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Operations of the Federal Reserve Bank of St. Louis—1974 JEAN LOVATI THE Federal Reserve System consists of the Board of Governors, located in Washington, D. C., and twelve Federal Reserve Banks located in districts across the United States. The Federal Reserve Bank of St Louis serves the Eighth Federal Reserve District which includes all of Arkansas and parts of 1111nois, Indiana, Kentucky, Mississippi, Missouri, and Tennessee. To assist in servicing the area, branches of the St. Louis Federal Reserve Bank are located in Little Rock, Louisvffle, and Memphis. The St. Louis Federal Reserve Bank and its branches perform a variety of services for the public, commercial banks, and the United States Government. These services include collecting and clearing checks, transferring funds, distributing coin and currency to commercial banks, and conducting fiscal agency operations for the Federal Government. The Bank also extends credit to member banks and supervises certain commercial banks to promote sound banking practices. This report reviews most of the operations and functions of the St. Louis Federal Reserve Bank and its branches during 1974. The actions of the Bank, along with the other eleven Federal Reserve Banks and the Board of Governors, in formulating and implementing monetary policy are discussed In other issues of the Review. Bank Supervision and Regulation The Federal Reserve Bank of St. Louis, along with the state banking authorities, supervises state chartered member banks in the Eighth Federal Reserve District. Bank supervision encompasses a wide variety of technical functions relating to the operations of member banks. The Bank Supervision and Regulation Department oversees the admission of state banks into the Federal Reserve System, conducts annual bank examinations, and analyzes periodic reports of condition. It reviews proposed mergers resulting in state member banks and applications to open new branches by these banks. The most familiar form of supervisory activity is bank examination, through which information is collected on the current financial condition of individual banks. The examiners ascertain whether state member banks are complying with the applicable laws and regulations and evaluate each bank’s assets, liabilities, capita], liquidity, operations, and management. Page 8 The 88 state member banks in the Eighth District were examined by St Louis Federal Reserve Bank examiners in 197t These banks are also subject to examination by state banking authorities. The 343 national banks in the Eighth District, which are required by law to be members of the Federal Reserve System, are examined by the staff of the Comptroller of the Currency. State nonmember banks that are insured by the Federal Deposit Insurance Corporation (FDIC) are examined by the FDIC along with the respective state banking authorities. The noninsured banks in the District are examined by state examiners only. Federal Reserve Banks also supervise bank holding companies. At the end of 1974~the Federal Reserve Bank of St. Louis had jurisdiction over 17 multibank holding companies and 73 one-bank holding companies. The Bank Supervision and Regulation Department, with the assistance of the Legal and Research Departments, analyzes applications for bank holding company formations and holding company acquisitions of additional banks and firms in industries closely related to banking. In reviewing an application, these departments consider the financial history, conditions, and prospects of the institutions involved, and evaluate the quality of management. The legal aspects of the proposal and its likely effects on banking competition are assessed. DurIng 1974, this Bank processed 11 applications to form one-bank or multibank holding companies and 39 applications by holding companies to acquire additional subsidiaries. Bank holding companies are required to file annual reports with the Reserve Banks. These annual reports are analyzed by the staff of the Bank Supervision and Regulation Department to verify accuracy and completeness, to ascertain the financial conditions of the holding company and its subsidiaries, and to determine compliance with applicable laws and regulations. Examination reports submitted to the primary supervisory agency of the respective bank subsidiaries are also analyzed by the Federal Reserve Bank to determine the overall conditions of such subsidiaries. In addition, the Bank conducts discretionary on-site inspections of bank holding companies. The purpose of these inspections is similar to that of examinations of subsidiary banks. FEDERAL. RESERVE BANK OF ST. LOUIS FEBRUARY 197! Tabte VOLUME OF OPERATIONS’ Nunsb (thou ands) 1974 Checks handed . Transt r5 a unds , Cur ency ret ived en~counted . . . Ca,,, received and counted . . 