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THE FEDERAL RESERVE BANK
OF CHICAGO

ESSAYS ON ISSUES

NOVEMBER 1995
NUMBER 99

Chicago Fed Letter
44,

;4' Alf7k+,4

Chicago's financial
industries
Since the middle of the last century,
the Chicago area has served as the
business capital of the mid-continent. Chicago's preeminence covers finance, retail trade, wholesale
trade, business services, and manufacturing. Like almost every other
major U.S. city, Chicago has seen its
manufacturing base erode sharply
over the last 40 years. For this reason, the Chicago area looks eagerly
to other business sectors to replace
lost jobs and income. This Chicago
Fed Letter examines the concentration and growth of Chicago's socalled FIRE industries—finance,
insurance, and real estate.
FIRE spreads in Chicago
The Chicago area's rate of economic
growth has been diminished by industrial upheavals. Since 1969, the
area has lost over 372,000 manufacturing jobs, a decrease of 37%. Fortunately, the area is having some
success in reinventing itself. Over
the past 25 years, service industries
rather than manufacturing have
stepped up to shoulder the burden
of the area's job growth, with FIRE
industries showing the most dramatic
growth. In 1969, the FIRE sector
accounted for only 7% of employment. By 1992, it had created over
190,000 new jobs and accounted for
almost one in ten Chicago-area jobs.
FIRE employment in the nation also
grew rapidly over this period, but by
1992 its share of total U.S. employment had not yet reached 8%. As a
result of FIRE's growing concentration in the Chicago area, the sector's
performance in coming years will
help determine the region's growth
and welfare.

FIRE industries
Industries within the FIRE grouping
are alike in that they are all financial
intermediaries. Banks and securities
brokers and underwriters gather
capital (savings) from firms and
households and transform it into the
stock of capital used for business
investment, household real asset
acquisition, and consumption. By
contrast, the insurance and real estate industries provide service outputs other than capital provision or
returns from savings. Many real
estate operations provide sales services on both business and residential
property, while insurance firms add
value by pooling and minimizing
household and business risk. The
futures exchanges, found under the
finance industry banner, also deal in
the market for risk, albeit in a different fashion. Futures exchanges create a market for risk, serving those
who want to shed it and those who
want to acquire it.
Some researchers have grouped the
FIRE industries along with the socalled business services such as accounting, data processing, and computer services whose primary
customers are firms rather than
households. However, to a greater
degree, FIRE activities include transactions with both businesses and
households. Approximately 50% of
the output of the finance and insurance industries is absorbed into further business production. By contrast, about two-thirds of real estate
output is absorbed by the consumer
sector through its sales services for
residential properties. Nevertheless,
grouping FIRE industries with business services may be sensible because
they do tend to share another important feature: Many FIRE services do
not require face-to-face delivery to

the customer. Because capital is
increasingly mobile, financial products are more frequently documented, bundled, and sold afar rather
than locally. As a consequence, communities view FIRE industries as
possible economic development
targets, that is, as industries that can
grow more rapidly than the community's own population through the
growth of external demand.
Occupation and employment
Because FIRE industries produce a
wide range of products and services,
they must employ two broad categories of workers: 1) business and finance professional personnel, and 2)
administrative, clerical, and data
entry personnel. Workers in these
two categories need not operate at
the same site for any individual firm
or any particular industry sector.
The highly skilled positions are typically located in large financial centers such as Chicago, London, and
New York, where face-to-face communications with others in similar occupations and access to specialty services facilitate product development
and sales.
In the Chicago area, over 22% of
those employed in FIRE industries,
or 66,000 workers, are in executive
and managerial occupations. Another 17% are in marketing, sales, and
professional specialty occupations,
the latter including computer systems analysts, public relations specialists, writers and editors, and miscellaneous jobs. By far the largest
category—administrative support—
accounts for 58% of total FIRE employment in the Chicago area. Similar to the broader aggregate services
sector, the FIRE industries include
occupations with a wide range of
salary and wage compensation.

gier'
4.4

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Which FIRE industries have led the
charge in Chicago? Personal income
figures suggest that the sector's surge
has been almost universal across
broad industry subgroups. Investment and holding company offices
contributed by growing extremely
rapidly from a somewhat modest
initial base in 1969. Securities and
commodities brokers grew strongly
from a large relative base, and insurance industries grew strongly from a
moderate base. Finally, credit institutions—both depository institutions
such as banks and savings and loans,
and nondepository institutions such
as mortgage banks and household
credit companies—grew modestly,
but from a very large base.
For all of these reasons, the economic base of Chicago's FIRE sector has
become very wide. Figure 1 ranks
major metropolitan areas by the
concentration of their individual
financial industries. The first column shows that the New York metropolitan area ranks first not by virtue
of the absolute size of its FIRE sector,
but rather because of the relative
importance of FIRE to the economy
of the entire metropolitan area. The
Chicago area ranks third, behind San
Francisco and New York, as a result
of its strength in securities and commodities brokerages, credit institutions, and insurance establishments.
Despite the long-term strength of
Chicago's FIRE industries, two of its
growth engines face significant challenges ahead. Several of the area's
large banks are struggling, somewhat
successfully, to emerge from unfavorable developments of the 1980s. At
the same time, the banking industry
has been wracked by mergers, acquisitions, and downsizings that have
resulted from the new era of interstate deregulation. Meanwhile, Chicago's financial hallmarks—its futures exchanges—face threats of
tighter regulation and fierce competition from abroad, as well as the
uncertainty of technological change.
Banking revival
After struggling through the 1980s,
Chicago's depository and nondeposi-

