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DECEMBER 1971
Correspondent Banking·
Part Ill: Account Analysis . . . . . . page 3
The Metropolitanization
Of the Tenth District . . . . . . . . page 1 8
Index of Monthly Review
Articles in 1971 • . . . . . . . . . page 24
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this publication.
Correspondent Banking
Part Ill: Accou nt Analysis
By Robert £ . Knight
th e hac kh one o r the co rreba nkin relationship has been
formed by ovcrline loa n participations, tr ansit
opera ti on s, bond portfo lio advice and se rvi ces,
and loan s to bank officers. Perso nal relationships often determined where balances would
go and in time a degree of per manence tended
to so lid ify th e relationship. Toda y th ese traditional se rvices continue to be th e ones which
sma ller bank s generally find mos t va luable.
The first article in this se ri es, which appeared in the Novembe r 1970 Monthly R eview.
exa mined the di stribution and behavior o f
co rrespondent bulances. Th e types of se rvices
offe red by corresponde nt ba nk s were di scussed and figure s pre ented indicating th e extent to which th e e se rvices are utilized by
responde nt bank s. T he primary focus of th e
seco nd ar ticle, published in the December
1970 Monthly R eview, was on th e need for
loa n participation s. The percentage of bank s
req uiring different types of participations and
the average doll ar amounts involved were
analyzed. Pa rti a l fi gure were der ived sho wing th e net now of funds between co rres pondent bank s and their res pond ents. Thi s arti cle
Traclitionall
1 ~pondent
1
I / Througho ut I hi s artic le. ..co m .:sponde nt bank s" ( or .. co rrespondcn1 s·· ) rcf'cr to banb accepting dcposits from o thcr banks
and in return offcrin g ser vices to th ese ba nk s. '" Respondcnts"
o r banks in ge ncral arc co nsid ercd to bc thc rcc ipicnt s of thcsc
sc rv1ccs.
Monthly Review
•
December 1971
will explore the account analysis proc<.:durcs
used hy correspo ndent s to d<.:t<.:rmine th e
profitability o r se rvicin g individual acco unts.
orrespondent ba nkin g, lik e mos t oth er aspec ts of ba nking, has ex peri enced major
changes in recent yea rs. Perh aps th e most
significant development has been the in crease
in the number and quality of services pro vid ed
by correspondents. Correspondent banks have
been asked to clear checks more quickl y an d
efficiently and req~ested to take an eve r increasing a mount of loan participation s. Smaller banks have so ught improved access to th e
money mark ets in such areas as Federal fund s
tran actions. Res pondent s have also bee n
offered num ero us new se rvices; electroni c data
processing, in so me cases with remote terminal s located directl y in the bank ; portfolio
analysis; credit cards; location studies; international banking assistance; cost analysis and
budgeting; profit sharing and retirement
plans; mortgage banking assistance; and
trust department advice, to mention only a few .
ln an attempt to obtain better services from
correspondents, a slow but generalized movement ha developed to consolidate acco unt s
in th ose co rres pondent s with esta bli hed
reco rd s of perform a nce. The high levels of inter es t rates of recent years made many bank s
acutely awa re of the potenti al ea rnings which
3
Correspondent Banking
were being lost on many friendship a nd entert a inm en t acco unts, and th ese accounts were
closed or dr as ticall y reduced in size. While
requestin g more from their co rrespon dent s,
ba nks have generally been willing to provide
increased compensation. It is both remarkable
and surprising th a t during a period in whi ch
int eres t rates rose to th e hi ghes t levels in nearly a ce ntury a nd acco unt co nso lid at ion became
more pronounced, tota l co rr espondent bala nces g rew more rapidly than in a ny oth er
time in th e postwar period.
ACCOUNT ANALYSIS
The recen t reriod of hi 1 h in te rest rates and
decreased li4uiuit y has a lso wi tn essed a development that ma ultimate! brin) a co mplete restructuring or the corrcspondcn t bank ing bu iness. Larger correspondent bank s,
co nfronted with an increasing demand for
loan s from their own nonb a nk customers, for
loa n participa tion s from banks, an d for more
services from smaller ban ks, began ser iously
to ana lyze the accounts of respondent bank s
to determine the profitability of se rving as
their correspondents. In some instances the
impetu s for th e analysis came from the need
to determine a n accura te measure or float on
cas h letters. Some sma ller bank s were attempting to sell uncollected ba lances in th e
Federa l funds market.
Account analysis is no t new ; it ha s been
performed for years on both corpo ra te and
corres pondent accounts, but the se ri ous appl icat ion of the analys is is rel ative ly novel. In
the analysis, correspondent banks determine
the revenue from a typical co rres pondent account by multiplying the average co llected
balance, normally adjusted for reserve requirements, by an ea rnin gs credi t or al lowa nce .
The expen e of se rvic in g the acco unt a re
determined by multipl yin g th e number of
times a bank utili zes a given se rvi ce by the
cos t (generally including a n allowan ce for
profit) of providing the se rvice. A typi ca l
4
Table 1
FIRST NATIONAL BANK
Account Analysis For
Month of
EARNINGS A LLOWA NCE
Average Ledger Ba lance
Less Average Uncollected Funds
Average Collected Balance
Les s Legal Reserve of (17 ½%)
Average Balance Available for Investment
Earnings Allowance (
%)
$ ---$ ---$ ---$ ---$ ----
INVESTMENT VALUE
$----
EXPE NSES
Account Maintenance
Credit s
Debits
Deposited Items
Not Encoded
Encoded
Return ed Items
Stop Payments
Wi re Transfers
Coupon Envelopes
Cu rrency Transactions
Coin Shipped
Safekeeping
Float Overdrafts
$2.00
7¢ each
7¢ each
2 ½¢ each
l ½¢ each
25¢ each
$2.00 each
$1 .5 0 e a ch
2 .00
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
TOTAL EXPENSES
$
NET PRO FIT (OR LOSS)
$
acco un t analysis schedule is shown in Table 1.
The methods of account analysis differ
wide ly among bank s. Some correspondents
charge for se rvices such as safekeeping of
sec uriti es, wire tran sfers , currency and coin
preparation, advice, etc ., whi le others do not
fi g ure th ese items directl y in th e analysis.
Virtuall y a ll banks, howeve r, levy fees for ledger entries, depo ited items, a nd return ed
items. Unfortunately , there is little agreement
among th e larger banks about the charges
which shou ld be made for providing even th e
Federal Reserve Bank of Kansas City
Account Analysis
most basic se rvices. In part, these differen ces
are due to altern a ti ve method s of a ll ocating
and ca lcul atin g cost. Three ba sic approaches
may be follo wed: marginal cost pri ci ng, average va ri a ble cos t pr icing, and ave rage tota l
cos t pri cing. The different approac hes ca n
perhaps best be ex pl a in ed by an exa mple.
Assume for a moment that a smaller
bank ha alway kept a good ba la nce wi th a
co rres pon dent but that it has neve r used th e
co rrespondent to clear check s. Th e small bank
is now con id ering th a t po ss ibility and wa nts
to know how muc h it will cost to send chec ks
to the co rres ponden t. " Th e smal ler ba nk estimall:s th a t it will se nd 50,000 check pe r
month to th e co rres pondent. These will be
amount encoded.
In consi de rin g the poss ible char les r r
thi s ser vice, the ro llowing di a logue might typica ll y ensue wi thin th e correspondent bank.
Th e fir st to spea k m ight be the corre pond ent
bank offi cer res ponsible for the sm all er bank.
" lt seem to me th a t we have a lot of peo pl e
in th e check co ll ec ti on department who are not
busy all th e time. Th e ba nk has always kept
a good bal ance with us. Our comp uter has
plenty of excess time ava il able. If the bank
would agree to ti me its delive ry for our slac k
period , our onl y cos t wo uld be a few supplies.
I don't think we should cha rge them an ythin g. "
The manager of th e check co ll ection depar tm en t ri ses, " Eve n if th eir cash letter
don' t always arri ve at our slac k period , we
ca n ha ndl e th e load without hirin g any new
emplo yees or purchasing new equipm ent. l
ag ree suppli es would not be very ex pensive,
but th ey ough t to be co nsidered . In my opinion we o ught also to charge for employee
and eq uipment time . Figuring the cost of
th ese suppli es, equipm ent tim e, and th e wage
and frin ge bcm:rits o f th e empl oyees, it will
2/ Small ha nk s ra rel) pa) co rr..:~pond..:nl , directl ror ,uch ,e rvice, a, ched, ckar in~ . Ne,..:rth..:k" . the required co111pen,.1tin g ha lan ce whi ch a re, pon denl i, npcct..:d to mai nt a in i, ha,cd
on the.: ana lys is o f cxpen ses.
Monthly Review
•
December 1971
cost me arou nd $300 per mont h to se rvice
th ese chec ks. "
The co mptroller interrupts, " Our most
recent analysis showed us that it cos ts 3
ce nts per check to ha ndle th e fir st 2,000
tr a nsi t item s and 2 ½ cen ts for each check
after that. 3 You ge ntl eme n a re fo rgetti ng to
includ e the cos ts of th e bui lding, in surance,
ta xe , support per on nel, postage, man agement overhead, a nd ou r a ll owa nce for profit.
According to my ca lcul a ti on s, we should
charge $1,260 per month ."
Th e correspondent ba nk officer retor t ,
" You mea n o ur profits will be $ 1,260 per
month hi gher if we don ' t do thi s se rvice!"
The co mpt ro ller shook hi s head that thi s would
not be the ca se, as the corresp ndcnt bank
o ffi cer co ntinu ed, " In my opini on if we don ' t
agree to ·lcar these checks the ba nk ma y
close o ut it s cor respo nd ent account. We'l l
lose both th e deposit and the ea rnin gs from
it if that ha ppens."
Which officer is co rrect? What should be
cha rged for clearing the checks? Might the
situ at ion be approached differentl y? Al locating
the costs in a multiple product firm such as
a bank is always l)ighly a rbitra ry. The difficulty is furth er co mpounded by th e fac t th at
banks ge nera lly mu ·t ma int a in staff and eq uipment to handl e peak loads, but most o f th e
time do not perate at ca pac ity. The co rrespo nd ent bank o ffi ce r who a rgued th at no fee
should be cha rged was tr ying to a pply th e
margina l cos t prin cipl es he had lea rn ed in hi
so phomore econo mics co urse. The head of
the chec k collection department remembered ,
however, that to avo id losses, average varia bl e cos ts must always be cove red in the
short run. In effect, he was stating th a t on ly
cos ts direc tl y a ttributabl e to the co rrespondent bank d epa rtm ent should be co n idered
in pricing co rr es po nd ent se rvic es . Th e ge n-
J / Th c slidin g sc ale.: is o ften uscd as an alternati ve lo charg ing
an acco unt maintcn a n..:c kc .
5
Correspondent Banking
eral costs of being in bu siness a nd top m anagem ent sal a ries sho uld be a bso rbed by o th er
dep a rtm ents in th e ba nk . Th e ba nk co mpt ro ller was looking a t th e lo ng-run situ a ti o n in
which to tal revenu e mu st exceed total cos ts.
H oweve r, he was fo rgettin g th a t average fi xed
cos ts4 tend to declin e as volum e ex pa nds.
As may be seen in th e hypoth eti ca l exa m pie,
a ltern a tive meth ods of a nalyz ing a situ a ti on
ca n give ri e to ve ry la rge differences in
cos ts. It is not surpri sin g th a t th e ave rage
pri ce to cl ea r o ne encoded chec k o ften va ri es
significa ntl y a mo ng co rre pond ent ba nk s.