11.5 Say ng Bands acid Savrngs Notes 0th r Coy nm at Secursties U . Gavenim ntcavpon paid Food stamps ece,v dead counted To iEtd ci Loin ~ *1 Tt k ovusneothek nic , ci d 614, 04 61 2 7,873 . . . . I 29 .469 1 422 674 446 180 365 1973 58 713 494 273, 04 1 291 3 11,021 493 683 142,635 r at Change 4.9°/a 24. .7 0.1 3.6 4.7 54 26.5 Do to Amount (a iRon ~ 1974 1973 $210413 691,202,7 2400.1 $19 ,440 3 491 2449 2,147.0 1278 66$ 2 28,326 2 2579 4277 131 6426 822 0 2426 31 .6 2 ant Chang 99% 407 11 8 27 0 18 9 63 355 o~nfl y ci m Check Collection Checks drawn on commercial banks are the major means of settling daily financial transactions, since in most cases payment by check is more convenient than lar payment by currency. The use of checks is facilitated by the collection and clearing operations of the Federal Reserve Banks, which provide a mechanism for settlement of checks collected by commercial banks. Settlement is made by entries to the reserve accounts of member banks. The four Eighth District Federal Resene offices cleared 614 million checks with a dollar volume of , . $210 billion in 1974. I his represents a 4.9 percent increase in number and a 9.9 percent increase in dolvolume over 1973 (See 1 able I). Electronic Transfer of Funds has instituted a method to improve the handling. clearing, and settling of checks and to increase the speed of the payments mechanism. Regional Check Processing Centers ( RCPCs ) have been established in key cities across the country for these purposes. RCPCs are facilities which serve a geograpluc area wherein checks drawn on participating banks are processed overnight. In order to further increase the efliciency and speed at which funds are transferred, the Federal Reserve Bank of St. Louis is expanding its part of the Federal Reserve Communications System. A computer at the Bank serves as the communication and switching center for the entire Eighth District. Member banks may use the System’s network to transfer to other member banks funds of $1,000 or more for their own accounts, or for their customers, anywhere in the country with— out charge. These transf ers are most oftei used for large transactions and for those requiring immediate t payment. Nonmember banks have access to this sen ice indirectly through member banks. The Federal Reserve Bank of St. Louis and its branches each have been defined as an RCPC. A zone has been established for each center which corresponds to that portion of the Eighth District served by the respective offices. Overnight check clearing within the zones has been expanded smce 1972 to include additional counties, thus providmg more banks with this faster service, The RCPC zones of the Memplus and Louisville branches have already been expanded to cover the entire areas served by these offices. Approximately 90 percent of the dollar volume of checks in the Little Rock zone and 80 percent of the dollar volume in the St. Louis zone are on an immediate payment basis. Significant changes in the structure of the communication network in the Eighth District were implemented in 1974. Recently, on—line terminals were installed at the three St. Louis commercial banks having the largest volume of funds transferred through the St. Louis Federal Reserve Bank. These terminals are linked directly’ to the Bank’s computer and enable the banks to initiate fund transfers directly from their offices, Previously, banks usually telephoned or telety-ped the necessary information to the St. Louis Federal Reserve Bank for transmission. Now a transfer initiated by means of an on-line terminal is switched automatically by computer through the Federal Reserve Bank of St. Louis to the Federal Reserve office Since the number of checks cleared has increased rapidly in recent years, tile Federal Reserve System Page 9 FEOERAL RESERVE BANK OF ST. LOUIS of the receiving commercial bank with no direct in’ s’olvement by personnel at the St. Louis Federal Reserve Bank. If the receiving bank is also on-line, the transfer is again automatically switched by computer to that bank through its Federal Reserve office with— ont being handled by the personnel at that office. As the fnnd transfers are processed, the compnter generates the accounting data and other information needed to complete the transaction. This information is then used to npdate member banks’ reserve accounts. Banks with on-line terminals receive an insmediate record of each transaction. Three commercial banks in St. Lonis and two commercial banks in Memphis plus the St. Lonis, Louisville, and Memphis Federal Reserve offices are nOw on-line to the hank’s compnter. A funds transaction may reqnire as long as 2-3 honrs for completion when information is telephoned or tehetyped to the Federal Reserve Bank. Antornated switching has reduced that time to 2-3 minutes, and has reduced the number of transfers handled by the Bank’s personnel by 70 percent. An average of 937 transactions per day sent and received are no longer handled by the personnel of the Federal Reserve Bank of St. Louis since the installation of on-line terminals at the three St. Lonis commercial banks. The Federal Reserve Bank of St. Louis facilitated the transfer of more than $290 hiillion of fnnds in 1974. This represents a 26 percent increase from the $231 billion transferred in 1973. During 1975, the Little Rock branch and nine additional large volume banks in the Eighth District are expected to he directly linked to the compnter facilities at the St. Louis Federal Reserve Bank through on-line terminals. Coin and Currency Although checks and wire transfers are the major means of payment in this country