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7 2001

Spring 1996
News and Views

Eighth District Bankers

Fe~ Encourages Direct Deposit Use

to Offer

Federal Reserve Bank of St. Louis

deposit among
financial institutions, corporations
and consumers nationwide.
The five-phase campaign kicks
off in early March and carries
through to the end of 1996.
Although NACHA and SSA have
been involved in promoting

direct deposit for the past four
years, this marks the first time
the Fed has taken such an
active stance, reflecting its
increased commitment to
converting paper payments
to electronic.
By increasing the use of direct
deposit, bankers can generate
several tangible benefits for
their organizations, through:
• Reduced teller lines in
branch lobbies, freeing staff
for other tasks;
• Increased customer service
by expanding their electronic
product offerings; and
• Improved cost efficiency

by reducing the number of
checks that need to be handled
and mailed back to customers.
According to a Federal Reserve
System study, it costs an average of74 cents to handle a
check deposit over the counter,
compared with just 5 cents for
an ACH deposit.
Tom Pope, vice president
of operations at Owensboro
National Bank in Kentucky,
says that his bank has been
selling direct deposit since
1988 for another reason: It's

he St. Louis Fed's Little
Rock and Memphis
branches will begin offering
check imaging services beginning March 1 and June 1,
respectively. The branch
introduction of the service
comes on the heels of the
St. Louis bank's kick-off Jan. 1.
Image technology involves
capturing the front and back
images of paper checks and
then transferring the digitized
pictures to CD-ROM or magnetic tape. Benefits include:

reduced postage, processing
and handling costs, more
efficient archiving, enhanced
cash management capabilities
and speedier check retrievals.
"It's just so fast, " says Polly
Hoskins, the Memphis Fed's
imaging project coordinator,
"banks will be able to answer
customers' questions in seconds,
where it now takes a couple of
hours, or even a week."
Hoskins says that a small-town
bank can gain a competitive
advantage over the other bank

or banks in town by offering
imaging first.
Bill Dean, vice president of
People's Bank in Cuba, Mo.,
plans on just that when his
bank starts its imaging service
with the St. Louis Fed March l.
"I think all banks are going to
get involved in it," Dean says.
"The only question is when. "
For information on starting
imaging service, contact your
account executive.


(co11/i11ued 011 11e.\'I j){lge)

Electronic Banking:
Time to Take the Plunge?


n the 20 years I spent
in commercial banking
before coming to the
St. Louis Fed last November,
I often had to w e igh the
benefits of inve sting in
new technologies against
the associate d expenses
L e Grande Rfres
and uncertain outcomes.
Today, commercial bankers are struggling
with perhaps the ir biggest dilemma yet in this
regard: the emergence of electronic banking
services like electronic check presentment, personal computer home banking, electr onic cash
and lots of other forms of electronic payme nt.
The opportunities to offer electronic banking
products and services, which can pote ntially
improve service to customers, seem to be
multiplying daily, leaving many bankers
pondering how best to proceed. Can a small
bank afford to make such an investment?
Should the investment be made when only
a small percentage of the customer base may
be open to using e lectronic banking services ?
These are obviously valid conce rns.
From my current perspective as a central
banker, I've seen banks successfully address

product and customer service questions throughout the Eighth District, as highlighted in our
Page 1 stories. Some banks are starting smalloffering products one market at a time-while
others have gained market acceptance by educating their customers about the innovations
and s ervices before introducing them.
I believe that financial institutions will
have no choice but to familiarize themselves
with these new electronic technologies and
ultimately to introduce the resulting customer
products. For many banks in the Eighth
District, this isn't going to mean setting up a
virtual bank on the Internet. Rather, it might
mean using an existing PC to begin originating
ACH items for their customers.
Can banks really afford to take advantage of
all that electronic banking has to offer? Perhaps
not right away, but they must begin to educate
the mselve s and their customers and begin
to chip away at the inefficient paper-based
infrastructure that has been in place for most
of this century. In time, competition will force
the market to change.
LeC,'rmtde Ril'es isj,rsl rice president of the Federal Resen'e Bank
r!f SI. Lou is.

