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Operations of the Federal Reserve Bank of St. Louis —1972 by WILLIAM C. NIBLACK UNCTIONS performed by the Federal Reserve System can be divided into three broad categories: economic stabilization, bank supervision, and the performance of numerous services for commercial banks, the U.S. Government, and the public. The economic stabilization role is primarily conducted on a Systemwide basis through the Board of Governors and the Federal Open Market Committee (FOMC), while the service and supervisory roles are largely responsibilities of the twelve Federal Reserve Banks. Since this Bank annually reviews economic stabilization policy decisions elsewhere,t this article will review only the supervisory and service operations. The Federal Reserve Bank of St. Louis and its branches at Little Rock, Louisville, and Memphis serve the Eighth Federal Reserve District, which includes all of the state of Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee. A change in the geographical makeup of the Eighth District occurred in 1972; 24 counties in western Missouri containing 26 member and 92 nonmember banks \vere transferred to the Tenth Federal Reserve District to be served by the Federal Reserve Bank of Kansas City. The transfer of these counties, which are economically more aligned with Kansas City than with St. Louis, resulted in shorter distances for check and cash delivery routes and thus in finproved service for the banks in the area. This was the first change in district boundaries since 1926, when two New Mexico counties were transferred from the Dallas to the Kansas City District. At the end of 1972 there were 430 member and 976 nonmember banks in the Eighth District, Although fewer in number than nonmember banks, member banks held nearly 60 percent of total deposits in the District. SUP.ER%-JJ&ION One of the major functions of the Federal Reserve Banks is supervision of state member banks and ~Annsmalreviews of FOMC monetary actions for the years 1964 through 1971 are contained in Reprints 13, 17, 22, 28, 39, 57, 68, and 76, available on request from this Bank. bank holding companies to insure a safe, efficient banking system. A major supervisory function is the annual examination of state banks which are members of the Federal Reserve System to evaluate their assets, liabilities, capital adequacy, liquidity, operations, and managemnent while assuring compliance with applicable laws and regulations. The information obtained from these examinations is used by banking authorities to correct unsatisfactory conditions and to assist banks in finproving their operations. Examiners from the Federal Reserve Bank of St. Louis examine the 95 state member banks in the Eighth District, usually in conjunction with examiners from the state supervisory authority. All national banks are required by law to be members of the Federal Reserve System, hut they are examined by representatives of the Comptroller of the Currency. Other insured banks are examined by the Federal Deposit Insurance Corporation (FDIC) and state supervisors, while the few noninsured banks are examined by state examiners only. Federal Reserve Banks also supervise hank holding companies. At the end of 1972, the St. Louis Reserve Bank had jurisdiction over 14 multiple bank holding companies headquartered in the Eighth District2 and 72 one-bank holding companies registered in the District. Applications to form bank holding companies and for bank holding companies to acquire bank or bank-related subsidiaries are processed by the Federal Reserve Banks. The Reserve Banks have been delegated authority by the Board of Governors to approve certain types of bank holding company applications; the remaining applications are processed and forwarded to the Board of Governors for final disposition. Bank holding companies are required to file annual reports which are reviewed by the Examination Department of this Bank for completeness and accuracy. These reports are analyzed to determine the financial eonditiorm of the holding company and its subsidiaries and to assure compliance with applicable laws t These 14 multi-bank holding companies had 56 bank subsidiaries in the Eighth District and 12 in other districts. Page 17 FEDERAL FEBRUARY RESERVE BANK OF ST. LOUIS and regulations. Inspections of bank holding companies are also conducted to evaluate the management of the holding company and its nonbanking subsidiaries. Examination Table I VOLUME OF OPERATIONS Dolor Ar’ount reports of subsidiary banks are analyzed to determnine the soundness of the banks and to appraise their management. Other supervisory functions include the admission of state banks to membership in the System and the approval of bank mergers and new branches of state member banks. I - millions I Pe’cqr’t - 1972 Currency items . . U.S. Savings Other 9.84 69.5 102 455.7 - 772 . 