in terms of dollar vohnme, coin and paper currency are indispensible and are used in the greatest number of transactions. Currency is more widely acceptable than checks and is a more convenient means of settling relatively small transactions. To meet the public’s demand for cash, a member bank orders currency from its Federal Reserve Bank, which charges the order to tile member’s reserve account. On the other hand, if a member bank has excess currency, it may deposit currency at the Federal Reserve Bank and receive credit in its reserve account. Nonmember banks generally receive or deposit coin and currency through member banks. Currency is sorted at the Reserve Banks and that Page 12 FEBRUARY 1975 wInch is no longer usable is removed from circulation and destroyed. During 1974. currency totalling $809 milhon was verified and destroyed. Combined sorting, counting, and wrapping of coin and currency at all four Reserve Bank offices in the Eighth District amounted to slightly less than 7.6 million pieces per working day during 1974. This volume represents a decrease of 13 percent compared to 1973. Let ding Federal Reserve credit is extended on a short term basis to member banks which intend to use this source of credit to meet their reserve requirements. There are three types of credit available to members from their Federal Reserve Banks short—term adjustment credit, seasonal cre(lit, and emergency credit. The interest rate at svhich these banks may borrow is called the discount rate. During periods when shsort-term market interest rates are lower than the discount rate, member banks may he reluctant to borrow from the Federal Reserve to cover temporary adjustment needs. Instead, they may obtain funds through the Ferleral funds market ( where one cons— mercial hank lends to another) or through the markets for other short-term instruments, On tile other hand, if the discount rate is low relative to rates in these markets, Federal Reserve lending is likely to increase. An ansenclment to Regulation A of time Federal Reserve Act was approved in 1974. This amendment authorizes the application of a special discount rate to certain types of lending to member banks. The special rate applies to Federal Reserve credit to member banks requesting large assistance over a prolonged period where there are exceptional circumstances involving only a particular member bank. The special rate svould ordinarily he higher than the discount rate. The discount rate at the beginning of 1974 was 7.5 percent. It was raised one time to a record 8 percent on April 26, and then lowered once to 7.75 percent on December 13. Short-term market interest rates remained above the discount rate throughout 1974. ihe St. Louis Federal Reserve Bank made 2,164 advances totalling $11.1 billion to 111 Eighth District member banks ill 1974. During the previous year, 1,759 advances totalling $11.1 bullion were made to 95 member banks. The daily average of outstanding loans was roughly the same in 1974 and 1973, $54.9 million, FEDERAL RESERVE BANK OF ST. LOUIS The Federal Reserve Banks extend credit to smnaller banks to tide these banks over peak seasonal demands for funds. Nine banks itt the Eighth District made use of this seasonal borrowing privilege during 1974. All of the banks winch used this privilege were located in predominantly agricultural areas. No emergency loans were granted. Fiscal Agency The Federal Reserve Bank provides a number of services as a fiscal agent of the Federal Government. As banker for the Government, the Reserve Banks carry the principal checking accounts of the United States Treasury through whicil the Government receives and spends its funds. Goverunsent receipts come mainly fronl taxpayers amId purchasers of Federal Government securities, and are deposited initially in Treasury tax and loan aeeoumsts at designated commercial banks, Periodically, these funds are transferred to Treasury accounts at tile Federal Reserve Banks and spent. The Reserve Banks also act as aim agent for the Government in issuing and retiring Federal Government securities. Wilen the Treasury offers new securities, the Reserve Banks publicize the sale and receive bids from banks, dealers, and others who wish to buy. In accordance witil instructions from the Treasury, allotments of securities are made by the Reserve blanks whiell collect payment on the Government’s behalf, After the securities Ilave been issued and delivered, the Reserve Banks pay the interest on the securities and redeem them at maturity with funds from the Government’s account, In 1974, 11.4 million savings bonds and notes and 674,000 other Treasury issues with a combined dollar value of rougilly $29 billion were issued, serviced or redeemed by the four Eighth District Federal Reserve offices. During the year, 646,000 Government bond coupons valued at $257.9 million \vere paid by these offices. Another fiscal activity is the redemption of U.S (;overnment food stamps. A total of 180 million food stamps with a value of $428 million were received and counted by the Federal Reserve Bank of St. Louis and its branches in 1974. Research The Research Department contributes to national monetary policy through its collection and analyses of a wide range of