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Winter 1992
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News and Views
for
Eighth District Bonkers
I
'
The St. Louis Fed's bank relations effort, launched last year
to improve communications
between the Fed and Eighth
District depository institutions, begins its second year
this month. Among the highlights of 1991:
* Bank President Tom
Melzer hosted five District
Dialogue meetings with CEOs
of financial institutions. This
year marked the first time
that meetings of this nature
were held in Mt. Vernon, Ill.,
and Paducah, Ky.
* About 200 participants attended first-ever Regional
Economic Forums in
Greenville, Miss., El Dorado,
Ark.Jackson, Tenn., and Columbia, Mo. Fed economists
and a representative from
Banking Supervision participated in a discussion of economic issues with bankers and
business leaders.
* District bankers applauded
the Fed's new visit program, affi rming the need for Fed officers to continue meeting with
them. Hottest topics of discussion included the regional
economy and Fed services.
* The Central Banker, or CB,
our quarterly newsletter, is now
mailed to more than 2300 individuals and, in its first year,
covered topics ranging from
the credit crunch and the
shrinking S&L industry to
truncation and the importance
enders in the Eighth Federal Reserve District approved the majority of homepurchase loan applicationsroughly 77.5 percent of conventional loans and 62.2 percent of government-backed
loans. Nationwide, the approval rates were 72.3 percent
for conventional loans and
71.7 percent for governmentbacked loans.
Based on data from the four
largest metropolitan statistical
areas in the District (St. Louis,
Little Rock/North Little Rock,
Louisvi lle and Memphis), black
applicants were denied conventional home-purchase loans
2.8 times more often than
white applicants in 1990.
White applicants were denied
about 12.4 percent of the time,
black applicants, 35 percent of
AYear In Review: Fed's
Bank Relations Effort
Turns One
Trends
in Home
Mortgage
Lending
Similar in
District and
Nation
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
L
of the public comment process.
Asubscriber survey in this issue
(see enclosed postcard) will
help us continue to get you the
news you need most.
Plans for year two of the bank
relations effort include meetings in additional cities and
more contact with bankers. If
you have any suggestions
about our bank relations programs, please call Jackie
Himmelberg at 1-800-3330810, ext. 8311, or (314) 4448311.
the time. Denial rates for government-backed loans were
similar.
The primary reason reported
for denying loans was credit
history, followed by debt-to-income ratio and collateral.
Lending records of individual
institutions varied greatly, depending on their location, the
types of applicants they serve,
the types of loan products they
offer and their credit standards.
For 1992, several changes
have been made in the HMDA
reporting requirements. The
major change requires financial institutions to begin using
1990 census tract numbers instead of 1980 in identifying and
reporting property locations.
Feditorial
Why Fed Presidents Should Be on the FOMC
T
hroughout the Fed's 77year history, its independence and accountability have been questioned.
With the introduction of
the Monetary Policy Reform Act last summer (see
Anatol B. Balbac/J
story below), this issue has
risen again. Though it has been said before, it
bears repeating: the Fed's structure ensures accountability, and Fed presidents contribute significantly to monetary policy decisions. Here's
how.
Members of the Fed's Board of Governors, who
constitute a majority (seven) of the Federal Open
Market Committee (FOMC), are appointed by the
President and are confirmed by the Senate. In
addition, the President nominates and the Senate
confirms the Board's chairman and vice chairman.
The five remaining voting members of the
FOMC are regional Reserve Bank presidents. The
Board approves the appointment of each Reserve Bank president and is responsible for overseeing Reserve Bank activities.
The Board also appoints three of the nine directors on each Reserve Bank's board of directors, including the chair and vice chair.
Congress
Introduces
Bill to Limit
Fed Presi•
dents' Role
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
T
he first Senate hearings on
a bill to remove Federal
Reserve Bank presidents from
voting on monetary policy decisions were held in November.
