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MAR 1 4
1984
;RAL RESERV
g PHILADELPHI A
I
norme
eview
DERAL RESERVE BANK OF ATLANTA
)ecial
Section
)EPOSIT
NSURANCE
CHE DOLLAR
ÎIOTECH
li
MARCH 1984
Deposit Protection,
Deregulation
and Market Discipline
Is
it "Overvalued"?
Implications for Southeast
President:
Robert P. Forrestal
Sr. Vice President and
Director of Research:
Donald L. Koch
Vice President and
Associate Director of Research:
William N. Cox
Financial Structure:
B. Frank King, Research Officer
Larry D. Wall
Robert E. Goudreau
National Economics:
Robert E. Keleher, Research Officer
Mary S. Rosenbaum
Joseph A. Whitt, Jr.
Regional Economics:
Gene D. Sullivan, Research Officer
Charlie Carter
William J. Kahley
Bobbie H. McCrackin
Joel R. Parker
Database M a n a g e m e n t :
Delores W. Steinhauser
Pamela V. Whigham
Payments Research:
David D. Whitehead
Visiting Scholars:
George J. Benston
University of Rochester
Gerald P. Dwyer
Emory University
Robert A Eisenbeis
University of North Carolina
John Hekman
University of North Carolina
Paul M. Horvitz
University of Houston
Peter Merrill
Peter Merrill Associates
C o m m u n i c a t i o n s Officer:
Donald E. Bedwell
Public Information Representative:
Duane Kline
Publications Coordinator:
Gary W. Tapp
Graphics:
Eddie W. Lee, Jr
Cheryl D. Berry
T h e E c o n o m i c R e v i e w s e e k s to inform the public
about F e d e r a l R e s e r v e policies a n a the e c o n o m i c
environment and. in particular, to narrow the g a p
between s p e c i a l i s t s a n d c o n c e r n e d laymen. Views
expressed in the E c o n o m i c R e v i e w aren t necessarily
those o' this B a n k or the F e d e r a l R e s e r v e S y s t e m
Material may be reprinted or abstracted if the R e v i e w
a n d author are credited P l e a s e provide the B a n k s
R e s e a r c h Department with a copy of any publication
containing reprinted material F r e e subscriptions a n d
additional c o p i e s are available from the Information
c e n t e r Federal R e s e r v e B a n k of Atlanta, P O . Box
1731. Atlanta, G a 3 0 3 0 1 1404/521-8788). Also contact the Information C e n t e r to r e c e i v e S o u t h e a s t e r n
E c o n o m i c I n s i g h t a free newsletter on e c o n o m i c
trends published by the Atlanta F e d twice a month.
ISSN 0732-1813
5
Financial Disclosure
and Bank Failure..
Additional public disclosure of individual banks'
financial condition has been proposed as a way to
enlist the public's help in monitoring bank risktaking. Could s u c h a policy be effective, and what
costs would it impose?
14
Brokered Deposits:
Issues and Alternatives.
New systems that allow brokers to divide large
deposits into insured lots of $100,000 or less call
into question the purpose and effectiveness of
deposit insurance. Whatproblems do these "brokered
CDs" pose for the insurance system, and how can
the insuring agencies respond?
26
The Future of
Deposit Insurance:
An Analysis of the
Insuring Agencies' Proposals
Financial deregulation may be increasing banks'
ability and incentive to take risks, a trend that w o u l d
present problems for the deposit insurance system.
Concluding a study begun in the January Review,
this article evaluates three regulatory agencies'
proposals for reforming the system.
42
The Advent of Biotechnology:
Implications for
Southeastern Agriculture
Spurred by visions of freeze-proof tomatoes and 20foot corn stalks, research in biotechnology is booming.
What are the implications of this research for the
Southeast, and how soon should we expect results?
51
Is the Dollar Overvalued
in Foreign Exchange Markets?
Is the dollar "overvalued" compared to foreign
currencies? What roles have inflation and interest
rates played in the dollar's rise?
59
Statistical Summary
Monetary policy cannot function well in an unstable
financial system. The transmission mechanism for
monetary policy—a system of financial institutionsworks less effectively in passing along to the
economy the influence of changes in reserves and
reserve requirements When the system is unstable,
institutions and people behave so differently that
the monetary authority has far less confidence in
the eventual effects of its actions Public confidence
may be reduced to such an extent that monetary
policy actions have less impact. Most western
nations have witnessed such disruptions
At least in part because its policies are inhibited
by financial instability, the Federal Reserve is
charged with maintaining a safe and stable financial
system. The Fed, however, does not have full
responsibility for this national goal. It shares the
duty with the federal corporations that provide
insurance for deposits at commercial and savings
banks, savings and loan associations and credit
unions. That insurance complements the Federal
Reserve's control of the reserves on which money
is based, helping to preserve the public's confidence
that .deposit money backed by those reserves is
safe and will be available when needed.
In recent years, rapid changes in our financial
system, in conjunction with a wrenching business
cycle, have caused observers to question the
purposes of this system of deposit insurance and
its capacity to.achieve financial stability in an era of
deregulated financial institutions. Some have suggested that alternative insurance systems might
better achieve the purposes of deposit insurance.
The questions culminated in instructions by Congress in the Garn-St Germain Act for the deposit
insurance agencies to assess the present system
and to propose ways to improve it. Their reports
were issued about a year ago. (They are summarized
in Larry D. Wall, "The Future of Deposit Insurance:
The Insuring Agencies' Proposals," in last month's
issue of this Review, pp. 43-57.)
Since these reports were submitted, many forums
have discussed problems of the insurance system.
The thread that seems to tie these discussions
together involves the exercise of discipline on risk.taking by institutions that are subsidized by deposit
insurance and that have rarely been allowed to fail.
In a competitive environment these institutions
cannot be expected to exercise such discipline to
the full benefit of the public.
The following three articles deal with several
facets of discipline in the current deposit insurance
system. The first is a discussion of the efficacy of
public d i s c l o s u r e as a method of enlisting
uninsured depositors as regulators of risk takingpunishing risk-taking without compensating reward
in the market for stocks and liabilities.
4
The second article takes up so-called brokered
deposits. These deposits are an innovation in the
market for bank and thrift certificates of deposits—
an innovation that uses one of the insurance
system's basic features to avoid market discipline.
Some deposit brokers now offer investors a service
that divides large deposits into lots of $100,000 or
less and disperses them among institutions so that
the depositor has no more than the insured maximum
at any institution. The deposit insurers, the Congress and other regulators are quite concerned
about this practice and propose to regulate it. The
general practice of deposit brokerage has many
potential benefits, however. Regulating it directly
may be costly in terms of benefits lost It may also
be very difficult.
While the first two articles point up specific
issues in the deposit insurance system, the third
presents a general critique of reform suggestions
made by the FDIC, the F H L B B and the NCUA in
their reports to Congress last spring. It deals with
issues of market and regulator discipline and with
the relevance of reform proposals to goals of the
insurance system. The article also presents some
proposals of its own for strengthening market
discipline.
As a group, the articles underline the reasons for
concern about our deposit insurance system. They
analyze major problems that any reform must face,
and they point toward viable alternatives to the
present system.
—B. Frank King
M A R C H 1984, E C O N O M I C R E V I E W
Devising ways to control banks' risk-taking is an
essential function of deposit insurers and other
bank regulators.1 Deposit insurance allows those
who hold a majority of banks' liabilities to ignore
the institutions' financial condition. The practice
of merging failing banks into sound ones allows
many other liability holders to act as if they were
insured depositors. Many elements of market
discipline that restrain other businesses are unavailable to encourage banks to limit their risktaking. Yet, if the public-policy goals of a safe and
stable financial system are to be achieved, risktaking must be controlled.
In light of recent competitive developments
that give banks more incentives to take risks,
their federal insurer—the Federal Deposit Insurance Corporation (FDIC)—has recommended
additional disclosure of the financial condition of
individual banks to enlist the public's help in
monitoring and controlling banks' risk-taking.2 As
Financial Disclosure and
Bank Failure
the deposit insurance system is currently organized,
however, greater disclosure is unlikely to produce
greater market discipline. If shareholders expect
greater returns from greater risk, they may not be
induced by more information to exercise greater
discipline. Banks' liability-holders are generally
uninterested in banks' financial condition because
they have little risk of loss. Under these conditions,
expanding disclosure may increase costs to the
disclosing banks more than it will benefit the
public. Changes in the present system, however,
hold the potential to make increased disclosure
an effective policy.
'Hereafter the term "banks" is used to refer to depository financial
institutions generally.
F e d e r a l Deposit Insurance Corporation, 1983.
2
Greater disclosure of banks' financial conditions—as proposed by the FDIC—is unlikely
to produce greater market discipline. Changes
in the present deposit insurance system, however, might make increased disclosure effective
F E D E R A L R E S E R V E B A N K O F ATLANTA
5
they could pay depositors. Hence, depositors
had both negative and positive reasons to assess
the risks undertaken by bankers, and bankers
had reason to be concerned about the depositors'
perceptions.
Recent Concern About Bank Failures
The failure of a bank or other financial institution
is but a point on a continuum of risk. At one end is
the high probability that the owners will achieve
a greater than expected increase in wealth; at the
other is the failure of the enterprise and loss of
the owners' investment. What is usually termed a
bank failure is towards this other end of the
continuum. In most failures, supervisory authorities generally step in and reorganize the troubled
bank. This reorganization usually entails loss to
the owners, the supervisory authorities and the
employees, and can impose costs on uninsured
depositors and other customers. Consequently,
while failure is but a point on the continuum
between great success and total loss, it is an
important point indeed.
The phenomenon of bank failure is as old as
banking itself. Therefore, we should consider
first why there appears to be more supervisory
interest in bank failures now than in the recent
past and whether this concern seems to be
justified. I f o n e l o o k s o n l y a t t h e number of banks
that have failed in recent years, there seems to
be reason for concern. The number of failures or
FDIC-assisted mergers reflects a substantial increase. Compared with the three commercial
bank failures per year from 1943 through 1974
and the 12.9 per year from 1975 into the early
1980s, the 34 in 1982 and 48 in 1983 appear
worrisome. That seems particularly true considering the large number of thrift associations that
have merged with the support of the Federal
Savings and Loan Insurance Corporation (FSLIC)
since 1980. 3 But when we recall that over600 banks
failed each year during the 1920s, the recent
number seems small. Furthermore, the considerably larger number of failures duringthe 1920s
brought no significant reforms or even vociferous
demands for changes in banking supervision. It is
possible, therefore, that the current increase
over the post-World War II failure rate actually is
desirable, since failure is a necessary attribute of
dynamic, innovative markets.
However, the enactment of deposit insurance
in 1933 changed the environment of the 1920s
profoundly. Previously, depositors knew that
their funds were at risk. Consequently, they had
reason to monitor their banks. W h a f s more,
banks were not restrained legally in the interest
3
McGuirk, 1983, indicates that the F S L I C h a s participated in 1 5 0 assisted
mergers since 1980.
6
Initially, federal deposit insurance did not
absolve all depositors of concern about the risks
that banks might take, since the amount guaranteed per account was limited at first to only
$2,500. But severe restrictions on new bank
charters and increased supervision reduced the
risk of failure considerably. Restrictions on entry
also served to increase the cost of failure to bank
owners, since the value of their charters generally
was greater than it would have been with free
entry, and almost certainly would be lost if failure
occurred.
The authorities also sought to reduce the risk
of failures by maintaining and further restricting
the range of products that financial institutions
could offer. In particular, thrift institutions were
barred from offering checking accounts, business
loans unrelated to real estate, and (for the most
part) consumer loans. Commercial banks were
not permitted to engage in most securities underwriting and trades. These constraints kept bankers
from straying beyond activities that they and
their examiners knew well. 4 While these policies
and practices appear to have been sufficient to
prevent most failures, the environment since the
late 1970s has altered this situation.
Two phenomena helped change the environment by increasing competition in markets that
banks dominated. T h e principal one is inflationdriven high nominal interest rates. These high
rates increased the opportunity value obtainable by
other institutions from avoiding regulatory constraints on interest rates, thereby encouraging
them to begin offering banking services. Brokerage
houses, for instance, introduced money market
mutual funds and interest-bearing money management accounts. The other change is more effective
and less costly technology for transferring financial
assets. As a consequence, third-party transfer
services (in effect, demand deposits) were offered
successfully by nonbanks, and government-insured
deposits could be sold nationwide by brokers.
The 1980 increase in insurance on accounts with
balances up to $100,000 and the removal early
in the 1980s of interest rate ceilings on most time
4
Other reasons for and effects from imposing or continuing the restraints
probably were more important (see Benston, 1982a).
M A R C H 1984, E C O N O M I C R E V I E W
deposit accounts permit people to make large
investments at market interest rates without
concern about the risks taken by the depository
institution. The insuring agencies' long-time practice of liquidating only small institutions largely
removes uninsured depositors' concern for most
institutions' safety.
The entry of nonbanks into activities previously
reserved to chartered and (mostly) insured banks
also increased the risk of bank failure by reducing
bank owners' incentives to avoid failure. This is
not to say that the owners and managers of banks
are indifferent to failure. But increased and then
almost unrestricted entry into their markets have
reduced the value of their charters. This is particularly true for banks that operate in unsheltered
markets, such as the large, money center banks
that face competition from a wide range of
institutions, both domestic and foreign.
The Role of Disclosure
Disclosure of the financial condition and operations of individual banks has been put forth as
a means of averting excessive risk-taking. Advocates contend that e x p a n d e d disclosure can
prevent or reduce risk-taking by bankers and
enhance the ability of depositors and investors
to assess the risks taken.
Disclosure to supervisory authorities has long
been a means by which banks are regulated. In
particular, banks report to the regulators their
balance sheets, income statements and detailed
schedules of transactions with related parties. In
addition, field examinations provide the authorities
with additional information. Bovenzi, et al. (1983)
and Korobow and Stuhr (1983) show that this
information, together with or replaced by publicly
available data, can be used effectively for predicting bank failures and possible financial distress.
The general public also has relied on the
release of financial information, since banks have
long been required to publish their balance
sheets. Many banks also have provided depositors
and the general public with more detailed balance
sheets and income statements voluntarily. Since
1978, banks have had to publish the income
statements they file with the banking authorities.
However, banks as such are not subject to the
Securities Exchange Act of 1934. Therefore, only
bank holding companies are required to report
FEDERAL RESERVE BANK OF ATLANTA
publicly as do other corporations. 5 As Coulson
(1983) delineates, bank holding companies are
required to publish detailed information about
the past-due status and concentration of their
loans, dealings with insiders and sources of
revenue.
The question now raised by the F D I C and
others is whether increased public disclosure of
banks' financial operations and even of the
evaluations made by examiners and supervisors
would be helpful in controlling risks that banks
might take. This question can be analyzed first by
delineating the parties that might be interested
in evaluating bank risk and then examining the
nature of their concerns. As the analysis shows,
their concerns are importantly different.
Four Groups Concerned
About Disclosure
Four interested groups are: (1) the deposit
insurers—the FDIC, Federal Savings and Loan
Insurance Corporation and National Credit Union
Share Insurance Fund ( N C U S I F ) , and the other
supervisory agencies closely related to them—
the Comptroller of the Currency, the Federal
Reserve, the Federal Home Loan Bank Board, the
National Credit Union Administration, and the
state banking departments; (2) uninsured depositors—those with accounts over $100,000;
(3) ordinary creditors—for example, bondholders
and banks with loan participations; and (4)
stockholders—residual claimants to the net assets
of banks.
Stockholders: They lose if their bank's managers
or others perpetrate fraud upon them. This is the
risk with which they are primarily concerned.
Stockholders of all corporations face this risk,
except that it generally is easier to remove
resources from banks fraudulently, money being
the most"fenceable" of assets. Hence, disclosure
of loans to related parties is of interest to bank
stockholders.
However, shareholders are not otherwise opposed to their bank taking risks, as long as the
risks are offset by expected gains. Stockholders
can eliminate the risk from owning any particular
investment by holding a diversified portfolio of
assets, though this may be costly for stockholders w h o have a large proportion of their
a
S e e Coulson, 1983, for a description ol the SEC's reporting requirements
7
assets invested in controlling interest in a smaller
bank. However, when a government agency such
as the F D I C or FSLIC accepts the risk of failure for
a premium that is less than sufficient to cover
that risk—that is, when the premium is not
directly related to the risks undertaken—stockholders benefit from their banks taking greater
than normal risks. It is a situation best described
as "heads the stockholders win, tails the F D I C or
FSLIC loses." Thus, the stockholders of banks will
logically prefer risk, knowing it offers the promise
of greater returns.
Disclosure of risk, then, is useful to stockholders
as a means of identifying banks likely to have a
greater variance of returns and to compensate
shareholders for accepting that greater variance.
In this regard, the stockholders benefit when
they and other investors can secure information
about risk conveniently and inexpensively. Thus,
it is desirable to have some uniformity in the type
and format of information disclosed. But stockholders also must be concerned with the cost of
disclosure to the bank. This cost includes informing
competitors, customers and regulators of the
bank's strategies and condition when this disclosure might work against the institution. Auditing
data and presenting and explaining it to users
and the curious also can be costly. A management
that operates a bank in the interest of its shareholders must weigh the benefits and costs of
disclosure as it weighs benefits and costs of other
decisions. Therefore, the authorities would seem
to express their concern for the well-being of
stockholders best by mandating only financial
disclosure that reduces the probability and extent of fraud or of misinforming shareholders and
the cost to investors of using information. 6
Ordinary Creditors: Unlike the stockholders,
who prefer non-fraud risk w h e n compensated,
creditors could be useful to the regulatory authorities as monitors of bank risk-taking. The
creditors' returns are effectively limited at the
top since, in the absence of capital gains resulting
from unexpected changes in interest rates, they
can expect to receive no more than the amount
agreed to contractually. But they can lose their
entire investment Hence, they have reason to
be concerned about the variance in the returns
earned by banks, and will price their contracts
with the banks accordingly.
Banks similarly have reason to assure their
ordinary creditors that the risks undertaken will
be no greater than the creditors e x p e c t If the
banks are unable to convince them, the creditors
are likely to insist on interest rates that compensate them for the risks to which they might be
subject. This situation is no different from that
faced in any debtor-creditor arrangement. Consequently, if a bank's management discloses
honestly, it is likely to disclose voluntarily the
optimal amount of financial information.7 Management, it must be admitted, has incentive not to
disclose honestly when disclosure would raise its
costs of liabilities or might cause the withdrawal
of uninsured deposits.
Since any additional disclosure required is
likely to be more costly than beneficial (on the
margin) to the creditors and to the stockholders,
it would seem preferable for the regulatory
authorities to forebear from imposing more rules.
The authorities could benefit, though, from observing the types of data that unsecured creditors
and analysts request from banks. Most importantly,
the regulatory authorities could obtain information from observing the risks assessed by
creditors. This information is available from the
market rates at which banks' nondeposit liabilities
trade. The authorities also might get continuous
reports on the interest rates and fees paid by a
bank to other creditors.
Uninsured Depositors: At present, in almost all
banks, deposit accounts with balances of more
than $100,000 are not insured. Hence, it would
seem that depositors holding these accounts are
a class of uninsured creditors. However, until the
1982 failure of the Penn Square Bank in Oklahoma
the government insurance agencies had in fact
insured the deposit balances of almost all depositors. They did this by having the deposits of a
failed bank assumed by another bank, either
directly or through a merger (the practice followed
for all large bank failures before and since Penn
Square) or by paying off the insured depositors
after many depositors with uninsured balances
" S e e Benston 1982 b, for a further explication. In any event, the usefulness
of these data to security analysts isquestionable. By the time the financial
statements are made public, astute analysts will have ferreted out the
information from other sources.
' Economies of scale from imposed disclosure requirements are exceptions
to this conclusion. However, I am not aware of any conditions that are not
already obviated by the effects of deposit insurance and Federal R e s e r v e
discount window and open market operations. Evidence of the existance
of economies of scale might be obtained from the public's demand for
such information as is published in the Federal Reserve's Uniform Bank
Performance and Bank Holding Company Performance Reports, assuming that the price charged for the reports is not less than their cost of
production and distribution.
8
M A R C H 1984, E C O N O M I C R E V I E W
had been able to withdraw their funds. Consequently, most depositors have reason to believe
that all their funds are, in fact, guaranteed.
Indeed, surveys reveal that depositors are little
concerned with the risks taken by banks in which
their funds are deposited. 8 Some evidence suggests that investors demand somewhat higher
interest rates on large, negotiable certificates of
deposit (CDs) issued by banks perceived to be
riskier after a notable failure—for example, regional
banks after Franklin National's failure and at least
one large bank after the Penn Square failure. 9
Since the Penn Square liquidation, however,
several deposit brokers have developed systems
that allow them to distribute large time deposits
in lots small enough to be insured entirely. 10
Recently proposed F D I C and FSLIC rules may
eliminate these systems by limiting insurance to
the first $100,000 of a deposit spread by a broker
among many banks. However, opposition to
these rules is strong, and brokers and depositors
are both inventive and sensitive to probable
losses. Whether the proposed rules will eliminate
the use of broker networks to spread and effectively insure large deposits is open to question. 11
The FDIC has proposed to encourage uninsured
depositors to monitor bank risk more aggressively
by paying them off in merger transactions at only
the estimated value of recoveries from a troubled
bank. Since the FDIC'scostof recovery would be
taken off the top, uninsured depositors would in
all probability get less than their deposit balances.
An evaluation of that proposal is detailed by
Larry Wall in this Review. Briefly, the FDIC's
proposal is unlikely to be beneficial because of
the different reactions of demand and time
depositors.
Demand depositors with balances that they
believe might be lost as a consequence of a bank
failure are likely to withdraw their funds as soon
"Gilbert 1983 p. 71. summarizes these surveys as follows; Corporate
treasurers choose their banking reiationsnips primarily on the basis of
services offered, availability of financing and convenience. Financial
analysis of their banks is generally cursory in nature. Risk of loss is not an
important consideration because of the size of the institutions they do
business with and the perception that the government would bail out
these institutions of they get into trouble."
* S e e Gilbert, 1983, pp. 71-73.
'"See testimony of the federal regulatory agencies (J. Charles Partee.
member of the Federal R e s e r v e Board; C. T. Conover, Comptroller of the
Currency, William M. Isaac, chairman of the Federal Deposit Insurance
Corporation; Edwin J . Gray, chairman of the Federal Home Loan Bank
Board and Edgar F. Callahan, Chairman of the National Credit Union
Administration) before the Subcommittee on Financial Institutions, Supervision, Regulation and Insurance of the Committee on Banking, Finance
and Urban Affairs, U. S. House of Representatives, October 27, 1983.
1
' For a detailed presentation and analysis of the spreading of deposits in
insured lots by brokers and F D I C s reaction to this, s e e Caroline Harless.
F E D E R A L R E S E R V E B A N K O F ATLANTA
as they suspect a failure. 12 These depositors have
little incentive to engage in more than rumor
monitoring—a condition reinforced by the lag
between the end of a disclosure period and the
actual disclosure of financial information. The
financial system would face the prospect of bank
runs, which deposit insurance was designed to
prevent
Time depositors would be at risk for balances
over $100,000. But,if the FDIC's proposal to limit
the insurance on brokered deposits were withdrawn or avoided, bankers and brokers could get
around the proposed limitation by packaging
and selling portfolios, of whatever dollar amount
desired, consisting of the fully insured C D s of
many banks. T h e removal of effective deposit
insurance on some portion of C D balances
above $100,000 is likely to convince them to go
to this trouble. 13 Consequently, financial disclosure would play a small role with uninsured as
well as insured depositors.
Deposit Insurers: Unlike others who use bank
financial data, deposit insurers and the supervisory
agencies on which they rely can gather information
by examining records in the banks. These data
are reported by field examiners and are used
directly by their supervisors. In recent years,
researchers and supervisors have experimented
with early warning surveillance systems that use
data reported by banks and examiners. 1 4 An
analysis of the effectiveness of this information in
predicting bank failures should provide evidence
on the usefulness of financial data, in general, for
this purpose.
Some indication of the ability of bank examiners
to predict trouble may be obtained from the
ratings they gave banks that failed in the examination just prior to their collapse. As part of a
study conducted for the Hunt Commission, 1 5 I
reviewed the records of all commercial banks
"Brokered Deposits; Issues and Alternatives, this Review, March 1984,
pp. 14-25.
^Technically, funds would be withdrawn when the marginal cost of a
withdrawal (which is small for demand deposits) is e x c e e d e d by the
expected amount of loss times the probability of loss, all in present value
terms.
,3
T h e combination of deposit insurance, improvements in technology,
expanded marketing of CD s by brokers, and de facto as well a s de jure
deregulation of financial services have, I believe, substantially increased
the risk of bank failure. In particular, Isaac reports that "many of the 72
commercial banks that failed between February 1982 and mid-October
1 9 8 3 had substantial brokered deposits. Overall, brokered deposits
constituted 16 percent of the total deposits held by the 72 banks that
failed." T h e nature of these developments and some suggestions for a
solution are presented in Benston, 1984.
u
Bovenzi, Marino and McFadden, 1983, present a good review of much of
this literature, as well as a report of their own research.
" T h e Presidential Commission on Financial Structure and Regulation.
9
that failed from January 1959 through April 1971.
(Benston, 1973, Table XIII, p. 43.) Of these 56
banks, fully 59 percent had been rated "no
problem." More recent evidence is presented in
Bovenzi, Marino and McFadden (1983, Table 6).
They related the numerical CAMEL (Capital, Assets,
Management, Earnings, Liquidity) ratings given
by the bank examiners to the 11, 17 and 45
banks that failed in fiscal 1981, 1982 and 1983.
Banks considered to be no problem are assigned
ratings of 1 or 2; banks rated 3 are "watched" by
the Federal Reserve, "considered for formal
administrative action" by the Comptroller, and
presumably looked at closely by the FDIC; problem banks get ratings of 4 and 5. 16 The researchers
report that C A M E L ratings of 1 and 2 (definitely
no-problem) were given to 34 percent of the 73
banks that failed in the year prior to failure.
Ratings of 1, 2 or 3 (probably no-problem) were
given to 63 percent of these banks. 17 Two years
before failure, 57 percent of the 60 failed banks
on which researchers have data were rated by
the examiners as definitely no-problem and 78
percent as definitely or probably no-problem.
Thus, the examiners' record in identifying banks
that will fail is far from perfect.
It also is interesting to note that the failure
prediction models employed by Bovenzi, Marino
and McFadden (1983) predict about as well
when only publicly available information is used.
They correctly predicted 64 percent of the 73
failures between July 1, 1980 and July 1, 1983
using call data available in the year before the
failures. That compares with 67 percent when
examination data were added to the model, 66
percent when C A M E L ratings 3, 4 and 5 were
used, and only 37 percent for ratings 4 and 5. For
data available two years before the failures, the
model using only call data correctly predicted 50
percent of the failures. That compares with 58
percent from the model with the examination
data included, 43 percent for the C A M E L ratings
3 , 4 and 5 and only 22 percent for ratings 4 and 5.
Thus, the more detailed and subjective examination data do not seem to add much in predicting failures.
An important reason for the imperfect forecasting ability of the early warning models that use
publicly available financial data is that the principal cause of failure is fraud or misdealing. Of
the 59 banks that failed from January 1959
'"See Flannery and Guttentag, 1980, pp. 196-199 for a description and
comparison of the way the three agencies use the C A M E L ratings
10
through April 1971, fully 34 were rated "no
problem" approximately one year before failure.
As I reported, " a case-by-case analysis of the nonproblem rated banks that failed reveals that, in
28 or 29 of the 34 cases, failure was due to
embezzlement or change of management control between examinations" (Benston, 1973, p.
