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FEATURED IN THIS ISSUE: Are We in a “Jobless Recovery”? | Many Community Banks Still Struggling with Crisis Fallout

In-Depth Public Discussions Explore the Financial
Crisis, Federal Deficit and Unemployment


ill the Dodd-Frank Act lessen
the impact of future financial shocks? Could the debt crisis in
Europe trigger a recession here? Why
is the unemployment rate barely moving even though jobs are opening up?
What is driving the federal deficit?
These are among the concerns the
public raised during the St. Louis
Fed’s fall discussion series, “Dialogue
with the Fed: Beyond Today’s Financial Headlines.” Hundreds of guests
came to the Bank on Sept. 12, Oct. 18
and Nov. 21 to see the presentations
and engage in open discussions with
experts from the St. Louis Fed. The
public series proved so popular that the
final two sessions were webcast live via
the Bank’s web site.
“We noticed a significant increase in
interest from the general public for current financial and economic information
from the Federal Reserve,” said Julie
Stackhouse, senior vice president and
managing officer for Banking Supervision, Discount Window Lending and
Community Development. “We decided
the best way to connect the public with
the expertise here at the Fed was to
engage them directly. The goal of the
series was to provide the public with relevant and timely information as well as
a forum for discussion of current issues.
Based on the feedback we received, I
think we addressed this need.”
Although Dialogue organizers had no
shortage of possible topics related to the

PA G E 2

| Central View | Reaching the General Public

PA G E S 3 - 6

| Part 1 | Lessons Learned from the Financial Crisis

PA G E S 7- 9

| Part 2 | Bringing the Federal Deficit under Control

PA G E S 9 -1 1

| Part 3 | Understanding the Unemployment Picture

financial crisis and Great Recession to
discuss—including the sluggish recovery, a stagnant housing market and the
downgrade of the U.S. sovereign debt
rating—they focused on three specific
and critical themes. As explored in
this issue of Central Banker, the session
topics were:
1. the origins of, responses to and
lessons learned from the financial crisis;
2. the federal budget deficit and the
hard choices that must be made
regarding taxes and spending;
3. and the current unemployment
situation in the United States.
to view the presentations and videos,
including the question-and-answer
sessions. Information on future
Dialogues will appear there soon.

T H E F E D E R A L R E S E R V E B A N K O F S T. L O U I S : C E N T R A L T O A M E R I C A’ S E C O N O M Y®



News and Views for Eighth District Bankers

Vol. 21 | No. 4

Dialogues Bring the Fed and
General Public Together


Scott Kelly
Central Banker is published quarterly by the
Public Affairs department 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.
Subscribe for free at to
receive the online or printed Central Banker. To
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Follow the Fed on Facebook, Twitter and more
The Eighth Federal Reserve District includes
all of Arkansas, eastern Missouri, southern
Illinois and Indiana, western Kentucky and
Tennessee, and northern Mississippi. The
Eighth District offices are in Little Rock,
Louisville, Memphis and St. Louis.

Useful St. Louis Fed Sites
Dodd-Frank Regulatory Reform Rules
FOMC Speak
FRED (Federal Reserve Economic Data)
St. Louis Fed Research

2 | Central Banker

By David Sapenaro


he recently completed “Dialogue
with the Fed” series is a new means
to engage an important Bank constituent: the general public. We have long
held these types of events for other
Bank constituents, such as business
leaders, bankers and local governmental officials, but this was the first time
we had events targeting a more general
David Sapenaro
is the first vice
We believe that it is important for the
president and chief
general public to have access to experts
operating officer of
who can explain important and often
the Federal Reserve
complex economic situations and inforBank of St. Louis.
mation in layman’s terms—especially
in an open forum. We also want the
public to have a better understanding
of what the Federal Reserve does, why we do it and how we
do it and to see firsthand that we are committed to working in the public’s interest. The Dialogues appear to have
been effective on all of these fronts because the events were
well-attended and, based on feedback from participants,
Over the past several years, the Bank has emphasized
the importance of external outreach, both in person and
through electronic means. Our Bank officials and economists devote time each year to meet face to face with constituents throughout the Eighth District to share information
and seek anecdotal feedback on the economy and other
pressing financial and banking-related issues.
In addition, we have significantly enhanced our web sites
and begun using social media tools to provide timely and
high-quality economic and financial information. And we
have expanded and augmented our outreach to specific
constituents, such as teachers and community development
professionals, to provide information and materials to help
them better perform their responsibilities.
Visit for more information about
our events, programs and economic research. Also, please
visit, where you can use
Twitter, Facebook, RSS feeds and more to keep track of the
latest information and data.

>> N O W O N L I N E

Third-Quarter 2011 Banking Performance Reports


Can Lessons from the Recent Financial Crisis
Help Avoid Future Crises?


ven though financial crises,
recessions and depressions are
nothing new in America, the severity
of the 2007-2009 recession and ensuing financial crisis highlighted some
weaknesses in our financial system
and gaps in our regulatory system.
On Sept. 12, St. Louis Fed officials
and a public audience explored the
causes of and responses to the financial
crisis during the first “Dialogue with
the Fed” discussion, “Lessons Learned
from the Financial Crisis.” Julie
Stackhouse, senior vice president and
managing officer for Banking Supervision, Discount Window Lending and
Community Development, led the presentation and discussion. Joining her
for an audience question-and-answer
session were Mary Karr, the St. Louis
Fed’s general counsel, and economists
William Emmons and Silvio Contessi.

