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Summer 1994

News and Views
Eighth District Bankers

No More Guessing on Mutual Funds
The days of (guess) timating
how many banks sell mutual
funds are over. Just-compiled
data from the March 1994 call
reports show which banks are
selling funds, what types of
funds they' re selling and the
contribution of these sales to
the bottom line.
In the first quarter of 1994,
15.6 percent of banks in the
Eighth District (181 institutions) sold mutual funds or
annuities, compared with the
21 percent national average.
In total, District banks sold
$1.08 billion in mutual funds
and $49.5 million in annuities.
This line of business generated
earnings of $11.3 million in
fees and other income.

Federal Reserve Bank of St. Louis


ince the Federal Reserve
implemented fees for
daylight overdrafts on April 14,
the reaction nationwide has
been dramatic: maximumpeak overdrafts fell 38 percent
from nearly $130 billion per
day during first quarter 1994
to $79 billion per day during
the first 10 weeks of pricing.
The average per-minute overdraft, the base for calculating

District Banks' Mutual Funds and Annuities (MF&A) Sales
First Quarter 1994

Asset Size

Number of

MF&A Income
Proportion of
as a % of
District Total Noninterest Income

Less than $100 million


$100 million - $300 million



$300 million - $1 billion




$1 billion - $15 billion







All banks



The table above illustrates
that banks of all sizes are
getting into the mutual fund
market, though mid-sized
and large banks show the
most activity.
Though mutual fund and
annuity income represented
a scant 2.2 percent of all

District noninterest income,
most analysts expect these
nontraditional products to
become increasingly important
to bank earnings in the future.

fees, also dropped from $72 billion per day to $47 billion, a
35 percent decline.
Eighth District institutions
have quickly adjusted to the
new overdraft posting rules.
Hillary Debenport, assistant
vice president, Account
Monitoring, says that daylight
overdraft pricing is well on
its way to reducing payments
system risk. "We' re very

pleased with the efforts made
by Eighth District bankers to
lower excessive intraday credit,"
says Debenport. "Only six
of the 800 account holders
in the District have incurred

Why Have Long-Term Interest
Rates Risen?


any economists,
investors and others,
who have recently pondered the rise in long-term
interest rates, have concluded that the Fed's raising
of short-term rates last
Thomas C. Melzer
spring is to blame.
I believe, however, that the rise in long-term
interest rates primarily reflects expectations
that inflation is likely to increase. A quick
example can explain the role of inflation
expectations in long-term rates.
For an investor who plans to hold a long-term
bond to maturity, the nominal interest rate
on that bond can be divided into two main
components: a real rate of return, plus an
expected inflation component. Since World
War II, real returns have averaged 2 to 3 percent. With 30-year Treasuries currently around
7.5 percent, the arithmetic implies an expected


Aim to
Federal Reserve Bank of St. Louis


ighth District state member
banks and bank holding
companies will receive a new
information service this fall
resulting in significantly fewer
mailings and two consolidated
reference sources.
The service, Supervisory
Bulletin, will replace all
supervisory mailings from the
St. Louis Fed. It will provide
policy statements in a binder
for reference, retention and
easy storage. State member
banks and bank holding
companies will each receive
a binder with supervisory
information specific to their
type of institution. An annually

inflation component of about 5 percent, well
above current inflation.
There are a number of driving forces behind
the rise in inflation expectations, among them
the pace of economic activity and some actual
evidence of accelerating inflation, as reflected
in the GDP deflator. But another major factor
has been the Fed's accommodative policy stance
for three years following the 1990-91 recession,
which helped foster legitimate market worries
about the risks of higher inflation.
In my opinion, the Fed's moves to fight
inflation by raising short-term rates this spring
dampened inflation expectations and helped to
lower long-term rates relative to what they would
have been in the absence of a policy change.
Accordingly, such moves should sustain economic growth, not kill it.
Thomas C. Melzer is president of the Federal Reserve Bank
of St. Louis.

updated index that cross-references information by both date
and subject also will be part
of each binder.
An improved distribution
service for Federal Reserve
regulations is also in the works.
In addition, we're exploring
the electronic delivery of supervisory information over the
Eighth District's electronic bulletin board, FRED® (Federal
Reserve Economic Data).
These new services are in
response to frequent concerns
raised by bankers about
the number of memos and
documents mailed by the
Fed each year. The latest

services are part of a continuing effort by the St. Louis Fed
to reduce regulatory burden
and communicate more
effectively with bankers.
Other efforts include publications, like CB, which were
introduced to keep bankers
abreast of various Fed issues.
Other publications that target
specific bankers throughout
the District include: The Check
Exchange, Community Affairs,
and Supervisory Issues.