The Monetary Policy Reform
Act of 1991 , which was introduced into Congress last August
by Sen. Paul Sarbanes, D-Md. ,
proposes to make the Federal
Reserve's Board of Governors in
Washington, D.C. solely responsible for directing monetary policy actions. Acompan-
Thus, the Board of Governors, who are direct
appointees of the President and Congress, and
Reserve Bank presidents, who are directly responsible to the Governors, are ultimately answerable to both the President and Congress.
The Monetary Policy Reform Act, which proposes to limit monetary policy decisions to the
Governors, will ensure that Washington exerts
more everyday influence on policy. Because the
primary impact of monetary policy is on the
long-run economy, responding to short-term
pressures by attempting to fine-tune the
economy could do serious damage to long-term
economic stability.
Historically, the more responsive a central
bank is to short-term political concerns, the
higher the long-run inflation rate and the lower
the standard of living. Regional Bank presidents,
simply because of their distance from Washington, can help insulate monetary policy from
short-term pressures. They stand as an important buffer between persistent pressures to devalue the currency and the maintenance of economic stability.
Anatol B. Balbach is a senior l'ice /)resident and director of research at the
Federal Reserve Bank ofSt. Louis.
ion bill was also introduced in
the House.
Essentially, the bill would
eliminate the Federal Open
Market Committee (FOMC) ,
which directs open market operations, the most powerful and
flexible monetary policy tool.
The FOMC is made up of 12
members, each with one vote.
The seven members of the
Board of Governors are always
voting members as is the president of the New York Fed. The
remaining four votes are rotated annually among the 11
other Fed presidents.
Under the new bill's provisions, Fed presidents would
serve as advisors to the Board of
Governors on monetary policy,
but would not vote on policy
actions.
The bill proposes to make the
Fed more accountable by limiting monetary policy decisionmaking to members of the
Board of Governors.
""
~'~{ · r
/
How To Tell
What the
Fed Is Doing
Daniel L. Tboniton
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
M
ost observers agree that
monetary policy has
been easing for over a year
now. The Fed's move to an
easier monetary policy began
with the onset of recession in
1990 and continued even more
strongly in the last half of 1991
as the economic recovery began to look anemic.
Many analysts and most of
the press base their conclusions
about monetary policy on the
behavior of interest rates,
which have dropped substantially over the period. Unfortunately, the Fed has only a
short-term influence on interest rates- it does not control
them directly and has little influence on them over the long
haul. Thus, interest rates are
not a reliable indicator of Fed
policy.
The only thing Fed actions
are reliably related to is money
growth; thus, it makes sense to
examine money growth to see
what indications it gives about
Fed policy. Unfortunately, the
growth rates of two widely used
monetary aggregates, M1 and
M2, give confusing and disparate indications of Fed policy.
So which is better?
M1 is the sum of currency
and checkable deposits, both of
which are controlled by the
Fed. Analysts, however, typi-
cally pay more attention to M2
because the Fed sets specific
targets for its growth. The
problem with M2 is that, in addition to Ml , it includes several
savings-type deposits: passbook
savings, small-denomination
time deposits, money market
deposits, some money market
mutual funds, etc. Currently,
such deposits account for about
three-fourths of M2.
These savings-type deposits
are not subject to the Fed's reserve requirements, so they can
grow or shrink for reasons that
are unrelated to Federal Reserve actions. Indeed, it is not
unusual for M2 growth to move
in a direction that is the opposite of Fed policy.
M1, on the other hand, is a
direct reflection of Fed actions.
The Fed supplies the currency
portion of Ml directly. And it
imposes reserve requirements
on the checkable deposit portion, currently about 70 percent
of Ml .
Through its open market operations-the buying and selling of Treasury securities in the
open market- the Fed increases or decreases the
amount of reserves available to
the banking system. Such actions directly influence the
amount of checkable deposits
and, consequently, M1.