43). Fraud and self-dealing also played an important role in the failure of banks in previous
periods. 18 Many of the largest bank failures in
recent history also appear to have been the
result of such practices. In such situations, publicly reported figures are likely to be deliberately
misleading. While it seems reasonable to expect
field examinations to reveal misreported data,
they appear to have been relatively ineffective in
this regard. One reason may be that the examiners
do not audit the banks sufficiently for fraud and
misreported data. Another reason is that the
exam iners' present performance may be as good
as it should be considering the costs compared
to the benefits of auditing.
Thus, without improved examination practices,
the public disclosure of examination data would
seem to be of little value to private analysts and
investors. Indeed, considering that the examiners
have the legal right to examine most of a bank's
records and assuming that the examiners' efforts
are cost-effective, their predictive performance
suggests that more extensive public disclosure
would not be worthwhile for identifying problem
banks.
Were it not for the reasonable fear that bank
failures will increase considerably, we might
conclude that the supervisory and insurance
agencies are doing as well as should be expected,
given the marginal costs and benefits of improved
monitoring and control of risks. Yet a number of
factors are encouraging more than a few bankers
to take risks deliberately. These factors include
deposit insurance that removes the incentives
for depositors to be concerned with banking
operations and investments, the available technology that permits inexpensive packaging of
insured CDs, the ability of brokers to market
these C D s nationwide, consumers' increased
acceptance of such investments, and the continuing deregulation of deposit banking. Consequently, a change in the present risk-monitoring
procedures seems desirable.
" A n a l y s i s of 1, 2 and 3 rated banks as reported in letter of September 19,
1983 from J o h n Bovenzi.
'"See Benston, 1973 for details.
M A R C H 1984, E C O N O M I C R E V I E W
Summary, Suggestions and Conclusions
Our analysis of the several potential users of
bank financial data—stockholders, ordinary
creditors, uninsured depositors, and the deposit
insurers—reveals both coincidence and divergence of interests regarding the assessment of
bank risk.
The stockholders' interests are consistent with
the interests of the other users in the detection
and prevention of fraud by banking officers.
Financial data also help the investors assess risks
and identify and purchase shares of riskier banks
that compensate for the risk. But when the
deposit insurance agencies undercharge for the
risks assumed, stockholders benefit from banks
seeking higher returns from riskier investments.
Investors would be attracted to these banks.
Ordinary creditors, though, absorb the cost of
risk; consequently, they attempt to arrange their
returns to cover these costs. They have an
incentive to use financial data to assess the risks.
Importantly, the debtor banks have the same
incentive, since they must compensate creditors
(and stockholders) for risks the creditors perceive.
Consequently, the financial data that most banks
provide to creditors seem likely to be the optimal
quality and quantity.
Uninsured depositors, though, are not like
ordinary creditors, because the deposit insurance
agencies, realistically speaking, provide them
with insurance. Hence, they have little reason to
be concerned with the riskiness of banks in
which their funds are deposited. F D I C proposals
to increase their concern by explicitly denying
insurance protection for a fraction of their balances
over $100,000 are unlikely to be successful, at
least not without cost. These proposals would
enhance demand depositors' incentives to remove their funds upon a rumor of an impending
bank failure. Thus, they would apply "market
discipline" to the most volatile of banks' deposits.
In addition, many, perhaps all, time depositors,
currently can package their investments in portfolios of fully insured deposits of less than $100,000
in many banks, thereby defeating the FDIC's
proposal.
The deposit insurance agencies and other
supervisory authorities remain those principally
concerned about excessive bank risk-taking. The
agencies use financial data gathered in field
examinations and bank reports to assess and
control the risks taken by banks. It appears,
though, that they are able to predict only 37
percent to 66 percent of the failures (depending
FEDERAL R E S E R V E BANK O F ATLANTA
on whether a C A M E L rating of 3 is considered a
prediction of failure) from financial or examination
data available in the year before failure.
Increased development and use of bank surveillance models appear warranted, since they
already appear to be as effective as examiners in
predicting failures. At the least, the models can
serve to direct the examiners' efforts towards
banks that are more likely to fail. But, considering
how quickly brokers can sell the insured C D s of
banks that, in turn, can quickly place the funds in
risky investments, more current information is
needed. T h e insurance agencies (and their surrogates, the other supervisory authorities), might
increase their requirements for continuous reporting by banks. Additionally, they might direct
their field examinations more specifically towards
institutions that appear to have increased their
deposits quickly or to have changed investment
practices or control. Indeed, as of the September
30, 1983 call report, all of the federal banking
agencies require banks to report the amount of
funds obtained through money brokers. Revisions
proposed for the March 1984 call also require
disclosure of the amounts of brokered retail
deposits. The FSLIC now requires associations
that are in a "supervisory status" to limit the
amount of brokered funds and to submit a
monthly report giving the level of such deposits
and the sources and uses of the funds.
The authorities also could provide banks with
information that would permit them to assess
their risks better. Bankers can obtain information
from and about borrowers to estimate the risk
incurred. However, it is difficult for bankers to
learn about the indebtedness undertaken concurrently by borrowers, particularly w h e n these
borrowers intend to be deceptive and w h e n they
increase indebtedness after the date of the
balance sheet they provide to banks. Anti-trust
legislation constrains banks from exchanging
such information. Banks lendingto countries and
foreign firms have found this lack of information
vexing, particularly recently. Supervisory
agencies also appear to have been unaware of
the extent to which several banks sometimes
extended loans to a single risky borrower. While
each loan might be within acceptable risk limits,
the sum of a company's or country's indebtedness may not be.
It would seem desirable, therefore, for the
supervisory authorities to establish a central file
of indebtedness by countries and risky large
borrowers. T h e authorities could require banks
11
to report on their loans to such borrowers, and
the information could be made available promptly
to the banks (with identification of other banks
excluded) and all supervisory agencies.
In addition, the authorities could look more to
the private markets for indications of excessive
risk-taking by banks. The bond market is one
such important source of information. Changes
in stock prices are a similar source, though
increases in stock prices as well as decreases
could signal greater risk-taking. 19 Perhaps the
most important change would be to involve
depositors in risk-monitoring. This could be accomplished and the considerable incentives towards risk-taking by banks brought about by
deposit insurance could be mitigated by removing
deposit insurance from time-dated deposits greater
than, say, $5,000 or $10,000 per account. 2 0
Insuring these balances and limiting each saver
to one insured account would spare depositors
the burden of determining the risk of banking. If
,J
T h e F e d e r a l R e s e r v e B o a r d p r e s e n t l y m o n i t o r s the s e c u r i t y p r i c e s of
about 4 0 0 b a n k holding c o m p a n i e s (Putnam, 1983).
they wished to hold larger investments free of
default risk, they could purchase U.S. Treasury
obligations or banks could offer privately issued
insurance. The availability and cost of this insurance to banks, and the interest rates that
banks would have to pay for the uninsured
deposits, would provide the authorities with valuable information. Probably more important is the
concomitant interest of depositors and private
insurers in monitoring risk-taking by banks and
the banks' collateral interest in avoiding excessive
risks.
In the absence of such changes in the insurance
system, it is likely that additional financial disclosure, as such, will prove costly and ineffective.
—George J. Benston
This article is an augmented version oi comments on disclosure made by the
author at a workshop on bank surveillance held by the Federal Reserve Hank ol
Atlanta on September 12 and 73, 7983.
2
o S e e B e n s t o n , 1 9 8 4 , tor t h e m o r e tully d e s c r i b e d proposal,
REFERENCES
B e n s t o n , G e o r g e J " B a n k E x a m i n a t i o n , " T h e B u l l e t i n ( N e w Y o r k University G r a d u a t e S c h o o l of B u s i n e s s A d m i n i s t r a t i o n Institute of
F i n a n c i a l ) , pp. 8 9 - 9 0 M a y 1 9 7 3 .
B e n s t o n , G e o r g e J . " W h y Did C o n g r e s s P a s s N e w F i n a n c i a l S e r v i c e s L a w s
in t h e 1 9 3 0 s ? An A l t e r n a t i v e V i e w , " E c o n o m i c Review. F e d e r a l
R e s e r v e B a n k of Atlanta, April 1 9 8 2 a , pp. 7-10.
B e n s t o a G e o r g e J. " S e c u r i t y for Investors," C h a p t e r 6 . I n s t e a d of Regulation,
Robert W. Poole, Jr., ed, I n s t e a d of R e g u l a t i o n L e x i n g t o n B o o k s
( L e x i n g t o n , M A 1 9 8 2 b ) , pp. 1 6 9 - 2 0 5 .
B e n s t o n , G e o r g e J . " I n t e r e s t o n D e p o s i t s a n d D e p o s i t I n s u r a n c e in a
D e r e g u l a t e d E n v i r o n m e n t , " (forthcoming, E c o n o m i c Review, F e d e r a l
R e s e r v e B a n k of Atlanta).
B o v e n z i , J o h n F., J a m e s A M a r i n o a n d F r a n k E. M c F a d d e n , " C o m m e r c i a l
B a n k F a i l u r e P r e d i c t i o n Models," E c o n o m i c R e v i e w , F e d e r a l R e s e r v e
B a n k of Atlanta, 6 8 , ( N o v e m b e r 1 9 8 3 ) pp. 14-26.
C o u l s o n , E d m u n d . " F u l l D i s c l o s u r e : T h e S E C ' s R e q u i r e m e n t s R e l a t i n g to
B a n k Holding C o m p a n i e s , " E c o n o m i c Review, F e d e r a l R e s e r v e B a n k
of A t l a n t a 6 8 ( N o v e m b e r 1 9 8 3 ) pp. 6 2 - 6 9 .
E h l e n , J a m e s G. J r . "A R e v i e w of B a n k C a p i t a l a n d Its A d e q u a c y , "
E c o n o m i c Review, F e d e r a l R e s e r v e B a n k of Atlanta, 6 8 ( N o v e m b e r
1 9 8 3 ) pp. 5 4 - 6 0 .
F e d e r a l D e p o s i t I n s u r a n c e Corporation, D e p o s i t I n s u r a n c e in a C h a n g i n g
E n v i r o n m e n t W a s h i n g t o n , D. C., 1 9 8 3 .
12
F l a n n e r y , M a r k J. a n d J a c k M. G u t t e n t a g . " P r o b l e m B a n k s : E x a m i n a t i o n ,
I d e n t i f i c a t i o n a n d S u p e r v i s i o n , " in L e o n a r d L a p i d u s , ed„ S t a t e a n d
F e d e r a l R e g u l a t i o n of C o m m e r c i a l Banks, F e d e r a l D e p o s i t Ins u r a n c e C o r p o r a t i o n ( W a s h i n g t o n : 1 9 8 0 ) , V o l u m e II, pp. 1 6 9 - 2 2 6 .
Gilbert, G a r y G. " D i s c l o s u r e a n d M a r k e t D i s c i p l i n e : I s s u e s a n d E v i d e n c e , "
E c o n o m i c Review, F e d e r a l R e s e r v e B a n k of Atlanta, 6 8 ( N o v e m b e r
1 9 8 3 ) pp. 7 0 - 7 6 .
H a r l e s s , C a r o l i n a " B r o k e r e d D e p o s i t s : I s s u e s a n d A l t e r n a t i v e s , " Econ o m i c R e v i e w F e d e r a l R e s e r v e B a n k of Atlanta, 5 9 ( M a r c h 1 9 8 4 ) .
I s a a c , William M. " S t a t e m e n t o n H. R. 3 5 3 5 , I n t e r e s t o n D e m a n d D e p o s i t s ;
B r o k e r e d D e p o s i t s ; a n d H. R. 4 0 5 3 , C o m p u l s o r y F e d e r a l D e p o s i t
I n s u r a n c e , " p r e s e n t e d to S u b c o m m i t t e e on F i n a n c i a l Institutions, S u p e r vision, R e g u l a t i o n a n d I n s u r a n c e of t h e C o m m i t t e e on B a n k i n g ,
F i n a n c e a n d U r b a n Affairs, H o u s e of R e p r e s e n t a t i v e s , O c t o b e r 2 7 ,
1983.
M c G u i r k , E d w a r d J . " D e f a u l t P r e v e n t i o n , F i n a n c i a l A n a l y s i s a n d Modeling:
T h e F S L I C Perspective," Journal, Federal Home L o a n B a n k Board, 1 6
( O c t o b e r 1 9 8 3 ) pp. 10-17.
Wall L a r r y D. " T h e F u t u r e of D e p o s i t I n s u r a n c e : A C r i t i q u e of P r o p o s a l s , "
E c o n o m i c Review, F e d e r a l R e s e r v e B a n k of A t l a n t a 5 9 ( M a r c h
1984).
M A R C H 1984, E C O N O M I C
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13
F E D E R A L R E S E R V E B A N K O F ATLANTA
Brokered Deposits: Issues and Alternatives
Brokers of banks' and thrift institutions' certificates of deposits (CDs) have been providing
their services for over a decade. The merits of
funding banks and thrifts with brokered CDs
have been debated for about as long. Initially,
the largest depository institutions used money
brokers to secure large dollar amounts of uninsured CDs from institutional investors in a national
marketplace. In those days, debate centered
around whether big money center banks should
be restricted to funding their lending needs from
within the geographic locales of their existing
branches and offices. It was not until the mid1970s that the brokered funding practice began
to catch hold in regional depository institutions.
The small and middle-size institutions used this
funding method infrequently until the late 1970s.
Not until the July 1982 failure of Penn Square
Bank, N.A. in Oklahoma City and subsequent
bank and thrift failures was national attention
focused on the extent to which brokered funds
were being used by problem institutions, and the
exposure this presented to the federal insurance
funds. Since the Penn Square failure, the development of practices that might abuse the present
insurance system has further heightened concern
about brokered deposits. The innovations that
give the insuring agencies particular problems
allow brokers to divide large deposits among
insured institutions in insured lots of $100,000 or
less. These systems, which depend on computers
for recordkeeping and quick response, allow
investors to remain fully insured whatever the
size of their total C D investments.
Such systems call into question the purpose of
deposit insurance and the methods used to
discipline risk-taking by insured depository institutions. Attempts to regulate these systems also
bring into question the benefits of C D brokerage
to those who use it and to the public. Battle lines
have formed among regulators, members of
Congress, bankers and their trade organizations,
and C D brokers, members of the securities
brokerage industry and their trade groups. The
N e w networks, a c t i n g t h r o u g h " d e p o s i t
brokers" skirt restrictions built into the deposit
insurance system by dividing large deposits into
smaller, insured lots. Controversy over how to deal with
these innovations is growing; a solution could affect not only
the flow of funds t h r o u g h depository institutions but the safety and
structure of the financial system itself.
14
M A R C H 1984, E C O N O M I C R E V I E W
What is a Brokered CD?
The term "brokered CD" generally means any negotiable or nonnegotiable certificate of deposit of a financial
institution ("the deposit-seeking institution") purchased
by an investor (which may be another financial institution
for its own account, a money market fund, a pension
fund, an insurance fund, a bank trust department acting
as custodian, a corporation or an individual) through an
intermediary third party. This third-party intermediary
receives a fee or commission from the issuing financial
institution and may act strictly as a "broker" (selling CDs
as agent for t h e issuing financial institution), asa"dealer"
(by purchasing CDs as principal), or as both (a "brokerdealer").
alternatives being considered affect not only the
risk to investors and the way funds flow in and
out of depository institutions and their markets,
but also the safety, structure, participants and
services provided by the financial services industries.
In order to get a grasp of the issues these
systems create for deposit insurers and regulatory
agencies, this article will describe the brokered
C D market, its participants and their motivations.
W e will also focus on recent developments and
regulatory viewpoints and will conclude with an
analysis of the regulatory proposals.
The Brokered C D Market
T h e brokered C D market consists of two parts:
the institutional market where C D s are issued in
denominations of $100,000 or greater, and individual or "retail" markets where C D s are issued
in denominations not exceeding $100,000. In
the latter market, a broker-dealer may purchase a
C D issued by an insured financial institution and
sell participations or interests in it to customers
(See " W h a t is a Brokered CD?")
As long as certain record-keeping requirements
are observed, each investor's deposit, whether
invested directly with the issuing depository
institution or indirectly through a C D broker
(including investment interest in a C D through a
broker-dealeKs participation program), is insured
by either the Federal Deposit Insurance Corporation ( F D I C ) or the Federal Savings and Loan
'"FDIC, F H L B B Request for Comments on Brokered Deposits," Washington Financial Reports, The Bureau of National Aftairs, Inc., Vol. 41, No. 17
(October 31, 1983) p. 670.
F E D E R A L R E S E R V E B A N K O F ATLANTA
Insurance Corporation (FSLIC) up to the maximum allowable $100,000 per depositor. (To
receive full insurance coverage, the aggregate
deposits of an investor in any one insured depository institution cannot exceed $100,000.) 1
The C D Money Brokers
Most industry experts estimate that some
$120 billion in C D s (insured and uninsured) outstanding at U. S. financial institutions have been
placed by money brokers. Merrill Lynch, an
active broker, estimates that $100 billion of this
amount is institutional funds while $20 billion is
brokered retail deposits. 2
The C D brokerage industry, vaguely definable
at best, includes a wide variety of players ranging
in size from the sole proprietor with a desk and
telephone to the largest national securities brokerage firms. Most of these major brokerage firms
are now selling and making a market (primary
and secondary) in C D s for both individuals
(retail) and institutional investors. For the most
part, only t h e t o p 4 0 or so commercial banks and
some of the largest savings and loan associations
are able to place their C D s in the institutional C D
market. Most institutional C D s are negotiable
and are traded in blocks significantly larger than
the federal insurance maximum. Generally, institutional C D s are sold only by the largest national
brokerage and regional brokerage firms.
Other large national brokers of C D s serve
primarily regional, middle-size and small depositseeking financial institutions. Their primary activity is C D brokerage. T w o of these firms—FAIC
Securities I n c and Professional Assets Management Inc.—-have placed over $12 billion and $7
billion, respectively, in deposits of commercial
banks and thrift institutions in 1983. 3 Most of the
C D s sold through the brokers, which serve regional, medium and small institutions, are in $100,000
increments, the maximum amount covered by
federal insurance. Regional securities brokers
also act as C D broker-dealers for select groups of
regional financial institutions.
The list of C D brokers also includes trust
departments of commercial banks, mutual funds,
and diversified financial conglomerates. Even K
Mart Corp. recently began offering applications
2
L a u r a Gross, 'Will Federal Broker Limits Cut Deposits?" American
Banker, Vol. CXLIX, No. 10 (January 16, 1984) p. 1.
A d v e r t i s e m e n t s in various issues of The Wall Street Journal and
American Banker
15
Table 1. Commercial Banks Reporting Brokered Deposits
( A s of S e p t e m b e r 3 0 , 1 9 8 3 )
(in 0 0 0 ' s )
P e r c e n t a g e of B r o k e r e d D e p o s i t s
to Total Deposits
Dollar V o l u m e of B r o k e r e d D e p o s i t s
Assets
Deposits
Range
Mean
Median
Range
Means
Median
Mean
Median
Mean
T o p 2 5 % in t e r m s
of t h e ratio
brokered deposits
to total deposits
8.51 % t o 9 0 . 9 9 %
21.59%
17.15%
$ 4 0 0 to
$1,215,100
$81,030
$9,300
$765,463
$45,707
$496,208
T o p 2 5 % of t e r m s
of t h e dollar
v o l u m e of
brokered deposits
0.17% to 90.99%
14.69%
8.93%
$ 8 5 8 0 to
$1,215,100
$138,544
$41,278
$4,065,686
All b r o k e r e d
deposit reporters
( 5 3 6 banks)
Less than 0.01%
to 90.99%
7.16%
2,90%
$35,759
$1,500
$1,177,176
$1 to
$1,546,848 $2,684,697
$58,029
$787,494
Median
$39,877''
$1,212,640
$50,844
$1,215,100
for retail C D s and money market deposits for a
Michigan thrift through three of its stores in
Florida 4 A one-bank holding company in Miami
recently applied to the Federal Reserve System
for approval to establish a subsidiary that will
broker C D s primarily to foreign investors.
All C D money brokers charge a fee or commission for providing their service. Depositseeking institutions pay the fee, which generally
ranges from 2 5 to 100 basis points (annualized)
per C D . Some firms have pre-established fees;
others negotiate based on maturity dates and
volume of the C D s being sold and on characteristics of the issuing institution.
to S&Ls, 20 percent to commercial banks, and
the rest primarily to credit unions and pension
funds. 5 With respect to individual investors,
Merrill Lynch figures it has placed over $10
billion in brokered retail deposits since it initiated
this program in June 1982. 6
The Deposit Seekers
Most investors in brokered C D s are financial
institutions such as commercial and mutual savings
banks, savings and loan associations, credit unions,
money market funds, pension and profit sharing
plans and insurance companies. Large corporations
looking for liquidity and high yields and individuals also purchase C D s from brokers. An
executive of a leading C D broker estimates that 40
percent of the C D s brokered by his firm are sold
The deposit-seeking institutions are primarily
commercial and mutual savings banks and savings
and loan associations. Credit unions seldom
raise funds in this manner, though there are
scattered reports of brokers marketing their services to these institutions. 7
The growth of brokered deposits outstanding
has recently been phenomenal. Accordingtothe
Federal Home Loan Bank Board (FHLBB), brokers
"had brought in $26 billion to thrifts as of
October 1983, up from $4.6 billion in June
1982." 8 The $26 billion in brokered deposits
would represent about 4.9 percent of total deposits insured by the FSLIC. 9 Indicating concern
about future growth, Edwin J. Gray, chairman of
the FHLBB, recently stated that at the current
rate of growth, brokered deposits could account
"The Florida Comptroller's Office charged K Mart and the Michigan thrift
with illegally conducting savings association business in Florida A Florida
court has declined to continue a temporary restraining order on this
activity, saying that it did not constitute banking. K Mart agreed to remove
the name of the Michigan thrift and the F S L I C logo from its advertisements. "K Mart C a n R e s u m e Selling S&L Services in Florida J u d g e
Rules," The Wall Street Journal, (February 21, 1984) p. 38.
'Telephone interview with William A Goldsmith, Executive Vice President,
Professional Asset Management Inc., DelMar, California
6
Gross, op. cit, p. 1.
'Edgar F. Callahan, chairman of the National Credit Union Association
(NCUA) in testimony before the Housing Banking Committee's Subcommittee on Financial Institutions, Supervision, Regulation and Insurance
in October 1983, stated that "the use of brokers to raise funds is quite
isolated with respect to credit unions."
8
Tim Carrington, "Stiff Restrictions on Deposit Brokerage For Banks and
Thrifts Are Proposed," The Wall Street Journal, (January 1 7, 1 984).
9
T h e Public Information Office of the Federal Home Loan Bank Board,
Washington, D. C. reported total F S L I C insured deposits were $534.1
billion at year-end 1982.
The Investors
16
M A R C H 1984, E C O N O M I C R E V I E W
T a b l e 2. Distribution of Commercial Banks Using Brokered Deposits
(As of September 30, 1983)
Asset Size
Brokered Deposit Reporters
Number*
Percent of Reporters
Universe of Commercial Banks
Number*
Percent of Total
Less Than $50MM
241
44.96%
9725
67.02%
S50MM - S100MM
100
18.66%
2593
17.87%
$100MM - $300MM
62
11.57%
1504
10.37%
S300MM - S50MM
24
4.48%
254
1.75%
$500MM - $ 1 B
11
2.05%
185
1.27%
$1B - $5B
68
12.69%
203
1.40%
Greater Than $ 5 B
30
5.60%
46
0.32%
Total
536
100.00%
14510
100.00%
•Number that filed September 30, 1983 Fleport of Condition.
for more than one-third of all deposits in insured
S&Ls. 10
According to unedited call report data as of
September 30, 1983, 536 commercial banks (3.7
percent of 14,510 reporting banks) indicated the
use of brokered deposits. In the aggregate, these
deposits amounted to $19.2 billion, roughly 1.3
percent of total deposits outstanding in commercial
banks. 11 The average ratio of brokered deposits
to total deposits for banks reporting this source of
funding was 7.16 percent (Table 1). Deposit compositions ranged from less than one percent to
91 percent brokered funds, while the absolute
dollar levels ranged from one thousand to $1.2
billion. With respect to the heaviest commercial
bank users of this funding source (the top 25
percent in terms of the ratio of brokered deposits
to total deposits), the average ratio was 21.6
percent or roughly three times the average for all
brokered deposit reporters. Overall, 64 percent
of commercial banks reporting brokered deposits
had less than $100 million in assets as of September 30 (Table 2). Brokered deposit data for
commercial and mutual savings banks are unavailable prior to that date.
,0
L i s a J . McCue,"Agencies Propose Broker Limits," American Banker, Vol.
C X L I X No. 11 (January 17, 1984), p. 17.
" I n conducting additional research, it w a s noted that almost 20 percent of
those commercial banks reporting brokered deposits at September 30,
1 9 8 3 also reported an earnings loss for the nine month period.
F E D E R A L R E S E R V E B A N K O F ATLANTA
Thirteen of the 296 mutual savings banks
reporting on September 30 reported brokered
deposits. In the aggregate, these funds amounted
to $271.4 million, an insignificant portion of the
total deposits of mutual savings banks at that
date (Table 3). The average ratio of brokered
deposits to total deposits for mutual savings
banks reporting brokered deposits was 4.4 percent (somewhat less than the average for commercial bank users). Deposit compositions for
mutual savings bank users of brokered funds
ranged from less than one percent to 27.5
percent of total deposits (not nearly as broad a
range as that for commercial bank users; dollar
levels ranged from $24000 to $178.9 million).
Most of the mutual savings banks reporting
brokered deposits were less than $500 million in
asset size (Table 4). Based on the September 30
commercial bank and mutual savings bank data,
brokered deposits account for as much as $19.4
billion, approximately 1.6 percent of all deposits
insured by the FDIC. 12 Details on the proportions of
brokered retail deposits and brokered institutional
deposits are not currently available; however,
revisions proposed by the regulatory agencies
l2
The Public Information Office of the Federal Deposit Insurance Corporation, Washington, D.C. reported total F D I C i n s u r e d d e p o s i t s o f $1,197.7
billion ( J u n e 1 9 8 3 survey).
17
T a b l e 3 . Mutual Savings Banks Reporting Brokered Deposits
(As of September 30, 1983)
(in 000's)
Percentage of Brokered Deposits
to Total Deposits
Range
Dollar Volume of Brokered Deposits
Median
Top 25% in terms
of the ratio
brokered deposits
to total deposits
4.68% to 27.49%
16.71 %
17.$
Top 25% in terms
of the dollar
volume of
brokered deposits
0 . 5 2 % t o 17.94%
6.78%
1.89%
All brokered
deposit reporters
(294 banks)
0.0045% to
27.49%
Range
Median
Median
Mean
Median
$2,600 to $32,059
$14,372
$139,001
$195,789
$122,901
$178,685
$32,059 to $178,901
$84,145
$41,475
$6,998,325
$9,366,182
$5,889,948
$8,044,282
$24 to $178,901
$20,880
S 1,355
$2,057,028
$456,760
$1,755,124
$407,379
T a b l e 4. Distribution of Mutual Savings Banks Using Brokered Deposits
(As of September 30, 1983)
-
A s s e t Size _
Brokered Deposit Reporters
_ Number*
Percent of Reporters
Universe of Mutual Savings Banks
Number*
Percent of Total
Less Than $50MM
2
15.38%
$50MM - $100MM
13
4.39%
1
7.69%
67
S100MM - $300MM
22.64%
3
23.08%
$300MM - $50MM
109
36.82%
1
7.69%
37
$500MM - $ 1 B
2
12.50%
15.38%
32
$1B — $5B
2
10.81%
15.38%
33
Greater than $ 5 B
11.15%
2
15.38%
5
1.69%
13
100.00%
296
100.00%
Total
•Number that filed September 30, 1983 Report of Condition.
beginning with the March, 1984 Report of Condition would allow both the public and the
regulators to make this distinction.
What are the Functions
of the Brokered C D Markets?
Why did these Markets Develop?
