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Federal Reserve Bank
of St. Louis

FEB 1 Z 1991
Winter 1991

Federal Reserve Bank

of St. Louis

News and Views

Eighth District Bankers

St. Louis Fed Launches Bank
Relations Effort

CRA Ratings:
What the

Fed Will
Federal Reserve Bank of St. Louis

The newsletter you are reading
is not just any newsletter. It's
CB, the Central Banker, the
St. Louis Fed's new quarterly
publication, which kicks off a
bank relations effort.
CB is the first of three steps
the St. Louis Fed will take in
1991 to improve communications with Eighth District depository institutions.
Other steps include a bank
visit program and more frequent Fed-sponsored informational meetings throughout the

CEOs of District institutions,
will report on important Fed
information-just the factsthat banking leaders in the
Eighth District need to know,
along with other interesting
research and regulatory topics.
Regular features will include a
regional roundup, a calendar
and a "feditorial. "
Meanwhile, our officers will
begin paying annual informational visits to CEOs of all
member and some nonmember
banks. (The visits will be

he Federal Reserve has received numerous calls from
parties interested in the CRA
public evaluation reports.
Such callers typically request a
list of institutions the Fed has
examined since last July 1 and
their corresponding ratings.
Since last summer, banks
and savings and loans are requi red to make their CRA reports available to the public
30 business days after receiving
them from their supervisory

Until this 30-business-day
period has passed, the Fed will
release no information about
an institution's CRA evaluation. After this time, we will
disclose the names of institutions that have been evaluated,
but will refer callers to the institutions themselves for more
information. In addition, we
will release certain Districtwide information. For example, as of January 1, 1991 ,
we had completed 15 CRA
evaluations in the Eighth


CB, which will be mailed to

friendl y, how-can-we-help-you
calls.) The result is that banks
will have an ombudsman at
the Fed, someone to call with a
For more information on
these efforts, please contact the
Office of Public Information,
(314) 444-8310.




District; all 15 received a
"satisfactory" rating.
If a caller wishes a copy of
your bank's evaluation report,
you may charge a reasonable
mailing and reproduction fee,
since the option to review the
documents in person is available at no cost.
For further information,
please call Consumer Affairs at
(314) 444-8445.

Closer Contact Can Ease Uncertainty
,• ··

he Persian Gulf. The
economy. The S&L situation. Clearly, 1990 was a
year of uncertainty, filled
with new issues but few resolutions. In such complicated
times, communications beThomas C Melzer
come increasingly important.
As I'm sure you will agree, this is true today in
the banking community.
Although the Federal Reserve Bank of St. Louis
may not be able to eliminate uncertainty, we can
help bankers adapt to the changing environment
by providing clear, up-to-date information on
Fed activities, and we have made that our 1991
New Year's resolution-to improve communications with depository institutions in our District.
How do we propose to do this? By launching a
bank relations effort that will include this newsletter, a bank visit program and more regular
Fed-sponsored informational meetings throughout the Eighth District. Too often, we believe,

bankers view us as another in a long line of confusing, complicated bureaucracies. We hope to
make the Fed easier to understand and more responsive to your concerns.
The initiation of CB and more regular contact
with District bankers, we hope, will lead to improved service on our part and increased understanding of the Fed on yours. In addition, you'll
have a few more names to call when you need an
Because the objective of this program is to improve communications, we are interested in
hearing from you. We would particularly appreciate any feedback you may have on the content,
style or readability of this newsletter and on the
bank visit program.
Please let us know what you think. This is one
New Year's resolution we intend to keep.