Direct Deposit
(crmli111m lj i'()/11 fro 11I j ){lge)

an additional electronic link
with a customer, making the
relationship tougher to dissolve.
''The more you can move
your customer base electronically for a long-term goal, the
better off the bank is," Pope
says. "Direct deposit is just a
piece and not an entity. "
Federal Reserve Bank of St. Louis

Those interested in incre::L5ing
the number of direct deposit
customers at their own bank
can make use of any of the
• Statement stuffers, available
free from SSA, that describe the
benefits of direct deposit;
• Tent cards for bank lobbies

also available for free from
SSA; and
• Expanded use of direct
deposit within their organization through interest distribution on CDs and other
investment products.
To receive free direct deposit
promotional materials from

SSA, call Rick Rosen at
(410) 965-0390. For more
information on direct deposit,
contact Kathy Paese of the
St. Louis Fed at (314) 444-8453.

The New GDP:
"Chainging" with the Times

Kevin L. Kliesen
Federal Reserve Bank of St. Louis

nJanuary 1996, the U.S.
Department of Commerce
changed the way it calculates
real gross domestic product
(GDP)-the broadest yardstick available for gauging
the economy's performance.
Most economists agree that
accurate estimates of any measure of economic well-being
are a necessity, but particularly so for GDP estimates,
which affect everything from
a firm 's sales forecast to
presidential elections.
To calculate GDP, the number
crunchers at Commerce add
up the current dollar value
of spending on new goods
and services produced in the
economy each quarter. These
data-culled from the tax
returns, census surveys and
profit statements of households, businesses and other
government agenciesare grouped into four main
components: spending by
consumers, businesses,
government and foreigners
(less spending on imported
goods by U.S. residents) . The
sum of these components
equals the current dollar
value of GDP, otherwise known
as nominal GDP These components are first "deflated"that is, an adjustment is
made for inflation-by a
series of price indexes and
then "summed up" to equal
real GDP
Under the old measure,
these price indexes were
known as "fixed-weighted"
indexes because they measured
changes in prices relative
to a fixed base year, which
Commerce would change
about every five years.

This measure was flawed,
however, because of the significant changes that occur in the
economy over time. Moreover,
because these structural
changes cause corresponding
changes in the relative prices
of goods and services produced
in the economy, the purchasing patterns of consumers
and producers can also change
The old measure
of GDP was flawed
because of the
significant changes
that occur in the
economy over time.

markedly over time. For
instance, technological innovations tend to lower the cost
of producing a product like
computers, thereby increasing
the quantity of computers sold
and produced. Thus, all other
things equal , the value of
computer output as a percent
of the total value of real GDP
should increase.


ixed-weighted price indexes
do not handle these types
of changes well because their
prices are tied to a specific base
year. As a result, the accuracy
of GDP calculated using this
method erodes over time. To
counter this, Commerce has
decided with the new method
to calculate real GDP using
"chain-type" price indexes.
Simply put, instead of measuring prices and quantities
relative to a fixed base period
(fixed-weighted indexes), a
chain-weight measure of
GDP uses prices and quantities
from the current year and the

previous year. In this way,
more current prices are used
to calculate real GDP, thereby
better incoq1orating changes
in the structure of the economy
that are reflected in prices and
quantities of goods and services.
For example, in 1987,
according to the Commerce
Department, today's Pentium
personal computer would have
cost about the same as what
a new car cost-a little more
than $13,700. Thus, each
new computer and new car
produced would have added
the same dollar amount to
real GDP. By 1994, however,
because of falling computer
prices, the average price of
a new PC w;:Ls; about $2,500,
while the price of a new car
was about $19,700. Using
fixed 1987 weights meant
that each new PC produced
in 1994 was still being counted
as if it were equal to one new
car ($19,700) , rather than its
actual amount (about $2,500).
Thus, under the old method,
because the value of computer
output was being overstated,
estimates of real GDP were
overstated as we] I.
The new chain-weighted
measure should correct for
these discrepancies, which ,
in turn , should produce
more reliable estimates of
economic growth.
Km in l. Kliesen is an economist in
the Research /Ji1 isio11 al the Federal
Reser!'e Bank q/St. Louis.