By most accounts, the institutional C D market
originated in 1961 when the major money center
18
banks began issuing negotiable CDs. The negotiability feature provided liquidity—the crucial
element needed to attract funds in a national
marketplace. Initially, only the largest banks
sought deposits. The C D s were issued in large,
uninsured amounts, primarily to serve a wholesale market of large institutional investors. Only
the largest financial institutions could solicit funds in
this market because institutional depositors believed that the federal government would not let
any of the largest institutions fail. Even today,
MARCH 1984, E C O N O M I C REVIEW
many of the regional banks and thrifts find it
difficult to sell their long-term C D s in this market 13
In time, larger regional depository institutions,
looking outside their traditional markets for
funding, began to participate in the national C D
market. Geographic limitations had kept many
from soliciting the funding necessary to finance
their growth. During the 1970s and early 1980s,
inflation, high interest rates and deposit disintermediation to the money market funds (which
offered the small investor market interest rates)
drove some financial institutions to satisfy funding
needs through issuing large uninsured C D s not
subject to regulatory interest rate restrictions.
Many larger regional financial institutions were
able to establish contact with and buy funds
directly from institutional investors. For others,
the broker provided a valuable service in soliciting
these funds.
Four events aided development of a brokered
retail m a r k e t : ( 1 ) C o n g r e s s i n c r e a s e d t h e
l e v e l of d e p o s i t i n s u r a n c e from $ 4 0 , 0 0 0 to
$100,000 in 1980. (2) The Depository Institutions
Deregulation Committee ("DIDC") removed the
requirement that fees paid to third-party brokers
be included in interest rate calculations for the
purposes of Regulation Q in 1981. 1 4 (3) In 1982,
the D I D C deregulated interest rates on C D s of
less than $100,000 with maturities of 3 1/2 years
or more and authorized these C D s to be issued
in negotiable form. T h e negotiability feature
permitted an active secondary market to develop
for retail CDs, allowing individuals the benefits of
liquidity and market rates enjoyed by institutional
investors for 20 years. 15 (4) The potential of
brokered funds increased dramatically again in
October 1983, when the D I D C removed all
remaining interest rate ceilings on retail deposits
other than passbook and N O W accounts. These
changes enabled financial institutions, as well as
brokerage firms, to offer their customers federally
insured C D s at various lengths of maturity down
to seven days, without interest rate restrictions.
What Services are Provided and Who Benefits?
C D brokers act as conduits among financial
institutions; they have played and continue to
" N o v e m b e r 2 8 , 1 9 8 3 letter from Roger M. Vasey, Chairman and President
ot Merrill Lynch Money Markets, Inc., to Hoyle L. Robinson, Executive
Secretary ot F D I C and the Director ot the Information Services Section of
the F H L B B , setting forth Merrill l y n c h ' s response to the questions posed
F E D E R A L R E S E R V E B A N K O F ATLANTA
play an important role in our economy. Their
services have benefited not only the banking
system but the individual consumer as well. This
brokered-deposit mechanism has:
1. Provided national sources of funding, an
alternative for many sound and stable small,
medium-sized and regional deposit-seeking
institutions. Previously, market bias toward
the largest banks and thrifts confined smaller
institutions, regardless of financial condition,
to their local regions for funding.
2. Facilitated the transfer of excess savings
from savings-rich areas to areas short of funds
to meet credit needs of individuals and businesses. For example, a bank with greater loan
demand than it can meet through local deposits
may sell one of its own certificates to another
bank in an area with slack loan demand,
allowing each institution to satisfy its customers'
needs profitably. Without the use of a third
party, the investor and the deposit-seeking
institution probably would not know of each
others need. The C D broker allows small
creditworthy and medium-size depository institutions to solicit funds in a national capital
market from institutional investors as well as
individuals.
3. Provided the deposit-seeking and the investing institutions greater flexibility in managing
funds by allowing them to match more closely
the maturities of assets with those of liabilities.
The brokerage process allows smaller and
medium-size banks and thrifts to raise funds
with maturities longer than "overnight" This
allows them to hedge more effectively against
margin squeezes w h e n overall interest rates
and the cost of funding rise quickly.
4. Provided a quicker, more efficient, and
often cheaper source of funding for depositseeking institutions than they can obtain within
the local market Many C D brokers have an
elaborate distribution system or an exchange
service that enables the transaction to occur
almost immediately. The deposit-seeking institution often pays a higher rate for C D s placed
through a broker than it would pay in its local
market, but brokered deposits do not require
additional investment in "bricks and mortar"
by the November 1, 1983, Advance Notice of Proposed Rulemaking by
the F D I C and the F H L B B
'"Dennis Jacobe, "Advice to Regulators: If It's Brokered, Fix It," Savings
Institutions (December 1983) p. 33.
,5
Robert M. Vasey, op. cit.
19
for branch facilities, or increased expenditures
for additional personnel or advertising. Additionally, for a small and middle-size bank or thrift,
soliciting funds needed for a specific lending
purpose in a national rather than a local
market avoids possible competitive repercussions from bidding up the local cost of funding.
(In certain cases, these funds also have proven
to be more stable than funds derived locally.)
5. Increased the investment alternatives available for the institutional investor and for the
small investor. Higher competitive rates and
liquidity provided by an active secondary
market are now available forthe small investor
through various broker retail deposit programs.
The disparity between what institutional investors are able to command and what the
individual investor can demand has been
narrowed.
6. In conjunction with deregulation, C D brokerage has helped to reverse the flow of funds to
the money market funds and other competitive
investments. Merrill Lynch estimates that 30
percent of the deposits it has placed for banks
and thrifts were transferred from money market
funds that it sponsors. 16
7. Increased the ability of regional banks and
thrifts to compete with the largest financial
institutions as they expand their efforts in
soliciting individual deposits in a national
marketplace. The improved competitive position of the regional banks lessensthe possibility
of deposit concentration in a few large money
center banks.
Broker Practices and Market Innovation
Three basic types of C D brokerage services are
being offered today: simple brokering, depositlisting services, and C D participation programs.
All types allow investors the opportunity to
disburse millions among insured institutions with
no more than $100,000 in any one institution.
(Institutions have not fully taken advantage of
this opportunity.)
Simple brokering can be accomplished in
several ways, differing usually in the way funds
flow: In the simplest method, the investor sends
funds directly to the deposit-seeking institution,
which has been notified by the broker of the
impending transaction. The investor may, however,
,6
Vasey.
20
send his funds to the C D broker who in turn
transfers the funds to the deposit-seeking institution. The C D s are registered in the name of the
brokerage firm as nominee or agent for the
investor. A third variation on this theme is brokerarranged custodial programs. These programs
allow the investor to send funds to a bank which,
for a fee, acts as custodian for the investor. The
custodian bank disburses the funds to the depositseeking institution and retains the safekeeping
receipts issued by these institutions. The C D s are
registered in the name of the custodian bank as
custodian for the investor.
Of the deposit-listing services, the most advanced
plan allows a deposit-seeking institution to call
the broker's voice-response computer and state
the quantities, rates and maturities (six maturities
ranging from 30 to 360 days) it is offering to sell.
Listings are automatically meshed with other
current listings, sorted by rates and maturities,
and made available to investors on a first-in, firstout basis. The broker's computer automatically
eliminates institutions where the investor has
already purchased a C D , buys no more than one
$100,000 C D from any of the listed deposit
seeking institutions and selects those listed C D s
paying the highest interest rate for the investors
maturity selection. Upon execution of the order,
the broker transmits issuing instructions to a
bank, which delivers the purchased C D s to the
investors designated custodian. T h e custodian
transfers the investors funds to the bank, which
wires the proceeds to the deposit-seeking institutions. 17
The third type of brokerage arrangement is the
C D participation program offered by brokerdealers. In such a program, a broker-dealer
purchases a C D from a deposit-seeking institution
and sells interest in it to investors, generally
individuals. The C D purchased is registered in
the name of the broker as nominee for others.
The broker's records, in turn, reflect the true
ownership interest of the participants. Full insurance coverage flows through to each participant, provided all of the participants accounts in
that specific institution do not exceed $100,000.
Other examples of market innovation include
broker-arranged discount $100,000 C D s and
federally insured money market accounts that
are available on demand. Discounted CDs provide
"Promotional material provided by Karen Fawcett, Vice President, Harvey
Baskins & Co.
M A R C H 1984, E C O N O M I C
REVIEW
deposits without regard to an institution's
financial condition. Investors, without assessing
the financial health of the deposit-seeking
institution, can maximize the return on investment knowing that their deposits are completely underwritten by federal insurance. Little,
if any, incentive exists for investors to avoid
risky institutions. In certain cases, brokers
have been accused of steering funds to problem
banks deliberately in order to offer interest
rates significantly above the market and to
receive excessive brokerage fees.
The problem posed by multiple coverage
also is related to the market discipline issue.
The insurance funds are concerned that coverage provided to pension and other custodial
deposits also "fails to encourage market and
institutions' analysis in the placement of these
deposits." Under current rules, multiple insurance coverage is provided for pension
funds and other custodial deposits in which
more than one individual has a beneficial
interest. As a matter of practice, trustees and
custodians normally limit deposits in insured
institutions much the same way that C D
brokers do in order to stay within the bounds
of insurance coverage. This practice undermines
market discipline, relieving fiduciaries of their
obligation to analyze the financial condition of
institutions in which they place deposits.
2. Protects Sophisticated Depositors
These brokered arrangement systems protect sophisticated depositors whom the system
was not designed to protect. As seen by the
deposit insurors, protecting unsophisticated
depositors is a primary goal of insurance. But
this goal is difficult to achieve unless sophisticated liability holders require insured institutions to temper their risk-taking. Setting a
maximum insurance ceiling has been the
principal method of distinguishing between
sophisticated and unsophisticated depositors.
Dividing large deposits among banks clearly
makes the insurance maximum ineffective for
this purpose. F D I C chairman William M. Isaac
has charged that brokered deposits represent
"an outright misuse of the federal deposit
insurance system, which was designed to
protect 'unsophisticated individuals' rather
than customers of large intermediaries." 2 0
an investor with federal insurance for both principal and interest. The insured money market
accounts, which use a mutual fund in conjunction
with a custodian bank arrangement, allow an
investor the highest possible interest rate, federal
insurance and the ability to choose maturities as
short as overnight (In some programs the interest
rate is determined by the broker. Fund withdrawals
are restricted, but the investor is not subjected to
interest rate penalties, which would be the case
had the investor redeemed a C D investment
prior to maturity.)
What Are The Issues?
Individual institutions' use of funds obtained
through nontraditional means from nontraditional
sources has long concerned regulatory authorities.
The presence of these volatile funds in a bank
often is linked to out-of-territory lending, loans of
questionable value, or liquidity pressures. In the
last year, the insurance funds in particular have
grown increasingly concerned about the use of
brokered funds and the rate of growth of this
practice at problem institutions. F D I C Chairman
William M. Isaac recently explained this concern,
stating that " 1 6 percent of total deposits of the
72 commercial banks that failed between February
1982 and October 1983 originated from money
brokers." 18 At least 60 percent of the deposits in
one of these failures had been placed by brokers.
Similarly, brokered funds were a factor in 35
mergers of problem savings and loan associations in
1981-82. 1 9
Increased regulatory concern today is based
on t h e d e v e l o p m e n t of s y s t e m s for d i v i d i n g
large deposits into insured lots. This concern
springs from responsibilities for the safety of the
financial system as a whole, as well as for individual
institutions, and forassets of the unsophisticated
depositor. Through C D brokers, insured institutions—even those with serious p r o b l e m s have been able to attract large amounts from
outside their traditional market areas. By parceling
out funds in $100,000 increments, brokers are
able to offer investors full insurance protection.
Some of these concerns are that this practice:
1. Erodes Market Discipline
Dividing deposits into insured lots reduces
market discipline of banks' and thrifts' risktaking by allowing depositors to make insured
,8
M c C u e , op, cit., p. 17.
F E D E R A L R E S E R V E B A N K O F ATLANTA
,9
2
"The Hot Money," Forbes, (January 2, 1984), p. 61.
°Carrington, op. cit.
21
Other
Other problems caused by broker deposit funding
relate to traditional depository institutions' funding metho d s the relationship between the depository institutions
and the customers, and the unregulated nature of the
CD broker industry.
Recently, FHLBB's Chairman Gray expressed concern that some newly chartered thrifts, instead of
seeking deposits in their local markets, may become
"sixth-floor type" operations using only brokered deposits to meet their funding needs. Some regulators
have misgivings about securities industry competition
with banks and savings and loan associations They
argue that the securities industry benefits from deposit
insurance without having to pay the price of extensive
regulation. They fear that, if the depositors can earn
higher rates by buying an insured CD through a broker,
the money brokers will erode the traditional relationships between depository institutions and depositors. If
this occurs depository institutions could become hostages
of the national brokerage firms, dependent upon t h e m
for funds or subject to their requirements to make
certain types of loans The diverse, largely unregulated
nature of the CD brokerage industry and the unclear
relationship between broker and investor are other
major concerns. What's more, implementation of the
" D I C / F H L B B proposal might confuse customers w h o
3. Encourages Undue Growth and Risk-Taking
Broker arrangement programs allow depository
institutions to grow rapidly whether or not their
managers have the expertise to handle larger,
more complex institutions. The availability of this
funding method tests the asset/liability management skills of small and middle-size institutions
and may encourage some speculative lending
that could not be easily funded through traditional
sources. Consequently, with excessive growth,
the underlying net worth or capital position of
these institutions can be diminished.
4. Postpones Demise of Failing Institutions
Brokered C D money has afforded some failing
banks quick access to liquidity that was no longer
available in the local market or through traditional
funding means. In these cases, the broker, rather
than the Federal Reserve System, becomes " t h e
lender of last resort" A weak bank's accumulation
of a large level of insured deposits derived
through brokers not only postpones failure; it
also influences the timing of closing by the
chartering authority and the insurance funds'
choice between merging institutions or paying
off depositors when they close the institution. A
significant volume of insured deposits can make
the cost of a deposit pay-off prohibitive to the
22
would not necessarily know which CDs are protected
by federal insurance. Representatives of the SEC have
voiced concern about the CD money brokers. They
have indicated that, if a reduction in deposit insurance
for brokered CDs were contemplated, the SEC, because of
its experience in dealing with similar matters would be the
logical regulator to assure that depositors were alerted
to applicable insurance levels.
Federal Reserve Governor J. Charles Partee addressed
the issue of SEC regulation in his October testimony by
suggesting that thought be given to requiring registration
and regulation of the brokerage f i r m s "perhaps along
the line of the Investment Advisers Act of 1940 already
being administered by the SEC."*
Opponents of broker regulation argued that registration of CD brokerage firms with the FDIC/FHLBB or
SEC is not necessary and would only serve to increase
the cost of providing these services raising the cost to
t h e deposit-seeking institution. They c o n t e n d e d that
SEC regulation would only add another r e g u l a t o r t o the
picture and would delay the flow of needed information
to deposit insurance a g e n c i e s Others argued for the
formulation of a self-regulating body that would impose
a code of ethics and method for disciplining CD brokera
•Federal Regulators . . . " op cit.
i n s u r a n c e fund. L i k e w i s e , a d e p e n d e n c y on
brokered funds generally reduces a failing bank's
attractiveness to prospective merger candidate.
Thus, riskand exposure to the insurance fund are
increased.
5. Increases Overall Exposure
of the Insurance Funds
Pressures on the insurance funds created by a
rise in insured deposits are a side effect of
brokered deposit systems. These systems have
the potential for converting a large volume of
uninsured time deposits into insured deposits.
Thus, they increase the ratio of insured deposits
to the size of the insurance funds. Chairman Gray
of the FHLBB emphasized recently that "insurance
is finite" and that the insurance funds cannot
serve as guarantor for the whole financial system
(See " O t h e r Problems").
Regulator Positions and Proposals
The brokered deposits issue has arisen at a
time of ferment in financial regulation. America's
banking and savings institutions, as well as their
regulatory bodies, have become the subject of
considerable public and legislative scrutiny. Investigations and hearings following the demise
M A R C H 1984, E C O N O M I C
REVIEW
of Penn Square (the first time uninsured depositors
stood to lose substantial sums in a deposit payoff) and subsequent failures, focused on the
need to identify causes and to reduce the chances
of recurrence. Rightly or wrongly, attention has
come to rest on the practices of C D brokers and
brokered deposits, a common element in many
of the failures.
Initially, the agencies reacted by changing the
quarterly call report to allow themselves and the
public to monitor this funding practice more
frequently than they can through the examination
process. This did not satisfy some critics. Last
September, Rep. St Germain, chairman of the
House Banking Committee, asked the five federal
agencies to recommend a plan to control and
monitor C D money brokers. Since that time, he
has prodded the regulatory bodies to impose
controls on these brokers rather than waiting for
the "often times leisurely pace of rulemaking to
run its course." 21
Last October, chairman Isaac of the FDIC, in
testimony before the House Banking Committee's
Subcommittee on Financial Institutions' Supervision, Regulation and Insurance, stated that the
F D I C and FHLBB were considering two avenues
for limiting the abuse of brokered deposits:
increased monitoring and supervision of brokerage
activities and reduced insurance coverage for
brokered deposits. He elaborated that either the
brokers could be required to register with the
insurance authorities (an approach that would
require legislative approval) or the insurance
authorities could increase their monitoring of
banks and thrifts that use brokered funds. He
indicated that his agency was considering several
insurance coverage options: (1) removing insurance coverage from broker-arranged deposits;
(2) treating brokers as a principal and limiting
total insurance coverage to $100,000 per broker;
and (3) giving brokered deposits different insurance coverage, perhaps 75 percent coinsurance
up to $100,000.
Subsequent actions by the F D I C and FHLBB
follow these options given by chairman Isaac.
Until recently, regulatory agencies set explicit
limits on the amount of brokered funds or other
forms of "hot money" a financial institution
could solicit consistent with "safety and soundness." In November, however, the FHLBB issued
" " F e d e r a l Regulators Testify on Brokered Deposits Issue," American
Banker, (October 28, 1983), p. 4-9.
F E D E R A L R E S E R V E B A N K O F ATLANTA
new supervisory procedures restricting the use
of brokered funds (to 5 percent of total deposits,
including custodial deposits) by institutions subject to its regulation that do not meet net worth
requirements. The F D I C also is enforcing its
authority to limit the acceptance of brokered
deposits by certain problem institutions.
On January 16, the FHLBB and the F D I C set in
motion changes in insurance coverage for brokered
deposits. They jointly requested comment on a
proposed regulation that would limit insurance
coverage to " a maximum of $100,000 per insured
bank or savings association for the total deposits
placed by or through a single deposit broker."
The agencies stated that deposit brokerage that
parcels out deposits to gain insurance coverage
is a misuse of the federal deposit insurance
system and that:
deposit insurance was originally intended to
establish stability and to promote confidence
in the monetary and banking systems by
protecting primarily small, relatively unsophisticated depositors in their relationships
with banks and savings associations. It was
never intended to protect investors seeking
the highest yields available in money markets.
If the proposed rule is adopted, it " w o u l d
become effective October 1 and would apply to
basic brokering programs, certificate-of-deposit
participation programs, deposit listing services
and other brokerage-type transactions." According
to the proposal, a "deposit brokei" is:
any person or entity who is engaged in the
business of placing deposits for others and an
agent or trustee who establishes a deposit or
member account in connection with an agreement with the institution to use the proceeds
in the accounts to fund a prearranged loan.
The deposit broker definition would not, however, include salaried employees of depository
institutions and "normal activities of trust departments of insured institutions," unless such activities
were established to circumvent the proposed
amendments. Insurance coverage available to
pension funds, other employee benefit plans
and irrevocable trusts would not be affected
unless the deposits were placed by or through a
deposit broker. 22
" J o i n t News R e l e a s e — F H L B B and F D I C dated January 16, 1984. Request for comment on proposed regulation that would limit insurance ot
brokered deposits.
23
The agencies concluded that "deposit brokerage
has a sufficiently adverse effect upon the depository institutions industry to warrant remedial
regulatory action." They opted against "alternative
regulatory action through increased monitoring
and regulation of brokerage activity" at federally
insured institutions and determined that absolute
prohibition on the use of this funding method
would be "unduly restrictive" and would eliminate
the benefits to insured institutions of brokered
funds. As an indication of the complexity of their
problem, the agencies requested: (1) comments
as to whether subsidiaries or networks or depository institutions should be included within the
proposed definition of "deposit broker;" (2)
comments on the treatmentthatshould be given
to institutions owned either directly or indirectly
by entities that would fall within the proposed
definition; (3) comments with respect to what
other types of activities of agents should or
should not be deemed to constitute deposit
brokerage; and (4) comments on what regulatory
steps should be taken to prevent misuses or
circumvention of the proposed amendments
through bearer-form CDs. 2 3
Quarterly brokered deposit information that
insured depository institutions have begun to
provide will greatly enhance the regulators' early
detection systems. Rapid growth funded through
brokered deposits will cause the supervising
agency to investigate and, if necessary, to pursue
corrective action. Although this may reduce use
of brokered funding in some potentially troubled
institutions, it alone does nothing to resolve the
market discipline problem. Forthe most part, the
regulatory response is after-the-fact not preventive
The deposit insurors' effort to limit weak institutions' use of brokered funding would also
prove ineffective in restoring market discipline.
Institutions may become dependent upon this
funding method long before they become troubled
or are recognized as weak. Attempting to control
a funding method already in use by a troubled
bank could further weaken its position. This
alternative is unlikely to restore market discipline to
most institutions because, overall, few depository
institutions are classified as weak (and thus
subject to regulatory constraint) and few would
expect to be.
It follows from the inadequacies of dealing
only with troubled institutions that the F D I C and
FSLIC would be compelled to search for a more
general alternative. Their broader proposals of
this January, however, are not without problems.
If successful, they threaten to impose burdens
on a market that developed to serve legitimate
needs of deposit seekers, investors and the
public. Moreover, these proposals seem likely to
induce further innovations that will allow market
participants to avoid regulatory and market discipline. The federal regulators have foreseen
many of these problems and have received many
industry comments upon the issues and alternatives. In testimony before the House Banking
Committee's Subcommittee in October, all five
representatives of the federal regulatory bodies
pointed out the benefits and economic value of
brokers and expressed concern for the issues
and problems that the deposit brokerage activities
have raised. All emphasized that solutions were
just as complex as the issues.
The January 16 proposal to restrict insurance
coverage to $100,000 per broker, per insured
institution would limit brokers' ability to place
insured deposits. If the burden is severe, as
seems likely, smaller institutions would be the
most disadvantaged in their search for both
liquidity and long-term funding. Indeed, the
Securities Industry Association contends that the
proposal would "virtually eliminate this smoothly
functioning and economically useful market"
and"without broker participation, only a handful
of the largest banks and money-center thrifts,
with massive branch systems and the capability,
will be able to reach a national customer base." 24
Tables 1 -4 suggest that this could be a significant
problem. Small and middle-size commercial and
mutual savings banks are substantial users of this
funding method. Except for the very smallest commercial banks (those with less than $50 million in
deposits), the proportion of all banks reporting
that they use brokered deposits in each size
category exceeds their respective population
proportion. Furthermore, among commercial bank
users, 50 percent have more than 2.9 percent of
their total deposits in brokered funds. Some
commercial banks are much more dependent on
this method; the median proportion of total
deposits taken from brokers in the top 25 percent
of banks by dependence on brokered deposits is
" J o i n t News Release, op. cit.
"Advertisement in The Wall Street Journal, January 20, 1984.
An Analysis of Insurers' Actions
and Proposals
24
M A R C H 1984, E C O N O M I C R E V I E W
17.1 5 percent. Of these most dependent commercial banks, more than half have deposits of
less than $51 million. T h e incidence of brokered
deposits among mutual savings banks is much
smaller; less than 5 percent of mutual savings
banks reported using brokered deposits to meet
funding needs.
Burdensome regulation on a market that developed to provide services buyers and sellers
value tends to induce innovation to avoid the
regulation. The brokered C D market is particularly
complex; many potential arrangements are available for moving deposits in this market Some of
these were recognized by the insuring authorities in
requesting comments on the regulations they
proposed in January. Their list of avoidance
measures included multiple broker subsidiaries
designed to avoid the $100,000 insurance per
bank per broker rule, information (as distinct
from brokerage) services, and use of bearer CDs.
The potential list is probably considerably longer
and the potential burden of regulation to meet
innovations is considerable.
Direct regulation, with all of its problems, may
not be the appropriate approach to brokered
deposits. The problem that brokered C D s cause
for the financial system—that of vitiated market
discipline—arises from other features of our
deposit insurance system. The flat-rate insurance
premium, de facto insurance of all deposits through
mergers of failing banks, and limited uninsured
liabilities at many institutions all erode potential
market discipline of insured institutions' risk-taking.
Risk-related insurance premiums and coinsurance
of uninsured deposits suggested by the F D I C in
its review of the insurance system in 1983 or
required levels of uninsured liabilities (see the
article by Larry Wall in this Review) are among
more inclusive proposals that would address
discipline problems without attacking the C D
market itself.
Summary and Concluding Thoughts
Quick and easy solutions to issues raised by
current brokered C D problems are not apparent.
Dealing with brokered funding abuses by troubled
banks on a case-by-case basis does not resolve
FEDERAL RESERVE BANK OF
ATLANTA
the systemic problem of market discipline. O n
the other hand, limiting the amount of insured
funds that a depository institution can solicit
through brokers penalizes the smaller depository
institutions that are well run and financially
sound but dependent upon the national marketplace to supply their funding needs. Broader
regulations that limit federal insurance coverage
on brokered C D s with respect to either the
principal or his agent could damage a well
established and useful national C D market Again,
the smaller depository institutions, many of them
significant users of this funding method, would
be disadvantaged. Funds may well run to the
largest financial institutions. Limiting insurance
coverage per broker per issuing institution adds a
definitional problem, does not address other
methods of soliciting"hot money" that also have
played a role in failing bank scenarios, could
cause investor confusion, and will encourage
market innovators to find new ways to circumvent the new rules. More comprehensive methods
of dealing with a broader market discipline
problem may be more useful.
Until more comprehensive steps are taken, a
more limited, but carefully targeted approach
would be to:
1. Limit insurance coverage to individual
depositors only. Deposit insurance was never
designed to benefit sophisticated institutional
investors, who have the capacity to exercise
market discipline.
2. On a case-by-case basis, restrict weak institutions from gaining access to all forms of "hot
money," including brokered deposits and
funds solicited directly in the national marketplace.
3. Impose higherinsurance premiumson institutions engaged in riskier lending or investment.
4. Require firms that broker C D s to register
with the Securities and Exchange Commission.
The SEC already has an effective registration
mechanism. Besides, many of the C D brokers
already are regulated by the SEC.
—Caroline T. Harless*
'Department
ot Supervision
and Regulation,
Federal Reserve Hank of
Atlanta.
25
The Future of Deposit Insurance:
An Analysis of the
Insuring Agencies' Proposals
Congress has recognized that even though deposit insurance has provided valuable benefits,
the role of deposit insurance in the deregulating
financial system should be reviewed. T h e GarnSt Germain Act of 1982 required the Federal
Deposit Insurance Corporation, the Federal Home
Loan Bank Board and the National Credit Union
Association to conduct such reviews, and report
their recommendations. In their reports, all three
agencies affirm that deposit insurance performs
a valuable function, but each argues for specific
reforms. T h e reports are summarized in the
January issue of this Economic Review; their
recommendations are summarized in the box on
the right. This article will critically evaluate the
proposed reforms.
Goals of Deposit Insurance
The current deposit insurance system encourages
banks to take risks, and
financial deregulation may
be adding to that encouragement. The federal deposit insuring agencies
have proposed reforms in
the system. Congress will
need to proceed with caution to ensure that the
money supply and the payments system are protected
without undue cost.
