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Summer 1994 News and Views for 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. Overdraft Pricing Yields Immediate Changes https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 5 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 Banks MF&A Income Proportion of as a % of District Total Noninterest Income Less than $100 million 82 $100 million - $300 million 60 26.8 $300 million - $1 billion 25 61.0 1.45 $1 billion - $15 billion 14 70.0 2.93 181 15.6 2.20 All banks 9.4% 0.36% 1.58 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 charges.'' Feditorial Why Have Long-Term Interest Rates Risen? M 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 New Services Aim to Reduce Regulatory Burden https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis E 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 f John C. Weicher https://fraser.stlouisfed.org 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 A 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. The John C. Weicher is a Senior Fellow at the Hudson Institute and a visiting scholar at the Federal Reserve Bank ofSt. Louis. RegionalRoundup OUT FOR COMMENT The following ore Federal Reserve System proposals currentty out for comment: ■ 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. Healthy Economy Causes Penny Shortage https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Savings Bonds Find New Home in Kansas City 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 o 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. Automation Consolidation Progresses 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 information. • 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 Michels. https://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (Memphis, Little Rock and Louisville). 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 lending. 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 District. 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 Lending. 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 1-800-708-7080. • Judy Arn1strong, community affairs analyst (314) 444-8646 Little Rock • Kim Bowlin, community affairs analyst (501) 324-8251 Louisville • Julie Michels, community affairs analyst (502) 568-9200 Memphis • Keith Turbett, community affairs analyst (901) 579-2421 Calendar Dlsclosure Statements Under Review 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. https://fraser.stlouisfed.org 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 Proposed 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 statements. 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. Upcoming 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.