Public Purpose vs. Safety and
Soundness in Mortgage Lending

John C. Weicher
Federal Reserve Bank of St. Louis

ask financial institutions to
ive years ago, Congress
passed the Financial Institake a little more risk so they
tutions Reform, Recovery, and
can more effectively achieve
Enforcement Act (FIRREA).
their public purposes. This shift
This legislation was the culmi- is most noticeable in efforts
nation of a 20-year period of
to provide adequate mortgage
change in the U.S. housing
credit to "underserved" areas
finance system, away from a
and groups, an issue that
system based on several thousand local mortgage portfolio
Fannie Mae and
lenders and toward a system
Freddie Mac have
dominated by two national,
gone from less
than 3 percent of
secondary market, governthe market to
ment-sponsored enterprises.
nearly one-third.
In 1969, S&Ls held almost
half of all home mortgages
is perhaps most familiar to
in their portfolios; in 1992,
bankers in the context of the
they held less than 15 percent.
Fannie Mae and Freddie Mac,
Home Mortgage Disclosure Act
on the other hand, have gone
and the Community Reinvestment Act. For example, the
from less than 3 percent of the
market to nearly one-thirdAdministration has just issued
since FIRREA, they have bought a report recommending that
or securitized about 75 percent the Federal Home Loan Banks
of the net increase in home
be given a new and very different mandate to facilitate mortmortgage debt.
gage lending to lower-income
FIRREA also turned out to
be the first in a series of laws
families-without relaxing
their standards for collateralaffecting the entire housing
finance system. These laws
in place of their traditional
struck a new balance between
role of providing access to
national capital markets for
the public purposes of the
system-promoting homeS&Ls or commercial banks
that have some concentration
ownership, particularly for
middle- and lower-income
in home mortgage lending.
families and providing support
different problem may
to the mortgage market during
arise in the next receseconomic downturns-and
sion, whenever that occurs.
Institutions will then be conthe safety and soundness of
the individual institutions in it, fronted with the requirement
with much more emphasis on
to maintain the new higher
levels of capital as mortgage
safety and soundness. To
forestall another S&L debacle,
defaults rise, while providing
capital requirements were raised support to the mortgage marfor virtually every type of instiket during the downturn. This
tution including Fannie Mae,
issue is likely to be most significant for Fannie Mae and
Freddie Mac and FHA.
Recently, however, the pendu- Freddie Mac.
lum has begun to swing back.
The new laws have also
changed the way most private
Policymakers are starting to


institutions in the system are
regulated. The responsibilities
of the old Federal Home Loan
Bank Board have been parceled
out among several agencies,
and the Bank Board itself has
been abolished. To some
extent, the inherent conflict
between safety and soundness
and public purpose has been
institutionalized; regulation
of Fannie Mae and Freddie
Mac has been split between
the Secretary of HUD (public
purpose) and the Director of a
new Office of Federal Housing
Enterprises Oversight (safety
and soundness). The effectiveness of this arrangement has
not yet been tested.
United States has had
a specialized housing
finance system since the 1930s,
and it still does. The system
still has the same public purposes and the same conflicts
between those purposes and
the safety and soundness of
individual institutions in the
system. If anything, the conflicts are more sharply drawn.


John C. Weicher is a Senior Fellow at
the Hudson Institute and a visiting
scholar at the Federal Reserve Bank
ofSt. Louis.



The following ore Federal Reserve
System proposals currentty out for
■ Extension of comment period
on Regulation DD, Truth in
Savings, to September 6.
Proposal contains an alternative approach for APY calculations. (Docket No. R-0836)
■ Proposal to revise Regulation T, which requires full
payment of margin calls within
two days of settlement of
securities purchases. (Docket
No. R-0840)
■ Proposal to amend Regulation C, Home Mortgage
Disclosure Act (HMDA), to
improve the quality of HMDA
data and deadlines. See related
article on back page. (Docket
No. R-0839)
Direct all comments to William
W. Wiles, Secretary, Board of
Governors of the Federal
Reserve System, 20th St. and
Constitution Ave., N. W.,
Washington, D.C 20551.
For copies ofproposals out for
comment, contact Anne Guthrie
at (3 14) 444-8810.