26
The agencies give several reasons for deposit
insurance:
protection of the money supply,
protection of the payments mechanism, protection
of small depositors, reduction in the cost of using
money, protection of small financial institutions,
provision of funds to mortgage markets and
encouragement of credit unions. The F D I C and
FHLBB assert that the major goal of deposit
insurance should be the protection of the money
supply and the payments mechanism, while the
N C U A places more emphasis on protecting
small depositors.
The Money Supply and the Payments System.
Protecting the money supply and the payments
mechanism are important functions of deposit
insurance. Depository institutions have a dominant position in both; hence, insurance can
protect the money supply and the payments
system by protecting those depository institutions.
While economists differ on how important the
money supply is to the economy, virtually all
M A R C H 1984, E C O N O M I C R E V I E W
Review of the Agencies' R e c o m m e n d a t i o n s
The three insuring agencies each proposed several
deposit insurance reforms All three insuring agencies
said that insurance should be reformed to provide
greater incentives for insured institutions to limit their
risk exposure. The agencies also made some important
recommendations on other specific insurance issues.
The FDIC favored a reduction in the effective coverage
of deposits to give the private sector a greater incentive
to monitor bank risk The FDIC has handled most large
bank failures through the purchase and assumption
method, in which a healthy bank purchases some of the
assets and assumes all of the deposits of the failed
bank. This has had the effect of providing 100 percent
deposit insurance to all deposits, including those with
balances in excess of $100,000. The FDIC discussed
the possibility of reducing the coverage of balances in
excess of $ 1 0 0 , 0 0 0 and has subsequently announced
that it will use a modified payout system at failed b a n k s
Under this plan, w h e n a bank fails, its uninsured depositors will receive an immediate advance equal to the
amount the FDIC expects to recover forthem. The FDIC
would also return more money to the uninsured depositors if more funds are recovered than was expected.
The FDIC also proposed a fairly well developed
variable rate deposit insurance premium plan. It said
that the premium credit that banks receive should
depend on their riskiness The proposal called for a full
credit for normal risk banks, a 50 percent credit for high
risk b a n k s and no credit for very high risk b a n k s The
FDIC expected the "vast majority of banks to be normal
risk" The FDIC also provided a detailed discussion of
how banks will be assigned to the three categories. The
FDIC's variable rate insurance plan is not intended t o
influence bank risk positions and will not do so because
the size of the premium credit is too small. The FDIC
does hope that its plan will bring greater equity to
bank insurance premium payments by reducing the
subsidy that normal banks provide to risky banks.
The FDIC argued that it should disclose supervisory
actions taken against individual b a n k s The FDIC also
argued that it should have sole responsibility for examining and insuring all banks and thrifts If this part of
the FDIC plan were implemented, then the FSLIC would
be absorbed by the FDIC, which would also take over
the Federal Reserve's and Comptroller of the Currency's
examination responsibilities.
The F H L B B also supports variable rate deposit insurance premiums Unlike the FDIC, however, the FHLBB
wants its variable rate insurance premiums to influence
insured institutions' risk exposure. The FHLBB report
discussed the principles on which it would base variable
rate insurance, but it did not provide any details on how
its plan w o u l d w o r k
agree that a stable supply of money is essential to
a smoothly operating economy.
The payments mechanism is important because it
contributes to the efficient transfer of money in
the economy. Cash transactions are more efficient
FEDERAL R E S E R V E BANK O F ATLANTA
Private deposit insurance should be developed to
provide additional coverage to government insured
deposits, according to the FHLBB. The F H L B B would
have the government insure deposits up to some
minimum, with private insurance covering the excess. It
also suggested some cap o n private insurer's liability in
case of a macro-economic policy failure. The F H L B B
hopes that private insurers could substitute at least in
part for government regulatory agencies in controlling
insured institutions' risk The FHLBB also proposed
several measures intended to make thrift owners and
managers more accountable for the risk position of
their institution.
The F H L B B pointed out that many of the services
provided to banks by several government agencies are
consolidated for thrifts in the FHLBB. The FHLBB
argues that consolidation of the services such as chartering, examining and insuring in one agency is more
efficient and facilitates the handling of failures. This
leads the F H L B B t o conclude that the bank regulatory
agencies should be rationalized before the insurance
funds are consolidated. The F H L B B report was written
before its current chairman, Edwin J. Gray, took over.
Gray is unambiguously opposed to agency consolidation.
The NCUA proposed two measures to reduce the risk
exposure of credit unions: large accounts (over $50,000)
at credit unions should have insurance premiums and
the first share of every credit union member should be
uninsured. Most accounts at credit unions are small.
The NCUA believes that the larger accounts are attracted
by high interest rates at aggressive credit unions. It
thinks that these aggressive credit unions are also
taking on excessive risks to afford the high interest
rates they pay. The NCUA would uninsure the first share
of all credit union members to give members greater
incentives to monitor their credit union's risk
The NCUA believes that private insurance is at least
as good as government insurance for credit unions. The
agency, therefore, proposes that federal credit unions
be given the option of substituting private insurance for
public insurance. The NCUA also believes that its fund
is inadequate and it proposes a one-time assessment
from credit unions to provide more resources t o the
fund. Credit unions would be assessed 1 percent of
their insured shares to provide additional resources t o
the fund.
The NCUA is opposed to consolidating its insurance
fund with the other funds, arguing that credit union
interests would be ignored in an agency responsible for
the banking and thrift industries.
than barter, but exchanging cash is inconvenient
and expensive for many transactions. T h e cost of
using cash can be particularly significant for large
transactions. Today's payments systems (which
are dominated by paper checks and wire transfers)
27
are convenient and less expensive. Depository
institutions are important because they dominate
third party payments transfer systems.
Deposit insurance, therefore, protects the
money supply and the payments mechanism by
maintaining public confidence in depository institutions. Depository institutions depend on public
confidence. Without such confidence, depositors
would withdraw their deposits. Insurance protects depository institutions by eliminating the
incentive for people to redeem their deposits
because it guarantees depositors that they will
keep their funds, no matter what happens to
their institution.
But deposit insurance does not provide complete protection of the money supply or the
payments mechanism, because only depository
institutions are insured. Insured depository institutions historically have had a dominant position
in the money supply and payments mechanism,
so the unprotected portion of both is small. This
position has been eroding, however, and at some
point in the future protecting insured depository
institutions may not provide adequate protection
to the money supply and payments mechanism.
Depository institutions' dominant position in
the money supply appears to be more secure
than their position in the payments system. If
other features of the accounts are roughly similar,
individuals have an incentive to place their
money in insured depository institutions because
of government deposit insurance. This incentive
has only limited value, however, and individuals
will move their money to nondepository institutions under the right circumstances. For example,
money market mutual funds ( M M M F ) grew very
rapidly during the late 1970s and early 1980s.
M M M F growth was due in large part, however, to
the interest rate restrictions imposed on depository institutions. W h e n a money market account
with no interest ceiling was authorized for insured
institutions in 1982, some of the funds that had
been in M M M F s returned to depository institutions. Thus, deposit insurance can help depository institutions maintain their de facto dominance
of the money supply, but only if insured institutions offer competitive transaction accounts.
Depository institutions' virtually dominant position
in the payments system is eroding. Depository
institutions have a dominant role in checks and
wire transfer, but the importance of checks in the
28
economy is being reduced through time. 1 Nondepository firms are playing a larger role in newer
technologies such as ATMs and point-of-sale
networks. 2
If depository institutions lose their dominant
position in the payments system, then deposit
insurance will lose its ability to protect the
system and other methods will have to be found
to protect the payments mechanism.
Cost of Using Money. Deposit insurance also can
reduce the information costs of using money. 3 In
the absence of deposit insurance, any person or
business wanting a checking account would
need to evaluate the financial health of individual
depository institutions. Furthermore, some individuals might be reluctant to accept checks
drawn on weaker depository institutions and the
cost of accepting checks would be substantial.
Deposit insurance can reduce this cost by transferring the risk of loss and the responsibility for
evaluating risks to the insuring body. This advantage of deposit insurance exists whether or not
banks are vulnerable to financial panics. Individuals have an incentive to check on the financial
health of depository institutions so long as bank
failure can cause losses for depositors or those
who receive checks, because banks can still fail
due to insolvency.
Other Benefits of Insurance. In addition to these
three general advantages, deposit insurance may
benefit specific individuals and institutions. It
may protect small, unsophisticated transaction
account holders from loss. Many small depositors
lack the ability to analyze financial institutions,
and the costs of losing a small deposit can be
important to them.
Deposit insurance also can help maintain the
level of service in various local areas. If a depository institution fails, its community loses the
services provided by the failed bank. Deposit insurance does not, however, guarantee that any
c o m m u n i t y w i l l r e c e i v e a g i v e n l e v e l of
service. It neither guarantees that a depository
institution will be established in every community
that desires one, nor that institutions will provide
all the services desired by a community.
1
S e e the August 1 9 8 3 issue of the Economic Review for a discussion of
the future of c h e c k s and other payments s y s t e m s
For example, Penney"s is planning on using its communications network
to carry payments information for unaffiliated corporations S e e the
November 1983 issue of Transition.
3
S e e Merton for a discussion of the role of deposit insurance in reducing
the costs of using money.
2
M A R C H 1984, E C O N O M I C
REVIEW
Deposit insurance also protects individuals'
wealth. This raises problems, because insurance
guarantees one investment, insured deposits,
while leaving other forms of wealth at risk.
Insuring wealth held as deposits results in those
who hold a below-average proportion of their
wealth in insured deposits subsidizing those
who hold an above-average proportion of their
wealth in insured accounts. Insuring deposits
also increases the proportion of wealth placed in
depository institutions. Any government deposit
insurance system inherently guarantees some of
the wealth of some individuals.
Some regard the ability of insurance to funnel
wealth into insured institutions as an opportunity
rather than a disadvantage. For example, the
FHLBB notes that the FSLIC was originally created
to maintain and improve the flow of funds to the
housing industry, by lowering the cost of funds to
institutions making mortgage loans. The question is
whether deposit insurance is an efficient means
of subsidy. The benefits of deposit insurance
flow to all savings and loan customers whether or
not Congress wants to subsidize them, including
wealthy individuals who can buy unsubsidized
houses. A direct subsidy would allow Congress to
target its aid with greater efficiency.
Deposit insurance also provides benefits to
two particular types of depository institutions:
small institutions and credit unions. To the extent
that d e p o s i t o r s b e l i e v e s m a l l e r i n s t i t u t i o n s
are riskier, in the a b s e n c e of i n s u r a n c e t h e y
w i l l f a v o r larger i n s t i t u t i o n s . T h e N C U A
report notes that credit union officials believe
insurance benefits them by helping in the competition for funds, encouraging sponsoring o r ganizations to create new credit unions, and
allowing credit unions to venture into new activities knowing that the insurance fund will handle
any severe problems.
The desirability of using deposit insurance to
benefit specific institutions seems questionable.
The cost to society of allowing individual institutions to fail is relatively low, according to
George Benston. T h e real price of not allowing
depository institutions to fail,Benston argues,
is that it allows inefficient firms to c o n t i n u e
operating. 4
J
S e e Tussig for an analysis of why banks should be allowed to fail. S e e
also George Benston, "Deposit Insurance and Bank Failures"
F E D E R A L R E S E R V E B A N K O F ATLANTA
The Need to Reform Deposit Insurance
Deposit insurance provides several benefits to
society, but it can also impose costs. The magnitude of those costs depends on the details of the
deposit insurance system. At an extreme, a
system of 100 percent insurance offered at no
cost would provide a significant subsidy to institutions and their customers by having the government insuror absorb all risk of failure. Such a
system also would encourage depository institutions to take on loans that yield a high return
but are also very risky. 5 If the loans were paid off,
the depository institution would profit. If the
loans were not paid off, the insuror would cover
the losses.
Three ways of reducing these costs of deposit
insurance to society have been discussed recently:
(a) some liabilities can be given less than 100
percent insurance, (b) premiums can be charged,
and (c) regulations can be imposed to limit
institutions' risk taking. All three methods are
built into current laws providing for deposit
insurance, but the agencies say that in practice
these limitations have been ineffective. Each
depositor is guaranteed insurance only on the
first $100,000, but most cases of failure have
resulted in full deposit insurance for all depositors. 6 Insurance premiums have reduced the
costs by making insured institutions bear the
costs of ordinary failures. T h e agencies note,
however, that insurance premiums have not
limited institutions' risk exposure because the
rates charged do not vary according to the bank's
risk.
The F D I C and FHLBB reports argue that regulation has limited the risk exposure of insured
institutions, but their reports offer only limited
evidence to support this view. Furthermore, a
case can be made that the institutions' management, rather than regulation, has limited their
riskiness. For example, regulations do not prevent
depository institutions from taking on enormous
interest rate risk, but most have avoided doing
so.7 Furthermore, regulation generates incentives
to innovate with substitutes that are not covered
by regulation. 8 In some cases the regulations
5
A simple demonstration of the effect of deposit insurance on banks'
incentives to take risks is given in Flannery. More analytic demonstrations
are given by Kareken and Wallace, Merton and Sharpe.
6
Other liability holders, such as subordinated debt holders, do suffer
losses w h e n an insured institution fails
'Those institutions that did a s s u m e large interest rate risks, primarily
thrifts, did so in large part because they were required to invest in long
term, fixed rate mortgages.
8
S e e Kane and Eisenbeis.
29
may actually weaken the ability of deposit insurance to protect the money supply by inducing
innovations (like money market mutual funds)
by uninsured firms. Regulations that limit depository institutions also impose costs on consumers because they limit consumers' options.
Another reason why banks can be expected to
become more risky in a deregulated environment
is given by George Benston elsewhere in this
Economic Review. He notes that at one time
many regulations protected banks from the competition of other banks and in some cases nonbank suppliers of financial services. This protection
made a bank charter a valuable possession
because it gave the owner an opportunity to earn
an above-market rate of return. Aside from usual
stockholder interest bank owners were reluctant
to take risks that might cause the bank to fail
because that would mean giving up their valuable
charter. Recent deregulation, however, has exposed banks to more competition and reduced
banks' ability to earn an above-market rate of
return. Presumably, this has lowered the value of
the bank charter to its owners and increased
their incentives to take risks. In other words, the
franchise lost by bank owners is less valuable if
their bank fails in a deregulated environment
rather than in a heavily regulated environment. 9
The old system of generally providing 100
percent de facto insurance coverage and no
tiering (varying premiums according to bank
risk) of insurance premiums provides an incentive
for banks to take on excessive risk. Deregulation,
as mentioned, may extend the problem by
increasing insured institutions' ability and incentive to take risks. In this situation, some combination of increased incentives for private parties
to monitor institutions' risk, risk-related premiums
and increased regulation may be desirable to
offset the incentives to take risk.
Critique Of FDIC Insurance Reforms
The F D I C report argues that deposit insurance
should protect the money supply, the payments
system and small depositors. It further notes that
the current flat rate premium schedule overcharges
safe banks, and that the current system does not
impose sufficient controls on insured institutions'
risk. The F D I C report proposes that tiering insurance premiums would be more equitable,
9
This argument would be much stronger if it presented some evidence that
regulation did increase the value of insured institutions' charters.
30
and that the risk exposure of insured institutions
would be reduced if private parties had a greater
stake in the failure of insured institutions. The
F D I C report, therefore, suggests several proposals for placing private parties at greater risk
and the agency subsequently decided to implement one of the proposals, eliminating the 100
percent de facto insurance coverage on deposits. 10
Would proposals in the F D I C report enhance
protection of the money supply or the payments
system? Would they reduce the degree of bank
risk?
The F D I C plan to tier insurance rates is indeed
more equitable to banks. The current system
makes the strongest banks pay as much as the
weakest banks. The F D I C does not, however,
depend on risk related premiums to reduce bank
risks. T h e proposed differences in insurance
premiums charged by the F D I C have typically
amounted to less than 4 percent of banks'
operating income before taxes, a relatively small
proportion. Instead, the FDIC relies on a reduction
in de facto insurance coverage to reduce bank
risk exposure.
The F D I C proposes to reduce the effective
coverage of deposits to $ 100,000 in order to get
large depositors to monitor the risk exposure of
banks. Undoubtedly, some large depositors will
evaluate bank risks and charge appropriate risk
premiums as the F D I C wishes. The problem with
the proposal is that large depositors can follow a
variety of other strategies that will defeat the
FDIC's intentions.
One of the problems is that the elimination of
the de facto coverage of large depositors could
provide them with more incentive to participate
in bank runs. Deposit insurance reduces depositors' incentive to participate in runs by reducing
their risk of loss. If insurance coverage is reduced
then the incentive to participate in runs increases.
The F D I C argues that its proposal does not
impose large enough risks on depositors to
induce bank runs. T w o pieces of evidence suggest caution, however. First, large depositors
already flee when an insured institution begins
having financial difficulties because of the risk
the F D I C will enforce the $100,000 coverage
limit. 11 Second, the F D I C estimates that its future
expenses at failed banks will probably average 9
' ° F D I C plans are reported in Slater.
' 1 For example, Sinkey reports that $ 5 5 0 million in uninsured deposits were
withdrawn from Franklin National prior to its failure.
M A R C H 1984, E C O N O M I C R E V I E W
or 10 percent of the failed bank's assets. This
suggests that uninsured depositors may lose a
large amount of money in future bank failures.
The F D I C proposal does provide uninsured
depositors with immediate access to some of
their funds, a condition that might reduce the
potential for bank runs based entirely on depositors' concern for liquidity. The F D I C report
includes no evidence, however, that bank runs
are based primarily on depositors' concern for
liquidity. Furthermore, the potential for losses of
9 to 10 percent might motivate rapid withdrawals
by large depositors.
Another problem with the F D I C proposal is
that it allows large depositors to substantially
reduce their risk of loss by following a strategy
that weakens the stability of the entire financial
system. That is, large depositors can reduce their
riskiness by holding all their deposits in demand
deposits and very short term deposits. If large
depositors did this, they would not need to
monitor their bank's condition. Uninsured depositors could substantially reduce their risk by
withdrawing their deposits when they heard a
rumor about the bank having financial problems
or about examiners visiting the bank If many
depositors followed this strategy, then the FDIC's
plan would reduce the stability of banks while
the agency still would bear the most risk of
failure. The number of large depositors following
this strategy will be reduced if longterm rates are
significantly higher than short term rates, but the
number will be increased as the risk of bank
failures increases.
The F D I C notes that its plan may have limited
effectiveness at banks with few large deposits.
The plan relies on uninsured depositors to reduce
banks' risk exposure. A bank could avoid uninsured
depositors' discipline, however, by minimizing
its number of large accounts. Banks limiting their
clientele to individuals and small businesses may
have few accounts with balances over $ 100,000.
Elsewhere in this issue, Caroline Harless explains
how brokered deposits can be used to avoid the
$100,000 limit. Thus, the uninsured deposit
feature might not have much effect on the risk
exposure of some banks.
These concerns do not imply that the money
supply and payments system are in any danger.
The Federal Reserve can still prevent a bank run
from forcing banks to close by providing adequate
liquidity to the financial system through open
market operations. Congress and the financial
system should recognize, however, that the FDIC
F E D E R A L R E S E R V E B A N K O F ATLANTA
plans w o u l d shift more of the burden of protecting the financial system to the Federal Reserve.
Critique of FHLBB Insurance Reforms
Thrifts, the FHLBB reports says, were originally
given insurance to help maintain a steady flow of
funds to the mortgage markets. The report predicts that some thrifts are going to reduce their
role in the mortgage markets and begin to
function more like commercial banks. This change
will obviate somewhat the original reason for
insuring thrifts, but also will provide a new set of
reasons for insurance—the same reasons given
for insuring commercial banks. The FHLBB proposes several measures to reduce thrift risk
exposure: variable rate insurance premiums, partial
reliance on private insurance, greater emphasis
on legally enforcing the fiduciary responsibility
of managers and directors, encouragement of
mutual organizations to convert to stock organizations, and increased emphasis on capital adequacy.
The FHLBB notes that thrift insurance helps
provide funds to the mortgage markets, but it
does not argue that this role in itself justifies the
continuation of deposit insurance. The report
says that as thrifts gain more transaction accounts,
the rationale for insuring thrifts will be the same
as that for insuring commercial banks. But, so far,
thrifts have not attracted a large volume of
transaction accounts. 12 The FHLBB also discusses
the protection that insurance provides to small
institutions and depositors, but does not argue
that these reasons are sufficient to justify continuing insurance.
The traditional case for insuring thrifts may
appear to be weak, but withdrawing insurance is
not a practical alternative. Thrifts with significant
transaction accounts should be insured for the
same reasons that banks are insured. If insurance
were limited to thrifts with significant transaction
accounts, then thrifts would maintain insurance
byencouragingtheirtimeand savings depositors
to convert to transactions accounts. Such a
conversion would result in the continued deposit insurance for thrifts, but might also increase
interest rate risk exposure. Conversion of accounts
would increase thrifts' interest rate risk by shortening the maturity of their deposits while doing
nothing about the long term nature of their
mortgages.
,2
Transaction and Super Now Accounts were only 3.0 percent of deposits
at savings and loans on March 31, 1 9 8 3 according to Olin. S h e also
reports that MMDAs accounted for 18 percent of their d e p o s i t s
31
The FHLBB report advances risk-related insurance premiums as an important means of
reducing the risk exposure of the institutions it
insures. The agency acknowledges that it cannot
determine what premiums an insured institution
should be charged to exactly offset the risks that
it imposes on the FSLIC. The report also acknowledges that the existing empirical evidence to
support such a risk-based system is weak. It
nevertheless backs risk-related premiums as preferable to flat rate premiums.
Variable rate premiums charged by a government agency raise significant questions. O n e
problem with government-determined insurance
premiums is that correcting rate mispricing is
costly. If a formula fails to measure risk adequately,
then it can be corrected only through a costly
appeal to Congress or the courts.
Another problem with variable rate government insurance is that appeals to the courts and
Congress might be made on non-economic
grounds. That is, the premiums set by the insuring
agency might induce institutions to reduce their
risk exposure, but they also might induce the
institutions to look for other ways of reducing
rates. Any action by a regulatory agency can be
overturned by the courts or by Congress. 13 If a
government agency set insurance premiums,
then the premiums would be based not only on
insured institutions' risk, but also on such legal
and political factors. 14
The FDIC and FH LBB reports' variable premium
plans are both subject to these questions, but
bear more heavily on the FHLBB plan. Problems
with the F D I C premium formula are minor because the agency does not rely on risk-related
premiums to control risk and because the differences in the rates charged are small. If the
FHLBB risk penalties are significantly larger than
those of the F D I C (which they should be given
FHLBB objectives) then any problems in the
FH LBB premium formula might affect thrifts' risk
position and income more significantly.
The FHLBB "private insurance" proposal may
increase the incentive for runs, even though it
l3
An example of interference from the courts is the c a s e or tsiscayne
Federal Savings and Loan. The owners of Biscayne Federal fought the
F S L I C closure of their institution through the courts and won a preliminary
ruling in their favor although the F S L I C won on appeal several months
later. An example of the use of the political process to interfere in bank
regulation is the pressure applied on bank regulators with regard to past
due bank loans to farmers
'"The B u s h C o m m i s s i o n h a s s u g g e s t e d that variable rate insurance
premiums are desirable but that the agencies should rely on private
sector judgments to the extent feasible. Neither of the problems with
government insurance premiums are avoided by relying on private sector
32
also limits private insurers' liabilities. The FHLBB
c a n n o t g u a r a n t e e that p r i v a t e i n s u r e r s w i l l
have sufficient liquid funds to meet their obligations. If depositors were unsure of a private
insurance company's ability to meet its entire
obligation in a timely manner, they would presumably consider withdrawing their deposits
from institutions rumored to be in trouble. 15
The FHLBB's other proposals are unlikely to
affect thrift risk positions significantly. Its proposal to enforce the fiduciary responsibility of
thrift managers may discourage reckless behavior,
but it is a relatively blunt tool for managing thrift
risk exposure. A proposal to maintain capital
a d e q u a c y at thrifts r e m a i n s to be s p e c i f i e d .
The FHLBB report also mentions the desirability
of thrift conversions from mutual organizations
to stock organizations. Conversion would help
thrifts by making it easier for them to raise new
equity capital, but it is not certain that it would
reduce their risk exposure. The FH LBB notes that
equity holders do not lose when a mutual organization fails (since the depositors are also the
shareholders) but that stockholders lose when a
stock organization fails. The FHLBB report concludes, therefore, that mutuals may be less
sensitive to their risk exposure than stock organizations. In a stock organization, on the other
hand, the stockholders, stand to benefit from
successful gambles. Thus it is not obvious that
stock organizations will be less risky.
Critique of NCUA Proposals
The N C U A report provides a strong case for
reforming credit union share insurance. It favors
allowing federal credit unions to substitute private
insurance for government insurance, imposing
higher premiums on large deposits, and creating
a deductible for share insurance. The question is
whether private insurance is an acceptable substitute for government insurance and whether
higher premiums on large accounts and a deductible would reduce credit unions' risk exposure.
judgement. One government agency will still have to sift through the
multitude of private sector opinions to determine an institution's risk.
Many opinions of an institution's risk may be listened to, but insured
institutions' premiums would still depend on the judgement of one
agency. If institutions dislike that opinion, they still must engage in a
costly legal or politicalappeal. Furthermore, if an insured institution does
appeal to the courts or Congress, it can and probably will use noneconomic
as well as economic arguments
' 5 T h i s problem did occur for privately insured Mississippisavingsand loans
in the mid-1970s. S e e Leff and Park for a discussion of the Mississippi
experience.
M A R C H 1984, E C O N O M I C R E V I E W
The N C U A report says that share insurance
was originally provided to "...reward credit unions
for a job well done and provide parity in insurance
with other financial institutions." The N C U A
then lists several advantages credit union officials
believe they obtain from insurance. It does not
specifically endorse any of the other advantages.
These advantages generally embody subsidies,
in one way or another, of credit unions by
government insurance. The N C U A also argues
that individuals should be able to have savings
and transactions accounts required for routine
needs at any institution without risk of loss. To
meet this criterion, of course, the government
would have to insure savings accounts at all
institutions, which the N C U A proposes to do.
Credit union shares warrant insurance because they are a depository institution that
offers a transaction account. Insuring credit
union accounts would reduce the cost of using
money to credit union members and would
help protect the money supply.
The N C U A report maintains it is not important
whether credit unions are insured by the federal
government or private insurers; what matters is
that they are insured. This raises the question of
why government insurance of credit unions is
needed if a private substitute is available. The
N C U A answers that the government should be
an "insurer of the last resort," maintaining that
every credit union, no matter how risky, is entitled
to insurance An "insurer of the last resort" might
be justified if the government wished to subsidize
credit unions through share insurance or to
protect wealth held at credit unions. Yet, as is
noted above, subsidizing institutions and protecting wealth held in depository institutions are
dubious justifications for insurance.
If the purpose of insuring credit unions, as with
other depository institutions, is to protect the
money supply and reduce the cost of transferring
money, then private insurance is no substitute
for government insurance. Private insurers' resources are limited, so these insurers are vulnerable to a loss of confidence. If shareholders
lost confidence in the private insurers ability,
then the insurance would not be able to prevent
a financial panic. Furthermore, depositors concerned about the safety of their money would
have to evaluate both the credit union and its
private insurer. Therefore private deposit insurance
can neither protect the financial system from
financial panic nor reduce the cost of using
F E D E R A L R E S E R V E B A N K O F ATLANTA
money to the same degree as government insurance.
The N C U A proposal to increase insurance
premiums on accounts above $50,000 is not
intended to affect the risk exposure of most
credit unions. Whether this is a desirable measure
for influencing the risk exposure of some credit
unions depends on their role in our financial
system. If credit unions are to become fullfledged competitors with other depository institutions, then the scaling of insurance premiums
to account size would unnecessarily handicap
their ability to compete. If, on the other hand,
credit unions should serve only individuals of
modest means, then such a scaling of premiums
would both reinforce credit unions' role and
reduce the risk exposure of some credit unions
by discouraging them from seeking large deposits.