Underlying Causes and Lessons
According to a December 2009 congressional report, the chain of events
leading to the severe crisis in the fall

of 2008 began with an asset bubble in
housing, expanded into the subprime
crisis, escalated into a severe freezeup of the interbank lending market,
and culminated in intervention by
the U.S. and other industrialized countries to rescue their respective banking systems.
Numerous assumptions, miscues and
efforts to transfer risk to other parties
combined to trigger the crisis. As
Stackhouse explored in her presentation, several lessons have been culled
from those underlying causes.



Lesson: Misguided Comfort
High levels of debt, uncertain ability of borrowers to repay debt and an
expectation that housing prices will
always increase (among other factors) created a comfort level that was
“Too much debt that does not have a
clear ability to be repaid and is dependent on an asset—typically land—going
continued on Page 4



Federal Reserve
• Provided funds (liquidity)
to stabilize financial markets
through several credit
and lending facilities and

United States
• Troubled Asset
Relief Program
• $800 billion
economic stimulus
• Cash for Clunkers program
• Homebuyer tax credit
• Extended unemployment

Federal Deposit
Insurance Corp.
• Raised bank deposit
insurance limits
• Provided other
bank debt guarantees

Central Banker Winter 2011 | 3


Federal Reserve Credit Easing Policy Tools
Weekly, January 2007 - August 2011, in billions of dollars
Financial crisis
liquidity programs


Fed’s purchasing programs of bonds,
mortgage-backed securities and U.S. Treasuries.


Oct 11

Jul 11

Apr 11

Jan 11

Oct 10

Jul 10

Apr 10

Jan 10

Oct 09

Jul 09

Apr 09

Jan 09

Oct 08

Jul 08

Apr 08

Jan 08

Oct 07

Jul 07

Apr 07

Jan 07


Traditional Security Holdings

Securities Lent to Dealers

Repurchase Agreements

Other Fed Assets

Currency Swaps

Term Auction Credit

Primary/Other Broker Dealer

Primary Credit

Secondary Credit

Seasonal Credit

Maiden Lane 1

Maiden Lane 2

Maiden Lane 3

Asset-Backed Commercial Paper

Net Portfolio Holdings Comm. Paper

Other Credit

Credit to AIG

Mortgage-Backed Securities

Federal Agency Debt Securities

Term Asset-Backed Securities

Long-Term Treasury Purchases

SOURCE: Federal Reserve Board

continued from Page 3

up in price is a recipe for disaster,” said
Stackhouse. “We like to think that
values will always increase over time;
we need to begin to think that they
might not. And you have to be able to
repay your debt—particularly when it’s a
big debt on your balance sheet.
“This is one of those lessons that
has to be learned and relearned and
relearned. And the risk was a lot
harder to see this time around because
it was so spread out over the financial
system,” she said.
Lesson: Misunderstood Risk
Risk needs to be understood across
all parts of the financial system, including banks and nonbanks. Spreading
risk outside of the insured banking
system and the use of “insurance” policies, such as credit default swaps, did
not result in risk diversification.

4 | Central Banker

Why, though, didn’t the Fed see
it? “Our regulatory structure was not
built to see this risk,” she said, because
different agencies oversee different
components of the financial industry.
Not all risk is found in banks; many
times, risk is in financial institutions
that aren’t banks, such as insurance
companies and investment houses (the
so-called shadow banking system).
Stemming from this lesson, a new
Financial Stability Oversight Council
was created by the Dodd-Frank Wall
Street Reform and Consumer Protection Act of 2010. The council is charged
with monitoring risk across all financial sectors. If the council identifies a
new systemically important financial
institution, it will be supervised by one
regulator, the Federal Reserve.
Lesson: Short-Run Choices
Choices made in the short run may
have long‐run consequences that need
to be carefully considered.

“That is our role: providing financial
stability by being there to stop the
panic but stepping out when the
panic is done.” 
—Julie Stackhouse
During the housing bubble, many looked upon owning a
home as a means for building wealth for retirement, based
on the assumption that prices would always go up. “But if
building wealth for retirement was a goal, then there were
probably better and more certain choices than investing in a
home,” Stackhouse said. “Looking back, it’s a simple lesson
but probably one that we looked over a bit too quickly.”

Panics Can Be Stopped…
In the fall of 2008, the Federal Reserve, the federal government and the Federal Deposit Insurance Corp. (FDIC)
started using many tools to combat and stop the financial
crisis. (See Figure 1 on Page 3.) The Fed repeated and
expanded on a measure last used immediately after the 9/11
attacks: It injected liquidity via credit programs and loans
to banks and financial organizations to get the financial
markets moving again.
As Figure 2 on Page 4 shows, the Fed’s balance sheet was
fairly steady until the crisis became acute in fall 2008. The Fed
initiated many lending facilities and used other long-standing
liquidity measures, including working with foreign banks.
“That is our role: providing financial stability by being there
to stop the panic but stepping out when the panic is done,”
Stackhouse explained. “What’s not well-understood is that
although the balance sheet got very large and peaked at a
high level in the late winter of 2009, the programs enacted in
response to the crisis have largely gone down to zero. Today
there is very little left on the Federal Reserve’s balance sheet
from the financial crisis programs.”
As seen in Figure 2, what’s left on the balance sheet—the
large amounts from early 2009 to the present—represents
the Fed’s efforts to stimulate the economy by purchasing
bonds, mortgage-backed securities and U.S. Treasuries.
During the question-and-answer session, Emmons added
that central bank liquidity—both here and abroad—ideally
should be used only for emergencies. “We don’t want the central banks to be the only providers of liquidity—they’re the
lenders of last resort,” he said. “We want the interbank markets to be the primary—almost exclusive—sources of liquidity. That lack [of a strong interbank market] is the problem in
Europe right now.”