1,968.9 397,204.6 605 6 20,710.9 219.4 273.8 Bonds: Go,ernment secLrifes’’ coupor.s paid Food Coupons received and counted U.S. . - t Trons ers of funds 5155,803.1 268.9 860 1,866.8 349,249.4 585.0 23,629 2 229.4 249.2 .. - counted change $171,092.6 checks collectedZ Noncass, collec’ion coir’ counted 1971 Govcrnmrr.t ... SERVICES In addition to its supervisory role, the Federal Reserve Bank of St. Louis and its branches perform numerous services for banks, the Government, and the public; these services include collecting and transferring funds, distributing coin and currency, maintaining time reserve accounts of member banks, serving as fiscal agent for the Government, conducting economic research, and performing educational functions concerning the banking system, Federal Reserve operations, and 1973 N urn br r Ithousands - — - 5.5 13.7 3 5 I 2.4 4.4 9.9 PercenT 1972 Checks collected~ Noncosh collection coin . - . . . - . counted Currency . items . counted . Transfers of funds U.S Sav;ngs Bonds~ Other Government . securit’es’’ U.S. Government coupons paid Food Coupons ~‘,,ts.l F’.’ shu ‘ecew.,d S: (,ri’..’ ii,, au~.. and co.:n.tnd Change 512,966 /51 652,056 266,323 410 10,311 .415 136 129,610 480,946 804 /25,885 248,606 356 10,724 581 804 89.813 6.7. 6.6 10 2 7 0 15.2 3.9 28.6 12 2 44.2 TLuc’k. lam i,~,Ik~ml ums,h:-..uflmres. M Unlu r,’. ‘liii’.’ .. 19/1 ,r’.sl 1 .‘~i’sl.,‘-.v},Li.,’.-. I stabilization policy. her and a 9.8 percent increase in dollar value over (]aiiartira, .aa.d 1rara/e~r of I/trabr The Federal Reserve System plays a central role in the payments meehanismn and is presently embarked on a program designed to accelerate the transfer-offunds process. Cheeks drawn on commnereial banks are at present the means of settling most nonhank financial transactions. Payment by cheek offers many advantages over payment by cash, including less risk from theft or loss, greater convenience in making many types of transactions, and provision of a record of disbursements. The use of cheeks is facilitated by the collection and clearing operations of the Federal Reserve Banks, which provide a mechanism for setfiement of checks collected by commercial banks. Settlement is accomplished by entries to the reserve accounts of member banks. With a growing economy, the number of checks written per year has risen a.t a rapid rate. The St. Louis Federal Reserve Bank and its branches cleared 513 million cheeks with a dollar value of $171 billion in 1972. This represented a 6.7 percent increase in numPage 18 the 1971 levels (see TI’able I). itil (‘IIOi’t to liii— i’fhic’mu’~’.rI cluck s Ii-arui~(ips’l’ltti)Il~: ‘Sn— tuali~ cii ml thy Hu-ek~s_hired In tIic’ St. louis Rank III 972 ~\t’i’r pii.cx’~sc’d Is> c’ouputri—. \VitIi the imitiri— [).LtlOhl (ml it sosiliiiii’sI ill(’i’i’,lsi’ It ‘lieu_-k \Uhiilllc’, Still .\utomii,ttiimmi li~1s imi-i’ll itit’ii’mt’~t’si ill jii’sm\s’ till’ ti’anslu’m’rinq fuiud~ lint’ ht’en iim— i!rvehrpr’d. ‘1 he ~oul of snub (hurts k in k]s’utnuinc’ Funds ‘I r’mnstci— S>sfrnu iH”i Si ill \\ Ilk Ii cli’s ti—inns’ si~Zil:kis l’c’piau:c’ ~ checks In’ ‘rc’ I api! e’tiu,ttrs! tile Ilit’.ulis Inc’’ul~ ii! mmmli’ In imumz ml ti’aii~ls’r. Although such a system will evolve over a number of years, a substantial amnount of funds are already transferred by electronic means, through the Federal Reserve Communications Network. These wire transfers are used for large transactions such as those resulting from interbank loans, check collection, and U.S. Treasury obligations where immediate payment is desirable. In 1972, 410,000 wire transfers totalling $397 billion were made by the four offices of the St. Louis Bank, an increase of 15.2 percent in number FEDERAL RESERVE BANK OF ST. LOUtS FEBRUARY 1973 Table Ii PERCENT RESERVE REQUIREMENTS Net Demand Drposits Nit Demand Deposits in Eecess Oi $5 Miuion uo to $5 Million up Reserve c:t, Banks Prior to November 9, 1972 . Othe Member Bonks Reserve Oty Banks Other Member Banks Ti’nu Depastn to $5 Million and Savings Depo:’tu Time Deposits in Excess of — 55 Mh:on I? 121i, 17½ 13 3 5 . Net Demand Dcpasits (Mi.t,ons of Dotlo’s I 2 ou Less November 9.1972 November 16. 