The proposal to eliminate insurance on the
first share conflicts with the N C U A ' s stated
purpose for deposit insurance without providing
the N C U A with much protection. The agency
argues that uninsuring one share would "...recreate,
we believe, a greater sense of responsibility for
the credit union among its members." The N C U A
continues, however, that " A n individual should
be able to deposit a reasonable amount of funds
... without being required to constantly monitor
the safety and soundness of the institution and
worry about loss."16 Thus, the proposal would
have depositors (shareholders) monitor their
credit union, but says that insurance is needed so
that they will not have to monitor the credit
union. Society benefits if people do not have to
use their resources to monitor the safety of their
transactions accounts. Another problem is that
other depository institutions would offer fully
insured accounts. If shareholders are concerned
about the safety of their shares, they may shift
funds to fully insured institutions. Those who
decide to leave their funds in a credit union
would be those least likely to care about their
credit union's risk exposure.
An Alternative Reform
Deposit insurance performs several valuable
functions, but a poorly structured deposit insurance system also can impose significant costs.
The current system needs to be reformed, but
16
Pages 2-6 of the NCUA report.
33
proposals to increase depositor exposure to risk,
to charge risk-related premiums and to substitute
private for public insurance all have significant
problems. Fortunately, other reforms could reduce deposit insurance's cost while preserving
its benefits. O n e appealing reform idea—that
banks be required to carry more subordinated
debt—is contained in the F D I C report. 17 Subordinated debt holders may lose their investment
if a bank fails, so they have an incentive to
monitor a bank's risk. Maturity requirements
could be placed on subordinated debt so that
the debt, unlike demand deposits and short term
deposits, could not leave the bank at the first
sign of trouble. Subordinated debtholders do
not share in the benefits of bank risks that pay off,
so they have no incentive to encourage the bank
to take more risks.
A modest increase in required subordinated
debt at insured institutions would encourage the
institutions to decrease their risk exposure. A
substantial increase would be even better because
it would allow discipline imposed by private
creditors to replace at least some of the discipline
currently imposed by government regulation.
Ideally, the requirements for the total of an
institution's subordinated debt plus equity should
be lifted to a point where the private sector bears
virtually all the risk of failure. Such a shift would
reduce the need for most other government
safety and soundness regulations. Government
regulation of institutions' equity capital position,
for example, might be unnecessary. The financial
markets could control depository institutions'
equity capital positions as they do for most
corporations.
An increase in subordinated debt seems to
offer a logical long run solution, but it would take
time to implement. The amount of subordinated
debt that can be issued is limited by practical
problems. Insured institutions' ability to sell
subordinated debt is limited, as is the financial
market's ability to absorb the debt.
Institutions' ability to sell the debt is limited
by their financial strength and the effect subordinated debt has on the maturity of their
funding. Some institutions, such as small, volunteer-run credit unions, may have problems
finding investors interested in their debt Other
"Horvitz also argues In a series of articles that subordinated debt is a
better method ot controlling bank risk.
' " S e e Pringle for a discussion of the importance of banks' control over the
maturity of their funding.
34
institutions, especially some thrifts, are currently
so weak financially that few would be interested
in buying their subordinated debt.
Minimum maturity requirements placed on subordinated debt could cause problems for institutions that seek to maintain some balance in the
maturity of their assets and their funding. 18
Currently, bank subordinated debt is required to
have an original maturity of at least seven years.
Furthermore, debt with a remaining time to
maturity of less than five years is not given full
weight. 19 This burden on insured institutions can
be reduced in several ways. The existing requirements are longer than needed if the only concern is preventing funds from leaving a bank
immediately prior to failure. The insuring agencies
should be able to handle problem institutions in
one year or less. Insured institutions could continue to be allowed to issue floating rate subordinated debt that would reduce any potential
interest rate risk problems. Insured institutions
also could adjust the maturity structure of their
liabilities to offset some undesirable attributes
of their subordinated debt funding. Finally, the
burden imposed on banks could be reduced
further by giving the insuring agencies the
power to allow banks to retire their subordinated debt early and to repurchase their own
stock if the bank has far more equity and subordinated debt than the standards require.
The financial markets probably could absorb
more insured v institutions' subordinated debt
now, but they would need time to absorb enough
subordinated debt and equity to transfer all the
risk of failure to the private sector. In principle,
the amount of equity plus subordinated debt
needed to transfer virtually all the risk to the
private sector depends on the government's
policy for closing failed banks and the risk of a
sudden large loss in the value of the banks'
assets. If insured institutions were promptly
closed when their economic worth reached
zero,then the required private funds at risk
would be smaller than if they were allowed to
operate with negative economic worth. Similarly,
if insured institutions have a well diversified asset
portfolio, minimal interest rate risk and few
contingent liabilities, then they will require relatively less private funds at risk because they are
l9
These requirements are placed on subordinated debt that banks wish to
include in the calculation of their total capital ratio. Subordinated debt
with between 4 and 5 years to maturity is counted at 8 0 percent of its
book value, debt with between 3 and 4 years counts 6 0 percent and so
forth with debt maturing in less than one year being given no weight
M A R C H 1984, E C O N O M I C R E V I E W
less likely to suffer a large sudden drop in their
asset value.
The simplest solution may be to require a
relatively large amount of equity plus subordinated debt, and require banks to meet certain
diversification, interest rate risk and contingent
liability requirements. Virtually all the risks
would be shifted to the private sector if banks
have equity and subordinated debt equal to 20
percent of their assets. 20 Finer calculation may
reduce the percentage, which also might be
lower under different examination and closing
policies. Indeed, Bierwag and Kaufman point
out that depositors and the F D I C would not be
at risk if banks were closed immediately after
their net worth fell to zero.
If 20 percent of assets were required, then a
substantial amount of new issues would have to
be sold. Under the proposal, commercial banks
with assets in excess of $100 million would be
required to increase their subordinated debt
plus equity from about $104.4 billion to $361.4
billion. A number of years would be required to
develop a market for the subordinated debt and
equity that banks would have to sell.
A substantial increase in insured institutions'
subordinated debt is desirable even if all the
risks of insured institutions' failure cannot be
transferred to the private sector. Admittedly an
increase in the subordinated debt requirements
might have higher servicing costs and they will
create some problems for banks liability management. Such an increase will, however, provide
an incentive for the private sector to monitor
bank risk in a way that is unavoidable (unlike
limitations on deposit insurance coverage).
Furthermore, increases in subordinated debt
requirements do not increase the incentives
for bank runs.
Private Sector Discipline:
What About Multinational Banks?
The F D I C report notes that uninsured depositors may exert little discipline on multibillion
dollar institutions because they do not believe
that such an institution would be allowed to fail.
J0
The 2 0 percent of a s s e t s figure is a rough approximation of the amount
banks should be required to have and is based on three elements: the
FDIC's expected c o s t s in closing failed banks, the losses borne by
shareholders at failed banks and a safety margin. The FDIC's report s a y s
that the FDIC's e x p e n s e s had averaged 4 percent of bank a s s e t s
between 1930 and 1980, but that the average has risen to 9 percent of
a s s e t s in recent years. The F D I C s a y s that it expects its costs in the future
to remain around 9 to 10 percent The losses borne by bank equity
F E D E R A L R E S E R V E B A N K O F ATLANTA
As George Benston notes in this issue of the
Economic Review, no plan to shift risk to private
creditors and insurers will be fully effective if
large institutions are not allowed to fail. Thomas
Mayer analyzed the question of allowing large
banks to fail and concluded that protecting
depositor confidence may be an important reason
for protecting large banks. He also argued, however, that such protection would not be needed
if 100 percent deposit insurance existed.
Mayer's analysis suggests that the F D I C goal of
protecting depository institutions from panics is
inconsistent with its plan to rely on depositors to
discipline insured institutions' risk position. The
problems with the F D I C plan do not mean,
however, that no system can be devised that
simultaneously maintains depositor confidence
while relying on private creditors to discipline
bank risk exposure. O n e workable alternative
would be a system of 100 percent insurance for
all deposits together with a requirement for
insured institutions to increase their use of subordinated debt. In this system, large banks could
fail without affecting depositor confidence Furthermore, this plan would accomplish the F D I C goal
of encouraging the private sector to monitor
bank risks.
Bevis Longstreth argues that large financial
institutions have significant credit relationships
with other financial institutions. He says allowing
major institutions to fail could cause serious
problems for the financial system. If large depository institutions are to be protected, one of
several approaches could be taken to control
their risk. O n e possibility is that no additional
measures be taken to limit these institutions'
exposure to risk. Insuring an institution's losses
while allowing it to keep any profits encourages
the institution to take on excessive risks. The
multinational organizations might well follow
this incentive.
Another possibility is that the risks could be
controlled through a significant increase in regulation. This option also has problems, as evidenced by the success of money market mutual
funds w h e n bank interest payments were constrained. The money market funds were able to
holders and uninsured creditors vary by bank but a reasonable approximation for these losses might be 4 to 8 percent of bank a s s e t s A 2 0
percent of a s s e t s standard thus e x c e e d s probable losses at failed banks
by at least a couple of percentage points The amount of equity plus
subordinated debt that is required if this alternative plan is adopted
should obviously be based on a more careful analysis of expected losses
at failed banks.
35
attract money that would otherwise have been
deposited in insured institutions. This resulted in
a large pool of highly liquid funds being controlled
by uninsured institutions. If some financial institutions are to be insured and not others, that
could raise the problem of competitive advantages
for uninsured institutions.
A third possibility is that the risks could be
controlled through risk-based insurance premiums.
The problems with this option are that correcting
errors in the government premium system would
be expensive and that institutions would appeal
their premiums on legal and political grounds as
well as on economic grounds.
The fourth possibility is that private sector
discipline could be strengthened through a dramatic increase in the equity capital standards
applied to multinational institutions. An increase
in the required equity capital at multinational
institutions would increase private sector discipline
because equity holders could suffer losses even
if the institution were not closed. An increase in
subordinated debt can only be an effective
control on an institution's risk if the institution
can fail, because subordinated creditors can
suffer losses only if the institution fails. The
problem with this option is that equity capital
can be more.costly for institutions to raise than
subordinated liabilities. If multinational depository
institutions were forced to raise excessive capital
to replace subordinated liabilities, they might
be placed at a competitive disadvantage vis-avis uninsured institutions.
Each of these options has significant disadvantages,which need to be weighed against
the potential harm of closing a multinational
institution.
Financial Disclosure
All three agencies believe that financial disclosure is important if the private sector is to
discipline bank risk taking. None of the three
agencies favors the disclosure of examination
findings, but the F D I C report urges that agency
actions taken against insured institutions should
be disclosed. The F D I C notes that the insuring
agencies' authority to mandate disclosure is
limited to information the agencies need for
deposit insurance. The F D I C does not want the
authority to mandate further disclosure because
it holds that disclosure is the bank's reponsibility.
Bank managers, however, have an incentive to
hide their mistakes both from the bank's creditors
36
and from stockholders. If the managers disclose
their mistakes, they may receive lower bonuses
or even lose their jobs. Government minimal
standards would guarantee adequate disclosure.
The problem of management's incentive to
hide its mistakes is not unique to depository
institutions; all publicly traded firms have the
same problems. The current system protects
investors in public firms, including investors in
bank holding companies and savings and loan
holding companies, by requiring that their disclosure meet standards set by the Securities and
Exchange Commission (SEC). If most of the
burden for disciplining depository institutions
were placed on the private sector, then the SEC's
standards could provide a good model.
Adequacy of the Insurance Funds
The F D I C says that its fund is adequate, the
FHLBB thinks its fund may need to be increased
and the N C U A argues that its fund must be
increased. These funds must be evaluated from
two different perspectives: the ability of the
fund to handle a financial crisis and the amount
of resources contributed by insured institutions
to handle non-panic failures.
A fund's ability to handle a financial crisis is
important if deposit insurance is expected to
prevent financial panic. To prevent such a panic,
the fund should have unquestionable resources
and liquidity. The alternative to relying on deposit
insurance to maintain public confidence is to
rely on the Federal Reserve in its role as lender of
last resort (LLR). T h e LLR can prevent panic
situations either by making loans directly to
troubled institutions or by providing liquidity to
the financial system after the panic begins. The
Federal Reserve has the ability to create money
and, therefore, can create the resources needed
to handle any financial panic.
Both the F D I C and FHLBB say that insurance
should protect the money supply and payments
mechanism. The F D I C does not acknowledge
that this function could be performed by a
lender of last resort. The FHLBB does, but it
contends that action by the LLR is discretionary.
The current system, however, does not rely on
deposit insurance alone to protect the money
supply and payments mechanism. Deposit insurance has reduced the incentive for depositors
to participate in financial panics, but large commercial banks have too many uninsured deposits
M A R C H 1984, E C O N O M I C R E V I E W
for insurance to stop all tendency towards panic 21
The current system would be dependent on the
LLR if the public lost confidence in large commercial banks because large accounts are not
guaranteed 100 percent by insurance. The F D I C
proposal to reduce effective coverage would
shift even more of the responsibility for protecting
the money supply and payments mechanism to
the LLR. Therefore, the ability of the insurance
fund to handle a financial panic is important but
not crucial. The LLR, which has ultimate responsibility for protecting the system, would still be
able to protect the financial system even if the
insurance fund collapsed.
But there are other problems. The twin goals
of preserving depositor confidence and trying
to have large depositors discipline institutions
are in fundamental conflict. The current system
forces the LLR to choose which goal will be
attained. It could expose depositors to risk by
following its classical role of protecting the liquidity
of t h e f i n a n c i a l s y s t e m in t h e e v e n t of a
panic but ignoring the problems of individual
institutions. 22 Then large depositors would occasionally lose confidence in some depository
institutions. Alternatively, the LLR could protect
confidence by providing loans to troubled
institutions. These loans constitute a subsidy to
the extent that the institutions could not borrow
an equal amount on the open market at the
same rate. If the market expected the LLR to
provide funds at below market rates, then large
depositors would be less effective in disciplining institutions.
Deposit insurance could prevent bank panics
by itself if the public were confident that all
deposits were insured. If the public felt that its
deposits would not be at risk even if a bank
failed, then it would have much less of an
incentive to participate in a bank run. If 100
percent deposit insurance were adopted, the
public's perception of thefunds' ability to handle
potential failures would be crucial. The current
deposit insurance funds would be inadequate in
a 100 percent insurance system because they do
2
' T h e F D I C report s h o w s that over 25 percent of the deposits at banks with
a s s e t s of $1 billion or more is in accounts of $ 1 0 0 , 0 0 0 or more. T h e
percentage of funds in accounts that are not fully insured rises to 71
percent of total deposits at banks with a s s e t s of $ 1 0 billion or more if
foreign deposits are counted.
" S e e Humphrey and Keleher.
" S u p p o s e as a purely hypothetical example, that several foreign countries
with large debts to United States banks reneged on their debt and this
made s o m e large United States banks insolvent. T h e failure of several
large banks could reduce the FDIC's fund to dangerously low levels
S u p p o s e further that the Secretary of the Treasury became o b s e s s e d
F E D E R A L R E S E R V E B A N K O F ATLANTA
not guarantee that they could honor their commitments on a timely basis.
The current insurance fund system has some
problems that could weaken the public's confidence in its ability to weather serious financial
problems. A fundamental problem is that it relies
on insurance funds. This reliance could weaken
depositor confidence by leading the public to
believe that deposit insurance would disappear
when the funds were exhausted. Another problem
with the funds is that their resources and liquidity
are not guaranteed under the current system.
The FDIC recognizes the desirability of increasing
its resources. It currently can borrow up to $3
billion from the Treasury, but it would like to be
able to borrow as much as the secretary of the
Treasury thought was needed during an emergency. The FDIC proposal still does not guarantee
that it will have adequate resources to handle
any problem. 2 3 Furthermore, most of the insurance funds' assets are invested in Treasury
securities, which may be hard to sell duringatrue
financial panic In order to guarantee the agencies
both resources and liquidity, they must have
access to as much money as it takes to handle all
conceivable failures. 24
The other dimension of the insurance funds'
adequacy is their ability to meet routine failures
without relying on funds from the Treasury. The
F D I C and N C U A both make reasonable arguments about the ability of their respective funds
to meet non-panic failures. The FHLBB does not
say the FSLIC fund is inadequate, but it notes
that the fund could have been exhausted if
interest rates had returned to their 1981 levels
for 1983 and 1984. The potential problems with
the FSLIC fund are not, however, so much
related to the fund's size as they are to the
FSLIC's inability to close institutions with negative
net economic worth. The FHLBB acknowledges
that if the FSLIC had closed institutions w h e n
they first reached negative net economic worth,
then the fund would never have been in danger.
Instead the FSLIC waited until institutions had
negative book value before closing them. No
with reducing the budget deficit and w a s unwilling to provide the F D I C
with additional funds. Under these circumstances, the financial markets
could become concerned about the strength of the banking system and a
financial panic could begin. Even in this unlikely scenario, the financial
system would not collapse because the Federal R e s e r v e would almost
certainly step in to provide liquidity to the financial system, but the F D I C
would be powerless to stop s u c h a panic.
' " T h e insuring agency could be given a c c e s s to the money directly by
making it a part of the central bank or indirectly by giving it unlimited
a c c e s s to the Treasury and requiring the central bank to purchase new
Treasury issues used to fund the insurance agency if necessary.
37
deposit insurance fund can be large enough to
meet routine failures if economically bankrupt
institutions are allowed to continue accumulating
losses for extended periods before they are
closed. Thus, there is merit in the idea that
regulators use economic values rather than book
(or accounting) values as much as possible.
The need for the funds to be able to handle a
financial crisis is questionable. Large, uninsured
depositors can lose money in a bank failure
under the current and F D I C proposed systems.
Therefore, these depositors have an incentive to
panic regardless of the funds' ability to weather a
financial crisis. If insurance were modified to
protect large depositors, reforms would be needed
to provide the funds with unquestionable resources and liquidity.
The agencies' recommendations appear reasonable with respect to the second dimension of
fund adequacy, the ability of the fund to handle
routine failures without Treasury assistance. The
key point that emerges from analyzing the second
dimension, however, is that regulators should
use economic rather than accounting values
where possible. No fund by itself can meet the
losses a failed institution can generate if it is
allowed to continue in operation.
Agency Consolidation
The FDIC favors consolidating the examination
functions of the Office of the Comptroller of the
Currency and the Federal Reserve System, and
the examination and insurance function of the
FHLBB into the FDIC. The FHLBB concedes that
there is some merit in consolidating the regulatory
agencies, but it argues that the banking agencies
should be rationalized before any functions are
taken from the FH LBB. The N C U A flatly opposes
consolidation. Our evaluation may shed some
light on the relationship among deposit insurance,
supervision and regulation, and the Federal Reserve's role as lender of the last resort.
The relationship between the insuring agencies
and the lender of last resort depends on how
potential financial panics are handled. In the
abstract, if the deposit insurance system and the
LLR have joint responsibility for preventing financial panics, then the Federal Reserve may
need an important role in bank supervision and
regulation. If, on the other hand, the federal
government wants to limit the effect of panics,
but does not seek to prevent financial panics,
38
then the LLR needs no supervision and regulation
powers beyond those necessary to conduct
monetary policy.
Complete confidence in depository institutions can be preserved by TOO percent deposit insurance or by LLR subsidies of failing
institutions. In order for full insurance to be
effective in maintaining depository confidence,
the insuring agency must have unquestioned
resources and liquidity. This implies that the
Federal Reserve must be involved, because it is
the only government body that can create
money. At one extreme, the Fed's role might be
limited to creating money at the insuring
agencies' request, effectively turning monetary
policy over to the insuring agency. Alternatively,
the Federal Reserve could take over all of the
functions of the insuring agencies and assume
sole responsibility for handling financial crises.
The current deposit insurance system ultimately
d e p e n d s on potential LLR loans to preserve
depositor confidence. Stripping the LLR of supervision and regulation functions in this environment would reduce its ability to recognize and
avert potential serious problems. If an LLR without close involvement has difficulty recognizing
the seriousness of potential problems, then it
may underreact and fail to stop a panic situation,
or overreact and provide subsidies where none
are needed.
The Federal Reserve System maintains that its
monetary policy responsibilities require that it
be actively involved in bank supervision and
regulation. Others argue that the Federal Reserve
has no such need and that there is a potential
conflict between the Fed's conduct of monetary
policy and the Fed's bank supervision and regulation responsibilities. 25 Any redrawing of the
Federal Reserve's responsibilities also will need
to consider these issues.
Conclusion
Congress picked an issue ripe for action when
it asked the insuring agencies to review deposit
insurance. The current insurance system provides
incentives to take risks, and financial deregulation
may be increasing banks' ability and incentive to
" S e e Peterson for a review of the literature on this potential conflict of
interest
M A R C H 1984, E C O N O M I C R E V I E W
take risks. Congress needs to identify those
functions that it wishes to have deposit insurance
perform and then enact the system that will
meet those functions at the lowest cost
The F D I C and FHLBB stress the protection
insurance provides to the financial system, especially the money supply and payments system.
Both contend that the current system provides
adequate protection but needs to be adjusted to
reduce the incentives for insured institutions to
take risks. The FHLBB proposes to do this through
variable rate government insurance and private
insurance. A variable rate government insurance,
however, would make depository institutions
dependent on one government agency's definition
of risk, a definition that might be heavily influenced
by political factors. Private insurance does not
seem to provide a good substitute for government insurance because its capacity to handle
failures is most suspect w h e n the insurance is
most needed, during periods of significant financial
problems.
The F D I C argues that placing large depositors
at risk will reduce the risks taken by insured
institutions while preventing financial panics.
In practice, any attempt by the government to
place large depositors at risk will give them
substantial incentives to participate in financial
panics. The F D I C proposal, thus, shifts more of
the burden of protecting the financial system
to the Federal Reserve. T h e N C U A suggests that
all shareholders (depositors) should bear some
of the risk.To the extent the N C U A plan succeeds
in getting shareholders to monitor credit union
risk, it would create the same incentives for
depositor anxiety as the F D I C plan.
— Larry D. Wall*
'The author would like to thank George Benston, Leonard Lapidus and Samuel
Talley lor valuable discussions and B. Frank King and Robert Eisenbeis lor
comments on an earlier draft. The views expressed are those ol the author and do
not necessarily reflect the opinions ot the individuals cited above.
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( S p r i n g 1 9 8 3 ) , pp. 1-9.
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Partial-Equilibrium Exposition," J o u r n a l of B u s i n e s s (July 1978), p p 4 1 3 - 4 3 8 .
Leff, G a r y a n d J a m e s W Park, " T h e M i s s i s s i p p i D e p o s i t I n s u r a n c e C r i s i s , "
B a n k e r s M a g a z i n e 1 6 0 ( S u m m e r 1 9 7 7 ) , pp. 7 4 - 8 0 .
L o n g s t r e t h , B e v i s . " I n S e a r c h of a S a f e t y Net for the F i n a n c i a l S e r v i c e s
Industry," B a n k e r s M a g a z i n e 1 6 6 ( J u l y - A u g u s t , 1 9 8 3 ) , pp 2 7 - 3 4 .
M a y e r , T h o m a s . " S h o u l d L a r g e B a n k s B e A l l o w e d to F a i l ? " J o u r n a l of
F i n a n c e a n d Q u a n t i t a t i v e Analysis, 1 0 ( N o v e m b e r 1 9 7 5 ) , pp. 6 0 3 - 6 1 0 .
Merton, R o b e r t C. "Discussion," in T h e Regulation of F i n a n c i a l Institutions,
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B o s t o n a n d t h e N a t i o n a l S c i e n c e F o u n d a t i o n , ( O c t o b e r 1 9 7 9 ) , pp. 2 5 6 - 2 6 3 .
Merton, R o b e r t C. " O n t h e C o s t of D e p o s i t I n s u r a n c e W h e n T h e r e A r e
S u r v e i l l a n c e C o s t s , " J o u r n a l of B u s i n e s s ( J u l y 1 9 7 8 ) , pp. 4 3 9 - 4 5 2 .
N a t i o n a l C r e d i t U n i o n Administration. C r e d i t U n i o n S h a r e I s s u a n c e :
A R e p o r t to the C o n g r e s s p r e p a r e d by the National C r e d i t U n i o n A s s o c i a t i o n ,
W a s h i n g t o n , D. C. (April 1 9 8 3 ) .
Olin, Virginia K " C h a n g e s in D e p o s i t A c c o u n t S t r u c t u r e : S e p t e m b e r 1 9 8 2 March 1983," Federal H o m e Loan Bank Board Journal (August 1983),
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P e t e r s o n , M a n f e r d O. " C o n f l i c t s B e t w e e n M o n e t a r y P o l i c y a n d B a n k
S u p e r v i s i o n , " I s s u e s in B a n k R e g u l a t i o n ( A u t u m n 1 9 7 7 ) , pp. 2 6 - 3 7 .
Pringle, J o h n J. " T h e C a p i t a l D e c i s i o n in C o m m e r c i a l B a n k s , " J o u r n a l of
F i n a n c e 2 9 ( J u n e 1 9 7 4 ) , pp. 7 7 9 - 7 9 5 .
S h a r p e , William F. " B a n k C a p i t a l A d e q u a c y , D e p o s i t I n s u r a n c e a n d S e c u r i t y
V a l u e s , " J o u r n a l of F i n a n c i a l a n d Q u a n t i t a t i v e Analysis, ( N o v e m b e r
1 9 7 8 ) , pp. 7 0 1 - 7 1 8 .
S i g a l e , M e r w i n , " B a n k B o a r d E x p e c t s to S e l l N e w B i s c a y n e W i t h i n W e e k s
O u t of S t a t e I n s t i t u t i o n s C o n t e n d e r s for F l o r i d a S & L , " A m e r i c a n B a n k e r ,
( D e c e m b e r 1, 1 9 8 3 ) , p. 2 0 .
S i n k e y , J o s e p h F., Jr. P r o b l e m a n d F a i l e d Institutions in t h e C o m m e r c i a l
B a n k i n g Industry ( J A I P r e s s , Inc., G r e e n w i c h , C o n n e c t i c u t ) 1 9 7 9 , p. 1 5 6 .
S l a t e r , K a r e n . " F D I C H a s N e w S t r a t e g y for T r o u b l e d B a n k s : M o d i f i e d
D e p o s i t P a y o f f Will I n c r e a s e M a r k e t D i s c i p l i n e , I s s a c S a y s , " A m e r i c a n
B a n k e r ( D e c e m b e r 7, 1 9 8 3 ) , p. 1.
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E c o n o m i c s , 1 0 ( O c t o b e r 1 9 6 7 ) , pp. 1 2 9 - 1 4 7 .
Wall, L a r r y D. " T h e F u t u r e of D e p o s i t I n s u r a n c e : T h e I n s u r i n g A g e n c i e s
P r o p o s a l s , " E c o n o m i c R e v i e w F e d e r a l R e s e r v e B a n k of A t l a n t a , 6 9
( J a n u a r y 1 9 8 4 ) , pp. 4 3 - 5 7 .
Recent research by the Federal Reserve Bank of Atlanta has focused on high-performance
companies, firms whose ideas might be useful in stimulating our sluggish national
productivity.
As part of that research, we are inviting chief executive officers from successful and
innovative southeastern companies to discuss the secrets of their success. In addition, we'll
hear from respected consultants and securities analysts offering their perspectives on the
ingredients of what distinguishes successful companies from mediocre ones.
T o assure your place at this gathering of representatives from corporations, academia, and
government, return the registration form below and join us in Atlanta in April!
REGISTRATION F O R M
Atlanta Hilton Hotel
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How to C o m p e t e Beyond the 1 9 8 0 s :
Perspectives from
High-Performance C o m p a n i e s
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TOPICS AND SPEAKERS INCLUDE..