FCA Service Alive and Well

and produces an annual report
for each participant that illustrates how the organization is
performing compared to last
year, as well as how it compares to its peers.
The annual report is detailed
and tailored to the institution.
Peer groups are detennined by
size, specific product activity,
and other factors. However,
participants can request comparisons based on other criteria
if they wish. The Fed will also
provide support in interpreting
the report.
FCA can be used to price
products, control costs, and
evaluate key operating functions, as well as to measure
overall performance. The


Federal Reserve Bank of St. Louis


tter an outcry trom customers and industry
groups, the Federal Reserve has
revived its Functional Cost
Analysis (FCA) service for small
and medium-sized financial
institutions. The Fed had previously announced that it
would discontinue the service.
FCA is a cost accounting program th at compares institutions of similar characteristics.
Once a year, participants
gather data on income, expenses and volume for various
functional areas within their
organizations and submit this
information to the Fed. The
Fed edits the data, processes it


Thomas C. Melzer is the president o/the Federal Reserve Bank ofS't. Louis.

charge for the service, which
includes a copy of a national
average report, is nominal$150 a year.
The Fed, along with industry
trade associations, plans to
market the 30-year-old FCA
service aggressively in an effort
to increase participation. Over
the next two years, several
enhancements to the program
will be offered. The first additions to FCA will be analyses of
home equity loans, ATMs and
ACH transactions. For more
information, call John Lorentz
or Flora Annon at 1-800-3330869, or in St. Louis at
444-8322 .


Thomas B. Ma ndelbau m
Federal Reserve Bank of St. Louis

The Ripple


boulder drops into a
pond. While its initial
impact makes the biggest
splash, the ripples surrounding
its entry are more widespread
and long-lasting. Similarly, a
dramatic change in a region's
economy-the opening of a
major manufacturing plant or
the construction of a convention center-will have both a
direct and a "ripple" effect on
the region's economy.

How a new construe·
lion proiect will
affect the local
economy is hard to
predict. Multipliers
provide logical, but
sometimes inaccu·
rate, estimates.
Recognizing the importance
of these indirect, ripple effects,
economists and city planners
often find themselves discussing something called "regional
economic multipliers." Such
multipliers are one way to prediet how a change in the
economy will affect a region's
employment or income. A
multiplierof three, for example,
indicates that, for every new job
created, two additional jobs will
be generated in the region.
This additional activity is the
result of firms in a region buying goods and services from
one another. Suppose, for example, a new manufacturing
plant opens, directly adding
500 new jobs to the local
economy. As it buys industrial

inputs and business services
from other fim1s in the region,
and as its new workers spend a
portion of their earnings on
locally produced goods and
services, additional jobs and incomes are generated throughout the region. Often, these
ripple effects can end up exerting a stronger influence on the
regional economy than the
plant's initial effects did.
Such multipliers are used in
a variety of situations. Local
governments might use them
to justify their investment in a
public project, like an ai1vort
expansion. Regional planners
might use them to help estimate the total number of additional classrooms or public
utility capacity needed to accommodate a major manufacturing facility. Multipliers
might also be used to anticipate the reduction in economic
activity that will result from
some cutback, like a plant
closing. Given their widespread
use, it is important that these
figures be accurate; few realize,
however, where multipliers
come from or how meaningful
they are.


n many cases, a regional
multiplier is derived from an
input-output model, which is
simply a mathematical way to
describe the relationship
among all the sectors of a regional economy. Unfortunately, multipliers are imperfeet estimates because of the
way in which the model is put
It is prohibitively expensive,
for example, to survey all of a
region's firms in constructing
the model, so estimating procedures are used. These procedures often rely on limited or
outdated information.


oreover, if the structure
of the economy changes
substantially after the model is
developed, its multipliers will
likely be inaccurate. Many
widely used regional models
are derived from U.S. inputoutput relationships as they
existed in 1977.
The model also relies on assumptions that are sometimes
suspect. For example, the relationship between an industry's
production and its pattern of
purchases from other regional
businesses is assumed to be
fixed. In practice, this is often
not true. As a business expands
or contracts, it may radically
change its pattern of purchases.
Amanufacturer in the midst of
an expansion, for example, will
likely purchase proportionately
less labor per unit of output or
buy more inputs from suppliers
in other regions.
Another big problem is that
people simply misinteq)ret
what multipliers mean. Part of
the problem is that the economic effects that multipliers
identify are often transitory. A
large drop in government purchases of aircraft produced in
St. Louis, for example, would
reduce employment throughout the metropolitan area;
however, a portion of this reduction will be only temporary,
as some workers who lost their
jobs find new jobs in the area.
Despite these drawbacks,
regional economic multipliers
often provide the best available
guess about the effects of a big
change in the economy. Because of their limitations, however, keep in mind that such
effects are merely estimates,
subject to considerable error.
ThomasB. Mandelbaum isa11
eco11omistal the Federal Reserve
BankofSt. louis.

