregon

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


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

John A. Dahlstrom
Chairman of the Board
Tracy-Collins Bank and Trust Company
Salt Lake City, Utah
Lela M. Ence
Executive Director
University of Utah Alumni Association
Salt Lake City, Utah
Albert C. Gianoli
President and Chairman of the Board
The First National Bank of Ely
Ely, Nevada

Fred C. Humphreys
Ch~rman, P~s~entand

Chief Executive Officer
The Idaho First National Bank
and Moore Financial Group
Boise, Idaho

David Nimkin
Financial Development
Neighborhood Housing Services
of America , Inc.
Salt Lake City, Utah
Robert N. Pratt
Former President
White River Shale Oil Corporation
Salt Lake City, Utah




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



Lonnie G. Bailey
Executive Vice President
Farmers and Merchants Bank
of Rockford
Spokane, Washington
Carol Birkholz
Managing Partner
Laventhol & Horwath
Seattle, Washington
Byron I. Mallott
President and Chief Executive Officer
Sealaska Corporation
Juneau, Alaska

John N. Nordstrom
Co-Chairman of the Board
Nordstrom, Inc.
Seattle, Washington
W. W. Philip
Chairman, President and
Chief Executive Officer
Puget Sound Bancorp
Tacoma, Washington
William S. Randall
President and Chief Executive Officer
First Interstate Bank
of Washington, N.A.
Seattle, Washington


Comparative Statement of Account

(Thousands of Dollars)
December 31,

Gold certificate account
Special Drawing Rights certificate account
Other cash






$ 1,182,000 $ 1',318,000
518 ,000

Loans to depository institutions



. 23,700 •

Federal Agency obligations



'. 1;075 ;682 ,

United States Government securities:


8,345 ,211
. 9,108,176
8,107,233 " ' 8 ,364;689
2,639,318 " 2,942,780 ,


Total United States Government securities
Total loans and securities
Cash items in process of collection
Bank premises
Operating equipment






Other assets:
Denominated in foreign currencies
All other . , . ,








, .


" 31,319


,, 589,744
. 690,995

,. ,





, .. ,








Interdistrict Settlement Account







Total assets



' 26,929,393 "

Federal Reserve notes

19,930,15121 ,048,999


Total depository institutions-reserve accounts
Other deposits

Total deposits








, .. ,


Deferred availability cash items
Other liabilities



Total liabilities




, .. , .. ,


, .. ,

, ., .,


,., .. ,

, .,.,. ,

, .,











, ..




57,996 '

Capital Accounts
Capital paid in
Surplus ,


Total liabilities and capital accounts


,.,. ,






255,490 '

Earnings and Expenses
(Thousands of Dollars)
December 31,


Current Earnings

Total current earnings




Total current expenses

Less reimbursement for certain fiscal agency and other expenses




Net expenses
Cost of earnings credit




Current net earnings

Additions to current earnings

Profit on sales of United States Government securities (net)

All other







Total additions




Deductions from current net earnings

Loss on foreign exchange transactions (net)

All other




Total deductions




Net additions ( + ) deductions ( -)
Assessments by Board of Governors

Board Expenditures

Federal Reserve currency cost

Net earnings before payments to United States Treasury

Dividends paid

Payments to United States Treasury (interest on FR notes)


- 37,088




. -20,624

Transferred to surplus

Surplus January 1

Surplus December 31






2,122,735 .

Discounts and advances

United States Government securities

Foreign currencies

Income from services

All other


Current Expenses

Profit and Loss


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

This report was prepared by the staff of the Federal Reserve Bank
of San Francisco: produced by Karen Rusk; graphics designed by
William Rosenthal ; edited by John L. Scadding and Gregory J.
Tong. Assistance provided by Economic Research; Supervision,
Regulation and Credit; District Operations; Accounting; Personnel;
and Computer Services .

Federal Reserve Bank of San Francisco
P.O. Box 7702

San Francisco, California 94120






Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102