Perspectives from Leaders in Management Studies
Alan M. Kantrow,
Rosabeth
asssociate editor, Harvard Business Review, author, Industrial Renaissance
Moss Kanter,
author, The Change Masters: Innovation for Productivity in the American
Corporation
How can companies stimulate innovation in a changing economic and social environment? Intriguing answers
from two leading experts on management and organizational change.
Perspectives from Top Southeastern Bankers
chairman of the board, Trust Company of Georgia, Atlanta
Robert Strickland,
Joel R. Wells Jr. president & C E O , Sun Banks, Inc., Orlando
In these sessions, you will learn how innovative financial institutions are thriving during a time of rapid change and
upheaval and how they stay in touch with the human side of their businesses.
Perspectives from the Federal Reserve Board, the New York Stock
Exchange, and Private Economic Forecasters
Preston Martin, vice-chairman, Board of Governors of the Federal Reserve System
Eugene
Epstein,
senior economist, New York Stock Exchange
M. Kathryn Eickoff,
executive vice president and treasurer, Townsend-Greenspan
What strategies can government and business pursue to stimulate national productivity and sustain economic
growth?
Perspectives from Companies Revitalizing Traditional Industries
Marvin Runyon, president & C E O , Nissan U. S. A , Smyrna, Tennessee
C. Martin Wood III, sr. vice president & CFO, Flowers Industries, Thomasville, Georgia
Not all high-performance companies are high-tech firms. Some creative companies in traditional industries have
been able to manage their way to success. How do they do it and what role can Japanese management techniques
play in this process?
Perspectives from High Growth Companies
John P. /m/ay, Jr., chairman & C E O , Management Science America, Inc., Atlanta
Bernard
Marcus, chairman and C E O , T h e Home Depot Atlanta
William A. Fickling, Jr., chairman & chief executive, Charter Medical Corporation, Macon
How do high-performance companies shape their management philosophy, strategy, and decision-making
processes to compete successfully in fasttrack industries? Chief executives from three winning companies share
their secrets.
The Advent of Biotechnology:
Implications for Southeastern
Agriculture
" N o new industry will make more of an impact on America...in the
next 20 years than the gene-splicing business,..." The Futurist, June
1982.
Freezing weather! Two especially ominous words for southeastern
crop producers in 1983. Unusual freezes both early and late in the
year inflicted heavy damages on fruit and vegetable growers. Tender
vegetables were virtually wiped out when a Christmas-day freeze
reached all the way to the normally safe winter cropping areas of
Florida.
If the tomato could somehow withstand the cold temperatures as
does its cousin the Irish potato, the damage from untimely frosts
Civilization may stand on the edge of a biotechnological
revolution that could affect virtually every area of the environment. Because much research so far has f o c u s e d on high
value-per-acre crops like cotton and tobacco, the Southeast
may be one of the first areas to benefit from the new research.
42 M A R C H 1984, E C O N O M I C R E V I E W
could be greatly diminished; even potato plants
vary considerably in their ability to withstand
freezes. What home gardener has not observed
that a few plants appear relatively untouched by
a freeze w h e n next door neighbors along the row
have turned black and fallen over? The difference
is probably due to variations in the genetic
material inside each living organism that determines its characteristics.
That genetic material, and progress researchers
are making in changing it, now offers hope that
frosts may one day be less destructive to such
tender plants as tomatoes. In fact, wild tomato
plants have been discovered growing in mountainous regions of South America that can withstand frosts.1 But the fruit these freeze-hardy
plants produce is a hard little inedible berry. And
although domestic varieties of tomatoes can be
crossed with this wild relative, the freeze-hardiness of the offspring seems of little value if the
fruit is useless. Over limitless generations of
selection and recrossing, plant breeders might
eventually succeed in getting most of the desirable
fruit qualities of domestic tomatoes and the
characteristics of freeze-hardiness grouped together in one plant. Butthe immense excitement
of biotechnology, and specifically genetic engineering, is the potential to shortcut this long,
tedious, and usually disappointing selective breeding process.
crop production. W e also will suggest some
implications for southeastern agriculture. Developments in the livestock industry will be explored
in future issues.
Biotechnology. What is it?
Researchers believe they eventually will be
able to identify the specific gene that induces
freeze-hardiness in the wild tomato plant and
transfer that genetic material directly into the
nucleus of the cell of a domestic tomato. The
resulting plant would retain its desirable fruit
characteristics while incorporating the wild plant's
cold resistance. Freeze-hardiness, as well as other
favorable characteristics, would then be passed
along in a natural way to its offspring.
The economic implications of this one achievement for the tomato plant alone are important
for the winter-grown vegetable industry. But this
only hints at the biotechnological developments
already beginning to emerge on the agricultural
scene. Although work of this nature is proceeding
rapidly in both the plant and animal kingdom, we
will confine this article to the background of
biotechnological research and some of the more
prominent developments relating to commercial
The science of genetics, which is the wellspringof
biotechnology, orginated with the Austrian monk
Cregor Mendel, who in 1866 published the first
"laws of genetics." Mendel's observations resulted
from many years of working with generations of
plants. I n the more than 100 years since, science
has uncovered how nature passes genetic information from generation to generation.
Biotechnology can be defined almost literally
as the technology of life. The field embraces a
variety of techniques by which organisms ranging
from man to micro-organisms can be altered.
Biotechnology ranges from such straightforward
methods as tissue culture and cloning existing
cells, to the more esoteric recombinant DNA, or
genetic engineering that changes the basic nature
of cells.
At present, tissue culture provides the most
important application of biotechnology. 2 The
technique has long been known, but only within
recent years has it gone into widespread use. For
crops such as tomatoes, tobacco, potatoes and
sugarcane, the use of tissue culture occurs routinely; however, for other crops, such as grains,
the technique has yet to be successfully adopted.
In essence, the operation involves taking a minute
amount of tissue from a plant, placing it in an
ideal artificial environment, and growing it to the
desired stage of development. The final result
may be a full grown plant, or the process can be
stopped at any stage short of that.
The benefits from tissue culture are enormous.
For example, thousands of separate cell cultures
can be started in a laboratory and subjected to
some adverse variable such as drought. Those
cultures surviving presumably would have stronger
drought tolerance than others. A culture can be
grown to a full size plant, providing selected
material to plant breeders for use in developing
new strains of crops. In addition, the genetic
diversity observable in a laboratory of tissue
cultures would require several acres if tested in
'"The R a c e to Breed a Su pertornato, " Business Week. J a n u a r y 10,1983,
p. 34.
'Robert Cooke, 'Engineering a New Agriculture," Technology Review
(May/June 1982), p. 26.
F E D E R A L R E S E R V E B A N K O F ATLANTA
43
field grown plants. 3 Tissue culture has been
especially helpful in forestry. Tree breeding historically has been a slow process taking several
decades for the results of breeding experiments
to be expressed. Tissue culture can speed up the
process substantially.
Genetic engineering has the potential to become the most significant area of biotechnology,
but it also is the most complex and controversial.
Essentially it involves the introduction of genes
to (or deletion from) an organism to give it some
favorable characteristic that it can pass along to
its descendants. The work done with tomatoes
indicates how researchers may alter living cells to
achieve some desired objective. Genetic transfer
may allow researchers to engineer new plants
with characteristics radically different from those
now in existence.
O n e novel manner of lookingat biotechnology
is to consider it part of the on-going information
revolution. The complexity of the information
transfer process in biotechnology far exceeds
that in computer technology. The transfer of
genetic traits from parent to offspring is the
passing of information between two succeeding
generations, information that is more complexly
coded than, anything man has yet to invent. This
information tells each cell of the succeeding
organism what purpose it has in life.
W h e n there is a breakdown in this transfer of
information, the receiving organism will be altered
from its parents. This alteration—a mutation—may
be for better or worse, because the new entity
could have some new desirable characteristic or
some life threatening trait Mutations occur rather
frequently in nature, sometimes altering species.
As the environment changes, organisms without
the proper genetic make-up die out, while those
with favorable mutations or necessary traits survive.
The science of biotechnology is concerned
with assisting nature with the normal information
transfer. Researchers take encoded information
from one organism that has been broken down
to its specific elements and insert it into other
organisms. These entities then pass to their
offspring not only the normal genetic information
but also the added material that has then become
part of the species characteristics. The advantage
of biotechnology over natural transfers of genetic
information is speed, plus the possibility of
3
Quick Book, Genetic Engineering of Plants California Agricultural
L a n d s Project, 1982,
44
adding desirable characteristics that might not
otherwise be attainable. Mankind learned long
ago that depending on nature alone for plant
adaptation was a risky long term process. Even
with science's help, traditional breeding programs
often have taken years to pay off with new plants.
Biotechnological applications someday could
achieve successful transfer of desired genetic
traits within months.
Biotech's Development
In 1971 the first company (Cetus) was formed
in Berkeley, California to engage in commercial
development of genetic engineering (see time
chart). Widespread research was also beginning
in university labs. In 1975 a group of the world's
leading scientists met in Monterey, California to
establish safety guidelines for laboratory experiments in biotechnology. At the Asilomar Conference (as it became known) these scientists
established strict laboratory rules and urged the
scientific community to adopt these precautions.
Later, the National Institutes of Health adopted
the basic guidelines for all NI H-supported research
and urged the voluntary complianceof all others.
By the late seventies there were still only a few
companies actively engaged in research in this
field. O n e disincentive was the question of
patentability of products. Firms were reluctant to
spend the vast sums required unless they could
retain control and reap the benefits from their
developments. O n June 16, 1980 this question
was resolved when the U.S. Supreme Court
concluded that laboratory creations could indeed
be patented. Following this court decision, biotech
firms multiplied rapidly in virtually every field of
endeavor. Today well over 100 such firms exist,
and many large established companies are conducting in-house research.
If there is any doubt that biotechnology is
growing rapidly, consider these facts. From March
1971 to February 1972 only eight listings appeared
in the Readers Guide to Periodical Literature
under the heading "genetic research." In that
same period the listing "plant genetics" did not
even exist. A decade later, there were 74 entries
under genetic research and 19 under the title
plant genetics (Chart 1). And perhaps an even
better indicator of the growth of its commercial
potential can be gained from the Business Periodicals Index. In 1976 there were 18 listings
under genetics but none for genetic engineering
M A R C H 1984, E C O N O M I C R E V I E W
1973
1975
First successful transfer of genetic material
between organisms using recombinant D N A
Agrigenetics incorporated
1980
First animal gene transplant. (Between mice
at U C L A Medical Center.)
1971
1981
First genetic engineering firms.
Invention of the "gene" machine.
First successful cloning of a mammal(mouse).
1953
DNA structure first proposed
1921
1983
T h e first successful transfer of a bacterial or
other gene into a plant cell.
First commercial hybrid corn
The first successful transfer of a foreign gene
from one generation to another—a major breakthrough in plant genetic engineering.
1906
Plant cells made to produce foreign proteins.
C e t u s Madison requests approval to field test
genetically-altered plants.
Scientists at University of California request
approval to field test genetically-altered bacteria
"Genetics" named by William Bateson
1902
Walter Sutton proposed the Chromosome
Theory of Heredity, ¡.a, hereditary factors
were located within c h r o m o s o m e s in the
nucleus.
1866
Gregor Mendel—The first laws of genetics
or genetic engineering firms. Five years later
there were 40 listings under genetic engineering
and 35 under genetic engineering firms.
Genetics usually is thought of as complicated
and technical, which probably accounts for the
public's general lack of knowledge about it. At its
simplest, however, it can be understood more
readily. Every entity, plant or animal, is composed of
building blocks called cells. Within each cell is an
information system coded in a unique manner
which, among other things, directs the cell to
perform its primary function. For instance, the
cells composing the stomach perform one duty,
while brain cells perform another. Yet within
every normal cell is all the information needed
for the body to perform its functions. This information is stored in thousands of units called
genes inherited from the organism's parents.
Genes do not set a precise characteristic but
rather a range through which the environment
also works to establish a trait. For example, genes
provide a height range by which, under ideal
conditions, the bearer will reach the upper limit
of that range, but under less ideal conditions may
be at the lower end of the range. Genes may
someday be introduced that would provide the
com plant with the capability of reaching 20 feet
high, but inadequate moisture could well reduce
F E D E R A L R E S E R V E B A N K O F ATLANTA
C I B A — G E I G Y announces plan to construct
agricultural biotechnology research center in
North Carolina
Campbell Soup and DNA Plant Technology
field test genetically-engineered processing
tomatoes.
the growth to no more than the ordinary five or
six feet.
Agricultural Impact
The Agricultural Revolution began in the late
19th century and has extended to the present
During that period, thanks to plant breeding,
mechanization, the development of commercial
fertilizers, and the invention of pesticides, yields
of most crops doubled or tripled. As a result, less
farmland today feeds more people.
As important and significant as the past 100
years have been to agriculture, the industry
stands today on the edge of still another revolution. This new revolution will be the result of
biotechnology, w h o s e potential contribution
to agriculture and a variety of other fields can
hardly be overstated. Breeding of plants containing
desired characteristics can be accelerated substantially. A variety of traits that have been
extremely difficult, if not impossible, to aggregate in single individuals through cross breeding
may now be developed more easily. Over the
next quarter century it is possible that agriculture will undergo changes as far-reaching as
any in its history. Those changes will affect both
producers and consumers.
45
Chart 1. Genetic Research Articles
March 1973-February 1982
160T
120 -
1973
1975
1977
1979
1981
Biotechnology could aid commercial production
of agricultural plants in several ways. The most
important are nitrogen fixation, plant photosynthetic enhancement salt tolerance, improved
plant varieties with increased protein content
and resistance to diseases, insects, drought, and
herbicides. Plants need nitrogen in orderto grow.
Although nitrogen abounds in the air space
within the soil, plants cannot use it directly.
Bacteria that grow on leguminous plants' roots
absorb nitrogen and, combining it with other
substances, produce nitrates the plant can use.
Nitrogen fertilizers are applied to supply this
food element to plants lacking this capability. A
growing problem with such fertilizers, however,
is the increased pollution from run-off and the
rising cost of fertilizers that use large amounts of
natural gas.
An improvement in the efficiency of plant
photosynthesis also would represent a major
development in agriculture. Plants presently convert one percent of the absorbed energy from
sunlight into sugars. If farmers could achieve a
conversion rate of 2 percent, a plant might
double its rate of growth. 4 Obviously, acquiring
that increase through ordinary breeding and
selection would be a major task requiring many
"Ray Vicker,"California College's R e s e a r c h Helps State Stay at the
Forefront of Agricultural Developments," Wall Street Journal. J a n u a r y
13, 1981, p. 54
46
years. The transfer of a genetic trait for improved
photosynthesis could have an immediate impact
Even minute gains in conversion efficiency would
enhance food and fiber production.
Scientists have devoted considerable effort to
breeding a high degree of salt tolerance into
various food-producing plants. Genetic engineering should speed success in this a r e a Because so
few plants are tolerant of high salt concentrations,
such as exist in sea water, traditional plant
breeding techniques will be hard pressed to
develop salt tolerance in a wide number of foodproducing plants in the near future. Genetic
engineering, on the other hand, may be able to
accomplish this goal. If researchers can identify
the genes that enable certain plants to tolerate
large amounts of salt, those genes could be
transferred to commercial crops. The development of the transfer technology is well underway;
the major holdup is the ability to identify specific
genes.
What would increased salt tolerance mean to
producers? Coastal land that has been unusable
or of limited use could support a commercial
crop. Worldwide, literally millions of acres of arid
lands adjacent to saline water could be utilized for
food production for the first time Within the
Southeast, salt water encroachment into irrigation
wells as fresh water is removed would be less of a
problem if resistant plants were available. This
single improvement would enable vast increases
in world agricultural output.
O n e project that may come to earlier fruition
than many others is the effort to implant specific
herbicide resistance into certain crops. A single
gene transfer from a species with known resistance
may provide the recipient plant with the desired
protection. If so, this relatively simple project could
prove to be a valuable shortcut to efficient weed
and grass control. This would be a particular
boon to southeastern crop production where
frequent rainfall encourages luxuriant growth of
undesirable plants.
A clear implication of all of these potential
innovations is that food and fiber production is
likely to expand rapidly on a global basis. While
that would be good news for producers who can
get the j u m p on their competitors and be first to
reap the benefits of increased output, the immediate prospects are less bright for multitudes
of marginal producers around the world. Those
lacking the means to afford the probable high
cost of the new genetically-engineered plants
M A R C H 1984, E C O N O M I C R E V I E W
may find the markets for their meager production
swamped by the abundant supplies that can be
produced with the advantages of new technology.
Producers for export markets could also discover
that new production in formerly uncultivatable
areas has supplanted the need for products from
abroad. In short, demand for agricultural production is unlikely to grow as rapidly as output
expands. The result would be additional dislocations of marginal producers who would be
forced to search for other means of sustaining
their livelihood.
Most developed countries passed through a
similar adjustment process when the new technology of farm mechanization reduced the
number of producers required to produce food
and fiber for the population. Although the process
was not without pain, most former farm workers
eventually found jobs manufacturing products
that enabled standards of living to rise for the
whole populace. The capabilities offered through
new biotechnology could eventually produce
similar favorable transitions in regions of the
world where food production currently strains
and often fails to meet the needs of the population.
as much as 30 percent of their yield potential. 5 If
the use of relatively expensive commercial fertilizer
could be avoided or sharply reduced, however,
cost reductions could well outweigh losses in
crop output. Fertilizer prices could influence the
tradeoff at any given time. The early benefits
would probably accrue to farmers who could
reduce their cost of production and shield themselves from the risks of high costs and uncertain
availability of future nitrogen supplies tied to
volatile petroleum markets.
In other instances, the future is indeed now.
Consider, for instance, the application by two
University of California scientists to test genetically
altered microorganisms that can protect plants
from frost until temperatures drop well below
normal frost levels. 6 Chemically altered bacteria
have already performed such a feat, but the
scientists believe they have developed a modified
bacteria with this desired capability that reproduces itself. Their goal is to let the bacteria
multiply naturally and perform its intended task.
How Close is the Future?
How close are we to some of these capabilities?
One area of research in nitrogen fixation may
have an early payoff. Allied Chemical is trying to
increase the efficiency of nitrogen fixation in
soybeans. Since soybeans naturally fix nitrogen,
this should be accomplished with greater ease
than in other non-fixing plants such as corn
(Chart 2). With corn, it may take a decade or
more before seed stock of strains with nitrogen
fixing capabilities are commercially available.
Research has begun in this area, however, and
some results could occur soon. Biotechnica International, for example, recently requested permission to field test alfalfa with a modified strain
of the bacteria responsible for nitrogen fixation.
However, corn is probably the crop for which
nitrogen fixation has the greatest interest and
potential because of the vast quantities of nitrogen
fertilizer applied by producers to attain current
high yields. Some observers caution that corn
plants that fix their own nitrogen are likely to lose
In addition, both public and private institutions are engaged in biotechnological research
for the improvement of plants. Cetus Madison, a
division of possibly the largest biotech firm in the
United States, has requested permission to field
test a variety of genetically altered crops including
potatoes, tomatoes, cotton, tobacco, and soybeans. 7 As more money and energy are devoted
to this research, minor plant improvements could
'Agriculture 2 0 0 0 : A Look at t h e Future, a study by Columbus Division.
Batelle Memorial Institute, Batelle Press, Columbus, Ohio, 1983. p. 53
-Federal Register. Vol. 48. No. 106, J u n e 1, 1983, p. 9441.
'Ibid. Vol. 48, No. 44, March 4, 1983, p. 9441.
F E D E R A L R E S E R V E B A N K O F ATLANTA
47
Si
-
^
\
'*
Agricultural research areas in w h i c h
biotechnology may prove valuable:
Nitrogen fixation in commercial crops
Plant photosynthetic e n h a n c e m e n t
Improved protein in oilseeds
Improved salt water tolerance
Plant varieties with increased disease,
insect, herbicide resistance
Drought resistant plants
New methods of producing agricultural
inputs
Reduced time for new plant
development.
be announced in the near future. More important
breakthroughs in plant genetics will take longer,
yet additional major developments could occur
within the present decade.
Many companies are understandably reluctant
to reveal their specific areas of research, including
the plants involved. The International Plant Research Institute reportedly is working on salt
tolerance in plants; Calgene on herbicide resistance in cotton, Agrigenetics on a variety of
plants; and Cetus Madison on cotton and tobacco,
among others. Calgene's president, Norman Goldfarb, has said his firm is aiming for an herbicideresistant cotton plant to be commercially available
by 1989. 8
Plant research is not limited solely to the
genetic engineering firms. Scientists at Stanford
and Cornell Universities have applied to field
test genetically altered corn, tomato, and tobacco
plants.9 Many other laboratory projects have yet
to reach the point of field testing. And neither is
all research occurring in the United States; both
" W a l l Street J o u r n a l , May 10, 1983, p. 6.
48
Europe and Japan have invested large sums in
biotechnology.
Within the Southeast, biotechnological activity
related to agriculture has been limited. In September, North Carolina state officials announced
that CIBA-GEIGY will construct an agricultural
biotechnology center at the Research Triangle
Park near Raleigh, the center of the state's hightech industries. The company, a major producer
of chemical and agricultural products, plans
research in plant biology to develop new products.
In Mississippi, Delta and Pine Land Company
has commissioned the Cetus Madison Corporation
to conduct research using genetic engineering to
improve cotton yields.
A project at North Carolina State University is
focusing on tissue culture of tobacco cells. The
first goal is to identify tobacco cells resistant to a
disease-causing fungal toxin. These cells are then
placed in a growth medium and developed into
plants. Eventually the plants will be used to
develop a new disease-resistant variety of tobacco
plant for farmers.
At Louisiana State University, work in tissue
culture of rice and sugarcane is underway. One
project concerns an attempt to develop a strain
of rice not prone to lodging (flattening after
inclement weather). In addition, research with
sugarcane is proceeding to develop a technique
for identifying plants with a particular virus.
University of Georgia professors are engaged
in research involving tissue culture and recombinant DNA. The work underway ranges from
forestry to commercial field crops. Perhaps most
advanced is the work involving tissue culture of
trees. At Georgia and at many other southern
universities, research also is underway in other
fields of biotechnology.
In other regions, developments are occurring
that ultimately will affect farmers and consumers
everywhere. For example, a group of major
companies is sponsoringa Biotechnology Institute
at Cornell University. The group will provide $2.5
million dollars over a six year period. Kellogg, a
major food processing company, invested $10
million in Agrigenetics Corporation^ biotech
firm devoted to agricultural research, in 1982.
Kellogg hopes to develop strains of oats, rice, and
wheat that have high protein content and minimize fertilizer use. Two companies with products
9
F e d e r a l Register, Vol. 47, No. 184, September 22, 1982, p. 4 1 9 2 5 .
M A R C H 1984, E C O N O M I C R E V I E W
A partial list of biotech c o m p a n i e s with agricultural research u n d e r w a y includes:
Calgene, Davis, Ca.
Phytogen, Pasadena, Ca.
Agrigenetics, Denver.
Molecular Genetics, Edina, Minn.
Advanced Genetic
International Plant
Sciences, Greenwich, Conn.
Research Institute, San Carlos, C a
Biotechnica
Cetus Madison, Berkeley, C a
International, Cambridge, Mass.
Genentech, San Francisco
In addition to biotech firms, a number of major companies connected with agriculture have
their o w n programs. A partial list includes:
Monsanto, St. Louis.
Allied Chemical, Morristown, N. Y.
CIBA-GEIGY, Greensboro, N. C.
Eli Lilly, Indianapolis
Du Pont, Wilmington, Del.
Merck, Rahway, N. J.
for the agricultural industry, Monsanto and Du
Pont, also are becoming heavily involved in
biotechnology—Monsanto through a $20 million
investment in Biogen, Du Pont through the
establishment of its own biotech program in
1980. Many other companies are conducting
biotechnological research. Clearly, the majority of
those engaged in research are not concerned solely
with agriculture, but breakthroughs in any area
are likely to have spillover effects in agriculture
as well.
A published 1981 estimate of expenditures by
a few major companies suggests that approximately $450 million was budgeted for long-term
agricultural research involving areas such as nitrogen fixation. 10 And in that same year Agrigenetics, based in Denver, is reported to have
spent $19 million on research. The government
also is actively involved in biotechnological research. In 1979, for instance, the USDA had
approximately $5 million invested in this field,
the National Institutes of Health was funding
717 separate projects while the National Science
Foundation had 194 active grants involving genetic
engineering. More recently, in 1983, the NSF
spent $43 million on basic plant science research.
A division of USDA, the Cooperative State Research
Service, supplied $9 million through grants and
funding for biotechnological research from 1980
through 1982. This money was utilized by universities and agricultural experiment stations.
'""Chip Off the Old Block," Forbes, March 2, 1981, p. 94.
"Marilyn Chase, "After Slow Start, G e n e Machines Approach a Period of
F E D E R A L R E S E R V E B A N K O F ATLANTA
State experiment stations are also believed to be
funding biotech research at approximately $45
million.
The Technology
Typically, a new technology involves a function
that only a few skilled individuals can perform. As
time passes, the technology is transformed so
that less skilled individuals can perform the same
function, increasing the supply of the product
Biotechnology seems to be following the same
pattern. As it slowly developed in the 1970s, only
a few highly trained scientists could perform the
experiments necessary for research and development By 1980, when the Supreme Courts favorable
ruling on patents encouraged genetic engineering,
more researchers had become sufficiently skilled
to undertake the research. Applications were
further enhanced in 1981 with the development
of a"gene machine" that can be programmed to
construct segments of DNA for insertion into
genes. Previously, that process could be done
only by the painstaking work of highly skilled
scientists. 11 The gene machine" reduced the
time and cost of gene construction by an estimated 80 percent In addition to the obvious
economic efficiency, the machine makes it much
easier and faster for firms to undertake genetic
engineering research.
Fast Growtti and Steady Profits," Wall Street Journal, December 13,
1983, p. 33.
49
Summary
Civilization stands on the edge of a biological
revolution that seems likely to affect virtually
every area of the environment. Science already
has succeeded in altering both plants and microorganisms. Some altered plants are in various
stages of laboratory testing and some are even
ready for field testing. Micro-organisms also have
been created or altered to perform new functions
or to perform old ones better. The implications of
these accomplishments are tremendous.
In terms of agriculture, the Southeast may be
one of the first areas to benefit from biotechnology because much of the research deals with
high value per acre crops such as cotton and
tobacco. Among row crops, the soybean, a major
southeastern product, isa leadingtarget of study.
It appears that the impact of biotechnology on
crops will come in two primary areas, cost and
yield. Reducing fertilizer and pesticide requirements will lower production costs, while yield
increases may result primarily from improving
photosynthetic efficiency.
W h e n should farmers see the results of plant
genetic research? Given the large amount of
resources committed to the area, and the rapid
strides made within the last year (see time chart,
1983), the first significantly genetically altered
plants could be available commercially before
1990. By 1987, a number of plants with minor
improvements could reach the marketplace.
Within 20 years major breakthroughs in nitrogenfixation of non-legumes are likely. Certainly within
the next quarter to half century, agriculture will
experience major change.
—W. Gene Wilson
and Gene D. Sullivan
REFERENCES
Batelle Memorial Institute. Agriculture 2 0 0 0 : A Look at the Future
Columbus: Batelle Press, 1983.
"Productivity in the American Economy." Hearings Before the Task Force
on Economic Policy and Productivity of the Committee on the Budget,
House of Representatives, 97th Congress, S e c o n d Session, J a n u a r y 12,
13. and 15, 1982.
Cooke, Robert. "Engineering a New Agriculture," Technology Review,
May/June 1982, pp. 22-28.
T h e R a c e to Breed a'Supertornato,'" Business W e e k J a n u a r y 1 0 , 1 9 8 3 ,
ppp. 33, 37.
Quick Book: Genetic Engineering of Plants, California Agricultural
L a n d s Project, 1982.