Th e diffi culti es in cos tin g ba nk se rvices
a rc ma ni fo ld . A t a ny po int in tim e, ma ny bank
cos ts a ppea r to be fixed . Pl a nt a nd eq ui pment ex penses arc sunk; mos t empl oyees
a rc sa la ri ed ; a nd ove rhead nor m all y shows
littl e va ri a nce with o utpu t. By co mpariso n,
th e in crea e in total cos ts which a ba nk inc ur s fr om pro viding a sta nd a rd service to one
addition al cu stomer is no rm all y small- suppli es, postage, space on th e co m pute r, perha ps occasion al ove rtim e, etc. In th e short
run , a ny re ve nu e ga in in excess of th ese
ma rgin al costs add s to total pro fi ts. If the
ba nk were to cha rge th ese costs , howeve r,
th e cha rges wo uld not make. any contr ibut ion
towa rd mee tin g th e heavy fixed cos ts a nd
co uld loc k th e ba nk into a n unrea listic pri ce
stru cture. On th e o th er ha nd , if the bank
we re to cha rge average tota l costs, the sit uati on might be reve rsed . M ost ba nk s mainta in
substa nti a l excess ca pac it y. If th e pr ice we re
set equ al to es tim a ted ave rage tota l cost ( or
perh a ps average hi stori cal cost), the customer would be as ked to pay not onl y fo r the
cos t of pro viding th e service, but also for the
cost of ma in ta ining th e excess ca paci ty and
a ny ineffi ciencies th a t may be prese nt. S tudi es
whi ch show th e average cost of perform in g
4/ Fixcd cos t, a n.: th ose co, l, which do not v;.w y direcll) with
o utput. Exam ple~ wo uld inclu de ckprccia t ion o r pl an t a nd e4uip111 ent. di rec tors· fees. overhead wages a nd sal a ri es. and prope rt y
ta xes.
6
ce rt a in servi ces in a n effi cient m ann er- sta nda rd cos t studi es- ca n be used to elimin a te
cha rges fo r unu sed ca pac ity a nd was te, but
even so, a n a rbitr a ry element rema in s.
Altern ati ve meth ods of a ll oca tin g th e expenses o f ge nera l ba nk ove rh ead a nd support
depa rtm ents (s uch as th e ma il roo m, pe rso nnel depa rtm ent , co m put er se rvice, a nd empl oyees' ca feteri a) ca n res ult in widely different cost fi gur es . Fo r so me ba nk se rvices,
th ese co sts may co nstitute as mu ch as 40 to
50 per ce nt o f tota l cos ts. Pa rtl y to avo id
thi s difficu lty, some ba nk s do no t direc tl y include ge nera l over head in cos tin g studi es . In
th is a lte rn ative approa ch, tota l ba nk rcvcnu l.'.
m ust he suflicil.'.n t Lo cov,l.'. r process in, cos t
a nd overhead, bu t ove rh ead itself is co nsiderl.'.d a cos t or bl.'.i n ) in business a nd is not
attr ibuted to a ny spec ific gro up o f ac ti viti es.
Differences in th e number of di sc rete
act ivities being cos ted ca n give ri se to va ri ati ons in the costs fo r specific servi ces. Fo r
examp le, ma ny ba nk s have fo und th at ledge r
ent ry credits a re mo re expensive to process
than ledger en try debits. Ba nk s which do not
se parate the two wo uld have o nl y a single
fig ure fo r ledge r entri es whi ch should lie bet ween the ave rage cos ts of deb its a nd cred it .
The same situ ati o n wo uld preva il fo r ba nk s
wh ich d iffe rentiate be twee n encoded a nd nonencoded items received a nd th ose ba nk s
wh ich do no t. T he cost of proce sing return ed
items ge nera ll y exceeds the cos t o f ha ndli ng
no rma l items in cas h letters. S o me co rres pondents, co nseq uently, incl ud e a sepa rate entry
fo r returned items in th e acco unt a nalys is.
O thers, however, lump th e cos t for return ed
item s in with the cost fo r items depos ited ,
thus producin g a hi gher per item depos ited
co t, othe r thin gs be ing equ a l, th a n a t th o e
bank s whi ch ca lci.tl a te a epara te cha rge for
each.
In a comp lete co t stud y a ll ba nk costs
m ust be all ocated. Alth o ugh a n eleme nt of
uniformi ty ex ists among co rrespo nd ent in
Federal Reserve Bank of Kansas City
Account Analysis
th e type of tr a nsacti ons which a re common ly
in clud ed in th e accou nt a nalys is, va ri a nts in
th e spec ific acti vities co nsidered may produce
differences in est im a ted cos ts. Fu rth er differences co uld arise from th e alte rnativ e
types o f costs wh ich may be es timated.
eve rthel e s, for accou nt analys is purposes
th e vas t maj or it y of banks ca lcul ate eith er
th e ave rage tota l standard or hi sto ri ca l costs
of providin g ser vices. In determi nin g th e
cha rges which wi ll be made to respo nd ent
ba nk s, howeve r, a number of modifications
are often made in the cos t fig ures. The average cos t ri gur e ma y he in creased to in clu de
a profit m ..1r ,i n or it ma y he reduced ir eo mpctin 1 h;1nk s ~,re c h. ,r 1 in 1 substa nti a ll y lowe r
am ounts . Th e pri ces rnay ~tl so he modified to
rerlect the earnings allowance used in computin g the inves tm en t va lu e o r a n acco unt.
Ba nk s which use an unrea li stica ll y low ea rn ings credit are lik ely to have ve ry low cha rges,
and vice versa. A few banks, th ough, have
low charges and high earn ings cred it s to help
th em build a larger corres ponden t bu sin ess .
In view of these adju stme nts, the commo n
tend ency for bank official s to refer to th e
charges as cost fi g ures is probabl y quite mi slead ing.
EARNINGS ALLOWANCES AND CHARGES:
THE SURVEY RESULTS
In an effor t to broaden the information
ava il ab le on accoun t analysis procedures and
to ob ta in repr esentative d at a o n charges a nd
ea rnin gs credit s, the Federal Reserve Bank
of Ka nsas Cit y, in cooperation with other
Federal Reser ve Bank s, as ked 93 major correspo nd en ts to suppl y co pies of their acco unt
ana lysis forms in use durin g July 197 1. The
sample con tain ed hanks in a ll sections of the
co untry except the South. Three or the banks
co nt ac ted indica ted that their a nal ysis procedures were bei ng revised and did not feel
th a t th eir current formula s would be meanin gful. On e bank sta ted that a for mal account
Mo nthly Review
•
D ecember 1971
ana lys is had neve r been in stitut ed , whil e a noth er noted th a t its ana lys is formu la had
ori g inall y bee n developed for another bank
whi ch was also included in o ur sur vey . Th ese
fiv e bank s were exc luded from th e sa mpl e.
Of th e remainin g 88 bank s, 77 suppli ed
co pies o f th e ir a nal ys is forms. During the
co ur se of th e sur vey, a pp rox im a tely o ne- ha lf
of th ese bank s were persona ll y inter vie wed
to lea rn how th e d ata fo r th e ana lys is arc
co mpil ed a nd used .
Mos t co rres pond ents a nalyze th e acco unt s
of res pond ent s monthl y, bu t excep ti o ns arc
co mm o n. A few banks ana ly1,e accounts o nl
qu a rter ly or sem ian nu a ll y, whi le seve ra l exa min e accoun ts thre · or four times e~tch
month . At leas t tw o hanks e~tl cu la tc the net
co ll ec ted ba lance for eac h responden t dai ly
to preve nt ban ks from drawin g on unc o ll ected
fund s o r a tt e mptin g to se ll th em in the Federal fund s ma rk et. Rega rdl ess of th e frequency of th e a nalys is, nea rl y a ll co rres pond en ts
look a t the fi g ures from a long-run poi nt of
view. If a n acco unt proves to be unprofit ab le
in one or two co nsec uti ve month s, th e cor re-spo nd ent will genera ll y ignore th e loss, provid ed th e acco unt is suffi c ientl y profitable in
subsequent mo nth s.
A lth o ug h the objec tive of account ana lysis is to es tim ate th e profit or loss represe nted by th e accoun t, an eleme nt of ca uti on
mu st be maintained in interpretin g th e figure s.
A t th e maj o rit y of banks onl y th e mos t basic
co rres pond ent tran sacti ons such as c learing
chec ks ha ve been co sted . Man y act iviti es a re
not included in the ana lys is sta tem ents. Common examp les wo uld be sec urit y safe keep in g
and investment adv ice, ove rlin e loa n pa rti cipatio ns, assis ta nce with so phisticated types
of loans, account refe rra ls, cred it inform ati on,
and loan lin es. Even th oug h a ll owa nce is fr equent ly not made for such serv ices in th e
account a nalys is, few co rresponde nt banks
wi ll se riou sly consider specia li zed assis tance
if a respo nd ent 's acco unt ha not been suf7
Correspondent Banking
ficiently profitabl e over th e long run o r if the
bank ha s not maintained adequate bal a nces
to compensate for the ervice. For thi reaso n
a siza ble numb er of correspondent ba nk prefer to think of the profit or los figure a th e
amount ava ilable to co m pensa te for other
se rvices rend e red . Some ba nk s, to avo id
tating a profit or lo on the a nal y i sta tement , co nvert th e fi g ure to '' unu sed " fund s
ava ilabl e for oth er se rvi es. In any eve nt ,
th e profitabilit y fi g ure o r th e " unu sed" fund s
balan ce mu st be adjusted ment all y for se rvices performed by co rrespo nd ents but not
in cluded in th e analys is.
Uncollected Funds
In 1x:rl"ormin > an acco unl a na lys is, all th e
co rn:s po ndent bank s sur veyed be )in by subtra ctin g average un co llected fund s rr 111 the
respo nd ent ' average ledge r ba lance to obtain an e timate of average co llected fund .
Uncollected fund s represe nt the doll a r a mount
of cash an d noncash item s which respo nd ents
send to co rrespondents for clea ring, but for
which the correspondent is un able to obtai n
immediate credit. In ca lcul ati ng this noat,
mo t correspondent use th e Federal Rese rve's clea rin g sched ul e a a g uid e to th e
availability of fund s. Howeve r, the accuracy
or th e c-1lculations varies cons idc rab ly. ' ome
co rres pondents analyze every cas h lett er received , while oth ers simpl y study lett e rs period ically to develop a n es tim a ted noa t fac tor.
Interesti ngly, those bank s whi ch work with
a noat factor often sta te that subsequent examination of fund availability fr om cash letters rarel y results in a significa nt cha nge in
the noat factor for a given bank . evertheless, the noat e tim a tes a re lik ely to be subject to a sub stantial mar gin of error. Th e
ava il ab ility of fund s se nt direc t to payo r bank s
o r to other correspondent s may differ co nsid erabl y from th e Federal Rese rve's publi shed sc hedul e. Midwe tern a nd easte rn
banks noted a n in creas in g tend ency to end
8
check s drawn on so uthern and western bank s
dir ect beca use clearing co uld be acce lera ted.
Slight dela ys, on th e other ha nd , in th e receipt of ca h letters by banks using a noat
fac tor may res ult in a mu shro omin g of noat
which wou ld not be noted in th e account
a nalys i .
Perh aps mos t surpri sing is th e ma gnitude
of uncollected fund . mong co rre pondents
whi ch we re a bl e to pro vid e fi g ures, th e ratio
of un co ll ec ted fund s to total ledger ba la nces
of re spondents ra nged from 16 to 80 per
ce nt , wi th fi g ures betwee n 30 a nd 55 per
ce nt being th e mo t commo n. T he average
unco llected fund s ra ti o was 42 per ce nt.
In conju nction with th e surve or co rrespo ndrnt hanks, d;.1t a on co lkcted ;.ind un co llcctcd .
h~ilan ccs hcld a t primary co rrespond cnls durin g th e sa me period were ga ther ed for a sample of 344 respo nd ent bank s loca ted in various secti ons of th e co untry. A wo uld be
ex pected , individual res pondent
di played
cons id era bly g reate r diversity in th e proportion s of un co llected funds . The ratio often
tended to be ve ry high for small bank s which
clear large vo lumes of checks throu gh co rrespondents an d near zero for respondent
whose acco unt s a re relative ly in ac ti ve. Active
clea rin g acco unts of rur al re pondent s averaged
1.0 per ce nt un co ll ected fund s a nd
th ose of urban respondents 55. 1 per ce nt.