The following is a Federal Reserve
System proposal currently out for
■ Request for public comment
on whether the rules under
Truth in Lending (Regulation Z)
provide adequate p~otection
for consumers seeking homeequity lines of credit. Comments due by April 1, 1996.
(Docket No. R-0913)
Direct all comments to William
W Wiles, Secretary, Board of
Governors of the Federal Reserve
System, 20th St. and Constitution
Ave., NW, Washington, D.C.

to Rise
Federal Reserve Bank of St. Louis

Fed Surveys Bankers
on Account Prototype
Eighth District bankers were
among those surveyed nationwide in late 1995 for their
input on a proposed interstate
branching account model.
Industry feedback will help
the Fed structure the new
account model , which is
expected to be announced
by mid-1996, so that it meets
customer needs.
The new model will address
how banks with offices across
several Fed Districts can most
effectively manage their
accounts when interstate
branching is fully under way
in 1997. While the model will
provide for a consolidated view
of account balances, banks
should be able "to slice and
dice the detail any way they
want, depending on their informational needs or organizational structure," explains

Enhanced EDITH ®
Users of EDITH , the Eighth
District Interactive Telephone
Helpline, will be converted
to an upgraded version of
the voice response system by
March 18. The new system
incoq1orates improved security
features to better safeguard
customer account information.
The new system also calls
for all customers to use
a new telephone number:
1-800-333-0864. The local
number will no longer be
If you have questions about
the new EDITH or would like
to receive a quick reference
guide that will help you use
it, call Customer Access
Support at (314) 444-8999
or 1-800-333-0871.

he number of banks in
the Eighth District may be
declining, but the number of
branches is continuing to rise.
St. Louis Fed data show that,
in the Eighth District, the
number of branches rose an
average of 6 percent from 1991
to 1995. About a quarter of
the increase is due to the
acquisition of thrifts by banks.
Overall, though , the figures
counter the notion that branches
are being made obsolete by
factors like electronic banking
and industry consolidation.
St. Louis Fed economist Neil
Stevens says that electronic

in metropolitan areas like
banking has not developed to
the point yet where it would
St. Louis, necessitating branches
greatly influence branch
in areas farther out. The
closures. In addition, Stevens
upshot: "OId offices don't
says, the Eighth District bas
get closed as fast as the new
seen little in the way
ones get opened."
of same-market
Number of Eighth District Banks
mergers, which
shrink the number
Number of
Number of
of branches. "We
haven't had any
1239 ..
huge in-market com- 1991 ...
binations in recent
l 168
1993 ..
years," he says.
1994 .....
On the flip side,
1995 ......
Stevens says,
the population
(Customer Information S)'Stem)
continues to spread


Hillary Debenport, assistant vice
president at the St. Louis Fed.


New Fed ACH
Fed ACH customers will soon
be receiving a Fedline patch
enabling them to expand their
use of the new Fed ACH software that was implemented
late last year. Once it's loaded,
the patch will enable users,
via a Fedline terminal, to
receive current-day ACH files
and balance reports on-demand,
as well as inquire on ACH files
awaiting delivery, at anytime
during the day.
In addition, after all Districts
have converted, which is
expected to be sometime this
fall, Fed ACH users will be
able to request their own
remakes of advices or files,
and initiate online item
traces and file inquiries.

Daylight Overdraft Fees Found Effective

Peak Daylight

............ he fees that the
Federal Reserve
began charging
two years ago
for daylight overdrafts incurred
in Reserve Bank accounts have
produced dramatic results,
bringing peak daylight overdrafts down below the level
of the mid-1980s, in constantdollar terms. This conclusion
is the result of a two-year study
of the policy by the Federal
Reserve Board.
In the first 12 months of the
daylight overdraft fee program,
the Fed col lected a total of
$18.5 million in fees from
280 depository institutions
nationwide. In the Eighth
District, the Fed collected
roughly $87,000 in fees
from 12 institutions.

Billions of Dollars
1 6 0 - - - - -1 - - - - - - - - - - - - April 1994


April 1995 2 - - - -

100 _ _ _ _ _ _ _ __ _ _ _ _ ___,___ _____,
80-- - - - - - -------------+---------I
60 - + - - - - - - - - - + - - - -____:!l~ ~ '-----I

NOTE: Biweekly averages of daily data,
Jan. 6, 1993 to Oct. ll, 1995
1 l Obasis

point daylight overdraft fee

21 Sbasis point daylight overdraft fee
Federal Reserve Bank of St. Louis



The bulk of the effect appears
to be due to the initial institution of fees-10 basis points
of chargeable daily daylight
overdrafts-in April 1994.
The additional increase of
5 basis points instituted in
April 1995 hcLS had little
additional effect, prompting
the Fed to put off the increase
it had scheduled to start this
April until it can evaluate the
results of the 1995 raise.