50
Vicker, Ray. "California C o l l e g e s R e s e a r c h Helps State Stay at the
Forefront of Agricultural Developments," the Wall Street Journal, J a n u a r y
13, 1981, p. 54.
"Machines That Splice G e n e s Automatically." Business Week, Jan;uary
12, 1981, p. 54.
Harsanyi, Zsolt, and Richard Hutton. Genetic Prophecy: Beyond the
Double Helix, New York: Rayson, Wade Publishers, Inc. 1981
Sylvester, Edward J. and Lynn C. Klotz. The G e n e Age: Genetic Engineering and the Next Industrial Revolution, New York: Scribne^s, 1983.
Chertas, Jeremy. Man-Made Life: An Overview of the Science, Technology, and C o m m e r c e of Genetic Engineering, New York. Pantheon
Books, 1982.
M A R C H 1984, E C O N O M I C R E V I E W
Is the Dollar Overvalued in Foreign Exchange Markets?
As the dollar has gained value relative to
other currencies, foreign goods and services
have become cheaper than domestic goods
and services. It then becomes cheaper to import
goods to the U. S. than to buy domestically.
Similarly, U. S. exports suffer as higher exchange
rates price domestic goods out of foreign markets.
Some have suggested that the dollar is "overvalued." 1 This term suggests that the dollar is
valued at "too high" a price relative to foreign
currencies. Under the present system of flexible
exchange rates, it is unclear what this means.
Under a system of flexible exchange rates, this
simple interpretation of the term "overvalued"
makes no sense.
Since 1972, the dollars value has been determined in a more-or-less free foreign-exchange
market, by the demand for and supply of
dollars relative to foreign currencies. T h e
demand reflects the demand for money for
transactions and as a store of value. In general,
money demand for these purposes is a function
of income and interest rates. This implies in
turn that changes in income and interest rates
in the relevant countries, as well as expectations
of the future demand and exchange values,
affect the exchange rate. The supply of currency
is determined largely by the monetary authorities
in the two countries.
Chart 1 shows a demand curve and a supply
curve for dollars relative to a foreign currency,
say the Swiss franc 2 In this figure, M u s / M s w is
the quantity of domestic money relative to
Swiss money, and e is the exchange rate—the
value of Swiss francs relative to the dollar or the
price of dollars in terms of Swiss francs.
Changes in demand or supply, or both, could
account for the increase in the exchange rate.
An increase in the demand for dollars relative
to a foreign currency raises the exchange rate.
In Chart l a , this is shown by a shift in demand
from d i to d2 and an increase in the exchange
rate from e-j to e2. Similarly, a decrease in the
supply of dollars relative to a foreign currency
raises the exchange rate. In Chart l b , this is
shown by a shift in supply from s-] to S2 and an
increase in the exchange rate from e-\ to e2Hence, either a relative increase in the demand
for dollars or a relative decrease in the supply
of dollars, or both, could account for the increase
in the exchange rate. 3
The particular result above and its relative
simplicity hinge on the precise theory used. 4
Nonetheless, one conclusion of any analysis is
' E x a m p l e s are Art Pine, "Dollar's G a i n s May B e Justified By Strong U. S.
Economy, Analysts Say," Wall Street Journal, August 5 , 1 9 8 3 , p. 24 and
" E x c h a n g e Rates: A Better Goose," The Economist, N o v e m b e r 5 , 1 9 8 3 ,
p. 77.
2
The supply of money in the two economies is not affected by the change
in the exchange rate. If this is correct then the relative quantities of the
two currencies are not affected by the increase in demand. The supply
curve in Chart 2 could just as well be drawn with an upward slope without
affecting the conclusion that an increase in the demand for dollars
relative to foreign currencies raises the exchange value of the dollar.
3
A relative increase in supply that tends to reduce the exchange rate
may occur in combination with an increase in demand, but the exchange
rate increases if the increase in demand is the dominating factor.
Similiarly, a relative d e c r e a s e in demand that tends to reduce the
exchange rate may occur in combination with a d e c r e a s e in supply, but
the exchange rate increases if the d e c r e a s e in supply is the dominating
factor.
"This exposition is based on the monetary approach to e x c h a n g e rates.
For a brief overview of this theory, s e e J a c o b A Frenkel, "A Monetary
Approach to the Exchange Rate: Doctrinal Aspects and Empincal Evidence,"
in The Economics of Exchange Rates, ed. by J a c o b A Frenkel a n d
Harry G. Johnson (Reading, Massachusetts: Addison-Wesley Publishing
Company, 1978). A thorough exposition with historical background is
presented in Thomas M. Humphrey and Robert E Keleher, The Monetary
Approach to the Balance of Payments, Exchange Rate Rates, and
World Inflation (New York: Praeger Publishers, 1983).
Foreign Exchange Markets
The recent rise in the value of the dollar does not necessarily mean
that the dollar has been "overvalued" by foreign-exchange traders.
Instead, evidence suggests that lower inflation and higher interest
rates in the United States have been at least partly responsible
for the dollar's rise.
F E D E R A L R E S E R V E B A N K O F ATLANTA
51
Chart 1 . Shifts in demand for and supply
of currencies determine exchange rate.
S2
S
e
2
e
1
\
\
\
\
\
e
\
d2
l
e2
Si
\
di
1a
Mus/Msw
1b
Mus/Msw
Quantity of U. S. money relative to quantity of Swiss money.
sure: under a system of flexible or floating
exchange rates, the foreign-exchange value of
the dollar is determined by demand and supply,
approaching the economist's ideal of a perfect
market. In this ideal, transaction costs are
low—clearly true for large blocs in this market. 5
In addition, information about current trading
prices is readily available at low cost As a result
prices of foreign exchange reflect buyers' and
sellers' use of currently available information.
Given the information available to those
trading in the foreign exchange market, the
dollar cannot be "overvalued." The price of
foreign exchange at any time reflects the relative
demand for and relative supply of currencies,
such that traders are willing to hold the various
currencies at these prices. Hence, the prices
must reflect the relative values in the exchange
markets; a currency cannot be "overvalued."
O n e way prices can be overvalued is when a
"bubble" occurs. 6 In general, the price of a
good can be bid up because of factors changing
the relative value of that good, or because the
buyer expects to be able to resell that good at a
higher price. A bubble occurs when the price of
an asset is bid up on the expectation of future
^Evidence on this question is presented by Jacob A Frenkel and Richard M.
Levich in "Covered Interest Arbitrage: Unexploited Profits?" Journal of
Political Economy 83 (April 1975): 325-38 a n d ' T r a n s a c t i o n s C o s t s and
Interest Arbitrage Tranquil Versus Turbulent Periods.'' Journal of Political
Economy 85 (December 1977), 1209-26.
6
F o r one possibility of a more precise definition, s e e Robert P. Flood and
52
price increases, without any basis for expecting
changes in the underlying determinants of
value—supply and demand. The tulip market
in Holland in the early 1660s is a classic
example of a bubble. The price of tulips was
bid up to very high levels because buyers
expected to be able to sell the tulips at even
higher prices in the future, although there was no
evidence that a fundamental determinant of
demand or supply would change. Prices became
so high, according to Charles Mackay, that one
root of a relatively rare species of tulip was
exchanged for a total of " t w o lasts (about 4,000
pounds each) of wheat, four lasts of rye, four fat
oxen, eight fat swine, twelve fat sheep, two tons
of butter, one thousand pounds of cheese, (and)
a silver drinking cup." 7
Trading this astounding total of commodities
for one tulip root does not in and of itself
constitute a bubble. The suggestion that this
episode was a bubble is based on indications
that, at least for a year or two, prices rose
because buyers expected prices to be still
higher in the future, yet no fundamental determinant of the demand for or supply of tulips
had changed. Buyers were willing to pay a
higher price than they would have been willing
to pay otherwise because they expected to be
able to sell even higher in the future.
Ultimately, because there was no intrinsic
value supporting these tulip prices, the price of
tulips was "overvalued," and prices collapsed.
The mere fact that a price falls when it is
expected to rise is not evidence of a bubble.
This merely indicates that the expectation of a
price rise was misguided. In general, a bubble
occurs when prices rise based on expectations
that do not reflect the expected changes in the
fundamental determinants of prices.
W e can estimate future expected exchange
rates. The forward rate reflects expectations of
future exchange rates. In the forward exchange
market, it is possible to buy and sell foreign
exchange for future (or forward) delivery at a
price that is fixed today. While there is evidence
that forward exchange rates cannot be interpreted as reflecting only the expected future
Peter M. Garber," Market Fundamentals versus Price-Level Bubbles: The
First Tests,' Journal of Political Economy 88 (August 1980), pp. 745-70.
' C h a r l e s Mackay, Memoirs of Extraordinary Popular Delusions and
the Madness of C r o w d s vol. I, (London: George Routledge and Sons,
1869), p. 87.
M A R C H 1984, E C O N O M I C R E V I E W
Table 1. Exchange Rates and Forward
E x c h a n g e R a t e s in 1 9 8 3
( U n i t s of F o r e i g n C u r r e n c y p e r Dollar)
Annual Averages
United
France Germany
Japan
Switzerland
Kingdom
Exchange
Rate
7.63
2.56
238.16
2.10
.659
7.69
2.53
236.28
2.08
.660
3-Month
Forward
Exchange
Rate
exchange rate, in the 1970s at least they were a
better predictor of future rates than the most
prominent economic theories of exchange markets. 8
The prices of foreign exchange for future
delivery have not been uniformly higher than
the prices for current delivery. Table 1 shows
the spot and three-month forward exchange
rates for 1983. 9 (Note:
Exchange rates are
based on data through November.) To the extent
that forward exchange rates can be interpreted
as estimates of the exchange rate expected in
the future, they are inconsistent with uniform
expectations of future increases. This suggests
that foreign-exchange rates have not uniformly
been expected to increase and the dollar is not
"overvalued" in the sense thatthe increase in the
dollar is the result of a simple bubble.
A more demanding way of determining if the
dollar is overvalued is to determine if its value
is "too high" relative to the equilibrium value
implied by an economic theory. If the theory is
correct and the current exchange rate is greater
than the predicted value, then presumably the
market will at some point adjust to the exchange
rate implied by the theory.
This meaning of "overvalued" assumes that
analysts have a better theory of the foreignexchange market than do foreign-exchange
"Richard A. Meese and Kenneth Rogoff, "Empirical E x c h a n g e Rate
Models of the Seventies," Journal of International Economics 1 ^ F e b ruary 1983), pp. 3-24.
9
The data are from a data tape produced by the International Monetary
Fund and various issues of International Financial Statistics.. The
forward-exchange figures are annual averages based on three-month
discounts on foreign exchange.
F E D E R A L R E S E R V E B A N K O F ATLANTA
traders. An immediate implication is that the
analyst can capture substantial profits on the
basis of this theory by selling dollars and buying
foreign exchange before the prices adjust to
the fundamentals.
Unfortunately, economists' knowledge is not
sufficiently developed to permit such a strong
conclusion. If the predictions of an economic
theory are wrong, it is far more plausible that
the theory is wrong than that the market is
wrong. Besides, the empirical analysis of exchange rates is relatively undeveloped compared
to most fields of economics. A recent study
found that the most promising theories to date
cannot predict exchange rates better than
either the forward exchange rate or the assumption that exchange rates are random walks, i.e.
that exchange rate movements on successive
days are independent of one another and that
the best estimate of tomorrow's prices is that
they will be the same as today 7 s. 10
Purchasing-Power Parity
The concept of "purchasing-power parity"
provides another useful tool for examining market-determined exchange rates.
Purchasing-power parity is a widely accepted
rough standard for exchange rates that has a
long history. 11 This standard is based on the
"law of one price": the proposition that denominated in a common currency, wheat, steel,
gold, or tradeable commodities in general should
sell for the same price in different countries net
of transportation costs, tariffs, and the implicit
costs of quotas. 12 If a tradeable good sells for
different prices net of these transfer costs in
two countries for any substantial period, then it
would be profitable to ship the good to the
country with the higher sales price. This would
increase supply in the country with the higher
price, thereby lowering the higher price, and
decrease supply in the country with the lower
price, thereby raising that price. Such trade
would occur until it was no longer profitable
when the good sold for the same price net of
,0
Richard A Meese and Kenneth Rogoff, Ibid.
For an analytical discussion of purchasing-power-parity, s e e L a w r e n c e H.
Officer, "The Purchasing-Power-Parity Theory of E x c h a n g e Rates," I M F
Staff Papers 23 (March 1976), pp. 1-60. For an excellent history of
purchasing-power-parity, s e e Thomas M. Humphrey and Robert E.
Keleher, Ibid.
,2
A s used here, "quotas" included controls on currency and capital flows.
11
53
t r a n s f e r costs. B e c a u s e of this p r o c e s s of
"arbitrage," prices net of transfer costs should
generally be the same.
Purchasing-power parity is the application of
the law of one price to the price of commodities
in general, i.e. the price level. According to this
theory, prices of foreign and domestic goods,
as reflected in exchange rates, should equalize. 13
Purchasing-power parity implies that the exchange rate—the value of a foreign currency
relative to the dollar—should track the ratio of
the price of goods in terms of the foreign
currency relative to the price of goods in terms
of dollars. To the extent that purchasing-power
parity fails to hold, the difference between the
exchange rates and price ratios will provide an
indication of the change in the relative cost of
foreign and domestic goods to U.S. residents.
Chart 2 shows exchange rates and relative
price levels from 1960 through 1983 for five
countries. 14 For 1983, the exchange rates are
based on data through November; the price
indexes are based on data through October or
November. France, Japan, the United Kingdom,
and West Germany were the largest countries
besides the U.S. in terms of exports from 1975
through 1979. 1 5 Switzerland is included in the
analysis because of its relative price stability.
The fixed-exchange rate period of the 1960s
and early 1970s is included in addition to the
more recent flexible-exchange-rate period in
order to provide greater perspective. For each
country, the exchange rate and the ratio of the
country's consumer price index to the index
for the U.S. are plotted. If purchasing-power
parity held exactly, then the two lines in the
graph would coincide. As is evident in Chart 2,
there are substantial and persistent deviations
from purchasing-power parity.
With the exception of Japan, purchasingpower parity is consistent with the general
movements of exchange rates. In France and
the United Kingdom, the level of prices increased
more than in this country; the exchange rate
increased. In Germany and Switzerland, the
level of prices increased less than in the U.S.;
the exchange rate decreased.
l3
S e e Milton Friedman and Anna J. Schwartz. Monetary Trends in the
United States and the United Kingdom, (Chicago: University; of
Chicago Press, 1982), p. 6, pp. 289-92 for a long term analysis of the
United States and the United Kingdom, and Richard A. Meese and
Kenneth Rogoff, Ibid., for an analysis of recent d a t a
14
The exchange-rate and price-index data are from various issues of
International Financial Statistics, July 1983 and International Year-
54
Chart 2. Exchange Rates and Relative Price Levels
of Five Countries from 1960 to 1983.
1.5
France
1.0
.5
1.5
I
I I I I I
Japan
1.0
.5
1.5
I
I I I I I » I 1 1
I
I I
l i
i I
Switzerland
1.0
.5
I
I I
1970
1960
1980
exchange rate
price level
Japan is an anomaly because prices rose
relatively more in Japan than in the U.S. from
1960 to 1982, but the exchange rate was lower
in 1982 than in 1960. As a result, compared to a
situation in which purchasing-power parity held,
the cost of Japanese goods to residents in the
U.S. was greater than in 1960. Indeed, the cost
of Japanese goods to U.S. residents increased
book 1981 The exchange rates are annual averages of daily rates. The
price indexes are consumer price indexes or retail price indexes. The
graphs in Chart 2 are scaled so that the means of the exchange rates and
the ratio of price indexes for e a c h country are at the same point on the
vertical axes.
^"Introduction," International Financial Statistics (July 1983), p. 5.
M A R C H 1984, E C O N O M I C R E V I E W
steadily from 1960 through 1978. Only since
1978 has this cost decreased. 1 6
These graphs suggest that purchasing-power
parity does not indicate any unusual relationship between the domestic and foreign value
of the dollar during the past couple of years. In
Chart 2, the deviations of the exchange rates
from those suggested by purchasing-power
parity in 1983 are within the range of variation
historically observed.
To be sure, we do not know the "correct"
value of the exchange rate implied by purchasingpower parity. Exchange rates are the number of
units of foreign currency per dollar and, as
such, have a clear and precise unit of measure.
Price indexes, on the other hand, are calculated
with arbitrary base-year values, and ratios of
these indexes also have arbitrary base-year
values. Chart 2 is drawn so that the average
exchange rates and the ratios of price indexes
for 1960 through 1982 are at the same point on
the vertical axis. If Chart 2 were drawn with the
exchange rates and ratios of price indexes at
the same point in 1979 or 1980 in particular,
then the above statement that the deviations are
not unusual would be incorrect. There is, however, no reason to pick these particular years as
ones in which purchasing-power parity held.
The Recent Increase
in the Value of the Dollar
Rather than using an absolute standard such
as purchasing-power parity, there is an alternative
way of looking at the question of whether or
not the dollar is overvalued. This consists of
seeing if there is an explanation of why the
value of the dollar has increased since 1979-80
that is r e a s o n a b l y c o n s i s t e n t w i t h t h e data.
Many plausible reasons exist for the recent
increase. T w o of the leading explanations are
related to interest rates. 17 Nominal interest
rates, which are reported every day in the
financial press, are the sum of two components:
the expected rate of inflation, plus the "real"
(or inflation-adjusted) interest rate.
16
There are a variety of possible reasons for this anomolous behavior
including but not limited to changes in tariffsand subsidies, technological
changes, the inclusion of non-tradeable goods s u c h as housing in the
indexes, and different weights in the two indexes assigned to goods with
changing relative prices.
" T h e r e are other factors that may have played a part in the increase in the
value of the dollar, such as deregulation of oil prices in the United States,
which reduced the demand tor imported oil in the United States. The
analysis in this section is not intended to be comprehensive.
F E D E R A L R E S E R V E B A N K O F ATLANTA
The first explanation for the recent increase
in the value of the dollar is that because
expected inflation has decreased in the U.S.
relative to expected inflation in foreign countries,
the demand for dollars has increased, thereby
raising the value of the dollar.
The second explanation is that real interest
rates in the U. S. have increased relative to real
interest rates in foreign countries. The higher
real interest rates attract a capital inflow into
the U. S., which forces up the value of the
dollar. This increase in the exchange rate raises
the price of U. S. goods in foreign markets,
thereby decreasing U. S. exports, while similtaneously lowering the price of foreign goods
in the U. S. markets, thereby increasing U. S.
imports.
These two explanations for the rising value of
the dollar have conflicting implications for
nominal interest rates—the sum of the expected
real interest rate and the expected inflation
rate. The first explanation suggests that, with a
constant expected real interest rate, the nominal
interest rate in the U.S. should decrease relative
to foreign interest rates. The second explanation
suggests that with a constant expected inflation
rate, the nominal interest rate in the U.S. should
increase relative to foreign interest rates.
There is little evidence that the appreciation of
the dollar in recent years is solely a result of a
relative decrease in expected inflation in the
U.S. In general, nominal interest rates in this
country have not fallen substantially relative to
foreign rates. Chart 3 shows the differences
between nominal interest rates on three-month
interbank loans in the U.S. and in each of the
foreign countries for 1976 through 1983. 1 8
(Interest rates for 1983 are based on data through
November.) Compared to 1979 and 1980 w h e n
the exchange rates were lowest, the nominal interest rate in 1983 was lower in the U.S. than in both
France, where inflation has increased substantially, and Switzerland, which has had little
inflation. The U.S. rate has decreased relative
to the German rate, but this decrease is not
'"The interest rates are annual averages of daily interest rates. For 1 9 7 6
through 1981, they are from the Board of Governors of the Federal
R e s e r v e System, Annual Statistical Digest 1 9 7 0 - 1 9 7 9 , 1 9 8 0 , and
1981. (Washington: By the author, 1980, 1981, and 1982 respectively),
Tables 63, 68, and 69 respectively. The data for 1982 and 1 9 8 3 are from
various issues of the Federal Reserve Bulletin, Table 3.27. T h e interest
rate for J a p a n is the interest rate on loans and discounts that can be
called after being held over a minimum of two month-ends
55
substantial compared with past movements.
Furthermore, for the same period, the domestic
interest rate has increased relative to the United
Kingdom rate. This is generally consistent with
the proposition that the dollar has appreciated
relative to foreign currencies because of a
relative decline in expected inflation. It is not,
however, clearly indicative that decreases in
the relative interest rates were the cause of the
increase in the value of the dollar relative to
1979 and 1980.
Furthermore, there is little indication that the
appreciation of the dollar in recent years is
solely a result of a relative increase in interest
rates in the U.S. There is some support for this
proposition relative to the United Kingdom,
but interest rates in the other countries have
fallen relative to U.S. interest rates.
Unfortunately, it is difficult to measure either
the expected rate of inflation or the expected
real rate of interest, which are the two components which form the nominal interest rate.
What can be measured is the actual inflation
rate, which equals the expected inflation rate
plus the error in the projection of the inflation
rate. This actual inflation rate can be used to
,9
T h e inflation rates are based on monthly Consumer Price Indexesfrom an
International Monetary Fund data tape and various issues of International
Financial Statistics The inflation rates are calculated to span the same
time period as the interest rates above. T h e inflation rate for any month
is t h e p e r c e n t a g e c h a n g e in the p r i c e level b e t w e e n that month
56
adjust the nominal interest rate to obtain the
actual real interest rate. Such calculations can
be useful if projections of inflation are sufficiently accurate. They can be quite misleading,
however, if projections vary substantially from
actual inflation. Because the data used are
annual averages of three-month inflation rates,
their broad movements are likely to track the
movements of actual inflation.
Since 1978, the U.S. inflation rate has declined
relative to the inflation rate for each of the
foreign countries listed for comparison. Chart 4
shows the differences between the inflation
rate in the U.S. and in each of the foreign
countries for 1976 through 1982. 19 The inflation
rates are c a l c u l a t e d to c o r r e s p o n d to t h e
nominal interest rates in Chart 3. The interest
rates generally are annual averages of threemonth rates (at an annual rate) and indicate
the number of dollars of interest per dollar
loaned that will be received three months in
the future. The inflation rates are annual averages
of three-month rates (at an annual rate) and
indicate the relative increase in prices three
months in the future. Because only part of the
1983 inflation rate can be calculated as of the
and three months in the future. B e c a u s e nominal interest rates for three
months are usually converted to an annual basis by multiplying by four,
the inflation rates are converted to an annual basis by multiplying by four.
(Compounding would have little effect on any of the figures.) The inflation
rates in Figures 4 are annual averages of these inflation rates
M A R C H 1984, E C O N O M I C R E V I E W
;
printing of this article, 1983 is not included in
the figure.
Inflation in the U.S. peaked relative to inflation in the cited countries in 1978 or 1979. The
decline from that peak has in some cases been
quite substantial. For example, in 1979 the
inflation rate was about 8.1 percentage points
higher in the U.S. than in Germany; in 1982, the
inflation rate was virtually the same in the two
countries. The decline from the peak difference
of the relative inflation rate in the U.S. in 1978
or 1979 to the difference in 1982 is greater
than 5 percentage points for all countries
except the United Kingdom. Indeed, the decline
in the U.S. inflation rate relative to the rate in
Switzerland is greater than 10 percentage points.
The inflation rates in the U.S. for 1978, 1979,
and 1980 are substantially greater than rates in
all of these countries except France and the
United Kingdom. T h e only one of the five
countries with a lower inflation rate than the
U.S. in 1982 was Japan.
Whether or not each year-to-year change in
relative inflation rates in Chart 4 was anticipated
accurately (or at all), it is plausible that the
expected inflation rate for the U.S. in 1982
relative to these foreign countries is lower than
in 1978 through 1980. As a result, these data
are consistent with an explanation of recent
exchang^rate movements based on a decrease
of the expected inflation rate for the U.S.
relative to these foreign countries.
The puzzle from this point of view is the
failure of nominal interest rates to reflect this
relative decrease in the expected inflation rate
in 1982. It is clear from Charts 3 and 4 that the
relative decreases in the inflation rate are
substantially greater than the relative decreases
in nominal interest rates.
An implication of Charts 3 and 4 is that the
real interest rate in the U.S. was relatively
higher in recent years than in prior years. Chart
5 shows the differences between the real
interest rate in the U.S. and in each of the
foreign countries for 1976 through 1982. 2 0
With the exception of the United Kingdom, the
real interest rates for the U.S. in 1981 and 1982
exceeded the foreign real interest rates by
more than in prior years and in some cases
20
T h e s e are c a l c u l a t e d using the d a t a in F i g u r e s 3 a n d 4. T h e formula r
= 1(1 + I) (1 + ttJ - 1 w h e r e r is the real interest rate, i is the nominal
interest rate, a n d rr is the inflation rate, is u s e d to c a l c u l a t e t h e real
F E D E R A L R E S E R V E BANK O F ATLANTA
Chart 5. Real Interest Rate Differentials
(U. S. minus Foreign Rates)
10
Germany
France
0
- 1 0
'76
10
'78
'80
'82
- 1 0
'76
'78
_1
'80
L.
'82
Switzerland
Japan
-10
- 1 0
'76
10
'78
'80
'82
'76
'78
'80
'82
United Kingdom
- 1 0
_J
'76
'78
'80
I
L.
'82
substantially more. It is plausible that the
substantial relative decrease in U.S. inflation
was largely expected by 1982. Since the nominal
interest rate on a loan is known w h e n the loan
is made, it is also plausible that relatively high
real interest rates also were at least partly
expected by 1982. It may well be that the
expected real rates were lower than the actual
real rates, but it is possible that the expected
real rate was relatively higher in the U.S. than in
prior years.
The actual real interest rates on loans made
late in 1983 cannot yet be calculated. Nonetheless, the real rates through July and August
suggest that the relatively high real interest
rates in the U.S. in 1981 and 1982 were
transitory. The excesses of the U.S. over foreign
real interest rates were 1.41, 1.73, 0.27, 2.57,
and 0.45 percent for France, Germany, Japan,
Switzerland, and the United Kingdom, respectively. All of these differentials were less than in
1982. This transitory aspect of the rise in the real
interest rate was partly due to an unexpected
decrease in inflation in the U. S. It is also possible
that real interest rates rose in the U. S. and are
returning to equality with foreign real interest
rates because of the large capital inflows attracted
interest rate for e a c h month. A n n u a l a v e r a g e s of the monthly real
interest are t h e n c a l c u l a t e d .
57
by high real interest rates. T h e large capital
inflows into the U.S. in 1982 and 1983 suggest
that there is at least some truth to the second
proposition.
Conclusion
Since 1979 and 1980, the international value
of the dollar has increased substantially. This
has led some observers to suggest that the
dollar is "overvalued" and frequently to conclude
that the value of the dollar must fall.
Such a conclusion overlooks the fact that
foreign exchange is traded in a more-or-less
free market Without evidence that arbitrary
expectations are influencing the
market
significantly, there is no reason to think that
current prices of foreign exchange reflect a
bubble. Forward exchange rates provide no
evidence of uniform expectations that the
value of the dollar will increase further. This
rules out relatively simple versions of bubble.
T w o factors appear to be at least partly
responsible for the rise in the dollar's value.
58
Since 1979 and 1980, inflation has decreased
substantially in the U.S. relative to France,
Germany, Japan, and Switzerland. These decreases are persistent and substantial, a factor
which suggests that a decrease in the expected
inflation rate has occurred and is partly responsible for the increasing value of the dollar. Real
interest rates in the U.S. rose relative to real
rates in these countries as well in 1981 and
1982, but recent data suggest that the increases
were transitory. This is possibly because of
capital attracted to this country by higher
expected real interest rates in the U.S. Thus, it
is plausible that the increased exchange rate is
partly a result of higher real interest rates as
well.