1. Industry concentration, 1992
Rank

Total
FIRE

Credit
institutions

Securities and
commodities

Insurance

Real
estate

1
2
3
4
5
6
7
8
9
10
11
12

New York
San Francisco
Chicago
Atlanta
Miami
Denver
Dallas
Los Angeles
St. Louis
Pittsburgh
Detroit
Cleveland

New York
Miami
Dallas
Chicago
Los Angeles
Atlanta
Pittsburgh
Detroit
St. Louis
Denver
Cleveland
San Francisco

New York
San Francisco
Chicago
Dallas
Denver
Los Angeles
Miami
St. Louis
Atlanta
Pittsburgh
Cleveland
Detroit

San Francisco
Chicago
Atlanta
Dallas
New York
Denver
Miami
St. Louis
Los Angeles
Detroit
Pittsburgh
Cleveland

New York
Atlanta
Miami
Denver
Chicago
Pittsburgh
St. Louis
Los Angeles
Detroit
Cleveland
Dallas
San Francisco

Source: U.S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System.

tory credit institutions are experiencing a resurgence in the 1990s (see
figure 2). Before being purchased by
BankAmerica Corp., Continental
Bank changed course, and its debtfor-equity swaps recently returned its
Latin American operations to profitability. Moreover, its continued presence in the southern hemisphere has
proved valuable for Americans seeking to do business in the region as
well as for Latin American businesses—a positioning that became more
important with the passage of NAFTA.
In 1994, Continental Bank was purchased by BankAmerica Corp. and
renamed Bank of America Illinois.
BankAmerica Corp. moved its corporate banking operations to Chicago,
making Bank of America Illinois one
of the most prominent commercial
lending units in the nation.
Chicago's status as a top-tier banking
center was further enhanced with the
recently announced merger of its
largest bank, First Chicago Corp., with
Detroit-based NBD Bancorp. First
Chicago's success in recent years is
due in large part to its rapidly expanding credit-card operations, the fourthlargest in the nation. The new bank,
First Chicago NBD Corp., will be
headquartered in Chicago and will be
the seventh-largest banking concern
in the nation. With NBD's strong
middle-market connections and First
Chicago's large corporate customer
base and growing credit-card operations, First Chicago NBD Corp. ex-

pects to have the experience and
resources needed to compete with the
nation's largest banks on both the
commercial and consumer fronts.
Chicago-area investors have also organized at least 31 new bank ventures
since 1986, and Illinois leads the nation with 11 newly chartered start-ups
since 1992. This phenomenon can be
partly attributed to the rash of mergers
and acquisitions occurring in the banking industry. Since an acquiring bank
typically pays a premium for the stock
of the bank to be acquired (often as
high as twice the stock's book value),
each acquisition frees up investor's
capital, which can be used to finance
new ventures. In addition, the downsizing that generally accompanies bank
consolidation leaves many talented
and experienced managers available to
lead new ventures. The result has
been an increase in start-ups of smaller, niche-based banks or "de novos."
The Chicago area's de novos have
aggressively targeted niches such as
middle-market companies unhappy
with large bank service or seeking
more personal contact with their banker. Others have targeted ethnic niches, family-owned enterprises, or affluent individuals who are also dissatisfied
with larger commercial banks.
Chicago's financial hallmark
Chicago's financial hallmark is that it is
the headquarters of major commodity, futures, and options exchanges.

0 $2

2. Credit institutions' employment
index, 1987=100

Chicago

105

100

95
1987 '88

'89

'90

'91

'92

'93

Source: U.S. Department of Labor, Bureau of
Labor Statistics.

The Chicago Board of Trade
(CBOT) and the Chicago Mercantile
Exchange (CME) are the world's two
largest futures exchanges. The Chicago Board Options Exchange is the
world's largest stock options exchange. In sum, over one-third of
the world's options and futures are
traded on Chicago's exchanges.
The local impact of this market activity is clearly great, though difficult to
estimate precisely. One study reported in the late 1980s that the exchanges were directly responsible for
33,000 jobs and indirectly for over
110,000 jobs.' Related spending in
the Chicago area on legal and other
business services, rents, and communications is considerable. Since the
time of the last Chicago impact estimate, the securities and commodities
industries have continued to grow,
outpacing the industry nationally and
outpacing total employment growth
in the area.
In recent years, events involving either the trading of futures contracts
or so-called derivatives have caused
some to question whether the regulatory environment should be modified. The debate has led to proposals
to add regulations, tax more heavily,
or otherwise restrict the use of riskmanagement products. The stock
market crash of 1987 was followed by
criticism of the role that stock index
futures played in the event. In response, both the Securities and Ex-