…But Will It Work in Europe?
Previous experiences demonstrate that actions of central
banks can stop a crisis in its tracks. But because of debt woes
in Greece, Italy, Spain and other nations, Dialogue audience members were eager to know whether events in Europe
threatened a new crisis that could spread to America.
continued on Page 6

Did the 1999
Act Cause the Crisis?
During the Sept. 12 “Dialogue with
the Fed,” some audience members
questioned whether previous government and regulatory actions not only
fueled the crisis but also need to be
undone to prevent a future crisis. One
person asked whether the Dodd-Frank
Act sufficiently addresses the lack of
separation between commercial banking and investment banking; the 1933
Glass-Steagall Act created the separation, but it was repealed as a result of
the 1999 Gramm-Leach-Bliley Act.
According to some economists,
policymakers and lawmakers, the
repeal helped create the subprime
mortgage crisis and “too big to fail”
financial institutions, but Fed economist William Emmons noted the lack
of consensus behind that argument.
He pointed to the extraordinary
September 2008 actions involving
four large financial organizations: The
federal government took over Fannie
Mae and Freddie Mac; allowed the
investment firm Lehman Brothers
to go bankrupt; and bailed out AIG,
one of the world’s largest insurance
companies. “None of them,” Emmons
said, “had anything to do with GlassSteagall, and they were unaffected by
the act of 1999.”
The Fed’s Julie Stackhouse added:
“The reason why Glass-Steagall was
repealed is because investment banking and commercial banking became so
intertwined they couldn’t be separated
easily. Many investment banking
activities support prudent commercial
banking activities.”
One of the components of the DoddFrank Act, the pending “Volcker Rule,”
is meant to address issues related
to the 1999 act, such as proprietary
trading. The public can comment on
the proposed Volcker Rule until Jan. 13,
2012. Go to the “Open for Comment”
section at for
more information on the rule.
Central Banker Winter 2011 | 5


Congress first authorized the Fed’s liquidity actions
under the Federal Reserve Act of 1913.

continued from Page 5

Speaking specifically of the situation
in Greece, Contessi said it wasn’t clear
whether a crisis could be contained.
“The direct exposure of the U.S. to
the Greek financial system is small,
but there is a lot of indirect exposure.
Obviously many European banks own
Greek debt, and there are bilateral relationships between U.S. and European
banks,” he said.
“If any of those countries default,
then the value of the Treasury bonds
that banks hold may be very different
within a few days of default. So, there

>> M O R E O N L I N E

Financial Crisis Timeline
Liquidity Crises in the Small and Large
Federal Reserve Balance Sheet Information

is a chance that things could turn ugly,”
he said.
“Direct and indirect exposure is
where contagion comes from; that’s
where panic is very dangerous,” Stackhouse said. “But that’s also where
central banks step in to calm the fears
by making sure that payments can be
made where solvency otherwise exists.
And of course the hard thing to judge is
when solvency exists.”

In Sum: What Did the Financial
Crisis Teach Us?
Unrealistic comfort levels, assumptions, miscues and the failure to appreciate industry-wide risks converged to
trigger the financial crisis. The DoddFrank Act is designed to deal with
those shortcomings and help prevent a
similar crisis in the future, but its costs
and impact on the financial industry
are not yet known.
Meanwhile, the Fed, along with the
federal government and FDIC, proved
once again that major financial crises
are stoppable. Most of the Fed’s liquidity measures for the crisis itself have
since fallen off the Fed’s balance sheet.
And even though financial events in
Europe could spread to the U.S., central
banks still have the ability to inject
liquidity into the markets.
While there is no magic bullet to
prevent all financial crises, there is
vigilance: “Risk will be something different tomorrow than it is today. The
challenge will be to identify what the
next thing is so that it doesn’t get ahead
of the system designed to watch over it,”
Stackhouse said.

Many Community Banks Still Struggling with Crisis Fallout
The financial crisis officially ended in 2009, but many
banks are still struggling, a situation that concerned
some audience members during the Sept. 12 “Dialogue
with the Fed” discussion.
The subprime mortgage market has largely disappeared, and significant challenges remain in the
housing market: Seriously delinquent or in-foreclosure
mortgages are backlogged and must be worked
through the pipeline.
“There are massive numbers of home equity loans
out there,” the St. Louis Fed’s Julie Stackhouse said
to members of the audience. “If a mortgage defaults,
then the home equity loan is almost a total loss.”
6 | Central Banker

Hundreds of the nation’s 7,000 community banks
are still having troubles. “That’s one of the things
we worry about: It’s just going to take time to work
through the problems because inevitably every one of
those banks has a lot of real estate loans on its books.
When you have that problem, those banks are not in
the business of doing new lending—which is frustrating for many of you looking for credit.”
On the positive side, Stackhouse noted, are the
thousands of community banks that are fairly healthy.
“Those are the ones in the lending game,” she said.
“The question going forward for all banks is whether
borrowers can meet banks’ tighter loan standards.”


