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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



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