regional, national, and interna- FEBRUARY 1975 tional economic data. The information is usedl by tile President of the Bank in making monetary policy reeornmendations at meetings of the Federal Open Market Committee. This Committee, which consists of the Board of Governors and five of the twelve Reserve Bank Presidents, directs the purchase audi sale of Treasury and Government Agency securities on the open market by the Federal Reserve System. The economic analyses of the Research Department are also useful to the Bank’s Board of Directors in establishing, subject to approval by the Board of Governors, the Bank’s discount rate. The public also has access to data and information relating to economic developments through the Research Departnsent’s 10 regular pubheations. The Review, with a monthly circulation of 35,000, incorporates much of the analytical research done by the Research staff. Research staff members are encouraged to publish studies in professional j()rIr1l~~1s’’as ~vell. In addition to these functions, the Research Dcpartmnent engages in studies of bank market structure. These studies include review amIdl analysis of proposed bank iloidhing company acquisitions and batik mergers. In tins analysis, consideration is given to the expected effects of the proposed acquisitions and 1 mergers on competition and On the ci In\-enienee amid needs of thearea to lie served, Bank Relations and Public Information The St. Lotus Femleral Reserve Bank endeavors to maimltain persottal contact with all banks in the Eighth District and aids member banks in tlteir actions dlealing with the Federal Reserve, The Bank Relations audi Public Infonnation Department makes available to all Eighth Distm’iet member banks the Federal Reserve Functional Cost Anaix-sis Program which provides a cost-income profile of the participating bank’s major functions. The utdividual bank can compare its current operating costs and revenue for individlual services not only with its past performance hut also with average figures for member banks of similar size, There were 46 banks participating in the program last year in the Eighth District. Through this departnleut, the Bank also maintains contact with the public. Officers and staff members of the St. Louis Federal Reserve Bank and its branches presented 227 addresses before groups of bankers, businessmen, and educators in 1974. The Bank was representeml at 314 banker, 151 professional, and 225 miscellaneous meetings. During the year, 235 groups Page 13 FEDERAL RESERVE BANK OF ST LOUIS cOM? ~ A FEBRUARY 1975 ycar (sec Table II). \ $111 nnllmon mttcrea e in Lcdem ii kg ncv oblig’ltiomls ‘mud i 81o9 mud lion i mmcm tsr im the Gold C m tifie’mtc Adeount xx em d thc major sources ND }~R of tIm imlcrease itt total assc ts. Approximatc lx 71 per ccnt of thc B’usk ‘issdts ii d mc imc Id in U.S. ( .nx’em ml nlent s( curitid s. 1 lmc rem mm in m” as ets mmmclii liii the Si 1 c. 7 6 31 Nat 1~ 01 4oldl cdt tifie ttc itoumit titc speci ml di us imm,r m iuimts eeitifie’ttc tecount mmotes Omi othd r Re cr5 e Banks audi dasil billion items pin ‘c’s iii ni d’oiid etioi m tot’dled $1.3 t Li’lbmhties of the St. I ouis F cderai Resen e Bank 1 4 and it brinches increised 104 percent ox er the 1973 leveL to $4.3 hilhon. Timis inure ise pm ins mrmix rc-sultm’mi 5 I S f omn a 14.1 p m Cd nt inereise in F c dcral Resers e Notes ~ ~ ~ o I ma fl 2 o * ~ ~ I S tat 0 8 the p mmmciple tx pc of curt cues in circulation. Ti e c not 5 ansounted to 83.0 billion appm’oxinsitc lx 69 percemtt of the B’umk’s tot ii liabilities at yc ar end 1974. Dc posits cmiii ‘1 stmw’ mnainix of member bank re ers e accounts amoummtc d to $1.0 billion an imscrease of 4.0 percent. AflL~~ tQtJ$t COJAPAL&TWE PROfiT AN b 97 S 0 ~ Mm Cii NIISN I amA 4 Papa I vtbty Cm a TM ma tu4Dxd 97 2~ 4 MILl 4 PS 4 78 901 at l’P41n 3Q0 . 3007 $ cIA TA ACCU 15 API ALACCOUNTS o - 0 5 . , 006 438 120 C 9 2 485 2 48 6,970 9887 m 1 equested film mud 3 80? visitor. tourcd tile B utk and its brauchics. lime B ink s tt ix cling cuirc mlcy ~1 hibits xver displa) cdl at ten banks ~ umimmc, 1974, I ott1 as cts of the I ccl ‘r ii Re cmxc B’umk (IF St. Louis mud its hr mucltd s at thc end of 1974 W did $4.4 billion ma mere m C of 10.3 petcemit fromn tlmc pm evious Page 14 ttammt N . Namer LOSS To 14 $9&9 13 tearnimp ddno s TAItMEN mrnd 9 $7 7°. 17 ~‘ 90/a 155 a 6 9 e 24 19,4 10(70 57 6 pay meaa t Tea my D,stmm~aion a N I an, I, CflIIAL ACCOUNTS Cpa Sm ~344 09 0 . a 7 5 staim 2 6 . DIMS Pet 1 maIm ((dOS . late ~temmcFe4 mat Re emye 1,764 19143 194 744 299% 5.8% 1 67 14682 P,oa~ 304 2 a! I eder il Resers - B inks’ eai numigs rcsult from iilter est on Gove nn cut securities intc Ic st on loans to member banks amId rc imbur enseut of cci tin fiscal ~ fumleticiml In 1974. the pothon ol time Feclei al Rcs mx c Systems e irmuimgs llloc’ltcdl to th e St. I ouis B’mnk ‘md its branches totalled 8230 million an ine case of 17.2 ~d reent from the pi mx ions x dir ( s( e Tchie III). Aftc’m . tatutorv dividends of 81.7 million xx crc pa ‘dl to member b im tks and opm mating ‘xpemsses of ~39,7 mihliomm xx re cox ered $1.5 mIliou xx ‘is trails fen ed to surplus ‘mud $191 million xx as paid to the Treasurx as intere t omi F deral Reserx e msotes.