Ever-Higher Taxes or Ever-Higher Debt?
Exploring Scenarios and Possible Solutions to the Federal Budget Deficit


ince the end of World War II, the
U.S. had been fairly successful at
managing its debt and deficit. However, inadequate tax revenues for
most of the last 30 years, the shock of
the financial crisis and looming fiscal
challenges related to the aging U.S.
population and rising health care costs
have left the U.S. with a more than
$1.3 trillion fiscal gap between revenue
and outlays.
While a number that size may seem
insurmountable, one St. Louis Fed
economist suggests that a solution is
still well within our reach—but only
if lawmakers and citizens make hard
choices now and stick with them.
The deficit was just one of the stark
figures presented during the second
“Dialogue with the Fed” on Oct. 18,
“Bringing the Federal Deficit under
Control.” St. Louis Fed economist
William Emmons led the presentation and discussion. Joining him for a
question-and-answer session with the
attendees were Christopher Waller,
senior vice president and director of

Research, and Julie Stackhouse, senior
vice president and managing officer
for Banking Supervision, Discount
Window Lending and Community

A $1.3 Trillion Deficit
“We have an extreme situation of
very large budget deficits,” Emmons
explained. According to an August
2011 Congressional Budget Office
(CBO) report, the United States is facing “profound budgetary and economic
challenges,” which Emmons described
as “the most accurate statement of the
seriousness of the budget situation.”
CBO figures anticipate that the fiscal
gap between revenue and outlays will
be equivalent to $1.3 trillion dollars
every year between now and 2085 if the
nation continues on its present course.
To see what may happen, Emmons
explored the CBO’s two markedly different scenarios for deficit control.1



continued on Page 8

Two Scenarios for Debt Held by the Public
Actual debt-to-GNP ratio
through 2011

Percent of GNP

(More likely, according to CBO)

Debt-to-GNP ratio under CBO’s
“extended baseline scenario”


(Less likely, according to CBO)

fiscal scenario
Additional percentage points of
debt under CBO’s “alternative
fiscal scenario”


Extended baseline














NOTE: The CBO’s August 2011 baseline reflects the effects of provisions related to the Congressional Joint Select Committee on Deficit Reduction.
SOURCES: Office of Management and Budget (OMB), Congressional Budget Office (CBO)

Central Banker Winter 2011 | 7

Taxes or Debt
continued from Page 7

Current-Law Scenario:
Ever-Higher Taxes
The CBO’s extended-baseline, or
current-law, scenario assumes that
all provisions of laws currently on the
books will be fulfilled on schedule in
2011 and 2012. This includes reverting tax rates to year 2000 levels, ending
the one-year payroll tax reduction and
ending the temporary limitations on
the alternative minimum tax. Spending caps and cuts currently on the
books, including those mandated by the
Budget Control Act of 2011, would need
to be enforced.
“Current law would reasonably shrink
long-run deficits and reduce debt levels
relative to the size of the economy in
three to five years, with the deficit of
about 2 percent of GDP,” Emmons said.
“However, it would mean that revenues
as a share of GNP would continue rising indefinitely.
“Tax revenues would increase at double‐digit percentage rates for each of the
next three years at 12 percent or more


The Fed is responsible for monetary policy, but
Congress controls fiscal policy, which involves
taxes and spending.

and then would continue to grow faster
than the economy. It’s a windfall for the
federal government,” Emmons said.
The restoration of higher marginal
tax rates, “bracket creep” and the alternative minimum tax will play a large
role in ever-rising taxes. “So, yes, current law solves the budget problem but
in a fairly unpleasant way,” he said.

Alternative Fiscal Scenario:
Exploding Debt
The CBO warned in August 2011 that
certain provisions of current law are
either widely expected to change or
would be politically and economically
difficult to sustain for a long period.
Therefore, the CBO created an alternative fiscal scenario based on current
policy (not current law), assuming that
many current-law provisions will not
be enacted. The temporary revenue
and outlay measures would not expire
as planned, and most of the spending
caps would not begin. Based on recent
experiences and current policy, the CBO
suggests that deferring painful choices
would produce a large and growing
mismatch between revenue and outlays,
resulting in a massive increase in debt.
“At some point, investors might
refuse to buy the expanding stock of
Treasury debt, resulting in a debt crisis
that would push interest rates skyhigh,” Emmons said. “If hard choices
continue to be deferred, about half of
all national income would be needed
simply to pay the interest on federal
debt by the end of the 21st century.”

The Supercommittee and Other Ideas

Could More Debt-Financed
Stimulus Reduce the Deficit?
The Oct. 18 Dialogue audience members wondered whether
more short-term, debt-financed stimulus would be an effective
deficit-fighting tool.
The St. Louis Fed’s Christopher Waller replied that there is
no clear consensus on whether such stimulus spending has a
significant impact on the economy. “If you borrow a dollar to
spend a dollar on government spending, the amount of GDP
you increase is small or zero—you’re borrowing a dollar from
someone who would have spent it anyway. So, essentially,
you’re not changing anything.
“There is a lot of evidence that it’s not that powerful of a tool
to get the economy going. On the other hand, a lot of economists think that it has huge effects, but so far we don’t seem to
see it in the data yet,” Waller said.
8 | Central Banker

If either CBO scenario is unpalatable,
what can be done? Congress’ latest
deficit reduction attempt, the Budget
Control Act of 2011’s supercommittee,
ended in deadlock on Nov. 21. According to the act, the bipartisan supercommittee’s failure to submit proposals is
supposed to trigger an automatic $1.2
trillion in deficit reduction measures
starting in January 2013.
Meanwhile, opinion polls consistently indicate that the majority of the
public believes that the economic pain
of increased taxes and spending cuts
should be shared by all income levels, including spending reductions for
Social Security and Medicare. Dialogue
audience members generally agreed.
continued on Page 9


What’s Not Working This Time Around?
Third Dialogue Examines Why Unemployment Remains High


he nation lost more than 9 million jobs during the Great Recession, and the unemployment rate has
been stuck around 9 percent for more
than two years. Companies, uncertain
about the recovery, remain reluctant to
hire, and millions of job seekers have
stopped looking for work entirely.
Because the employment situation
has been so frustrating and confusing,
the St. Louis Fed hosted “Understanding the Unemployment Picture” on
Nov. 21 to offer insight on this issue
and answer attendees’ questions. As
part of the “Dialogue with the Fed”
series, Christopher Waller, senior vice
president and director of Research,
led the presentation and discussion,

with assistance from economists David
Andolfatto and Natalia Kolesnikova.