The di stribution of un co ll ec ted fund as a per
ce nt o r ledger balances for ba nk s clear ing
la rge numbers of chec ks throu gh prim a ry co rrespo nd ents is sho wn in T a ble 2. ' Th ese
fi gures indicate clearly that the deduction
made for un co llected balances in the account
ana lysis is normal ly quite large .
. / Thi.: l'ig11ri.: , in thi.: tahli.: c~1n nut hi.: t :1k i.: n as rcprc,i.:n lat ivi.: ol'
th..: , ituati on gi.: ni.:r all . By co in cidi.:ncc.:. t lt i.: dat :1 wi.:ri.: lar •i.: ly
co l li.:cti.:d l'rnm '\llTi.:,pon di.:111 , which ti.:nd l o ha vi.: Cll lltparati vi.: I
1011 r ~ttiu, nl' unc.:n lli.:i.: tc.:d fun d, tu kdgi.:r ha l anci.:, . l · urthi.:rrnori.:.
alth ough th..: ,a mpli.: ,i,i.: i, inadi.:quati.: I ll dra,\ ,trong c.:o nclu,ion,. thi.: figuri.:, ,uggc,t marh.i.:d dilli.:n.:nci.:, ma) C.:\i, t among
gi.:og raphi ca l ri.:gi on, in thi.: t)p ica l unco lkcti.:d fund, ratio .
i.:11
1:.ngland rcspondi.:nts . for i.:xampli.:. ri.:gular l) had highi.:r ratio,
than did rnid"i.:,ti.:rn hanb .
Federal Reserve Bank of Kansas City
Account Analysis
Available Funds
Table 2
UNCOLLECTED FUNDS AS A PER CENT OF
LEDGER BALANCES FOR BANKS CLEARING
TRANSIT ITEMS THROUGH CORRESPONDENTS
Uncollected Funds
as a Per Cent of
Ledger Balances
0 to
10 to
30 to
50 to
70 to
90 to
Over
Per Cent of
Respondents
5.0%
25.8%
35.4%
20.4%
10.0%
0.8%
2.7%
10%
30%
50%
70%
90%
100%
100%
Du ring th e a na ly is per iod, as how n in
Tab le 2, a small g rour, or rcsr,o nd cnl s had
unco lk ctcu rund s avcrag tn • ove r I 00 per
ccn t or kd gcr b~ilanccs. S uch nega ti ve co llec ted balan ces represen t a loan fr om th e
correspond ent to the res po nden t by th e
amount of uncollected fund . A number o f
co rrespondent banks, th erefo re, include an
interest charge in the analysis statement for
fund s advanced. Among survey ban ks th e
mos t typical fee is the prime loa n ra te, but
th e interest cha rges va ry from below th e
di sco un t rate to severa l percentage points
above the prime rate. While a siza bl e gro up
sta ted that chargcs would be lev ied fo r chronic defic iencies, onl y sli ghtl y more th a n onefo urth of the banks indi cated that they reg ularl y cha rged for noat overdrafts. 6 In case
of nega ti ve collected f"und s, corre pondents
norm a ll y work with respondents to deve lop
meth ods of im proving th e ava ilabil ity of funds,
such as ea rli er mailing of cash letters. Alth ough no clear geographical pattern is evident in the bank s wh ich regu larl y levy fees
for nega ti ve co llected balances, a slightly
sma ll er propor tion of bank in the eas tern
and ce ntral pl a in s states ha ve such cha rges.
Perh aps respo nd ents in these sectio ns or th e
co untry a re less frequ ent offenders.
6/ See l tc:111 11 of"Tablc: 5.
Monthly Review
•
December 1971
For mos t co rres pondents th e seco nd step
in perfo rming an acco unt ana lys is is to ca lculate th e ava il a bl e or in vesta bl e fund s represe nted by th e res pond ent's ba lance. Thi s
meas ure is no rm all y obta ined by subtractin g
an a ll owance for rese rve requirement s fr om
th e co ll ected ba la nce fi gure. 7 By far th e maj ority of bank s dedu ct ac tu a l rese rve requirements o f th e Federal Re. erve- 17 1/2 per
ce nt a l rese rve city co rr espo nd ents and 13
per ce nt at co untry co rres po nd ents. Of th e
rema inin g bank s, as may be seen in T abl e 3,
13 dedu ct a large r perce ntage than ac tu a l
requirements, 3 a small er pe rce ntage, and 4
ma ke no dedu ct io n. Thc max imum dcd uct ion
is 2 r,er cc nl , but th c most com mo n 11 0 11 rescrve require ment dedu cti on is 20 r,cr ce nt
th e sa me a is co mm onl y subt rac ted in
th e analys is o f co rporate acco unts. In a na lyzin g th e acco unt of a co rp ora te customer,
ba nk s often subtr act an all owance not onl y
for required reserves, but also for correspondent balances th ey keep in other bank s on
the premise th at these bala nces are necessa ry for clearin g chec ks deposited by co rporaTable 3
RESERVE REQUIREMENT DEDUCTIONS
AT CORRESPONDENT BANKS
Percentage Deduction
No deduction
13%
16 ½%
17%
17 ½%
18%
18 ½%
20%
25%
Number of Banks
4
3
1
2
53
2
1
9
1
7 / Three o r th e banks in th e , urvey redu cc:d th e ea rn ings a ll owa nce rathc:r tha n the co llcued ba lance fi g ur e h th e rc:4u ired
rese rve percen tage . Since the est ima ted earnings va lue o r a n
acco un t is sim1 I) the product o r these two va ri ables. the effect
or the alternative deduction, i, identi ca l. T o improve co mparabi lit y or the data. a ll bank s making a ll O\\an ce for rese rve requiremen ts in the acco unt ana1 1 sis \\ ere assumed 10 ha ve made the
dc:duct ion from co llec ted balances .
9
Correspondent Banking
tions . S in ce the ea rnin gs a llowa nce cou ld be
readily adjusted to reflect a ny va riance in th e
percentage deduction s for un a vailable fund s,
differences in the deduction s might largel y
be expected to cancel out in th e calculation
of earnings . However, some bank s which make
comparatively small subtraction s hav e consid erably abov e a verage earnin gs all o wa nces
a nd some ba nk s which ha ve a bove average
deduction s impute a verage ea rnin g all owances.
Earnings Allowance
Th e ea rnin gs o r reve nu e fr o m a co rrespond ent acco unt is ob ta in ed by multipl yin g
the ava il a bl e fund s fi g ure (o r th e co ll ected
ha lan c<.: ri g ur<.: ir no d<.: du cti o n is made fo r
required reserv es) by th e ea rn in YS a ll ow ·tn e<.: .
Of th e ba nk s sur veyed , 46 per ce nt ti c th eir
ea rnin gs c redits to pecifi c money ma rk et
ra tes, the 3-month Treas ur y bill rate being
the most common. Several ba nk s also use
the discount rate, the representative Federal
funds rate, or a rate I or 2 per cent below
the prime loan rate. Administrati vel y se t ea rnings allowances m ay reflect money mark et
rat es, the rate a ba nk is willin g to pay for
tim e depo it s in unlimited a mount , or th e
overa ll yield o n th e ba nk 's tota l loan s a nd
inv es tm ents. If th e ea rnin gs all owa nce is ti ed
to mon ey ma rk et rates, it is norm a ll y cha nged
monthl y o r qu a rterl y. Th e fr equ ency of adju tme nt for admini str a ti vely set ra tes va ri es co niderabl y. At some ba nk s th e rate has not
been a ltered in years, but a t others it is
changed monthly .
The earnings allowa nce a t correspondents a t the time o f th e survey ra nged fr om
a nnual rates of 3.36 per ce nt to 6.60 per
ce nt , with th e average a nd medi a n perce ntages bein g 4 .8 1 a nd 4. 97, res pec tiv ely.
The di stributi o n o f rates all owed is sho wn
in T a bl e 4. Th e av era ge a nd medi a n ea rnin gs
credits a re so mewh at lowe r th a n ave rage
money mark et ra tes durin g Jul y 197 1, but
10
Table 4
EARNINGS ALLOWANCES
AT CORRESPONDENT BANKS
Earnings Allowance as a
Per Cent per Annum
Less than 4%
4 to 4 ½%
4
Per Cent of
Correspondent Banks
2.6%
19.7%
½ to5%
5 to 5 ½%
5
to6%
More than 6%
½
31.6%
31.6%
10.5%
4.0%
a re a bout equa l to th e a verage 9 1-day Treasur y bill rate fo r th e 3 month s endin g in Jul y.
A bstr ac tin g fr o m th e fac t th a t most ma ll
ba nk s a rc subject to lower reserve req ui rcm<.: nts than a rc th eir co rn.:s11o ndent s, the im ruted return is ab o ut equal to th e yield a
r<.: spo nd ent co uld ea rn on its co rres po nd ent
ba lances if th e fund s we re in vested in T reasury bill s. The simil a rity, howeve r, i pa rtl y
co incident al. Th e la rge fr ac ti on of co rres po ndent ba nk s whi ch do not have an a ut o ma ticall y fluctu a ting ea rnings credit ca uses th e
ave rage ea rnin gs credit to be less th a n mon ey
m ark et rates when ma rk et ra tes a re high or
ri sing. In a ny event , th e ea rnin gs all owa nce
at mos t co rres pond ent ba nk is below th e
ave rage port fo li o in co me on dema nd depos it
fund s. The Federa l Reserve's fun cti ona l cos t
studi es show th a t a mong la rge bank s th e return on in ve ted demand de pos it fund s h·1s
averaged a bout I / 2 per ce nt a bove th e ma rk et
yield on 3-m o nth Treas ur y bill s durin g th e
las t 3 year s.
Analysis Charges
Alth ough most la rge co rres pondent bank s
determin e th e reve nu e from acco unts in a
simil a r fas hi on, mu ch grea ter di ve rsit y i ev ide nt in th e meth ods of ca lc ul a tin g th e tota l
ex pense fo r performin g co rres po nd ent se rvice . Th e maj o rity of bank s cha rge fo r onl y
a small gro up of bas ic tra nsacti o ns such as
chec k clea rin g, wire tran sfers, a nd ledger
Federal Reserve Bank of Kansas City
Account Analysis
entries, but a handful of banks have identified
and charge for as many as 500 separa te
banking services. As explained ea rlier, omission of some services from the formal acco unt
analys is does not mean that cor respo nd ents
do not ment ally consider these se rvices when
eva luating an account, but ra th er th at no
formal pricin g procedures have been developed . Of necessity, the survey resu lts repo rt ed
in thi s section are limited to those act ivit ie
fo r which charges a re co mmonly assessed.
A movement is presently underway a mong
co rrespondents to refrain from sta tin g the
ea rnin gs allowan ce a nd the per item cha rge
on ana lys i statements and in stead to show
on ly the collec t ·d ba lance which a b;rnk must
maintain for each unit or a 1 iven sL:rvice . Despite the apparent clouding or L:arn in 1 s crL:dits
and chargL:s in such an approac h, th l'. rt::su lting fi g ures ar l'. probab ly more mean ingful for
interbank corn pari so ns. Even though a correspo ndent may have a higher per item cha rge,
if the correspondent is more ge nero us with
its earnings all owance and ma kes a smaller
deducti on for rese rves, the co ll ected balance
required for th a t ervice ma y be smaller than
at another bank which has lower charges .
Similarl y some ban ks cha rge prices whi ch
arc greater than costs to ob tain a profi t, while
others cha rge L:stimated cos ts but g ive an
earnings allowan ce less than ac tual earn ings .