The fees have produced
several other effects in the
two years since their passage.
They've caused:
• a shift in the overall intraday peak of overdrafts to earlier
in the day. This shift is caused
by U.S. government securities
dealers now arranging their
financing transactions earlier
in the morning and delivering
securities used as collateral for
repurchase agreements more
quickly to cover overdrafts
caused by early-morning
repayment of maturing
repurchase agreements.
• a reduction in daylight
overdrafts that parallels the
concentration of overdrafts
that existed before the implementation of fees. Specifically,
more than 90 percent of the
System-wide reduction in
average overdrafts has come
from the six institutions that
generally incur average perminute overdrafts of more
than $1 billion. Overdrafts
among these banks have
fallen 45 percent.
• an overall reduction in
positive intraday balances in
Reserve Bank accounts. In the
six months after the start-up
of overdraft fees, positive intraday balances averaged about
$70 billion, compared with
$90 billion in the six months
before April 1994.
The fees supplement the
quantitative limits on daylight
overdrafts, known as net debit
caps, set by the Fed in 1985.
The caps, which are based on
a variety of factors and average
about 20 percent of an institution 's capital, have proven to
be the most effective method
of managing overdrafts in all

but the largest institutions.
The Federal Reserve Board
is continuing to look for
additional ways to reduce the
volume of daylight overdrafts.
Possibilities include: the
development of an intraday
funds market, greater use of
private payments systems and
increased netting of securities

District Banks
Can Hold Their
Heads High
In the Eighth District,
only about 40 percent of
account-holding institutions have any daylight
overdrafts, and less than
30 of them breach their
net debit caps. Of those
that incur daylight overdrafts, only about six are
charged fees.
"A lot of banks in
our District never go
overdrawn," says Hillary
Debenport, assistant
vice president at the
St. Louis Fed.
Even though they have
no history of daylight overdrafts, many Eighth District
banks have implemented
additional account controls
to ensure compliance with
the overdraft policy.
"The majority of them
have made a lot of changes
just to be cooperative,"
Debenport says. "We
really appreciate their
effort since it has helped
the Fed reduce overall risk
in the payments system."


Help for Nondeposit
The Federal Reserve System
has developed a checklist to
assist state member banks
in their compliance with
the Interagency Statement
on Retail Sales of Nondeposit
Investment Products. The
checklist highlights key features of the statement, which
was issued in 1994, and focuses
on provisions that examiners
have identified as important
for banks to monitor.
While not intended to be
a substitute for a thorough
understanding of the Interagency Statement, the checklist
can serve as a guide for periodically reviewing your bank's
compliance perfo1mance. It
also can be used to identify
additional staff training needs
and areas requiring improved

Post Office Box 442
St. Louis, Missouri 63166

CB is published quarterly by the

Public Affairs Office of the Federal
Reserve Bank of St. Louis. \'iews
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

procedures and controls.
To receive a checklist, contact
Bernie Berns of our Public
Affairs Department at
(314) 444-8321.

Mutual Funds
Education Material
The Federal Reserve System
has developed an educational
program,Mutual Funds:
Understand the Risks, to
help consumers understand
the difference between insured
bank deposits and uninsured
investment products. Program
materials include an eightminute video and a resource
kit, complete with a script,
overhead masters, consumer
handouts and sample publications. The kit also contains
information on how to plan
and implement a consumer

seminar. To order copies of the
video or the kit, contact Bernie
Berns of our Public Affairs
Department at (314) 444-8321.

Risk Management
in '96
The Federal Financial
Institutions Examination
Council (FFIEC) will hold two
risk management planning
seminars this year: April 18-19
in San Diego, Calif.; and
Sept. 26-27 in Kansas City, Mo.
The seminars will cover a
variety of risk-related topics,
such as the implications of
interstate banking, the risks
of emerging technologies and
a summary of pending legislation and its potential impact
on risk management. For more
information on the seminars
or to register, contact the FFIEC
at (703) 516-5588.

Fed-sponsored Events
for Eighth District
Depository Institutions

"Examining for the
CRA" Seminars
Small Institution
~1arch 12-Columbia, Mo.
~1arch 14-St. Louis, Mo.

Large Institution
March 13-St. Louis, Mo.
For more information on
Examining for the CRA
seminars, call Dianajudge
at (314) 444-8751.