Federal Reserve Bank of St. Louis

Savings Bonds Find
New Home in Kansas
It took a little over one year,
and thanks to the cooperation
of many Eighth District bankers,
the St. Louis Fed's transfer of
savings bond processing is
complete. On August 1,
Missouri institutions closed
the book on this project by
transferring their bonds to the
Kansas City Fed. Institutions
in Arkansas, Kentucky, Indiana,
Illinois, Mississippi and
Tennessee completed their
conversions during the latter
half of 1993 and earlier in 1994.
The staff in Kansas City is
eager to service Eighth District
institutions to ensure that
strong relationships established
here carry on. If you have
any savings bond questions,
please call 1-800-333-2919.
CDC Update
Late last year, the St. Louis
Fed sponsored meetings
with CEOs of area banks to


rders for pennies are
increasing, but available
supplies are not keeping pace.
Acommon question among
bankers and others is, Where
are all the pennies? The
answer? In dresser drawers,
jelly jars and piggybanks
across America. There are,
in fact, 163 billion pennies in
circulation, more than enough
to meet the needs of bankers
and merchants alike. Of the
18 billion coins produced by
the U.S. Mint this year, 80 percent were pennies.

encourage their participation
in the St. Louis Business
Development Fund, a multilender community developmen t corporation (CDC).
The CDC was organized to
provide loans to St. Louis
area small businesses. To
date, 14 banks have joined
the loan consortium. The
St. Louis County Economic
Council and the city's St. Louis
Development Corporation are
also participating. All bankers
are encouraged to check out
the community welfare investment opportunities available
through the CDC. For more
information, call Glenda
Wilson at (314) 444-8317.

With the conversion to FEDNET, the Federal Reserve's
new communication network,
looming on the horizon,
the St. Louis Fed is at the half
way point in its automation

Dick Kay, vice president, Yaluables Processing, has seen this
type of coin 'crunch' before.
"During previous peaks in the
business cycle, when the economy is good, people don't pay
much attention to their pennies.
Instead of trading them in
for cash, consumers let them
collect at home," says Kay.
1ypically, these situations don't
last long. Kay indicates that,
"these types of shortages or
'crunches' are cyclical, based
on the health of the economy.
Just like the crunch in the

consolidation effort. Following
are tentative dates for upcoming
conversion activities.
As we get closer to these events,
you'll be contacted with specific
dates and other important
• All dial electronic connections (Fedline, etc.) will
migrate to the new National
Dial Center between January
and March 1995.
• All leased-line connections
will migrate to FEDNET
between April and July 1995.
• The Eighth District's Funds
Transfer system will convert
to the centralized application
in May 1995.
• Conversion to the centralized
ACH system will occur in
September 1995.

early 1980s, this is a temporary
situation that should correct
itself soon."
What can bankers do to help?
The Mint and the Federal
Reserve are encouraging financial institutions to accept loose
coins, waiving the traditional
requirement that coins be
wrapped and labeled. "Making
it easy for consumers to return
pennies might motivate some
people with large holdings to
cash them in," says Kay.

Fed St. Louis Branches Out To Help
Achieve Goals of CRA
...,.._..... he St. Louis Fed
is branching out
with two major
initiatives to help
lenders meet
the goals of the
Community Reinvestment Act
(CRA) and assist community
leaders in the process.
First, full-time staff members
have been added at each
Eighth District branch office

District Community
Affairs staff recently
met to plan upcoming
events. Sta.fffrom left
to right are: Marilyn
Corona, Howard Wells,
Judy Armstrong,
Randall Sumner,
Tom Boone, Kim Bowlin,
Karl Ashman, Glenda
Wilson, Keith Turbett,
Mike Sinnett, and
John Baumgartner.
Not pictured:Julie
Federal Reserve Bank of St. Louis