change Commission (SEC) and
Brady Commission subsequently
recommended changing the regulatory framework, which would have
involved both raising margin requirements and giving the SEC an oversight role in stock index trading.
More recently, the image of derivatives trading may have been called
into question by large losses in socalled derivatives instruments realized by corporations such as Proctor
& Gamble and by governments such
as California's Orange County Treasurer and the Wisconsin Pension
Board. Ironically, these events may
ultimately improve the public perception of exchange activity, because
the problems occurred in the largely
unregulated arena of over-thecounter derivatives contracts, not in
the regulated arena in which the
exchanges operate. Nonetheless, the
possibility of tighter state and federal
controls, and the imposition of a
federal transactions tax, may inhibit
the continued expansion of the exchanges' financial products.
Technological changes offer both
opportunities and challenges to continued growth. Over-the-counter
trading via computers located elsewhere has penetrated the markets
and threatened Chicago's trading
mechanisms. Chicago's exchanges
have answered these challenges with
innovations and new products of
their own. For example, both CBOT
and CME have proposed to offer
transactional services to participants
in the over-the-counter SWAPS market. The CBOT and CME have also
established linkages with other exchanges, which may well protect or
enhance market penetration. So too,
the Chicago Stock Exchange recently
applied for SEC approval to create a
new electronic exchange for the
increasingly lucrative off-exchange
trading market. These products are
still too young to allow any solid assessment of their effectiveness in
meeting worldwide competition.
Conclusion
Chicago's FIRE industries have been
a bulwark in sustaining the area's

economic strength over the past 25
years. The Chicago area's share of
income and employment derived
from FIRE industries now significantly exceeds that of the nation, and the
gap continues to widen. This growth
has been widespread within the financial services industries, extending
across depository institutions, real
estate, insurance, and securities dealers and brokers. As a result of its
broad base of financial industry
strength, the Chicago area has maintained its status as a regional and
national center for financial services.
Its international status, however, is
confined to its specialization in a few
markets, the most prominent being
its futures and options exchanges.
Richard E. Kaglic
Associate Economist
William A. Testa
Assistant Vice President
and Senior Economist
' See "Economic Impact of the Chicago
Exchanges", Report of the Civic Committee
to the Commercial Club of Chicago, 1987.
Indirect jobs are estimated to derive
from purchases by the industry
of legal and other business services, as
well as from expenditures in later rounds
arising from payroll spending by Chicago employees.

Michael H. Moskow, President; William C.
Hunter, Senior Vice President and Director of
Research; David R. Allardice, Senior Vice President,
regional programs; Douglas Evanoff, Assistant
Vice President, financial studies; Charles Evans
and Kenneth Kuttner, Assistant Vice Presidents,
macroeconomic policy research; Daniel Sullivan,
Assistant Vice President, microeconomic policy
research; Anne Weaver, Manager, administration;
Janice Weiss, Editor.
Chicago Fed Letter is published monthly by the
Research Department of the Federal Reserve
Bank of Chicago. The views expressed are the
authors' and are not necessarily those of the
Federal Reserve Bank of Chicago or the
Federal Reserve System. Articles may be
reprinted if the source is credited and the
Research Department is provided with copies
of the reprints.
Chicago Fed Letter is available without charge
from the Public Information Center, Federal
Reserve Bank of Chicago, P.O. Box 834,
Chicago, Illinois, 60690-0834, (312) 322-5111.
ISSN 0895-0164

Tracking Midwest manufacturing sctivity
145

Manufacturing output indexes
(1987=100)
Aug. Month ago

Manufacturing output indexes, 1987=100

MMI

Year ago

MMI

142.8

138.9

135.4

IP

124.3

123.1

120.9
130

Motor vehicle production
(millions, seasonally adj. annual rate)
Aug.

IP

Month ago Year ago

Cars

6.1

6.1

6.4

Light trucks

5.8

4.6

5.9
115

Purchasing managers' surveys:
net % reporting production growth
Sept. Month ago Year ago
MW

54.5

52.3

70.2

U .S.

50.6

49.3

61.9
100
1

11111
1992

111111111

1993

One month may not constitute a trend, but Midwest manufacturing activity
strengthened significantly in August. After languishing in the second quarter
and into the summer, in August the Midwest Manufacturing Index posted its
largest single monthly increase since January 1984. This gain was led by such
cyclically-sensitive output as motor vehicles, primary and fabricated metals,
and industrial machinery.

ICI

11

1994

111111

1995

Sources: The Midwest Manufacturing Index (MMI)
is a composite index of 15 industries, based on
monthly hours worked and kilowatt hours. IP represents the Federal Reserve Board industrial production index for the U.S. manufacturing sector.
Autos and light trucks are measured in annualized
units, using seasonal adjustments developed by the
Board. The purchasing managers' survey data
for the Midwest are weighted averages of the seasonally adjusted production components from the
Chicago, Detroit, and Milwaukee Purchasing Managers' Association surveys, with assistance from
Bishop Associates, Comerica, and the University of
Wisconsin–Milwaukee.

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