1972 in effect February 1, 1973... Rave. vs 5 :ty BicS ‘Oths SI s:sut,s—r II’, Over 2 to 10 Over 10 to tOO 8 10 10 10 16’,,’ 12 8 8 O,’er 100 to 400 12 12 13’’ 13 13 Over 400 171/2 171/2 17’/~ 1 mc Deposits up to 55 Milan and Sa,rnqs Dnposits 3 3 3 Time Deposis in Exress of $5 Million 5 5 5 ., — and 13,7 percent in value over the 1971 levels. The number of transactions was small compared to the number of cheeks processed, but the value of funds transferred by wire in 1972 exceeded the value of checks processed by $226 billion. Following the Board of Governors’ “Statement of Policy on the Payments Mechanism” in June 1971, Regional Check Processing Centers (RCPCs) were established at strategic locations around the country to give overnight clearing service to participating banks. The Federal Reserve Bank of St. Louis and its branches at Little Rock, Louisville, and Memphis began RCPC operations in 1972. By the end of 1972, the St. Louis RCPC was able to offer overnight clearing services to banks in the City of St. Louis and eight surrounding counties in Missouri and Illinois, At the same time the Little Rock RCPC zone had expanded to include 42 Arkansas counties, while the Louisville zone included 41 Kentucky and Indiana counties and the Memphis zone contained 35 counties in Tennessee, Arkansas, and Mississippi. Significant changes in check collection procedures and reserve requirements were also implemented during 1972. Before these changes took place, banks outside overnight cheek clearing zones were allowed to delay payment to the Reserve Bank for one or more days after being presented a check drawn against them. This practice resulted in a form of Federal 3 Reserve credit known as “float,” Under a change in tm Float results when a bank presenting a check to the Reserve Bank is givers credit for the check before the bank against which the cheek is drawms pays the Reserve Bank. The longer the time period between crediting the bank presenting the check and collecting the funds from the bank against which the check is drawn, the greater the amount of float, On the Federal Reserve balance sheet, float is the difference betsveen the value of cash items in process of collection on the asset side and deferred availability cash items on the liability side. the Federal Reserve System’s Regulation J (“Collection of Checks and Other Items by Federal Reserve Banks”) implemented on November 9, 1972~, ll banks a using the Federal Reserve check collection system must remit for checks drawn against them in immediately available funds the same day the checks are presented for payment. This accelerated collection and transfer of funds was designed to reduce float. The change in cheek collection procedures was purely technical, and the loss of reserves resulting from reduction in float was not intended to result in any change in the stance of monetary policy. The reduction in reserves was more than offset by a release of reserves caused by a simultaneous change in the System’s Regulation D (“Reserves of Member Banks”), which reduced certain required reserve ratios. The purpose of the Regulation D change was to restructure reserve requirements on net demand deposits by eliminating the distinction between banks based on their location. Before the change, deposits at “Reserve City Banks” were subject to higher required reserve ratios than those at “country Banks” of the same size, Now, reserve requirements are determined solely by the amount of deposits of the bank. All member banks of equal deposit size are required to meet the same 5 required reserves (see Table II). Although checks are the major means of payment in this country, coin and paper currency still play an important role. Currency is more universally accept4 The change was originally scheduled for implementation on September 21 but was delayed until November 9 by court action, 5 changes to Regulations D and J are discussed in greater detail in the Federal Reserve Bulletin (July 1972), pp. 626-630. Page 19 FEDERAL RESERVE able than checks and is a more convenient, less time consuming, and cheaper method of settling relatively small