(Memphis, Little Rock and
By conducting one-on-one
meetings, researching community and lending needs and
hosting informational programs, these staff, along with
the staff in St. Louis, will facilitate alliances between local
bankers and community
organizations, helping them
identify lending opportunities.
The second initiative is a series
of workshops, starting this fall,
that focuses on fair lending
and community development
The one-day fair lending
workshop geared toward commercial bank employees,
will provide tips for avoiding
discrimination during the

entire lending process, along
with pointers on bank selfaudits and internal reviews.
1\vo community development
workshops will also be offered.
The first workshop, designed
for loan officers, will emphasize
the relationship between small
business lending and community reinvestment. Tips on
working with community
groups and cooperatives will
also be provided. A
second workshop will
focus on affordable
housing issues, including
overviews of existing
lending programs and
approaches for managing risk.
These initiatives, as well
as many other community affairs efforts at
the Federal Reserve,
are guided by one basic
principle: If the goals
of the Community
Reinvestment Act are to be
reached, both the lender and
the community must benefit
from their alliance.
For more infom1ation on
these workshops, please contact
an individual at your local
Fed office listed below.
These staff are also available to work with lenders,
local government agencies,
and community organizations throughout the Eighth

St. Louis
• Randall Sumner,
vice president and
community affairs officer
(314) 444-8644
• Glenda Wilson, assistant
manager (314) 444-8317

Fed Helps Lenders
Close The Gap
The Federal Reserve
System recently released a
23-minute videotape called,
Closing The Gap: AGuide
To Equal Opportunity
Produced by the San
Francisco, Boston and
Chicago Reserve Banks,
the video is designed to
help financial institutions
ensure fair lending within
their organization.
Chairman Alan Greenspan,
along with Federal Reserve
System personnel, present
10 "best practices" that can
help financial institutions
ensure equitable treatment
of all applicants and
borrowers. For more
information on the tape,
contact VIDICOPY at
• Judy Arn1strong,
community affairs analyst
(314) 444-8646

Little Rock
• Kim Bowlin,
community affairs analyst
(501) 324-8251

• Julie Michels,
community affairs analyst
(502) 568-9200

• Keith Turbett,
community affairs analyst
(901) 579-2421

Statements Under
By now your institution
should have received its 1993
Home Mortgage Disclosure Act
(HMDA) disclosure statement.
As a reminder, financial institutions are required to make
these statements available to
the public no later than three
business days after receipt.
If an institution has branch
offices in other metropolitan
statistical areas (MSAs), the
data should be made available
in at least one branch office per
MSA within 10 business days.
Bankers will have 30 days to
review their disclosure statements for content and accuracy before final statements are
produced. The 30-day review
period ends August 22.

Post Office Box 442
St. Louis, Missouri 63166

CB is published quarterly by the

Public Information Office of the
Federal Reserve Bank of St. Louis.
Views expressed are not necessarily
official opinions of the Federal
Reserve System or the Federal
Reserve Bank of St. Louis.
Federal Reserve Bank of St. Louis

LARs Should Be
Publlc Too
In addition to HMDA disclosure statements, lenders must
also make public loan application registers (LARs). For
privacy reasons, the register
should be modified to remove
the application or loan number, the date the application
was received and the date
action was taken. Questions
regarding this or other HMDA
data should be referred to Bob
Dowling at (314) 444-8532 or
1-800-333-0810, ext. 8532.

Reg C Revisions
The Federal Reserve Board
is requesting comments by
August 10, on several proposed
changes to Regulation C.

The proposal aims to improve
the quality of HMDA data and
address legal requirements for
earlier availability of disclosure
Proposed amendments
include: 1) setting an earlier
deadline for data reporting
from March 1 to February 1,
2) requiring institutions to
keep their loan application
registers (LARs) current during
the year as data are collected,
and 3) requiring data to be
submitted electronically in
machine-readable format.
Comments on definition
changes and clarifications
on the reporting instructions
are also being sought.
See the "Out for Comment"
box on the previous page for
information on how to obtain
a copy of the proposal.

Fed-Sponsored Events
For Eighth District
Depository Institutions

District Dialogues
September 20
Memphis, Tenn.
September 21
Columbus, Miss.

Economic Forums
October 12
Springfield, Mo.
October 13
Fort Smith, Ark.
For more information about
these meetings, please
call Jackie Himmelberg
at (314) 444-8311.