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2008 Compilation

Federal Reserve

BULLETIN .

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Volume 94 D 2008 Compilation

, Federal Reserve

BULLETIN

Board of Governors of the Federal Reserve System, Washington, D.C.

PUBLICA nONS COMMITTEE

Rosanna Pianalto Cameron, Chair 0 Scott G. Alvarez 0 Sandra F. Braunstein 0 Roger T. Cole
Jennifer J. Johnson 0 Brian F. Madigan 0 Stephen R. Malphrus 0 H. Fay Peters
D. Nathan Sheets 0 Michelle A. Smith 0 David J. Stockton

o Maureen T. Hannan 0
o Louise L. Roseman 0

The Federal Reserve Bulletin is issued annually under the direction of the staff publications committee . This committee is responsible for opinions expressed excepl in
official statements and Signed articles. II is assisled by the Publications Depanmen~ Office of Board Members, under the direction of Lucretia M. Boyer.

Table of Contents
PREFACE
ARTICLES

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007 .. . ........ .... ... .
William F Bassett and Thomas King

June 5

Industrial Production and Capacity Utilization: The 2008 Annual Revision. . . . . . . . . . . . . . . . . . . . . A41
Kimberly Bayard and Charles Gilbert
August 7

Economic Development Incentives: Research Approaches and Current Views. . . . . . . . . . . . . . . . . .. A61
Dan Gorin
.
October 28

Recent Payment Trends in the United States. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. A 75
Geoffrey R. Gerdes
October 28

The 2007 HMDA Data . .... .. . ........ .. . .. . .. ..... .. . .... ... . . .. ..... .. ... . . .... . ....... Al 07
Robert B. Avery, Kenneth P Brevoort, and Glenn B. Canner
December 23

LEGAL DEVELOPMENTS

Fourth Quarter, 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

March 7

First Quarter, 2008 . . ... .. ...... . .. ...... . .. .. . .... ..... .. . .. .. . .. .. . ... . . ....... ...... . . C31
June 6

Second Quarter, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. C73
August 13

Third Quarter, 2008 . . .... . ... . .. ... ........ . ... .. ...... . ..... .. ...... ... ..... . .......... , C99
November 21

INDEX. . .... ....... ... .... . . . . . .. ...... .. .. .... .... . ............... . ... . . .. . .. . . ... . ... .

Preface
The Federal Reserve Bulletin was introduced in 1914 as a vehicle to present policy issues developed by the
Federal Reserve Board. Throughout the years, the Bulletin has been viewed as a journal of record, serving to
provide the public with data and research results generated by the Board. Authors from the Board ' s Research
and Statistics, Monetary Affairs, International Finance, Banking Supervision and Regulation , Consumer and
Community Affairs, Reserve Bank Operations, and Legal divisions contribute to the Bulletin, which includes
topical research articles, orders on banking applications , and enforcement actions.
Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the
increased use of the Internet-and in order to release articles and reports in a more timely fashion-the Board
discontinued the quarterly print version of the Bulletin and began to publish the contents of the Bulletin on its
public website as the information became available. All articles, orders on banking applications, and enforcement actions that were published in the online Bulletin in 2008 are included in this print compilation.
The tables that appeared in the Financial and Business Statistics section of the Bulletin from 1914 through
2003 were removed and published monthly as a separate print and online publication, the Statistical
Supplement to the Federal Reserve Bulletin, from 2004 to 2008. Effective with the publication of the December
2008 issue, the Board discontinued both the print and online versions.
The majority of data published in the Statistical Supplement are available elsewhere on the Federal Reserve
Board's website at www.federalreserve.gov. The Board has created a webpage that provides a detailed list of
links to the most recent data on its site and links to other data provided by the Federal Reserve Bank of New
York , the U.S. Treasury, and the Federal Financial Institutions Examination Council.
Online access to the Bulletin is free . A free e-mail notification service is available to alert subscribers to the
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Subscribe to e-mail notification service:
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Articles

June 2008

Profits and Balance Sheet Developments
at U.S. Commercial Banks in 2007
William Bassett and Thomas King, of the Board's
Division of Monetary Affairs, prepared this article.
Thomas C. Allard assisted in developing the database
underlying much of the analysis. Adina Goldstein and
Oren D. Ziv provided research assistance.
The U.S. commercial banking industry faced significant challenges in 2007, including continued deterioration in the performance of subprime mortgagerelated assets and a more general reassessment by
investors of structured finance instruments. Those
developments contributed to significant strains in
financial markets and dislocations in bank funding
markets over the second half of the year. Moreover,
economic growth slowed late in the year, and the
outlook for 2008 worsened. The turmoil in financial
markets hampered banks' securitization programs
and their ability to syndicate leveraged loans, which
put considerable pressure on the balance sheet
capacity and liquidity positions of some banks.

NOTE: The data in this article cover insured domestic commercial
banks and nondeposit trust companies (hereafter, banks). Except as
otherwise indicated, the data are from the Consolidated Reports of
Condition and Income (Call Report). The Call Report consists of two
forms submitted by domestic banks to the Federal Financial Institutions Examination Council: FFIEC 031 (for those with domestic and
foreign offices) and FFIEC 041 (for those with domestic offices only).
The data thus consolidate information from foreign and domestic
offices, and they have been adjusted to take account of mergers and the
effects of push-down accounting. For additional information on the
adjustments to the data, see the appendix in William B. English and
William R. Nelson (1998), "Profits and Balance Sheet Developments
at U.S. Commercial Banks in 1997," Federal Reserve Bulletin, vol. 84
(June), p. 408. Size categories, based on assets at the start of each
quarter, are as follows: the 10 largest banks. large banks (those ranked
II through 100), medium-sized banks (those ranked 10 I through
1,000), and small banks (those ranked 1,00 I and higher). At the start of
the fourth quarter of 2007, the approximate asset sizes of the banks in
those groups were as follows: the 10 largest banks, more than
$140 billion; large banks, $7.2 billion to $140 billion; medium-sized
bankS, $494 million to $7 . 1 billion; and small banks, less than
$494 million.
Data shown in this article may not match data published in earlier
years because of revisions and corrections. Call Report data reflect
information available as of April 16, 2008. In the tables, components
may not sum to totals because of rounding . Appendix tables A.J.A
through A.I.E report portfolio composition, income, and expense
items, all as a percentage of overall average net consolidated assets,
for all banks and for each of the four size categories. Appendix table
A.2 reports income statement data for all banks.

Bank prof1tabilily . 1985- 1007

Pcrccnl

P.:n.::enl

1.8

Return on equity

16
14

1.6
1.4

I.2

1.0

I I I I I I I I I I I I I I I I I I I I I I I I I
1986

1989

1992

1995

1998

2001

2004

2007

NOTE: The data are annual.

Profitability-especially in the final quarter of 2007feU noticeably from the very high levels posted in
recent years (figure 1). The drop in profits, reflecting
primarily lower trading revenue and significantly
higher provisions for loan losses, was more pronounced at large banks, but the net income of smaller
banks also declined markedly.
Financial markets came under considerable pressure in 2007. Problems that were mostly contained
within the markets for subprime mortgages and
related structured products in the first half of the year
intensified around midyear. In tum, the deepening
troubles in subprime mortgage credit quality caused
investors to become increasingly concerned about the
likely performance of even highly rated securities
backed by subprime mortgages. Furthermore, investors reassessed the soundness of many structured
financial products not backed by residential mortgages, including asset-backed commercial paper and
collateralized loan obligations. Those developments,
along with emerging worries about the economic
outlook, contributed to a broad-based reduction in
investors' appetite for risk over the second half of the
year. As a consequence, the markets for some types of
structured investment products virtually dried up by
year-end, and the prices of such securities dropped,
events that generated large losses at some banks and

Federal Reserve Bulletin 0 June 2008

Seleo.:led il1lere 1 rales. 2002- 08
Percent

4
3
Target federal funds rate
2

I I

I
14
13

12
-

10
9

8
7

6
S

30-year
_fixed-rate mongages

2002

2003

2004

200S

2006

2007

2008

NOTE: The data are monthly and extend through March 2008.
SOURCE: For Treasury securities, mongages, and Moody 's corporate
bonds, Federal Reserve Board, Statistical Release H.IS, "Selected Interest
Rates" (www.federalreserve.gov/releaseslhIS); for federal funds , Federal
Reserve Board (wwwJederalreserve.gov/fomc/fundsrate.htm); for high-yield
bonds, Merrill Lynch Master 11 index.

financial institutions. Yields on both investmentgrade and speculative-grade corporate bonds increased, while those on Treasury securities fell because of easier actual and expected monetary policy
as well as heightened demand for safer assets (figure 2). Equity prices dropped over the second half of
the year, and volatility in many financial markets
increased.
Despite the deterioration in housing-related markets and emerging financial strains, the U.S. economy
generally performed well through the first three quarters of 2007. However, economic growth weakened
considerably in the fourth quarter as pressures in
financial markets worsened, the downturn in the
housing market intensified, and prices for crude oil
and some other commodities rose. Consumer spending and business investment, which had both increased at a healthy pace, on balance, over the first
three quarters of the year, slowed, which contributed
to reduced demand for credit from households and
businesses. Late in the year, consumer sentiment

worsened, and forward-looking indicators of business
spending also became less favorable. The weakening
outlook added to concerns about asset quality at
banks . Measures of overall consumer price inflation
stepped up in 2007, but core inflation (which excludes
the direct effects of movements in energy and food
prices) was little changed on balance. With downside
risks to economic growth increasing, and with monetary policy makers generally expecting inflation to
moderate somewhat in 2008 and 2009, the Federal
Open Market Committee substantially eased the
stance of monetary policy in late 2007 and early
2008.
The difficulties in financial markets, together with
the ongoing weakness of the housing sector, had
significant effects on bank balance sheets, especially
over the second half of the year. As the residential real
estate market contracted and banks tightened their
credit standards, the growth of residential mortgages
on banks' balance sheets slowed dramatically from
the rapid rates posted between 2002 and 2006. At the
same time, credit and liquidity concerns reduced
institutional investors' willingness to participate in
the syndicated loan market. Large commercial banks,
which had underwritten a record volume of such
loans in the first half of the year, primarily to finance
leveraged buyouts, found themselves unable to place
these loans in the market. Commercial and industrial
lending at those banks expanded rapidly for a time as
loans intended for syndication ended up on banks'
books. At least partly in response to these unexpected
additions to assets, banks sold U.S. Treasury and
agency securities and tightened standards and terms
on many types of loans .
These balance sheet pressures, coupled with uncertainty about the size and distribution of losses on
subprime mortgages and structured financial products , also strained short-term bank funding markets.
The Federal Reserve responded to the financial turmoil with a series of actions to support liquidity and
functioning in bank funding markets (partly in coordination with foreign central banks).1 Core deposits
continued to grow relatively slowly. As spreads on
interbank borrowing widened (figure 3), banks increasingly funded asset expansion with managed liabilities,
1. The Federal Reserve conducted unusually large open market
operations, made adjustments to the primary credit rate and to
procedures for discount window borrowing and securities lending,
established a Term Auction Facility, and entered into currency swap
arrangements with two other centra] banks. For a fuller discussion of
the measures employed by the Federal Reserve in 2007 to support
orderly market functioning, see box "The Federal Reserve's Responses to Financial Strains," in Board of Governors of the Federal
Reserve System (2008), Monetary Policy Report to the Congress
(Washington: Board of Governors, February), pp. 26-27 .

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

Spread:, of 3- month Libor over OIS ra le, 200:2 ·08

I U mher r ban" . and share of a Sl.:ts at the largest
banks. 1990--2007

na."iis puinl.'i
Thou,·mnd..

Number

-tOO

12
80
10
8

I
P~rcent

20
Share of assets
I

2002

2003

2004

2005

2006

2007

2008

NOTE: The data are daily and extend through May 15, 2008 . For Libor,

quotes are as of 6 a.m.; for the OIS rate, quotes are as of the close of business
of the previous trading day. An overnight index swap (OIS) is an interest rate
swap with the noating rate tied to an index of daily overnight rates, such as
the effective federal fund s rate . At maturity, two parties exchaoge, on the
basis of the agreed notional amount, the difference between interest accrued
at the fixed rate and interest accrued through geometric averaging of the
noating. or index , rate.
SOURCE: For Libor, British Bankers ' Association ; for the OIS rate , Prebon .

including Federal Home Loan Bank (FHLB) advances,
foreign deposits, and, late in the year, large time
deposits.2 Some large banks also received substantial
cash infusions from their parent holding companies.
Financial and economic developments contributed
to the decline in the profitability of the banking
industry last year after a long period of very strong
performance. As a consequence of the difficult conditions in financial markets, several large banks experienced sharp reductions in trading revenue. Solid
revenues from investment banking activities and private asset-management businesses were insufficient
to offset those decreases, and total non-interest income declined in 2007 . Profitability was al so depressed by a stepped-up rate of loss provisioningwhich had been at very low levels-in response to an
across-the-board worsening of asset quality. In addition, non-interest expense grew briskly last year
despite a slight deceleration in employee compensation . Moreover, the declines in market interest rates
and hjgher credit spreads observed in many sectors
over the second half of 2007 were inadequate to boost
the industry wide net interest margin, which continued
its longer-run slide last year.
2 . In this article, core deposil~ are defined as the sum of transaction
deposits , savings deposits (including money market deposit accounts) ,
and small time deposits (time deposits issued in denominations of less
than $100 ,000) held at domestic offices. Ma naged liabilities consist of
large ($100,000 or more) time deposil~ booked in domestic offices,
deposits booked in foreign offices , subordinated notes and debentures,
federal funds purchased and securities sold under repurchase agreements, FHLB advances , and other borrowed money.

10 largest

I I
1991

I I I I I I I I I I I I I I I I
1993 1995 1997 1999 200 1 2003 2005 2007

NOTE : The data are as of year-end. For the definition of bank size, see the
general note on the first page of the main text.

The number of new commercial banks chartered
edged down in 2007, and the average size of such
banks declined considerably from that of the previous
two years, Merger activity also dipped last year but
still outpaced bank formation . As a result, the number
of banks declined further, to about 7,300 at the end of
2007 from about 7,450 at the end of 2006 (figure 4).
The share of assets held by the top 10 banks increased
further, reaching 53 percent at the end of 2007, and
the share of assets held by the top 100 banks rose to
80 percent. According to the Federal Deposit Insurance Corporation, two banks with assets totaling
$100 million failed in 2oo7.
The formation of new bank holding companies
(BHCs) increased for the second consecutive year in
2007 and was the highest in several years . Mergers
among BHCs also moved up last year, and the rate of
mergers continued to exceed the rate at which new
BHCs were formed . The number of BHCs thus edged
down to about 5,070 from about 5,100 in 2006 (for
multi tiered BHCs, only the top-tier organization is
counted in these figures). The number of financial
holding companies held fairly steady in 2007 at about
640. 3 The share of BHC assets that were held by
financial holding companies was unchanged in 2007
at 86 percent.
3. Statistics on financial holding companies include both domestic
SHCs that have elected to become financial holding companies and
foreign banking organizations operating in the United Slates as
financial holding compa nies and subject to the Bank Holding Company Act. For more information, see Board of Governors of the

Federal Reserve Bulletin 0 June 2008

I. Changt' in balance ShC\!l il<!n1S. all U. .

hank~ .

1998- 2007

Percent

Item

1998

1999

2000

2001

2002
,

2004

2005

2006

2007

10.80
11.31
11.23
4.37
15.44
15.1 I
15.76
14.24
35.59
10.17
3.57
-4.18
10.59
6.17
-15.87

7.79
8.04
10.48
12.54
13.81
13.93
11.95
16.62
7 . 19
2.80
-.17
-5.56
2.40
1.\9
-17.59

12.36
12.45
11.97
11.81
14.94
15.05
15. \I
14.96
8.79
6.19
3. 17
1.66
11.53
6.94
-19.30

10.81
10.12
10.58
20.38
7.03
6.77
5.54
8.37
22.76
11.67
12.85
27.63
4.57
-4.42
-26.90

11,077
9,569
6.473
1,362
3,634
3,565
1,995
1,570
69
948
619
90
2,195
1.562
29

r
Assets ... ... .... .. .. .. ... ...... .. ........ ......
8.21
Interest-earning assets
8. 19
.. ........ ...
Loans and leases (net)
.. .. .... .. .. 8.73
Commercial and industrial . . ... .. . . ... . . .
12.96
Real estate ... . . . . ... . . . .. . . . .. . . . .. . . .
8.03
Booked in domestic offices
. . ..... .
8.01
One- to four-family residential . . .. .. .
6.39
Other real estate . .. . ..... .. ..... ... .
10.34
Booked in foreign offices . . ........ . . .
8.79
Consumer . . .. . . . .... . . . . . .. . . . . . .. . .. ..
.38
Other loans and leases ..... . .. .. ... .. . .. .
13.50
Loan-loss reserves and unearned income ..
3.10
Securities .. . .....
. . ... . ..... ... . . . . . ..
8.45
Investment account ... .. . .... . . . . ...... ..
12. 1I
U.S. Treasury . .. . . . . . . . . . . . . . . .. . . . . . -25.05
U.S. government agency and
corporation obligations ... . . . . . . . . .
17.03
Other . . . ...... . . . ..... . .. . . ... ... . . ..
27.02
Trading account . .. . ... .. .... ... ... .. .. . -13.32
Other .. .... .. . ...... . . . . . . . . . . . . . . . . . . .
3.80
Non-interest-eaming assets ... ... . ... .. -... ..
8.39

2003

MEMO
Dec,
2007
(billions
of
dollars)

5.47
5.91
8. 13
7.90
12.28
12.42
9.73
16.16
6 .28
-1.47
7.19
2.40
5.14
6.71
-1.87

8.78
8.67
9.25
8.55
10.76
11.04
9.29
13.34
-1.62
8.05
7.01
8.00
6.39
2.89
-32.71

5. 13
3.97
1.83
--{j.n
7.95
8.03
5.71
10.97
3.97
4.17
-2.00
13.17
7.26
8.92
-40.23

6.60
- .02
5.82
16.28
13.60
41.93

7 .25
7.35
6.60
-4.52
9.78
9.69
10.05
9.22
15.74
9.77
8.31
-2.48
9.46
8.73
14.14

1.87
20.93
--{j.93
-8.35
2.66

3.81
13.41
37.16
10.33
9.46

12.90
12. 19
-3.72
13.04
12.79

18. 15
2.81
36.32
-2.92
5.14

9.70
6.04
14.01
6.86
6.65

9.48
3.03
36.81
14.29
7.61

-1.82
10.1 2
7.96
5.99
6.21

4.71
13.78
31.32
19.29
11.80

-12. 13
10.72
36. 13
22.34
15.36

893
639
633
901
1,509

7.23
7.58
5.93
- 7.39
14.49
14.90
19.92
8.85

-7.41

Liabi lities .... . . . .... . ... .. .. ... ..... .... . .. .. .
Core deposits .. .. . . . . . ... .. . . .. . .. . .. . ... ..
Transaction deposits ... ..... .. ..... ... . ... .
Savings deposits (including MMDAs) . ... .. .
Small time deposits .. .... ... ... .. .. .. .. ...
Managed liabilities I . . .. ..... .... ...... .. ....
Large time deposits .. .... .... ..... . .... . .. .
Deposits booked in foreign offices ... . . . . .. .
Subordinated notes and debentures . . . .. .... .
Gross federal funds purchased and RPs .... .
Other managed liabilities . , , . ..... . . .. , .. . . .
Revaluation losses held in tmding accounts ... .
Other ... ..... .... .. . . , .. . .. . .... . .. . . . . ... .

8.09
7.08
-1.38
18.35
.59
9.45
9.14
8.71
17.00
4.38
15.66
3.44
12.74

5.61
.27
-8.93
6.71
-{).70
15.55
14.24
14.60
5.07
1.57
35.29
-13,20
-1.25

8.60
7.56
-U8
12.53
7.24
8.79
19.39
7.84
13.98
6.49
1.80
7.47
20.63

4.47
10.56
10.22
20.69
-7.21
-2 .71
-3.64
- 10.92
9.56
5.74
-.28
-17.06
14.92

7.17
7.62
- 5.11
18.51
-4.85
5.38
5.18
4.49
- .59
12.76
1.00
33.44
5.24

7.31
7.32
2.84
13.71
--{j.67
7.09
1.84
12.63
5.08
-8.70
22.11
14.02
5.30

9.57
8.27
3.25
11 .73
1.61
12.07
21.89
16.84
10.49
8.40
1.37
-12.61
17.19

7.80
6.41
-1.19
6.94
12.90
12.26
23.00
6.32
11.42
15.62
6. 15
-17.86
- .82

12.10
5.84
-4.28
5.53
16.97
19.45
15.95
29.67
22.60
9.47
18.89
6.89
22.34

10.79
5.48
-1.21
3.33
18.00
16.58
1.92
25 .86
16.83
7.06
28.44
42.20
3.35

9,941
4,721
695
2,995
1,031
4,550
1,024
1,502
174
744
1,106
205
465

... ... . ... . .. .... ... ..

9.58

3.92

10.68

12.32

7.87

6.69

23. 15

7.73

14.69

10.96

1,136

MEMO
Commercial real estate loans 2 " ... ... ..... .. ....
Mortgage-backed securities
.. ......... ..
Federal Home Loan Bank advances . .. . .. . . ....

11.40
22.14

15.52
-3 ,33
D.a.

12.19
3.30

13.11
29.06
n.a.

6.86
15.60
17.30

9.02
10.14
3.71

13.97
13.45
3.74

16.87
2.07
10.00

14.91
10.22
29.80

9.21
-1.24
30.62

1,578
960
455

Capital account . . . . • _. .

R.a.

n.a.

NOTe : Data are from year-end to year-end and are as of April 16, 2008.
I. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures, federal fund s
purchased and securities sold under repurchase agreements. Fede ral Home
Loan Bank advances, and other borrowed ruoney.
2. Measured as the sum of construction and land de velopment loans secured
by real estate; real estate loans secured by nonfarm nonresidential prop-

BALANCE SHE·T DEVELOPMENTS
Balance sheet developments in 2007 were influenced
importantly by the turbulence in financial markets in
the second half of the year. The turmoil exerted
pressure on both the asset and liability sides of banks'
balance sheets, as banks found markets less receptive
to sales of loans and securities and faced funding
markets that were, at times, illiquid. Together with the
softening macroeconomic picture, these disruptions

Federal Reserve System (2003), Report to the Congress on Finan cial
Holding Companies under the Gramm-Leach-Bliley Act (Washington:
Board of Governors, November), www.federalreserve. gov/pubs/
reports_other.htm.

erties or by multifamily residential properties; and loans to finance commercial real estate, construction, and land development activities not secured by
real estate.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement ,

led banks to become more cautious in the extension
of credit and to take steps to bolster capital positions.
Total bank assets expanded 10,8 percent in 2007,
down somewhat from the previous year but still
strong by historical standards (table 1); indeed, the
growth rate easily outpaced that of total domestic
nonfinancial debt. And, excluding the conversion of
one commercial bank to a thrift institution in the first
quarter, bank assets grew even faster-l 1,9 percent.
Loans expanded at about the same rate as assets,
primarily becau se of rapid growth in commercial and
industrial (C&I) lending. The demand for C&I loans
was spurred , in part, by vigorous capital investment
and financ ing for mergers and leveraged buyouts
(LBOs) in the first half of the year. In the second half,

Profits and Balance Sheet Developments at

the deterioration in credit markets caused C&I loans
that had been intended for syndication to accumulate
on banks' balance sheets. Residential mortgage lending slowed amid the contraction in home sal~s a~d the
continuing decline in house prices, and lendIng In t~e
commercial real estate market also decelerated late In
the year. In contrast to the rapid pace of overall
lending, banks' securities holdings expanded relatively slowly, a development that was likely a result,
in part, of efforts to ease the pressures on balance
sheets. Other types of bank assets expanded rapidly in
2007 as commercial banks were net providers of
liquidity during the financial turbulence; in particular,
short-term loans to financial institutions-in the form
of federal funds sold, securities purchased under
resale agreements, and balances due from
depositories-increased 29 percent over the year.
On the liability side of the balance sheet, growth of
core deposits remained moderate. In the autumn,
banks attracted small time deposits by maintaining
relatively high rates, on average, on such deposits
while other short-term yields were falling, but these
inflows were partly offset by the continued sluggish
growth of savings deposits (including money market
deposit accounts) . Given the relatively rapid growth
in assets, banks turned to managed liabilities for
funding. Moreover, in response to the pressures in
funding markets, banks increased their reliance on
FHLB advances and subordinated debt late in the
year.
Banks' capital expanded at about the same pace as
assets. The rise in equity capital was supported by
increased goodwill but was hampered by meager
retained earnings. Regulatory capital, which excludes
goodwill, grew somewhat more slowly than equity
capital and assets, and regulatory capital ratios edged
lower. A number of large institutions received sizable
cash injections from their parent holding companies,
which helped maintain capital ratios . As asset quality
deteriorated late in the year, many banks significantly
boosted loan-loss reserves.

LoallS to Businesses
C&I loans grew 20 percent during 2007. For most of
the year, this growth was supported by robust fixed
investment and merger and acquisition (M&A) activity at nonfinancial corporations. Solid growth of
capital expenditures contributed to a large financing
gap , especially as corporate profit growth slowed late
in the year (figure 5). As conditions in credit markets
tightened, the pace of capital accumulation and new
borrowing slowed. Meanwhile, with conditions in the
syndicated loan market also deteriorating, some large

u.s.

Commercial Banks in 2007

Financing gap at nonfuml nonlinilndal corporations.

1990-2007
Dillions of dollars

300
250
200
150
100
50
+

50
100
150

I I I

1 I I I I I I I I I I I I

1991 1993 1995 1997 1999 200 I 2003 2005 2007
NOTE: The data are 4·quarter moving averages . The financing gap is the
difference between capital expenditures and internally generated funds.
SOURCE: Federal Reserve Board . Statistical Release Z.l , "Flow of Funds
Accounts of the United States," table F.102 (www .federalreserve.gov/
releaseslz I).

banks were forced to retain on their balance sheets a
considerable amount of loans that were originally
intended for syndication, many of which were extended to finance LBOs (see box "Market for U .S.
Leveraged Syndicated Loans"). As the economic
outlook weakened and banks tightened their credit
standards, commercial real estate (CRE) lending,
particularly for construction and land development,
slowed somewhat from the rapid growth of recent
years .
According to respondents to the Federal Reserve's
quarterly Senior Loan Officer Opinion Survey on
Bank Lending Practices (BLPS), demand for C&I
loans softened steadily throughout the year as the
economic outlook deteriorated (figure 6) . Banks that
experienced weaker C&I loan demand generally
pointed to decreased needs by busines~es. to fina~ce
M&A activity and to fund investments In Jnventones
and in plant and equipment. Despite the reported
weakening in demand for C&I loans, growth in such
loans was evident at commercial banks of all sizes,
although it was particularly concentrated among the
largest institutions, which are the most acti ve participants in the syndicated loan market. 4 Meanwhile,
some firms drew upon previously arranged backup
lines of credit with commercial banks as debt markets
tightened, a move that further boosted the volume of
C&I loans on banks' balance sheets.
In light of the rapid growth of syndicated lending,
and the considerable extent to which such lending
4. In asking banks to report demand, the survey instructs them to
"consider only funds actually disbursed as opposed to requests for
new or increased lines of credit."

Federal Reserve Bulletin 0 June 2008

Market for U.S. Leveraged Syndicated Loans
The market for U.S. leveraged syndicated loans was
significantly affected by the disruptions in credit markets
that first emerged in the summer of 2007. Although
issuance of leveraged loans posted a record of nearly
$700 billion last year, reflecting a surge in merger and
acquisition (M&A) activity and leveraged buyouts
(LBOs), the bulk of the deals were struck in the first half
of the year, with activity slowing significantly over the
second hal f. I
During the first and second quarters of 2007, issuance
of leveraged loans soared to an annualized rate of nearly
$860 billion, an increase fueled by strong M&A activity
and an unprecedented wave of large LBOs (figure A).
Institutional investors represented an important source of
funding for these deals: Issuance of institutional loansthat is, leveraged loans structured for institutional
investors-topped $290 billion and accounted for a record
share of leveraged lending? Against a backdrop of stronger demand from institutional investors and improved
liquidity in the secondary market, loan credit spreads
continued to narrow over the first half of the year.
Nonprice terms were also eased, with issuance of "covenant lite" loans and second-lien loans surging to record
highs?
Early last summer, however, investors began pulling
back from the leveraged loan market, apparently in
response to concerns about the accommodative terms on,
I. Financial firms account for only a small share of funds rdised in lIle
leveraged loan market.
2. Institutional investors include a wide range of nonbank lenders, such
as loan mutual funds, issuers of collateralized loan Obligations, insurance
companies, finance companies. hedge funds. and distressed and high-yield
funds.
3. According to Standard & Poor's, covenant-lite loans are loans that
have bond-like financial incurrence covennnts, which merely limit !he
issuance of additional debt, ralller than lIle more restrictive maintenance
covenants lIlat have traditionally been part of a syndicated loan agreement. For more information, see Standard & Poor's (2007), A Guide 10 the
Loan Markel (New York: S&p. October).
As lIleir name implies, second-lien loans are loans whose claims on
collateral are behind lIlose of first-lien loans.

was used to finance large LBOs and M&A activity,
the July 2007 BLPS queried banks about their participation in the syndicated loan market. About one-half
of domestic respondents indicated that syndicated
loans accounted for 5 percent to 20 percent of the
C&I loans on their books, but a few large institutions
noted that syndicated loans accounted for more than
50 percent of their C&I loan portfolios. Most survey
participants indicated that only a small fraction of the
syndicated loans on their books were originated to
finance LBOs. Indeed, nearly two-thirds noted that
LBO-related syndicated loans accounted for less than
5 percent of the syndicated loans on their books,

and the very substantial actual and anticipated volumes
of, large LBOs. As a result, the flow of new deals slowed
noticeably, but the pipeline of leveraged deals that banks
had reportedly underwritten but not yet syndicated swelled
to about $250 billion from roughly $110 billion at the
start of the year. In the secondary market, a drop in
average bid prices on leveraged loans and a worsening of
liquidity pushed the average bid-asked spread substantial'ly higher. Meanwhile, the implied spread on the
LCDX index-an equally weighted index of 100 loanonly credit default swaps-rose sharply; the spread was
allegedly boosted by investors positioning themselves
to profit from a deterioration in credit quality as well
as by strong hedging demand from both arrangers of
collateralized loan obligations (CLOs) and market participants with exposure to the pipeline of leveraged deals
(figure B).4
In August, as strains emerged in term bank funding
markets, conditions in the leveraged loan market deteriorated further. Several loan issues were postponed or
restructured in response to investors' demands for wider
spreads and tighter non price terms. Spreads on lowerrated tranches of CLOs widened considerably, and issuance slowed markedly, developments that reportedly
reflected investors' increased uncertainty about the appropriate valuation of structured finance products used to
fund business credits. Because CLO vehicles had been
the largest buyers of leveraged loans in recent years,
banks faced severe difficulties syndicating previously
underwritten loans used to finance large LBOs and were
subsequently forced to bring a number of such loans onto
their books. As conditions in corporate credit markets
improved for a time in the fall, underwriters were success-

4. A loan-only credit default swap (LCDS) is similar to a standard
credit default swap. The main difference is lIlat the reference obligation
for an LCDS is a syndicated secured loan of a reference entity with a
designated priority (for example. first lien or second lien).

which probably reflected the concentration of this
activity within a few large banks and the tendency of
these banks to place large portions of LBO-related
syndications with institutional investors.
The accumulation of previously underwritten C&I
loans may have been offset to some degree by a
growing reluctance to make new C&I loans in the
second half of the year. In the first- and secondquarter BLPS , a majority of banks reported no change
in their underwriting standards for C&I loans. However, as concerns about financial market conditions
mounted and the allocation of syndicated loans to
investors became difficult during the second half of

Profits and Balance Sheet Developments at Us. Commercial Banks in 2007

ful in some cases at reducing their exposures by selling
loans to investors, although often at prices well below par.
All told, leveraged loan issuance slowed sharply in the
second half of 2007, as institutional lending tumbled
more than 50 percent from the level of the previous six
months, to about $140 billion.
Pressures in the leveraged syndicated loan market have
continued so far this year, and activity has remained
subdued. Financial market dislocations eased somewhat
in January, but they subsequently intensified again. In
addition, the financial market pressures and the ongoing
decline in the housing sector led investors to mark down
their outlook for economic activity. As concerns about the
eft'ect of slower growth on credit quality mounted and as

some leveraged investors were reported to have unwound
their positions. average bid prices on leveraged loans
plunged, and the implied LCDX spread widened sharply.
Loan market liquidity was reportedly poor, and the
average bid-asked spread widened to a level well above
the peak reached in the summer of 2007. Since midMarch 2008, conditions in financial markets appear to
have improved somewhat, and loan prices have reversed
some of their earlier declines. Nonetheless, only $54 billion of leveraged loans cleared the primary market in the
first quarter of 2008, down from the $209 billion syndicated a year ago. Also as of the first quarter, issuance of
institutional loans. at about $12 billion. dropped more
than 90 percent from its year-earlier level.

A. Issuance of U.S. leveraged syndicated loans, 2002-08

B. LCDX indexes, 2007-08

Billiom of

dou.u. lIIIlusl nolO

___________________________________Bu
__
w~mg

o Institutionat loans
•

Bank loans

800

600

500

400
300
200
100
I

2007
Non;: The data extend through 2008:QI. Institutional loans are term
loans of relatively long maturity and intended for institutional investors,
including loan mutual funds, coUateralized loan obligalions, insurance
companies, finance companies, and bedge funds. Bank loans are the
remaining portions of syndicated leveraged loans and can include both
revolving credits and sborter-maturity term loans.
SouRCE: Reuters LPCIDcaIScan.

2007, significant net fractions of respondents tightened their credit standards and terms on C&I loans .
CRE loans expanded 9.2 percent last year, down
from the very rapid rates posted over the previous
three years . The slowdown was widespread but was
somewhat more pronounced at the largest institutions.
For 2007 as a whole, CRE lending was supported by
growth of construction and land development loans,
which accounted for more than one-third of all CRE
loans at the end of the year (figure 7). However, the
growth in this category of CRE loans, which includes
loans to residential real estate developers, slowed in
the second half of 2007 along with housing market

2008

Non;: The data are daily and extend through March 31, 2008. Each
LCDX index consists of 100 single-name credit default swaps
referencing entities with flrSl-lien syndicaled secured loans that trade in
the secondary market for leveraged loans. Series 8 began trading on
May 22, 2007, rmd series 9 on October 3,2007.
SoURCE: Marltil.

activity. Real estate loans backed by nonfarm nonresidential structures, the largest category of CRE loans.
grew at a pace somewhat below its recent average,
and CRE loans secured by multifamily dwellings also
expanded somewhat more slowly than in 2006.
Smaller banks maintained the relatively high concentrations of CRE lending that they had built over the
past two decades (figure 8).5

5. In view of the increasing concentration at smaller institutions,
regulators issued interagency guidance in December 2006 to promote
sound risk-management practices at banks regarding their CRE loans.
See Office of the Comptroller of the Currency, Board of Governors of

Federal Reserve Bulletin 0 June 2008

6. Change' in demand and upply conditions at elected
banks ror commercial and industrial loans to large and
middle-market tim1s. 1990-2007

Change in commercial real esL:'lte loans, by major
components , 1990---2007
Percent

Percenl

Net percentage of banks reporting stronger demand I

60
30

+
20

80
I

I I

I
1991

I I I I
1993 1995

I
1997

I I I I I I I I I I
1999 200 1 2003 2005 2007

NOTE: The data are annual.

Net percentage of banks reporting tighter standards 2
60

8. Share or all loans con:;isling or commercial real e tate
loans by hank size. 1990- 2007

40
Percent

20
50

o
40

I I
1991

I I
1993

II I
1995

I I
1997

I I t I I I I I I I
1999 2001 2003 2005 2007

Medium-sized
and small banks

20
NOTE: The data are drawn from a survey generally conducted four times
per year; the last observation is from the January 2008 survey . which covers
2007:Q4 . Net percentage is the percentage of banks reponing ao increase in
demand or a tightening of standards less , in each case, the percentage
reponing the opposite. The definition for firm size suggested for. and
generally used by. survey respondents is that large and middle-market firms
have annual sales of $50 million or more.
I. Series begins with the November 1991 survey.
2. Series begins with the May 1990 survey.
SOURCE: Federal Reserve Board, Senior Loan Officer Opinion Survey on
Bank Lending Practices (www.federa1reserve.gov/boarddocs/snloansurvey).

The lower growth rate of CRE loans in 2007
appears to have reflected a moderation in demand and
a reduction in supply, trends that began in 2006 but
accelerated last year (figure 9). Banks responding to
the BLPS indicated that demand for CRE loans
weakened steadily throughout 2007. On the supply
side, a notable fraction of survey respondents reported
a tightening in their credit standards for CRE loans
over the period. Terms on CRE loans were also
tightened, with many banks requiring higher loan-tovalue and debt-service-coverage ratios. The move
the Federal Reserve System, and Federal Deposit Insurance Corporation (2006), " Federal Banking Agencies Issue Final Guidance on
Concentrations in Commercial Real Estate Lending, " press release, December 6, www.federalreserve.gov/newsevents/presslbcreg!
20061206a.htm.

100 largest banks

I I
1991

I I I I

I I

1993

1997

1995

10
I I I I I I t it
1999 2001 2003 2005 2007

NOTE: The data are quarterly. For the definition of bank size, see the
general note on the first page of the main tex\.

toward a more stringent lending posture was likely
due, in part, to the effect of the softening economic
outlook on the expected credit performance of CRE
loans. In addition, banks may have been concerned
about deteriorating conditions in the market for commercial mortgage-backed securities (CMBS). Amid
the broad reassessment of the risks associated with
structured financial products, investors in CMBS
retreated from the market, spreads moved significantly higher, and issuance dried up .