Taxes or Debt

The general public appears open to
a combination of tax hikes and spending cuts. Those sentiments are echoed
by advocates of broad‐based spending
reductions and efficiency‐ and revenue‐enhancing tax reforms, which
include controlling health care costs
and reforming the budget process.
“This isn’t like a technology problem
that we have to send engineers to figure
out,” Waller said. “You cut spending,
raise taxes or both—that’s it. But do
you have the political will to do it?”

continued from Page 8

Also, many legislators, economists
and even Fed Chairman Ben Bernanke
agree that the deficit must be controlled
to ensure economic stability. Alternatives include increasing tax revenue
and efficiency, cutting mandatory and
discretionary spending, reducing the
growth of health care costs, and promoting reforms focused on growth and economic stability. “There can be no sacred
cows in the budget,” Emmons said.
The supercommittee’s inability to
reach a consensus illustrates that
nothing will fundamentally change
unless the government actually makes
the hard choices and sticks with them,
Emmons insisted. “The supercommittee is a new version of an old game:
We’ll promise to make these changes
in the future—but then we’ll see if we
actually make them,” he said.


The Causes Are Many


Most recessions between World War
II and the Great Recession had several things in common. For example,
after a sharp spike in unemployment,
housing starts and sales would lead
the recovery and unemployment would
decline in response to monetary or fiscal policies. That pattern did not occur
this time around.
Unemployment doubled between
January 2008 and October 2009, and



continued on Page 10

>> M O R E O N L I N E

FRED Charts on the Gross Federal Debt
Questions about the Budget Deficit
Have No Easy Answers

In Sum: Will We Make Hard Choices?


Neither the current-law nor the
current-policy scenario that the CBO
created would produce an ideal outcome because the former would mean
ever-higher taxes and the latter would
mean ever-rising debt.

1 Both of the CBO’s scenarios are based on a
rate of inflation of about 2.5 percent CPI, with a
similar economic growth rate, and interest rates
of 10-year U.S. Treasuries at 5 percent. Note
that the alternative/current-policy scenario does
not reflect provisions related to the 2011 Budget
Control Act’s bipartisan supercommittee.
Central Banker Winter 2011 | 9

Not Working
continued from Page 9

more than two years after its peak of
10.2 percent, the unemployment rate
has fallen only about 1.1 percentage
points. “In 2008-2009, we lost 750,000
jobs for six straight months. That’s
why it’s called the Great Recession,”
Waller said. “These numbers are staggering, and it means we’ve dug a very
big unemployment hole.”
Several interrelated factors are contributing to high unemployment:
Housing isn’t leading the recovery.
The collapse of the housing market
was one of the primary drivers of
the financial crisis and Great Recession. After effectively building 12
years’ worth of houses in five years,
this sector alone lost nearly 2 million
jobs, with peripheral industries losing
another 800,000. “What we’re seeing
is a big recession heavily dominated by
one sector,” Waller said.

The Labor Market Seems To Be Changing

Unemployment Duration
Unemployment spells are much longer for many

MAY 2007

Less Than
5 Weeks


Less Than
5 Weeks
5-26 Weeks

5-26 Weeks

27 Weeks and Over

27 Weeks
and Over

NOTE: Due to rounding, numbers do not equal 100 percent.
SOURCE: Bureau of Labor Statistics

Monetary and fiscal policies don’t
seem to be helping employment.
Since the start of the financial crisis,
the Fed has lowered its key interest
rate to effectively zero and the federal
government has lowered tax rates and
spent upwards of $1 trillion to stimulate the economy. “But we haven’t
seen in the data any kind of dramatic
rebound in investments or buying of
durable goods and housing,” Waller

10 | Central Banker

said. “There is some spending, some
hiring, some housing buys, but there
seems to be a permanent drop in the
level of consumption relative to the
previous trend.”
Households are retrenching.
Consumption is lower partly because
people have been deleveraging—
restraining spending, reducing debt
and repairing their balance sheets—
over the past couple of years. “So,
people are trying to get their debt
down while we’re encouraging them to
spend—and it’s not working like it has
in the past,” Waller noted.
Uncertainty weighs on most businesses. While some sectors, such
as health care, continue to do well,
overall hiring appears stuck. “We’ve
asked businesses point-blank why
they aren’t hiring, even with very low
interest rates and tax rates. They point
to the lack of customers and the large
uncertainty surrounding the health
care laws, regulations and the political
situation,” Waller said.

Many businesses now treat layoffs as
permanent job cuts instead of temporary decisions to be reversed when the
economy improves. And while many
businesses are posting vacancies, they
aren’t necessarily filling them.
Under normal economic conditions,
vacancies are high when unemployment is low and vice versa. However,
even though vacancies are coming back
to pre-financial-crisis levels, unemployment remains high. This leads
some economists to believe that some
structural changes are happening in
the labor market. (Please see “Many
Moving Parts: A Look Inside the U.S.
Labor Market” at
for details.)
As seen in the Figure at left, 42 percent of the unemployed have been out
of work for at least six months, more
than twice the percentage observed
before the start of the financial crisis.
“One study suggests that about half of
the increase in long-term unemployment can be explained by demographic
changes before the recession started,
especially among older people,” economist Kolesnikova said.
“Although unemployment rates are
higher for younger workers, the rate
is larger for all workers. Even people

with college degrees—regardless of their age—are
unemployed at a higher rate now,” she said.
Kolesnikova also noted that the market has become
polarized between low-skill, low-pay jobs and high-skill,
high-pay jobs; middle-skill, middle-pay jobs are disappearing. “For the past three decades, workers at midlevels have
been replaced by computers, automation or jobs being sent
overseas—a trend that has accelerated during this recession,” she said.