To correct for these difference , all item
charges have bee n conve rted to annual balance requ irements for each transaction. 8 If
accounts are ana lyzed by co rrespondents on
a monthl y ba sis, th e req uired monthly bal-
8/ T o ca lcul ate th e annu a l collected balance requirement fo r a
tran sac ti on. dat a is required on the tran , acti on price, th e ea rn in g, cn.:dit or a ll owa nce . and the deduct ion, if an), made for
re, er vc requirement ,.
,,11m e, I' = pr ice per tr:1n ,ac tio n for :,
given ser vice, i = e:1rni11 g, credit llr :ill,>11-a11 ce :11 :111 :1nnual
rate . exprc,sed a, a de ci m a l. a11d r = rr :1cti o n o f co lb .: ted ba lan ce, dedu ct<.:d to meet rc,cne requirements . The :1nnua l co llected bal :1n ce, B, required for :1 gil"en tran,ac ti on i, then deri ved rrom the l"o ll o11ing for mul a:
I'
B = --i ( 1.00-r)
Monthly Re v iew
•
December 1971
ances, ignoring complications of compounding , would be 12 times these a mounts. 9
Befo re turning to the s urvey finding s, the
limitation s of the dat a should be noted. The
collected bal a nce figure s a re based on actual
charges during Jul y 1971. To the extent
money ma rk et rates and earnings allowances
change, or co rres pondents modify account
analysis cha rges, th e figures would no longer
be applicable. At th e tim e of th e urv ey a
surpri sin gly la rge number of bank indica ted
that their account analysis forms were under
rev iew. With the abse nce of some irregul a r
charges which have not been tabulated and
a n acc ura te measure of n oat assoc iated with
cash letters, the tabu latio ns presented below
do not co ntain su lli ci<.; n t in format ion for a
bank to ca lculate the balances its co rrt;spo ndents wo uld expect it to maintain .
The co llec ted balance req uireme nts fo r
selec ted co rres pondent serv ices are shown
in Table 5. 10 As may be seen in th e table,
9/ Maintena ncc fees a rc a n exception to thi s generalizati o n.
Bala nce requirem en ts for mainten a nce a rc not affected by th e
time p<.:ri od covered in th e analysis . The tabl e shows the a nnual
balance requirements for th e maintenance o f a n account fo r I
yea r. If the account anal ys is ,•vere performed monthl y. the , amc
do llar balance wou ld co mpcn , at e fo r the maintenan ce fo r I
month .
10/ ln redu cin g th c an :il y, i, charge s to the co mm on denominator o r required CL>llectcd ba lances , a number pf diffi cultic , ;1rn,c .
M:1n y corrcspondenl , c ha rgc 0 111 oeca,ill n:ill y ror ,D mc , erviccs,
and in these in,t :1n cc, th e :1n10unl i, norma ll y det crmined hy
admin i, tra ti vc dccisi o n rather than a prede termined pri ce schedule . Bccau,c co rrespo nd ent , in , uch ease, o ften , ta tcd that thc
charge, II LJ uld l'a r) 11ith th e ,pcc il"i c c ircum , tan ce,. no att <.: mpt
11a , made to include the po" ible cha rge, in the a verage , .
Se1'er: il cor re,po nd cnt , hal'c , lidi ng ea rnin g, crcdi1' 11hi ch ri se
11ith the , il'. e nr the respo ndent ·, balance or 11ith the acti vit ) nf
th e acco unt. Since the v: 1ri a ncc in the earninl!S ,ill o11ancc in
the,c ca, e, is ge nerall y , mall. ma ximum rate s ~ha ve arbitraril)
been used to determine the required cgll_e ~ted ba lances.
M os t co rrespon dent s li st ex plicit account ma intenan ce fees
in th eir an alys is. but a number have onl y indirect maintenance
fees. Such maintenan ce fees co uld arise if a co rrespondent ha s
a charge for a mo nthl y st atement o r has varying charges for th e
number o f item s deposi ted . The co rrespondent. fo r exa mple.
might cha rge 2 '• cents fo r th e fir st 1.000 items depos ited and
2 ccnh for a ll add iti o na l item, . In effect . bank , which clear
over 1.000 chcch arc charged a maintenanee fce o f $2 .50
:ind a rate per chcck o r 2 cen ts. In tabulatin g the resu lt s. an y
ch:1rge ror a rcg ul :1r mon thl y sta teme nt has au tonwt ica ll y been
c1 >n, id ercd to he an acco unt maintcnance l"cc: hut a similar :tdju, tm cnt cann o t he 111 ,td c ro r hank s which ha ve marginal ehargc,
fo r the number o r item , dcpo, itcd . In a f"e11 in stan ce, th<.: number of item s requircd to ,ccure the minimum chargc pcr item
i, ,o hi gh that com para ti vc ly f'c11 banh 11 ould be able to qualir). Sin ce it mak c, littlc dillcrcnce in the average, whe thcr thc
minimum ,H maximum per item charges are used. the minimum
11
Correspondent Banking
Table 5
ACCOUNT ANALYSIS CHARGES FOR SELECTED CORRESPONDENT BAN KING SERV ICES
Charge Per Tr ansaction
(Am oun ts in Dollars )
M ode
1. Annual Accoun t
Main tenance
lB .00
2. Ledg r En t ries
Cred it s
Debits
3 . Item s Depos ited
N o t En od cl
Rang e
6 .00-720 .00
An nual Collec ted Balan ce Requ ire d Per
Transa ction in th e Acco unt Anal ysis
!Am oun ts in Dollars )
Average
1, 193 .26
Ran ge
Per Cent
of Bonk s
Charging in
Acco unt
Analy sis
Per Cent
of Banks
Requ i ring
Dire ct
Payment
Per Cent o f
Bonb N ot
Charging
Per Cent of
Bank s Not Responding or
Moking Only
Irr egular
Charges
76 .62 %
-
23 .38 %
-
-
14 .29
Median
l 61 .64-22,500.00
539.76
.10
.025-.50
3.29
.57 -12.68
2.39
85 .7 1
.07
.025 -. 16
1.88
.57 -3.33
1.80
97 .40
.006-.045
.58
.23 -1. 29
_56
100 .00
En cocl d
.01
.005 .033
_39
. 13 .97
.33
100.00
4. Rt•lu111"d lt c111
.? '
05 I 60
10 13
I 3' 3 4 ?6
7 .?2
68 83
5 . Wir e lrun sl
Outgoing
"
.02 & .03
2.60
-
I 17
1.00-3. 48
40 .43
22 .04 85 .66
36 .5 1
85.7 1
14.29
In coming
1.00
.50-3.48
38.69
11.41 -76 .69
34 .36
83 . 12
16 .88
6. Secu rities Draf ts
2.00
.06-5 .60
44.77
3 1.75
38 .96
7 . Curren cy
Furni sh ed
8 . Rolled Corn
Furni shed
9 . Dom stic
ol
l c ct ion ll c 11H
10.
oupon
1.00 & 1.50
(5
4.00-10.25/ hr.
00/ hr.
·130/ $1 ,000 .0 1-_ 60/ $ 1,000
f
02/ roll
_l3o; s.1 .ooo
146 .46/ hr . 91.95 -227.78/ hr.
6 .27 / $1 ,000 .29-16.67 / $1 ,000
(A lte nati ve Method s)
.50/ roll
. 16-1.84/ roll
.003 -.03/ roll
.10-.60/ $1 ,000 9,0 4/ $1 ,000 2.90- 16.67 / $1 ,000
(Alt er ,olive M et hods )
132.79/ hr.
6 .24/ $1 ,000
1~:;?
1.30%
-
25 .97
33 .77 %
27.27
16 .88
27.27
6 .49
16.88)
.44/ roll
B.30/ $1 ,000
38.96 I
1.30
2~): (
11 .00
.23 -5 .13
3B .23
5.5 1 11 3.06
(Ali e r1oti ve M ethods )
3 1.7 5
53 .25 I
6.49 (
{ 50
.03 2.35
17 .7 1
13.47
40 .26}
6.49
1.30
29 .87
22 .08
29.87
-
41 .56
28 .57
)
.64-60 .65
(Ali e noti ve M etho ds)
Co ll cl1 or1s
11. N ega tive Col lected Fund s
1.50-136 .30
-
-
-
6. 12%
4.75 %-8 .00 %
6%
5. 19
25 .97
9 .09
NOTES Ave rage and median fi gu res are b ased only on banks wh, ch nav e analysis charges
Banks wrth no char ges are au tom at,ca lly ex cluded
The mode refers to tlie most co mm on charge at co rr es ponden ts wt11te the median ,s a measure at the middl e char ge half th e cor r es pon den ts
char g e mor e than th e m edian f, gu , e and h all less Detail s may not add to tota ls du e to roundin g.
10/ ( ·o ntinu ed)
ch:tr l!c h:1, hccn ,c ll.)clcd "h..:rc1·cr rc:1,1rn :1hlc .
, :1 rc, ull or
lhc ,~ :1dj11,t111cn1'. lhc 1:1hul :1t ion, , lig htl ~ 11ndcr, 1:1tc .1 c1u :tl
ba lance rcq11irc111cn1, in >11111..: in , 1a 11 cc, .
/\ 11111rc ,c rinu , dil'ficult1 i111·11 il'c, th e dctc r1111n a 1i o n ll r r..:c ,
1'11 r co mm o n tr:111,:iction, . ~1:111~ c11 rrc , pllnd..:nt , c hargc for rurni , hin l! rolkd co in . hut th c 111 ..: tlrnd, o f ch:t rl!ill l! ,·an c,1 11 , 1d..:r:1h h . - lt ..:rnatil'..:, 1.1,..:d ;11110111! ,ur1..:1 bani-.\ i nc lu<lc a 1.!i,·..:n
pri ~..: per ro ll 11r p..:r h:tg . :t 11 :it c hargc . p..:r o rdLr . :1 cha rg..: 1;:1,cd
o n th e nurnh..: r o r 111inut ..:, r..:quircd to prcp:1rc th c ,1 rdcr o r on
12
thc doll:tr :lllll)Lllll or coin rurni,h..:d . a nd co 1nhi11:11iu11 , or th ..:,..:
pu ss ihiliti..:, . Si111il:trl ~. ii' h:tnls, dil'f..:r cntiat..: item, d..:po,it..:d . a
hil!h t.: r ch:trl!c i, al111<1>l :1 )11a1, k l' icd for nt1n..:nc,>Llcd it..:111,
111:111 ror i'ulil ..:111:od..:d i1..:111s . Scl'..:ral h:1nb. JH1\l <.: 1cr. mal-. c 1111
di , 1in ct1 011 rZ1 r c11u1dinl! hut c har!!<.: dilT..:r..:111 :111111unts if th..:
c h..:cl-. , :1rc dr:11111 on l~1c: tl llr no ,; lo..::1 1 h:inls, . ~ 'h..:nc,cr it i,
possihlc 1,1 , h1111 :ilt..:rnatil'c 111..:th, id , o r ..:h:irgin g II itlw11t r..:k:1,in g :1..:tu:11 figur..:, ror o n..: ,1r 111 11 b:1111-. ,. :1 ,c p:1r:1t..: ..:ntr 1
h:1 , h..:cn inc luckd in thc 1ahula1i o11>.
Federal Reserve Bank of Kansas Clty
Account Analysis
th e o nl y ser vice for wh ic h a ll corresponde n ts
ca lc ul a te c harges is check clea ri ngs. Amo ng
s ur vey bank s, a pprox im ate ly one-t hird levy
id e n t ica l c h a rges for amo unt e ncoded an d
nonencod ed chec k s. Cor responde n ts whi c h
diffe rentiate the two gener a ll y c ha rge o ne o r
m o re cents additiona l for ite m
rece ived
whi c h have not previously been e ncod ed . o nsequ e ntl y, the average a nd m ed ia n ba la nce
re qui rem e nt s for no nencoded item
exceed
th ose for encoded item by abo ut 50 a nd 70
pe r ce nt , respectively. Cor res po nd e nts uni form ly tated that the propor ti on o f items th ey
a re required to encode fo r respo nd e nt s has
d ec lin t.:d 1 reat ly in rt.:ccn t yea rs; mos t ba nk s
arc rm.:scntl
:--en lin g encoded cas h let te rs .