Loans to Households
Pressures in the housing market, including outright
declines in home prices in some areas, continued to
affect bank lending to households last year (figure 10). In response to the easing of monetary policy
that started in September, mortgage rates moved

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

Ch,UlgI:S in demanu anu upp ly cunditil1n ilt
sel<!clect ban.ks for commercial real estale loans.
1996-2007

Ch,mge in prices of exisling single-family h mes,
1988-07
PcrCl!nL

P\!.rccm

-----------------------------------

Net percentage of banks reporting stronger demand

60
15

40
10

20
+

40
10

I I I I I I I I I I I I I I I I I I I I I I I
1989 1991 1993 1995 1997 1999 200 I 2003 2005 2007

Net percentage of banks reporting tighter standards
60
40

NOTE: The data are quarterly and extend through 2007:Q4; changes are
from one year earlier. For the years preceding 1991, the repeat-transactions
index includes appraisals assoc iated with mortgage refinancings; beginning in
1991 , it includes purchase transactions only. The S&P/Case-Shilier index
refiects all arm's-length sales transactions in the metropolitan areas of
Boston , Chicago, Denver, Las Vegas, Los Angeles, Miami, New York, San
Diego, San Francisco, and Washington. D.C.
SOURCE: For repeat transactions, Office of Federal Housing Enterprise
Oversight; for S&P/Case-Shiller, Chicago Mercantile Exchange.

I
1997

1999

I
2001

2003

2005

2007

NOTE: See figure 6. general note and source note.

down over the remainder of 2007, and refinancing
activity increased somewhat (figure 11). Nevertheless, the severe drop in home sales weighed on
residential mortgage lending, and turmoil in credit
markets during the second half of 2007 impaired
securitizations of nonconforming mortgages. Overall,
the value of mortgages on banks' books grew just
5.5 percent last year; excluding the aforementioned
conversion of a large bank to a thrift charter, the
growth rate was 9.3 percent, still the lowest rate of
increase since 2001.
The slowdown in residential real estate lending
stemmed from both weaker demand and tighter credit
standards. In the BLPS survey conducted during the
first quarter of 2007, considerable net shares of
respondents reported reduced demand for residential
mortgages .6 Beginning in the second quarter, banks
were asked to report separately on changes in demand

and credit standards for prime, nontraditional, and
subprime mortgages. In the year's remaining surveys ,
large net percentages of banks reported weaker
demand in all three loan categories and indicated that
they had tightened their credit standards for all three
types of residential mortgages. Not surprisingly, the
tightening was especially pronounced for nontraditional and subprime products, although only a small
number of banks reported that they originated
subprime loans during that period.
I I.

Level
refinanc ings of reside nlial mortgages.
1990--2007
January 26. t990 = t

90
80

70
60

40
30

20
10

I I I I I I I I I
6. In asking banks how demand for mortgages to purchase homes
has changed over the past three months, the BLPS instructs banks to
consider only new originations as opposed to the refinancing of
existing mortgages. However, that distinction may be difficult for
banks to make in practice.

1991

1993 1995

I
1997

I I

I -

1999 200 I 2003 2005 2007

NOTE : The data are 4-week moving averages. Residential mortgages
include both first and second liens secured by one- to four-family residential
properties .
SOURCE: Mortgage Bankers Association .

AIO

Federal Reserve Bulletin 0 June 2008

In contrast, consumer loans on banks ' books expanded 11.7 percent in 2007, almost double the pace
in 2006. Credit card loans grew 10 percent overall,
but growth was faster at large institutions, where such
lending is concentrated. Growth in other consumer
lending was even more rapid. The pickup in consumer lending in the past two years might reflect, in
part, a substitution away from cash-out refinancing,
as softer home prices have made such refinancing a
less viable option for some households. Nevertheless,
most banks surveyed in the BLPS reported a weakening of demand for consumer credit in 2007. In
addition, as the outlook for household credit quality
deteriorated, banks significantly tightened their lending standards for non-credit-card consumer loans
(figure 12). According to the BLPS, the net percentage of banks reporting tighter standards for such
loans reached its highest level on record in the fourth
quarter. In contrast, standards and terms for credit
card loans changed little, on net, during 2007.

12.

el percentage of selected bank reponing lighter
standard' for consumer lending. 1996-2007
Percent

Credit card loans
50

40
30
20
10
+

I .l.

Consumer loans other than credit card loans

30
25
20
15
JO

Other Loans and Leases
Other loans and leases grew 13 percent during 2007.
Lending to state and local governments grew robustly
again in 2007, perhaps because of continued strong
growth in construction activity. Agricultural loans
expanded at a pace slightly below that of the preceding two years, as originations in this category ticked
down for most loan purposes. 7 The remaining components of other loans , such as lease financing receivables and loans to purchase and carry securities, were
about flat last year.

Securities
After growing at an average rate of about 10 percent
over the previous five years, overall holdings of
securities at commercial banks rose just 4.6 percent
last year. Growth in securities was particularly weak
in the second half of 2007, an indication that the
slowdown likely resulted, in part, from banks' efforts
to offset rapid growth elsewhere on their balance
sheets. At the same time, banks shifted securities out
of investment accounts and into trading accounts;
some of that shift is traceable to a few large institutions that adopted new rules on fair value accounting,
7. Using its Survey of Terms of Bank Lending to Farmers, the
Federal Reserve estimates the amount of non-real-estate bank loans
made to farmers by loan purpose, such as to obtain farm equipment
and machinery or to cover operating expenses. The information is
published quarterly in Board of Governors of the Federal Reserve
System, Statistical Release E.15, "Agricultural Finance Databook,"
section A, www.federalreserve.gov/releases/eI5 .

5
+
0

5
10

1997

1999

2001

2005

2007

2003

NOTE: See figure 6. general note and source note.

which led to the reclassification of certain types of
securities (see box "New Rules on Fair Value Accountiog " ). Holdings of investment account securities
declined 4.4 percent, as banks of all sizes sold
government-backed mortgage pools and collateralized mortgage obligations . In contrast, holdings of
pri vate mortgage-backed securities in investment
accounts rose during the year. Holdings of Treasury
securities declined again in 2007, ending the year at
just 2 percent of banks ' investment accounts. Banks'
holdings of securities issued by state and local governments kept pace with overall asset growth, although such securities ran off late in the year amid
concerns that the private guarantors of municipal
securities held exposures to subprime mortgagebacked assets that imperiled their AAA ratings.

Liabilities
Bank liabilities increased 10.8 percent in 2007, an
advance matching that in bank assets. Core deposits
grew only 3.2 percent, the slowest rate since 1999,

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

A II

New Rules on Fair Value Accounting
Statement of Financial Accounting Standards (FAS)
No. 159, finalized by the Financial Accounting Standards
Board in 2007, provides an option to elect a fair value
measurement for most financial assets and liabilities. 1
The election of the fair value option (FVO) applies on an
instrument-by-instrument basis, is generally restricted to
use at the inception of a financial instrument (for example,
on the purchase date, on the origination date, or after a
business combination). and is irrevocable. Although this
standard did not become effective until 2008. banks were
able to adopt the FVO earlier (starting with their March
2007 financial statements), provided that they were also
early adopters of FAS 157, which establishes the I1Iles
governing fair value measurement. 2 The FVO standard
permitted a one-time application of fair value accounting
to existing assets and liabilities. with the effect of the
remeasurement reported in retained earnings and not in
net income.
The new rules had two possibly significant effects on
bank balance sheets. First, business and residential real
estate loans previously held at amortized cost could be
revalued pursuant to an FVO election. Second, securities
to which the FVO was applied were required to be
reclassified from available-for-sale or held-to-maturity
accounts to trading accounts. Because losses from the
revaluation of these securities are not reported in current
earnings, some banks may have had an incentive to
reclassify large portions of their securities portfolios upon
adopting the FVO.
The overall effect of the FVO on bank balance sheets
has been limited thus far. Fewer than 150 banks filed
schedule RC-Q of the Call Report, which is required for
FVO adopters, on the March 2007 reporting date, and the
I. More·narrow fair value options are availabk in FAS 155, Accounting for Certain Hybrid Financial Instrumenl.<-An Amendment of FASB
Swtements No. 133 and 140. and FAS 156, A<"cOIllltinl: for Sen'icing of
Financial Asset.,-An Am"ndment of FASB Statement No. 140.
2. Among olher innovations, FAS 157 implemenls a Ihree·liered
hierarchy for measuring fair value; an assel's classification depends on Ihe
relative reliabililY of Ihe inputs 10 Ihe measuremenl. based on Iheir
observability.

and transaction deposits contracted for the third consecuti ve year. 8 The rate of expansion of savings and
money market deposit accounts slowed despite the
decline in short-term market interest rates, which
lowered the opportunity cost of holding liquid depos8. Before 2007, insured brokered deposits were included in large
time deposits on the Call Repon. As of the first quarter of last year,
they are classified as small time deposits . The accounting change
makes it appear as if there were rapid decreases in large time deposits
and rapid increases in small time deposits in that quarter. The growth
rates reponed in the text have been adjusted for this effect and thus do
not match the numbers reponed in table I.

number of banks continuing to file this schedule declined
through the remainder of the year (table A). Among these
banks, the application of the fair value option has been
limited. Although some banks elected the FVO for a
portion of their existing loan portfolio, the amount was
small relative to total loans outstanding, and few new
loans have reportedly been placed under the FVO. Indeed,
as of the end of the year, loans and leases reported at fair
value accounted for less than 2 percent of all loans and
leases. The bulk of these assets consisted of residential
real estate loans intended to be secUlitized at a few large
banks.
The etl'ect of the FVO on some banks' securities
portfolios was somewhat more pronounced. In the first
quarter of last year. trading accounts at commercial banks
increased $70 billion. in part because some early adopters
took advantage of the FVO and reclassified assets into
these accounts. At year-end. 85 percent of all trading
assets were held by banks reporting on schedule RC-Q.
although. again. most of the amount was concentrated in a
handful of large institutions.

A. Fair value of selected assets held by U.S. commercial banks. as reported under the fair value option.
2007
Billions of dollars except as nOled

Period

QI .. . . . . . .
Q2. ... . ..
Q3 .. .... .
Q4 .. ..

Number
of banks
filing
schedule
RC-Q

Reponed
under !he
FVO

148
122
III
107

83
102
107
120

Loans and leases

Trading assets

Total

Filers of
schedule
RC-Q

5.910
6,100
6.316
6,561

563
614
678
737

Total
679
723
803
867

NOTE: Data are as of April 16,2008. Schedule RC-Q oJ" !he Call Repon is required for banks electing Ihe fair value option (FVO) under
FAS 159.
SouRn: For the FVO value of loans and leases. Federal Financial Institutions Examinalion Council, Consolidated Repons of Condition and
Income (Call Repon). schedule RC-Q; J"or olher dala, Call Repon,
schedule RC.

its. over the second half of the year (figure 13). Small
time deposits grew somewhat faster than savings
accounts; aggressive bidding for them by banks held
their yields steady even as other short-term rates
declined in the fall. Core deposits are generally a
more important funding source for smaller banks than
for larger institutions, but core deposit growth was
essentially zero for banks below the top 100 in 2007.
To compensate for the lackluster growth of core
deposits, banks-especially the largest institutionscontinued to ramp up their managed liabilities. Those
funding sources accounted for 41 percent of the

A 12

13.

Federal Reserve Bulletin 0 June 2008

C hange in selected domes tic liab iliLies al ban ks,
1990-2007

14 .

Regu latory ca pilal ralios . 1990-2007
Percen,

Percent

14
25

10
5
+

Tier 1

Leverage

10
_

Small time deposits

15
20

I I I I
1991

I I

I I I I I

1993 1995 1997 1999 200 1 2003 2005 2007

NOT~ : The data are as of year-end. Savings deposits include money market
deposit accounts.

liabilities of all banks at year-end, up dramatically
over the past decade. Given the deterioration in
interbank markets late in the year, growth in managed
liabilities was due primarily to the expansion of
nonbank deposits booked in foreign offices (the largest component of managed liabilities) and to Flll...B
advances, which grew 42 percent at the 10 largest
banks. Although growth in FHLB advances was
lower at medium-sized banks, those banks now use
advances to fund more than 5 percent of their assets.
Large time deposits expanded 13 percent, primarily in
the second half of the year.

CapitaL
Equity capital held by commercial banks expanded
11 percent in 2007, about in line with asset growth.
Retained earnings slipped to just 0.2 percent of assets,
the lowest level since 1991. However, mergers and
acquisitions boosted goodwill, leading to a rise in
capital. In addition, parent holding companies injected about $40 billion into their commercial bank
subsidiaries in 2007, mostly late in the year, to bolster
capital positions in view of the pronounced deterioration in asset quality and the C&I-fueled expansion of
loan portfolios. About 60 percent of the volume of
transfers from parent holding companies was attributable to one large commercial bank.
Growth of regulatory capital generally slowed last
year (figure 14). Tier 1 capital grew 7 .1 percent. The
gain of 9.7 percent in total regulatory capital reflected
a 20 percent increase in tier 2 capital. The rise in tier 2
capital, in tum, was attributable in part to higher
loan-loss reserves, as banks boosted provisioning in

I I

9
8
7

I I I

1991

I I I

I I

I I I I

I I I I I I

1993 1995 1997 1999 2001 2003 2005 2007

NOT~ :

The data are as of year-end. For the components of the ratios, see
text notes 9 and 10.

the second half of the year.9 Risk-weighted assets
expanded 10.8 percent, a rate in line with that for total
assets. As a result, the industry's tier 1 and total
capital ratios ended the year a bit lower than they
were a year earlier. The regulatory leverage ratio,
which is based on tier 1 capital and tangible average
assets, also edged down.lo Nevertheless, the share of
assets at well-capitalized banks remained above
99 percent in 2007, although the average margin by
which banks remained well capitalized slipped to
1.84 percent, at the lower end of the range over which
it has fluctuated during the past decade (figure 15).11
9. Tier 1 and tier 2 capital are regulatory measures . Tier I capital
consists primarily of common equity (excluding intangible assets such
as goodwill and excluding net unrealized gains on investment account
securities classified as available for sale) and certain perpetual preferred stock. Tier 2 capital consists primarily of subordinated debt ,
preferred stock not included in tier J capital, and loan-loss reserves up
to a cap of 1.25 percent of risk-weighted assets. Total regulatory
capital is the sum of tier I and tier 2 capital. Risk-weighted assets are
calculated by multiplying the amount of assets and the creditequivalent amount of off-balance-sheet items (an estimate of the
potential credit exposure posed by the items) by the risk weight for
each category. The risk weights rise from 0 to 1 as the credit risk of the
assets increases. The tier I ratio is the ratio of tier I capital to
risk-weighted assets; the total ratio is the ratio of the sum of tier I and
tier 2 capital to risk-weighted assets.
10. The leverage ratio is the ratio of tier I capital to average
tangible assets. Tangible assets are equal to total average consolidated
assets less assets excluded from common equity in the calculation of
tier I capital .
II. Well-capitalized banks are those with a total risk -based capital
ratio of 10 percent or greater, a tier I risk-based ratio of 6 percent or
greater, a leverage ratio of 5 percent or greater, and a composite
CAMELS rating of I or 2. Each letter in CAMELS stands for a key
element of bank financial condition--Capital adequacy, Asset quality,
Management, Earnings, Liquidity, and Sensiti vity to market risks . The
estimated average margin by which banks were well capitalized was
computed as follows: Among the leverage, tier I, and total capital
ratios of each well-capitalized bank, the institution's "tightest" capital
ratio is defined as the one closest to the regulatory standard for being
well capitalized. The bank ' s margin is then defined as the percentage

Profits and Balance Sheet Developments at

15 .

Assets and regulatory capital at well- apit lilca banks.

1990-2007
i'lcn;cnl

Share of industry assets at well-capitalized banks
100
80

60
40
20

I I I

Percentage point"

Average margin by which banks were well capitalized
3.0

2.5

2.0

1.5

1 I I I I I I I I I I I I I I I I I I I ,
1991 1993 1995 1997 1999 2001 2003 2005 2007
NOTE: The data are annual. For the definitions of "well capilalized" and
of the margin by which banks remain well capitalized , see text note II .

Deri vatives and

O.ff~Balan ce- Sheel

Items

The notional principal amount of derivative contracts
held by banks rose 26 percent last year, to more than
$160 trillion (table 2). Even though the notional value
of derivative contracts grew at banks of all sizes, the
share of industry contracts at the 10 largest banks has
continued to edge higher and stood above 98 percent
at the end of the year. The considerable concentration
mostly reflects the role that some of the largest banks
playas dealers in the derivatives markets. As dealers,
these banks often enter into offsetting positions,
which significantly boost the notional value of their
derivative contracts. The fair market value of derivati ve contracts held by banks reflects the contracts'
replacement cost and is far smaller than the notional
point difference between its tightest capital ratio and the corresponding
regulatory standard. The average margin among all well-capitalized
banks-the measure referred to in figure IS-is the weighted average
of all the individual margins ; the weights are each bank's share of the
total assets of well-capitalized banks.

u.s.

Commercial Banks in 2007

A 13

principal amount. The fair market values of contracts
with positive and negative values in 2007 were both
about $1.9 trillion, representing increases of about
60 percent over the year.12 The growth stemmed
primarily from changes in the values of credit derivatives at large institutions.
One important way for banks to hedge interest rate
risk, including that related to interest-sensitive assets
such as mortgages and mortgage-backed securities, is
through the use of interest rate swaps.13 Those swaps
are the most common type of derivative used by
banks and account for about two-thirds of the notional
value of banks' derivative contracts, although most of
the swaps are held for trading and market-making
purposes rather than for hedging. The notional value
of interest rate swaps increased 27 percent in 2007,
which is about the average pace over the past decade.
Other types of interest rate derivative contracts employed by banks include futures, forwards, and options. The notional value of these other derivative
contracts also expanded at a brisk rate last year.
Despite the growth in interest rate derivative contracts, their share of total derivative contracts dropped
3 percentage points, to 78 percent.
One of the fastest growing components of banks'
derivative portfolios in recent years has been credit
derivatives. The notional value of such derivatives at
banks jumped 76 percent in 2007, a rate of increase
somewhat faster than that in 2006. Increasingly,
banks are participating in the credit derivatives market by using credit default swaps written on loan
contracts rather than on corporate bonds. Amid the
financial turmoil in the second half of the year, the
market prices of many credit derivative contracts
changed so dramatically that their fair value more
than doubled at many large banks. The concentration
in this market was even more apparent than in other
derivatives markets, as the 10 largest banks held more
than 99 percent of the notional value of all the
industry'S credit derivative contracts at the end of
2007. As dealers, the 10 largest banks are beneficiaries of protection when they buy contracts and provid-

12. That the fair market values of banks' derivative contracts are
nearly offsetting does not mean that banks' aggregate exposures to the
market and credit risk associated with the contracts are likewise nearly
offselling because, for example, the counterparties to banks' positiveand negative-valued con1racts may differ.
13. Interest rate swaps are agreements in which two parties contract
to exchange two payment streams, one based on a floating interest rate
and the other based on a fixed interest rate; the payment streams are
calculated on the basis of the notional principal amount of the contract.

A14

Federal Reserve Bulletin 0 June 2008

2. Chang in notional value and fair value of derivatives, all US. banks, 2002-07
Percent

Item

Total derivatives
Notional amount ...... ... ... ....
Fair value ..... ... . . ... . .....
Positive .. ..... . .... .. . ... .
Negative .. ... .. . . . . . .. ... ...
Interest rate derivatives
Notional amount .... ... . ... ..
Fair value ... .. ........ .......
Positive. .... ...... ... .....
Negative . .. .. . . .. . . .. .....
Exchange mte derivatives
Notional amount .... .... .....
.. . . . ... ..... ....
Fair value
Positive .... ... .. .. ......
Negative . .... . .. . .. ...
Credit derivatives
Notional amount . ...... ..... .
Guarantor . .. ..... ........
Beneficiary . .. .... . . . .. ...
Fair value ... ....... .... ......
Guarantor ... ........ ... .. ..
Positive ..... .. .. . . . ......
Ne~ative . . . . .... . ...... . .
Bene ciary .. .. .. .. .. . .. .. ..
Positive .. . . ....... ..... .
Negative ... .. . ... . . . . . .
Other derivatives I
. ....
Notional amount ... .
.... . . .. ..
Fair value
Positive .... . .... ....... . .
Negative .. ... .. .. . . .. .....

... .

2003

2004

24. 14

26.54

23.69

15.38

29.75

25.76

166.190

85.41
89. 18

.36
1.00

13.71
13.75

-6.46
-5.78

-4.50
-4.27

57.78
56.63

1,902
1,869

26.83

27.62

22.07

11.92

27. 11

20.63

129.560

108.20
113.02

-5 .95
-5.07

13. 14
12.94

-5.52
-5 . 15

-14.55
-15 .06

42. 22
42. 12

1,194
1,160

7.34

18.81

21.03

7.69

29.27

36.69

17. 174

8.67
15.73

41.81
38.81

14.86
12.74

-35.84
-37.36

22.86
21.39

44.38
45.02

260
254

52.47
38.57
66.36

55.98
61.82
51.13

134.52
139.07
130.46

148.09
137.87
157.53

54 .93
67.69
44.03

75.87
73.99
77.74

15,863
7,823
8,040

n.a.
n.a.

68.31
378.09
-68.87
19.85
-63. 13
295.74

69.92
74.56
38.37
51.28
2.64
66.36

81.43
-5.62
827 .98
83.50
505.51
2.79

92.96
201.40
-1.59
90.26
3.98
187.44

295.25
-38.79
1.187.41
301.20
1,086.95
-18.95

274
31
243
312
267
45

6.70

3.77

32.66

29.43

75. 17

13.60

3,593

20.28
24.62

3. 16
-5.25

8.55
19.73

58.51
74.29

18.99
24. 15

32.76
30.67

167

o.a.
n.a.

n.a.
n.a .

2005

2006

MEMO
Dec. 2007
(billions of
dollars)

2002

2007

ISO

NOTE: Data are from year-end to year-end and are as of April 16, 2008 .
I. Other derivatives consist of equity and commodity deriv atives and other contracts.
n.a. Not available .

ers of protection (guarantors) when they sell. Banks
are typically net beneficiaries of protection; as of
year-end, contracts in which banks were beneficiaries
of protection totaled $8.0 trillion , and contracts in
whjch they were guarantors totaled $7.8 trillion (figure 16).
Banks also use derivatives rel ated to foreign exchange, equities, and commodities. Collectively, however, those instruments account for only 13.6 percent
of the notional value of the derivative contracts held
by banks. The notional value of banks ' foreignexchange-related contracts grew 37 percent in 2007,
considerably faster than in previous years. Bank
customers likely increased their hedging activity in
light of sharp exchange rate movements last year.
Banks' notional holdings of equity and commodity
derivatives rose 14 percent in 2007.
Unused commitments at commercial banks grew
slightly more slowly than assets in 2007. Lines of
credit secured by one- to four-family residential
properties grew just 5.8 percent amid the deterioration in the housing market, and commitments to fund
CRE loans were flat. Credit card lines increased about

10 percent, and letters of credjt rose about 8 percent.
The category "other unused commitments," which
consists primarily of lines to businesses, grew 11 percent over the year as a whole but contracted in the
fourth quarter.
16.

Notional amounts of credit derivatives for which
banks were heneficiaries ur guarantor ', 2000-07
Trillions of dollars

8.0
7.0
6.0
5.0
4.0
3.0
2 .0
1.0

I I

I
2000

200 I

I
2002

2003

NOTE: The data are quanerl y.

2004

I
2005

2006

I
2007

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

TRENDS IN PROFITABILITY

After many years of high earnings, the commercial
banking industry posted significantly lower profits in
2007 . Industrywide net income contracted more than
20 percent, primarily because of a sharp drop in
trading revenue and much higher provisions for loan
losses in response to deterioration in asset quality.
Return on equity (ROE) for the full year fell to less
than 10 percent from more than 13 percent in recent
years. Banks' return on assets (ROA) also declined
markedly last year, to less than I percent, its lowest
level since the early 1990s. The sector's profitabilitywhich had weakened somewhat in the first half of the
year-dropped sharply in the second half. In the
fourth quarter, ROE tumbled to around 4 percent and
ROA to 0.4 percent.
The decrease in profitability was most pronounced
among the largest commercial banks, but ROA and
ROE decreased considerably for all bank-size groups.
In the fourth quarter, some of the largest commercial
banks posted substantial losses that reportedly resulted mainly from write-downs of the value of
mortgage-related assets and other structured investment products; however, almost all of those banks
remained profitable for the year as a whole. 14 Overall,
the fraction of banks that incurred losses in 2007
increased notably, to about 10 percent, and those
institutions accounted for about 3 percent of industry
assets, the highest share since 2000.
Net interest margins of commercial banks slipped
further in 2007. Over the first half of the year, spreads
reportedly were compressed by price competition in
business and mortgage lending. With financial markets and institutions under pressure in the second half
of the year, interest rate spreads over market reference
rates on many types of bank loans widened. Banks
were unable to benefit fully from those developments
because spreads on many types of bank funding,
especially term funding in wholesale markets, increased well above their levels in recent years. The
unexpected growth of their balance sheets in the
second half of 2007 also forced banks to rely more
heavily on managed liabilities and small time deposits, sources of funds that tend to have higher average
interest rates than liquid deposits.

14. It is worth emphasizing that the analysis in this article is based
on the Call Reports for commercial banks. For a commercial bank that
is a subsidiary of a bank holding company or a financial holding
company, the Call Report does not include the assets, income, or
expenses of the other subsidiaries of the larger organization, including
nonbank subsidiaries. Thus. the profits of the commercial banks that
are subsidiaries of a larger banking organization may differ substan tially fTOm the profits of the consolidated institution .

A15

A decline in non-interest income for the year-the
first such dip in at least 40 years-contributed importantly to the lower profitability of banks in 2007.
Non-interest income was 2.1 percent of average total
assets last year, the lowest share since 1995. Large
banks experienced a substantial decline in revenue
from trading and loan sales, whereas smaller banks
registered slower growth in other types of noninterest income. Non-interest expense grew rapidly
again in 2007, and the increase was spread across a
range of categories.
Profits in 2007 were also significantly reduced by a
surge in loss provisions stemming from a slump in
asset quality. Amid falling house prices and a slowing
economy, the delinquency rate on residential mortgages held by banks climbed to about 3 percent at
year-end, its highest rate in more than a decade. The
delinquency rate on CRE loans doubled to 2.7 percent
at year-end. That jump primarily reflected surging
delinquencies on construction and land development
loans, particularly those used to finance residential
projects. Banks also recorded smaller but still noticeable increases in delinquency rates on consumer and
C&I loans. Charge-off rates, which had been very low
in each of the past several years , moved up along with
delinquencies.
Despite the steep drop in profits, banks still increased dividends in 2007 after having raised them
more than 25 percent in 2006. As a result, dividends
absorbed much of last year's profits, and retained
earnings contributed relatively little to capital. The
erosion in profits as well as investors' concerns about
banks' exposures to structured investment products,
leveraged loans, and subprime mortgages precipitated
a sharp decline in bank stock prices, which considerably underperformed the S&P 500 last year (figure 17). Similarly, premiums on credit default swaps
on banks' subordinated debt widened sharply (figure 18).

Inferest II/come and Expense
After increasing throughout 2006, the average interest
rates earned on assets and paid on liabilities peaked
around the beginning of 2007. Average interest rates
on many of banks' assets and liabilities decreased late
in the year, in part owing to the decline in market
interest rates as the Federal Reserve eased the stance
of monetary policy. However, this decline only partly
reversed the run-up in 2006, and, as a result, average
effective interest rates on banks' assets and liabilities
were somewhat higher in 2007 than in 2006. The
average interest rate earned increased somewhat less
than the average rate paid, and the industry wide net

A16

Federal Reserve Bulletin 0 June 2008

17. Stock price indexes. 200 J---08

19.

el inlere t margin, by size of bank. 1990- 2007
Percent

January 2007 ; 100

All banks
4.50
-

100

4.25
4.00
3.75

3.50

3.25

I I

200 I

2002

2003

I
2004

2005

2()()6

I
2007

I I

2008

NOTE: The data are monthly and extend through March 2008.
SOURCE: Standard & Poor' s and Dow Jones.

5.00

interest margin declined II basis points in 2007, to
3.36 percent (figure 19). The decline represented a
continuation of the longer-term downward trend in
net interest margins evident since the mid-1990s.
Particularly over the second half of the year, banks
took steps that could help stem the decline in net
interest margins. According to the BLPS for October
2007 and for January 2008, banks charged wider
spreads on C&I loans relative to their cost of funds in
the second half of last year-the first such increases
in several years (figure 20). Similarly, about half the
banks responding to a question in the January 2008
survey reported having increased spreads on CRE
loans over the course of 2007 after they had reported
narrowing spreads on such loans in 2006. Banks also
reported that, on net, they widened spreads on consumer loans during 2007 .
18. Premium on credit defaulL swaps on subordinated tlehl
at selected bank ing inslitulions. 2002-08
__________________
B""_is poims

120
105

90
75
60
45
30
15

I I
2002

2003

2004

2005

2()()6

2007

2008

NOTE: The data are weekly and extend through March 2008. Median
spread of all available quotes.
SOURCE: Markit.

4.50
4.00
3.50
3.00

I I I I I I I I I I I I I I I I I I I I I
1991 1993 1995 1997 1999 200 I 2003 2005 2007
NOTE: The data are annual. Net interest margin is net interest income
divided by average interest·earning assets. For the definition of bank size. see
the general note on the first page of the main tex!.

The average interest rate on bank assets in 2007
increased 13 basis points, to 6.78 percent. The rise
mostly reflected higher average rates on trading
account securities and on federal funds sold and
reverse repurchase agreements. The measured returns
for the latter category were boosted by elevated
spreads in bank funding markets during the second
half of the year. The average interest rate earned on
loans and leases was little changed relative to 2006 .
After increasing throughout 2006, the average interest
rate earned by banks on business loans held steady
over much of 2007-at about the level that prevailed
in the second half of 2006-and then decreased some
late in the year. The November 2007 Survey of Terms
of Business Lending, which measures the interest rate
on new loan originations at a broad sample of banks,
indicates that interest rates on new business loans fell
significantly relative to earlier in the year. According
to the survey, a majority of C&I loans have variable
interest rates and are made under the terms of previously negotiated commitments; thus, their interest
rates declined along with comparable-maturity market interest rates, and spreads on such loans remained

Profits and Balance Sheet Developments at

et percentage r sdcl:teu domestic bank. reporting
increased spreads of raIl! on various types of loans
over cost of funus. 1990-2008

20.

_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _---.:...:Perccnl

Commercial and industrial

60
40

20
+

20
40

60
80

L I

Imlml~I~lm~2~2~2D~8

NOTE: The data are drawn from a survey generally conducted four times
per year; the last observation is from the January 2008 survey, which covers
2007:Q4. Net percentage is the percentage of banks reporting an increase in
spreads less the percentage reporting a decrease.
SOURCE: Federal Reserve Board, Senior Loan Officer Opinion Survey on
Bank Lending Practices (www.federalreserve.gov!boarddocs/snloansurvey).

u.s.

Commercial Banks in 2007

A 17

interest rates than liquid deposits. The rate on savings
deposits (including money market deposit accounts)
averaged 2.22 percent last year, somewhat higher
than in 2006. The average interest rate on small time
deposits increased significantly to 4.72 percent in
2007, and it remained elevated at the end of the year
even though interest rates on other money market
instruments declined. Banks, particularly those experiencing unplanned expansions of their balance sheets
or those leery of volatility in interbank funding
markets, likely kept rates on small time deposits
relatively high-and, as noted earlier, boosted spreads
on large ti me deposi ts-to attract deposi tors. 15
The downward pressure on banks' net interest
margins last year was exacerbated by a decline in the
share of bank assets funded by non-interest-bearing
liabilities and capital. 16 Because these instruments, by
definition, have no explicit interest expense, the
returns on the interest-earning assets that they fund
help support banks' net interest margins.

NOll-interest In come and Expense
quite low in the November survey. The average
interest rate earned on consumer loans rose somewhat
in 2007, to 10.2 percent. In contrast, the average
effective interest rate on real estate loans declined
during 2007 to a little less than 7 percent at year-end,
a decrease that partly reflected the effects of lower
market interest rates on the portion of banks' real
estate portfolios that has variable interest rates.
Banks' increased reliance on managed liabilities,
which generally pay higher interest rates than other
funding instruments, contributed to a 23 basis point
increase in the average interest rate paid on liabilities
in 2007, to 3.82 percent. For 2007 as a whole, the
interest rate on managed liabilities averaged 4.8 percent, a little higher than in 2006. Realized interest
rates on the category called "other borrowed money,"
which includes FHLB advances, declined appreciably
in 2007. In contrast, interest rates on large time
deposits and on federal funds and repurchase agreements rose significantly between 2006 and 2007.
Although the average effective interest rates paid by
banks on those instruments moved down some late in
the year as the Federal Open Market Committee
eased policy, the spreads of those rates over various
short-term market interest rates jumped in the third
and fourth quarters of 2007 to fairly high levels.
After a large advance in 2006, average effective
interest rates paid on core deposits increased somewhat further in 2007, to 2.81 percent. The increase
reflected both higher rates paid on each type of
deposit as well as the rapid growth of small time
deposits, which, as noted earlier, generally pay higher

Total non-interest income dipped in 2007, marking
the first time in at least 40 years that non-interest
income contracted on an annual basis. As a result,
total revenue of commercial banks, defined as net
interest income plus non-interest income, edged up
only 3.4 percent. The share of total revenue from
non-interest income dropped to 42 percent, its lowest
level since 1998 (figure 21). Non-interest expense
grew at a faster clip in 2007 than it had in 2006, and it
increased as a share of revenue to the upper end of its
recent range .
In recent years, the growth of non-interest income
has been concentrated among the largest banks,
while smaller banks have seen this revenue source
stagnate or decline. In 2007, non-interest income
dropped at the largest banks and was flat to lower in
most other bank-size categories. The softness in
non-interest income at the largest banks last year
primarily reflected steep declines in trading revenue
at a few of those institutions. Banks reported almost
$10 billion in net losses on the trading of credit
15. The average interest rate paid on time deposits may adjust
slowly to changes in market interest rates because time deposit rates
are usually fixed for the duration of the instrument. However, about
30 percent of small time deposits, and more than 50 percent of large
time deposits, issued by banks had a remaining maturity of three
months or less as of midyear 2007. Thus, the rates on a significant
fraction of those deposits would have reset before the fourth quarter.
16. For more information, see box "The Role of Non-InterestBearing Instruments in the Net Interest Margin," in Mark Carlson and
Roberto Perli (2004) , "Profits and Balance Sheet Developments at
U.S . Commercial Banks in 2003," Federal Reserve Bulletin, vol. 90
(Spring) , p. 173.

Al8

Federal Reserve Bulletin 0 June 2008

21 . . on-interest i11l:0me and selected components as
a proportion of revenue. 1990-2007

22 .

Percenl

Income from deposit fees as a proportion or total
domcsli.: deposits. 1990-2007
Pcrccnl

-----------------------------------

Total
.80

45
.75

.70

.65
.60

.55
30

.so
I

1991 1993 1995 1997 1999 200 I 2003 2005 2007

Selected components

15
Deposit fees

:::

5
+

==:t--~-----.t-~
Trading income

Fiduciary income
-

I I I I I I I
1991

The data are annual.

Other non-interest income

NOTE:

1993 1995 1997 1999 200 I 2003 2005 2007

NOTE : The data are annual. Revenue is calculated as the sum of noninterest income and net interest income.

exposures last year, which likely included some of
the substantial write-downs of mortgage-related structured products as well as losses on collateralized
debt obligations and credit derivatives associated
with syndicated leveraged loans . Income from the
trading of equity exposures also dropped considerably in the second half of the year, and trading
revenue generated by other products-interest rate,
foreign exchange, and commodities-weakened as
well. In addition, several of the largest banks experienced losses or a steep drop in income from the
sale of loans that were not held in their trading
accounts, particularly in the second half of the year.
However, the difficulties were partly offset by
strong growth in other categories of non-interest
income at large banks. Revenue from investment
banking services increased as banks profited from
their role in financing robust M&A activity over
much of 2007 and also benefited from high trading
volumes, spurred by market volatility, in their wealthmanagement businesses. In a related area, several
large institutions experienced jumps in income from
fiduciary activities. Fees collected on deposit accounts

also advanced briskly, outstripping the muted growth
in deposits (figure 22)_
The weakness in non-interest income at smaller
banks was widespread across many business lines_
Revenue from securitization activities and from loanservicing operations declined, a development probably related, in part, to the problems in the residential
mortgage markets. Income from subsidiaries and
other affiliates also dropped considerably at some
smaller banks; the decrease may have stemmed to
some degree from reduced contributions from mortgage banking arms.
Non-interest expense rose 9 percent in 2007, somewhat faster than in 2006. That increase, combined
with the sluggish growth in revenue, pushed noninterest expense to about 61 percent of total revenue,
the top end of the range over the past 10 years
(figure 23). Growth of employee compensation, which
accounts for about 45 percent of non-interest expense,
slowed in 2007_ The easing in that category reflected
both a reduced pace of net hiring as well as a
slowdown in the growth of compensation per employee. The cost of premises and fixed assets rose
modestly in 2007, about in line with recent annual
increases. Other non-interest expense, which accounts
for more than 40 percent of total non-interest expense,
increased more than 10 percent last year. The category includes various intercompany transactions,
such as payments to affiliates and to parent holding
companies, which appear to have increased notably in
2007 ; it also includes expenses related to restructuring or mergers and the cost of amortization of goodwill and other intangible assets. The total of restructuring costs and amortization of intangible assets
accounted for about 15 percent of the increase in
non-interest expense.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

23 .

on-intercst expense as a proporti n ~)f reven u.:.
1990-2007

Dclinquency and charge-off rales for l oans
busine - se~. by type of loan. 1990-2007

24.

A19

Percenl

Percent

Delinquencies
70

64
62

I I I I I I I I I I I I I I I I I I I I
1991
NOTE:

I I I

I I

1993 1995 1997 1999 200 I 2003 2005 2007

Net charge-oft's

The data are annual.

3.0
2.5

Loan Peliormance alld Loss Pro vi ionillg
Credit quality declined across all types of loans in
2007, and the overall delinquency rate at commercial
banks rose to about 2.5 percent of total loans and
leases at year-end, its highest level since early 2003.
The aggregate charge-off rate also moved up, reaching an annual rate of 0.72 percent in the fourth
quarter, but for the year as a whole it was only a little
more than half its recent peak in 2002. The most
significant deterioration occurred in banks' residential and commercial real estate portfolios; delinquencies and charge-offs on real estate loans rose to their
highest levels in more than a decade. The erosion in
the credit quality of real estate loans was somewhat
concentrated within geographic areas that were experiencing below-average economic growth or declines
in residential home prices (see box "Geographic
Distribution of Delinquency Rates on Selected Loans
Held by Small Banks"). Charge-offs and delinquencies on consumer loans also moved higher during
2007. The credit quality of C&I loans remained fairly
strong but showed signs of slipping late in the year.
The significant rise in non performing loans and the
generally weaker economic outlook led banks to
substantially boost loss provisioning in 2007.