transactions. The demand for coins has increased with the increased use of vending machrnes. The public adjusts its money holdings between detnand deposits and currency according to its preferences for holding each. The demand for currency, for example, usually rises sharply before Christmas. To sneet the public’s demand for currency, member banks order funds from their Reserve Bank, which charges the order to the banks’ reserve accounts; ruelsIber banks with excess currency deposit it in their reserve accounts. Nonmember banks generally receive currency from and transfer excess currency to snember banks. At the Reserve Bank, the usable currency is then redistributed, and the unfit is removed from circulation to be destroyed. Coin and paper currency handled at the four offices of the St. Louis Bank increased in 1972 as the demand for a hand-to-hand medium of exchange rose with increased economic activity. More than 266 million pieces of paper currency valued at nearly $2 billion were counted by the St. Louis Bank in 1972. This represented a 7 percent increase in number and a 5.5 percent increase in value over 1971 figures. Pieces of coin counted in 1972 declined as a result of new counting procedures implemented during the year. Under the new procedures, coins are counted and wrapped in one operation rather than two. Len.dHuig Ac;tzvi.ty Federal Reserve member banks may borrow from their Reserve Bank over short-term periods to meet reserve deficiencies under certain conditions. The volume of these bors’owings is influenced by the discount rate K the rate charged on borrowings from Reserve Banks) and snarket interest rates.” Use of the borrowing privilege, called the “discount \vindow, normally increases when the discount rate is low relative to the Federal funds rate (the rate at which one commercial bank lends funds to another, usually for one business day) or to rates of other short-tersn instruments such as Treasury bills and prune commercial paper. Conversely, loans to member banks usually decline when the discount rate rises relative to these other rates. “The interest rate charged nn borrowings from Reserve Bsusks is still referred to as the discount rate, although most lending is now’ in the form of advances. use Board of 1)1rectors of each Reserve Ilassk sets the discount rate for tIme Bank subject to review and detcrsnination by the Board of Governors. Page 22 FEBRUARY 1973 BANK OF ST. LOWS During the entire year of 1972, the discount rate remained at 4.5 percent, having been reduced from 4.75 percent on December 13, 1971.~Short—term market interest rates rose during 1972. Member bank borrowings from the St. Louis Bank was, accordingly, higher in 1972 than in 1971, especially in the second half of the year as the differential between money market rates and the discount rate increased (see Table III). Daily average member bank borrowings increased from $2.6 million in September to $41.1 million in December. In 1972, 198 advances totalling $1.35 billion were made to 25 banks. This represents a four-fold increase over 1971 when advances totalled $337.1 million. Daily average outstandings in 1972 were $6.6 million, compared to $1.5 million in 1971. Fiscal 4~~c”~iI Federal Reserve Banks also serve as bankers to the Federal Covernsnent. The functions they perform as fiscal agent include the handling and transfer of Government funds and assistance in the management of the public debt. The principal Governtnent checking accounts from which the Treasury makes its disbursements are maintamed at the Federal Reserve Banks. When the Government collects taxes or sells securities to the pubhc, the payments received are normally depi sited initially in Treasury tax and loan accounts at those colnmercial banks which have been designated special depositories. The Treasury periodically calls in funds from these accounts and uses them to replenish its working balat~ccs’atthe Reserve Banks. Reserve Banks also play a significant role in the management of the public debt. They assist in marketing new Government securities by (1) circulating subscription forms and receiving applications for the purchase of the securities, K 2) allotting the securities according to the Treasury’s directions, and K 3) dclivering them to the purchaser. In addition, the Reserve Banks redeesn securities at maturity, make security exchanges, amid pay interest by redeeming coupons. In 