In co ntr ~1s t to diffe ren tia t in g fo r e ncodin g,
th ree of thc surv e
banks lev y diffe re nt
c ha rges for transit it e ms drawn o n loca l o r
no nl ocal banks . These bank have bee n e nte red in the tabu lat io ns by averag in g th e two
ch arges.
Mo s t corres pondents a lso inc lud e ledger
e ntr ies in the account ana lys is. About o neh a t f of the ban ks differentiate between credit s
a nd debit s, wit h the cha rge fo r no r ma l c redit s
genera lly averag ing abou t 150 per cent hig he r
th a n th e c ha rge for no rm al debits. The co llec ted ba la nce requiremcnt s in th e tab le refe r
o nl y to s ta nd a rd transactions. /\ sm a ll g ro u p
o f ba nk s have specia l c harges fo r c red it s asoc ia ted with cash let te rs. These fees a re
ge nera ll y tw o o r three times the amount fo r
no rm a l c redit s. Interestingly , a few ba nk s
have c harges
debits to cor res po nd ent acc o unts b ut mak e no charge fo r c redit s.
A ltho ugh m ost banks ha ve ide ntica l
ch a rges fo r in co min g and ou tgoi ng wi re tra nsfe rs o f fund s, a fe w have lowe r cha rges fo r
fund rece ived. O ccas io nall y fcc a lso va ry
with a lte rn a t ivc m e th od s o f hand lin g the a dvice o f th e tran sfe r . /\ s iLable gro up of cor respo nd e nts ba se th e ir fees o n th e w ire tra nsfe r c ha rges impo ·ed by the Federa l R ese rve.
Pri o r to A ugus t 1971 , Federa l R ese rve Ba nk s
ro;
Monthly Re vi e":"
•
December 1971
c h a rged $ 1. 50 fo r wire tr a ns fer in multipl es
o f $1 ,000 whi c h inv o lved no nm e mbe r ba nk s.
In mid-A ug us t , howeve r, th e Fed e ra l R eser ve
e limin a ted c ha rges for t ra ns fe rs to no nm e mbe rs if th e a m o unt wa s in excess o f $ 1,000.
As a res ult o f these m od ifica ti o ns, seve ra l
ba nk s a t th e tim e o f the s u rv ey indi ca ted
th a t th e ir wire tr a ns fe r fees mi g h t be lowe red
o r d ro pped a lt oge th e r . Th e co ll ected ba la nce
re quire m e nt s fo r w ire tra ns fe r
how n in th e
ta bl e, co nsequ e ntl y, m ay not be re p rese ntat ive o f th e prese nt s itu a ti o n .
Cor res po nd e nts use a var ie ty of methods
to c ha rge fo r c urre ncy a nd co in t ra nsac t ion s.
In a d d iti o n to th e a lt e rn at ives rm.:v io us l no ted ,
scvcra l ba nk s h ave se para te kcs for c urr c n ·
rece ived ·tnd rr ov id cd, a nd for wrapred a nd
un wrapped c urr e ncy o r co in . T he m s t co m m o n m e th od s o f c ha rg in g fo r c urre ncy provid ed a re a n h o url y pre par a ti o n c ha rge o r a
fee p ro po rti o n a l to th e d o ll a r a m o unt o f c urre ncy furni she d . Simil a rl y, co in cha rges a re
mo st fr e qu e ntl y based o n a s pec ifi ed pri ce
pe r roll o r o n th e d o ll a r a m o unt o f co in requ es ted . Th ese fi g ures a re sh ow n in th e t a bl e .
Other poss ibilities no t in c lud ed in th e ave rages a re a ra te pe r bag , a fl a t fee fo r eac h
c urre ncy o r co in o rd e r, a nd co mbin a ti o ns o f
th ese rates . Th e indi ca ted c ha rges ge ne ra ll y
d o no t in c lud e a n a ll owa nce fo r pos tage o r
in s u ra nce . So m e co rres po nd e nts simpl y pa ss
th ese c ha rges a lo ng to res po nd e nts whil e
o th e rs in c lud e th e cos t as a n ex pe nse in th e
acco unt a na lys is.
As in the case o f wire tran s fer s, a significa nt gro up of co rres po nde nt s base th e ir a n a lys is c ha rges fo r c urre ncy a nd co in o n th ose
o f th e Feder a l R eserv e . Th e Fed e ral R eserv e
ge nera ll y m a kes no direct c ha rge fo r c urre ncy
o rd e rs, b ut if ro ll ed co in is re qu ested , a s m a ll
c h a rge is m a d e to bo th m e mbe r and no nm e mbe r ba nk . T he cos ts o f in ur a nce a nd
tr a nspo rt a ti o n a re a bso rb ed by th e Fed e ral
R ese r ve fo r s hipm e nts to m e mbe r ba nk s .
H oweve r, th ese ex pe nses a re pa sed o n for
13
CorrespOfldent Banking
shipments to nonmembers. Undoubtedly most
respo ndents ordering currency a nd co in from
correspondents are nonmembers.
A significa nt proportion of ba n ks- 44
per cent for curren cy tran saction s a nd 34 per
cent for coin tran saction s- indicated that
they eithe r did not charge or charged only
irregul a rl y for such orders. M a ny o f th ese
co rrespondent a re loca ted in money ma rk et
cities a nd have rarely bee n as ked to furni sh
currency or coin.
Nea rl y one-hal f of th e sur vey banks also
have spec ia l cha rge for co up on co ll ecti ons.
Mos t co rrespo nd ents ba c th e charge on th e
number of envelopes pr ocessed, but a t least
o ne bank assesses a kc proportional to th e
do ll a r va lu e of th e e nvel ope . Ir banks have
no t es tabli shed a specia l rate for ·o up ons,
th e fee is no rm a ll y th e sa me as fo r a deposited item . Co ll ected balan ce requirements for
sec urities drafts a nd other co ll ecti o n items
are a lso shown in the ta bl e. The number of
mi scellaneou s charges included in th e acco unt
ana lysis va ri es greatly among correspondents.
The major omission in th e ta bl e is th e
sc hedule of fee s rel ati ng to sec urity purchases
or sa les, and afekeeping . About 60 per cent
of th e co rres pondents in the sur vey include
such charges in th eir acco unt a nalys is, but
the wide variety of charges makes it impossible to prese nt mea nin gful figures in sum ma ry form. Some ba nk s, fo r exa mpl e, have
high analysis charges for purcha ses or sa les,
but minim a l (or no) charges for safekeepi ng.
By providing safekeeping for a nomin al fee,
these bank s hope to stimulate purch ases a nd
sales through their bond dep a rtments. S afekeeping fee s, moreove r, may be based on the
do ll ar a mount held , the number of iss ues o r
rece ipt · held , perhaps differenti a ted by th e
type of sec urit y, th e number of co upons
clip ped, th e numbe r of in-o ut tran sac ti o ns,
maintena nce fee , tran sfer s, etc. The omi sio n o f safekee ping cha rges sho uld no t be
interp reted as sugges tin g that th ese fees a re
14
unimport ant ; for so me respondents they represent a major expe nse in th e account ana lysts.
For mo t res pondents the m ajo r proportion of analy is ex penses a re rela ted to check
clea ring . The la rgest single entry in th e acco unt ana lysis is often th e cha rge for th e
number of items de po ited . Urban ba nk s in
particular tend to have ve ry hi gh a na lysi
cha rges for check cl ea rin g. In th e sample of
344 res pond ent ba nk s, urb a n res pondents
typ ica ll y se nt I ½ to 3 tim es as many chec ks
to co rrespondents as did similarl y sized ru ra l
bank s. Total fee for ledger entri es a nd returned items, howeve r, arc no rm a ll y quit<.:
small , desp ite the fa ct th a t th e per item
cha r lCS arc com parati ve ly hi lh . Whil · la r 1 e
var iances were ev ident , th e number o r returned items a nd ledge r ent ries, res pec ti vely,
amo unted to less th a n .08 per ce nt a nd .76
per ce nt of th e number of ite m depo ited.
evert heless, th e total bala nces req uir ed to
compe nsate co rrespo ndent s for performing
tran sit serv ices a re sub sta nti a l. For all but
sma ll ru ra l bank s, th e sum of un co llected
balances and balances required for transit se rvices averaged over 70 per ce nt of th e gros
ledger balances of res po nd ent s a t principal
corresponde nts. Fo r rural banks with depos its
under $ 10 million th e comparable percentage
was slig htl y ove r 50 per ce nt. The impor tan ce,
on the ot her ha nd , of mi sce ll a ne o us cha rges
no t related to tra nsit se rvi ces var ied with both
correspondents a nd res pond ents.
As with a ny set of averages, th e fi gures
in T ab le 5 a re subject to a degree of di stortion . Differences in the proportion of banks
charging for specific se rvices co uld bias th e
ave rages. Some banks, for exa mpl e, have hig h
acco unt ma int ena nce fees to hold dow n
charges fo r no rmal services. Others do not
levy charges for return ed items but includ e
th e process ing cos t in th e average charge for
item depo ited . Simple ave rages of th e acco unt maintenance fees o r th e items deposFederal Reserve Bank of Kansas City
Account Analysis
ited cha rges wou ld make no a ll owa nce for
th e fact th at price at so me bank s a re higher
beca use these ba nk s do not cha rge or have
minimal charge for oth er services. An upward bia s in the average cha rge might be introdu ced, but th is distortion is unlik ely to be
g reat. Th e hi ghe t co ll ected balance req uirement often occur at majo r ba nk s with th e
mos t sop hi sticated a nd length y Ii ts of cha rges
for se rvices . 11 A more serio us difficulty a ri ses
from th e fact that th e d istributi ons o f co llec ted balan ce requirements tend to be badl y
skewed in th e direc tion of hi gher cha rges.
Many bank s charge slightly below ave rage
fees, but a kw banks charge co nsid erab ly
~,hov · th e average. ·onscqucntl , the median
balan ce rcqu in.: mcnt s arc ·onsistcn tl y below
th e avera ge . For ana l sis r,urpose s the medians
are und oubtedly a better mea ure of typical
bal a nce requi rements than are th e averages.
The group of se rvices in the table a re
th ose for wh ich account a nalys is fees have
co mm on ly been es ta blished. Ma ny cor res pondents also charge fo r other miscellaneous
transactions, but these vary from ba nk to
bank. Examples of se rvices for whi ch co mparatively few bank s charge are co mputer
reject item , credit investiga ti ons, specia l
sta tements,
F.D. I. .
in surance, payab le
thr ough drafts, and muna ge ment tru ining progra ms. In thi s se nse the li st of se rvices and
charges is inco mpl ete . Services for wh ich
ac tu al payments arc normall y made by respo nd ents, on th e other hand, have also been
omitted . The e services would include computer fees, exchange co ts for clearing nonpa r items, purch a es or safekee ping of securiti es for bank cu tamers, and portfo li o
a nalys is studies.
I I f ;\, th<.: :in :il ) s1, d1 :1r!!t.:' 11 <.: r<.: ht.:1n !! !!alh crt.:d . a tcnth:nn
l'or h:inl-. , 11 ithin :1 g11·t.:11 <.: 111 ,11 r<.: •i o n 11 1' th <.: <.: 1H1nt r1 to h:11 <.:
vc r , 1milar charg<.:, l'nr ha,i <.: . , t.:rv1 cc, ht.:c:1111 <.: ,1pp:1rcn1.· u<.:h ol'
thi, g<.:ographit.::11 , imi l:1.-it1 i, l,1 , 1. JH1\\ t.:1·c r. in th <.: co lk t.: tcd
h:1 l:1n~c rt.:quirt.:mt.: nt ,. ,~hi ch dt.:t c rmin t.: th e dkclll'l'. c har!!<.: l'or
s<.: rvicc, . Ea stern monc, mark<.:t h:ink, g<.:n<.:ra lh . hut nut \\itlwut
t.:,\c<.:ptinn. u ftcn had th<.: hi!!hc, t rcqui~cmcnt .; in term , ul' colk c tcd hal:inccs for var iou, , cr vicc,. C o rrc, pondcnt , "ith lu"
char!!t.:S "ere sca ll crcd throu!!lrnut the cn untr ) .