As w e have seen, there are explanations of
the recent increase in the dollar's value that
are consistent with the expectations of traders
in the foreign exchange market Hence, it
would be misleading to describe the dollar as
overvalued in any sense of the word.
—Gerald P. Dwyer
MARCH 1984, E C O N O M I C REVIEW
s
O l
*iri
fftffîmïïêM,
FINANCE
JAN
1984
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings <3c T i m e
DEC
1983
JAN
1983
1,351,110 1,321,567 1,245,791
339,879
311,529
323,014
87,186
68,433
88,716
348,775
219,770
350,156
610,635
663,834
619,835
61,185
52,276
60,793
5,686
4,192
5,549
49,983
43,436
50,541
ANN.
%
CHG.
+
5
30
59
7
16
32
16
+
+
+
+
Savings & L o a n s * *
T o t a l Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
152,066
38,744
11,358
39,298
67,269
6,025
502
149,715
36,843
11,221
39,171
66,525
5,979
500
136,742
37,361
8,951
23,731
69,905
4,992
369
4,262
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings <5c T i m e
15,930
4,107
1,040
3,210
14,914
3,897
802
2,080
8,534
857
72
734
Savings & L o a n s * *
T o t a l Deposits
NOW
Savings
Time
915
15,698
3,878
1,022
3,211
8,132
910
C o m m e r c i a l Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
53,617
13,550
4,707
18,364
18,417
2,638
253
2,114
53,015
13,196
4,673
18,215
18,209
2,634
254
2
45,582
13,216
3,923
10,263
19,257
2,255
197
1,789
Savings Sc L o a n s * *
T o t a l Deposits
NOW
Savings
Time
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
22,248
7,458
1,509
4,885
9,692
I,359
75
21,743
7,045
1,486
4,849
9,485
I,336
73
20,234
6,696
1,206
3,917
9,253
923
41
828
Commercial Bank Deposits
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
25,722
6,379
1,472
5,450
13,105
202
22
195
25,121
5,840
1,453
5,426
12,947
24,179
6,469
1,213
3,185
13,829
164
11
154
C o m m e r c i a l Bank
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
II,784
2,542
827
2,442
6,320
N.A.
N.A.
N.A.
II,670
2,429
2,468
6,304
N.A.
N.A.
N.A.
10,898
2,487
654
1,197
6,779
N.A.
N.A.
N.A.
Commercial
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
22,765
4,708
1,803
4,947
11,549
911
63
860
22,468
4,455
1,779
5,002
11,448
898
62
842
20,935
4,596
1,153
3,090
12,253
793
48
757
Commercia
Demand
NOW
Savings
Time
C r e d i t Union Deposits
Share D r a f t s
Savings & T i m e
Notes:
¿096
8,186
U208
M05
1J96
201
23
194
808
+
+
+
+
27
66
4
21
36
20
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Mortgages Outstanding
Mortgage C o m m i t m e n t s
+
+
+
+
+
+
+
11
25
25
5
47
83
46
6
- 1
+ 21
+ 71
- 5
+ 23
+ 100
+ 27
+ 2
+ 26
+ 104
- 7
Savings & Loans
T o t a l Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Savings & Loans**
T o t a l Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
Savings & L o a n s * *
T o t a l Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
9
+
2
+ bb
+ 60
6
+ lb
+ 31
+ 14
+
Savings &
T o t a l Deposits
NOW
Savings
Time
Mortgages Outstanding
Mortgage C o m m i t m e n t s
ANN.
%
CHG.
JAN
1984
DEC
1983
JAN
1983
627,164
18,709
174,733
437,078
DEC
483,596
32,331
621,740
18,983
175,774
430,484
NOV
479,026
34,332
556,603
13,454
124,374
421,051
DEC
473,656
17,964
N.A.
N.A.
N.A.
N.A.
DEC
68,866
4.578
N.A.
N.A.
N.A.
N.A.
NOV
68,791
4,926
N.A.
N.A.
N.A.
N.A.
DEC
67,016
3,067
5,222
151
865
4,242
DEC
3,846
288
5,169
152
863
4,201
NOV
3,791
289
4,559
147
594
3,847
DEC
3,685
247
53,387
2,119
14,591
37,152
DEC
41,223
3.181
53,821
2,194
15,022
36,938
NOV
40,809
3,458
49,137
1,600
10,524
37,282
DEC
39,268
2,346
N.A.
N.A.
N.A.
N.A.
DEC
8,326
477
N.A.
N.A.
N.A.
N.A.
NOV
8,259
503
N.A.
N.A.
N.A.
N.A.
DEC
8,641
182
8,970
198
2,406
6,460
DEC
8,046
446
8,949
197
2,421
6,418
NOV
8,109
531
8,176
139
1,488
6,603
DEC
7,394
210
+ 10
+ 42
+ 62
- 2
2,545
107
498
1,974
DEC
2,035
63
2,534
100
505
1,961
NOV
2,048
62
2,508
75
336
2,124
DEC
2,033
21
+ 1
+ 43
+ 48
- 7
6,765
180
1,354
5,282
DEC
5,390
185
7,359
218
1,504
5,674
NOV
5,775
205
6,667
136
903
5,689
DEC
5,995
153
+ 1
+ 32
+ 50
- 7
+ 13
+ 39
+ 40
+ 4
+ 2
+ 80
15
3
46
10
+
+
+
+
5
+ 96
+
+
+
+
-
9
32
39
0
+ 5
+ 36
+ 9
+ 113
+ 0
+200
- 10
+200
A l l deposit data are e x t r a c t e d from the F e d e r a l R e s e r v e Report of T r a n s a c t i o n Accounts other D e u n t s
Jg*<P*J«00>'
and are reported for the average of the week ending the 1st Wednesday of the month. T h i s data, reported by institutions w i t h
. ^ / m P i | i o n i n d e u o s its a s o f December 31, 1979, represents 95% of deposits in the six state a r e a . T h e major d i f f e r e n c e s between
this report™ and the " c a T ^ o " ° a r e ^ e t^e Vreatn^nt "of interbank deposits, and the treatment of float
the Report of T r a n s a c t i o n Accounts is for banks over $15 million in deposits as of D e c e m b e r 3 1 1979
r h e t o t a l deposit data generated
from the Report of T r a n s a c t i o n Accounts eliminates interbank deposits by reporting the net of deposits due to and due from other
depository institutions. T h e Report of T r a n s a c t i o n Accounts subtracts cash items in process of collect n rom demand deposits, w h i l e
the call report doe, not. S a v i n s and loan mortgage data are from the Federal Home Loan Bank Board S e l e c t e d B a l a n c e Sheet D a t a .
T h e Southeast data represent the t o t a l of the s i x s t a t e s . Subcategories were chosen on a s e l e c t i v e bas.s and do not add to t o t a l .
* = f e w e r than four institutions reporting.
= SicL deposits subject to revisions due to reporting changes.
for* *FRASER
N . A . = not available at this t i m e .
Digitized
CONSTRUCTION
DEC
1983
12-month Cumulative Rate
• D H H I H B H B H H
Nonresidential Building P e r m i t s - ^ M U :
T o t a l Nonresidential
51,297
Industrial Bldgs.
5,550
Offices
12,555
Stores
6,998
Hospitals
2,045
Schools
858
Nonresidential Build
Total Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
8,096
668
1,942
1,329
481
155
ANN
%
NOV
1983
DEC
1982
51,321
5,620
12,738
6,976
2,108
876
45,658
5,109
12,139
5,231
1,818
800
+ 12
+ 9
+ 3
+ 34
+ 12
+ 7
R e s i d e n t i a l Building P e r m i t s
Value - $ M i l .
Residential P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ M i l .
8,028
683
1,867
1,279
519
171
6,426
723
1,384
927
328
109
+ 26
8
+ 40
+ 43
+ 47
+ 42
Residential Building P e r m i t s
Value - $ M i l .
Residential P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ Mil.
399
63
69
64
44
8
+ 32
- 48
13
+ 47
- 91
+ 13
R e s i d e n t i a l Building P e r m i t s
Value - $ M i l .
R e s i d e n t i a l P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ M i l .
+ 24
4
+ 32
+ 53
+ 63
+ 205
R e s i d e n t i a l Building P e r m i t s
Value - $ Mil.
Residential P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ Mil.
CHG
XätiÄlBHHMH
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
526
33
60
94
4
9
535
28
63
90
25
9-
FLORID/
Nonresidi
Nonresidential Building P e r m i t s
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals "
Schools
Mil.
4,032
364
897
753
289
58
3,988
366
878
713
291
54
3,250
378
679
493
177
19
h
h
h
^
H
I
Nonresidential Building
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
1,341
163
445
155
31
28
1,296
181
396
147
35
27
9^2
145
225
82
25
17
+
+
+
+
+
37
12
98
89
24
65
Value - $ M i l .
R e s i d e n t i a l P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ M i l .
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
1,186
35
374
131
119
49
1,207
37
366
134
123
70
976
84
300
151
32
50
+ 22
- 58
+ 25
- 13
+ 272
- 2
R e s i d e n t i a l Building P e r m i t s
Value - $ M i l .
Residential P e r m i t s - Thous.
S i n g l e - f a m i l y units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ M i l .
Nonresidei
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
191
10
18
38
19
6
185
7
19
39
18
7
160
14
16
38
5
4
+ 19
- 29
+ 13
0
+ 280
+ 50
Value - $ M i l .
Residential P e r m i t s - Thous.
S i n g l e - f a m i l v units
M u l t i - f a m i l y units
To^al Building P e r m i t s
Value - $ M i l .
T o t a l Nonresidential
Industrial Bldgs.
Offices
Stores
Hospitals
Schools
820
63
148
158
19
5
817
64
145
156
27
4
659
39
95
99
45
11
+
+
+
+
24
62
56
60
58
55
R e s i d e n t i a l Building P e r m i t s
Value - $ M i l .
Residential P e r m i t s - Thous.
Single-family units
M u l t i - f a m i l y units
T o t a l Building P e r m i t s
Value - $ Mil.
.
+
-
NOV
1983
DEC
1983
ANN
%
CHG
DEC
1982
••
67,830
66,938
39,636
+ 71
891.2
699.1
884.0
694.0
537.5
447.6
+ 66
+ 56
119,126
118,259
85,295
+ 40
12,660
12,452
7,103
+ 78
183.1
160.7
182.0
156.7
110.5
86.3
+
20,683
20,407
13,529
434
424
239
+ 82
8.0
8.0
7.9
7.8
4.9
4.3
+ 63
+ 86
960
959
639
7,387
7,224
4,202
+ 76
98.4
88.8
97.2
86.6
57.0
51.5
+ 73
+ 72
11,419
11,211
7,451
+ 53
2,405
2,398
1,366
+ 76
41.5
25.4
41.5
25.4
26.3
13.0
+ 58
+ 95
3,747
3,694
2,348
+ 60
1,093
1,085
652
+ 68
16.8
17.1
16.8
16.6
11.2
8.4
+ 50
+ 104
2,278
2,292
1,628
+ 40
312
317
181
+ 72
4.7
4.8
4.9
4.7
3.5
2.2
+ 34
+ 118
503
502
341
+ 48
1,029
1,004
463
+ 122
13.7
16.6
13.7
15.6
7.6
6.9
+ 80
+ 141
1,776
1,749
1,122
+ 58
66
+ 86
+ 53
+
50
NOTES:
D a t a supplied by the U . S . Bureau of the Census, Housing Units A u t h o r i z e d B y Building P e r m i t s and Public C o n t r a c t s , C - 4 0 .
Nonresidential data excludes the cost of construction for publicly owned buildings. T h e southeast data represent the t o t a l of
the six s t a t e s . T h e annual percent change calculation is based on the most recent month over prior y e a r . Publication of F . W.
Dodge construction c o n t r a c t s has been discontinued.
60
M A R C H 1984, E C O N O M I C R E V I E W
GENERAL
LATEST
DATA
AIM
Personal Income
($bil. - S A A R )
T a x a b l e S a l e s - $bil.
Plane P a s s . A r r . 000's
Petroleum Prod, (thous
Consumer P r i c e Index
1967=100
K i l o w a t t Hours - mils.
•
B
l
Personal Income
($bil. - S A A R )
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . 000's
2,709.1
N.A
N.A.
8,619.3
2,584.7
N.A.
N.A.
8,680.5
+ 7
JAN
2,755.1
N.A.
N.A.
8,675.5
JAN
DEC
305.2
185.4
303.5
170.5
293.1
170.3
+ 4
+98
326.7
N.A.
4,144.8
1,400.0
310.0
N.A.
4,326.2
1,384.0
+ 7
DEC
JAN
332.1
N.A.
4,447.5
1,403.0
DEC
N.A.
27.8
N.A.
26.7
N.A.
26.1
+ 6
3Q
OCT
DEC
JAN
36.8
29.3
109.2
50.0
36.2
28.6
109.2
51.0
34.2
27.6
98.0
53.0
+ 8
+ 7
+ 12
- 6
DEC
N.A.
3.7
N.A.
3.4
N.A.
3.5
+ 6
124.9
74.3
2,258.6
51.0
JAN
165.0
7.3
121.9
73.9
1,972.1
52.0
NOV
164.0
7.6
115.1
67.4
2,253.8
65.0
JAN
157.9
7.1
+ 9
+ 10
+ 0
-22
59.3
41.1
1,647.4
N.A.
DEC
307.3
4.6
58.2
40.4
1,610.9
N.A.
OCT
304.4
4.1
54.4
39.3
1,568.9
N.A.
DEC
296.1
4.1
+ 9
+ 5
+ 5
45.3
N.A.
258.8
1,215.0
45.9
N.A.
272.7
1,211.0
44.9
N.A.
247.7
1,190.0
+ 1
N.A.
4.2
N.A.
4.3
N.A.
4.1
DEC
JAN
21.1
N.A.
31.4
87.0
20.8
N.A.
31.3
86.0
19.8
N.A.
29.0
88.0
DEC
N.A.
1.9
N.A.
1.8
N.A.
1.8
3Q
DEC
DEC
JAN
44.7
38.2
142.1
N.A.
43.7
37.7
148.6
N.A.
41.6
35.1
128.8
N.A.
DEC
N.A.
6.1
N.A.
5.5
N.A.
5.6
3Q
3Q
JAN
DEC
JAN
Miami
N o v . 1977 = 100
DEC
K i l o w a t t Hours - mils.
H H 1
Personal Income
3Q
($bil. - S A A R )
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . 000's
DEC
Petroleum Prod, (thous.)
Consumer P r i c e Index - A t l a n t a
1967 = 100
K i l o w a t t Hours - m i l s .
DEC
M Ë I H
Personal Income
(Sbil. - S A A R )
3Q
T a x a b l e Sales - $ b i l .
DEC
Plane P a s s . A r r . 000's
Petroleum Prod, (thous.) J A N
Consumer P r i c e Index
1967 = 100
DEC
K i l o w a t t Hours - mils.
• • • •
Personal Income
($bil. - S A A R )
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . 000's
Petroleum Prod, (thous.)
Consumer P r i c e Index
1967 = 100
K i l o w a t t Hours - m i l s .
ÏNNËSSËÈ
Personal Income
(Sbil. - S A A R )
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . 000's
Petroleum Prod, (thous.)
Consumer P r i c e Index
1967 = 100
K i l o w a t t Hours - m i l s .
ANN.
PREV.
PERIOD
3Q
Personal Income
($bil. - S A A R )
T a x a b l e Sales - S b i l .
Plane P a s s . A r r . 000's
Petroleum Prod, (thous.)
Consumer P r i c e Index
1967=100
K i l o w a t t Hours - mils.
ALABAMA
Personal Income
($bil. - S A A R )
T a x a b l e Sales - $ b i l .
Plane P a s s . A r r . 000's
Petroleum Prod, (thous.
Consumer P r i c e Index
1967=100
K i l o w a t t Hours - mils._
YEAR
AGO
CURR.
PERIOD
3Q
CHG.
- 0
+ 2
+ 1
+ 4
+ 3
+ 12
+ b
+
•i
+
2
+ 7
+ 9
- 1
+ 6
+ 7
+ 9
+ 11
+ 9
JAN
1984
R = revised.
F E D E R A L R E S E R V E B A N K O F ATLANTA 61
ANN.
CHG.
Agriculture
P r i c e s R e c ' d by F a r m e r s
143
Index (1977=100)
79,834
B r o i l e r P l a c e m e n t s (thous.)
61.4
C a l f P r i c e s ($ per c w t . )
36.9
B r o i l e r P r i c e s (« per lb.)
7.49
Soybean P r i c e s ($ per bu.)
243
B r o i l e r F e e d Cost ($ per ton)
140
80,140
60.6
33.7
7.74
240
128
81,770
62.4
25.8
5.56
202
+ 12
- 2
- 2
+43
+ 35
+20
Agriculture
P r i c e s R e c ' d by F a r m e r s
132
Index (1977=100)
30,786
Broiler P l a c e m e n t s (thous.)
56.4
C a l f P r i c e s ($ per c w t . )
37.0
Broiler P r i c e s (« per lb.)
7.75
Soybean P r i c e s (S per bu.)
235
B r o i l e r F e e d Cost ($ per torp
128
30,819
57.1
33.9
7.79
234
116
31,619
59.1
24.7
5.66
191
+ 14
- 3
- 5
+ 50
+ 37
+ 23
Agriculture
F a r m C a s h R e c e i p t s - S mil.
1,419
(Dates: S E P T , S E P T )
10,366
B r o i l e r P l a c e m e n t s (thous.)
57.3
C a l f P r i c e s ($ per c w t . )
36.5
Broiler P r i c e s (« per lb.)
7.66
Soybean P r i c e s ($ per bu.)
B r o i l e r F e e d Cost ($ per ton)
270
-
10,475
57.3
32.5
7.36
270
1,443
10,530
58.4
24.5
5.60
205
- 2
- 2
- 2
+49
+ 37
+32
Agriculture
F a r m Cash R e c e i p t s - $ m i l .
3,305
(Dates: S E P T , S E P T )
1,789
Broiler P l a c e m e n t s (thous.)
60.5
C a l f P r i c e s ($ per c w t . )
36.0
Broiler Prices (« per lb.)
7.66
Soybean P r i c e s (S per bu.)
260
B r o i l e r F e e d Cost ($ per ton)
1,853
61.3
33.0
7.36
260
3,166
1,999
60.8
25.0
5.60
215
+ 4
-11
- 0
+ 44
+37
+21
Agriculture
F a r m Cash R e c e i p t s - S m i l .
2,146
(Dates: S E P T , S E P T )
12,380
Broiler P l a c e m e n t s (thous.)
55.4
C a l f P r i c e s ($ per c w t . )
36.0
Broiler P r i c e s (<? per lb.)
7.67
Soybean P r i c e s ($ per bu.)
220
B r o i l e r F e e d C o s t ($ per ton)
12,387
54.3
33.5
7.62
215
2,140
12,718
55.3
24.0
5.56
185
+ 0
- 3
+ 0
+50
+ 38
+ 19
904
N.A.
59.6
26.0
5.88
255
-10
- 6
+46
+ 33
+ 16
1,207
6,372
61.9
26.5
5.58
163
- 4
- 2
-12
+51
+ 38
+ 17
1,178
N.A.
58.0
22.5
5.65
181
+ 4
Agriculture
Farm Cash Receipts - $ mil.
(Dates: S E P T , S E P T )
Broiler P l a c e m e n t s (thous.)
C a l f P r i c e s ($ per c w t . )
B r o i l e r Prices (<C per lb.)
Soybean P r i c e s ($ per bu.)
Broiler F e e d Cost ($ per ton)
-
-
817
N.A.
56.0
38.0
7.80
295
N.A.
58.7
36.0
7.89
290
Agriculture
F a r m C a s h R e c e i p t s - $ mil.
1,161
(Dates: S E P T , S E P T )
6,251
B r o i l e r Placements (thous.)
54.6
C a l f P r i c e s ($ per c w t . )
40.0
Broiler P r i c e s ($ per lb.)
7.70
Soybean P r i c e s ($ per bu.)
191
Broiler F e e d Cost ($ per ton)
6,153
57.8
37.0
7.88
195
Agriculture
F a r m Cash R e c e i p t s - S m i l .
1,230
(Dates: S E P T , S E P T )
N.A.
Broiler P l a c e m e n t s (thous.)
54.5
C a l f P r i c e s ($ per c w t . )
35.0
Broiler P r i c e s ( i per lb.)
7.88
Soybean P r i c e s ($ per bu.)
225
Broiler F e e d Cost ($ per ton)
N.A.
53.6
32.5
8.01
225
Personal Income data supplied by U . S. Department of C o m m e r c e
T a x a b l e Sales
^
Passenger A r r i v a l s are c o l l e c t e d from 26 airports. Petroleum Product.on data supplied by U . S. Bureau of M nes.
Index data supplied by Bureau of Labor S t a t i s t i c s . Agriculture data supplied by U . S . Department of A g n c u l t u r e .
R e c e i p t s data are r e p o r t « ! as cumulative for the calendar year through the month shown
Bro.er t Z T ^ Z l
r a t e . T h e Southeast data represent the t o t a l of the six s t a t e s . N . A . = not a v a . l a b l e . T h e annual percent change
on most recent data over prior y e a r .
JAN
1983
DEC
1983
-
-
-
- 6
+56
+39
+ 24
Cor*umer P n c e
Farm Cash
T a l S o n fs bas'ed
c a l c u l a t . o n .s based
EMPLOYMENT
DEC
1983
NOV
1983
DEC
1982
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment Hate - % S A
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . W k l y . Hours
Mfg. A v g . W k l y . E a r n . - $
111,795
102,803
8,992
8.2
N.A.
N.A.
41.2
373
112,147
103,018
9,129
8.4
N.A.
N.A.
40.8
366
110,477
98,849
11,628
10.8
N.A.
N.A.
39.7
345
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % S A
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . W k l y . Hours
Mfg. A v g . Wkly. E a r n . - $
14,685
13,380
1,297
9.0
N.A.
N.A.
41.5
324
14,712
13,358
1,354
9.5
N.A.
N.A.
40.9
316
14,207
12,668
1,539
11.0
N.A.
N.A.
40.7
306
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % S A
Insured Unemployment - thous.
Insured Unempl. R a t e - 96
Mfg. A v g . W k l y . Hours
M f f j . A v g . Wkly. E a r n . - $
1,763
1,546
217
12.8
N.A.
N.A.
41.6
322
1,775
1,552
223
13.1
N.A.
N.A.
41.1
316
1,720
1,453
267
15.7
N.A.
N.A.
39.6
294
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . W k l y . Hours
Mffj. Avg. Wkly. Earn. - $
5,118
4,735
383
7.4
N.A.
N.A.
42.4
315
5,064
4,656
408
7.8
N.A.
N.A.
41.2
306
4,798
4,343
455
9.5
N.A.
N.A.
41.4
302
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . Wkly. Hours
Mffj. Avg. Wkly. Earn. - $
2,679
2,502
177
6.8
N.A.
N.A.
42.3
309
2,689
2,502
187
7.2
N.A.
N.A.
41.8
301
2,670
2,461
209
8.1
N.A.
N.A.
40.4
279
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. Avg. Wkly. Hours
Mffj. Avg. Wkly. Earn. - $
1,899
1,708
191
10.4
N.A.
N.A.
40.1
394
1,925
1,716
209
11.4
N.A.
N.A.
39.6
384
1,1,855
1,640
215
12.0
N.A.
N.A.
42.7
401
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - % SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . Wkly. Hours
Mfg. A v g . W k l y . E a r n . - $
1,027
924
103
10.1
N.A.
N.A.
41.5
290
1,044
934
110
11.3
N.A.
N.A.
40.6
279
1,051
927
124
11.9
N.A.
N.A.
40.1
262
C i v i l i a n Labor F o r c e - thous.
T o t a l Employed - thous.
T o t a l Unemployed - thous.
Unemployment R a t e - 9 6 SA
Insured Unemployment - thous.
Insured Unempl. R a t e - %
Mfg. A v g . W k l y . Hours
Mfg. A v g . W k l y . E a r n . - $
2,199
1,973
226
10.4
N.A.
N.A.
41.1
313
2,215
1,998
217
10.5
N.A.
N.A.
40.9
310
2,113
1,844
269
12.8
N.A.
N.A.
39.8
295
Notes:
ANN.
%
CHG.
+ 1
+ 4
-23
+ 4
+ 8
+ 3
+ 6
-16
+ 2
+ 6
+ 3
+ 6
-19
+ 5
+ 10
+ 9
-16
+ 2
+ 4
+ 1
+ 2
-15
+ 5
+ 11
+ 3
+ 4
-11
- 6
- 2
- 0
-17
+ 3
+ 11
+ 4
+ 7
-16
+ 3
+ 6
DEC
1983
NOV
1983
DEC
1982
ANN.
96
CHG.
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
Fin., las., & Real Est.
T r a n s . C o m . & Pub. U t i l .
92,289
19,225
4,077
21,298
16,002
20,062
5,520
5,054
92,118
19,262
4,248
20,942
16,013
20,051
5,501
5,057
89,321
18,159
3,786
20,824
15,968
19,149
5,349
5,036
+
+
+
+
+
+
+
+
3
6
8
2
0
5
3
0
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real Est.
T r a n s . C o m . & Pub. U t i l .
11,746
2,224
656
2,851
2,183
2,314
675
698
11,696
2,223
660
2,804
2,183
2,309
671
700
11,440
2,135
629
2,758
2,156
2,259
652
702
+
+
+
+
+
+
+
-
3
4
4
3
1
2
4
1
Nonfarm Employment- thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins., & Real Est.
T r a n s . C o m . & Pub. U t i l .
1,326
335
61
276
295
216
59
71
1,324
335
61
271
295
217
59
71
1,310
326
58
273
291
218
59
70
+
+
+
+
+
-
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , I n s . , ic R e a l E s t .
T r a n s . C o m . & Pub. U t i l .
4,015
494
267
1,100
653
954
303
235
3,969
488
263
1,078
651
946
299
234
3,834
461
242
1,034
638
927
284
239
+ 5
+ 7
+ 10
+ 6
+ 2
+ 3
+ 7
- 2
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
T r a n s . C o m . & Pub. U t i l .
2,296
515
108
560
440
394
121
149
2,287
515
no
550
441
395
121
148
2,227
495
103
540
440
376
118
146
+
+
+
+
3
4
5
4
0
+ 5
+ 3
+ 2
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & Real E s t .
T r a n s . C o m . & Pub. U t i l .
1,595
190
113
375
315
307
80
122
1,597
193
115
371
315
307
80
124
1,607
199
119
372
310
305
79
127
+
+
+
+
+
-
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
F i n . , Ins., & R e a l E s t .
T r a n s . C o m . & Pub. U t i l .
801
207
37
167
181
124
33
39
799
207
38
164
181
124
33
39
794
198
40
167
182
124
33
39
Nonfarm E m p l o y m e n t - thous.
Manufacturing
Construction
Trade
Government
Services
Fin., Ins., & R e a l Est.
T r a n s . C o m . & Pub. U t i l .
1,713
483
70
373
299
319
79
82
1,720
485
73
370
300
320
79
84
1,668
456
67
372
295
309
79
81
1
3
5
1
1
1
0
+ 1
0
5
5
1
2
1
1
4
+ 1
+ 5
- 8
0
- 1
0
0
0
+
+
+
+
+
+
3
6
4
0
1
3
0
+ 1
A l l labor force data are from Bureau of Labor S t a t i s t i c s reports supplied by s t a t e agencies.
Only the unemployment r a t e data are seasonally adjusted.
T h e Southeast data represent the t o t a l of the s i x s t a t e s .
T h e annual percent change calculation is based on the most recent data over prior y e a r .
62
M A R C H 1984, E C O N O M I C R E V I E W
FEDERAL RESERVE BANK OF ATLANTA
B u l k Rate
U . S . Postage
PAID
Atlanta, Ga.
Permit 292
@FedFRASER