If you look at the accompanying table, you 'll see that both
M1 and reserves started growing rapidly in late 1990, reflecting a significant easing in
monetary policy. M2 grew
Growth Rates of Selected Monetary and Reserve Aggregates
-
- -
Period - - --Dec. 1989 - Dec. 1990
Dec. 1990- Dec. 1991
Dec. 1990 - Sept. 199 l
Sept. 199 l- De~
-·
Ml
4.0%
8.8%
7.3%
13.4%
M2
3.2%
2.7%
2.5%
3.5%
Savingstype
Total
deposit_s _ reserves
3.0%
2.9%
0.7%
9.6%
0.9%
5.5%
-0.2% 22.9%
somewhat more slowly, reflecting a sharp drop in the growth
rate of savings-type deposits.
Since September 1991 , both Ml
and reserves indicate a significant further easing, while M2
shows only a modest acceleration.
Because a large portion of
savings-type deposits is made
up of "managed liabilities"
that depository institutions can
Unfortunately, the
growth rates of two
widely used mon•
etary aggregates, M1
and M2, give confus·
ing and disparate in•
dications of Fed
policy. So which is
better?
increase or decrease with credit
demand, their recent slow
growth is due in part to the decline in credit demand during
the recession. If the economy
picks up, as most analysts are
forecasting, the growth rate of
these savings-type deposits
should accelerate in 1992.
Such deposits have also been
affected increasingly by the restructuring of banks and thrifts
and by what appears to be a
trend away from credit market
intermediation through depository institutions. This suggests
that their growth in 1992 may
be slow by historical standards.
Regardless of what happens
to these deposits, however, their
inclusion in M2 renders it a
poor indicator of Fed policy. If
you want a monetary aggregate
that gives the clearest indication of what the Fed is doing,
watch Ml.
Daniel L. Thornton is an assistant
vice president at the Federal Reserve
Bank of St. Louis.
Regional Roundup
and will probably remain slugfleets operational boundaries.
The principal benefit of the en- gish in early 1992, declines in
larged territory is that residents economic activity in consecuof the Indiana counties can now tive quarters-that is, another
The following are Federal Reserve
be considered for appointment as recession-are unlikely.
System proposalscurrently out for
a Louisville Branch director,
comment:
Treasury Announces
while remaining eligible for
Two proposed amendments to head office director.
New Collateral Valua·
Reg Z{Truth in Lending)
For more information, please tion for TT&L Deposits
dealing with home equity
To minimize risk, the Treadisclosure rules. Comments due call Louisville Branch Manager
Howard Wei Is at 1-800-626-4 507. sury announced that, effective
by Feb. 28. {Docket No. RMarch 30, the value of collat0743)
eral
securing TT&L deposits will
Double-dip Recession
Direct all comments to William Wiles,
Secretary, of the Board, Board of
be the same as that of securities
Unlikely, Say Experts
Governors ofthe Federal Reserve
pledged
for borrowing at the
Are
we
headed
for
a
double~)stem, 20th and Constitution Avenue,
N. W, Washington, D.C. 20551. For
Fed's discount window.
dip recession? Probably not,
copies ofproposals out for public
Here's an example: Currently,
though it might feel that way
comment, contact Anne Guthrie at
Federal National Mortgage
(314) 444-8810.
to a lot of people.
Despite positive growth in the Association bonds are valued at
100 percent of their par value as
nation 's economy in third
Fed Expands
TT&L
collateral. When used as
quarter 1991 (a 1.7 percent
Louisville Territory
credit discount collateral, howannual rate of incre,be), some
On February 3, the Fed offiever, these same securities are
recent economic indicators,
cially expanded its Louisville
valued at 90 percent of par
particularly those mecLliuring
Branch territory to include 10
value. Under the new rules,
consumer confidence, are
counties in southwestern [ndiFederal t\ational ~lortgage Aspointing downward. In addiana that had previously been
sociation bonds will be valued
tion, the index of coincident
assigned to the St. Louis terriat 90 percent of par value when
indicators, a gauge of the
tory. They are the counties of
used
as TT&L collateral.