0
Monthly Review
•
December 1971
Profit and Loss
The net profit or loss on a re pondent's
acco unt is, of co urse, deri ved by subtracting
the total ana lys is expenses from the ea rnings
va lue of th e acco unt. Th e mea ning of thi s
figure, howeve r, va ri es g reat ly a mong co rrepondent . Ma ny co rrespo nd ents build a profit
ma rgin into th e acco unt analysis by imputin g
a n ea rnin gs a ll owa nce below the ac tual return
on dema nd depos it fund s, by addin g a profit
ma rgin to th e est im ated cos ts of performin g
se rvices, by m a kin g a dedu ction fo r required
rese rves whi ch ma y exceed act ual requirements, or by be in g ·1ble to co ll ec t checks
more rap idl y than th e Federal Reserve rl oa t
sc hedule wou ld impl y. Pract ices dill·r amo ng
bank s a nd arc tempered by comr,ct iti on .
Among th e survey bank , approx imate ly
50 per cent indica ted th a t th ey had a ttemp ted
to make a ll owa nce fo r profit. The before-tax
margin ge nera ll y ra nged from IO to 40 per
ce nt. Oth er banks, however, ofte n exp ressed
uncert ai nty ove r th ei r actu al costs a nd profits
or indica ted th at profit had not bee n co nsidered in desig nin g th e acco unt a nalys is.
Des pite th ese respo nses, ma ny banks appea r
to benefit from gra ntin g an ea rnin gs a ll owa nce whi ch is lower th a n th e actu al return on
in vcs tab le fund s.
To th e extent co rrespo nd ents have previo usly made a ll owa nce for profits in th eir
a nalys is comp ut a ti o ns, th e profit or loss figure
derived from th e a nalys is sta teme nt does not
represent profits in th e norm al se nse of th e
term. M a ny co rrespo ndents feel th at this fi gure considerably ove rstates profits because
many important correspo ndent se rvices, such
as loa n participat io n , are not included in th e
ana ly is. In any eve nt, th e practices of co rrespondent s tend to be quite uni fo rm in th eir
behav io r toward th e net profit figure. If a
bank's acco unt show s a net profit, as mo st
do, th e co rrespo ndent will genera ll y do noth ing . If the acco unt a na lys is reg ul a rl y show a
15
Correspondent Banking
loss, the analysis statement may be se nt to
the respondent and a requ est made for the
respondent to in crease its co mpensa ting balance . In those comparatively ra re instances
in which th e respond ent does not co mpl y,
the acco unt may ultim ate ly be serv ice charged
the amount of th e loss.
CONCLUDING OBSERVATIONS
Des pite th e nearly universa l use of ana lysis statements by co rresponde nt bank s, comparatively few res pond ent s use the figures
as a guid e to th e approp ri ate size of th eir
co rrespondent balance . One of the questi ons
includ ed in th c 1969 sur vl'. y or cor-rL:s pondent
ba nkin ac ti vit y, condu cted b the 1:L'.d L: ra l
Reservl'. B·tnk of Kansas ' ity, asked resp ondents to specify th e basis for determinin g
the size o f correspo nd ent acco unts. Amon g
2, I 00 mid western and Rocky Mount ai n bank s
returning the questionnaire, 78.6 per cen t
stated balances were based on the res pondent 's estimated va lue of se rvices rend ered.
About 17.5 per cent kept the minimum or
average balance suggested by correspondents,
and 4.0 per cent indicated rese rv e requirements and other factor s were th e primary
determin a nts. Th e fac t that com para ti vely
few respondents rel y on acco unt a na lys is
estimates to deter m in c th e opt imal size of
th eir co mpen ating ba lances may be an indication th at most co rres pond ent acco unt s
a re profitable and, consequently , sma ller respondents have rarely bee n co nfronted with
analysis statements.
Correspondent banks genera ll y emphasize the quality and ava il ability of services,
while th e prices of th ese se rvices a re frequently not co mpetitive iss ues . Neve rth eless,
th e most unexpected findin g of th e prese nt
survey is th e wide variance in th e cha rges
for typica l ervices a mong bank s. Th e range
of co ll ected balan ce requirements for different tran saction s, as show n in T ab le 5, is immen se and is much la rger th an would be ex16
pec ted from a group of bank s performing
esse ntially identical services. Initial differences in th e per item charges might la rgel y
be expected to cancel out by th e time collec ted bal ance requirem ents a re calcu lated
but, in stead, th ey are often acce ntuated . Th e
outgoi ng wire tr ansfe r charge, for exa mpl e,
ra nges from $1 .00 to $3.48, a difference
of about 250 per cent, whil e th e co llected
balance requirements differ by nea rl y 300
per ce nt. Th e charge for encoded items va ri es
from 0.5 ce nt to 3.3 ce nts, or by 560 per
ce nt, but th e co llec ted balance requirement
va ries by as mu ch a 650 per cent. In co ntra st, th e maximum charge for returned item s
is 32 times the minimum chargc, but th e ma ximum co ll ected ba lan ce requircmL:nt is on l
2 times the minimum. Re 1 ard less or th c
realism of th e charges, as lo ng as such variances ex ist co rres pondent bank s are lik ely to
en cou nter great difficulty in co nvin cin g respo nd en ts of the va lidity of acco unt ana ly is
stat isti cs .
Several yea rs ago bank s were criticized
fo r the ana lysis which they performed on th e
acco unts of co rporation s. 12 It was argued
th at th e charges whi ch were imputed for providin g va ri ous ervi ces were unrea li sticall y
lo w as was th e ea rnin gs credit. Pa sin g judgment on th e rea li sm of the cos t fi gures in the
co rres pond ent bank account ana lys i would
be beyond th e cope of thi s stud y, alth ough
it mi ght be noted th at th e averages for basic
se rvi ces do not differ great ly from what would
be expected from functional cost studies.
However, the same cr iticism as formerly could
probably be made about the earnings allowance at the majority of banks today. If smaller
banks ca n earn a higher return by investing
their fund s in sec urities or by lend in g directl y,
strong pre sur cs ma y develop to purcha se
12/ .lam ..:, I' . Furni ss and Paul S . Nadkr . .. Sh ould Ba nb R..:pri ..:..: Co rpo ra l..: S..:rvi..:..:, ·r · Hnn·ard /J1.1si11 es.1· R e1•ie 11·. M:t ) -Jun..:
I 966. pp . 95- I 05.
Federal Reserve Bank of Kansas City
Account Analysis
correspondent banking se rvices so lel y for a
fee.
Cr it ics of th e present sys tem hav e often
arg ued th a t g rea ter efficien cy in the di stribution of ba nkin g resou rces wo uld be prom oted
if cor respondent banks were to substitute
explicit charges for compe nsat ing ba la nce requirements. Man y sma ll banks, it is maintain ed, have no knowledge of th e cos t of providing va ri ous serv ices to th em. If th ese cos ts
were kn own, a bank wo uld probably requ est
onl y th ose services fo r whic h th e potential
reve nu e ju stified the ex pe nse. Price co mpetiti on among correspo ndent ban ks, mo reove r,
may be mo re effec tive than co mpetition on
th e basis or the quali ty and avu ilability of
servi ces offered .
13:,nk s 1 e11er~ill y have bet.:n opposed t. o th e
int roduction or a !'cc sys tem . A sur vey co ndu cted in 1963 fo und fewer th an 6 per ce nt
of th e banks clea rl y in favo r of fees, a nd more
rec ent re sul ts from a survey con du cted by the
editors of Burroughs Clearing House found
littl e change . 13 Only 8 per cent of the ba nk s
favored a stra ight fee system. Nonmember
13 / H arr y V. Odk. -- 11 0 \\ Smalkr Banks R ate Co rr cs poncknl
Scrvicc..: s. ·· 811rro11gh.1 Clearing I ln11.1t'. !\ ugusl 1971 .
Monthly Review
•
December 1971
bank s, which may co unt co rrespo nd ent bala nces toward mee tin g rese rve requir ements,
feel that th e use of fees would increase the
cos ts of pro viding services to customers.
Oth er ba nk s have a rg ued th a t the prices of
ma ny se rvi ces would be arbitrary. The average
cos t of clea rin g a c hec k may be ca lcul a ted
with so me deg ree of acc uracy, but the cost
and va lu e of an account refe rrul or a req ues t
for information would vary grea tl y with th e
spec ific circum stan ces. Oppo iti on to fee arra ngemen ts is oft en encountered from co rrespo nd ent bank officers who frequently feel
th e primary fun cti o n o f th eir depar tm e nt is to
ge nera te ba lan ces. A few, however, have
adopted th e view th a t prorits ma y be increa sed
under either a ppro ac h. Despite these rese rvati o ns , it is on ly a sma ll st<.;p rrom th e accoun t
ana lys is proced ures to a li stin g o f prices ror
co rres po nd ent se rvi ces. C han ges in traditiona l
co rres pondent ba nkin g procedures will not
come ra pidl y, but the seeds a re in th e wind.
Newer co rres pond ent se rvices such as financia l planning, portfolio reviews, ED P, and
cap ital requirement studies are a lm ost exclusively provided on a fee basis . Although
it rema in s rudim ent a_ry, th e accou nt ana lysis
re presents a major step fo rw a rd .
17
The Metropolitanization
Of the Tenth District
By Glenn H . M ii/er . .Ir.
O
ne charac~eri sti c o r_U._'. popula~ion gro"". th
th at rece iv es co ntinuin g att ention a rr1 es
th e unwi eld y des ignat ion o f " metropolita ni zation. " Thi s characteristic may be desc ribed
as the long-run tendency of Americans to cluster in and around large urban centers.
Since it was desirable for various agencies of the Fed eral Governm ent to be able to
use the sa me geographic units in collecting
and publi shing inform ati on use ful in stud ying
thi s chara cteri sti c and va ri ous pro bl em a ri sin g
from it , th e co nce pt o r ''Standard Metr opolitan
tati sti ca l Areas" ( M SA 's) was deve loped .
In ge nera l, th e co ncept is o r a metrop olitan
area as "an integra ted eco nom ic and social
unit with a recog ni zed la rge population nucleu s." A number of obj ec ti ve criteria of a
quantitative nature have been es tablished to
make this concept operational for the gathering
and publication of statist ica l data. The population nucleu s mu st be at least one ce ntral
city of no less th a n 50,000 population . The
SMSA includ es th a t ci ty' co unt y, and adjace nt co unti es · found to be metropolitan in
characte r a nd socia ll y and eco nomi ca ll y integ rated with th e co unt y of th e ce ntral city.
C riteria for determinin g a co unt y's "metropolita n cha rac ter" relate primaril y to a ttributes of
th e co unty as a pl ace of work , or as a home,
18
for a spcciricd co ncc ntf'lti o n of nona l ri cultunl
workcrs.
Mo t simpl y, th e metropolita ni za tion of th e
U.S. po pulation can be observed in the increas in g proportion of all residents who live
in SMSA 's. In 1930 more th an half (53 per
ce nt) of a ll Americans lived in SMSA's; by
1970, the proportion had risen to about 68
per cent. In cre as ing concentration of popul ation in metropolitan areas ha s been associated
with ri sing leve ls of eco nomic activit y th ere,
so that jobs and incom e have also tend ed to
co nce ntrate in th e
MSA '.. In 1969, for
exa mple, 76 per ce nt of ·Ill perso nal in co me
received in th e United States wa ea rn ed in
SMSA 's, and onl y 24 per ce nt was ea rned in
th e much , mu ch larger geographic area that
makes up th e non-SMSA pa rt of the N ation .