C&T L oan s
The delinquency rate on C&I loans edged up over the
second half of 2007, but it remained at a low level
(figure 24). The relatively strong performance of C&I
loans throughout the year likely reflected continued
strength in nonfinancial corporate profits and generally healthy corporate balance sheets; the interestpayment ratio for nonfinancial corporations remained

2.0

1.5

1.0
.5

I I I I I I I I I I I I I I I I I I
1991 1993 1995 1997 1999 200 I 2003 2005 2007

NOTE: The data are quanerly and seasonally adjusted; the data for
commercial real estate begin in 1991. Delinquent loans are loans that are not
accruing interest and those that are accruing interest but are more than 30
days past due. The delinquency rate is the end-of-period level of delinquent
loans divided by the end-of-period level of outstanding loans . The net
charge-off rate is the annualized amount of charge·offs over the period. net of
recoveries. divided by the average level of outstanding loans over the period.
For the computation of these rates, commercial real estate loans exclude loans
not secured by real estate (see table 1, note 2).

quite modest last year (figure 25). The default rate on
corporate bonds also stayed low. Moreover, the rapid
growth in C&I loans may have reduced delinquency
rates temporarily because loans are presumably less
likely to become delinquent soon after they are
extended . Charge-offs of C&I loans picked up a fair
bit in 2007, and in the fourth quarter they were about
at their long-run average level. The rise in charge-offs
mostly reflected deterioration among the portfo)jos of
the largest banks. Respondents to the January 2008
BLPS expected the credit quality of C&I loans to
weaken this year.
Comme rc ial Real Estate Lo an .
The rate of delinquency on CRE loans doubled in
2007, mostly because of a deterioration in the credit
quality of construction and land development loans.
In line with the problems in the housing sector, the

A20

Federal Reserve Bulletin 0 June 2008

Geographic Distribution of Delinquency Rates on Selected Loans Held by Small Banks
The geographic distribution of delinquency rates in
national data on single-family mortgages has attracted
considerable attention. This box analyzes, as of the end of
2007, the geographic distribution of delinquency rates at
small banks for loan categories that experienced noticeable detel;oration last year: residential real estate loans,
construction and land development loans, and consumer
loans. The analysis covers commercial banks with less
than $2 billion in total assets: Because these banks likely
extended the loans held on their balance sheets to businesses and households that are in relatively close proximity to their head offices, the location of a head office is a
reasonably good proxy for loan location. Banks of that
size held about 10 percent of the industry ' s residential
mortgages and about 12 percent of consumer loans at the
end of 2007. However, they held about one-third of all
construction and land development loans.
The state-specific average delinquency rates on residential mortgages held by smaller commercial banks
were generally highest in areas where economic growth
had lagged the national average or where home prices had
declined after several years of rapid increases (figure A).
At the end of 2007, residential mortgage quality at small
commercial banks with headquarters in Michigan or other
states in the Great Lakes region was poor relative to that
in other states. Delinquency rates on residential mortgages at small banks were also higher than average in
Florida and many other states in the Southeast region.

Many of those areas also experienced the largest increases
in small-bank delinquency rates between year-end 2006
and the end of 2007. Those geographic patterns in
small-bank delinquency rates were broadly similar to
those for individual mortgage loans detailed in other
sources. I However, smaller banks with headquarters in
California or other western states had low delinquency
rates at the end of 2007 relative to such rates at smaller
banks in other states, even though data for individual
mortgage loans show significant rates of impairment in
some of those western states. The divergence between
individual delinquency rates and small-bank delinquency
rates may reHect, in part, a decision by smaller banks in
those states not to compete vigorously in the local
residential mortgage markets during the housing boom.
Indeed, smaller banks in those states had a relatively low
concentration of residential mortgages on their books at
the end of 2007, and several major thrifts and large banks
that specialize in residential mortgages have headquarters
in those areas.

I. For illustralions of a variety of mongage loan conditions across the
United States, see the set of dynamic maps and data provided by the
Federal Reserve Bank of New York (www.newyorkfed .org/
mortgagemaps); or Ben S. Bernanke (2008), "Mongage Delinquencies
and Foreclosures," speech delivered at the Columbia Business School's
32nd annual dinner. New York, May 5. www.federalreserve.gov/
newse vents/speechlBernanke20080505a.htm.

A. Delinquency rates on mortgages for one- to four-family homes , by state, December 31, 2007

o
_

Delinquency
rate (percent)
Less !han 1.30
1.30·1.67

0 1 .68. 2. 37
Note: De linquenc y rates for Delaw are and Sout.h DakOta are not shown ~c ause Ihl! data arc unrepn::sentativt: of condilions in those SlalL::S.
Delinquency fOlie is the perct: nt ofloans 30 days or more pas t due or not acc ruing i nle ~ s t.
Source : Fedl! fai FinanciallnsLiruti ons Examination Council. Consolidated Rcpons of Condition and Inco me (Call Repon).

2.38 - 2.87

Greater tban 2.87

Profits and Balance Sh eet Developments at U.S. Commercial Banks in 2007

Not surprisingly, the geographic distribution of statespecific average delinquency rates on residential construction and land development loans held by small banks is
broadly similar to the distribution of such rates on troubled
residential loans (figure B). Residential developers were
probably aft'ected most heavily in areas where housing
markets were weakest, leaving them with high inventories
of unsold homes and reduced revenues from the homes
they did sell. For instance, high delinquency rates at small
banks in the Midwest, Florida, and Georgia are common to
both residential mortgages and residential construction
loans. The overall state-level correlation between the
small-bank delinquency rate on residential mortgages and
that on residential construction loans was 0.54 at the end of
2007. The two geographic distributions differ notably in
the western states, however. For example, smaller banks in
California, Nevada, and Arizona have very high delinquency rates on residential construction loans but very 'low
delinquency rates on residential mortgages. In contrast to
the relatively low concentration of residential mortgages
on the books of small banks in those states, the concentrations of residential construction loans held by such banks
are generally higher than the average concentration of such
loans at small banks across the country.
The relationship between the state-specific delinquency
rate on other types of construction and land development
loans (not shown) and that on residential construction
loans is also fairly strong, with a correlation of 0.37 at the
end of 2007. Such a relationship might be expected if

returns on some projects financed by nonresidential construction and land development loans at small banks
depended, in part, on the anticipated population growth
reflected in residential construction and land development
loans (for example, loans to finance the construction of
retail establishments).
Households that have difficulty paying a mortgage may
also have difficulty making timely payments on consumer
loans . Indeed, earlier this decade, the correlation between
the state-specific delinquency rates on those two types of
loans was very high-an average of 0.77 between 2002
and 2005. The deterioration in the housing sector and
tighter mortgage credit standards could also impair the
credit quality of consumer loans if those developments
reduce the ability of consumers to use equity from their
homes to finance consumer spending or to payoff existing
consumer loans. Nonetheless, the correlation between the
state-specific delinquency rate on consumer loans (other
than credit card loans) held by small banks and that on
residential mortgages at those institutions dipped to 0.67 in
2006 and to 0.42 in 2007. The relative decoupling of
delinquency rates on mortgage and consumer loans over
the past two years may partly stem from differences in
some states between the condition of the housing sector
and that of the broader state economy. In addition, the
changes in bankruptcy law enacted in 2005 may have
temporarily depressed delinquency rates on consumer
loans in 2006 and, likely to a lesser extent, in 2007, which
may also have weakened the correlation.

B. Delinquency rates on loans for re sidential con struction and land development, by state, December 3 1, 2007

Delinquency
rate (percent)

D
NOIe: De li nque nc y ra t..:s for Delaware a nd South Dak ota are nOl shown bct:ause tht: data are unrep rese ntative of condit ions in those slates .

Delinquency (ale is the. perce", of loans 30 days or morc pas t due or not acc ru ing interest.
Source: f cdc raJ Financial lnslitUli ons Examination Council, Co nsolidated Reports of Co ndition and Income (Call Report ).

Less lhan 2.32

2.3 2.3.13

3.14· 4.56

4.57 .7.70

Greater than 7.70

A21

Federal Reserve Bulletin 0 June 2008

A22

25.

26. D'linqucncy amI charge-ofr rates for construction
and land developmenl loans. by IYP~ of 103n. 2007

Interest-paymenl ralio for nonfinancial corpol1lli on..
1990-2007

Percen.

Percent

_ Delinquencies
20

o Residenlial

•

9
8

Other

7
16

-6

3
10

I I I

I I I I I I I I I I I I I I I I I I

1991

1993 1995 1997 1999 200 I 2003 2005 2007

NOTE: The data are quanerly. The inlerest-payment ralio is calculated as
inlerest payments as a percenlage of cash flow.
SOURCE: Nalional income and producl accounts and Federal Reserve
Board.

Net charge-orrs
-1.2
-1.0

delinquency rate on construction and land development loans that financed residential development
nearly tripled between the first and fourth quarters of
2007, to 7.3 percent at year-end (figure 26). Moreover, the majority of the increase in this delinquency
rate was attributable to loans put on non-accrual
status, which means that the banks perceive a very
low probability that the borrowers will resume making payments. Charge-off rates on those loans also
rose considerably, from near zero in the first quarter
to more than 1 percent at an annual rate in the fourth
quarter of 2007. Other (nonresidential) construction
and land development loans experienced marked
increases in delinquency and charge-off rates as well,
but the run-ups were somewhat less steep than in the
residential construction sector.
The credit quality of other types of CRE loans also
worsened in 2007, particularly that of loans for
multifamily residential properties. The delinquency
and charge-off rates on loans backed by nonfarm
nonresidential properties (for example, office buildings) edged up but stayed within the very low ranges
that have prevailed over the past decade. In part, the
sustained strong performance in this sector reflected
fundamentals-such as vacancy rates, rents, and
prices-that remained solid through most of 2007.
Nonetheless, by the end of the year, some of those
fundamentals had begun to show signs of erosion:
Vacancy rates edged up, rent growth slowed, and
indicators of CRE prices slipped. The number of sales
of commercial properties also slumped.

NOTE: For definilions of delinquencies and net charge-offs, see the nOle for
figure 24 .

Loans to Households
The credit quality of household loans weakened, on
balance, in 2007, primarily because of a sharp increase in delinquencies and foreclosures on residential mortgages. The performance of credit card and
other consumer loans also deteriorated. Household
bankruptcy filings remained low relative to the levels
seen before the changes in bankruptcy law implemented in late 2005, but the bankruptcy rate moved
up a fair bit in 2007 (figure 27). The household
financial obligations ratio remained near its record
high reached in 2006, as slower growth in household
debt last year was offset by a deceleration in disposable personal income.

Re idential Real E ·tale Loan'
Credit quality in the residential mortgage sector worsened sharply in 2007. The deterioration was partly
rooted in the easing of underwriting standards around

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

27.

Indica tors of hou eholt.! linanci<l] stre s, 1991-2007

2X .

A23

Rate of erious delinquency on residentia l mortgages.
by type of mortgage ant.! type of intere l rate. 2000-08

Per IOO.tlOO persons

Percent

Household bankruptcy filings

900

SOO

700
20

600
Subprime, variable rate

500
400

)00
-

200

====-

100
Percent

Financial obligations ratio
20

]

Prime, fixed rate

Prime. variable rate

I
I
I
1
I
1
I
1
I
2000 200 I 2002 2(0) 2004 2005 2006 2007 200S

NOTE: The data are monthly and extend through March 200S. Seriously
delinquent loans are 90 days or more past due or in foreclosure. The data are
representative of al I residential mortgages, not just those held by commercial
banks.
SOURCE: First American LoanPerformance.

IS
17

16
I

I I
1993

I
.1995

I I
1997

I 1
1999

I I
200 I

I I
2(0)

I I
2005

I
1
2007

]

NOTE: The data are quarterly. The series shown for bankruptcy filings
begins in 1995:QI and is seasonally adjusted. The financial obligations ratio
is an estimate of debt payments and recurring obligations as a percentage of
disposable personal income; debt payments and recurring obligations consist
of required payments on outstanding mortgage debt, consumer debt . auto
leases. rent, homeowner' s insurance. and property taxes.
SOURCE: For bankruptcy filings. staff calculations based on data from
Lundquist Consulting; for financial obligations ratio. Federal Reserve Board
(www .federalreserve.gov Ireleaseslhousedebt).

the middle of the decade-a shift in lending posture
that was likely based to an extent on the assumption
that house prices would continue to rise for some time
to come. The easing of credit standards on mortgages
reportedly was more pronounced at nonbank financial
institutions than at commercial banks, in part because
of different levels of regulation in those sectors. A
historically large fraction of the loans originated in
2005 and 2006, particularly those to borrowers with
weaker credit histories (subprime loans), had high
loan-to-value ratios. Many subprime loans also had
discounted introductory interest rates, which exposed
borrowers to the potential for significantly higher
mortgage payments after the initial rates on the loans
reset, typically two to three years after origination.
House prices generally decelerated in 2006, and in
2007 they declined in some areas of the country;
consequently, many borrowers with high loan-tova1ue ratios were unable to build equity in their

homes, making refinancing difficult. Moreover, large
fractions of commercial banks tightened credit standards on residential mortgages in 2007-not only on
subprime and nontraditional mortgages but also on
loans to prime borrowers-which further impaired
the ability of borrowers to refinance existing mortgages . Reflecting these developments, national data
on variable-rate mortgage loans show that delinquency rates on such loans increased more than those
on fixed-rate loans, especially for lower-rated borrowers (figure 28). All told, the delinquency rate on
variable-rate subprime mortgages jumped to more
than 20 percent in December of last year and has
increased further in 2008.
At commercial banks, delinquencies on residential
real estate loans were around 3 percent by the end of
2007, their highest rate since the early 1990s and
more than double their recent low posted in the fourth
quarter of 2004 (figure 29). Charge-offs had increased
to 0.44 percent at an annual rate in the fourth quarter
of 2007, equal to the highest rate recorded si nce 1990.
Delinquency and charge-off rates rose across all types
of mortgage products and all bank sizes. Delinquency
rates on closed-end one- to four-family mortgage
loans and on revolving home equity loans rose
substantially-to 3.6 percent on the closed-end mortgages (including both first and junior liens) and
1.7 percent on the revolving loans. Charge-off rates in
the fourth quarter on closed-end mortgages quadrupled from the year-earlier quarter to 0.36 percent,
and those on revolving loans rose from 0.19 percent
at year-end 2006 to 0.69 percent in the fourth quarter
of 2007 . The delinquency rate on closed-end mort-

Federal Reserve Bulletin 0 June 2008

A24

Delinquency and charge-off raLe ' fo r residential rca I

29.

'LaLe loans al commercial banks, by type of loan.

1991 - 2007
Percenl

Delinquencies

-4

Net charge-offs
-.70
-

ReVOlving home equity

Total

.60

-.50

Consumer Loans

-.40

The delinquency rate on credit card loans held by
banks rose a fair bit in 2007, especially in the second
half of the year (figure 30). The charge-off rate on
such loans fluctuated around 4 percent last year, a
relatively low level compared with the rates that
prevailed before the change in bankruptcy laws in
2005. 19 The delinquency rate on other (non-creditcard) consumer loans also rose moderately but still
remained around the midpoint of its range over the
past 15 years. Charge-off rates on those loans climbed
from about I percent in 2006 to 1.6 percent for 2007
as a whole, a considerable increase that brought the
annual rate to its highest level in at least two decades.
The weakening in the credit quality of consumer
loans may have reflected, in part, the pressures on
households generated by troubles in the residential
mortgage sector and the slower pace of economic
growth late in the year. Respondents to the BLPS
expected further declines in the credit quality of both
credit card and other consumer loans in 2008 .

-.30
-.20
-.10

I I

1991

1993

Olher

1995

1997

1999 2001

2003 2005

tutions. Most commercial banks responding to the
January 2008 BLPS indicated that loan modifications
based on individual borrowers' circumstances were
an important part of their loss-mitigation strategies;
many banks were also willing to refinance loans for
some troubled borrowers. However, loans are often
packaged and sold in securitized pools owned by a
dispersed group of investors, which makes the task of
coordinating renegotiation to avoid foreclosure among
all affected parties difficult. In part to address the
challenges in modifying securitized loans, a diverse
group of mortgage market participants joined in a
collaborative effort called the Hope Now Alliance to
facilitate cross-industry solutions to the problem .18
About one-third of respondents to the January 2008
BLPS said that streamlined modifications such as
those proposed by the Hope Now Alliance were
important to their strategies for limiting losses .

2007

NOTE: The dala are quarterly and seasonally adjusled. For definitions of
delinquencies and net charge-offs, see Ihe note for figure 24.

gages rose most sharply at the 100 largest banksadvancing about 1.5 percentage points, to 3.8 percent-but it also moved up 0.7 percentage points at
smaller banks, to about 2.5 percent; the rise in
charge-off rates was also somewhat greater at larger
banks than at smaller banks.
The sharp increase in mortgage loan delinquencies
and foreclosures over the past year-particularly for
subprime borrowers-has created distress for many
homeowners and communities. The Federal Reserve
has taken a number of actions intended to help
distressed subprime borrowers and limit preventable
foreclosures, as well as other actions aimed at reducing the likelihood of such problems in the future . 17
Moreover, avoiding foreclosure-even if it involves
granting concessions to the borrower----can be an
important loss-mitigation strategy for financial insti17 . For a detailed description of these aclions, see box " The
Federal Reserve's Responses to the Subprime Mortgage Crisis," in
Board of Governors of the Federal Reserve System (2008), Monetary
Policy Report 10 the Congress (Washington: Board of Governors,
February), pp. 8-9.

18. The Hope Now Alliance (www.hopenow.com) aims to increase
outreach efforts to contact at-risk borrowers and to play an important
role in streamlining the process for refinancing and modifying
variable-rate subprime mortgages. The alliance will work to expand
the capacity of an existing national network to counsel borrowers and
refer them to participating servicers, who have agreed to work toward
cross-industry solutions to better serve the homeowner.
19. For a discussion of the change in bankruptcy law that was
implemented in 2005 and its effect on credit card loans, see box "The
New Bankruptcy Law and Its Effect on Credit Card Loans," in
Elizabeth Klee and Gretchen Weinbach (2006), "Profits and Balance
Sheet Developments at U.S. Commercial Banks in 2005," Federal
Reserve Bulletin, vol. 92 (June), p. A89 .

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

30 . Delinquency ami charg~-otT rates for I ans
to h u cholds, by type of loun, 1990-2007
Pcn:cnl

Delinquencies
6

4
3

2
-

I I I I I I I
_

Net charge-offs

8
7

-6

5
4

2
Other consumer
-

I
+

I I
1991

I I
1993

I I
1995

I I
1997

I I I I I I I I I I
1999 2(0 ) 2003 2005 2007

NOTE: The dala are quarterl y and seasonally adjusled ; data for delinquencies begin in 1991. For definilions of delinquencies and nel
charge-offs. see the nOle for figure 24.

Securitized Loans
The credit quality of loans that were sold and securitized by banks that retained servicing rights or
recourse or provided other credit enhancements to the
securitization structure (hereafter referred to, for simplicity, as "securitized" loans) weakened in 2007,
though not, in most cases, to the same extent as loans
that were held on banks' balance sheets .2o The majority of loans securitized by banks are residential
mortgages on one- to four-family homes (63 percent).
The delinquency rate on those mortgages (excluding
revolving home equity loans) was 3.7 percent in the
fourth quarter of 2007, almost unchanged from its
level at the end of 2006 and well below the levels
seen earlier in the decade. Likewise, the delinquency
rate on the small amount of securitized revolving
home equity loans was little changed in 2007, though
it fluctuated near the high end of its recent range .
20. The analysis excludes loans that were sold to, and securitized
by, a third party (for example, the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation).

A25

Charge-off rates on securitized residential mortgages
also changed little and stayed well below the rates on
residential loans on banks' books.
The relatively stable delinquency and charge-off
rates on mortgages securitized by banks could be
attributable to several factors . Banks as a group may
not have securitized large quantities of subprime
mortgages or other types of mortgages that have
accounted for much of the run-up in overall mortgage
delinquencies and foreclosures. Moreover, some securitization structures require that banks repurchase
from the securitized pools those loans that become
delinquent soon after origination, which could hold
down losses on securitized loans and dilute the credit
quality of loans held on banks' books.
The delinquency rate on securitized credit card
loans-which make up 22 percent of the loans securitized by banks-moved up , from about 3.7 percent
to just above 4 percent, in 2007, a rate that was still
below the midpoint of its range over recent years.
Charge-off rates on those loans continued to trend up
last year but stayed well below the rates that prevailed
as recently as 2005. The delinquency rate on securitized credit cards has been somewhat lower than that
on credit cards held on banks ' balance sheets, but
charge-off rates on securitized loans have generally
been higher than those on loans held by banks.
Delinquency and charge-off rates on the small amount
of bank-securitized auto loans jumped considerably
in 2007 and ended the year near the highest levels
recorded since the data became available in 2001. The
credit quality of other types of securitized consumer
loans was fairly stable in 2007; the delinquency rate
on such loans edged higher, to about 5.4 percent,
while the charge-off rate was generally lower in 2007
than it was in 2006 .
The delinquency and charge-off rates on the small
amount of securitized C&I loans rose considerably in
the second half of 2007 but remained in the middle of
their recent ranges. About $200 billion in other types
of loans and leases, a category that includes CRE
loans, are securitized by banks. The delinquency rate
on that category of loans declined, on balance, in
2007 to just 0 .2 percent, and the charge-off rate on
those loans was near zero.

Loss Provisioning
The erosion of credit quality spurred banks to step up
the rate of loss provisioning in 2007, particularly in
the second half of the year. Loss provisioning subtracted 54 basis points from ROA and consumed
more than 10 percent of total revenue in 2007, about
double the effect in each of the previous two years

A26

Federal Reserve Bulletin D June 2008

31 . Provi 'ions for loan and lea 'e los es as a
proportion of lolal revenue. 1985-2007

32.

Reserves for loan and lease losse , 1990- 2007
Percent

•_ _ _ _ _ _ __

_ _ _~_ _ _ _ _ ___.:..:Pcrccnt

As a percentage of totalloans and leases

3.0
2.5

2.0
20

1.5
1.0

15
10
-

I I I I I I I I I I I I I I
_

As a percentage of net charge-offs

500
400

300
11111111111111
1987
1991
1995

1111111111
1999
2003
2007

200
100

NOTE: The data are annual.
I

(figure 31) . By those measures, loss provisioning in
2007 was similar to that during the economic slowdown in the early part of this decade but well below
the highs reached during the late 1980s and early
1990s. Provisioning increased most at large banks,
where it reached an annual rate of more than 1 percent of average assets in the fourth quarter, compared
with just about 0.36 percent in the fourth quarter of
2006. Nonetheless, the increase over 2007 was also
notable at smaller banks, where provisioning rose to
an annual rate of 0.55 percent of assets in the fourth
quarter from 0.22 percent in the year-earlier period.
The rate of loss provisioning in 2007 considerably
outpaced that of charge-offs and boosted total reserves
for loan and lease losses. As a result, reserves as a
percentage of total loans and leases increased in 2007
for the first time in several years, but that ratio
remained near the low end of its historical range
(figure 32). The percentage increase in the stock of
reserves, however, was smaller than that in chargeoffs and delinquencies, which led to declines in some
other measures of reserve adequacy. At the average
charge-off rate for all of 2007 and without additional
loss provisions, current reserves are sufficient to
cover about 21/2 years of charge-offs, a typical reading
for this measure. As noted previously, however,
charge-off rates over the latter part of 2007 ran
considerably above those that had prevailed earlier in
the year. The ratio of reserves for loan and lease
losses to total delinquent loans, which in recent years
had been running near the high end of its range over
the past two decades, dropped substantially-to about
50 percent as of year-end, its lowest level since 1991.

I I

As a percentage of delinquenlloans
100
80
60

1991 1993 1995 1997 1999 2001 2003 2005 2007
NOTE: The data are as of year-end . For definitions of delinquencies and net
charge-offs, see the note for figure 24.

INTERNATIONAL OPERATIONS OF U.S,
COMMERCIAL BANKS
The share of U .S. bank assets booked in foreign
offices in 2007 increased about 100 basis points, to
14 percent, and remained highly concentrated among
the largest banks. However, U.S. commercial banks
lost money in 2007 on their international operations,
which subtracted about 6 percent from total consolidated net income. The losses were mostly attributable
to just a few institutions and primarily reflected a
jump in non-interest expense as we)) as a moderate
decline in non-interest income.
Banks ' exposures to emerging market countries
through lending and derivatives activities grew rapidly in 2007. 21 Banks' total exposure to Asian economies climbed to 45 percent of tier 1 capital, in part
because of a significant increase in lending to resi21. The analysis in this paragraph draws from information in the
Country Exposure Report (FFlEC 009), which is tiled only by banks
with significant international exposures. More information about the
report is available from the Federal Financial Institutions Examination
Council at www.ffiec.gov/formsOO9_009a.htm .

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

A27

:'1. Expo. ure of U.S. bank ' LO selecwd economies al yea r-end rdative Lo Lier 1 capitol , 1998-2007
Percent

Latin America and the Caribbean

Asia
Year
All
... . ... • . . . . ... ... .....
. . .... . . . . . . . . . •. .. ... . .
. . . . . . ... . . . , . . . . . . . . .

Chinn

India

Korea

All

Mexico

Brazil

Eastern
Europe

Total
exposure to
developing

economies

. . . .. . ........ .. ... ....
........ .. .. .. .. . . ... ...
. . .. . ........ . .... . ... ..
.. .. .... . ... . .. . .... . . . .
. .. .. .... .... .. .. ... .. .
. .. .. . . . . . .. . . . . . . . . . .

28.2
26.1
24 .0
22.4
21.9
22.8
32.2
30.7
34.7
44.6

1.0
.8
.8
.9
.9
1.3
1.4
2.4
4.1
4.5

2.4
2.4
2.6
2.6
2.7
3.9
4.2
4.9
6.1
9.8

7.1
6.6
6.4
5.8
5.8
5.5
15.0
12.9
13.6
14.4

42.9
39.0
37.9
54.1
38.9
32.9
31.8
31.8
30.8
35.6

9.9
9.5
9.1
26.0
20.8
18.0
16.7
17.4
16.9
17.2

11.3
10.5
11.2
3.0
8.4
6.8
6.5
6.9
5.7
8.2

3.5
2.9
4.4
4.3
5.5
5.4
6.1
5.9
6.5
9.0

100.1
90.7
87.9
100.3
84.8
79.8
89.2
86.4
92.6
119.6

MEMO
Total exposure
(billions of dollars)
1998 .. ....... . . . .. . . ... . . .
1999 . . . .... ..... .. .. .......
2000 ....... ...... .... ..... .
2001 ..... ......... .... .. . ..
2002 .. .. ... . .. . . ... .. ...
2003 ... .......... .... . .....
2004 ....... .. .... .. ..... . ...
2005 . ..... ..... ... .... .....
2006 .... .. .. . .. . .... . . .....
2007 ... .......... .... .. ... .

69.1
67.9
68.0
67.2
69.5
79.9
125.8
134.8
190.5
249.8

2.3
2.0
2.2
2.7
2.7
4.4
5.3
10.4
22.7
25.5

5.4
6.2
7.5
7.7
8.7
13.6
16.3
21.6
33.6
54.9

17.3
17.2
18.1
17.5
18.4
19.2
58.7
56.7
74.8
80.8

104.7
101.6
10703
162.4
123.5
115.2
124.4
139.7
168.9
199.3

24.2
24.8
25.7
78.0
66.2
63.0
65.2
76.1
92.5
96.1

27 .6
27.3
31.6
39.0
26.6
23.7
25.5
30.4
31.5
46.2

8.5
7.4
12.3
12.9
17.6
19.1
23.8
25.7
35.5
50.2

244.7
236.4
249.1
301.4
269.4
280.1
348.9
378.8
508.2
670.6

1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

... ..... .. - ....... ....

NOTE: Exposures consist of lending and derivatives exposures for crossborder and local-office operations. Respondents may file information on one
bank or on the bank holding company as a whole. For the definition of tier I
capital, see text note 9.
The year-end 2007 data cover 65 banks with a tOlal of $560.5 billion in
tier I capital.

SOURCE: Federal Financial Institutions Examination Council, Statistical Release E.16, "Country Exposure Lending Survey" (www.fliec.govIE16 .htm).

dents of India (table 3). An increase in lending to
residents of Brazil helped push up banks' exposure to
Latin American and Caribbean economies to 36 percent of tier 1 capital. Banks' exposure to eastern
European countries rose to 9 percent of tier 1 capital
in 2007, up from 6.5 percent the year earlier.

corporate bonds and variolls types of asset-backed
securities-increased across the ratings spectrum.
Against that backdrop, the Federal Open Market
Committee cut the target for the federal funds rate
from 4 Y2 percent at the end of 2007 to 2 Y4 percent by
the end of March . Yields on Treasury bills fell, at
times, to their lowest levels in 50 years, declines that
reflected heightened demand for safe and liquid
assets. Yields on longer-term Treasury securities also
declined sharply; by the end of March, the 2-year
yield had dropped to 1.61 percent and the 10-year
yield to 3.69 percent. The April 2008 BLPS indicated
that large fractions of banks had tightened credit
standards and terms on loans to businesses and households during the first quarter.
Various short-term funding markets had shown
some improvement in December and January with the
introduction of the Federal Reserve's Term Auction
Facility (TAF) and the passage of year-end. However,
the further deterioration of those markets in February
and March placed renewed pressures on banks and
other financial institutions and possibly exacerbated
the ongoing tightening of credit conditions. To provide liquidity and foster smoother functioning of
those markets, the Federal Reserve in mid-March
increased the TAF from $60 billion to $100 billion
and also expanded the size of its swap lines with the

DEVELOPMENTS IN EARLY 2008
U.S. economic activity, which was sluggish in the
fourth quarter of 2007, remained so in the first three
months of 2008. Residential construction and home
sales continued to contract, and home prices dropped.
Consumer spending was subdued amid slumping
sentiment and restrained growth in wealth and real
income, and business spending also weakened. Energy prices jumped again during the first quarter; the
price of oil rose to record highs, which added to the
headwinds facing the economy and helped sustain
pressures on headline inflation. However, core consumer price inflation decreased slightly in the first
quarter. Concerns about the economic outlook and
fears regarding possible further large losses at banks
and other financial institutions continued to put pressure on financial markets through the first part of
2008. Broad stock market indexes declined, and risk
spreads on a wide range of debt securities-including

A28

Federal Reserve Bulletin 0 June 2008

European Central Bank and the Swiss National Bank.
Moreover, the Federal Reserve announced a new
Term Securities Lending Facility, which allowed primary dealers to borrow as much as $200 billion of
Treasury securities from the portfolio of the Federal
Reserve's System Open Market Account against highquality collateral, including agency securities and
highly rated residential and commercial mortgagebacked securities . Finally, the Federal Reserve created the Primary Dealer Credit Facility to improve the
ability of primary dealers to provide financing to
participants in securitization markets. The facility
provides overnight loans collateralized by a specified
range of eligible investment-grade securities. 22
Growth of domestic bank credit slowed somewhat
in the first quarter of 2008. Although banks tightened
standards and terms on C&I loans, such loans expanded briskly on the heels of their robust fourthquarter pace, in part because of sustained disruptions
in the syndicated loan market and drawdowns on
existing C&I credit lines. CRE loans also continued
to advance despite reported further tightening of
credit standards in that sector. Residential real estate
loans expanded modestly, partly as a result of significant increases in revolving home equity loans, many
of which carry adjustable rates that may have become
more attractive as the market interest rates on which
they are often based declined. Consumer loans increased at a moderate rate but slowed somewhat
compared with the pace in the second half of 2007.
In the first quarter, profits of commercial banks
declined markedly from year-ago levels, and some
banks reported significant losses. Write-downs of
mortgage-related assets and leveraged syndicated
22. A concise summary of the Federal Reserve's recent initiatives
to promote liquidity and smooth functioning in financial markets
is available at www.newyorkfed.org/marketslForms_oCFed_
Lending.pdf.

Slock price indexc . 2007-08
January I. 2007 = 100

120
S&P500

110
100
90

80
70
60

2007

2008

NOTE: The data are weekJy and extend through March 2008.
SOURCE: Standard & Poor' s and Dow Jones.

loans reportedly contributed importantly to the drop
in profitability in the first quarter at many banks.
Banks also substantially increased loss provisions
amid additional deterioration in the credit quality of
loans to residential developers and continued weakness in residential mortgages. Delinquency rates on
consumer loans also increased, and those on C&I
loans edged higher.
The stock prices of banking firms dropped further,
and the spreads on their credit default swaps widened
through February. Sentiment improved in mid- to [ate
March, however, when the Federal Reserve announced the measures to provide additional term
funding, and first-quarter results at a few investment
banks were seen as reassuring. On balance, bank
stock prices fell almost 10 percent in the first quarter
of 2008, about in line with the change in the S&P 500
(figure 33). The median spread on credit default
swaps for large banking organizations nearly doubled,
to almost 100 basis points, over the same period. 0

Appendix tabLes slart

011

page A29

Profits and Balance Sh eet Developments at U.S. Commercial Banks in 2007

A. !, Portfolio

I:!

mp )si lion.

jntere~1 raIl:",

A29

and im:omc and expense. U.S. banks. 1998-2007

A. All banks
hem

1998

1999

I 2000 I

200 I

I 2002 I

2003

I 2004 I 2005 I 2006 I 2007

Balance sheel ilems as a percentage of average nel consolidated assets

Inlerest-eaming assets . .. .... .. . . .. . . ... . . . .. . .
Loans and leases (net) ... . ......... . ........ .
Commercial and industrial ... . .. . . .. • .
U.S. addressees . .. . .. . .. . ..... .. .. .. . .. .
Foreign addressees . . .. . .. . . . . . .. ... .
Consumer ...... .. .. . ............ ... ..... .
Credit card .. ..... .... ... .. .. ... .. ... ..
Installment and other . .... .. ... .. .. .. ... .
Real estate . . . .. . . . . . . . . . . .. . . . . . . .... . ..
In domestic offices .. . ...... . ..... ..
Construction and land development ... .
Farmland
. ...... .. . . ... . .. .. . ... . .
One- to four-family residential . ...... .
Home equity . ... ... . .. . ... . . . .... .
Otber.. .. .... .. .... .. ..
.. .... .. .
Multifamily residential. . . . . . . _.. . . . . .
Nonfarm nonresidential . . . . . . . ..... . .
In foreign offices
......... ....
To depository institutions and
acceptances of other banks . . . . . . . .. . .
Foreign governments . .. .. .. ...... .. .. .. .
Agricultural production . . . .. . . . . .. .. . . . .. .
Other loans .. .... ...... .. . ... . .. . .... .. ..
Lease-financing receivables .... . . ..... . . .
LESS: Uneamed income on loans .. . . . . .. . .
LES-" Loss reserves I .... .... .. .. .. .. .. ..
Securities . . ...... .. . . ............... .... .. .
Investment account .. ..... ..... .... ....... .
Debt .. .. .... ...... .. ...... .. ....... ..
U.S. Treasury
.. .. .. ........ .. .. .. .
U.S . government agency and
corporation obligations .. . .. . . . .
Government-backed mongage pools.
Collateralized moogage obligations
Other ....... ...... .. .. . .. ....... ..
State and local government . . ....... . .
Private mongage-backed securities ... .
Other .. .. .... .... ......... ........ ..
Equity .. ..... . .. .. ...... .. .... ...... ..
Trading account .... .. . . . ...... .. ... . . . .. .
Gross federal funds sold and reverse RPs . . . .
Interest-bearing balances at depositories .... . .
Non-interest-earning assets .. . . . ..... . .. ... ... . .
Revaluation gains held in trading accounts . . . .
Other .. ...... ...... ........ .... .... .... .
Liabilities ... .. . . ....... . . .. ........... ... .... .
Core deposits .. . . ... ..... . . .. . . ... . . . .. .
Transaction deposits ..... . .. . .. ... ...... . . .
Demand deposits . .... ..... .... .
Other checkable deposits ....... . . . ..... '
Savings deposits (including MMDAs) .. ... .
Small time deposits ..... . ..... ... . .. . ... .
Managed liabilities' . . . . . . . ...... .. . . . . ..
Large time deposits ... .. .. . ... ...
. .. . .
Deposits booked in foreign offices
. . .. .
Subordinated notes and debentures. . . . ... .
Gross federal funds purchased and RPs .... .
Other managed liabilities
. .. ...... . .
Revaluation losses held in trading accounts .. .
Other ...... .. .. .... .... .... ...... ...... .. .
Capital account . . .