1972 more than 10 million savings bonds and 400,000 other Governsnent securities with a total value of more than $21 billion were issued, exchanged, or redeesned by the Federal Reserve Bank of St. Louis. In addition, 706,000 Government coupons with a value of more than $200 mil]iou were paid by this Bank. T The discount rate at all twelve Federal Reserve Banks was raised to 5 percent ellective Jannas’y 15, 1973. FEDERAL RESERVE BANK OF ST. LOUIS FEBRUARY 1973 ment’s analysis of competitive and service factors involved in bank holding eosnpany and merger applications. Table III LOANS TO MEMaER BANKS fDottor Amounts in Thousand Ày q9e Amount Out boding January February March April May June July August September o tober , November $ . - - - - . - 552 17 1, 71 1,519 39 3220 &085 3~334 2 630 . . - . ,.. . . . - - - - - - Deemnber - 7,448 - 11,647 41,093 , - . . Nombe at Banks Total advonce~, 1972 Total advances, 1971 Daily average outstanding 1972 1971 . ~iou 5513- ave a o elY 25 . - 31 Fadea Ponds Rate 50 3.29 83 4 17 427 446 455 4 80 4.87 504 506 533 Number a ocunt Rota 055 450 4,50 450 4.50 450 .0 4 0 50 Bank lie tat:za D’scoont Rat fan-ire Intorm.anun. 100 1 21 67 3 .23 04 05 0 37 54 6 .83 4. 0 450 450 4 0 Advances Aggregate Amount of Ad once (including den wals) 198 185 5,1,349 145 37526 6, 51 53 - I, Pd olfund Rat Minos ‘~ An additional fisc’tl agcncx actis ‘ty is the rcdcmption of Government food coupons. These rcdempt’ons showed a substantial increase in 1972. uhen 130 ssiillion coupon sstth a total value of 82i4 million wer received and countedl by this Bank. TIus ret resented a 44.2 percent mere ise in number and a ~.9 p ‘scent increase in value o~cr1971 redcmptions. 5- The four offices of the St. Louis Bank endeavor to snaintain personal contact with all banks in the Eighth District, to assist member banks with their operations related to the Federal Reserve, and to provide educational programs on economic and banking topics to the public. One of the services available to member banks is the Federal Reserve “Functional Cost Accounting Program,” which provides a cost-income profile of each participating bank’s major functions. These data enable an individual hank to compare current operating data ivith its previous operating statistics as well as with a group of banks of similar size. During 1972, officers and staff snemhers of the Federal Reserve Bank of St. Louis and its branches delivered 304 add se before groups of bankers, businessmen, and educators. This Bank was represented at 284 hanker, 31 profc sionil and 244 miscellaneous meetings. Under the hank visitation program, 1,308 banks were visited. During 1972. 249 groups requested films, and 5,257 visitors toured the four offices. ST.ATI.iFIIk.NTS c.,.n ~ An increasing amount of Research Department activity is devoted to the study of bank snarket structure. Included in this activity is the Research Depart- Total assets of the Federal Reserve Bank of St. Louis and its branches at the end of 1972 were $3.71 billion, a decline of 6.9 percent from 1971 (see Table IV). The decline resulted primarily from a $400 million decrease in cash items in process of collection caused by the new check collection procedures described above. This decrease was partially offset by a $188 million increase in the Gold Certificate account to 8534 million.~’Two-thirds of the Bank’s assets were held in U.S. Government securities, primarily shortterm bills and notes. Remaining assets, including the Special Drawing Rights account, notes of other Federal Reserve Banks, Federal agency obligations, and hank premises, totalled $219 million. “A list of the recurring publications of the Research Depart— ment is contained in the January 1973 issue of this Review, ‘This change in the Gold Certificate account was caused in part by revaluation of gold in 1972. The Research Department of the St. Louis Reserve Bank collects and analyzes a broad range of regional, national, and international economic data. These an— aly’ses are used by the President of this l3ank in the formulation of monetary policy reeomsnendations at the meetings of the Federal Open Market Committee. Additionally, information and data related to economic developments are made available to the public through this Review and other publications.” Page 23 ~ = a cji - ~ ~ — ~ a — C’ — — 0 ~‘ (,e. 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