Can the Fed Bring Down Unemployment?
In a survey from a previous “Dialogue with the Fed,” 62
percent of audience members responded that the Fed could
do little or nothing to bring the rate down. Waller agreed.
“The Fed doesn’t have much direct control over unemployment. We can use interest rates to help firms and help stimulate demand, but at the end of the day, we don’t create any
jobs; the private sector does. If they say no to our efforts,
there is not much we can do about it,” Waller said.
Even though the economy is flush with liquidity and
the Fed has lowered the federal funds rate as far as it can
go, some have called for more policy easing by suggesting the Fed aim for a specific unemployment rate. But that
approach concerns policymakers and economists, including
Waller, who are wary that the U.S. could enter a long period
of high unemployment akin to what occurred in Europe during the 1980s and 1990s.
“We don’t want to tie monetary policy to a specific unemployment number because we could end up stuck in that
mode for decades,” Waller explained.

In Sum: No Easy Solution To Ending High Unemployment
The Great Recession and its aftermath have not followed
the historical patterns for recessions and recoveries: Unemployment has stayed around 9 percent for more than two
years, the number of people out of work for more than six
months is more than double pre-financial-crisis levels, and
housing appears unable to lead the recovery. Economists
are also seeing persistent changes in the labor market.
Although private payroll job growth stayed positive in
2010 and 2011, the growth appears inadequate to lower the
high unemployment rate. Policymakers, lawmakers and
economists have been debating the effectiveness of current
monetary and fiscal policies designed to encourage spending
and drive down unemployment.

>> M O R E O N L I N E

Construction and the Great Recession
Why Is Employment Growth So Low?

Have We Entered a
“Jobless Recovery”?
After the 2001 recession, it was
often said that increasing productivity
helped produce a “jobless recovery,”
in which real per capita output rises
while employment per capita remains
steady or declines. To some, that
seems to be happening again.
When asked at the Nov. 21 Dialogue
whether “jobless recoveries” were real,
economist David Andolfatto said that
they were and noted what occurred
during Canada’s severe recession in the
early 1990s. “It took seven to eight years
for the unemployment rate to drop from
12 percent to below 8 percent. Employment just flatlined for a decade while
GDP continued to rise. Eventually we
came out of it,” he said.
However, Andolfatto cautioned
against reading too much into rising
productivity, which has been occurring
in most western developed economies for the last 100 to 150 years while
employment per capita has remained
fairly stable. “Rising productivity does
not necessarily mean that employment
levels will fall over the long run, according to the data.”

Explore How the
Labor Market Works
In any given month,
tens of millions of
people are on the
move into, out of
and inside the U.S.
labor market. The
St. Louis Fed’s 2010
Annual Report, available online at,
explains how the labor market works.
Unemployment and employment data
are dissected by sex, level of education,
type of work and more. The essay also
examines how U.S. workers fared during
the Great Recession compared with
workers from other major countries.

Central Banker Winter 2011 | 11


Central Banker Online
S E E T H E O N L I N E V E R S I O N O F T H E W I N T E R 2011



• District and U.S. Peer
Banks’ Third-Quarter 2011
Performance Numbers

• Out for Comment:
Proposed “Volcker Rule”
Concerning Proprietary

• Statewide Third-Quarter
2011 Bank Performance

• Impact of the Financial
Crisis and Recession on
Banking Consolidation
and Market Structure
• Is Shadow Banking
Really Banking?

• Out for Comment: Help
the CFPB Set Regulatory
• Certain Financial Companies Now Required To
Submit Resolution Plans
• Agencies Clarify Supervision, Enforcement
Responsibilities for Federal
Consumer Financial Laws

Using FRED® Is Easier
Than Ever with the New
Add-in for Excel
Save time collecting and organizing your
macroeconomic data with the St. Louis
Fed’s new FRED add-in software for
Microsoft Excel.
With the add-in, you can quickly and easily:
• Set up one-click instant downloads of
more than 40,000 economic time series.
• Browse the most popular data
and search the FRED database.
• Use quick and easy data frequency
conversion and growth rate calculations.
• Instantly refresh and update spreadsheets
with newly released data.
• Create graphs with NBER recession
shading and an auto update feature.