86.08
56.88
12.18
10.48
\.70
9.05
3.54
5.51
29.91
29.46
2.99
.54
16.96
3.40
13.57
\.05
7.91
.46

86.90
56.98
11.06
9.52
1.54
9.18
3.87
5.31
30.77
30.24
3.26
.54
17.42
4.34
13.08
1.06
7.97
.53

86.82
57.88
11.17
9.64
1.53
9.12
4.05
5.06
32.40
31.84
3.90

7.56
.50

86.42
57.83
14.07
12.04
2.04
9.35
3.78
5.57
28.39
27 .91
2.98
.56
15.40
2.80
12.60
1.02
7.95
.48

18.26
4.95
13.31
1.08
8.06
.56

86.86
58.26
11.42
9.73
1.70
8.53
3.73
4.80
33.19
32.61
4.73
.53
18.23
4.71
13.51
1.06
8.07
.58

86.94
58.37
11.84
9.86
1.98
8.43
3.72
4.71
33.36
32.76
5.05
.53
18.31
4.48
13.82
1.04
7.84
.60

\.87
.12
.78
2.58
2.63
- .05
-1.02
20.01
17.59
16.93
1.66

1.83
.10
.75
2.34
2.58
- .04
-1.04
19.53
16.82
16.48
.85

1.87
.09
.70
2.06
2.44
- .05
-1.11
21 .27
18.30
17.99
.78

1.98
.08
.63
2.00
2.11
- .04
-\.04
2\.90
18.97
18.72
90

2. 11
.OS
.59
2.35
1.79
- .04
-.91
22.57
18.99
18.79
.89

1.73
.06
.56
2.09
1.58
-.03
-.79
22.04
17.87
17.71
.62

1.65
.04
.55
2.19
1.43
-.03
-.71
21.32
16.89
16.73
.47

1.21
.03
.52
2.48
1.23
-.02
-.70
20.77
15.41
15.23
.32

10.85
5.24
2. 15
3.46
\.62
.88
2.24
.61
2.06
4.61
2.68
12.97
2.57
10.41

10.31
4.75
\.92
3.63
1.52
.95
2.48
.66
2.43
4.12
2.52
12.87
2.28
10.58

10.08
5. 13
1.95
2.99
1.49
1.09
2.98
.34
2.72
5. 11
2.90
13.51
2.37
11.15

11.46
6.09
2.35
3.02
1.49
1.25
3.01
.31
2.97
4.81
2.52
13.58
2.42
11.16

12.26
6.75
2.34
3.17
1.48
1.30
2.78
.25
2.93
4.85
2.45
13.92
2.70
11.22

12.37
7.13
2.01
3.22
1.41
1.41
2.72
.20
3.59
4.58
2.76
13. 10
2. 19
10.91

11.51
6.78
1.80
2.93
1.36
1.76
2.47
.16
4.17
4.75
2.15
13.18
1.82
11.36

10.65
6.43
1.58
2.65
1.34
1.89
2.37
.16
4.43
5.30
1.98
13. 14
1.64
11.50

9.32
5.82
1.34
2.16
1.34
2.15
2.10
.18
5.36
5.49
2.30
13.06
1.73
11.33

9\.51
49.43
14.10
10.99
3.11
20.87
14.46
34.97
7.67
10.59
1.30
7.98
7.43
2.97
4.14

91.52
48.60
12.58
9.78
2.81
22.47
13.55
36.59
7.89
10.96
1.36
7.97
8.41
2.52
3.81

91.58
46.52
11.07
8.61
2.46
22.43
13.01
38.83
8.77
11.43
1.37
7.83
9.44
2.29
3.94

91.25
47.07
10.36
8.00
2.36
24.53
12.18
37.42
8.89
10.66
1.43
7.95
8.50
2.21
4.54

90.85
48.98
10.06
7.67
2.39
28.13
10.80
35.05
8.30
9.42
\.40
7.77
8.16
2.09
4.73

90.96
49.18
9.74
7.26
2.47
30.12
9.33
34.61
8.09
9.38
1.33
7.75
8.06
2.30
4.87

90.57
48.56
9.10
6.58
2.52
31.19
8.27
35.69
8.00
10.25
1.30
7.24
8.91
1.95
4.36

89.91
47.52
8.46
6. 16
2.30
30.83
8.23
36.25
9.11
10.39
1.34
7.05
8.37
1.67
4.47

89.84
45 .56
7.45
5.41
2.04
29.49
8.62
38.29
10.07
11.18
1.40
7.53
8. 11
1.51
4.47

89.78
43.89
6.43
4.66
1.77
28.21
9.26
39.86
9.13
12.81
1.55
7.06
9.31
1.59
4.44

8.49

8.48

8.42

8.75

9.15

9.04

9.43

10.09

10.16

10.22

10.11
.08
7.96
n.a.

10.87
.06
8.27

1\.58
.05
7.63
0.3 .

12.09
.05
8.17
2.89

12.57
.06
9.69
3. 17

12.47
.06
10.39
3.19

12.78
.06
10.56
3.07

13.52
.04
10.33
3.04

14.35
.05
9.89
3.07

14.47
.07
9.31
3.66

n.a.

5.147

5,439

5,906

6.334

6,634

7.248

7.879

8.591

9.427

10.396

86.76
58.33
16.36
13.61
2.75
10.41
4.02
6.39
24.85
24.28
\.86
.55
14.25
1.89
12.37
.82
6.80
.57

87.03
59.34
17.07
14.43
2.64
9.71
3.51
6.20
25.44
24.87
2. 18
.56
14.10
\.76
12.34
.88
7.15
.57

87. 13
60.49
17.16
14.67
2.49
9.38
3.52
5.87
27 .04
26.49
2.51
.56
14.96
\.96
13.00
.99
7.48
.54

86.49
58.95
16.08
13.69
2.39
9.23
3.69
5.55
27.10
26.60
2.85
.55
14.67
2. 18
12.49

1.91
.15
.89
2.78
2.12
- .07
-\.07
20.37
17.48
16.93
2.70

\.96
.16
.83
2.75
2.51
- .06
-\.04
20.40
18.33
17.73
2.14

10.28
5.16
2.12
2.99
\.57
.67
1.70
.55
2.90
5.37
2.69
13.24
2.95
10.29

.97

.54

MEMO

Conunercial real estate loans] ... . . . . . .. . . ... . . .
Other real estate owned" ....... .. . ..... ... . . .
Mongage·backed securities .... . . . . . . . . . . . .. .
Federal Home Loan Bank advances . . . . . . . . . . ..
Average net consolidated assets
(billions of dollars) .. .. .. .. ... .. .. .... ..

A30

Federal Reserve Bulletin 0 June 2008

A.!, Portfolio compo ilion, interest ratcs, nnd income and expense,

. . bank~. 1998- 2007-Colllinued

A. All banks- Continued
1998

Item

1999

2000

2001

2002

2003

2004

2005

2006

2007

Effective interest rate (perce nt)'

Rales earned

Interest-earning assets . . .. . .. . . , .. .. .. ... .... ...
Taxable equivalent ... .. . ... .. .. ........ .
Loans and leases, gross ... ... .. ... . .... ... ...
Net of loss provisions ..... .... .... .... ..
Securities . . . . . . .. . . . . . . . . ... .... ... .........
Taxable equivalent . .. . . , . . . . . . . . . .... .
Investment account . . ... . . . . . . . . . . . . . . . . .
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) . . ... .. . . . . .. . . . . . .
Mortgage-backed securities .. . . ... . .. ....
Other . . . . . . . . . . . . . . . . . . . . . . ..... ......
Trading account .. . . . .. . ... . . .... . . .... .. . .
Gross federal funds sold and reverse RPs . . . . .
Interest-bearing balances at depositories ......

8.01
8.07
8.85
8.30
6.44
6.63
6.38

7.73
7.78
8.50
7.99
6.30
6.48
6.28

n.a.
n.a.

8.20
8.26
9.00
8. 3 .~

6.47
6.65
6.45

n.a.

7.37
7.42
8. 15
7.15
6.04
6.22
6.05

6. 10
6. 15
6.89
5.84
4.95
5. 10
5.04

5.29
5.33
6.15
5.46
3.96
4. 10
4.00

5.08
5.12
5.91
5.47
3.86
3.99
3.96

5 .69
5.73
6.52
6.09
4. 18
4.30
4.29

6.65
6.68
7.55
7. 18
4.71
4.83
4.86

6.78
6.82
7.54
6.70
5.02
5.14
5. 13

4.42
5.44
4.74
4.38
1.93
2.79

3.29
4.24
4.08
3. 71
1.40
2.09

3. 11
4.38
3.76
3.35
1.40
1.98

3.46
4.60
4.23
3.72
2.66
3.70

4. 19
5. 10
4 .76
4. 16
4 .3 1
5.10

4.71
5.29
5.02
4.70
5.07
5. 15

2.38
2. 11
2.38
2.06
1.06
1.13
3.37
3.70
1.88
4.49

1.72
1.47
1.62
1.44
.75
.74
2.59
2.88
1.30
3.69

1.63
1.36
1.72
1.29
.77
.72
2.35
2.56
1.49
3.34

2.47
2.06
2.77
1.91
1.41
1.24
3.19
3.14
3.07
4.57

3.59
3.05
3.92
2.85
1.88
2.01
4.39
4. 11
4.57
6.28

3.82
3.39
4.23
3. 18
2.04
2.22
4.71
4.72
4.98
5.46

n.a.

6.85
5.29
6.32

6.48
4.78
5.95

6.63
5.56
6.48

5.76
6.45
5.60
6.01
3.86
4.01

4.68
4.31
5.66
4.01
2.29
2.79
5.22
5.48
5. 19
6.50

4.31
3.88
4.91
3.65
2.08
2.50
4.93
5.11
4.74
6.49

4.94
4.45
5.61
4. 17
2.34
2.86
5.78
5.69
5.77
6.97

3.93
3.61
3.94
3.54
1.96
2.19
5.04
5.43
3.83
5.91

n.a.

Rales paid

Interest-bearing liabilities ... ... ...•.. .... .. ... ..
Interest.bearin~ deposits . . . . .. .. .. ..... .. ... .
In foreign 0 ces . .. ............. . ....... ..
In domestic offices ....... ... . ..... .. . . ....
Other checkabte deposits .. . ..... .. . .... .
Savings deposits ~in.fluding MMDAs) .. ..
Large ume depoSIts . . ... . . . .. ....... ...
Other time deposits6 .. .... . . . . . . . . . . . . . .
Gross federal funds purchased and RPs . . .....
Other interest-bearing liabilities ... . . . . . . .. . . .

Income and expense as a percentage of average net consolidated assets
Gross interest income ....... ..... ..... .. ... ....
Taxable equivalent ... ..... .. .. .... .... ....
Loans . . . .. .... .. .. . . . ..... .... ... . . ..... . .. .
Securities ..... ...... ....... ... . .... . .... ....
Gross federal funds sold and reverse RPs .....
Other ...... .. .......... .. .... .. .... ... ......
Gross interest expense ... ...... ... ........ ... ..
Deposits .. .... ... ...... .... .. ... . ...... . . . ..
Gross federal funds purchased and RPs ... .. .
Other . .... .. . . .... ... ......... . .. ....... ... .

6.98
7.03
5.27
1.10
.29
.32
3.46
2.43
.43
.60

6.75
6.80
5. 13
1.15
.23
.24

Net interest income ......... .. . ...... .. . ... . ...
Taxable equivalent ........ .. ... ..... .. ...

3.52
3.57

3.22
2.21
.39
.63

4.54
4.58
3.55
.74
.07
. 18

2.98
2.09
.31
.58

5.27
5.3 1
4.06
.89
.09
.22
1.79
1.23
. 15
AI

3.41
3.46

3.40
3.44

3.48
3.52

3.24
3.28

7. 18
7.22
5.53
1.15
.23
.27
3.76
2.56
.45
.75

6.38
6.42
4.92
1.00
.20
.27

1.30

.86

.10
.33

4.43
4.46
3.42
.74
.07
.20
1.25
.81
.11
.33
3.17
3.21

4.96
5.00
3.82
.77
.13
.25

5.85
5.88
4.48
.84
.23
.31

5.94
5.97
4.47
.80
.28
.39

1.89
1.23
.44

2.79
1.84
.36
.59

2.99
2.05
.36
.58

3.07
3. t I

3.05
3.09

2.95
2.98

.30
2.35
.39
.31
.17
.05
.07
.04
1.48

.27
2.36
.38
.30
.20
.05
.08
.07
1.48

.54
2. 10
.38
.32
.05
.04
.07
.03
1.36

3. 19
1.44
.41
1.34

3. 13
1.44
.39
1.30

.... ....... .. .......

042

3.52
3.57
.39

Non-interest income .... .... ... ........ ........
Service charges on deposits ....... ... .. ......
FidUCiary activities . . . .. . .... . . .. .. .. ... . ... .
Trading revenue ... .. . ... .... .. . ....... .... ..
Interest rate exposures . . .. ....... . .. . . .....
Foreign exchange rate exposures . ... ..... . .
Other commodity and equity exposures ... . .
Other .... . ... ... ........ .. ... . . . . . ... .... ...

2.41
.38
.37
. 15
.05
.09
.01
1.50

2.66
.40
.38
. 19
.07
.09
.03
1.70

.50
2.59
.40
.38
.21
.08
.08
.04
1.61

.68
2.54
.42
.35
.20
.09
.07
.03
1.57

.68
2.54
.45
.32
. 16
.08
.07
.01
1.60

.45
2.54
.44
.31
. 16
.07
.07
.02
1.63

Non-interest expense . . .. . . .. .... ... . ... . . . .. .. .
Salaries, wages, and employee benefits .... ...
Occupancy . . .. .. .. ....... .... ........ .. .....
Other .. .. .. . .. ... .. .. .. ........... .. . . . . ....

3.77
1.55
.47
1.76

3.77
1.59
.48
1.71

3.66
1.51
.45
1.70

3.57
1.49
.44
1.64

3.47
1.51
.44
1.51

3.36
1.50
.43
1.43

.30
2.40
.42
.32
.13
.03
.07
.03
1.53
3.34
1.46
.42
1.46

Loss provisions

.. . . . . . ....

Net non-interest expense .... .. . . . ... ...... . ....

1.36

Gains on investment account securities ... ..... .

.06

Income before taxes and extraordinary items .. ..
Taxes .. ..... .. .. .. .. . ..... ..... ..... .. . . ....
Extraordinary items. net of income taxes . ....

.76

3.09
1.39
.37
1.33
.99

•

- .01

-.01

•

1.93
.62

•

2.00
.65
.03

J .41
.43
- .02

1.33
.76
.58

1.31
.75
.56

1.39
.87
.51

.97
.82
.15

14.14

12.99

13.64

9.48

1.11

1.07

1.03

.93

.82

.94

•

-.04

.07

.10

.08

.04

1.81
.62
.01

2.03
.72

•

1.81
.63

•

1.77
.59
-.01

1.96
.65

•

2.05
.67
.01

1.97
.64

Net income ........... . ..... . ... . ...... ... ... .
Cash dividends declared . ... . . . . . .. . . . ... .. . .
Reutined income .. . . .. .
.. . . . . . . .. . . . . . . .

1.20
.80
.40

1.31
.35

1.18
.89
.29

1.17
.87
.31

1.32
1.01
.30

1.39
1.07
.31

Return on equity ... . . .. . . . . . . . . . . . . . . .

14.07

15.43

13 .97

13.4t

14.38

15.34

MEMO:

.96

NOTE: Data are as of April 16, 2008.
I. Includes allocated transfer risk reserve.
2. Meas ured as the sum of large time deposits in domestic offices. deposits
booked in foreign offices. subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements , Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construcl io n and land development loans sec ured
by real estate ; real estate loans secured by nonfarm nonresidential propenies or
by multifamily residential properties; and loans to finance commercial real estate, constructio n, and land development activities not secured by real estate .
4 . Other real estate owned is a component of other non-interest-earning
assets.

.22

.84

5. When possible, based on the average of quarterly balance sheet data reported on schedule RC- K of the quarte rly Call Repon .
6. Before 1997 . large time deposit open accounts were included in other
lime deposits.
7 . Includes provisions for allocated transfer risk .
• In absolute va lue, less than 0 .005 percent.
n.a. Not available .
MMDA Money market deposit account .
RP Repurchase agreement.
MBS Mon gage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

A. I. Ponfolio compositi on. illler..:sl !"dIeS, and incom..: and expense.

A31

.5. banks . 1999- 2007

B. Ten largest banks by assets
Item

1998

1999

20c0

2001

2002

2003

2004

2005

2006

2007

Balance sheet items as a percentage of average net consolidated assets

4.58
16.96
15.55
.90
.10
10.17
1.54
9.22
.43
3.35
1.41

82.23
55.22
19.87
13.95
5.92
5.43
1.34
4.09
19.82
18.48
.98
. 11
13.37
1.61
11.76
.60
3.42
1.34

8 1.74
53.86
18.82
13.42
5.41
6.17
1.69
4.48
19.23
18.05
1.27
. 11
12.41
1.78
10.63
.51
3.76
1.18

81.68
5_'-61
16. 16
11.69
4.47
7.82
2.90
4.92
20.78
19.70
1.42
. 12
13.5 I
2.35
11.17
.55
4.09
1.08

81.39
52.20
12.98
9 .40
3.59
7.96
2.81
5.15
22.68
21.74
1.36
. 10
16.03
2.96
13.07
.47
3.78
.94

83.54
51.29
10.54
7.49
3.06
8.49
3. 19
5.30
23.21
22.21
1.40
.10
16.71
4.04
12.67
.45
3.55
1.00

83.96
51.35
10.61
7.74
2.87
8.80
3.60
5.21
24.55
23.52
1.70
. 10
17.73
5.22
12.52
.44
3.55
1.03

84.68
52.03
11.20
8.08
3. 12
8. 17
3.05
5.13
25.51
24.50
2.01
. 10
18.30
5.40
12.90
.44
3.65
1.01

85 .04
53.21
11.58
8.05
3.53
8.98
3.87
5. 11
27.04
26.00
2.01
.09
19.86
5.46
14.40
.55
3.49
1.03

4 .05
.35
.28
3.74
2 .81
- .06
-1.01
19.72
12. 12
11.64
1.70

4.34
.38
.26
3.96
3.40
-.05
-1.03
18.34
13.08
12.57
1.98

3.78
.28
.23
3.75
3.07
-.04
- .97
18.98
13.71
13.03
1.96

3.23
.20
.28
3.51
3.43
- .04
- .97
17.81
12.14
11.88
.68

3.20
.20
.23
2.94
3.44
- .08
- 1.12
20.54
14.35
14.13
.59

3.54
.17
.19
2.87
2.87
- .06
-1.02
21.22
15.31
15. 11
.82

4. 10
. 16
.22
3.32
2.08
- .04
- .80
22.95
15.99
15.83

3. 15
. 12
.20
2.81
1.78
-.04
-.65
23.37
15.58
15.44
.56

2.97
.07
.20
2.88
1.60
-.02
-.56
23.05
15. 12
14.97
.43

1.71
.05
. 17
3.08
1.22
-.02
- .61
21.98
12.81
12.66
.24

6.31
5. 13
.93
.26
.47
.60
2.57
.47
7 .60
7.81
2.96
18.75
7.62
11 . 13

6.35
5.03
.79
.52
.45
.57
3.22
.51
5.25
6.64
3. 14
18.51
6.66
11.85

6.59
4.88
.93
.78
.51
.51
3.47
.68
5.26
5.02
3.01
17.77
5.66
12. 11

6.84
4.99
1.11
.74
.55
.58
3.22
.26
5.67
6.38
3.69
18.26
5.48
12.78

8.69
6.38
1.52
.79
.59
.92
3.34
.22
6. 18
5.26
2.28
18.32
5.40
12.93

9.20
7.59
.91
.70
.59

9.92
8.64
.70
.58
.57
3.52
.16
6.96
6.37
2.93
16.46
4.45
12.01

9.48
8.64
.53
.32
.64
1.09
3.33
. 15
7.94
7.60
1.99
15.32
307
12.25

8.02
7.53

3.40
.20
5.91
5.79
2. 18
18.61
5.79
12.83

9.69
8.65
.54
.50
.58
1.18
3.43
. 14
7.79
6.96
2.28
16.Q4
3.50
12.54

.16
.65
1.45
2.30
. 16
9.16
7.47
2.38
14.96
3.03
11 .93

Liabilities . . ...... ..... ........ . .. ..... . ..... . .
Core deposits ... . ........ .. .. ...... . .. .. . .
Transaction deposits .... .......... . ..... . . .
Demand deposits
. . .. . . . .. .. ..
Other checkable deposits . .. .. . ..... .... .
Savings deposits (including MMDAs) ... . .
Small time depoSits .... . . . . . ... .. ... .. .
Managed liabilities' .. . . ..
. . . . ..
Large time deposi ts ... ...... . .. .. ...... ..
Deposits booked in foreign offices .. . ... . . .
Subordinated notes and debentures .... .... .
Gross federal funds purchased and R Ps ... .
Other managed liabi Iities ........ .... ..... .
Revaluation losses held in trading accounts .'
Other ... .. ... .. ...................... ..

92.58
32.94
9.45
8.46
.99
17.07
6.42
44.42
5.04
21.23
1.89
9.78
6.49
7.67
7.55

92.28
33.76
8.55
7.83
.72
18.94
6.26
45.49
5.19
22.22
1.98
8.84
7.27
6.51
6.52

92.36
33.28
8.01
7.28
.74
19.24
6.03
46.84
5.55
22.76
2.10
8.89
7.55
5.69
6.55

92. 14
36.38
8.40
7.50
.90
22.21
5.77
43.41
5.46
20.28
2 .16
9.04
6.47
5. 10
7.26

91.52
40.61
8.34
7.40
.95
26.82
5.44
38.89
5. 13
17.31
2. 11
8.83
5.53
4 .63
7.39

91.94
41.07
7.74
6.72
1.02
28.99
4.34
38.60
5.53
16.62
1.92
8.62
5.90
4.88
7.40

91.64
42.02
6.65
5.43
1.22
31.54
39.33
5.21
17.20
1.78
7.79
7.35
3.95
6.34

90.81
40. 18
6.05
4.90
1.15
30. 11
4 .02
40.83
6.28
17.51
1.89
8.39
6.76
3.21
6.60

91.10
38.03
5.41
4.32
1.09
28. 11
4 .52
43 .75
6.85
18.50
1.99
9.51
6.89
2.83
6.47

90.82
35.08
4.69
3.80
.89
25.55
4.84
46.83
6. 13
19.86
2.17
8.42
10.26
2.78
6. 13

Capital account .... . .. . . . .. .... .. ..... . .. .. . . ..

7.42

7.72

7.64

7.86

8.48

8.06

8.36

9 . 19

8.90

9.18

5.61
.09
6.65
n.a.

5.69
.06
6.40

5.87
.04
6.32
n.a.

6.68
.04
6.68
.82

6.92
.03
8.82
.82

6.31
.03
9.60

.84

5.99
.03
10.30
.79

6.33
.02
10.36
.63

6.73
.03
10.25
.75

6.64
.05
9.31
2.33

2.234

2,527

2.785

3.148

3,654

4,232

4.759

5.469

Interest-earning assets .. . . . . . . . . .. . . . .. .. . ... ..
Loans and leases (net) . . . ..... . .. .... . .. ... ..
Commercial and industrial . . . . . . . . . . ..... .
U.S. addressees .. ....... .... ... .. .. ' "
Foreign addressees ........ . .. ......... ..
Consumer
... . ......... . ... .. .. ..
Credit card ........ ....... .... .. .... ... .
Installment and other .. . .. ... .. . .. .. ... ..
Real estate . . . . . . . . . . . . .... ... ........ .. .
In domestic offices .. .......... .. ...... .
Construction and land development .. . .
Farmland ........ ... ...... .. .... . .. ..
One- to four-family residential ..... . . .
Home equity ........ ..... ..... . ... .
Other ... ..... ... . .... . . .. ..... ... . .
Multifamily residential . .. . .... _. _. . . . .
Nonfarm nonresidential . . . .. . _. . . .. .
In foreign offices ....... ... ... . . . . . . . . .
To depository institutions and
acceptances of other banks .. . .. • ......
Foreign governments ... . . .. ...... .. ... . .
Agricultural production .. .. ..... .. .. . ..... .
Other loans .. ...... . ...... . . .. . . ... . . .. . . .
Lease-financing receivables .. .... .... . .. . . .
LESS: Unearned income on loans . . . . • . .... .
LESS: Loss reserves I . .. . . . . . .. .. .. .. . . . ..
Securities .. .. ..... .. . . . ... ... ......... ... .. .
Investment account ..... .. ... . .... .. ...... .
Debt .. ..... ........ ..... ........ . . ... . .
U.S. Treasury .. ...... .. .... ..... .. .
U.S. government agency and
corporation obligations .... ... . .
Government-backed mongage pools.
Collateralized mortgage obligations
Other . .. .. ... . . .... .. .. .
. ... .
... .... .
State and local government
Private mortgage-backed securities . .
Other ..... .. .. .... ... ............ . ..
Equity . .. . . ...... . . . .. . ..... ... ..... . . . .
Trading account .... . . . ............... ..
Gross federal funds sold and reverse RPs .. .. .
Interest-bearing balances at depositories ..... .
Non-interest-earning assets . .. . .. . . .. . . . . . . .. .
Revaluation gains held in trading accounts .. . .
Other ... ...... .......... . .. .. .. .. ........ .

81.25
50.76
18.Q7
11.76
6.31
6.04
1.30
4.74
16.51
15.08
.77
.09
10.33
1.72
8.61
.38
3.51
1.43

81.49
53.37
19.20
13. 14
6.06
5.94

1.36

LlO

.86

.96

.33

MEMO

Commercial real estate loans' . . ... .. . _. . . .. . __.
Other real estate owned" . .. ... ..... ... .. . .. . .. .
Mongage-backed securities . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances. . . . . . . . . . . . .
Average net consolidated assets
(billions of dollars) ... .. .. .. .. .... .. . .. ..

1.820

n.a.

1,935

A32

Federal Reserve Bulletin 0 June 2008

A. I. Portfo lio comp\)silion ,

inl~re:, 1

rates. and income and expense. ..S. hanks. 1998-2007-Conlillued

B. Ten largesl banks by assels-Continued

Item

1998

1999

2000

2001

2002

2003

2004

Effective interest rate (percentl

Rales earned
Interest-earning assets .. ..... ....... ... .. ... ....
Taxable equivalent .. ..... .. .. . . . ... . . .. .
Loans and leases, gross .... .. .... ...... ... .. .
Net of loss provisions .... . .. .. .. . .... . . .
Securities .... .. .. .... ...... ............ . ... .
Taxable equivalem ..... .. ... . . . . .... ....
Investmem account ... . . .. . . . . .. . .. . . .... ..
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBSl .. . . .. .... . . . .... ....
Mortgage-backed securities .. ... ... . . . . . .
Other . . . .. ...... ... . . . . . . . . . . . . . . . . . . .
Trading accounl ... .. . .. .. . . . .. .. ....... ...
Gross federal funds sold and reverse RPs . . . ..
Interest-bearing balances al depositories . . ...

Rilles paid
Interest-bearing liabilities ... ... .... .. ...... ..
Interest-bearing deposits . . ... ... .. , ........
[n foreign offices
...... .... .. .....
[n domestic offices .. . ... . ... ... .... .....
Other checkable deposits .. ...... .. , ...
Saving~ deposits ~influding MMDAsl .
Large ume depoSIts . . .... . . . .. . ... . . .
Other time deposits· . . .. .. ... . ........
Gross federal funds purchased and RPs . ..... .
Other interest-bearing liabilities . ..... . . .. ... .

2005

2006

2007

7.55
7.57
8.21
7.77
6.83
6.89
6.78

7.37
7.39
7.99
7.65
6.58
6.65
6.59

7.76
7.78
8.46
7.92
6.48
6.55
6.40

6.83
6.86
7.50
6.55
6.23
6.31
6.23

5.82
5.85
6.52
5.30
5.04
5.11
5.30

4.99
5.01
5.76
5.19
4.15
4.21
4.26

4.71
4.73
5.52
5.29
4.04
4.10
4.37

5.29
5.31
6.15
5.84
4.27
4 .32
4.63

6.32
6.34
7.36
7.02
4.69
4.75
5.11

6.52
6.54
7.33
6.29
4 .99
5.04
5.29

n.a .

n.a.

n.a.
6.92
5.20
7.16

n.a.
n.a.
n.a.

6.56
4.52
7.22

6.70
4.93
7.43

5.01
6.42
6.34
6.24
3.86
3.73

3.74
5.55
5.30
4.46
2.20
3.40

2.62
4.51
4.28
3.87
1.60
2.49

2.92
4.83
3.76
3.32
1.43
1.80

3.29
4.92
4.26
3.57
2.46
4.06

4.15
5.30
4 .81
3.90
4.07
5.59

4.15
5.41
5.08
4.57
5.06
5.36

4.94
4.40
5.83
3.39
1.67
2.45
4.53
5.21
5.18
7.47

4.52
3.82
4.99
3.04
1.44
2.11
4.36
4.95
4.53
8.26

5.03
4.40
5.67
3.51
1.61
2.43
5.32
5.53
5.47
8.07

3.78
3.27
4.02
2.84
1.67
1.92
4.40
5.11
3.81
6.84

2.33
1.94
2.59
1.67
.93
1.02
3.26
3.44
2.02
5.57

1.67
1.34
1.74
1.18
.80
.73
2.36
2.70
1.39
4.42

1.62
1.29
1.81
1.08
.97
.71
2. 14
2.61
1.59
3.83

2.52
2.01
2.77
1.70
2.27
1.15
3.06
3.40
3. 11
5.40

3.74
2.96
3.88
2.55
2.46
1.87
4.32
4.05
4.63
7.78

3.87
3.30
4.28
2.80
2.36
1.98
4.72
4.55
5.15
5.61

5.46
5.48
3.91
.80
.31
.45

5.61
5.63
3.98
.69
.38
.56

n.a.

n.a.
n.a.

Income and expense as a percentage of average net consolidated assets
Gross interest income
. .. . .. . . . .. . . . . .. ... . . .
Taxable equivalent ... ....... . . . . .... .... ..
Loans . . . ....... .. ... . . . ..... ... .. ..... ... ...
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross federal funds sold and reverse RPs ....
Other ..... . ..... ... . . ....... ... .......... ...

6.21
6.22
4.27
.81
.42
.70

6.01
6.03
4.35
.85
.30
.51

6.39
6.41
4.74
.88
.25
.51

5.55
5.57
4.13
.72
.25
.44

4.77
4.79
3.57
.73
.12
.35

4.05
4.07
3.04
.63
.10
.28

3.94
3.96
2.86
.69
.10

.30

4.47
4.48
3.19
.72
. 18
.38

Gross interest expense ... ................. .. ...
Deposits . . ..... .. . . . ... .. .... . .. , . . ...... ,. ,
Gross federal funds purchased and RPs .... ...
Other .......... .... .... .. . . . . ... . " .. ... ..
Net interest income .. . .. ... .. ... ... ...... ..... .
Taxable equivalent .. ... ..... ... , ... ... . . ..

3.48
2.20
.54
.74

3.16
1.97
.40
.79

3.60
2.33
.49
.78

2.69
1.74
.35
.59

1.65
1.05
. 18
.41

1.19
.74
.13
.33

1.20
.74
. 13
.33

1.89
1.17
.27
.45

2.88
1.72
.47
.69

3.00
1.87
.46
.68

2.73
2.75

2.84
2.86

2.78
2.80

2.87
2.89

3.12
3.14

2.86
2.88

2.74
2.76

2.58
2.59

2.58
2.60

2.61
2.63

....... .....

Non-interest income
. . . . . . . . . . . . .........
Service charges on depOSits .. . ... . . . . . . .. . ...
Fiduciary activities ........... , ..... .. .. ... ..
Trading revenue .. . ..... .. ....... ..... ... ....
Interest rate exposures . .. . . .... . . .. .. . .....
Foreign exchange rate exposures ... . . . ... . .
Other commodity and equity exposures .. . ..
Other ........ .... ........ .... ... ...... .. . ...

.31
2.15
.33
.32
.33
.10
.20
.03
1.17

.26
2.55
.37
.31
.46
. 17
. 19
.09
1.41

.38
2.54
.40
.27
.48
.20
.18
.11
1.39

3.45
1.57
.50
1.38

3.31
1.46
.47
1.39

. 16
2.21
.45
.24
.23
.07
. 12
.04
1.28
3.11
1.34
.43
1.33

.20
2 .37
.42
.27
.31
. 11
.12
.07
1.38
2.99
1.38
.43
1.19

.22
2.35
.41
.23
.37

3.47
1.45
.47
1.54

.73
2.31
.48
.25
.32
.15
.14
.03
1.26
3.16
1.41
.46
1.28

.35
2.32
.46
.26

Non-interest expense ... .... . . .. . .. .... . ..... ...
Salaries, wages. and employee benefits ... . .. .
Occupancy ....... .. ... .. . . . . .. ... . . . . . . . .. .
Other ...... . . . ...... . . . ... . ........ ... . .....

.59
2.26
.44
.29
.43
.20
. 14
.08
1.10
3. 13
1.38
.45
1.30

Loss provisions 7

.. .• . . . . . . . . .••••• .

.30
.12
.14
.04
1.30
3.02
1.39
.45
1.18

.. . . . . . . . . . . . . . . . . . .

1.32

.90

.77

.87

.85

.70

.91

Gains on investment account securities . ... . . ....

. 11

.03

-.03

.08

.13

. 11

.07

Income before taxes and extraordinary items ... .
Taxes . . ... . ... . .... , . . . ... . ... ... ....... . . . .
Extraordinary items, net of income taxes . . . ..

1.22
.44

1.71

1.60

1.48
.49
-.01

1.67
.56

1.92
.63

1.74
.56

Net non-interest expense . . .

•

.66

.60

•

.85
.02

1.75
.57

1.18
.33

•

1.29
.99
.30

1.18
.65
.53

1.18
.59
.59

1.25
.64
.62

.85

.32

1.11
1.05
.06

12.55

13. 14

16.06

14.07

12.86

14.08

9.23

1.05
.79
.26

1.00
.86
. 13

.66

. .. .. .. .. .. . .. .... . . . ..

10.53

13.58

13.04

I. Includes allocaled transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices. subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land developmenl loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by mullifamily residential properties: and loans to finance commercial real estate, construction, and land developmenl aClivities nOI secured by real estate .
4. Other real eSlale owned is a component of other non-interesl-eaming
assets.

.54
-.01

•

.78
.53
.25

NOTE: Data are as of April 16, 2008.

.14
.13
1.35
2.89
1.39
.40
1.09

.09

1.82
.59
.02

Net income ...... . . . ... . .. .. .. . . . ... ... ..... . . .
Cash dividends declared . .. ... ..... ..•• .. . . . .
Retained income .... . . .. .. . .... .. ... ...... ..
MEMO: Return on equity

.62

•

.60
1.95
.40
.20
.05
.08
.09
.06
1.31
2.80
1.32
.37
1.12

.99

•

.60
.25

5. When possible, based on the average of quarterly balance sheet dala reponed on schedule RC-K of the quarterly Call Report.
6. Before 1997, large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocaled transfer risk .
* [n absolute value, less than 0.005 percent.
n.a. Not available .
MMDA Money market deposil account.
RP Repurchase agreement.
MBS Mortgage-backed securities .

Profits and Balance Sheet Developments at

A. i. Portfolio composition.

inl~reSI

u.s.

Commercial Banks in 2007

A33

rale • anti income and expense. U.S. banks, 19lJH- 2007

C Banks ranked II through 100 by assets
hem

1998

2007
Balance sheet items as a percentage of average net consolidated assets

Interest-earning assets .. . .. ......... . . . .... . . . .
Loans and leases (net) .. .. . .. ......... . .
Commercial and industrial ......... •.......
U.S. addressees ............ . . ... .. ......
Foreign addressees ..... . ....... .. ... . . ..
Consumer ..... .... .... ... .. . . . . . . . . . . . .
Credit card ... .... ....... ... ............
Installment and other ... ..... ...... . .....
Real estate ...... . . .. . .. . . . . . ......... . ...
In domestic offices ..... . . . .. .. . . . ..... . .
Construction and land development .. ..
Farmland . . . . . . . . . . . . . . . . . . . . . . . . . . . .
One- to four-family residential
Home equity .... .. .................
Other .............. . . . . . . . . . . . . . . . .
Mullifamily residential .. . . . .. . ... .....
Nonfarm nonresidential
In foreign offices .................... . ..
To depository institutions and
acceptances of other banks ..
Foreign governments . . . .
Agricultural production .... ........ ....... .
Other loans ................
Lease-financing receivables .. ...... ... ....
Lp.ss: Unearned income on loans . . .........
LESS: Loss reserves I ........ ..............
Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment account ............ . ..... ...... .
Debt ..... ...... ..... ............... ....
U.S. Treasury .. ......................
U.S. government agency and
corporation obligations ...........
Government-backed mortgage pools .
CollateraUzed mongage obligations
Other .. ...... ................ .. ....
Slate and local government . . . . . . . . . . .
Private mongage-backed securities
Other .... ........................... .
Equity ......... ....... ......... ..... . ...
Trading account . . ................... . . . . ..
Gross federal funds sold aud reverse RPs .. . ..
Interest-bearing balances at depositories . . ....
Non-interest-earning assets ... . ...... .. .........
Revaluation gains held in trading accounts ... .
Other ......... .............. ........ .. ......

15.51
2.90
12.60
1.16
6.99
.09

88.34
60.00
13.27
12.94
.33
12.79
6.56
6.22
28.94
28.88
3.36
.22
17.05
3.92
13.13
1.20
7.05
.06

88. 10
59.48
11.96
11.66
.30
12.57
6.35
6.21
30.67
30.54
3.22
.20
18.79
4.74
14.05
1.32
7.00
.13

88. 18
60.63
11.90
11.64
.26
12.74
6.90
5.83
32.16
31.96
3.51
.19
19.52
5.90
13.62
1.34
7.41
.20

87.87
63.37
12. 17
11.91
.27
12.84
7.45
5.39
34.89
34.73
4.21
. 19
21.05
6.04
15.01
1.45
7.83
.16

87.05
62.77
12.13
11.81
.32
11.94
7.12
4.82
35.23
35.03
5.27
.17
20.27
5.01
15.26
1.45
7.86
.21

87.01
60.99
12.74
12.41
.33
9.99
5.29
4.70
33.53
33.34
5.95
.21
17.80
4 .01
13.79
1.26
8.13
.18

-1.12
17.32
16.10
15.50
1.12

1.40
.03
.32
2.03
3.18
-.02
-1.13
19.00
17.71
17.32
.67

1.44
.02
.27
1.80
2.65
-.02
-1.17
20.30
19.17
18.82
.74

1.21
.02
.23
1.59
2.35
- .02
-1.10
21.16
20.09
19.88
.95

.54
.01
.19
1.87
2.30
-.02
-1 .06
21.28
20. 12
19.96
.89

.56
.02
.19
1.62
2.07
- .01
- .97
19.96
18.80
18.69
.60

.45
.01
. 18
1.88
1.83
- .01
- .87
19.22
17.72
17.60
.44

1.05
.01
.21
2.43
1.80
-.01
-.75
19.89
17.99
17.88
.38

.96
1.53
.55
.54
3.57
3.24
12. 15
.75
11.40

10.57
5.12
2.89
2.56
.99
1.33
2.03
.65
.51
3.34
3.06
11.60
.56
11.04

9.70
4.31
2.55
2.84
.96
1.66
2.06
.60
1.22
3.76
2.71
11.33
.40
10.92

10.09
5.19
2.42
2.48
.99
2.01
3.56
.39
1.29
4.06
2.88
11.91
.55
11.37

11.45
6.00
2.79
2.65
.97
2.13
3.53
.34
1.13
4.71
3.33
11.66
.47
11.19

12.99
6.08
3.72
3.19
.95
2. 14
2.85
.2 1
1.07
4.20
3.26
11.90
.60
11.30

12.80
5.74
3.42
3.64
.96
2.65
2.66
.16
1.16
2.98
3.29
11.82
.42
11.40

11.62
4.83
3.39
3.40
.98
3.58
1.90
. 11
1.16
2.30
2.24
12.13
.33
11.80

10.07
4.04
2.94
3.10
1.01
4.29
1.78
.12
1.50
2.84
2.22
12.95
.30
12.65

9.06
3.73
2.68
2.65
1.16
4.60
2.67
.12
1.90
3.41
2.72
12.99
.48
12.51

Liabilities ... ......... ..... .... ..... ...........
Core deposits ..... ...... ..... .... ... ... ....
Transaction deposits ................. .... ..
Demand deposits ................ .......
Other checkable deposits ....... .. .......
Savings deposits (including MMDAs) ..... .
Small time deposits ..................... . .
Managed liabilities 2. . ........................ ,
Large Ume dePOSIlS ... . ...................
Deposits booked in foreign offices
Subordinated notes and debentures ... . . . ...
Gross federal funds purchased and RPs ...
Other managed liabilities ..... . ............
Revaluation losses held in trading accounts ...
Other .. . ...... ... . . . . . . . . . . . . . . . . . . . . .