economy's current strength, reDaviess, Gibson, Green, Knox,
The Treasury plans to anmained flat or declined for
Pike, Posey, Spencer, Sullivan,
nounce new collateral values
each month between July and
\'anderburgh and Warrick.
for more than l 00 types of seBecause the Louisville Branch
November 1991.
curities,
both definitive and
~1ost economists say, howalready provided most Fed serbook-entry, early in 1992.
ever, that even though the
vices to these counties, the
The Fed will contact each ineconomy WcLli weak in late 1991
change more realistically re--------------------------------~
OUT FOR
COMMENT
Fed Gets Phone Mail
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
C
allers to the St. Louis Fed
have a new option: you can
choose to leave a recorded message behind on a new phone
mail system, beginning early
1992.
Phone mail is being installed
as part of an effort to increase
the capacity of the head office ·s
telephone system and improve
responsiveness to callers.
stitution with information
about the effects of the changes
on its collateral. For more information, call Harriet Siering
at (314) 444-8502 or Judie
Courtney at (314) 444-8630.
Automation Consolida·
tion Sites Chosen
Richmond, Dallas and East
Rutherford, New Jersey, have
been selected to serve as the three
automation consolidation sites
for the Federal Reserve System.
The sites were screened early
last summer by a Chicago consulting firm that specializes in
location analysis.
In approximately two to three
years, these sites will house all
computer software applications
currently handled by mainframe
computers at each of the 12 districts. Better reliability is the
primary benefit from consolidation; responsiveness to customer
requirernentli, greater efficiency
and reduced costs will also result.
The new phone mail system
works like this: when the person you are calling is unavailable, your call will be answered
by someone else. This person
will either direct you to someone that can help you, take
your message themselves, or
give you the opportunity to
leave a detailed message behind on phone mail.
If you choose to leave a
phone mail message, your call
can be returned with the information \'OU need.
Please let us know how the
new system is working.
mixed advice and autocharge
totals. Currently, 239 financial
institutions Districtwide have
signed up for this service.
These same services are available over Fedline and are included in the monthlv access
,
fees.
Taking the Paper Out
of Check
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https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
ne goal of the
Federal Reserve
more electronic payments mechanism. In support
of this goal, the Eighth District
took several steps in 1991 to
encourage financial institutions to deposit and receive
check data electronically.
With the help of EDITWR1
(Eighth District Interactive
Telephone Helpline), FedlineR
and Bulkdata transmissions,
the Fed has increased its base
of electronic-check services and
customers during 199 l. Specifically:
In February.
Return item advices became
available over EDITH, at no additional cost. For $20 per
month, customers now have
timely access to both forward
collection and return item
St. Louis zone institutions began depositing interdistrict
point sheets for our Cash Letter
Monitoring System (CLMS)
electronically via bulk data. Bv
depositing electronically, duplicate cash letters can be deposited as late as 9:00 a.m. This
also eliminates the job of
manually preparing duplicate
casl~ letters, resulting in fewer
cl en cal errors and adjustments.
Currently, 75 percent of St.
Louis' CLMS data is deposited
electronically.
In April.
The St. Louis office began offering check truncation, making the service a Districtwide
product. With truncation, a financial institution receives pertinent information from the
~1ICR line electronicallv while
the Fed handles proces;i~g and
provides safekeeping of the actual items. Overall , this service
can reduce the costs associated
with sorting, filing and mailing
checks back to your customers.
In October.
Eighth District offices began
offering Extended ,\11CR . With
Extended A-11CR, presentment is
made electronically, with the
physical items following at a
later date.
In November.
The St. Louis office was selected as one of two System government check image pilots.
Although this will not affect
commercial check processing
right now, the technology being tested could play a major
role in the future services we
are able to offer our commercial check customers.
In addition to these enhancements, several more are scheduled for 1992. Specifically:
In January.