• Gender Wage Gap
May Be Smaller
Than Most Think
To start using this handy tool, visit:
FRED is a registered trademark of the Federal Reserve Bank of St. Louis.

printed on recycled paper using 10% post-consumer waste

C E N T R A L B A N K E R | W I N T E R 2 0 11

Quarterly Report: Banking Conditions on the
Upswing in District, Nation
Michelle Clark Neely
After stalling in the second quarter of 2011, bank earnings rebounded slightly in the third quarter, with both
District and similar-sized U.S. banks recording increases in average profitability ratios. Return on average
assets (ROA) jumped 10 basis points to 0.84 percent at District banks, up 27 basis points from a year ago. At
U.S. peer banks—those with average assets of less than $15 billion—the increase in ROA was slightly smaller
at 6 basis points; the third quarter ROA of 0.72 percent was 40 basis points higher than its level one year ago.
The rise in earnings at both sets of banks can be traced to improvements in the average net interest margin
(NIM) and declines in loan loss provisions. At District banks, the average NIM increased 4 basis points to 4.02
percent and now stands 18 basis points above its year-ago level. For U.S. peer banks, the increase was also 4
basis points, with the NIM rising to 3.94 percent in the third quarter, a 7-basis-point gain from one year ago. At
both sets of banks, the increase in average NIMs was due to increases in interest income and declines in
interest expense.
Loan loss provisions continued their steady yearlong decline in the third quarter. For District banks, loan loss
provisions as a percent of average assets fell 6 basis points to 0.53 percent. For U.S. peer banks, the loan loss
provision ratio declined 2 basis points to 0.59 percent. The drop in loan loss provisions mirrors the mostly
continual decline in nonperforming loans that has occurred since mid-2010.
Asset quality remains stable in the District and across the nation. At District banks, the ratio of problem assets
(nonperforming loans and other real estate owned (OREO) to total loans plus OREO fell 6 basis points to 4.88
percent at the end of the third quarter. The decline in the problem assets ratio was more substantial for U.S.
peer banks, at 18 basis points. At both sets of banks, most of the improvement in the aggregate ratio is related
to the real estate loan portfolio, where the portion of nonperforming loans fell 9 basis points to 3.64 percent in
the District and declined 20 basis points to 4.28 percent at U.S. peer banks. Although the drops in real estate
loan delinquency rates were widespread at U.S. peer banks, not all categories of real estate loans at District
banks experienced declines in nonperforming rates. Nonperforming loan rates for multifamily and nonfarm,
nonresidential real estate loans rose in the third quarter in the District.
District banks had about 62 cents in reserves for every dollar of nonperforming loans at the end of the third
quarter—unchanged from the second quarter and one cent more than at the same time a year ago. The loan
loss coverage ratio at U.S. peer banks was slightly lower at 60 cents, up a penny from the second quarter and
a nickel from a year ago.
District and U.S. peer banks remain, on average, well-capitalized. At the end of the third quarter, the average
tier 1 leverage ratios for District banks and U.S. peer banks were 9.50 percent and 9.98 percent, respectively.
Both ratios are up from their quarter-ago and year-ago levels.

On the Mend1
2010: Q3

2011: Q2

2011: Q3

District Banks




U.S. Peer Banks




District Banks




U.S. Peer Banks




District Banks




U.S. Peer Banks




District Banks




U.S. Peer Banks




Return on Average Assets2

Net Interest Margin

Loan Loss Provision Ratio

Problem Assets Ratio3

SOURCE: Reports of Condition and Income for Insured Commercial Banks
1. Because all District banks but one have assets of less than $15 billion, banks larger than $15 billion have been excluded from the
2. All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator.
3. Problem assets are loans 90 days or more past due or in nonaccrual status plus other real estate owned (OREO). The ratio is
computed by dividing problem assets by total loans plus OREO.

C E N T R A L B A N K E R | W I N T E R 2 0 11

Statewide Bank Conditions for Third Quarter 20111
Compiled by Daigo Gubo

2010: Q3

2011: Q2

2011: Q3




Arkansas Banks




Illinois Banks




Indiana Banks




Kentucky Banks




Mississippi Banks




Missouri Banks




Tennessee Banks




All Eighth District States




Arkansas Banks




Illinois Banks




Indiana Banks




Kentucky Banks




Mississippi Banks




Missouri Banks




Tennessee Banks




All Eighth District States




Arkansas Banks




Illinois Banks




Indiana Banks




Kentucky Banks




Mississippi Banks




Missouri Banks




Tennessee Banks




All Eighth District States




Arkansas Banks




Illinois Banks




Indiana Banks




Kentucky Banks




Mississippi Banks




Missouri Banks




Tennessee Banks







Return on Average Assets2
All Eighth District States

Net Interest Margin

Loan Loss Provision Ratio

Nonperforming Loan Ratio3

Nonperforming Loan + OREO Ratio4
All Eighth District States

Arkansas Banks




Illinois Banks




Indiana Banks




Kentucky Banks




Mississippi Banks




Missouri Banks




Tennessee Banks




SOURCE: Reports of Condition and Income for Insured Commercial Banks.
1. Because all District banks except one have assets of less than $15 billion, banks larger than $15 billion have been excluded from
the analysis.
2. All earnings ratios are annualized and use year-to-date average assets or average earning assets in the denominator.
3. Nonperforming loans are those 90 days or more past due or in nonaccrual status.
4. Nonperforming loans plus OREO are those 90 days past due or in nonaccrual status or other real estate owned.

C E N T R A L B A N K E R | W I N T E R 2 0 11

Banking and Economic Research
A Look at the Impact of the Financial Crisis and Recession on
Banking Consolidation and Market Structure
Consolidations have long concerned community bankers, but the financial crisis and Great Recession made
them even more wary of mergers and acquisitions.
Between Dec. 31, 2006, and Dec. 31, 2010, the number of U.S. commercial banks and savings institutions
declined by 12 percent, continuing a consolidation trend begun in the mid-1980s. Banking industry
consolidation has been marked by sharply higher shares of deposits held by the largest banks—the 10 largest
banks now hold nearly 50 percent of total U.S. deposits.
To understand better how and why this is happening, bankers should read “The Impact of the Financial Crisis
and Recession on Banking Consolidation and Market Structure” in the November/December Review. Dave
Wheelock, vice president and deputy director of research at the St. Louis Fed, extends prior research on the
structure of U.S. banking markets by investigating changes in deposit concentration at both the local and
regional levels. He also examines the effects on local market concentration of mergers of banks operating in
the same markets.