91.63
49.89
14.15
12.39
1.75
22.51
13.24
38.11
7.83
8.37
1.66
9.48
10.77
.76
2.87

91.66
48.33
12.12
10.52
1.60
23.89
12.31
39.85
8. 17
8.20
1.71
9.78
11.99
.58
2.91

91.57
46.28
9.93
8.61
1.32
24.02
12.33
41.98
9.54
7.56
1.54
9 .28
14.07
.41
2.91

91.15
46.28
8.37
7.17
1.20
26.62
11.28
40.81
9.72
7.05
1.53
9.71
12.79
.52
3.54

90.79
47.07
7.49
6.32
1.17
30.07
9.51
39.48
8.99
6.28
1.44
9.66
13.11
.44
3.80

90.65
47.93
7.29
5.96
1.33
32.34
8.30
38.12
8.20
6.54
1.38
9.69
12.30
.56
4.05

89.87
46.55
7.06
5.65
1.41
31.75
7.74
39.29
8.76
7.21
1.39
8.95
12.97
.40
3.64

88.86
48.18
6.64
5.35
1.29
33.33
8.20
37 .04
10.10
6.02
1.31
7 .17
12.44
.34
3.30

88.08
46.84
5.74
4.54
1.20
32.66
8.44
37.60
11.44
6.43
1.32
6.74
11.66
.29
3.35

88.40
47.44
5. 15
3.90
1.25
32.99
9.30
37 .02
10.20
8.52
1.40
6.79
10.10
.47
3.48

Capital account . . .. .. ... ...... ..... . . ..... .....

8.37

8.34

8.43

8.85

9.21

9.35

10.13

11.14

11.92

11.60

10. 11
.04
8.76

11.00
.03
9.34

12.06
.04
9.63
4.07

12.24
.05
10.93
4.85

12.10
.06
11.93
4.75

12.85
.05
11.81
4.65

13.93
.04
11.81
5. 19

15.05
.05
11.27
5.54

15.95
.06
11.01
5.35

2. 130

2.124

2.287

2.376

2.403

2.579

2.798

MEMO
Commercial real estate loans 3 . . . . . . . . . . .
Other real estate owned4 . . . . . . . . . . . . . . . . .
Mongage-backed securities . ........ . .. • ....
Federal Home Loan Bank advances ... ...
Avemge net consoUdated assets
(billions of dollars) .. ............

87.85
64.37
18.92
17.59
1.33
14.52
7.67
6.86
24.59
24.42
2.03
.17
14.86
2.17
12.69
1.00
6.36
.18

88.40
64.22
19.39
18.17
1.22
13.58
6.79
6.79
24.79
24.61
2.44
.19
14. 14
2.08
12.06
1.02
6.81
.19

88.67
64.88
18. 19
17.64
.55
13.79
6.97
6.82
26.21
26.12
3.00
.22
14.51
2.49
12.02
1.11
7.28
.09

88.09
62.14
15.84
15.36
.48
13.20
7.05
6.15
27.29
27.21
3.31

1.09
.06
.33
3.35
2.71
-.04
-1.16
16.66
16.13
15.58
2.25

.93
.06
.33
2.99
3.28
- .04
-1.11
17.78
17.27
16.62
1.70

1.05
.03
.37
2.57
3.82

9.93
4.98
2.83
2.12

.92

-.03

n.a.

12.06
.03
8.52
n.a.

1.745

1.879

2.031

.23

A34

Federal Reserve Bulletin 0 June 2008

A. L Portfolio l:omposilion . intcrc 'l rates, and income and expense,

.S. banks. 1998- 2007- Collfinued

C. Banks ranked II throu gh 100 by assets-Continued
I

1998

Item

,
I

1999

2000

2001

2002

2003

2004

I 2005 I 2006 I 2007

Effective inlerest rate (percent)'

Rates earned
Interest-earning assets ..... ...... .... .. .... .... .
Taxable equivalent .. .. .. ... . ... ... ... .. .
Loans and leases, gross . . ... .. . ..... . , .......
Net of loss provisions . . ... .... ... .... . .
Securities ... , ... ... .......... ..... .... .. ....
Taxable equivalent . ..... .. . ... . ... . .... .
Investment account · . . . . . . . . . . . . . . . . . . . .. .
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ... ...... ..... .......
Mongage-backed securities .. . ..... . . . . . .
Other
.. .... ...... ... . .... ... . .

8.12
8. 16
8.81
8.14
6.31
6.46
6.33

7.90
7.94
8.56
7.86
6.41
6.55
6.43

8.44
8.48
9. 14
8.25
6.64
6.77
6.66

7.54
7.58
8.26
6.96
5.96
6.08
604

6.03
6.07
6.80
5.59
4.79
4.91
4.86

5.30
5.33
6.11
5.11
3.80
3.90
3.87

5.21
5.24
5.98
5.19
3.63
3.73
3.64

5.98
6.02
6.61
5.89
4.18
4.29
4.11

6.93
6.97
7.58
7.04
4.99
5.10
4.84

6.87
6.9 1
7.45
6.64
5.25
5.37
5.18

n.a.
n.a.
n.a .
5.62
5. 13
4.82

n.a.

Interest-bearing balances at depositories .. ....

n.a .
n.a.
n.a.
5.86
5.46
5.67

n.a.
n.a.
6.25
6.06
5.49

5.83
6.60
5.13
4.83
3.86
4.38

4.28
5.34
4.22
3.59
1.68
2.46

3. 17
4.20
3.61
2.56
1.14
1.93

2.94
4.02
3.29
3.39
1.25
2.27

3.47
4.34
4.06
5.30
3.24
3.20

4.28
5.02
4.87
6.74
4.96
4.24

4.85
5.23
5.28
5.94
5. 12
4.84

Rates paid
Interest-bearing liabilities ....... . ... ... .. .. .. ...
Interest-bearing deposits .. .. ......... ........
In foreign offices .. . ... . . . . . .... ..... ......
In domestic offices · . . . . .. . . . . . . . . . . ... . ...
Other checkable deposits .. .... ........ ..
Saving~ deposits !in,fluding MMDAs) . . ..
Large time dePOSitS ... . . ...... .... .....
Other time deposits· ... .. ....... .. . .. . . .
Gross federal funds purchased and RPs .. . .. . .
Other inlerest-bearing tiabilities . . . . .. . . ..... .

4.55
4. 15
5.22
3.96
2.41
2.76
5.32
5.35
5.22
5.75

4.23
3.80
4.71
3.64
2.06
2.51
5.00
5.08
4.91
5.44

4.97
4.42
5.38
4.26
2.57
2.94
5.88
5.73
6.02
6.25

3.94
3.60
3.67
3.60
2.32
2.30
5.11
5.42
3.86
5.29

2.22
1.96
1.70
1.99
.94
1.08
3.37
3.68
1.73
3.65

1.61
1.35
1.23
1.36
.64
.66
2.70
2.95
1.20
3.04

1.56
1.29
1.42
1.27
.72
.65

2.44
2.03
2.76
1.95
1.29
1.30
3.31
3.03
3.04
3.81

3.48
3.07
4. 10
2.95
2. 12
2.14

3.72
3.33
4.01
3.22
2.60
2.44
4.46
4.74
4.71
5.25

G~~d;Je:~cfu~J; ~~id·~d· ;.;~~~~~ 'RP~'::: : :

2A9

2.58
1.37
2.77

4A5

4.09
4.46
4.90

Income and expense as a percentage of average net consolidated assets
Gross interest income . ..... ... . ... . .. . . . . .. ..
Taxable equivalent .. .. . . . .. .. ... ... . ... .. .
Loans ..... . . . . .... ... .. . .. ..... . ... . ........
..... ... ... ... .. ........ . .. . .. . .
Securities
Gross federal funds sold and reverse RPs . . .. .
Other ...... .. . ....... .. . ... .......... .. .....
Gross inlerest expense .. .. ... , .... ... ........ ..
Deposits ..... .... ........ ... .. ..... ...... ...
Gross federal funds purchased and RPs ...... .
Other ........... ......... .. ......... .... .. ..
Net interest income ..... ...... .... .... ... . .....
Taxable equivalent · , . . . . . . , . , . . . . . , . . , ' , .

Loss provisions 1

.. . " . , ...... . .. . . " . "
Non-interest income ... . . . , . , .. , . .... . . " . .... .
Service charges on deposits ... .... .. ...... . ..
Fiduciary activities . ... ... . , ' , . . ... . . . . . . .. ..
Trading revenue . . . .. , . ... , . . . , .... , ..... ....
Inlerest rale exposures . .. . . .. .. .. . ..... ...
Foreign exchange rate e xposures ....... .. . .
Other commodity and equity exposures ... . .
Other .................. .. .. .. .. . ....... .. ...
Non-inlerest expense .... .... .. . .. ... ... . , .... . .
Salaries. wages, and employee benefits . ... . . ,
Occupancy ... . . .. ,. , ... ,. .. .. , . " .. .. . , ', ...
Other ...... .... . . . , . , . , . . . . . . . . , . . . . . . . . . , .
Net non-inlerest expense ... . . ..... . . .. .. . ... .. .
Gains on investment account securities ... . . . .. . .
Income before taxes and extraordinary ilems . . ,.
Taxes .. . . . .. .. , ' .... . . .. . , ... ... . . . . , . . . . . . .
Extraordinary items, net of income taxes .. . . .
Net income ..... ..... ...... .... ..... ... . . .. .. ..
Cash dividends declared . , . . . . . . . . . ... .... . . . .
Retained income .. ... . . .. ... ... ........ .. .. .
MEMO: Return on equity .. . . . . . . . . . . . , . . . . . , . . .
. . .. . . . . .

7.15
7.19
5.78
1.00
.19
.18
3.45
2.23
.51
.71
3.70
3.73
.53
3.09
.42
.49
.09
.03
.06

7.03
7.07
5.60
1.11
.18
.14
3.29
2.04
.51
.74
3.75
3.78
.55
3.38
.42
.48
.08
.02
.05

7.54
7.57
6.05
1.09

2.09
4.05
1.53
.46
2.06
.95

2.40
4.15
1.54
.46
2.16
.77
- .01
2.42
.87

•

.oJ
2.24
.78

•

1.45
.96
.49
17.37

5.31
5.34
4.15
.90
.08
. 18
1.77
1.09
.17
.51
3.54
3.57
.80
3.30
.42

2. 18
4.00
1.44
.43
2.14
.82
-.05
2.02
.70

2.43
3.95
1.47
.42
2.07
.60
.09
2.14
.74

2.37
3.73
1.49
.40
1.84
.43
.10
2.41
.82

.22

•

1.55
1.17
.38
18.59

.18
3.96
2.41
.56
.99
3.58
3.61
.68
3.18
.42
.52
.07
.02
.04

6.70
6.73
5.28
1.06
.15
.21
3.14
2.01
.38
.75
3.56
3.59
.91
3.35
.42
.42
.08
.04
.03

•

1.32
.94
.38
15.72

NOTE: Data are as of April 16, 2008 .
I . Includes allocated transfer risk reserve.
2. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offi ces, subordinated noleS and debe ntures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of constructi on and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidenti al properties or
by multifamily residential properties; and loans to finance commercial real estate, construction, and land development activities not secured by real estate .
4. Other real estale owned is a component of other non-interest-earning
assets.

•

1.39
.96
.43
15.74

.08
.04
.04

•

1.59
.99
.60
17.24

4.67
4.70
3.72
.75
.04
.15
1.30
.77
.12
.41
3.37
3.40
.67
3.29

.37
.08
.04
.04
.01
2.41
3.64
1.47

1.76
.35
.06
2.42
.82

•

1.59
1.05
.54
17.Q3

4.63
4.65
3.71
.73
.03
.15
1.26
.74
.13
.40
3.36
3.39
.55
3.09
.40
.42
.07
- .01
.05
.oJ
2.20
3.55
1.45
.39
1.70
.45
.03
2.39
.82

•

1.57
.95
.62
15.54

5.28
5.31
4.27
.77
.06
.18
1.94
1.18
.23
.53
3.34
3.37
.52
2.81
.37
.35
.06
- .01
.04
.02
2.03
3.36
1.37
.37
1.62
.55

•
2.27
.77

.01
1.50
1.00
.50
13.48

6.08
6.11
4.85
.87
.13
.23
2.78
1.84
.30
.63
3.30
3.33
.41
2.91
.35
AI
.07
.02
.05
- .01
2.09
3.34
1.34
.33
1.68
.43
-.03
2.43
.83
.07
1.67
1.37
.30
14.05

5.99
6.02
4.60
.93
.17
.29
2.96
2.04
.32
.59
3.03
3.06
.55
2.73
.33
.54
.09

•
.08
•

1.77
3.45
1.32
.34
1.79
.71
- .05
1.71
.59
-.05
1.06
1.26
-.20
9.16

5. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Repon.
6. Before 1997, large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocated transfer ri sk.
* In absolute value, less than 0.005 percent.
n.a. Not available .
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mon gage-backed securities .

Profits and Balance Sheet Developments at U.S. Comm ercial Banks in 2007

A. 1. Ponfolio composition, illleres! rales . and income and expense.

A35

.5. ba nks . (91)8- 2007

D. Banks ranked 101 rnrough 1,000 by assets
I

hem

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Bal8J)ce sheet items as a percentage of average net consolidated assets
Interest-earning assets ...... . .. . . . . . .... .. . . . . ..
Loans and leases (net) . . .. .... . . . . .... .... .
Commercial and industrial . . . .. . . . • .... ..
U.S. addressees . .. .. .. . . . .. . .. . ..... ..
Foreign addressees . .. . .... .. .. .. ..... ..
Consumer
... . .. . . . . . . .... . . ....
Credit card .. .. ....... .. . ..... .... .. .. ..
Installment and orner .. ... ... . .. .. .. .....
Real estale . .. .. .......... . . . ...... .... ....
In domestic offices ... .. .. . .. ..... . . ...
Construction and land development ... .
Farmland .... ..... ...... .... ........ .
One- to four-family residential . . . .. ..
Home equity ...... .... ..... ... ... ..
Other .. ..... ...... .... ....... ......
Multifamily residential .... . .• .. ... ' . . .
Nonfarm nonresidential . ... . . . . .... . •.
In foreign offices ... . ... . . .. .......
To depository institutions and
acceptances of other banks . .. ... ... .. .
Foreign governments ... . . .... .. . .. . ... ..
Agricultural production ... .. ..... .. ...... .
Orner loans . . . . . ... . .. . . .. . ... ....... ... .
Lease-financing receivables . .... .... .... . ..
LESS: Unearned income 011 loans . . . ...... . .
LESS: Loss reserves I . . . . . . . . . . . . . . . . . . . . .
Securities .... ...... ... ............. ... ......
Investment account .. ....... .. . . ... .. ......
Debt ..... ....... .... .... ... ... .. .......
U.S. Treasury
. . . .. . , . . . . . . . .
U.S. government agency and
corporation obligations . . . . .. .. .. .
Government-backed mortgage pools.
Collateralized mongage obligations
Other ... .. . . . . .. . . . . .. . . ... .. . ... ..
State and local government .. ..... ....
Private mongage-backed securities ... .
Other .. .. ... .... ....... ...... . .. . ....
Equity . . . .... .. . .... ..... .... . . .. .. .... .
Trading account .... ... . .. .. .. . .... . . . .... .
Gross federal funds sold and reverse RPs .. ...
Interest-bearing balances at depositories ... ...
Non-interest-earning asselS . . ..... ...... .. .. ....
Revaluation gains held in trading accounts . . . .
Orner .. . . . . . . . ...... .... . . ... . . .. . .. .. . .. . .

91.38
61.23
12.45
12.12
.32
12.56
4.78
7.78
33.83
33.81
2.87
.56
18.14
2.14
16.00
1.25
10.99
.02

91.68
61.48
12.66
12.34
.32
10.77
3.37
7.41
35.89
35.87
3.48
.58
18.26
1.99
16.26
1.44
12.11
.02

91.50
62.15
12.95
12.60
.36
10. 19
3.27
6.92
36.93
36.91
4.15
.65
17. 17
2. 10
15.06
1.58
13.36
.02

91.16
62.46
13 .03
12.65
.38
9.76
3.65
6.11
37.64
37.62
4.90
.66
16.18
2.21
13.97
1.69
14. 18
.02

91.36
61.46
12.38
12.06
.31
8. 13
2.63
5.50
38.93
38.90
5.40
.73
15.39
2.51
12.88
1.83
15.55
.03

91.34
61.32
11.51
11.20
.31
6.76
1.79
4.97
40.97
40.93
5.90
.80
15.71
2.92
12.79
2.00
16.52
.05

91.56
63 .33
11.52
11.21
.31
6.33
1.91
4.42
43 .38
43 .32
7.01
.91
15.33
3.46
11.87
2.24
17.82
.06

.52
.03
.80
1.30
.99
-.09
-1.15
24. 19
24.08
23.39
3.91

.46
.03
.78
1.25
.78
-.08
-1.06
25. 18
25.10
24.34
2.53

.37
.03
.82
1.22
.75
-.08
-1.04
24.34
24.25
23.46
1.81

.38
.03
.85
1.22
.74
-.07
-1.12
22.81
22.70
22.27
1.32

.37
.02
.86
1.18
.75
-.06
-1.09
23 .85
23 .80
23.30
1.23

.37
.02
.83
1.25
.67
- .06
-1.02
24.37
24.23
23.80
1.00

.25
.01
.82
1.32
.75
-.06
- .98
23.59
23 .54
23. 18
1.02

.81
1.36
.75
-.06
-.90
21.59
21.51
21.22
.83

.84
1.20
.75
-.06
- .88
19.55
19.47
19.20
.59

.88
1.22
.65
-.06
-.91
18.30
18. 10
17.69
.47

15.08
6.45
3.21
5.43
2.69
.65
1.06
.69
. 11
4. 16
1.80
8.62

15.56
6.22
3.04
6.30
2.91
.99
2. 19
.80
.09
3.40
1.60
8.50
.02
8,49

14.70
6.27
3.08
5.35
2.90
.94
2.42
.43
. 11
4.20
1.68
8.84
.01
8.84

15.85
6.56
3.69
5.60
2.89
.99
2.34
.50
.05
4. 15
1.89
8.64
.01
8.64

16.96
7.03
3.69
6.24
2.95
.87
2.01
,43
.14
3.85
1.80
8.66

16.70
6.80
3.41
6.49
2.92
1.08
1.46
.36
.05
2.95
1.69
8.44

15.06
5.73
3. 16
6.17
2.79
1.17
1.37
.29
.08
2.82
1.76
8.69

8.62

16.28
6.72
3.52
6.04
2.90
1.03
1.60
.77
.08
3.35
1.68
8.32
.01
8.31

8.66

8.44

13.55
4 .83
2.81
5.90
2.74
1.08
1.24
.27
.07
2.81
1.67
8.93
.03
8.90

12.32
4.57
2.60
5.15
2.77
1.01
1.12
,41
.20
2.57
1.57
8.71
.04
8.67

Liabilities . . . . . . . . . . . . ................... ..
Core deposits ...... ..... . . .... ..... . . .. .. .. .
Transaction deposits .. .. ..... ... ... .. .. ....
Demand deposits ..... ..... ...... .... . ..
Orner checkable deposits ... . .. . . .. ... . .
Savings deposits (including MMDAs) ... . . .
Small time deposits .. . . . .. . . .. .... . ... ...
Managed liabilities 2 .... .. .. .. ......... ... . ..
Large time deposits ... . . ..... . ... . .. ..... .
Deposits booked in foreign offices . ........
Subordinated notes and debentures . . .. .. . ..
Gross federal funds purchased and RPs .....
Other managed liabilities .. ... ... .. .... ....
Revaluation losses held in trading accounts ...
., ... , ..
Orner .... ....... .. .. .. .. .....

90.55
63.87
16.08
11.87
4 .22
26,43
21.36
24.65
10.09
1.31
.37
6. 15
6.73
.01
2.02

90.90
62 .48
13.93
10. 19
3.75
28.56
19.98
26.33
10.29
1.20
.35
6.90
7.58
.01
2.09

90.95
60.80
12.29
8.97
3.32
28.55
19.96
28.01
11.98
1.28
.30
6.30
8. 15

90.32
60.34
11.48
8.23
3.25
29.40
19.46
27.75
12.60
1.24
.31
5.76
7.84

89.69
61.33
11.51
7.97
3.54
34.02
15.80
26.38
11 .90
.64
.35
5.36
8.13

89. 18
60.40
11.77
8.13
3.64
34,42
14.20
26.98
12.12
.65
.35
5.52
8.34

2. 13

2.23

89.93
61.27
11.37
8.05
3.32
32.34
17.55
26.57
12.16
.88
.34
5.27
7.90
.01
2.08

1.98

1.81

1.66

89.01
58.04
9.81
6.99
2.83
32.82
15.41
29.32
15.21
.52
.24
5.40
7.94
.01
1.64

88.86
59.68
8.43
5.94
2,49
32.89
18.36
27.51
14,42
.57
.22
5.33
6.97
.01
1.66

Capital account .. . .. .. .. . .. . ... .. . ... . . ..... .. .

9.45

9. 10

9.05

9.68

10.07

10.31

10.82

10.89

10.99

11.14

15.33
.09
10.31
n.a.

17.27
.08
11.27
n.a.

19.32
.07
10.25
n.a.

21.03
.08
10.29
5.27

23.06
. 10
11.24
5.71

24.64
.11
11.60
6.29

27.28
. 10
11.29
6.46

29.85
.08
10.07
6.43

32.22
.08
8.72
6. 11

34.52
.11
8. 18
5.53

938

974

987

1,002

1,022

1.072

1,080

1.152

1.249

1.267

.
.

MEMO
Commercial real estate loans3 ... . . . . . " . .. . .. .
Orner real estate owned" . .... . . ..... . . . .. . . ..
Mongage-backed securities .... ....... . . . .. . , .. .
Federal Home Loan Bank advances . . . .. ... .. .
Average net consolidated assets
(billions of dollars) .. .. ...... . .... ..... ...

•

.01

•

91.31
65. 15
11.79
11.49
.30
5.38
1.20
4.18
45.88
45.81
8.87
.99
15.18
3.61
11.57
2.37
18.40
.08
. 13

•

8.68

89. 11
59.07
11.16
7.87
3.28
33.77
14. 14
28.38
13.64
.57
.27
5.55
8.35

91.07
67.04
11.68
11.45
.23
5.50
1.63
3.87
47.88
47.78
11.01
1.07
14.76
3.25
11.51
2.32
18.63
. 10
. 14

•

91.29
68.85
12.08
11.80
.27
5.35
1.88
3.46
49.49
49.40
12.85
1.16
14.08
3.01
11.07
2.33
18.98
.09
. 14

•

A36

Federal Reserve Bulletin 0 June 2008

. b,mks, 1998-2007-Colllillued

A. 1. Portfolio compo ' ili( n. interest rales. and income and expense,
D. Banks ranked 101 through 1,000 by as sets-Continl/ed
,h em

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Effective interest rate (percent)'

Rutes enrned
Interest-earning assets ..... ... .... .. ... .. . ... .. .
Taxable equivalent ..... . . . ... .. ...... .. .
Loans and leases, gross .. ... . . . . .. ..... .. ... .
Net of loss provisions ....... .. .. ... .... .
Securities . .......... .... .......... . .. .... .
Taxable equivalent ...... . . ... ... . . ... .. .
Investment account ... ...... ..... .. .. . .... .
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ... .. .... .. .. .. .. .. ..
Mortgage-backed securities .. .. .. .. .. ... .
Other ..... . .. . . . .... .. ... . . ... . . ..... . .
Trading account ... . . .... ... . . ......... . .. .
Gross federal funds sold and reverse RPs .. . . .
Interest-bearing balances at depositories . .. . .

7.83
7.92
8.74
8.26
6.04
6.29
6.03

8.48
8.56
9.42
8.75
6.45
6.71
6.45

7.85
7 .94
8.76
7.87
5.96
6.24
5.96

6.42
6.50
7.30
6.55
4 .95
5.21
4.92

5.58
5.66
6.55
6.00
3.81
4.06
3. 82

5.46
5.53
6.25
5.87
3.79
4 .04
3.78

6 . 11
6. 18
6.89
6.63
4.03
4.28
4.02

7.01
7.08
7.79
7.54
4.53
4 .80
4.53

7.32
7.39
8.02
7.47
4 .86
5. 14
4.86

n.a.
n.a.
n.a.

n.a.
n.a.

n.a.

6.84
5.77

7.33
4 .98
5.07

n.a.
n.a.
9 .30
6.15
5.76

5.85
6.33
5.40
6.60
3.91
3.93

4.54
5.38
4.50
14.05
1.73
1.79

3.42
3.95
4.07
3.07
1.27
1.26

3.15
4.01
4.21
10.30
1.57
1.47

3.47
4.23
4.42
6.59
3.31
3.29

4 .19
4.64
4.81
4.92
4.94
4 .58

4.74
4.96
4.81
5.25
5.07
4.94

4.50
4.28
5.55
4.25
2.15
2.96
5.51
5.64
5.13
5.93

4.09
3.84
5.07
3.82
1.99
2.65
5. 17
5. 11
4.82
5.47

4.79
4.46
6.13
4.43
2.27
3.07
6.00
5.74
5.95
6.46

3.97
3.81
4.27
3.81
1.81
2.22
5.27
5.51
3.82
5.32

2.44

1.79
1.60
1.43
1.60
.74
.76
2.57
2.86
1.29
3.57

1.65
1.44
1.43
1.44
.72
.74
2.33
2.51
1.45
3.37

2.36
2.09
3.05
2.08

3.38
3. 11
4.50
3. 10
1.74
2 .06
4.41
4. 19
4 .52
4.75

3.79
3.59
4.63
3.58
1.89
2.38
4.91
4.83
4 .62
5.04

.05
.05

5.57
5.63
4.55
.86
.09
.07

6.40
6.46
5.29
.89
.14
.09

6.68
6.74
5.58
.88
. 13
.09

8.38
8.47
9.41

8.78
6.30
6.57
6.30

5.31

n.a.

ROles paid

Interest-bearing liabilities .... . .... •. ..... . . .... .
Interest-bearing deposits ... .. .. .. . . . . .. . .. .. .
In foreign offices ...... ..... ... .. . . .... .. . .
In domestic offices . . . ... . . ... . ... .. . .... . .
Other checkable deposits . . .. ..... ... . .. .
Saving~ deposits ~in6cluding MMDAs) .. . .
Large ume depoSIts ... .. . . ...... . ... .. .
Other time deposits" ... .... .. .. .. ... ... .
Gross federal funds purchased and RPs . . . . .. .
Other interest-bearing liabilities ..... .... . . . . .

2.27
2. 14
2.28
1.06

1.17
3.32
3.77
1.83
4.22

1.18
1.27
3.21
3.10
2.94
4.02

r----------------------------------------------------------------Income and expense as a perce ntage of average net consolidated assets

Gross interest income .... . ... . .. •• ..... . • _... . .
Taxable equivalent .... ... ...... . ......... .
Loans ... ... ........ . . . . . ....... . . .. . .. . . . . . .
Securities ......... .. ....... .... . . ... . . . ... . .
Gross federal funds sold and reverse RPs ... . .
Other .. . ........ . ...... . ...... . ............ .

7.66
7.74
5.89
1.50
.22
.06

7. 19
7.27
5.47
1.51
.17

.04

7.79
7 .86
5.96
1.58
.21
.04

7. 16
7.24
5.59
1.33
. 16
.08

Gross interest expense . ....... .. .. .. ... . . . .. .. .
Deposits . ........ . . . ...... ... .. . ... . . . ..... .
Gross federal funds purchased and RPs . . . .. . .
Other ......... . .... .. ........ .... ........ . ..

3.44
2.70
.32
.42

3.20
2.44
.34
.42

3.79
2.87
.38
.54

3. 14
2.48

Net interest income . ........... . . . ........ ... . .
Taxable equivalent . .. . . .... . ... ..... .... ..

4.21
4.29

3.99
4.07

4.00
4.07

.... . . .. ... . ... .. • . .. . .. • . • . . . .

.49

Non-interest income ..... ....... .... .. .. . .. . .. .
Service charges on deposits ... .. ... .. ..... . . .
Fiduciary activities ............ . .. .. • ..... . ..
Trading revenue . .... ...... ..... ...... .. .. . ..
Interest rate exposures ...... ... . .. ... ..... .
Foreign exchange rate exposures ... . . . . . . . .
Other commodity and equity exposures . .. . .
Other .. . ... .. . .... ......... ... ........ .... .
Non-interest expense .. . . . . . . . ... . . . . . . . . . . . . . .
Salaries, wages, and employee benefits .... . . .
Occupancy ... . . . .. . .. ... .. ...... ...... ..... .
Other .... . ... ... .. . .... ... ....... .. .... ... ..

2.26

.39
2.31
.38
.38
.02
.01

.52
2.35
.36
.44
.01
.01

2.37
.39
.40

Loss provisions 7

.39
.37
.02
.01
1.49

•

1.53

1.55
3.84
1.59
.47

5.84

5.07

5.91
4.56

5. 14
4.06
.91
.05
.05

1.15
.07
.06

4.99
5.06
4.01

.88

1.41

1.29

1.84

1.04

.92

.44

1.92
1.49
.09
.34

.07
.30

.08
.29

1.34
. 16
.34

2.67
2 .04
.24
.39

3.01
2.41
.25
.36

4.02
4 . 10

3.92
3.99

3.66
3.73

3.70
3.77

3.72
3.79

3.73
3.79

3.67
3.73

.65

.54
2.37
.41
.35

.40
2.30
.41
.34
.01
.01

.30
2.26
.39
.37
.01
.01

.23
2.01
.36
.35
.01
.01

.23
1.98
.35
.30
.01

.45
1.88
.36
.31
.01

1.29
3.37
1.61
.41
1.35

1.32
3.35
1.59
.40
1.35

1.20
3.26
1.57
.40
1.28

.22

-.01

•

•
•

•

1.60

1.54

3.88
1.61
.46
1.8 1

3.72
1.64
.45
1.63

3.59
1.64
.43
1.52

3.54

1.58

•

•
•

1.49

3.86
1.56
.47
1.83

3.70
1.56
.47
1.68

1.60
.04

1.39
- .01

1.48
-.04

1.52

1.35

1.29

1.36

1.38

.05

.04

.05

.02

- .01

2. 19
.74
.01

1.96
.67

1.90

2.07

.66
.01

.67

2.02
.66
.03

2. 13
.68

2 . 12
.69

1.83
.58

Net income . . ... .. . . . .... . ...... .. . . . ... .. . ... .
Cash dividends declared ........... _....... ..
Retained income . ... ... ... ...... ... . .. . .... .

2. 16
.74
.06
1.47
1.01
.46

- .01
2.12
.68

1.46
1.06
.40

1.29
.92
.37

1.25
1.33

1.39

1.39
1.64

1.45

1.19

.78

1.45
.86

- .08

-.25

.58

15.60

16.10

14.21

12.94

13.48

.68
13.42

1.25
.91
.34

MEMO: Return on equity .. .. ....... ..... .. ... . .

.20
13.83

1.43
.89
.54

13.30

13.03

11.21

Net non-interest expense ...... . ... .... ....... ..
Gains on investment account securities .. .. .. . . . .
Income before taxes and extraordinary items .. . .
Taxes . ... .... . ... . ... . .......
. .. .. ... . .
Extraordinary items. net of income taxes . ... .

1.78

NOTE: Data are as of April 16, 2008.
I. Includes allocated transfer risk reserve.
2. Measured as the sum of large time depos it~ in domestic offices, deposits
booked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under re purchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land de velopment loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties or
by multifamily residential properties ; and loans to finance commerci al real estate, construction, and land development activities not secured by real estate .
4 . Other real estate owned is a component of other non-interest-earning
assets.

1.64
.43
1.47

5. Wllen possible, based on the average of quarterl y balance sheet data re-ported on schedule RC-K of the quarterly Call Report .
6. Befo re 1997, large time deposit open accounts were inc luded in other
time deposits.
7. Includes provisions for allocated transfer ri sk.
• In absolute value , less than 0 .005 percent .
n.a. Not avail able.
MMDA Money market deposit account .
RP Repurchase agreement.
MBS Mortgage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

A. I. Portfolio

t:() m pO~ilion,

inlerest

rates,

A37

and income and expense. U.S. banks, 1998- 2007

E. Banks not ranked amoog the 1,000 largest by asse ts
Item

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

Balance sheet items as a percentage of average net consolidated assets
lnterest-earning assets . . . . . ... . .. .. . . . .. ... . ..
Loans and leases (net) .. . ... . . . ....... ... ..
Commercial and industrial. . .. . . _... .
U.S. addressees . . . . . . ... .. . .. .. ...... .
Foreign addressees . ... ....... . .. ... . . ..
Consumer
.... .. .... .. .....
. .. ..
Credit card . ...... ..... .. . ........ .... .
Installment and other ... . .. .... _... . .... .
Real estate . . .. . . . . . . . . . . . ... . .. ... ...... .
In domestic offices . .... ...... .. . . ...... .
Construction and land development ... .
Farmland ... . . . . . . ... .... ...... . . ... .
One- to four-family residential
Home equity .. .... ....... ... .... . ..
Other .... .. . .. ..... ....... .. .... . .
Multifamily residential .. ... . . . . .. . . .. .
Nonfarm nonresidential .. .. . •. ... .. . . .
In foreign offices .... . ... . . . .... . ...... .
To depository institutions and
acceptances of other banks .... ....... .
Foreign governments . ........ .... ...... .. .
Agricultural production ...... . . . . . ........ .
Other loalls . .... ... .. . .. ... .... . .. ..... .. .
Lease-financing recei vables .. . ..... .... . . .
LESS: Unearned income on loans ... . .. .... .
LESS: Loss reserves I .... .... ...... ...... ..
Securities ... ............ . ............ .. ... .
Investment account ....... .. . ... ... . . ... . ..
Debt ....... .. ........... . ...... .. ..... .
U.S. Treasury .... . .... .. ... ... ...... .
U.S. government agency and
corporation obligations .... .. . ... .
Government-backed mortgage pools.
Collateralized mortgage obligations
Other .. . ......... . ...... ... ....... .
State and local government . . . . . ..... .
Private mortgage-backed securities ... .
Other ...... ... ........ .. ..... .. . . . . . .
Equity ....................... ..... ..... .
Trading account ...... ..... . . ... .... ...... .
Gross fede ral funds sold and reverse RPs ... . .
Interest-bearing balances at depositories . .. .. .
Non-interest-earning assets ........ . .... . . . . . .. .
Revaluation gains held in trading accounts ..
Other .. ..... .... ....... ...... .... .. .... .

92.64
59.11
10.33
10.25
.08
8.46
.70
7.76
36.04
36.04
3.02
2.83
18.04
1.21
16.83
.93
11.22

92.55
59.76
10.64
10.55

.14

.14
.01
4.06
.67
.26
- . 15
- .87
26.91
26.88
26.34
3.34

. 12
.01
3.85
.69
.27
-.tl
- .88
25.40
25.38
24.82
2.12

16.89
3.95
2.00
10.93
4.96
.26
.89
.53
.03
4. 17
1.71
7.45

16.95
3.47
1.70
11.78
4.64
.23
.88
.56
.02
3.22
1.59
7.48

Liabilities .... .. ... .. .. ... ..... .. .. .. .. .. .. .. .
Core deposits . ... .. . . . . ... . .. . ...... .... . ..
Transaction deposilS .... .... . . . . .. . . ..... . .
Demand deposits . . ... .. .......... . . . .. .
Other checkable deposits . . . ..... .. . . ... .
Savings deposits (including MMDAs) . . .. .
Small ti,:"e d.epo~ilS .. ... ... . ..
.. . .. ..
Managed habillUes- . ..... .... ........ .... .. .
Large time deposits .. .. .. .. . . .... . . . . .... .
Deposits booked ill foreign offices
Subordinated notes alld debentures . ....... .
Gross federal funds purchased and RPs . .. . .
Other managed liabilities . ..... . . ..... ... . .
Revaluation losses held in trading accounts .. .
Other .......... .. .. .. .... . ...... .... ..... .

89.53
73 .75
24.26
13.08
11.18
19.06
30.43
14.76
11.11
.07
.01
1.49
2.08

Capital account ...... . .. ... ... . . . . . . . .. ... .. . . .

•

4 .27
.67
.24
-.20
- .86
26.69
26.66
26. 12
5.05
15.43
3.90

2.02
9.51
4.80
.16
.69
.54
.04
5. 13
1.72
7.36

.08
8. 17
.69
7.47
36.83
36.83
3.28
2 .95
17.66
1.17
16.49
.98
11.%

•

92.52
62.31
11.09
11.02
.07
7.98

92.26
62.67
11.t0
11.02
.08
7.42

.59

7.39
39.29
39.29
3.70
3.06
18.43
1.28
17.15
1.04
13.06

6.83
40.30
40.30
4.23
3.04
18.24

•

1.37
16.87
1.06
13.71

•

92.22
62.72
10.71
10.65
.06
6.77
.49
6.28
41.52
41.52
4.51
3.08
17.91
1.62
16.29
1.16
14.86

•

92.14
62.31
10.42
10.36
.05
6. 16
.51
5.65
42.30
42.30
4.99
3.13
17.09
1.79
15.29
1.28
15.82

•

92.34
63.80
10.29
10.25
.04
5.45
.40
5.05
44.75
44.75
6.01
3.22
17. 18
2. 11
15.06
1.41
16.93

•

.07

.05

.06

.90

3.26
.68
.25
- .06
- .89
23.34
23 .33
23.07
.81

3.21
.70
.24
- .05
-.87
21.92
21.90
21.70
.71

3.22
.70
.26
- .05
-.87
20.54
20.52
20.35
.61

3.26
.70
.27
- .04
-.87
19.65
19.57
19.41
.47

16.07
4.54
2.30
9.23
4.56
.26
1.12
.27
.01
4.26
1.90
7.78

16.23
4.&4
2.20
9. 19
4.73
.21
1.05
.31
.04
4.27
2.08
7.86

16.57
4 .76
1.96
9 .85
4.67
.19
.83
.26
.01
3.33
1.86
7.66

15.64
4.23
1.71
9 .70
4.49

14.73
3.62
1.50
9.61
4.30
.24
.48
.17

14.02
3.55
1.55
8.92
4.20
.29
.43
. 17
.07
3.92
1.55

7.86

7.66

.27
-.09
- .88
22.80
22.79
22.49
1.33
15.27
3.78
1.94
9.56
4 .51
.27
1.11

.01
5.01
1.78
7.74

•

89.58
69.97
23. 18
12.58
10.60
22.42
24.36
18.77
13.07
.06
.03
1.52
4.09

89.55
69.24
23.36
12.77
10.59

.01
1.79
2.69

89.73
70.04
22.67
12.24
10.42
21.32
26.05
18.79
13.21
.07
.04
1.51
3.96

1.03

.92

.93

1.00

.90

.84

10.47

10.25

10. 12

10.41

10.27

10.42

10.45

15.27
. 13
6.07

16.33

17.91

.11

. 11

6.22

5.39

n.3.