The metropolitanization of population and
economic activit y has proceeded in such a way
that its ex tent va ries greatly from region to reg ion across the co untry. Som e region s, such
as th e seven states lying wholly or partly in
the Tenth Federal Rese rve Di stri ct, were co m1
I/ Fo r rn o n.: detail s. sc.:c.:
.S .. Exc.:cuti vc.: Ofli ct.: o f th e.: Prc.:sidc.:n t.
Burc.:au o r the.: Budgc.:t, S tandard Metropolitan S w1is tical A reas:
196 7. Washin gto n. D . .. 1967 : a nd U. ' .. Dc.:pa rtrn c.:nt ol' Co rn mt.:rce,
ationa l Bu rc.:a u of S ta ndards. M etropolitan S ta1is 1ical
A reas. Fc.:dc.:ra l Information Process ing S ta nd ards Pu blica tion 8- 1.
Was hin gton, D.C.. Jul y I. 197 1.
Federal Reserve Bank of Kansas City
parativel y la te starters in th e metropolitani zation process. 2 In th e case o f th e Tenth Di strict
states, factor s such as th e relative lateness
of settlement a nd the eco nomi c structure of
the area a ri sing from its comparative advanta ges had much to do with this reg ion 's late
sta rt. Th ere a re a lso differenti a ls in growth
amo ng th e coun tr y' s va riou s SMSA's, re necting
not onl y th e fac to rs ju st mentioned but other
factor s as wel I, ·uch as differences in competitiveness a mon g a rea s, the changing relativ e impor tan ce of goods- producing and se rvices-produ cin g indus tries, a nd th e di stributi o n of such thin gs as Federal milit a ry purcha ses. Th e out co me for th e seven- late area
ha s bet...:n bo th a slowe r pa ce and a currently
les ser extent of metro politanization than for
the tota l U nit ed S lates . ll was not until 1960
th at the regio n's res idents we re divid ed half
and hair between S MSA ' s a nd non-SMSA
a reas; in 1970, 54 per ce nt of th e peo ple of
the seven states lived in SMSA 's. 3 A simi lar
differenti a l exi sts with rega rd to eco nomic activity: 60 per cent of the seven states' total
personal inco m e was ea rn ed in SMSA's in
1969, compa red wit h 76 per ce nt of U.S. income in th e ame yea r. 4
METROPO LITAN POPULATION GROWTH, 1950-70
Each or th t.: st.:vc n Di strict sta tes had a
larger share of it s popul ation residing in MSA ' in 1970 than in 19 50, bu l on ly in Co lorad o and Mi s o uri did metropo lita n res idents
mak e up more than half the slate's tota l resi-
2/ The T en th District incl udes Colorado, Ka nsas, Neb raska ,
Wyom in g, most of Okl aho ma a nd New Mexi co, and the weste rn
tier of Mi ssour i counties . Data in this article renect sta te-wide
deve lopments for eac h of th e seven sta tes.
3/ Severa l SM S A ·s in clude cou nt ies in mo re th a n one state, e.g.,
Kan sas Ci ty. S t. Loui s, F t. S mith . a nd Si oux C ity. S tate totals
of MS /\ inco me and populati o n used in this arti ck in clud e data
fr om onl y th ose metropolit a n co unti 1.:s lying in th t.: pa rti cular state.
4/ Two adju st1111.:nt s o r tht.: offi cial class ification of S MS/\ ·s made
hy the U .S. Depart me nt of Comme rce an: used in thi s article :
( I) The geographi c ddiniti on o f each S MSA i, held com tant
over th e entire pt.:r io<l for wh ich the est imate~ a n: pre~cnt ed : and
(2) alt ho ugh Wyo min g doc, no t havt.: an officia ll y des igna tt.:d
M /\. C h1.: ye nne is tn:ated here a, an S M ' . If a ll o r Wyo ming
were trea ted a~ a no n-S MS/\ a n:a. th ere wou ld be fewe r excepti ons to th e genera li, at io ns made in thi s arti cle about popul atio n a nd in corrn.: change.
Monthly Review •
December 1971
Chart 1
PER CENT OF TOTAL RESIDENTS IN SMS A'S
1950-70
Per Cent
80
70
60
50
~=------
Colorado
United States
Missouri
Tenth District
Oklahoma
40
30
New Mexico
10
O~_ _ _ _ ___.__ _ _ _ _ ___,____ _ _ _ _ __,
1950
1960
1970
SOURCE : U .S. Dep a rtment of Commerce, Bureau of the Ce nsus .
dent population (Chart I). Using this ya rdstick alone, Colorado, is clear ly the mo st " metropolitan " of the Tenth Di strict states, and the
onl y one of th e seve n more "metropo litan "
than th e N a ti o n as a whole.
In all of th e Di stri ct slates th e grow th of
population residing in SMSA 's was lowe r in
th e I960's th a n in the I950's (Table I).
In the face of this pattern, on ly Oklahoma experienced a more rapid rate of total population
growth in the I960's. The "Sooner State" acco mplished this feat because of a strong turnarou nd in the population growth pattern of its
non-SMSA areas- from a 10.4 per cent decrease in the number of such resident s from
19 50 to 1960, to a I .4 per cent increase
from 1960 to 1970.
Th e major co mponents of total popu lati on
change a re net na tural increase and net migration . Th e latter is of interes t beca use it is indicative of cha nges in spired by the des ire for
19
The Metropolitanization
Table 1
POPULATION CHANGE AND NET MIGRATION,
1950-70, TENTH DISTRICT STATES,
METROPOLITAN AND NONMETROPOLITAN
RESIDENCE
Porlotion Chon'e
19 0-60
1960-
o
N et Mia ra ti on
1950-60
1960-70
(I n per cent)
Colorado
Non metropo litan
M etropolitan
Kansa s
Non metropolitan
Metropolitan
M issou ri
Non metropol itan
M et ropo litan
N ebraska
N on metropolitan
Met ropo litan
New Mexico
N on metropolitan
Met ro politan
Oklahoma
Non metropol itan
Met ropol i tan
Wyom ing
Non met ropo li tan
Metropo li tan
Seven Stoles
Non met ropol itan
Metropolitan
32.4
2.5
53.4
14.3
0.6
45.2
9.2
2.9
18.6
6.5
-3.3
27.0
39.6
28.6
80.0
4.3
-1 0.4
29.1
13.6
11.1
26.2
13.3
0.3
31.3
25.8
11.3
32.7
3.2
-2.2
11.7
8.3
0.8
13.0
5.1
-2.3
17.0
6.8
1.5
20.4
12.3
-13.9
30.9
-2.3
-11.8
18.9
-3.3
-11 .4
2.9
-8.8
-16.4
7.0
7.7
-1.3
-2.9
1.9
-5.2
-8.8
0.6
-13.6
-18.8
40.3
9.9
-9.8
1.4
19.9
0.7
2.3
-6.3
9.4
1.0
-21.1
9.4
-6.8
17.9
12.3
0.4
17.9
-6.0
-8.1
-2.7
-8 .1
0.6
-4. 1
6.3
-11.9
-0.1
-9.3
-23.6
n.o.
n.o.
n.o .
n.o.
n.o.
n.o .
n .a. Not availab l e.
SOURCE: U .S. Department of Commerce, Bureau of the Census
Cur re nt . Popu lation Reports, Series P-23 , No . 7 , Nov . 1962 :
and Series P-25, No . 461 , June 28 , 1971.
·
the improvement of people' s econom ic situ ation s. That is, differential migration ra tes result beca use people believe that moving will
tak e th em to a rea offe rin g more favorable employment and in come oppo rlunit ies .5 Tabl e I
revea ls (with the exce pti on of Wyoming) relatively high rates of m ig ration into SMSA's in
the l 950's- in so me instances, rates high
enough to offset net outm igration from a sta te' s
non-SMSA areas, thu s making fo r overa ll net
immigrat ion for th e slate.
With th e exception of New Mexico, all
eve n sta tes saw rel a ti ve ly hi gh ra tes or migrati on out of th eir non-S MSA areas in th e 1950' .
5/ For .a disc uss ion o r tl~ e rcla.ti onshi[J bctwccn cmpl oymcnt opportun 1t1cs a nd fJOpu lat 1on m1grat 1on. sec thi s R eview. Ma yJunc 1966, pp . 7- 10.
20
Although in seve ral states th e tide of outmigration was stemm ed so mew hat in the fo llowing decade, onl y in Colorado wa there net
mi gra ti on into a Dist rict sta te's non-SMSA
area in th e agg regate. Th is i not to say, of
co urse, th at ce rt a in non-SMSA co unti es in
oth er sta tes might not have expe rienced so me
net immigration. At th e ame time, a id e from
th e spec ia l ca e o f Wyo ming, th e net fl ow of
migrants int o SMSA ' was slower in the 1960' s
in all Di strict states, wi th New Mexico showing virtually no cha nge and Kan as an ac tu a l
outmigration from its S MSA's in th e aggrega te. In shor t, th at th e rate of metropolitani zation or Di stri ct populat ion slowed in th e I960's,
corn panxl with th e I9'i0's, is show n by bot h
the ropu lalion chan 1 e an<..I net rni 1 ration data.
INCOME TRENDS IN METROPOLITAN AREAS
The notion that metropo litaniza ti on may be
used to characterize geograp hi c co ncentra tion
of economic act ivity as we ll as th e clu sterin g
of population has bee n sugges ted ea rlier in
thi s arti cle. In exa mining this as pect of metropolitanization , attenti on will be focused on the
vo lum e of economic acti vity.
Other
have observed that "Regional
growth in vo lum e [o f eco nom ic activi ty]
mi ght approp ri a tely be measured by in creases
in population (i.e., number of persons, vie wed
as co nsumers and labor fo rce), in creases in
total emp loyme nt, and /o r in creases in total
in come produced or received within a g iven
area." 6 In thi s arti cle, population change has
bee n used, not as a measure of change in the
volume of econo mic acti vity, but as a direct
measu re of metropolitanization . Fortunately,
( I) est im ates of total personal income fo r
SMSA 's and non-S MSA co unt ies are ava ilabl e
fo r se lected yea rs from the Reg iona l co nomics
Division of th e Office of Bu si ness Eco nomi cs
U .. Department of om merce, an d (2) "O n~
of th e most comp rehen ive a nd sugge tive
6/ Har vcy S.. Pcrloff. ct al. R eg io ns . R eso urces. and Eco 110111ic
Gro w1h. ( Balt1m o rc: The J o hn s Hopkin s Press. 1960). p. 4.
Federal Reserve Bank of Kansas City
o f th e Tenth District
Chart 2
PER CENT OF TOTAL PERSONAL INCOM E
EARNED IN SMSA'S, 1929-69
Per Cent
90
Colo r ado
80
- Unite d Sta tes
/".:.---- Missouri
70
Tenth District
60
Ok lahoma
50
, , - - - - Nebraska
: - - - - Kansas
4-0
30
20
10
0 .___ _ _.___ _____._ _____._ _ _~ - - - - ~
'69
'59
'4-0
'50
1929
SOURCE: U .S. Departme nt of Commerce , Office of Business
Eco nomics .
measu res of regio nal eco nom ic gro wth is provided by total pe rso na l inco me. " 7 Th us, th e
metropoli tani zati on l)f econo m ic act ivity in th e
Di stri ct will be d i.-cusscd in te rm s of changes
in th e di stributi on or total persona l in com e betwee n M A's and non-SM A area .
While th e pro porti on or tota l pe rso na l income earned in SMS ' s has rema ined close
to 75 per cent since 1929 for th e whole
United Sta tes, it has risen from abou t 52 per
cent to 61 per cen t for the seven-state region
durin g the 40 years end ing in 1969, with
most of the increase comi ng since 19 50
(Ch a rt 2). A comparison of C ha rts I a nd 2
discl oses- not su rprisingly- th at th e states
rank ed th e a me in 1969 in tend ency toward metropolitanizat ion by th e meas ure o f
7 / Ibid., p. 23. It is n:cogniLcd that the e inco me estim ates
a re si mp ly an approxima ti o n of production or ou tput dat a tha t
arc not, howeve r, a va ilab le fo r subna tional a reas.