The St. Louis office introduced an electronic fine sort
deposit option, allowing institutions to deposit fine sort cash
letter data electronic.Liiv via
bulk data or PC diskett~. Bv
depositing electronically, a'depositor can realize a 25-centper-package price savings.
In second quarter
1992.
The St. Louis office will pilot
one of two automated check
adjustment systems with several local depository institutions. The results of the pilot
will be used to develop a
Systemwide application.
Also, a new Fedline application will allow CLMS depositors
to deposit via Fedline.
Ongoing.
Payor bank account totals
and MICR line information via
Fedline or Bulkdata have become increasingly popular. As
of December 31, the District's
customer h~L~e for payor bank
services had increased to I67,
with 73 new customers added
in 1991.
In the big picture, movements toward electronics like
these are just beginning. The
District plans to pursue electronic check services furth er in
the coming years. If you would
like any information on electronic check processing, please
contact your local Fed office.
Calendar
FedFacts
New Flexible Rate
for Seasonal Credit
Available by Phone
Changes in the new flexible
rate on seasonal credit from the
Fed's discount window are now
available on a recorded interest
rate message by dialing 1-800333-0810, ext. 8728, or locally
at (314) 444-8728.
Since January 9, the new seasonal rate has been a marketrelated rate, based on the moving average of the federal funds
rate and the secondary market
rate on 90-day large certificates
of deposits.
The rate on seasonal credit
for the Jan. 23- Feb. 5 period is
4.0%. No change was made in
the basic discount rate, which
is currently 3.5%.
Fedline_R, Offers
Electronic Submission
ofFR29OO
Beginning in March, Fedline
customers will be able to submit their weekly FR2900 (Report of Transaction Accounts ... )
to the Fed electronically. Electronic submission will allow
you to submit more accurate
data faster, while eliminating
■
I
I
I
CB is published quarterly by the
Public Information Office of the
Federal Reserve Bank of St. Louis.
\'iews exp ressed are not necessarily
official opinions of the Federal
Reserve System or the Federal
Reserve Bank of St. Louis.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
the paper forms you usually
send. In the future, we will begin to accept other reports electronically as well.
For more information about
submitting your FR2900 report
electronically, please contact
Joan Boelter at (314) 444-8627.
Treasury Auction
Rules Changed
The Treasury has changed its
auction rules to broaden participation. The following
changes became effective November 5:
* All registered government
securities brokers and dealers
may submit bids for customers
in Treasury auctions.
* Any bidder may bid without
a deposit or an explicit payment guarantee. In place of
these, the Fed will accept an
autocharge agreement <leveloped by the Treasury and the
Fed and signed by the bidder
and a depository institution.
Under such an arrangement,
the securities purchased by the
bidder will be delivered to the
depository institution, and the
institution's reserve account
will be charged on the settlementdate.
* The maximum award on
non-competitive tenders was
increased. For notes and
bonds, the maximum award to
any single bidder is now $5
million, up from $1 million. A
maximum non-competitive
award of $1 million remains
for bills.
New Operating letter
for Electronic Access
Customers
The St. Louis Fed recently
adopted a comprehensive new
operating letter-Operating
Letter No. 22-that spells out
in one place the terms of
agreement for its electronic or
automated services. The new
operating letter eliminates the
burden on both depository institutions and the Fed of maintaining numerous agreements
for each electronic Fed service.
Now, by simply using an electronic or automated method to
access a service or provide data
to the Fed, your institution will
have agreed to the operating
letter's terms.
Upcoming
Fed-sponsored Events
for Eighth District
Depository Institutions
February 2S, 26, 27
Half-day seminars on
"CRA: Compliance or
Marketing?"
St. Louis, Missouri
March 11
Regional Economic Forum
Columbus, Mississippi
April 7
District Dialogue
Little Rock, Arkansas
April 8
District Dialogue
Jonesboro, Arkansas
For more information on
these meetings, please call
(314) 444-8320.
@FedFRASER