20.67
. 14
7.10
3.72

22.22
.15
7.25

D.n.

19. 15
.12
5.99
3.34

644

651

655

674

704

741

•

.09

89.59
69.92
22.35
12.16
10.19
19.38
28.19
18.67
13.55
.06
.02
1.55
3.49

.08

•

3.40
.66
.26
-.06
-.92
23.47
23.44
23.12

89.88
70.87
23.20
12.64
10.57
19. 19
28.48
18.08
12.51
.05
.02
2.06
3.44

19.77

•

. 10

89.75

29.10
16.09
11.52

46.97
7.46
3.25
17. 12
2.20
14.93
1.48
17.66

3.64
.65
.31
-.07
-.90
23.34
23.32
23.05
1.04

7.74

23 .87
12.80
11.07

.36
4.61

46.97

92.40
67.29
10.25
10.22
.04
4.36
.37
3.99
49.28
49.28
10.01
3.38
16.30
2.01
14.30
1.50
18.09

. 12

7.48

72.74

4.97

92.37
66.65
10. 17
10. 12
.05
4.63
.37
4 .25
48.54
48.53
9. 10
3.26
16.69
2.06
14.63
1.47
18.01

3.76
.67

7.45

7.36

92.30
65.44
10.21
10.15
.06

•

7.78

•

.22
.65
.20
.02
3.24
1.70
7.70

•
7.70

.02
3.53
1.65
7.63

7.60

•

7.63

7.60

22.64
19.57
13. 16
.07
.04
1.76
4.55

12.77
9.95
22.98
21.98
21.04
14.53
.06
.03
1.74
4.68

89.35
65 .74
20.81
11.97
8.&4
22.66
22 .28
22.76
16.49
.06
.03
1.82
4.36

88.95
65. 12
18.66
10.74
7.93
22.68
23 .77
22.92
16.91
.05
.03
1.82

.74

.77

.84

.91

10.51

10.65

11.05

24.50
. 14
6.91
4.32

26.76
6.15
4.47

28.81
. 12
5.36
4. 14

29.89
. 16
5.39
3.93

768

804

840

862

23.24

•

89.49
67 .68

22.72

•

4.11

MEMO

Commercial real estate loans' ... ... .. .. .. . .... .
Other real estate owned" ... ... . ............... .
Mortgage-backed securities .. .. . . .... .... . . .. .. .
Federal Home Loan Bank advances. . . . . . . ...• .
Average net consolidated assets
(billions of dollars) .. . .. .. .. . .. .. .. . ....

3.87

.13

A38

Federal Reserve Bulletin 0 June 2008

A.I . Portfolio compositi n, intl!r<!M ral<!s, and inc( me and ..:xpcn~e. U.S. banks. 1998-2007- CO/llilwed
E. Banks not ranked among the 1,000 largest by assets- Con linued

Item

1~8

I 1~9 I

20c0

2001

2002

2003

I 2~ I

2005

I 2~ I

2007

Effective interest rate (percent)'

Rate" earned
Interest-earning assets
.. .. .. . ... .. .... .
Taxable equivalent . . . .... . _...... . . .. . . .
Loans and leases, gross . .... .. ..... . .. . . .
Net of loss provisions .. .. . .. ...... . .... .
Secunues ......... . ... .... ... .. . . .... .. .... .
Taxable equivalent . . ..... .. . . .
Investment account ... . . . . . ...... . . .
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) . ..
Mortgage-backed securities .. . ... .
Other .............. .. ....... .. ........ .
Trading account . ... .... ..... ............ . .
Gross federal funds sold and reverse RPs . ... .
Interest-bearing balances at depositories . .... .
Rates paid
Interest-bearing tiabilities .... . .. ...... . .. . . , ..
Interest-bearing deposits . .... ... .. . .. .. .. .. . .
In foreign offices .. .. ....... . .. .... ... ... .
In domestic offices ..... .. ............ . ... .
Other checkable deposits .... . . .. ....... .
Saving~ deposits ~in.fluding MMDAs) ... .
Large lime depOSIts .... .... ...... . .... .
Other time deposits· ... ... ... . .
Gross federal funds purchased and RPs ..... . .
Other interest-bearing liabitities ... .. . ..... . . .

8.35
8.48
9.69
9.34
6.04
6.45
6.04

8.04
8. 17
9.27
8.89
5.88
6.29
5.88

8.44
8.56
9.51
9 . 14
6. 15
6.54
6. 15

7.92
8.03
9.01
8.60
5.86
6.27

o.a.
n.a.

n.a.
n.a.
n.a.

n.a.
5.26
5.35
5.65
4.63
4.52

4.84
4 .52
2.44
3.38
5.53
5.63
4.96
9.56

3.60
4.96
5.65
4.32
4.21
4 .12
4.21
2.27

3.20
5.21
5.24
4.73
8.25

4.01
6.24
6.38
4.84
4.67
5. 13
4.67
2.47
3.56
5.89
5.70
5.69
9. 13

5.86

6.79
6.90
7.83
7.39
5.03
5.43
5.02

5.93
6.04
7.08
6.71
3.87
4.26
3.87

5.73
5.84
6.71
6.45
3.74
4.11
3.73

6.23
6.33
7. 17
6.94
3.87
4.24
3.86

7 .01
7. 10
7.94
7.74
4.28
4 .65
4.28

7.26
7.36
8. 13
7.83
4.68
5.06
4.68

5.97
6.20
5.29
6.43
3.82
4.56

4.80
5.47
4.87
15.38
1.63
2.68

3.74
3.58
4 .43
2.89
1.08
1.97

3.38
3.90
4. 18
18.95
1.32
2.02

3.53
4. 16
4.16
7.52
3.21
3.21

4.12
4.59
4.25
7.51
4 .95

4.70
4.96
4.33
4.97
5.05
5.05

4.43
4.31
3.97
4.31
1.97
2.81
5.52

2.93
2.78
1.67
2.78
1.16
1.72
3.61
3.88
1.85
6.82

2. 14
2.02
.85
2.02
.78
1.13
2.78
2.96
1.31
5.32

1.88
1.75
1.04
1.75
.69
1.04
2.47
2.55
1.45
4 .59

2.44
2.29
2.86
2.29
.99
1.53
3.21
3.04
2.89
5.01

5.60
3.92
8.08

4.64
3.42
3.28
4 .27
3.28
1.45
2,34
4.37
4. 12
4 .37
5.70

3.91
3.81
4 .66
3.81
1.61
2.67
4.90
4.79
4.45
5.82

r----------------------------------------------------------------Income and expense as a percentage of average net consolidated assets

Gross interest income ....... .. . ... ... ...... . . . .
Taxable equivalent . .... . .. . ........ .. ... .
Loans .... .. ....... . ............. . .. . . .... .
..
Securities .. .... .... ...... .
Gross federal funds sold and reverse RPs . . ...
Other ........ .... ....... .. ........... ..
Gross interest expense . ....
. .... .. . . ..
Deposits .. .. .... . . .. ....... .. ......... .
Gross federal funds purchased and RPs . . .
Other .. ............. .... ......... .. .. ..
Net interest income . . . . ....... .. .... . , .. . . .
Taxable equivalent ... . . .• .. ..
Loss provisions1 , . .... .... . . . . . . . _ .
Non-interest income
. . .. . . , . ... .. . • ,
Service charges on deposils . .. . .. .. . .. . . .. ..
Fiduciary activities . . . ... . .... ... .. .. . .. ... .
Trading revenue .. .. .. . . ... . .. . ... . ....... .
Interest rate exposures .. . . .. ........ .. . . .
Foreign exchange rate exposures .... .... .. .
Other commodity and equity exposures .. .. .
Other .... ...... ...... .. .... .... .. ....... .. ..
Non-interest expense . ..... . . .. . .. . .... . . . . .. . ..
Salaries, wages, and employee benefits .... .. .
Occupancy ........ . . ...... . ... . . ........ .. . .
Other .. ....... .... ..................... . .. ..
Net non-interest expense
Gains on investment account securities . . . . .. .

7.74
7.86

7.83
7.95
5.99
1.57
.21
.05

7.33
7.44
5.73
1.32

6.49
6.58
5.35
.88
.18
.08

6.74
6.82
5.53
.92

1.82
1.58
.05
. 19

2.56
2.27

2.95
2.67
.08

.21

.20

3.96

3.91
4.00

3.96
4.05

3.94
4.03

3.79
3.87

.29
1.47
.43
.28

.23
1.38
.43
.31

.21
1.33

.20

.27

1.31

1.33

.38

.37
.38

5.46
5.56
4.47
.89
.05

5.32
5.41
4.35
.87
.05

5.78
5.87
4.76

.20

6.31
6.41
5.01
1.16
.07

.08

.06

.05

.06

2.22
1.98
.03
.21

1.60
1.41

1.41
1.22
.02
. 17

4.08
4. 19

3.86

1.59
.29

7.48
7 .60
5.62
1.58
.22

.06

3.46
3.25
.07
. 13

3.26
3.02
.08
.15

3.64

3.33

3.30
. 12
.21

3.07

4.28
4.40

4.22

4.34

4.20
4.31

.29
1.52
.42
.23

.31
1.44
.42
.26

.32
1.31
.43
.21

.33

.35

1.30
.44
.25

1.39

.86

.75

.67

.61

.67

3.74
1.82
.49
1.43

3.73
1.82
.49
1.42

3.54
1.79
.47
1.28

3.57
1.82
.46
1.28

2.23

2.29

3.57
1.78
.47
1.31
2.26

2.24

2. 18

3.56
1.82
.45
1.28
2.09

-.01

.04

.05

.04

.01
1.55
.37

1.60
.38

1.55

.36

1.32
.29

5.80

.02

.06
.20
4.00
4. 10

.45
.27

.02
. 17

.76

.85
. 11

.40
.33

.08

.36

.20
.08

.64
3.52

.61

.57

.58

3.48

3.53

1.81
.45
1.26
2.14

1.79
.44
1.25
2.15

3.49
1.82
.44
1.24
2. 18

1.84
.44
1.25
2.19

- .01

Income before taxes and extraordinary items
Taxes .. .. . .. .. . .... . . .. . ........ . ......... .
Extraordinary items, net of income taxes .. . . .

1.79

1.62
.47

1.61
.45

1.46
.39

1.60
.41
- .01

1.53

.53

Net income .. .. ....... .. .... .. . . ....... . .. .
Cash dividends declared . .
Retai ned income ... . .. .. ..... .

1.26
.81
.45

1.15
.70
.45

1.17
.79
.38

1.07

1.18

.43

.68
.50

1.14
.67
.47

1.18

.64

.54

1.21
.67
.54

1.19
.65
.53

1.03
.67
.36

12.00

11.25

11.52

10.28

11.49

10.97

11.26

11.54

11.15

9.30

MEMO: Return on equity . . . .

NOTE: Data are as of April 16, 2008.
l. Includes allocated transfer risk rese(Ve.
2. Measured as the sum of large time deposits in domestic offices, deposits
bOOked in foreign offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements, Federal Home
Loan Bank advances, and other borrowed money.
3. Measured as the sum of construction and land development loans secured
by real esta te ; real estate loans secured by nonfarm nonresidential propenies or
by multifamily residential properties; and loans to finance commercial real estate, construction, and land development ac tivities not secured by real estate .
4. Other real estate owned is a component of other non-interest-earning
assets

.38

.64

5. When possible, based on the average of quanerly balance sheet data reponed on schedule RC-K of the quanerly Call Repon.
6. Before 1997, large time deposit open accounts were included in other
time deposits.
7. Includes provisions for allocated transfer ri sk.
* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mongage-backed securities.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2007

A39

A.2. Rep()rt of income, all U. . bunk ', 1998-2007
Millions of dollars
Item

2007

1998

Gross interesl income . . . ... .. .... ....... ... 359.478
Taxable equivalenl ... . . . .
. ..... .... . 361 .941
Loans . .... .... . .... . .. . . ..... . . .... . ...
271.262
56,581
Securities . . .... . ... . . .. . . ......... ..
Gross federal funds sold and reverse
repurchase agreemenls . . .. .....
14.999
16.636
Olher ... ..... . . . . . . . ... , . ....

367,128
369,763
279,223
62.412

423,840
426,475
326,801
67,664

404.250
406.935
311 .539
63,061

349.583
352.330
269.384
59.305

329,138
331 ,919
257.619
53.315

348,663
351 ,647
269,404
58.575

426.535
429,490
328,023
65.864

551.042
554,296
421.872
78.913

617,099
620,563
464,903
82,714

12,336
13, 158

13.545
15.829

12.647
17.006

6.221
14.672

5.015
13,187

5.142
15,538

11,045
21.602

21.296
28,959

28,737
40.744

Gross inleresl expense . .. . .. ...... ..... ......
DeposilS . .......
. .. . ... . .. . .... .
Gross federal funds purchased and
repurchase agreemenls . . . ..
Olher . . .. ...........

178.133
125,197

175.399
119,971

222.159
151.145

188.746
132,310

118.731
81.691

94.098
62,377

98,539
63,638

162.499
105.922

263.372
173,878

310.496
212,784

22, 175
30.759

21.210
34,216

26,859
44,155

19,583
36.852

9.920
27.121

7,590
24,131

8.842
26,058

19, 161
37.416

33,775
55,720

37.797
59,914

181,345
Nel iRleresl income .. ...... .. .... ... . . ....
Taxable equi valeRI
.... ....... .... 183,808

191.729
194,364

201.681
204,316

215,504
218,189

230,852
233,599

235,040
237 ,821

250.124
253. 108

264.036
266,991

287.670
290,924

306,603
310.067

Loss provisions . . ....

21.413

21 .222

29.386

43,084

45,205

32,702

23,893

25.540

25.384

56,445

Olher . ... ...... . . . . - . . . . . . . .. .. .... ... ...

124.047
19,769
19.267
7 ,693
77.316

144,794
21.590
20,532
10,437
92.235

153, 101
23.720
22.212
12,235
94.934

160.897
26,872
21 ,988
12,380
99,658

168,231
29.628
21 ,403
10,790
106,409

183,745
31 ,692
22.453
11.585
118,015

188,998
33,454
25,088
10,303
120, 154

201,628
33,830
26,381
14.375
127.038

222,887
36. 194
28,312
19, 170
139,214

218,586
39. 185
32.973
5,278
141 ,149

Non-inleresl expense .. .. .. ...... ............
Salaries, wages, and employee benefils .... .
Occupancy . .. . . . .
. .. . . . . . . . .
Olher ...... ...... . .. .... ..

194,103
79.543
24 .162
90.397

205,205
86,394
25,944
92.867

216.373
89,015
26.761
100,598

225.979
94.196
27,939
103,846

230, 120
100,443
29,309
100.365

243, 180
108,434
31 ,312
103.433

263.301
115.253
33,252
114,797

274,063
124,037
35,050
114,976

294.890
135,868
36,393
122,628

321.390
144,700
38,526
138,164

Non-inleresl income .. . . . . ......
Service charges on deposits ... ... ....... ...
Fiduciary aClivilies .... .
.. . ... . ... . . .

Tradi ng revenue .. . . .... .. ... ... ..... .. .. , .

70.056

60,411

63.272

65,082

61.889

59,435

74.303

72,435

72,003

102,804

Gains on inveslment accouRl securilies . . .. • ..

3.090

246

-2.280

4.630

6.410

5,633

3.392

-220

-1 ,320

-618

Income before !axes . . .. ......... . . . . ........
Taxes . .. .. .... ... ........... . . . . . .. . .. ..
EXlraordinary ilems. nel of income laxes . . .

92.966
31.946

506

110,342
39,314
169

106,740
37,248
- 31

111,971
37.284
-324

130,173
42,816
-68

148.553
48,493
427

155,323
50,264
59

165.841
53.534
241

188.964
60,956
2.647

146,738
44,323
-1,674

Net income .... . . . . . .

61,524

71,197

69,461

74,363

87,288

100,489

105,116

112,546

130,656

100,739

41 . 144
20.380

52,280
18,917

52,547
16,914

54,844
19,518

67.230
20.059

77 ,757
22,733

59,523
45.591

64,523
48.024

82,309
48.346

85,244
15,495

Nel non-inlereSI expense . . .

Cash dividends declared .... .........
Relained income . . .... . .........
NOTE : Dala are as of April 16. 2008.

A41

August 2008

Industrial Production and Capacity
Utilizatiol1: The 2008 Am1ual Revision
Kimberly Bayard and Charles Gilbert, of the Board's
Division of Research and Statistics, prepared this
article. Betsy Wang provided research assistance.
On March 28, 2008, the Federal Reserve published
revisions to its index of industrial production (IP) and
the related measures of capacity and capacity utilization. Although the revision affected the data from
January 1972 through February 2008, most of the
changes were for the period beginning in 2003. 1
Relative to earlier estimates, measured from fourth
quarter to fourth quarter, IP is now reported to have
increased more slowly in 2006, but changes to output
gains in other years since 2003 were more modest.
The period from 2003 through 2007 was marked by a
steady, moderate rise in industrial output; on average,
production increased 2.2 percent per year, and the
annual rates of change ranged from 1.5 percent to
3. 1 percent (table 1).2
The revision shows that the rates of capacity
utilization for total industry in the fourth quarters of
2006 and 2007 were lower than previously estimated.
The larger revision was for 2006, when utilization
was restated to be 80.7 percent, 0.8 percentage point
lower than reported earlier. The downward revision
for the fourth quarter of 2007 was 0.5 percentage
point; at 81.0 percent, utilization was the same as its
(long-run) average for 1972 through 2007. The operating rate for manufacturing was revised down about

NOTE: Charles Gilbert directed the 2008 revision and , with Ki mberly Bayard, David Byrne, Wendy Dunn, Christopher Kurz, Paul
Lengermann , Norman Morin, Maria 0100, and Daniel Vine, prepared
the revised estimates of industrial production. David Byrne prepared
the improved estimates for communications equipment. Norman
Morin and Daniel Vine prepared the revised estimates of capacity and
capacity utilization.
1. When necessary to maintain consistency with any revisions to
the data for 1972 and subsequent years, the production and capacity
indexes for the years before 1972 were multiplied by a constant.
However, utilization rates and rates of change in IP for the years before
1972 were not revised .
2. Revised data reported in tills article were published in Board of
Governors of the Federal Reserve System (2008), Statistical Release
G.I7, " Industrial Production and Capacity Utilization" (July 16). Data
referred to in tills article as "previous" appeared in the G. 17 release
issued on March 17 , 2008. That release was the last G . l7 published
before the annual revision was issued on March 28.

1 percentage point in 2006 and Y2 percentage point in
2007; in both years, downward revisions were widespread across industries. For the fourth quarter of
2007, the factory operating rate stood at 79.3 percent,
a little below its long-run average of 79.7 percent.
The utilization rate for mines was revised down
almost 2 percentage points in the fourth quarter of
2007; still, it then stood at 90.2 percent, 2.7 percentage points above its long-run average . The revised
operating rate for utilities is lower, on balance, in
recent years than reported earlier.3 For the fourth
quarter of 2007, utilization was 85.9 percent, almost
I percentage point lower than its long-run average.
Compared with the previous estimates, total industrial capacity is now reported to have risen more
slowly in 2006, but the rates of change in other recent
years are little different. The smaller increase in 2006
reflected downward revisions to manufacturing and
utilities; the capacity index for mining is now reported
to have been higher than stated earlier. For hightechnology industries, capacity is now estimated to
have increased markedly less in 2005 and 2006, but
the revisions to the estimates for other recent years
were more modest.
Besides including the revised estimates and methods typical of annual revisions, the current revision
marks the incorporation of a six-month reporting
window. Beginning with the Federal Reserve's G.17
Statistical Release of April 16,2008, monthly releases
are based on a six-month reporting window : One
month of new data is reported, and the previous five
months of data are revised. For example, the monthly
release issued on April 16 included new data for
March and revised data for October through February.
Previously, the monthly releases were issued with a
four-month reporting window, which covered one
month of new data and revisions to the previous
three months of data. The incorporation of a sixmonth window will allow for the inclusion of additional data before an annual revision . From March
2007 to March 2008, a six-month window would

3. In tills article, "recent years" generally refers 10 years in the
period from 2003 through 2007.

A42

Federal Reserve Bulletin D August 2008

I . Rev ised rates of change in industria l production and capacity. revist:d rates
between revised and pre iou, ly reponed rates. 2003-07
Revised rate
MEMO:
(percent)
2006
proportion 2003-m1
2003 1 2004
2005 1 2006
avg.

Item

Production
Total index ... , ., . . . . . . . . . . . . . . . .
Manufacturing ..... .... .......
Exc\udinl) so;lected high-tech
ondustnes .... ... . .. .. ....
Selected high-tech industries ..
Mining and utilities .. ..... . . . .

Capacil)'
Total index . ... . . . ... ... .. ... . .. .
Manufacturing . . . . . , . . . . . ......
Ex~ludin~ s~lected high-tech
ondustnes ....... .. ... . ... .
Selected high-tech industries ..
Mining and utilities . . .. ... . . .. . .
Capacity utilization
Total index . .. . ..... . . .. . .. . . . . .
.. .... ... ... .
Manufactuti ng
Exdudinl! so;lected high-tech
Industnes .. . . .. . ...... ....
Selected high-tech industries ..
Mining and utilities ... ..... .....

or caraci ty ulilizal ion. and the di lfcrence
Difference between rates
(revised minus previous. percentage points)

2007

2003-07 1 2003
avg.

2004 1 2005

2006 1 2007

100.0
79.2

2.2
2.5

1.5
1.7

3.1
3.7

2.6
3.7

1.7
\.I

2.1
2.3

-.3
- .3

.4
.4

.1
.2

-.6
-.7

-1.8
-2.2

.4
.6

74.7
4.6
20.8

1.4
19.1
1.0

.2
23.8
.7

3.3
9.4
.6

2.5
22.4
- 1.6

.1
17.3
3.9

1.1
22.3
1.6

-.3
- .4
-.1

.0
6.7
.2

.3
-1.0
-.1

-.4
-5.7
.0

-1.9
-7.3
-. 1

.3
5.5
-.5

100.0
80.9

.7
.9

-.6
-.6

.2
.2

.8
1.4

1.3
1.4

1.8
2.0

-.2
-.3

.3
.3

.0
.1

- .2
-.3

-\.I

-1.3

.0
- .2

75.7
5.1
19.1

.3
10.9
.9

-.7
4.2
1.4

- .2
5.5
.8

.7
13.1
-.4

.8
10.3
1.1

.8
21.4
1.5

-.1
-1.7
.1

.1
2.8
.4

.0
1.2
- .4

.1
-5.2
.5

- .6
-9.3
-.3

- .2
1.9
.4

100.0
80.9

79.6
78.0

76.8
74.8

79.1
77.5

80.4
79.2

80.7
79.0

81.0
79.3

-.3
-.4

.0
-.2

.0
-.1

-.2
-.3

-.8
-\.I

- .5
-.5

75.7
5.1
19.1

78.2
74.3
87 .0

75.5
67.1
86.9

78.1
69.5
86.7

79.5
75.2
85.6

79 .0
80.0
87.9

79.2
79.9
88.1

-.6
.0
- .1

- .2
.3
.0

.0
-1.2
.3

-1.3

-1.4
.3
.0

-1.0
2.0
-.6

-.3
- .2

NOTE: For production and capacit)" the revised rates of change are from the
founh quarter of the previous year to the fourth quarter of the year indicated;
the differences between revised and previously reported prOduction are also
calculated fTom Q4-to-Q4 rates.

Capacity utilization rates are for the fourth quarter of the year indicated ; differences between revised and previously reported capacity utilization are also
calculated from Q4 rates.
I. Manufacturing excluding semiconductors and related electroni c components, computers and peripheral equipment, and communications equipment.

have allowed an additional 3 percent to 4 percent of
IP to reflect primary source data that otherwise
would have been incorporated only at the time of an
annual revision. 4 The longer reporting window will
cause the latest month of data shown for a few
indexes in the supplement to the G.17 release to be
as many as five months earlier than the latest value
for aggregate IP; the monthly values for detailed
production indexes are not shown until the underlying data are available or the reporting window is
closed. For the 12 months preceding the publication
of the 2008 annual revision, the data issued for only
one or two of the published indexes would have
been affected by this change.
The updated measures of production incorporate
several newly available sources of data. The primary
source is the U.S. Census Bureau's 2006 Annual
Survey of Manufactures (ASM), which shows a lower
annual level of output than previously estimated. The
revision also incorporates other new source data from
the Census Bureau, including manufacturing data
from selected 2006 Current Industrial Reports and
annual data on the publishing industry from the

Services Annual Survey. Updated price deflators from
the Bureau of Economic Analysis are used in the
construction of the revised production estimates. In
addition, new annual data on mineral extraction for
2005 and 2006 from the U.S. Geological Survey are
used. Finally, the new monthly production estimates
also reflect the incorporation of updated seasonal
factors and monthly source data that became available (or were revised) after the closing of the reporting window.
The revised capacity utilization rates incorporate
the results from the Census Bureau's 2006 Survey of
Plant Capacity for the fourth quarter of that year.
Moreover, the revisions to the capacity indexes and
capacity utilization rates reflect the revised production indexes and newly available data on industrial
capacity from the U.S. Geological Survey, the Energy
Information Administration of the U.S. Department
of Energy, and a number of private organizations.

4. Some IP indexes are estimated from secondary source data until
primary source data become available .

RESULTS OF THE REV[SfON

As revised, total IP for the fourth quarter of 2007 was
112.2 percent of output in 2002, and capacity stood at
138.5 percent of output in 2002. Both indexes are
lower than reported previously. The capacity utiliza-

Industrial Production and Capacity Utilization: The 2008 Annual Revision

A43

1, Industrial production, capacity. and capacity utilization : Total industry, January I 999-June 2008
Ratio scale, 2002 oulpul = 100

ProdlIction IIlld ClIJ>IICiIl'

Revised

Pn:violJil

Capacity

C..,..ity UlJJJzation

Perc:eol

140

130

120

78
110

76
100

I I

1
I
2000

,I
2002

2004

2006

2008

2000

I
2002

2004

1
1
2006

2008

NorE: Here and in the following figures, the shaded areas are periods of
business recession as defined by the National Bureau of Economic
Research.
Data labeled "revised" correspond to the data in the Federal Reserve's

Statistical Release G.17, "Industrial Production and Capacity UtiIWltion,"
published on July 16, 2008. Data labeled "previous" are those published
before the March 28, 2008, annual revision.

tion rate for total industry in the fourth quarter of
2007, at 81.0 percent, was revised down slightly.
Detailed results of the revision can be found in the
appendix tables. s

that for total IP and has posted moderate gains in
recent years (figure 2 and table A.3). Compared with
the previous estimates, the advance in the index is
now reported to have been 1.5 percent lower for
2006. Overall changes to the rates of increase in other
years were smaller. The index rose 0.3 percent faster
in 2003 and 0.4 percent slower in 2005; the revisions
were even smaller in 2004 and 2007.
The rise in the output of consumer goods was
revised down, on net, over the period from 2003
through 2007 . The output of durable consumer goods
rose in 2003, 2005 , and 2007 but declined in 2004
and 2006. The rates of change are now reported to
have been lower than earlier estimates for all major
categories of consumer durables other than automotive products. The most notable revisions were for the
home electronics industry, in which output is now
reported to have risen significantly less from 2003 to
2007 than was previously stated.
The index for consumer nondurables shows moderate gains in output in each of the past several years .
The index is now reported to have increased a little
less, on balance, over the period from 2003 through
2007. Among consumer nondurables, the indexes for
foods and tobacco, clothing, and paper products were
revised down for 2005 and 2006; however, the output
of chemical products is now shown to have increased
at a faster pace over the same time period. For 2007,
the output of clothing is now reported to have
declined somewhat less than earlier reports suggested. The index for consumer energy products is
now reported to have edged down, rather than increased, in 2006, but revisions to the rates of change

Industrial Production
The overall contour of IP in this revision is similar to
that reported previously, although the revised data
show a slightly flatter trajectory since 2005 (figure 1).
The total index has risen modestly each year since
2003. Relative to the previous estimates, total IP
increased 1.8 percent less in 2006, but the changes to
the gains were smaller in other recent years. For
earlier years, the change in total IP was revised up
0.4 percent in 2003 and 0.1 percent in 2004; it was
revised down 0.6 percent in 2005. For 2007, the
change in total IP was revised up 0.4 percent.

Market Grou p
The production index for final products and nonindustrial supplies follows an output path similar to
5. Table A. I shows the revised data for total IP, and table A.2 shows
the revised data for capacity and capacily utilization for total industry.
Tables A.3 and A.4 show the revised rates of change (fourth quarter to
fourth quarter) of IP for market groups, induslry groups, special
aggregates, and selected detail for the years 2003 through 2007 . Table
A.S shows the revised rates of change of annual IP indexes for market
and industry groups for the years 2003 through 2007. Tables A.6 and
A.7 show the revised figures for capacity and capacity utilization.
Table A.S shows the annual proportions of market groups and industry
groups in total JP. Tables A.3, A.4, A.S, and A.6 also show the
difference between the revised and previous rates of change. Table A.7
shows the difference between the revised and previous rates of
capacity utilization for the final quarter of the year.

A44

Federal Reserve Bulletin 0 August 2008

2. Industrial production: Market groups, January 1989- June 2008
Ratio scale, 2002 = 100

Ratio scale, 2002 = 100

EqulplllelU

ISS
110

13S
liS

100

7S
80

I I I I I I

I, I

(ndllltriDJ IIllIkriaI&

115

110

100

85
90
70
80

1990

I I

I!} ~ I

I I

1993

1996

1999

2002

2005

2008

for other years are fairly small. The path of consumer
energy shows a decline in 2003, moderate gains in
2004 and 2005, a small dip in 2006, and another rise
in 2007.
The production of business equipment has increased solidly since 2004; however, relative to previously published estimates, the revised index rose
more slowly in 2005, 2006, and 2007. For transit
equipment, the revised data show declines in output
in 2003 and 2007 and smaller gains in 2005 and 2006
than were reported earlier. The production index for
information processing equipment is now shown to
have risen notably more rapidly in 2003 and 2006
than in previous reports.
In contrast to earlier estimates, the production of
defense and space equipment is now estimated to
have fallen in 2006 and to have risen in 2007.
The output of construction supplies posted solid
gains in 2004 and 2005 but fell back in 2006 and
2007; relative to earlier estimates, the rates of change
in recent years are generally lower. Although the
production of business supplies edged down in 2006,
it increased moderately in all other years since 2003 ;

I I
1990

I I

I I It...:!

1993

1996

1999

I I I I

2002

2005

I I
2008

the rates of change for output in 2005 and 2006 are
now reported to have been weaker than previously
stated.
The production of materials has increased moderately in recent years since 2003. As revised , the index
for materials is now estimated to have expanded more
rapidly in 2003, 2004, and 2007 and more slowly in
2005 and 2006 . In particular, output gains for both
durable and nondurable materials were markedly less
in 2006 than stated earlier, although the rates of
change for both categories are now reported to have
been somewhat higher in 2007. Among durable materials, the downward revisions to the output index for
equipment parts in 2005 and 2006 tempered the
outsized gains in those years to render them more in
line with the strong gains in other recent years . On
balance, revisions to nondurable materials were small
over the period from 2003 through 2007, as upward
revisions to chemicals in every year except 2003 were
about offset by net downward revisions to textiles and
paper. In recent years, the output of textiles has
trended down (sharply, in some years), the output of
paper has been generally flat, and the output of

Industrial Production and Capacity Utilization: The 2008 Annual Revision

chemicals has risen. The index for energy materials is
now shown to have been slightly weaker, on net, from
2003 through 2007.

A45

3. Industrial production: Manufacturing, and manufacturing
excluding selected high-technology industries,
January I 989- June 2008
Ratio scale, 2002 = tOO

Industry Groups
115

Manufacturing production has expanded in each year
since 2003 (figure 3), albeit at a somewhat slower
rate, on balance, than initially reported (table A.3).6
Across all manufacturing industries, the largest downward revisions generally occurred for 2006, the year
that marks the incorporation of the most recent ASM
data.
For durable goods industries as a whole, output has
risen solidly in recent years, although these gainsespecially in 2006-have been moderated by the
recent revision. The overall rise in the production of
durable goods has been bolstered by the continued
rapid expansion of the computer and electronic products industry and by recent high rates of increase for
aerospace and miscellaneous transportation equipment.
The revisions to the changes in output of most
durable goods industries were relatively modest in
2003 and 2004; two notable exceptions include
upward revisions of 4.3 percentage points in 2003 for
computer and electronic products and of 1.4 percentage points in 2004 for aerospace and miscellaneous
transportation equipment. Relative to previous reports, changes in the output indexes are now stated to
be lower in 2005 and 2006 for nonmetallic mineral
products; computer and electronic products; electrical
equipment, appliances, and components; motor vehicles and parts; aerospace and miscellaneous transportation equipment; and miscellaneous manufacturing. The rates of change for the production indexes
for most durable goods industries in 2007 are now
higher than in earlier reports.
The estimates for selected high-technology industries posted sizable revisions over the period from
2003 through 2007 and warrant special mention
(figure 4 and table A.4). Overall, output in the hightechnology sector is still reported to have increased
rapidly in recent years, and all major components-

6. In the IP index, manufacturing comprises the following categories in the Nonh American Industry Classification System (NAICS):
manufacturing (NAICS sectors 31-33), the logging industry (NAICS
1133), and the publishing industry (NAICS SILL), which includes
publishers of newspapers , periodicals, books , and directories. Under
NAICS , logging and publishing are classified within agriculture and
information, respectively; however, historically they were considered
manufacturing industries and were classified as such under the Standard Industrial Classification (SIC) system. In December 2002, the
Federal Reserve reclassified all output indexes from the SIC system to
NAICS.

105
95

85
75

I II I

I I

ChonKO from y.... e.tlic:r

Percent

--~~------------~---------Manufacturing

I 1 .1 I

1990

I I I I I I I I I ) I I I I I I I
1993
1996
1999
2002
2005
2008

NoTE: For definition of manufacturing, refer to text note 6.
The selected high-technology industries are semiconductors and related
electronic components (NAlCS 334412-9), computers and peripheral
equipment (NAlCS 3341), and communications equipment (NAlCS 3342).

computers and peripheral equipment, communications equipment, and semiconductors and related
electronic components-have registered gains each
year since 2003. However, relative to earlier estimates, production for the high-technology aggregate
is now reported to have risen less sharply in 2004,
2005, and 2006 and to have increased more rapidly in
2003 and 2007.
Among the major high-technology componenhs,
increases in the index for computers and peripheral
equipment were revised down in 2004, 2005, and
2007 but were revised up in 2003 and 2006. The
average gain over the period from 2003 through 2007
for computers and peripheral equipment is about
15 percent, slightly lower than shown earlier; the
smallest annual increase over this period was 1.6 percent in 2004, but that was followed by a gain of
28.8 percent in 2005. The output of communications
equipment is now reported to have expanded less
rapidly in 2004 but more rapidly in other recent years.
Except for 2004, the index for communications equip-

A46

Federal Reserve Bulletin 0 August 2008

4. Industrial production: Selected high-technology
industries, January 1998- June 2008
Ratio scale, 2002 - 100

360
280
220
170
120
90
70

50
35

1
1
1998

1
I,
2000

,I
1
2002

1
1
2004

1
1
2006

1
1
2008

Non;; For the NAICS categories of these industries, refer to the Dote to
figure 3.

ment has posted solid annual gains in every year since
2003. The production of semiconductors and related
electronic components has risen robustly in each of
the past five years; however, the rate of increase is
now reported to have been lower in 2005, and particularly in 2006, than estimated previously.
Production in nondurable manufacturing industries
has advanced in every year since 2003 but at a more
modest pace than the output of durables. The largest
gain in nondurable output occurred in 2004. Within
nondurable goods, the indexes for food, beverage,
and tobacco products; petroleum and coal products;
and chemicals have generally provided support to the
output gains for the aggregate in recent years. In
contrast, the indexes for textile and product mills ,
apparel and leather, and paper have generally fallen
over the period.
For most recent years, the change in output in the
nondurable goods sector was similar to previous
estimates, except in 2006 , when it rose about I percentage point less than reported earlier. Relative to
earlier reports, the current revision found noticeably
lower rates of change in 2005 and 2006 in food,
beverage, and tobacco products; textile and product
mills; apparel and leather; printing and support; and
plastics and rubber products. In contrast, the output of
chemicals is now reported to have declined less in
2005, and to have risen more in 2006, than indicated
earlier.
The revision lowered the rates of change in the
output index for the publishing and logging industries
about 1 percentage point per year, on average, from
2003 through 2007; the IP index continues to include
these two industries under manufacturing, although
they are classified elsewhere under NAICS. The
revised output index for this group is now reported to

have declined in every year since 2003 except 2004.
The drop in 2006 was especially large.
The revised index for mining is relatively little
changed from previous estimates . Output is still
reported to have risen in 2003, to have fallen back in
2004, to have dropped more sharply in 2005, and then
to have increased rapidly in 2006. The output gain in
2007 is more modest than in previous reports. For
utilities, the revised output estimates are, in general,
very similar to those reported earlier. The main
exception is a downward revision of about 1 percentage point to the change in the index in 2006.