Karr Joins St. Louis
Mary H. Karr joined the St.
Louis Fed as vice president,
general counsel and secretary
on January 1, 1991. Karr sueceededjoan P. Cronin, who was
named senior vice president
over the Banking Supervision
and Regulation division last



Karr previously was a partner
with Peper, Martin, Jensen,
Maichel and Hetlage, where she
represented banks and bank
holding companies in regulatory and compliance matters.
She was also involved in mergers, acquisitions and general
corporate work.
Karr received her bachelor's

Federal Reserve Bank of St. Louis

and law degrees from Washington University in St. Louis and
is a member of the American
Bar Association, the Missouri
Bar, the Florida Bar Association
and the Bar Association of Metropolitan St. Louis.

Real Estate Loan
Shakeout Limited at
District Banks
Despite increasing real estate
loan problems across the nation , Eighth District commercial banks remain relatively
unscathed. The proportion of
District real estate loans in
nonperforming status remained at its September 1989
level of 1.83 percent in September 1990, while the ratio at U.S.
banks of comparable size rose
from 2.73 percent to 3.07 percent. Real estate loans made
up slightly more than half of
all nonperforming loans at
both District and U.S. banks
during the third quarter.
Real estate loans continue to
grow faster than total loans at
both District and U.S. peer

eginning in the first quar-

ter of 1991 , a new TT&L
application will become available for EDITH customers.
EDITH (which stands for
Eighth District Interactive Telephone Helpline) is an automated voice response system
that allows financial institutions to tap into the Fed's
computer using a touch-tone
The new TT&L application
will allow institutions to:
• enter advice of credit depos-

banks. Real estate loans on
the books of District banks rose
10 percent from September
1989 to September 1990, while
total loans increased 6.4 percent. At U.S. banks of comparable size, real estate loans increased 6.2 percent over the period, compared with 3 percent
total loan growth. Residential
lending accounts for much of
this growth.

District Service Indus•
try A Boon
Led by spectacular growth in
health and business services,
the service sector of the Eighth
District economy grew more
rapidly than any other sector in
the past three decades, according to Fed economist Tom
Mandelbaum. At the same
time, manufacturing's share of
jobs fell sharply. This pattern
also emerges in the national
The employment shift from
manufacturing to services does
not mean, however, that the
U.S. is losing its industrial
its. This will help institutions
who depend heavily on mail or
courier services to avoid incurring late fees.
•obtain TT&L account balance information, including
pending withdrawals and investments.
•obtain cycle accounting information .
The new TT&L application
joins EDITH 's other applica-

base, Mandelbaum says. Instead, it reflects manufacturing's success in increasing
In fact, such gains in manufacturing productivity are
responsible for consumers'
mounting affluence. This
affluence allows consumers to
buy more services, boosting
their growth.
For more on this, see the
December issue of the St. Louis
Fed's regional research quarterly, Pieces of Eight. Also stay
tuned for the March issue,
when the author asks the question, Are service jobs good jobs?

tions, ACH return items,
account balance information,
check auto charges and mixed
cash letter availability. Customers using the latter two
check applications will soon
begin receiving these same
services for return items.

Capital Adequacy for
Expansion-Minded Banks
Federal Reserve Bank of St. Louis

s of the first of
the year, the
Fed began
capital adequacy by looking at two capital/risk ratios
and a leverage ratio. Increasingly higher minimums for
these ratios will be phased in
over the next two years.