Monthly Review
•
December 1971
co ncentration of economic activity as well as
by that of popul ation . In each state, th e concentrat ion of eco nomi c acti vit y in SMSA's was
greater than th e co ncentration of population .
In th e seven-state regi on, a nd in each of
th e states except Wyo min g, th e share of a ll
eco nomi c act ivity located in SMSA 's in creased
more in th e l 950's th a n in th e I 960's. Put
anoth er way, in come ea rned in non- MSA
areas ro se m ore ra pidl y relative to inco me
ea rn ed in SM SA 's in th e I960's than in th e
l 950's. This is made clea rer by reference to
T a ble 2, which includes the ra tes of change
in total personal in co me earned in SMSA' s
and non-S MSA areas of th e va ri ous states .
In the sta tes of o lorado, Kansas, Neb ras ka ,
·ind Ok lahoma , M ;\ in co me in creased less
ra pidl y, and non-S M ' ;\ in co me more rar idl y,
in th e 1960' · th a n in th e 1950' ·; ju st th e
rev erse was true in Wyo min g. In Mi sso uri ,
both SMSA and non-S MSA in come grew mo re
rapid ly in the I 960's; while both grew mo re
slowly from 1959 to 1969 in New Mexico.
The relative changes in th ese la tt er two states
we re such, however, that the proportion of
Mi sso uri 's and New Mexico's total perso na l
income ea rned in SMSA 's did not grow as
mu ch in the l 960's as in th e I950's.
Table 2
COMPOUND ANNUAL RATE OF CHANGE
IN TOTAL PERSONAL INCOME,
SMSA'S AND NON-SMSA AREAS ,
TENTH DISTRICT STATES, 1950-69
l2:iQ-:i2
SMSA's
Colorado
Kansas
Missouri
Nebraska
New Mexico
Oklahoma
Wyoming
8.5
7.9
6.0
6.8
11.6
7 .2
3 .9
7 States
United States
7.0
6.5
Non-SMSA
Areas
4.7
3.4
4.1
1.7
7.9
3.8
12~2~9
Non-SMSA
Ar~!;H
~
7.7
6.0
5 .9
6.0
6.4
5.7
6.5
6.6
5.4
4.9
7 .1
6.0
4.7
4.7
4.0
3.9
6 .6
6 .9
5.8
6.8
4.7
SOURCE : U .S. De partment of Commerce , Office of Business
Economics .
21
The Metropolitanization
Table 3
COMPOUND ANNUAL RATE OF CHANGE
IN EARNINGS BY SECTOR,
SMSA'S AND NON-SMSA AREAS,
TENTH DISTRICT, 1950-69
1950-59
Non-SMSA
Areas
SMSA's
To tal Earn ings
Farm Ea rni ngs
Gove rnment
Earn ings
Priv ate Nonfa rm
Earn ings
1959-69
Non -SMSA
SMSA' s
Areg1
7 .1
-5.0
3 .5
-2.3
6 .6
2.4
5 .3
3 .3
9.4
8 .9
8.7
7.8
6 .9
5 .0
6 .2
5.1
(Manufacturing) (7.7)
(7 .5)
(6.4)
(7.2)
SOURCE : U .S. Depa rtment of Commerce , Office of Bu siness
Economics .
Total perso nal in com e is to o ag 1 re 1 ative
a measure or the vo lum e or economic acti vi ty
lo permit furth er exa min ation or th e differentia l
movements in MSA and non-SMSA in come.
For this purpo se, so me disaggregation by indu stry stru ctur e is ca lled for. Although the
total per onal in co me d a ta are not ava il abl e on
an indu stry bas is, total ea rnin gs are. 8 In recent years, tot a l earnings in the Nation have
averaged a round 80 per cent of total personal
income, a nd cha nges in earn ings ge neral ly
parallel closely th e chan ges in tot a l personal
income. Thee features of the total earn in gs
da ta, a long with th eir ava il abi lit y by major indu stri a l division of the econ omy, make it
poss ible to exam in e th e indu stria l stru cture of
subn at iona l a reas using th em.
Beca use of both the specia l charac ter of
th e Tenth Di st rict as an ag ri cultur a l a rea (in
1969 farming was more than twice as important a source of ea rnings in th e Di strict
as in the rest of th e United States) a nd the
farm-nonfarm nature of the division of th e
area into its SMSA a nd no n-S MSA part , the
ex tent a nd grow th of farm ea rnin g hould be
expected to be a n important element in expl a ining differentia l growth in SMSA and nonSMSA income . Thus, whe n fa rm earn ings fo r
the whole seven- sta te a rea declined in the
I 950's at a co mpound annu a l rate of 2.5 per
ce nt, the impact was mu ch greater on tota l
ea rnings of the non-SMSA a re as (Tab le 3).
Th en th e recove ry of farm ea rnings in th e
I 960's (along with slower grow th in the governme nt a nd private non farm sec tors o f the
S MSA's) co ntributed heavi ly to lesse ning the
spread bet ween th e growth rates in eco nom ic
activity of th e SMSA's a nd the non-SMSA
area .
Farm earni ngs were a decl inin g sha re of
total earn in gs for both S M /\ 's and nonSM S/\ areas l'rom 19 0 to 1969 . For nonSM ' /\ 's, the decline was fr om 35 per ce nt l o
17 per cent. On th e oth er hand , ea rnin gs from
the governme nt sector we re a large r share or
tota l earni ngs for both SMSA 's a nd non-SMSA
areas in 1969 than in 1950. By the later
yea r, earnings from government we re a lso a
relatively mo re import ant part of total earnings
in the non-SMSA areas than in the SMSA 's.
Earnings in the gove rnm ent sector grew faster
in both decades th a n ea rnin gs in either th e
farm or th e priva te nonfa rm ectors. On e reTable 4
EARNINGS BY SECTOR AS A PER CENT
OF TOTAL EARNINGS,
SMSA'S AND NON-SMSA AREAS,
TENTH DISTRICT, 1950-69
1950
Total Earnings
Farm Earn ings
Govern ment
Earn ings
Private Nonfa rm Earnings
SMSA's
100.0
2.6
100.0
35.l
11.6
11.6
85.7
53 .3
(Manufact uring ) (24.3)
8/ T o ta l perso na l in co m e is compo sed o f to ta l e a rnin gs (wa ge
and sa la ry di s bu rsem ent s . o th e r labor in co me. and pro pr ie to rs·
in co me - bo t h farm a nd no nfarm ). pro pe rt y in co me (re nt. di vidend s. a nd interes t). a nd tr a ns kr pay ment s (soc ia l sce urit y paym e nt s. unempl oy ment co mpen sa ti o n . etc .) less pe rso na l contributi o ns for soc ia l insuran c e .
22
1969
1959
Non SMSA
Areas
(7.3 )
SMSA's
NonSMSA
Areas
SMSA's
NonSMSA
Areas
100.0
0.9
100.0
20.9
100.0
0 .6
100.0
17 .3
14. l
18.3
17 .2
23.2
85 .0
60.8
82. 2
59 .5
(25.7)
(10.2)
(25 .2)
(12.3)
SOURCE: U .S. Department of Commerce , Office of Business
Economics .
Federal Reserve Bank of Kansas City
of the Tenth Di strict
suit was th at, by 1969, gove rnm ent was a
more import ant so urce of ea rnin gs in th e nonSMSA a reas th a n was farming (Table 4).
With farming, a slow-grow th indu stry ,
m aking up a sign ifica nt fr acti on of th e nonSMSA areas' total ea rnings, ex tremely rapid
growth in its ot her sec tors is necessa ry if it is
to match the ea rnin gs growth of th e SM SA 's.
In th e I 950's a nd I 960's, however, ea rnings
from governmen t an d private nonfarm ea rnin gs
bo th grew more slow ly in th e non-SMSA areas
tha n in th e SMSA's. But manufacturing earning did gro w faste r in th e non-SMSA areas
th an in th e SM SA ' s in th e I960's.
P clat ive to tota l ea rnin gs, private nonr~1rm ea rn in 'S becam e slightl y less important
in the S MS/\ ' s, and slightl y more important
in th e non-S M SA a reas, fr om 1950 to 1969 .
Duri ng those yea rs, manufacturing ea rnin gs
were onl y sli ht ly more than un changed as a
share of t ta l ea rnin gs in th e SMSA' s (about
Monthly Review
•
December 1971
one-fourth), but they beca me of con siderabl y
more rela tive importa nce in the non-SMSA
areas (moving from 7 per cent to 12 per
cen t) .
In th e agg rega te, th en, the las t tw o decades have witnessed an in crease in the
domin ance of th e Tenth Di stri ct eco nomy by
th e SMSA' s, in term s of th e loca ti on of th e
vo lum e of tota l eco nomi c ac ti vi ty. In 1950,
64 per ce nt of a ll pri va te nonfarm in co me of
th e seve n states was ea rn ed in th e SMS A's;
in 1969, th e proportion was 70 per ce nt. Th e
sha re of th e SMSA 's in the ea rnin gs from th e
gove rnm ent sector a lso rose, fr om 53 per
ce nt in 1950 to 56 per ce nt in 1969 . Even
in rn a nul'ac turin ,, when.: in th e 1960's nonS M S/\ grow th was co nsiderabl y more ra pid
than th at of th e SM S/\ 's, 77.6 per ce nt of
th e Di stri ct' s manufact urin g ea rnin gs in 1969
ori gin ated in th e S MSA 's- dow n exactl y
one percentage point from 1950.
23
INDEX OF
monthl_l/ review
Agricultural Outlook 1971
- The Production and
Income Puzzle ...... ........... ...... ..... ...... ..... January
The Amended Bank Holding
Company Act ... ... .. ..... .. ................ .. ... ... .. ... . May
ARTICLES IN 1970
Index-Linked Loans,
Part II .... ...... ... .. ...... ....... ...... ..... .. .. .. ... November
Th e Me t ropolitanization
of the Tenth District ..... ... .. ...... .... .. ..... December
Bank Holdings of U . S.
Tr e asury Securiti e s .... .... ... ... .. ... ... ... July-Au g u st
1971 : Econo m ic OutlookTh e Econ o my in Tran sition ....... .... ... ...... January
Cong e ste d ParksA Pricing Dil e mma .. .. .... .. .. .. ... ....... ... .. ........ Jun e
Pri ce Stability : What Does
It M ean, What Do e s It Cost? ... ... ... ... ... ... .. . March
Consumer Spending
and Economic Activity .. ........ ... ........... February
Productiv i ty Changes ..... ..... ... .. ...... .......... ...... April
Correspondent Banking, Part Ill,
Account Analysis ..... .. .... .... .. ...... .. ...... December
Powde r Snow on Tenth
D is t r ict Ski Slopes .. ... .... ... .............. ... November
Determinants of Member
Bank Borrowing ... .... ..... ..... ..... .. .. ........ . February
Rese rve AdjustmentsSome Empirical Findings .. .. .... .... ............... June
Farm Firm Growth: Transition
to an Industrialized
Agriculture? .. ... ..... .... .. ....... .... ... ...... ... ... .... .. May
Te n th Distri ct Population
and Economic Change .. ..... .. .... .... ... July -August
Incomes Policy- An Idea
Whose Time Has Come ...... September-October
Tenth Distri ct
Re creational Waters .... .. .. .. .... .. ......... ... ... .. March
Index-Linked Loans,
Part 1 .... ... ........ . ......... .. ....... September-October
The Treasury Debt
and Bond Rate Ceilings ... ... ... ..... ...... ....... .. April
24
Federal Reserve Bank of Kansas City
@FedFRASER