Capacity
Total industrial capacity is now estimated to have
risen at an average annual rate of 3/4 percent over the
period from 2003 through 2007, l;4 percentage point
more slowly than previously stated. By far, the most
significant revision to industrial capacity was for
2006 ; capacity is now stated to have risen 1.1 percentage points more slowly than estimated earlier (table
A.6). Relative to previous reports, total industrial
capacity is now estimated to have declined a little less
in 2003, to have risen more moderately in 2005, and
to have been little changed in 2004 and 2007. The
contour of manufacturing capacity and the revisions
to that contour are similar to those for total industry.
Manufacturing capacity is now shown to have expanded at an average annual rate of about 1 percent
over the period from 2003 through 2007, 1/4 percentage point less than estimated earlier.
Within manufacturing, capacity for durable goods
manufacturers increased modestly in 2003 and 2004
but rose more quickly in the subsequent years; however, the recent gains were tempered somewhat in the
current revision. Relative to earlier estimates, the
capacity index for nondurable goods is now reported
to have fallen less in 2003 and 2004, to have increased
more in 2005, and to have risen less in 2006 and
2007. Capacity for the logging and publishing industries fell from 2003 through 2005 but has risen since
then; on balance, the rates of change are lower as a
result of the revision.
For selected high-technology industries, aggregate
capacity has increased substantially in recent years,
especially since 2005. Relative to earlier estimates,
high-technology capacity rose less quickly in 2005
and 2006 but increased somewhat more rapidly in
other recent years. Excluding high-technology industries , manufacturing capacity advanced less in 2006
and 2007 than previously reported; revisions to the
changes for earlier years were minor.

Industrial Production and Capacity Utilization : The 2008 Annual Revision

Capacity at mines is still estimated to have contracted from 2003 to 2005 and to have expanded since
then. The gains in 2006 and 2007 are now reported to
have been stronger than previously published. Capacity at electric and gas utilities has risen each year
since 2003. The current estimates show a noticeably
slower gain in 2006 than was reported earlier; revisions to the estimates for other years since 2003 were
smaller.
By stage of processing, capacity in the crude stage
is now reported to have risen more in 2006 and 2007
than previously shown; on net, revisions to earlier
years were small. Capacity at the primary and semifinished stages rose less in 2006 than stated earlier.
Relative to previous estimates, increases in the index
for finished goods processors were revised down, on
net, over the period from 2003 through 2007.

Capacity Utilization
For the past few years, the capacity utilization rate for
total industry has remained near its long-run average
of 81.0 percent (table A.7). On balance, the utilization
rates for the 2005-07 period are lower than reported
earlier, while those for earlier years are little changed.
For the fourth quarter of 2007, total utilization stood
at its average for 1972 through 2007 and was 0.5 percentage point lower than reported earlier. The utilization rate for total industry was revised down 0.8 percentage point for the fourth quarter of 2006, but the
revision was smaUer for 2005.
The capacity utilization rate for manufacturing is
also now estimated to have been close to its long-run
average in recent years. Relative to earlier reports, the
factory operating rate was revised down in 2005,
2006, and 2007 and was little changed in 2004. For
almost all major categories of manufacturing industries over the period from 2005 through 2007, utilization is now reported to have been lower than stated
earlier, and downward revisions were particularly
noticeable for 2006.
Among durable goods industries, some of the
largest downward revisions to utilization over the
period from 2005 through 2007 were for primary
metals; electrical equipment, appliances, and components; motor vehicles and parts ; aerospace and miscellaneous transportation equipment; and miscellaneous manufacturing. The durable goods industries
that recorded the largest upward revisions since 2005
were wood products and computer and electronic
products. For 2007, upward revisions to the utilization rate for computer and electronic products offset
some of the downward revisions to the utilization
rates for other durable goods industries.

A47

Among nondurable goods industries, only chemicals registered higher rates of utilization since 2006
than previously reported; for all other categories,
operating rates are now reported to have been lower
than stated earlier. Capacity utilization in the other
manufacturing industries (logging and publishing)
was revised sharply downward for 2006 and 2007;
utilization in the fourth quarter of 2007 was 79.2 percent, 5.3 percentage points lower than its long-run
average.
The operating rate for the selected high-technology
category rose steadily from 2004 to 2006 but edged
down in 2007 (figures 5 and 6). Relative to earlier
estimates, capacity utilization is now reported to have
been lower in 2004 and 2005 but higher in 2006 and
2007. In the fourth quarter of 2007, the utilization rate
was about 10 percentage points higher than it was in
the fourth quarter of 2004, but at 79.9 percent, it was
less than 2 percentage points above its long-run
average. Among the selected high-technology industries for the period from 2004 through 2007, the
operating rates for computers and peripheral equipment and for communications equipment are now
shown to have been lower-especially for 2004,
2005, and 2007-than reported earlier. The utilization
rates for semiconductors and related electronic components are now higher in each year than previously
estimated.
Capacity utilization in mining was revised up for
2004 and 2005, but it was revised down slightly for
2006 and lowered more noticeably for 2007 . Nevertheless, as of the fourth quarter of 2007, the utilization rate for mining stood at 90.2 percent, almost
3 percentage points higher than its long-run average.
In electric and gas utilities, capacity utilization rates
were revised down for 2005 through 2007.
5.

Capacity utilization: Selected high-technology industries
and manufacturing excluding elecled high-technology
industries, January J989-June 2008

I !I

1990

1993

t 996

1999

J2002
I

I I I I I
200S
2008

NoTE: The high-technology industries are identified in the note to
figure 3.

A48

Federal Reserve Bulletin 0 August 2008

Capacity utilization: Selected high-technology industries,
January 1996-June 2008
Ratio scale. pen:cnl

CampuletS and poripboraJ equlpmcnl

== n
-~

110

90
70

CommunicatiOrlS equipment

CommuJlications eql/iprnelll

110

90
70
50

1998

I ..

2000

With this revision, the monthly production indicators
for some series have changed, and some new series
have been created.

110

1996

Chanf{es to IndividuaL Production Series

High-Technology Goods

factures to impute estimates of gross output for those
industries no longer reported separately.

2002

2004

2006

2008

TECHNICAL ASPECTS OF THE REVISiON

The benchmark indexes for manufacturing-defined
for each six-digit NAICS industry as nominal gross
output divided by a price index-were updated to
include new as well as revised information from the
2005 and 2006 ASMs. This revision also incorporates
the 2006 Survey of Plant Capacity, other annual
industry reports, recent information on prices, and
revised monthly source data on production, shipments, and production-worker hours.
As mentioned earlier, the benchmark indexes for
most industries incorporate updated price indexes
from the industry output program of the Bureau of
Economic Analysis. However, the price indexes for
pharmaceutic"als (NAICS 325412), semiconductors
(NAICS 334413), and most components of communications equipment (NAICS 3342) are constructed by
the Federal Reserve from alternative sources.
As in other recent years, the 2006 ASM did not
provide data for all six-digit NAICS industries but
combined some of them into higher-level industry
aggregates. To maintain benchmark references that
were consistent over time, the Federal Reserve used
detailed information from the 2002 Census of Manu-

Over the past several years, the Federal Reserve has
regularly modified the IP index for the communications equipment industry to keep pace with the rapid
technological change within the industry. Previous
Bulletin articles have documented these changes, and
the 2006 and current (2008) annual revisions have
extended the Federal Reserve 's earlier work.1 In
particular, the two most recent revisions have (1) provided a new structure for the measurement of communications equipment products, (2) introduced new
data sources that provide extensive product-level
detail, (3) used the detailed product information to
construct new quarterly and annual production and
price indexes, and (4) published new and revised
price indexes at the detailed product level.
Relative to the previous estimates, the combined
effect of the 2006 and 2008 annual revisions on
communications equipment is that the revised production index expanded faster over the time period from
1972 through 2000, fell less in 200 I and 2002, and
has increased more slowly since then (figure 7). Much
of the difference between the previous (pre-2006
revision) and current estimates is derived from recently constructed price deflators developed from
product-specific data.
The enhancements introduced in the most recent
annual revision include the incorporation of new
production data for a variety of types of communications equipment and the development of new price
indexes at both quarterly and annual frequencies for
the relevant products. The communications equipment industry is now represented by IP indexes for
six product groups: data networking equipment; enterprise and home voice equipment; transmission, local
loop, and legacy central office equipment; wireless
system equipment; satellites and earth station equip-

7. Charles Gilbert and Maria Otoo (2007), " Industrial Production
and Capacity Utilization: The 2006 Annual Revision," Federal
Reserve Bul/elill, vol. 93, pp. A 17-A35, www.federalreserve.gov/pubs/
bulletin.

Industrial Production and Capacity Utilization: The 2008 Annual Revision

7. Industrial production: Communications equipment,
January \ 972- June 2008
Ratio scale. 2002 ~ 100

200
100
50

20
10

~II II IIII
1973

t i l l 11111 11 1 11 11111 III !

1978

1983

1988

1993

1998

IIIIIII~

2003

2008

Average annual percent change
Period

1972-94 average
1995-2000 average
2001
2002
2003

Pre·2006 revision
6.8
24.2
-10.2

-30.0

2005
2006

.1
16.6
24.4
n.a.

2007

n.a.

2004

2008 revision

9.6

26.9
-2.7
-22.7
4.5
12.4
.1
28.6
14.1

n.8. Not available.

ment; and other communications equipment. 8 The
source data for estimating each of these indexes are
described next. The newly developed price indexes
for each of the six product groups are also included in
this article (tables A.9 and A.tO).

Data networking equipment. The 2006 annual revision introduced new source data for the index for data
networking equipment. For the period ending in
2000, the index is based on quarterly data on U.S.
domestic absorption from Gartner, an industry research group. For the period beginning in 2001, the
index uses quarterly data from a different industry
research group, Synergy, on U.S . domestic absorption
of selected routers and switches, measured in nominal
and unit terms. The quarterly matched-model price
indexes are built from detailed product information
available from the data sources and are aggregated to
one index that covers all of data networking equipmentY For routers, the data cover several categories
8. Although the Federal Reserve constructs IP indexes for the six
product types, only Ihe aggregate index for communications equipment is published in the G .17 Statistical Release.
9. Matched-model price indexes are based on changes in the
average prices of the same product in two different periods.

A49

of enterprise routers and service provider routers. IO
For switches, the index is aggregated from multiple
product classes, grouped largely by speed.
The annual benchmark price deflator for data networking equipment incorporates additional data from
Gartner on prices of wireless and security equipment
that are available only on an annual basis. To construct the annual benchmark deflator, the quarterly
price indexes constructed from the Synergy data on
routers and switches are converted to an annual
frequency and then combined with the Gartner-based
price indexes on wireless and security equipment in a
chained Fisher price index .

Enterprise and home voice equipment. The new IP
index for enterprise and home voice equipment covers products such as telephones, switches, and gateways used in PBX (private branch exchange) systems. The current revision incorporates quarterly data
on revenue and units of enterprise equipment; the
data, from Synergy, extend from 2003. The two major
subcategories of enterprise equipment are Internet
Protocol telephony and traditional TDM (timedivision multiplexing) equipment; the Synergy data
cover a variety of detailed products within each of
these categories .
The annual benchmark price deflator for enterprise
and home voice equipment combines the quarterly
price indexes (converted to an annual frequency) for
the enterprise equipment with data on prices of home
voice equipment that are available only on an annual
basis. For 1987 and subsequent years, the data on
home voice equipment include information from the
Telecommunications Industry Association on fax
machines, answering machines, corded telephones,
and cordless telephones. For 1975 to 1987, the annual
price index for home voice equipment is constructed
from information in the Census Bureau's Current
Industrial Reports (CIR) on push-button and dial
phones.
Transmission, local loop, and legacy central office
equipment. Transmission equipment, local loop
equipment, and legacy central office equipment provide the infrastructure necessary to support largescale telecommunications networks. Transmission
equipment includes the devices used to exploit underground and undersea cables for long-haul, highcapacity signal transmission. Local loop equipment
refers to the cables that run from the central office of a

10. Small officelhome office (SOHO) routers are omitted because
they are generally not manufactured domestically. Domestic absorption reflects U.S. sales by domestic and foreign producers .

A50

Federal Reserve Bulletin D August 2008

telecom service provider to neighborhood homes and
businesses. Legacy central office equipment historically includes the equipment that facilitates phone
connections and relays speech information.
This revision incorporates quarterly data on domestic absorption of transmission equipment; the data,
from the Dell'Oro Group, are for 1998 and subsequent years . For 1992 to 1997, information on transmission equipment comes from annual reports from
Gartner. The Dell'Oro data provide detailed information on three main types of transmission technologies :
dense wave division mUltiplexing, SONET (Synchronous Optical Network) , and optical switching.
The benchmark price indexes add data on local
loop and legacy central office equipment that are
available only at an annual frequency to the quarterly
data on transmission equipment. The annual price
data on local loop equipment are from Gartner and
cover the period from 1993 to 2004. Since 200 I,
production of legacy central office equipment has
been negligible, but for earlier years, the data underlying the benchmark price indexes are from multiple
sources. For the period from 1995 through 200 I, the
data are from Gartner. For earlier years , the price
index is drawn from academic research in this area.
For the period from 1972 through 1982, the index is
derived from Flamm (1989); for the period from 1982
through 1994, it is derived from the hedonic estimates
of Grimm (1997) and Currie (2005).11

Wireless system equipment. This revision incorporates new quarterly data from Dell'Oro on domestic
absorption of wireless system equipment for 2000
and subsequent years. Such equipment (often located
on towers or the sides of buildings) manages signals
to and from wireless handsets. Some of the main
types of equipment include base transceiver stations,
base station controllers, and mobile switching centers. The data include additional detail on the technological standard for mobile transmissions, such as
GSM (global system for mobile communications),
TDMA (time division mUltiple access), CDMA (code
division multiple access), and W-CDMA (wideband
code division multiple access).

II . Kenneth Flamm (1989), "Technological Advance and Costs:
Computers versus Communications," in Robert W. Crandall and
Kenneth Flamm, eds., Changing the Rules: Technological Change,
InternationaL Competition, and ReguLation in Communications (Washington : Brookings Institution), pp. 13-61 and 371-410; Bruce T.
Grimm (1997), "Quality-Adjusted Price Indexes for Digital Telephone
Switches," memorandum, Bureau of Economic Analysis, May 20; and
Kent A. Currie (2005), "Hedonic Price Indices for Digital Circuit
Switching Equipment: 1980-1998," unpublished paper, SBC Services,
August 7 .

Satellites and earth station equipment. The monthly
production index for satellites and earth station equipment is based on production-worker hours. The 2006
annual revision incorporated into the production
indexes annual data from Futron Corporation and the
Satellite Encyclopedia on satellite manufacturing revenues and total satellite capacity launched (proxied
by transponder bandwidth).12 The index for earth
stations is proxied by the index for cellular base
stations.
Other communications equipment. The monthly index for other communications equipment is based on
production-worker hours . The annual benchmark
price index uses the relevant producer price indexes
with product weights developed from the CIR.
COlllplllers
The index for electronic computer manufacturing
(NAICS 334111) was split into six separate product
class indexes, and these indexes are now based on
new source data and methods. The new product-based
indexes are for consumer desktop computers, consumer mobile computers, business desktop computers, business mobile computers, business servers that
use x86-based central processing units (CPUs), and
business servers that use CPUs other than those based
on x86 architecture. 13 Previously, electronic computer manufacturing comprised only two indexes: one
for consumer computers and one for business computers . Although the six new product-level indexes are
not published in the monthly statistical release, they
are included in the broader IP aggregate for electronic
computer manufacturing.
From 1995 forward, all of the product-based indexes for electronic computers are derived from
quarterly data on domestic absorption from IDC, an
industry research group. Data for 1994 are from
Gartner, and data for earlier years are Federal Reserve
Board estimates based on the CIR for computers. To
construct the monthly indicator, the nominal absorption data are aggregated to the industry level and
converted to industry shipments based on trade data
from the Census Bureau (by adding exports and
subtracting imports) . The industry-level ratio of shipments to domestic absorption is applied to each of the
six product-level absorption estimates to obtain
12. TBS Internet (2008), The SateLlite Encyclopedia (Caen, France:
TBS Internet , accessed January 23, 2008) .
13. The index for consumer desktops also includes servers for
consumer use. The term "x86" refers to CPUs with an instruction set
that is based on the instruction set for the Intel 8086 CPU, which was
introduced in 1978. These CPUs are used in most personal computers
and in an increasing number of servers.

Industrial Production and Capacity Utilization : The 2008 Annual Revision

product-level shipments. These shipments are then
adjusted by model-based estimates of the change in
product-level inventories and divided by the relevant
producer price index issued by the Bureau of Labor
Statistics (BLS) to compute a production index.
The estimates for the change in inventories follow
a procedure introduced in the 2004 annual revision;
this procedure is currently used for several other
industries. 14 In short, manufacturers are assumed to
want to hold inventories in proportion to their expected shipments. The estimate of inventory change
is computed as the sum of three components: a trend
rate of stockbuilding, a portion of the adjustment to
inventodes that a manufacturer would need to make
to reach a desired inventory level, and the effect on
contemporaneous stocks of shipments deviating from
expected shipments.
Se flli collducrors

This revision introduced more detail and new price
data to the MOS (metal-oxide semiconductor) memories portion of the semiconductor and related device
manufacturing index (NAICS 334413). Before the
current revision, all components of MOS memories
were grouped in one index. To better track differential
movements in specific product categories, this revision split the MOS memory index into three components: an index for DRAM (dynamic random access
memory), an index for flash memory, and an index for
all other MOS memories (primarily SRAM, or static
random access memory). The underlying source data
on nominal shipments for all memory components
continue to be from the Semiconductor Industry
Association (SIA) . The new indexes for MOS memories are not published separately but continue to be
included in the larger index for semiconductor and
related device manufacturing.
The current revision incorporated quarterly data on
prices from iSuppli, an industry research group , for
all three categories of MOS memories. Previously,
the DRAM portion of the index relied on quarterly
prices from Gartner, and the non-DRAM portion used
product-level producer price indexes from the BLS
that have been discontinued. Monthly interpolations
of the quarterly iSuppli prices are based on average
sales prices from iSuppli for the DRAM index and on
average sales prices from SIA for the indexes for flash
and other memories .

14. Charles Gilben and Kimberly Bayard (2005) , "Industrial Production and Capacity Utilization : The 2004 Annual Revision," Federal
Reserve Bulletin, vol. 91 (Winter), pp. 9-25, www.federalreserve.gov/
pubslbulletin.

A51

Vacuum Cleaners
The index for household vacuum cleaner manufacturing (NAICS 335212) is now based on monthly data
on unit shipments from the Association of Home
Appliance Manufacturers (AHAM) with a modelbased inventory adjustment. Formerly, the index was
based on quarterly data from the Vacuum Cleaner
Manufacturers Association (VCMA). In 2003, AHAM
assumed responsibility from VCMA for issuing the
data. With this revision, the monthly time series was
long enough to construct seasonal factors .

ReliabiLity oj Monthly Estimates
The extended six-month reporting window will allow
additional source data to be incorporated into IP
before an annual revision . The first estimate of output
for a month is preliminary and is subject to revision in
each of the subsequent five months as new source
data become available.
Some of the IP series that particularly benefit from
the new six-month window include electric and gas
utilities (NAICS 2211 and 2212), crude oil extraction
(part of NAICS 211111), and tobacco manufacturing
(NAICS 312221). The indexes for electric and gas
utilities depend on data from the U.S. Department of
Energy (DOE) that generally arrive with a threemonth lag; however, the data for earlier months tend
to be revised, and these revisions often were not
available in time to be incorporated into the fourmonth window. Although the aggregate data from
DOE on crude oil extraction are available within the
four-month window, the full complement of detailed
geographic data used for specific IP series typically
was not available until after the window had closed.
The data on tobacco manufacturing are from the
Alcohol and Tobacco Tax and Trade Bureau of the
U.S. Department of the Treasury. Over the past
several years, these data have been received with too
great a lag to get folded into the four-month IP
window; however, more recently, the timeliness has
improved somewhat. The six-month window will
permit these data to be incorporated in a timely
manner more often.
Most of the series that rely on quarterly data benefit
from the extended window. Under the four-month
window, some data that are quarterly in frequency
ardved too late to be fully incorporated into IP. Often,
only one or two months of the quarter were open by
the time the data were received. In addition, for some
quarterly series such as construction paints and industrial paints (both in NAICS 325510), even when
preliminary estimates were available for much or all

AS2

Federal Reserve Bulletin D August 2008

2. Availabilily of monlhly IP data in puhlicalion window
Percem of value added in 2007

data on producer prices for the period after 2006.
Table A.8 shows the annual value-added proportions
in the IP index from 1999 through 2007 .

Type of data
4th
Physical product ...... . .....
Production-worker hours. . . . .
IP data received .......
IP data estimated . ...

29
42
70
30

42
42
84
16

of the quarter, these estimates were revisedsometimes substantially-in later months, and the
revisions could not be fully adopted because some or
all of the relevant quarter had fallen outside the
reporting window.
Table 2 shows the availability of source data during
2007 with a four-month reporting window. The sixmonth window will permit almost all of the indexes
estimated in the fourth month to be calculated from
source data.

Weighrs for Aggregation
The IP index is a Fisher index. This revision used
information from the ASM to obtain updated estimates of the industry value-added weights used in the
aggregation of IP indexes and capacity utilization
rates . The Federal Reserve derives estimates of value
added for the electric and gas utility industries from
annual revenue and expense data issued by other
organizations. The weights for aggregation , expressed
as unit value added, were estimated with the latest

Revised Monthly Data
This revision incorporated product data that became
available, or were revised, after the regular fourmonth reporting window for monthly IP was closed.
These data were released with too great a lag to be
included with monthly IP estimates; however, the
data were available for inclusion in the annual revision.

Revised easonal factors
Seasonal factors for all series were reestimated with
data that extend into 2007 or 2008. Factors for
production-worker hours-which adjust for timing,
holiday, and monthly seasonal patterns-were updated with data through January 2008 and were
prorated to correspond with the seasonal factors for
hours aggregated to the three-digit NAICS level. The
updated factors for the product series, which include
adjustments for holid ay and workday patterns, used
data through 2007. Seasonal factors for unit motor
vehicle assemblies have been updated, and projections through December 2008 are on the Federal
Reserve Board's website at www.federalreserve.gov/
D
releases/gI 7/mvsf.htm .

Appendix tables start on page A53

Industrial Production and Capacity Utilization: The 2008 Annual Revision

A53

A.I . Revi cd <..lata for indu [rial production for lOlal induwy. 1978-2008
Seasonally adjusted data except as noted
Quarter
Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.
I

Annuat
avg. 1

Industrial production (percent change)
1978 . . . .. . . . ....
1979 ... . . . . . . . .. . .
... ..
1980 .... , .
1981 .... , .... ....
...... ..
1982 ...
1983 .. . .. .
... ..
1984 .. .. , ...... ..
1985 . . . . . . . . . . . . . .
1986. . . . . . . . .. . .
1987. ... .. ... ...
1988. ... .. ..... ...
1989 ............ ..
1990 ..... _.......
1991 ... .. .. .. ....
1992 .............
1993 . .. ........
1994 .. ........... .
1995 .. .. ........ ..
1996 .... , .. ... .. ..
1997 ..............
1998 .... ..........
1999 .. .. .... ... ...
2000 ......... . ....
2001 ....... . . .....
2002 ........
2003 .. ...... .... .
2004 . ... ... ......
2005 .. ...... ......
2006 .. .... . . . . ..
2007 .. .... .......
2008 .... , ...... ...

...

-1.4
- .7
.5
-.6
-1.9
1.9
2.0
-.3
.5
-.3
.0
.2
- .5
-.5
-.6
.5
.4
.3
- .6
.1
.4
.5
.1
-.7
.5
.6
.3
.5
.1
-,4
.2

.5
.6
.0
- .5
1.9
-.6
.5
.4
-.7
1.3
.4
- .5
.9
- .7
.7
.3
.0
.0
1.7
1.2
.0
.4

.4
-.6
.1
.4
.5
.6
-.1
.7

-.4

1.8

.3
-.3
.6
- .7
.9
.5
.1
-.6
.2
.3
.2
.5
-.5
.8
.0
1.1
.1
-.2
.8
.0
.2
.4

-.3
.7
-.2
- .5
.0
.2
-.1
.1

2. 1
-1.1
-2.0
- .5
- .8
1.2
.6
-.2
.1
.6
.6
.0
- .1
.2
.7

.3
.5
- .1
.7
.0
.5
.2
.6
-.3
.4
- .8
.5
-.1
.4
.5
-.7

.3
.8
-2.5
.7
- .7
.7
.5
.1
.1
.7
- .1
-.7
.2
1.0
.4
-.4
.6
.2
.6
.6
.6
.7
.2
-.7
.5
.0
.7
.3
-.1
.0
-.2

.7
.0
-1.2
.5
-.4
.6
.4
.1

-.3
.5
.2
.0
.3
1.0
.0
.2
.7
.3
.9
.5
- .5
-.2
.1
-.6
1.0
.2
-.8
.4
.5
.3
.5

-.1
-.2
-.7
.7

-.3
1.6
.3
-.6
.6
.6
.2
- .9
-.1
.0
.8
.3
.2
- .4
-.1
.6
-.4
.6
- .2
-.5
- .3
.4
.7
.0
.3
.6

...

.4
-.7
.3
.0
-.8
1.1
.1
.4
-.2
.7
.5
.9
.2
.1

-.5
.0
.5

1.3
.6
1.4
2. 1
.5
-.2
-.4
.1
-.1
.3
.2
.1
.0
.. .

.3
.1
1.6
-.6
-.4
1.5
-.2
.4
.2
.3
-.3
-.3
.2
.8
.2
.4
.2
.4
.5
.9

.8
.6

1.3
- .8
-.8
.8
-.1

.7
-.1
1.7
-1.1
-.4

.3
.4

-.4

.3
.5
.5
.2
.3
-1.2

-.3

.5
1.5
.6
- .1
-.7
-.2
.7
.7
.8
-.2
.0
.7
.7

-.4
.4
-.4
.0
.5
-.1
-1.8
- .4
.3
.. .

-.4
- .6
-.3
.1
1.0
1.2
-.1
-.4
.. .

1.3

-.2
.4

.4
.7

.3
.9
.9
-.1
.6
.0
-.5
.4
.8
.3
1.I
-.2
.4

.. .

6
.1
.6
-1.1
-.8
.5
.1
1.0
.9

.5
.4
.7
-.7
-.3
.0
.5
1.1
.5
.7
.4
.3
.8
- .3
.0
-.5
- .1
.6
.5
.6
.1

...

-1.3
1.9
1.8
.8
-7.8
4.6
12.2
1.2
2.3
5.4
3.5
1.5
3.2
-7.5
- .3
3.5
5.2
5.3
3.5
8.0
4.1
4.3
4.9
-5.5
2.3
2.7
2.6
5.4
3.2
1.5
.5

16.7
- .6
-15 .9
1.4
-4.9
9.5
6.3
.4
-2.4
7.2
3.5
-1.8
2.8
2.6
7.3
1.2
7.4
.9
7.7
6.3
3.1
3.8
5.0
-5.2
6.3
-2.9
2.0
1.9
2.6
3.2
-3. 1

3.5
-1.4
-{J.3
4.2
-5.8
14.6
2.7
- .6

1.7
7.3
2.1
-2.5
1.4
5.5
2.9
2.1
5.2
3.8
5. 1
9.7
2.9
4.0

-.3
-5.9
2.3
2.8
2.0
- .4
1.9
3.6
.. .

7 .5
1.5
16.2
-8.7
-7.4
10.8
.3
2.4
4.6
10.2
3.2
1.8
-{J.O
.7
3.9
6.0
8.2

3.3
5.6
10.7
5.2
8.0
-1.3
-5.2
-.5
3.7
5.8
3.7
- .9
.3
.. .

5.5
3.0
-2.5

1.3
-5.2
2.8
8.9
1.2
1.0
5.2
5.2
.9
1.0
-1.6
2.8
3.3
5.3
4.8
4.4
7.3
5.9
4.3
4.2
-3.4
- .1
1.2
2.5
3.3
2.2
1.7
...
I

Indusuial production (2002= I00)
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008

....... .... ...
....... .. . . . ..
.... .... . .... .
.... . .........
.. .. ..........
.. ......... . ..
.. ....... .. ...
.... .. . ......
. .... .... .. . ..
......... .. ...
..... _.. .. ....
.. .... .. ......
..... .. .......
.. ..... .. ... .
...... .. ......
....... ... . ...
. .. ....... .. ..
........ .....
..............
.... .. .... . .. .
.... .. .. ......
........ ..... .
...... .. ... ...
........ . .....
.... .. . ......
.. ..... ... . ...
.. .... .... . ...
......... .....
.... . ....... ..
. . . . .. .. .. . . .

.......... .

53.5
57.6
58.1
57.0
54.7
53.4
59.3
61.0
62.3
62.7
67.5
69.6
69.0
68.3
68.7
72.1
74.6
79.7
81.2
86.5
94.1
97.5
102.5
102.7
98.3
101.0
102.6
106.3
108.8
109.8
112.6

53.7
57.9
58. 1
56.7
55.7
53.1
59.6
61.2
61.8
63.5
67.7
69.3
69.6
67.8
69.2
72.4
74.6
79.7
82.5
87 .6
94.2
97.9
102.8
102.2
98.4
101.4
103.1
106.9
108.7
110.5
112.2

54.7
58.1
57 .9
57.0
55.3
53.5
59.9
61.3
61.4
63 .6
67 .9
69.4
70.0
67.5
69.8
72.4
75.4
79.8
82.4
88.3
94.2
98.1
103.2
101.8
99.1
101.3
102.6
106.8
109.0
110.4
112.2

55.8
57.5
56.8
56.7
54.9
54.2
60.3
61.2
61.5
64.0
68.3
69.4
69.9
67.6
70.3
72.6
75.8
79.7
83.0
88.3
94.7
98.3
103.9
101.6
99.5
100.4
103.1
106.8
109.4
111.0
111.4

56.0
57.9
55.3
57.1
54.5
54.6
60.6
61.2
61.6
64.4
68.2
69.0
70.0
68.3
70.6
72.4
76.2
79.9
83.5
88.9
95.3
99.0
104. 1
100.9
100.0
100.4
103.8
107.1
109.3
111.0
111.2

56.4
57.9
54.7
57.4
54.3
54.9
60.8
61.3
61.4
64.7
68.4
69.0
70.2
69.0
70.6
72.5
76.7
80. 1
84.2
89.3
94.7
98.9
104.3
100.2
100.9
100.6
102.9
107.6
109.9
111,4
111.7

56.4
57.8
54.3
57.8
54.1
55.8
60.9
60.9
61.8
65.1
68.5
68.3
70. 1
68.9
71.2
72.8
76.9
79.9
84.1
89.8
94.4
99.5
104.0
99.8
100.6
101.1
103.6
107.6
110.1
112.0

NOTE: Monthly percent change figures show the change from the previous
month; quarterly figures show the change from the previous quarter at a compound annual rate of change. Production and capacity indexes are expressed as
percentages of output in 2002.

56.6
57.4
54.5
57.8
53.7
56.4
61.0
61.1
61.7
65.6
68.8
69.0
70.3
69 .0
70.8
72.8
77 .3
80.9
84.6
91.0
96.3
100.0
103.8
99.4
100.7
101.0
103.9
107.7
110.2
112.0

56.7
57.5
55.3
57.5
53.5
57.2
60.9
61.4
61.8
65.8
68.6
68.8
70.4
69.6
71.0
73.1
77.4
81.2
85.1
91.8
96. 1
99.6
104.3
99.0
100.7
101.5
103.8
105.8
109.8
112.3

57.2
57.8
56.0
57.0
53.0
57.7
60.8
61.2
62. 1
66.8
69.0
68.7
69.9
69.5
71.5
73.6
78.1
81.0
85.1
92.5
96.7
100.9
103.8
98.4
100.4
101.6
104.8
107.1
109.7
111.8

57.6
57.7
57.0
56.4
52.8
57.9
61.0
61.4
62.3
67.1
69.1
68.9
69.1
69.4
71.8
73.9
78.6
81.3
85.8
93.4
96.7
101.6
103.8
97.9
100.9
102.4
105.2
108.2
109.5
112.3

58.0
57.8
57.3
55.8
52.4
58.2
61.1
62.0
62.9
67.4
69.4
69.4
68.6
69.1
71.8
74.3
79.5
81.7
86,4
93.8
97.0
102,4
103.5
97.8
100.4
102.3
105.8
IOS.8
110.2
112.4

54.0
57.9
58.0
56.9
55.3
53.3
59.6
61.2
61.8
63.3
67.7
69.4
69.5
67.8
69.3
72.3
74.9
79.8
82.0
87.5
94.2
97.8
102.8
102.2
98.6
101.2
102.8
106.7
108.9
110.2
112.3

56.1
57.8
55.6
57 . 1
54.6
54.6
60.5
61.2
61.5
64.4
68.3
69.1
70.0
68.3
70.5
72.5
76.2
79.9
83.6
88.8
94.9
98.7
104. 1
100.9
100.1
100.5
103.3
107.1
109.5
111.1
111.4

56.6
57.6
54.7
57.7
53.8
56.5
60.9
61.1
61.7
65.5
68.6
68.7
70.3
69.2
71.0
72.9
77.2
80.7
84.6
90.9
95.6
99.7
104.0
99.4
100.7
101.2
103.8
107.0
110.1
112.1

57.6
57.8
56.8
56.4
52.7
57.9
61.0
61.5
62.4
67.1
69 .2
69.0
69.2
69.3
71.7
73 .9
78.7
81.3
85.8
93.2
96.8
101.6
103.7
98.0
100.6
102.1
105.3
108.0
109.8
112.2

56 . 1
57.8
56.3
57.0
54.1
55.6
60.5
61.3
61.9
65. 1
68.4
69. 1
69.7
68.7
70.6
72.9
76.8
80.4
84.0
90.1
95,4
99.5
103.7
100.1
100.0
101.2
103.8
107.2
109.6
111.4

Estimates from February 2008 through June 2008 are subject to further revision in the upcoming monthly releases .
I. Annual averages of indusuial production are calculated from not seasonally adjusted indexes .
. Not available as of July 16, 2008 .

A54

Federal Reserve Bulletin 0 August 2008

A.2. Revi. ed data for capacity and capacity utilizalion lor tOUlI induslry. 197 -2008
Seasonally adjusted dala
Quarter
Year

Jan.

Feb.

Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Annual
avg.

Capacity (percent of 2002 output)
1978
J979
1980
1981
1982
1983
1984
1985
1986
J987
1988
1989
J990
J991
1992
1993
1994
J995
J996
1997
1998
1999
2000
2001
2002
2003

2004
2005
2006
2007
2008

.. .. .. ... . ....
.... .... .. .. .
....... ... ..
.. ..... ... ...
...... ... .. .. .
.... . .. . ... .. .
. .. . ..... .... .
.. ..... .... . ..
.... . ... ..... .
. .. ... .. .... ..
.. ...... ......
.. .. . .. . .....
...... .... .. ..
. .. . . .. . . . . ..
... .. .........
...... ... .. ...
......... .....
..... .... ....
........ .. ....
..... ... .... ..
.. .. .. .... . .. .
.. ......... .. .
. .. .... .... ...
... . .. ... .. ...
..... .. .. . .. ..
...... .... ....

65.0
67. 1
68.8
70.7
72.7
74.0
74.5
76.2
78.2
79.3
81.0
81.9
83.7
85.6
87.0
88.9
90.4
93.8
98.3
104.0
111.5
118.9
124.4
129.4
133.2
133.6
. .. .... ..... .. 133.0
.. .... .. ... .. . 133.2
.. . ...... ..
134.6
........ .. . ... 136.4
.... .. ... .... 139.0

65.2
67.3
69.0
70.9
72.8
74.0
74.6
76.4
78.3
79.5
81.J
82.0
83.9
85.7
87. 1
89.1
90.6
94. 1
98.7
104.5
112.2
119.4
124.9
129.8
133.4
133.5
133.0
133.3
134.7
136.6
139.1

65.4
67.4
69. 1
71.0
73.0
74.1
74.7
76.6
78 .4
79.6
81.2
82. 1
84.1
85.8
87.3
89.2
90.9
94.4
99.2
105.1
112.9
119.8
125.3
130. 1
133.6
133.4
133.0
133.3
134.9
136.8
139.3

65 .6
67.6
69.3
71.2
73.1
74. 1
74.8
76.8
78.4
79.8
81.2
82.2
84.2
86.0
87.4
89.3
91.J
94.8
99.6
105.6
113.6
120.3
125.8
130.5
133.7
133.3
133.0
133.4
135.0
137.0
139.5

65.7
67.7
69.4
71.4
73.3
74. 1
74.9
77.0
78.5
79.9
81.3
82.4
84 .4
86. 1
87.6
89.4
91.3
95 . 1
100. 1
106.2
114.3
120.8
126.2
130.8
133.8
133.2
133.0
133.5
135.2
137.2
139.7

65.9
67.8
69.6
71.5
73.4
74.1
75.0
77.2
78.6
80.J
81.3
82.5
84.6
86.2
87.8
89.5
91.6
95.5
100.6
106.8
J15.0
121.2
126.6
131.2
133.9
133.1
133.0
133.6
135.3
137.4
139.9

66. 1
68 .0
69.7
71.7
73 .5
74.2
75 .2
77.3
78.7
80.3
81.4
82.7
84.7
86.3
88.0
89.6
91.9
95.8
101.0
107.4
115.6
121.7
127.0
131.5
133.9
133. 1
133. 1
133.7
135.4
137.6
.. .

66.3
68.1
69.9
71.9
73.6
74.2
75.4
77.5
78.8
80.4
81.4
82.9
84.9
86.4
88. 1
89.7
92.2
96.2
101.5
108.0
116.2
122. 1
127.4
131.8
134.0
133.0
133.1
133.8
135.6
137.9
...

66.5
68.3
70.1
72.0
73 .7
74.2
75.5
77.6
78.9
80.6
81.5
83.0
85.0
86.5
88.3
89.8
92.5
96.6
102.0
108.7
116.7
122.6
127.8
132. 1
133.9
133.0
133.1
134.0
135.7
138. 1

.. .

66.6
68.4
70.2
72.2
73.8
74.3
75 .7
77.8
79.0
80.7
81.6
83 .2
85.2
86.6
88.5
90.0
92.8
97.0
102.5
109.4
117.3
123. 1
128.2
132.4
133.9
133.0
133. 1
134. 1
135.9
138.3

.. .

66.8
68.6
70.4
72.4
73.9
74.3
75.9
77.9
79. 1
80.8
81.7
83.4
85.3
86.7
88.6
90. 1
93. 1
97.4
103.0
110. 1
117.8
123.5
128.6
132.7
133.8
132.9
133. 1
134.3
136.0
138.5
.. .

66.9
68.7
70.5
72.5
73 .9
74.4
76.0
78.0
79.2
80.9
81.8
83.5
85.5
86.9
88.8
90.3
93.4
97.8
103.5
110.8
118.4
124.0
129.0
132.9
133.7
132.9
133.2
134.4
136.2
138.7
.. .