Is Shadow Banking Really Banking?
The term “shadow banking” describes a large segment of financial intermediation that is routed outside the
balance sheets of regulated commercial banks and other depository institutions. Shadow banks are defined as
financial intermediaries that conduct functions of banking without access to central bank liquidity or public
sector credit guarantees.
The size of the shadow banking sector was close to $20 trillion at its peak and shrank to about $15 trillion in
2010, making it at least as big as, if not bigger than, the traditional banking system. Read more in The
Regional Economist’s primer, “Is Shadow Banking Really Banking?”, which draws parallels between the
shadow banking sector and the traditional banking sector.

The Gender Wage Gap May Be Much Smaller Than Most Think
The gap between earnings of male and female workers has declined significantly over the past 30 years,
according to Bureau of Labor Statistics—but do the statistics tell the whole story?
The bureau reports that in 1979, median weekly earnings of full-time female workers were 63.5 percent of
male workers’ earnings, implying a gap of 36.5 percent. The earnings gap dropped to 30 percent in 1989 and
to 23.7 percent in 1999. In the second quarter of 2011, the gap reached a low of 16.5 percent.

Despite the accuracy of these numbers, many researchers believe that the mere comparison of median weekly
earnings of male and female workers presents an incomplete picture. Find out more with St. Louis Fed
economist Natalia Kolesnikova and research associate Yang Liu, who investigate how “The Gender Wage Gap
May Be Much Smaller Than Most Think” in the October 2011 Regional Economist.

C E N T R A L B A N K E R | W I N T E R 2 0 11

Rules and Regulations
Out for Comment: Proposed “Volcker Rule” in the Dodd-Frank Act
What potential impacts could the proposed “Volcker Rule” have on banking entities? The Volcker Rule
requirements are part of the Dodd-Frank Act’s Section 619, which contains general prohibitions and restrictions
on the ability of banking entities and nonbank financial companies to engage in proprietary trading as well as
have certain interests in, or relationships with, a hedge fund or private equity fund.
The Volcker Rule proposal (developed jointly by the Fed, the FDIC, the Office of the Comptroller of the
Currency, the Securities and Exchange Commission and the Commodity Futures Trading Commission),
clarifies the scope of the Dodd-Frank Act’s prohibitions and provides certain exemptions to these prohibitions.
See details in the Fed’s press release, and enter your comments in the official record by Feb. 12, 2012.

Out for Comment: Help the CFPB Set Regulatory Priorities
Which regulatory provisions should the new Consumer Financial Protection Bureau (CFPB) tackle first?
You can help the bureau determine its top priorities for updating, modifying or eliminating the existing federal
consumer financial regulations that came under the CFPB’s authority in July 2011. The regulations transferred
from seven other agencies, and the bureau wants to change or end rules that are found to be outdated, unduly
burdensome or unnecessary.
Until changes can be made to the existing regulations, the CFPB is republishing them as interim final rules to
reflect the transfer of authority, but not to impose any new substantive obligations. See more in the “Interim
Final Rules” section of our Dodd-Frank Regulatory Reform Rules web site.
The agency welcomes your comments on the consumer financial regulations by March 5, 2012.

Agencies Clarify Supervision, Enforcement Responsibilities for
Federal Consumer Financial Laws
Five regulatory agencies explained in November that they would use the June 30, 2011, Call Reports to decide
an institution’s supervisor for federal consumer financial laws.
The Federal Reserve, FDIC, Office of the Comptroller of the Currency (OCC), the National Credit Union
Association (NCUA) and the new Consumer Financial Protection Bureau (CFPB) agreed to determine the total
asset size of an insured bank, thrift or credit union based on that specific Call Reports release. (The agencies
chose the release closest to when the CFPB began operations on July 21, 2011.)
As called for by the Dodd-Frank Act, the CFPB has exclusive authority to examine and primary authority to
enforce federal consumer financial laws for institutions with total assets of more than $10 billion, as well as

their affiliates. The Fed, FDIC, OOC and NCUA retain their respective supervisory and enforcement authority
for the remaining institutions with total assets of $10 billion and under.
To avoid unwarranted uncertainty or volatility, the agencies generally won’t change an institution’s initial
classification unless four consecutive quarterly reports indicate that a supervisory change is in order.

Certain Financial Companies Are Now Required to Submit
Resolution Plans
Federal agencies hope that new regulations will help avoid harm to the financial system if a large, systemically
significant bank holding company (BHC) or nonbank financial company fails.
Such companies are now required to submit annual resolution plans, also called living wills, to the Federal
Reserve and the FDIC. The Dodd-Frank Act mandated creating living wills to ensure the rapid and orderly
resolution of such companies if they experience material financial distress or failure. In addition to the plan
requirements, the final rule details the procedures and standards that the Fed’s Board of Governors and FDIC
will use to review resolution plans.
If you commented on the proposed version of the rule between April and June 2011, note that the final rule
(effective Nov. 30, 2011) does not include the requirement for the submission of quarterly credit exposure
reports. Instead, the Board and FDIC will coordinate development of those reports in conjunction with the
Dodd-Frank Act’s single counterparty credit exposure limits.
A related final rule issued by the Federal Reserve requires BHCs with total consolidated assets of $50 billion or
more to submit annual capital plans as well as obtain prior approval for certain capital distributions. The rule,
effective Dec. 30, 2011, is encompassed in amendments to Regulation Y.