These minimums are not the
whole story, however. The Fed
expects only the healthiest
banks to be operating near the
low end of these allowable
ratios. Others should have
capital ratios 100 to 200 basis
points above the minimumeven higher if the risk profile of
the organization warrants.
This is particularly true of
organizations experiencing
growth-whether internally or
by acquisition. In assessing the
capital adequacy of an expanding firm, the Fed will review its
leverage ratio, after deducting
all intangible as:mts. Large
bank holding companies
($150mm or more in assets)
will be assessed on a consolidated basis.
Generally, financially sound
companies proposing to expand or take on additional risk
are expected to show stronger
capital adequacy figures than
their non-expanding peers.
This translates into a proforma
tangible leverage ratio of at
le~L'lt 5 percent and a total capital to risk-weighted assets ratio
of between 9 and 10 percent,
using the formula established

for the fully phased-in 1992
standards. Any decline in these
ratios that results from the proposed transaction will be taken
into consideration.
In general, the Fed believes
that holding companies in
less-than-satisfactory condition
should focus on methods of
improving their financial condition, rather than opportunities to take on additional risk.

Capital Adequacy:
The Basics
The new risk-based capital ratios
took effect on January 1for all
state member banks and for BH(s
with assets of at least $150
million. National and state
nonmember banks are subject to
the same standards from their
primary regulator.
To qualify as having adequate
capital, afirm should have:
• well-diversified risk (including
no undue interest rate risk
• excellent asset quality
• high liquidity
• good earnings
• leverage ratio of at least
3 percent
• risk-based total capital ratio
of at least 8 percent.
Those that do not meet the first
four standards must have a higher
level of capital to be considered
adequate. The Fed expects most
banks to maintain a leverage ratio
of at least 4 percent to provide for
unanticipated adverse operations
or economic conditions.
Until the end of 1992, when
these guidelines become fully
effective, transitional guidelines

will permit atotal risk-based
capital ratio of 7.25 percent. This
will allow time for certain
multinational and money center
banks to meet the 8 percent


New Services
Directories Shipped
The 1991 services directories
for the St. Louis Fed and its
branches in Little Rock, Louisville and Memphis will be
shipped shortly. The directories
are handy guides to the important telephone numbers and
contact persons for various Fed
services and information.
Customers may order additional copies by calling
(314) 444-8444, ext. 501.

New Check Deadlines
in St. Louis Zone
The St. Louis office announced some new check
deadlines starting March 4.
The early mixed and other Fed
deposit deadlines, for both
forward and qualified return
items, will move from 8 to 8:30
p.m.; the regular mixed and
other Fed deadline will go from
10:30 to 11:15 p.m. Country
deadlines, previously set at


Post Office Box 442
St. Louis. ~1issouri 63166

CB is published quarterly by the
Public Information Office of the
Federal Reserve Bank of St. Louis.
\'iews expressed are not necessarily
offical opinions of the Federal
Reserve System or the Federal
Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis

10:30 p.m., will move to 12:01
a.m. Country group sorts will
move from 11:30 p.m. to
1 a.m., while country fine sort
moves from 12:01 to 1:30 a.m.
At the same time, two new
products will debut: a late,
other Fed, pre-processed deposit
option at 10:30 p.m. (the early
deadline moves from 7 to 7:30
p.m.) and a country premium
fine sort option with a 2 a.m.
deadline. These improvements
will make it easier for depositors to reach the Fed and allow
current customers time to inelude more items in their deposit. For further information,
contact Customer Support at
1-800-333-0869, or in St. Louis
at (314) 444-8680.

Say Good-Bye to
At the stroke of midnight December 31, 1990, the St. Louis
Fed's PC-based communications system called FEDNET

ceased to exist. All 500 of our
customers have been converted
to Fedline, a new system that
was developed for the entire
Federal Reserve System.
When FED NET was introduced in 1983, the only service
available was wire transfer.
Today, Fedline offers customers
access to wire transfer, ACH,
TI&L, accounting, savings
bonds, check and U.S. government security transfer services.

FR2900 To Go Over
Fedline in 1991
Weekly reporters to the Fed's
FR2900, "Report of Transaction Accounts, Other Deposits
and Vault Cash," will be able to
transmit their reports electronically over Fedline som~time in
1991. Currently, about 700 institutions file their FR2900 reports weekly. The new service
will be free of charge. Additional information will be distributed in the coming months.

Legal Holiday
Schedule for the
Remainder of




February 18




July 4


September 2


October 14


November 11



Wednesday December 25