65.2
67.3
69.0
70.9
72.8
74.0
74.6
76.4
78.3
79.5
81.1
82.0
83.9
85.7
87.1
89.1
90.7
94. 1
98.7
104.5
112.2
119.4
124.9
129.8
133.4
133.5
133.0
1333
134.7
136.6
139.1

65.7
67 .7
69.4
71.4
73.3
74. 1
74.9
77.0
78.5
79.9
81.3
82.4
84.4
86. 1
87.6
89.4
91.4
95.1
100. 1
106.2
114.3
120.8
126.2
130.8
133.8
133.2
133.0
133.5
135.2
137.2
139.7

66.3
68. 1
69.9
71.9
73 .6
74.2
75.4
77.5
78.8
80.4
81.4
82.9
84.9
86.4
88.1
89.7
92.2
96.2
101.5
108.0
116.2
122.1
127.4
131.8
133.9
133.0
133. 1
133.9
135.6
137.9
...

66.8
68.6
70.4
72.4
73.9
74.3
75.9
77.9
79. 1
80.8
81.7
83.4
85 .3
86.7
88.6
9O.J
93. J
97.4
103.0
110.1
117.8
123.5
128.6
132.7
133.8
132.9
133.2
134.3
136. 1
138.5

66.0
67.9
69.7
71.6
73.4
74.2
75.2
77.2
78.7
SO.2
81.4
82.7
84.6
86.2
87 .9
89.6
91.8
95.7
100.8
107.2
115. 1
121.4
126.8
131.3
133.7
133.2
133.1
133.7
135.4
137.5

86.6
84.2
81.3
76.9
70.9
78.2
80.4
79.4
79.4
83.4
84.9
83. 1
80.3
79.6
80.8
82.3
85.1
83.5
83.5
84.6
82.0
82.6
80.2
73.6
7S. 1
77.0
79.4
80.9
80.9
81.0

82.8
86.0
84. 1
SO.3
75 .9
72.1
SO.O
80.0
79.0
79.6
83.5
84.7
82.9
79.2
79.5
81.2
82.6
84.7
83. 1
83.7
83.9
82.0
82.4
78.8
73 .9
7S.8
77.3
80.0
SO.8
80.7
80.6

85.3
85.3
SO. I
80.0
74.5
73.6
80.8
79.5
78.3
80.5
84.0
83.9
83 .0
79.3
80.5
81.1
83.4
84.0
83.5
83.6
83.0
81.8
82.S
77 . 1
74.8
7S.4
77.6
80.3
81.0
81.0
79.8

85 .3
84.5
78.3
SO.3
73 .0
76. 1
80.9
78.9
78.4
81.5
84 .3
82.9
82.8
80.1
80.5
81.2
83.7
83.8
83.3
84.1
82.3
81.6
81.6
7S.4
7S.2
76. 1
78.0
80.0
81.2
81.3
. ..

86.2
84.3
80.7
77.9
71.4
77.9
80.4
78.9
78.9
83.1
84.7
82.8
81.J
79.9
80.9
82.1
84.5
83.5
83.3
84.7
82.2
82.3
80.6
73.9
7S .2
76.8
79. 1
80.4
80.7
81.0

84.9
85.0
80.8
79.6
73.7
74.9
SO.5
79.3
78.7
81.2
84. 1
83.6
82.4
79.6
80.3
81.4
83.6
84.0
83.3
84.0
82.8
81.9
81.8
76.3
74.8
76.0
78.0
80.2
80.9
81.0
. ..

.. .

...

Capacity utilization (percent)
1978
1979
19SO
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003

.... .... ..... .

... ..... ......
... ...... ... ..
.... .... .. .. ..
..... .. .. .. .. .
.. . .. ... .. ... .
. .. .... .. .... .
..............

2004 . .. . . . .... ....
200S
2006
2007
2008

...... ... .....
.... .. . ,. , ...
.. ... .. . .... .
...... ... ... ..

82.3
85.8
84 .4
80.6
75.2
72.2
79.7
80.0
79.7
79.0
83.3
85.0
82.5
79.8
79.0
81.J
82.5
85.0
82.6
83.2
84.4
82.0
82.4
79.4
73.8
75.6
77.2
79.8
80.9
80.5
81.0

82.4
86.1
84.2
80.0
76.5
71.7
80.0
80.1
79.0
79.9
83.5
84.5
83 .0
79. 1
79.5
81.2
82.3
84.7
83.6
83.8
83.9
82.0
82.4
78.7
73. 8
75.9
77.6
80.2
80.7
80.9
80.3

83.6
86.2
83.8
80.3
75.8
72.3
80.2
SO.O
78.4
79.9
83.7
84.6
83.2
78.6
80.0
81.1
83.0
84.5
83. 1
84.0
83.4
81.8
82.4
78.2
74.2
7S .9
77.1
SO. I
80.8
80.7
SO.5

NOTE: See the general note to lable A. I.

85 .1
85.1
81.9
79.7
75.0
73.2
80.6
79.7
78.4
80.2
84. 1
84.4
82.9
78.6
80.4
81.3
83.2
84. 1
83.3
83.6
83.3
81.7
82.6
77.8
74.4
75.3
77.5
80.0
81.J
81.0
79.9

85 .2
85.6
79.7
80. 1
74.4
73.7
80.9
79.5
78.4
SO.6
83.9
83.7
82.9
79.3
SO.5
80.9
83.4
84.0
83.4
83.7
83.3
82.0
82.5
77.1
74.7
75.4
78.0
80.2
80.9
80.9
79.6

85.6
85.4
78.6
80.3
74.0
74.1
81.0
79.4
78.1
80.8
84. 1
83.6
83.0
80.0
80.4
81.J
83.7
83.9
83 .7
83 .6
82.4
81.6
82.4
76.4
7S .4
7S.6
77.4
80.5
81.2
81.0
79.9

85 .3
85.0
77.9
80.6
73 .6
75 .2
81.1
78.7
78.5
81.2
84.2
82 .6
82.7
79.9
80.9
81.2
83.7
83.3
83.2
83.6
81.6
81.8
81.9
7S .9
75.1
7S.9
77.9
80.4
81.3
81.4
...

85.4
84.3
77.9
80.4
72.9
76.0
81.0
78.9
78.3
81.6
84.5
83.2
82 .8
79.9
80.3
81.1
83.8
84. 1
83.4
84.2
82.9
81.9
81.5
7S.4
7S.2
75 .9
78. 1
80.S
81.3
81.2
.. .

85.4
84.2
79.0
79.8
72.5
77. 1
SO.6
79.1
78.3
81.7
84.2
82.8
82.8
80.5
80.4
81.4
83.7
84.1
83.4
84.5
82.3
81.3
81.6
74.9
7S .2
76.3
78.0
79.0
80.9
81.3

...

85.9
84.5
79.8
79.0
71.8
77.7
80.4
78.6
78.6
82.8
84.6
82.6
82. 1
80.2
SO.8
81.8
84.2
83.6
83.0
84.6
82.5
82.0
81.0
74.3
7S.0
76.4
78.7
79.8
SO.8
80.8

.. .

86.3
84.2
81.0
77.9
71.5
77.9
SO.5
78.7
78.8
83. 1
84.6
82.6
80.9
80.0
80.9
82.0
84.4
83 .5
83.4
84.8
82.0
82.2
80.7
73 .8
75.4
77.0
79.0
80.6
80.5
81.1
.. .

...

. . . Not available as of July 16, 2008 .

...

Industrial Production and Capacity Utilization: The 2008 Annual Revision

A55

A.l Rates of change in industrial producti n. by market and indu lry groups, 200J-07 1

2003
Total industry

... ........ ......... ... .. , . . . .

Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percenl)

NAICS
code'

Item

I 2004 I 2005 I 2006 I 2007

2003

I 2004 I 2005 I 2006 I 2007

...

1.5

3.1

2.6

1.7

2.l

-.6

-1.8

...

1.5
1.4

2.6
-10.9
2.1
-3 .8
-1.8
1.9
-1.2
10.5
-1.9
2.9
.9
1.3
1.5
2.1
4.1
-1.4
12.0
.5
-1.2
-8.3
-5.5
2.3
.2

2.6
1.7
-.7
-2.9
2.5
1.6
2.0
2.6
2.2
2.3
-9.8
4.0
2.2
3.9
5.2
7.2
6.3
4.0
3.1
1.7
3.2
3.7
5.4
6.0
.0
11.1
4.9
4.3
- .9
3.8
8.6
-.5

4.4
2.4
1.5
-1.9
11.0
1.6
5.6
2.7
3.0
3.9
-2. 1

1.3
1.1
.9
3.6
14.2
-{j.0
-1.5
1.2
.9
1.5
-1.9
.0

- .9
J.7
10.3
15.9
t4.6
5.9
6.9
7.5
2.6
.3
2.4
5.4
.5
11.3
2.9
-2.2
.5
-1.1
-5.8
-4.0

1.0
.2
-3 .9
-5.3
11.5
-{j.1
-2.8
1.5
2.1
.3
.3
7.7
-2.4
-.2
7.8
9.1
12.8
4.4
-2.6
-3.5
-.3
2.5
1.3
1.2
-5.8
9.4
-2.0
1.6
-12.2
1.6
4.9
5.2

.3
.0
.0
-.1
-1.9
.6
- .1
.0
.0
.0
.0
- .2
.5
-.1
.8
-1.6
3.5
.1
1.3
-.1
.4
.5
.7
1.1
.1
3.2
.0
-.1
-.7

-.4
-.4
-.8
-.1
-5.7
-1.4
-.7
-.2
-.3
- .9
-1.9
2.2
-3.1
.1
- .9
-4.6
.9
-.8
3.1
-.5
-.7
- .8

- .2
.1

.0
-.1
-.4
.3
-11.8
- .6
-.1
.0
.0
.0
.7
.2
-1.0
.2
.0
1.3
-.9
.0
.6
.2
.2
.3
.6
.7
- .2
J.7
.5
.6
2.5
-.1
.9
-.3

-1.6
-1.2
-4.7
.2
-.2
.3
-1.0
.8
.1

-1.5
-.9
-1.4
-.7
-1.6
-1.4
-2.2
-.7
-.6
-1.9
- .4
3.9
-5.7
-.8
-2.0
-7.8
2.6
-2.5
-4.9
-1.5
-2.7
-2.2
-3.2
-4.5
-2.6
-10.0
-1.2
-1.0
-4.9
-1.0
.1
-.1

.1
.1
-.1
.9
-4.5
-.5
-.7
.1
.1
.2
1.4
.3
- .4
.0
-.5
-5.5
.4
.7
5.8
-.6
.0
.7
1.3
1.6
-.5
5.7
-.6
.9
.3
.7
1.3
-.6

1.7
2.0
3.4
4.6
U
4.5
-2.4
-2.0
17.9

3.7
3.8
4.0
1.4
4.4
8.1
1.9
5.1
10.2

3.7
3.9
6.9
11.6
5.3
-1.1
6.2
8.3
15.1

1.1

31-33
...
321
327
331
332
333
334

1.4
1.6
-13.3
-3.5
-4.2
3.2
2.5
12.2

2.3
2.5
3.9
-{j.8
.7
4.1
3.4
-.7
13.9

.4
.4
.8
.1
-.6
.2
- .2
.0
4.3

.2
.3
.2
-.3
.5
.7
.3
.2
.0

- .7
-.6
-1.0
1.2
-.5
1.2
.1
.1
-3.2

-2.2
-2.1
-3.1
1.2
-1.6
-.7
- .6
-2.8
-{j.1

.6
.6
1.0
-1.4
.6
-1.9
.9
.9
4.4

335
3361-3

- .9
3.2

2.3
-1.4

1.8
-.3

- .5
-5.9

3.7
-2.2

.1
.1

-2.0
-.6

-2.8
-2.1

-.4

-4.0
.2
.3
.2
2.5
-5.1
-10.6
-5.6
-2.7
.9
1.9
-.2
-2.8
1.0
.6
1.9
-{j.2

3.4
3.4
1.6
3.5
1.3

11.5
1.6
6.6
.7
4.1
-.3
-1.3
- .7
.5
-3.7
-1.2
2.6
-.5
-4.9
2.0
3.5
-4.6

4.5
-1.6
2.7
1.3
.3
-11.7
-.8
.3
1.9
2.2
5.0
-3.6
-4.5
8.2
- .7
-1.2
1.5

10.9
-1.7
1.5
.9
2.1
-8.1
-2.0
-2.2
-1.3
-.5
1.4
4.4
-1.4
.2
3.1
3.3
2.0

- .2
.1
.2
-.1
.0
-.4
-.1
- .2
- .3
- .2
- .2
.0
.6
.3
.0
.1
-.2

1.4
- .1
-.5

-3.6
.0
-2.1
-.2

-10.2
-.4
-2.0
-1.0
-2.3
-4.0
-.7
.4
-3.3
- .4
1.3
-3.9
-4 .7
.2
-1.0
-1.2
-.4

MARKET GROUPS
Final products and nonindustrial supplies

... .. .

Consumer goods . . ... . .. . . . . . . . . . . . . .......
Durable . . ... . . . . . ...... .. . , .... .. ..... ...
Automotive products . . . . . . . . . . . . . . . . . .
Home electronics ..... ....... .. .. . ... ...
Appliances. furniture. carpeting .... .....
Miscellaneous goods ... . . . . . . . . . . . . . . . .
Nondurable .. . .. .. ... . .. ... ... . . . .. . .
Non-energy ... . ... . ....... .... .......
Foods and tobacco ... ... .. .. ...... ...
Clothing ....... .. .. ..... . ...... .. . . ..
Chemical products ... ......... .... ...
Paper products .... .. .... ... .... ... ...
Energy ... ................. .. .... .. .....
Business equipment ...... , .. ... ... ... .. .. ...
Transit
..... . . . .. ...... .... .. . , .
Information processing ........ ..... .......
Industrial and other .. ...... ..... ....... ...
Defense and space equipmem .. . . . . . . . .. . . .

.. .
·..
...
. ..
. ..
.. .
.. .

Construction supplies .. . . . .. .. ........ .. . . . . .
Business supplies ......... .... ........... .. .

...

Materials . .. . . .. ............ . ... .. .. ... . .. ... . .
Non-energy .. ............. ........ .. .. ..... .
Durable .. ...... .. ... .... .. .... ... .... ..
Consumer pans .. . . ....... ...... .. .... . .
Equipment pans ....... ... .... .... ... ...
Other . ......... . . .... . . , ... . . . . . . . ... ..
Nondurable .. .... .. ...... ..... .. ..... .....
Te.tile .... .... ....... .. .... ... ...... .. .
Paper . ... . . .. . ....... .. ... ..... .......
Chemical ... ...... .. .... .. ..... ..... ..
Energy . .... . ... . ......... . . ... , .... ..... .. .
INDUSTRY GROUPS
Manufacturing' ........ . . . . . . ... ... .......... ..
Manufacturing (NAICS) ...... .. .. .. ... ......
Durable manufacturing .. ... ... . . . . . . . . .
Wood products . . .. ..... . . .. .... ... .. ..
Nonmetallic mi neral products . . . . . . . . . .
Primary metal ..... ... .... ..... ... .. . ...
Fabricated metal products . . .. . ... . . . . .
Machinery ... -. - .... ..... ......... .. ...
Computer and electronic products . .. . . ..
Electrical equipment. appliances.
and components ..... ....... . .. ...... .
Motor vehicles and parts .. . . .. . . ..... ...
Aerospace and miscellaneous
transportation equipment . ...... ..
Furniture and related products . ..... • . ...
Miscellaneous . . . . .. . . ... .. . . ..... .....

.
.

......... ..
Nondurable manufacturing
Food. beverage, and tobacco products ...
Te.tile and product mills .. . . . ..
. ..
Apparel and leather . . . ..... . . . .. . . . . . .. .
Paper .. . ... . . . ... . . ... . ..... ..... .. ....
Printing and support
. .. . . .. . .
Petroleum and coal products . . . . . . . . . .
Chemical ......... . . . .. .. ... . . .... . .. . .
Plastics and rubber products . . . . . . . . . . .
Other manufacturing (non·NAICS) .... ... . . . .

.
.
.

Mining ..... ..... .... . . . . . . . . . . . ...... . . .. . .. . .
Utilities .. ........ . ...... .. ... ... ..... .. ...... .
Electric .......... ... .. .. .. .. ...... ... .. ..
Natural gas ... . ..... .. . ... .. . ... .. .... . .....

. ..

.. .
...

. ..
. ..
. ..
...
. ..

. ..
. ..
. ..

. ..
. ..
.. .
. ..
...
...
·.

...

·.
· ...
.. .
...

3364-9
337
339
. ..
311.2
313.4
315.6
322
323
324
325
326
1133.5111
21
2211.2
2211
2212

3.4
4.7
18.5
2.9
-1.4
.5
1.1

I. Rates of change are calculated as the percent change in the seasonally adjusted index from the fourth quarter of the previous year 10 the fourth quarter
of the year specified in the column heading.
2. North American Industry Classification System .
3. Manufacturing comprises North American Industry Classification System
(NAICS) manufacturing industries (sector 31·33) plus the logging industry and
the newspaper, periodical, book. and dire ctory publishing industries . Logging

-8.9
2.8
2.4
10.4
6.6
.9
2.0
- .9
1.8
2.3
-1.1

1.1

1.9
2.8
-3.4
8.9
1.7
5.2
-1.6
1.1

3.2
3.5
5.4
-2.0
12.5
3.0
.6
- 9.4
-1.3
2.1
2.7

-.3

.1
1.2
.7
-.2
.6
.5
.5
.1
-.6
-.2
.1
.1
.3

-1.1

-2.2
-1.7
-.6
-1.4
-.1
1.3
- .4
-1.2
.6
-.1
.1
-1.2

1.1

3.4
1.2

-1.7
.3
.4
-.2
U
.2
.9
-.5
.8
-.7
-.8
-1.0
.2
- .1
2.2

and pUblishing are classified elsewhere in NAICS (under agriculture and infor·
mation respectively). but historically they were considered to be manufacturing
industries and were included in the industrial sector under the Standard Industrial Classification (SIC) system. In December 2002 the Federal Reserve reo
classified all its industrial output data from the SIC system 10 NAICS .
Not applicable .

A56

Federal Reserve Bulletin 0 August 2008

A.4. Rates of change in industIial production, specinl aggrcgmcs and sciccted detail, 200:l-071
Dilference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)

NAICS

Item

code'
2003

I 2004 I 2005 I 2006 I 2007

Total industry ... ... . . . . ..... .. . . .... .. .. ... . .

1.5

3. 1

1.3

2.6
-1.8

1.7
3.7

2.1

Energy . .... . .......... . ... . . . . ....... . .. .... . .
Consumer products .. .... . ... .. . . ... . . ...... .
Commercial prOducts ... .... . ........ . . . . . . . .
Oil and gas well drilling .. ...• • ..... • .... . . . .
Converted fue I .... ..... . . ... .... ..... . .. ... .
Primary materials . .. . . . .. . .... . ..... . . . . ... .

-1.8

3.9

1.7

-.2

4.7

4.5

1.2

8.4

11.9
-2.6
-4.6
3.9

14.8
2.5

Non-energy .. ........... . .... .... . .. .. .. ... .. .
Selected high-Iechnology industries
Computers and peripheral equipment . . . . . . .
Communications equipment .... . . .
Semiconductors and related
electronic components ....... . .
Excluding selected high-technology
... ... .. ........ .
industries
Motor vehicles and parts ............. .... .
Motor vehicles . . .. ... . ... . . .. .. . . ..... .
Motor vehicle pans .. ......... .... . . . . . .
Excluding motor vehicles and pans ......... .
Consumer goods .... .. ... .... . .. ... . . . . .. .
Business equipment .. . ...... . . . ... .. . . ... .
Construction supplies ... . . . ..... ... . ... . ..
Business supplies ................ ...... . .
Materials .... .. .. .... .. . . . ...... ...... . . . .

213111

22.4
28.8
13.7

20.6

1.9
2.0
- .8
5.3
1.6
2. 1
22.3
16.7
20.6

34.0

17.3

24.0

15.4

3. 1

3.2
7.7
-1.9
- .1

-1.4

-5.9
-7.0
-4.3

-2.2

- .8

2.7
-.3
-2.3
-.6

3.6
2.3

3.0
3.1

21.3
1.0

2.3

-.1

-1.7

1.7
23 .8

3.5
9.4

3341
3342

9.9

1.6

17.4

334412-9
3361-3
3361
3363

2.3

1.1

-2.7

6.4
1.I
17.3
18.0

1.0

2003

I 2004 I 2005 I 2006 I 2007
.1
- .2
.2

-.6
.0
.1

.0
.1
.2

-.5

.4
.1
-.1
.0
.1

6.7

-1.0

5.1

-4.9

3.5

-5.5

- .1
.1
- .1
.3
- .7
-5.7
-1.5
.8

25 .9

9.5

3.6

.0
.1
.0

.3
.3

-2.7

.5
1.I
.3
2.8

.2
.0
.0
- .4
- .1
.1
-.1

11.4

-1.9

- .6
.2
-1.9
-.4
-.5
-1.6

-2.1

-.4

.2
.3

. ......... . . .

3.2

4.7

Mel/sures excluding mota,. vehicles l/1U1 parIS
Total industry ..... . ..... . ....... ..... . . . .. .. .
Manufacturing' . .. . .......... . . . . .... ..... .
Durable .... . ........ . ...... . . ...... .. .

1.4

3.5

2.4

4.2
5.1

2.8
4.0
8.1

2.1

1.6
3.5

1.7

2.6

.4
.4

2.8

4.8

1.2
l.l

-19.4

- .4

-1.5

1.6
2.5

-9.7

-.4

3.3

1.8

5.5
-7.7
5.9

-.4

2.7

- .1

5.9
5.8

.2
.3

.3
.2

-1.9

-2.2
-7.3

7.5

-1.6

.1
.3
- .4

-1.2
- .2
-1.0
-.3

-.4
- .7
- .2

- .1

7.3

1.7
2.2

2.4
.6

- .5

-1.2
.6
.3

5.2
5.0

- .3
-.8
-1.1

-1.0
-4.1
- 1.9
- .8
-4.4
-1.5
-2.6
-1.6

.3
.3
.3

-2.0
.7
- .9
-.5

5.8
-3.7

-1.8

.8
.2
.2

.0
.5

-.8
.0
.5

Mel/.sures excluding selected high-technolollY
industries

TO~a~~~~~~~gj·::::: : :: : : ::: :: :: ::::::: : .·· .
Durable. . ... . ........ . .

.1
- .5

1.5

.0
.0
- .1

- .5

- 1.9
- 2.5

- .6
- .7
-1.1

-1.8
-2.2
-3.2

-.3
-.4

-1.5
-1.9

- 2.7
.1

...{j.2

2.8

-1.0

.4
.4
.7

1.2

Measures excluding selected higlHechn% gy
industries and motor vehicles and pans

TO~I~~~~~~~gj ' : : : : : : : : : : : : : : : :: : : : : : : : :

3.1
3.8

1.7

1.4

- .1

2.7

1.3

- .1

Measult's 0/ non-energy materials inpllls to
Finished processors ....... . .... . .. ...... ...... .
Primary and semilinished processors .. . .. .. . .

3.7
.7

6.0
4.9

5.6
.1

2.8
.3

5. 1
2 .4

1.4

- .3

2.6
3.7

...{j.6
3.3
5.4

7.2

t.7

- .4

-.5

2.6
1.7

.1
.5
.3

-1.0

-1.0
-.2

-3.3

.7
.2

Stage-oJ-process groups
Crude ............ ..... .... . .. .. ... .. ...... .. .
Primary and semilinished ..... ..... .. .. .. .... ..
Finished . . .. . ...... ....... ... . ........ ....... .

1.I
2.7

2.4

3.4

-.2

2. North American lndustry C lassi fi cation Syste m.
3. See table A.3. note 3.
Not applicable.

- .6

IndustriaL Production and Capacity UtiLization : The 2008 AnnuaL Revision

AS7

A.S, Rates of change for annu al industri al production indexes. 2003- 07 1

2003

Total industry

. ... . ...... . .. .... .........

2004

2005

2006

2007

2003

2004

2005

2006

2007

-1.8

-.4

- .1

-,I

- .3
.0
,9
-1.0

-.5
.1
- ,6
5. 1
-,3

-1.0
-1.2
-.9

-1.3

2.5

J.J

2.2

1.7

1.3

1.1

2.8
.5
3,6

.3
-1.3
,8

1.7

3.2
.5
- .3
6.3
-.4

-.~

7.3
10.5
4.5
3.4

10.4
-3.2

.0
-.1
.0
-.5
2.5
-.2
,3
,4
.6
.1

1.2

Difference between rates of change:
revised minus previous (percentage points)

Revised rate of change (percent)
Item

MARKET GROUPS
Consumer goods ..... ...... .
Durable " " " . . . . . . . . . . .. . . . . . . . . . . . . . . . .
Nondurable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

... ........ ....
Business equipment
Defense and space equipment ... .... .. ... ..
Construction supplies , .... . ...... ,. , ... ,., . • '
Business supplies, . , , , , , , .. ' .... . .. ' ... , .. , . ,

Materials ................. ...... .......... ...
Non-energy . . . . • .. , . . ..... ,.,' •• .........
Energy .. ........ ...... . . . . . ....

1.4
5,2
-.8

1.7

2.1
2,2

1.3
1.8
,0

-,4

3.0
4.3

2.3
3.3
3,8
-2.5
.6

2.3
3.9
-1.2

2.2
.6
2,2
2.5
1.6

4,0
4,2
5.5
2.8
,7

2.4
2,8
4,6
.8
-4,3

1.7
1.8
2.6
1.0
-1.5

-1.3
2.1

3.1
-.6

3,3

1.9
2.1
1.6

.2
.0
-,I
,0
- .2

-.2

-1.3
-2.4

.1
-2.9
6.8
-1.2
-1.2

,2
.4
.1

-2.4
-3.4
.0

-.1
.3
-1.0

-.4
- .2

-1.3
-5 .6

INDUSTRY GRO UPS
Manufacturing2 , .• . , . ..
. . . . .. . . . . . .
Manufacturing (NAICS) . ..... . " . " .... " .
Durable manufacturing . .. , .... . ...... , , .
Nondurable manufacturing ..... ...... . ..
Other manufacturing (non-NAICS)

1.5
2,7
.1
-2.9

Mining . . . . . ... , .. , .. " .. , .. .... .
Utilities" ". " ." " . . ...... . . . . . ... .........

.2
1.9

1.3

2.9
3. 1
4.1
1.9
.8
- ,6
1.4

capacily. by

induslry

groups.

.0
.1
,I
.0
-.1

-1.1

-2.2
- 2.2
-3.0
-1.4
-3,0

.3
.0

.0
.0

.4
,0

.4
-,8

2004

2005

2006

Difference between rates of change:
revised minus previous (percentage points)

Revised rote of change (percent)

-.4

,I
-3.6
-1.1
.4

200~-O7\

hem
2003

.2
,0
.4

2, See table A,3, note 3.

I. The rates of change are calculated from annual averages of seasonally ad·
justed industrial production indexes rather than between the founh quarter of
one year and the founh quarter of the next.

A.6. Rales or change

.2
.2
,4
-,I
,I

2007

2003

2004

2005

2006

2007

..... ..... .... ...

-.6

1.3

1.8

-.2

-1.1

Manufacturing 2 . .. ...
.... .. ... .. ..... .
Manufacturing (NAICS) .. ,., , ...... .. .....
Durable manufacturing . . . . . . . . . . . . . . . . .
Nondurable manufacturing . . . . . . . . . . . . .
.O ther manufacturing (non-NAICS) . .

-.6

1.4
1.5
2,6
.5
-,2
-1.1
.7
13.1

1.4
1.4
2.4

2.0
2.0
3.3
.7
.6

-.3

1.2
21.4

2.8

.3
-.5
-1.0
.3
1.2

- .7
.2
- ,8
,6
.7
-5.2

-1.3
-1.4
-1.8
-.8
.1
.8
-1.2
-9.3

- .2
-.2
- ,2
- ,I
-,2

1.4
.8
10,3

.3
.3
.5
.2
-1.0
,7

,I
.1

-1.0
-4,8
-1.4
3.6
4.2

.2
.2
.5
- .1
-,6
-1.3
2.9
5.5

-.7

- .2

-,6

-.2

-1.8
- .8
,3

-,7
.7
.4

-,8
,8
2.3

,9
1.2
1.8

1.4
2.1

.4
.6
,0

-,6
.3
-.1

.3
-.6
,3

,7
-1.8
-.5

1.0
-,I
-,3

Total industry

....

.
.

Mmmg ... . . ... . . . ... . _, , ..
Utilities
Selected high-technology industries
Manufacturing except selected
high-technology industries' . .

..... .... ..

- .3
,3

.3
1.1

1.7

-.3

1.3
-.3

1.9

Stage-o/·process groups

Crude. .............. ....... ... , . . .... . .. . .
Primary and semifinished ..... ....... .... - ..
Finished ....... .... .....
.., ..... ... . . ...

I. Rates of change are calculated as the percent change in the seasonally adjusted index from the founh quarter of the previous year to the founh quarter
of the year specified in the column heading.

1.7

2, See table A.3, note 3,

AS8

Federal Reserve Bulletin D August 2008

A.7. Capacity utilization rates. by i nduslry groups. 2(J04-07

NAICS
code'

Item

Revised rate
(percent of capacity, seasonally adjusted)
19722007
avg.1I 2004:Q4

2005:Q4

Difference belween rates of change:
revised minus previous
(percentage points)

2006:Q4 2007:Q4 2004:Q4

I2005:Q4 12006:Q4 I2007:Q4

Total industry

81.0

79.1

80.4

80.7

81.0

-.2

-.8

-.S

Manufacturing 2 . . . . . . . . . . . .. . . .• . .. . • . . . . . . .
Manufacturing (NAICS) . .. ..... . .. ... . ... .
Durable manufacturing . . . .. .. .. . ... .. . ..
Wood products . .. . .. . . .. . .......... ..
Nonmetallic mineral products
Primary metal .. .... .. ..... .. ....... ..
Fabricated metal products . . . . . . . ... . . .
Machinery . ............. ... . ... .... ..
Computer and electronic products .... .
Electrical equip .• appliances,
and components .. ..... . ..... . . .. . .
Motor vehicles and parts . . .... ...... .
Aerospace and miscellaneous
transportation equipment ... . . . . .. . .
Furniture and related products .. .. . . . . .
Miscellaneous . ... . .. . . .. ...... .. . . .. .
Nondurabte manufacruring . . . . . ... . .. . ... .
Food, beverage, and tobacco products . .. .
Textile and product mills ..... ..... . . .. . .
Apparel and leather . . . ... . . ...... ... . ..
Paper .. ............ .. .. . .. . ..... .. . . . ..
Printing and support
.......... .. . .
Petroleum and coal products . . . . .. . . ... . .
Chemical . ..... ................. ....... .
Plastics and rubber products . ..... . .. . . . .
Olher manufacturing (non· NAICS) ....... . .
Mining . . .. .. . . ... . . ... . ... ... .. .. . ... .
Utilities .. . ...... ....... . . ....... . . ......... .
Selected high-technology industries .. . . .... . . .
Computers and peripheral equipment .. . . . .
Communications equipment . . . .... .. ...... .
Selniconductors and related electronic
components .. . . . . .. .... . . .... .. . .. .. . . .

77.5
77.1
74.8
81.4
80.3
86.7
73.8
73.2
71.1

79.2
78.9
78.0
89.9
83.3
83.9
78.0
78.5
74.7

79.0
78.9
77.3
75.9
78.9
80.8
79.9
79.4
78.0

79.3
79.3
77.8
70.1
78.2
83 .9
81.3
77.3
77.4

-.1
- .1
.0

- .3
-.4
-.2
1.4

-1.1
-. 9
-l.l
1.6

-.5
-.3
- .3

321
327
331
332
333
334

79.7
79.5
78.0
79.9
79.4
80.9
77.5
78.7
78.3

- .8

- .5

-.8

-. 2

.2
.1

- 1.4
- .3
-1.5

335
3361-3

83.2
77.4

79.9
79.2

83.2
78.3

82.1
72.3

83.4
72.4

.8
.3

3364-9
337
339

63.0
77.0
74.9
79.8
78.4
77.2
67.9
83.7
76.5
92.0
78. 1
83.8
85 .7
88.8
84.6

71.8
84.3
78.5
88.9
79.1
82.3
80.7
91.2
84.4
80.0
77.5
73.3

SO.4
76.6
74.7
81.0
81.1
68.9
73.0
82.6
76.4
88.9
78.9
84.6
79.2

1.6
.5
-. 1
-.3
.3
1.6
.0
-.8
.6
-2.4
-.4
-1.2

- .2
.3
-1.4
-.6
- .7
-. 1
-1.9
-1.0
- .1
-1.4

-1.9
-3.3
- 2.3
-1.2
-1.9
-1.2
1.4
-2.5
-3 .9

- .1

85.9
79.9
78.3
80.1

.5
.4
.0
- 1.2
-1.6
-2.0

- .8

- .6

69.5
78.2
52.4

70.0
79.0
76.9
SO.O
80.7
79.7
69.6
84.0
77.7
87.3
75.5
85.9
85.4
85.5
85.7
75.2
74.3
61.8

72.8
77.5
76.5
80.8
80.3

3341
3342

72.7
78.6
76.6
81.6
81.5
82.0
78.4
87 .6
83.5
85.9
78.3
83.6
84.5
87.5
86.8
78.1
77.9
75.7

-1.3
-1.9
-2.0

-.8
.0

-4.3
-1.9
- .2
2.0
-2.3
-1.9

334412-9

80.8

77.4

84.2

85.1

80.5

1.0

2.4

5.6

8J.2
79.8

79.7
78.1

80.7
79.5

SO.7
79.0

8 1.0
79.2

.2
.0

-.2

-1.0
-1.4

-1.0

86.6
82.2
77.7

88.0
81.4
73.8

83.3
83.4
75.9

89.2
81.3
77.0

89.3
81.3
77.6

.1
.0
- .1

.4
- .1

-1.1

-1.0
-1.3

-.5
- .7

31 -33

311 ,2
313,4
315.6
322
323
324
325
326
1133.5111
21
2211,2

72.5

90.2

- .1
.2
-.2
- .6

- .1

- .4

-2.6
.2
- .6
3.4

-.2

-2.2
-2.4

-2 .1
-3.7

-5.9

- 2.5
.6
-3 .0
-.4
-1.0
-2.8
-1.3
-1.4
-.7
-1.3
1.4
-2. 1

- .2

-.3

- .3
-.6

-.8
- 2.3

-.8

Measure.. excludillg selected
high-technology industrie..

Total industry ... .. .... ..
Manufacturing' .. .... .

-.3

- .8

Stage-a!-process groups

Crude ........ . .. . ..... .. .. .. .. . .. .. .. ... .. .
Primary and semifinished . .... .... . ... .... . ..
Finished .. . .. ..... .. ....... . . . .. . ... . . . . . . ..
I. North American Industry Classification System.
2. See table A.3, note 3.

Not applicable.

-.6

Industrial Production and Capacity Utilization: The 2008 Annual Revision

A.~ .

A59

Annual proportion in industrial product ion, by market ",roups and indu try groups. 1999- 2007
NAICS
code'

hem
Total industry

... .. . . . . . .

. . . . . . . . . . . . .. .

2000

2001

2002

2003

2004

2005

2006

2007

100.0

57.4
28.1
8.0
3,9
,4
1.4
2.3
20,1
16,6
9,1
1.3
3,8
1.9
3.5
11.8
2.3
4,1
5.4
1.8
4,3
11.1
42,6
33,1
21.4
4.3
8,1
8,9
11.7
1.0
2,9
4,5
9,5

57,2
28,3
7,8
3,7
.4
1.4
2,3
20.5
16,8
9,3
1.2
3,9
1.9
3,7
11.6
2,0
4,1
5,6
1.5
4.2
11.1
42,8
32,1
20,8
4,1
8,1
8.6
11.3
,9
2,8
4.2
10,6

58,7
29,8
8.1
4,0

57.8
30,7
8.7
4,6
,4
1.4
2.3
22,0
17,8
9,7
.8
4.9
1.8
4,2
9.6
1.6
2,9
5,0
1.8
4.3
11.0
42,2
30.0
18.6
3.8
6.5
8.3
11.4
,7
2.5
4,6
12,2

56,6
29,9
7.9
4,0
,4
J.3
2,2
22,0
17,1
9.4
.7
4,8
1.7
4,9
9.4
1.6
2,9
4.9
1.7
4.3
10.8
43.4
30.0
18.5
3.5
6.4
8.6
11.5
,7
2.4
5.2
13.3

56,6
29,6
7.4
3,6
.3

6.2
8.6
11.5
.7
2.3
5.4
13,8

56.5
29. 1
7.0
3.3
.3
1.2
2,2
22 ,1
16,2
8,8
,6
4,8
1.6
5.8
9,6
1.8
2.8
5,0
1.7
4.4
10,8
43.5
29.6
18.0
3.1
6,1
8.8
11.6
.6
2.3
5.5
13.9

56,1
29,3
6.7
3,2
.3

1.4
2.3
21.7
17,9
9,9
1.1
4.4
2,0
3.8
11.2
2,0
3.8
5.3
1.8
4.3
11.1
41.3
30,6
19,5
3,8
7,3
8.4
11.2
.8
2.8
4.1
10.6

58.5
30,8
8,9
4,7
,4
1.4
2,4
21.9
18.0
9,7
,9
4,9
2,0
3.9
10,2
1.8
3.1
5,3
1.8
4,3
11.0
41.5
30.5
19.0
4.0
6.6
8.4
11.5
.8
2.7
4,5
11.0

321
327
331
332
333
334

85.5
SO,7
46.6
1.5
2.3
2,8
5,9
5,8
10.5

84,0
79,2
45,3
1.4
2.2
2.5
6,0
5.9
10.4

83.5
78.6
44,0
1.4
2.2
2.3
5.8
5,5
9.4

83.2
78,5
43,2
1.5
2,2
2.3
5.7
5,3
8,1

81.7
77,2
42,0
1.6
2,2
2.3
5,5
5.0
7.9

SO.5
76.2
40,7
1.6
2.2
2,7
5,3
4.9
7,8

79.5
75 ,4
39.6
1.5
2.3
2.6
5.3
4,9
7.4

79,2
75.4
39,6
1.4
2.3
2,8
5,5
5,0
7.2

78.7
75,0
38.5
1.2
2.2
2,7
5,6
4,9
6,8

335
3361-3

2,5
7,0

2,5
6,6

2.4
6.5

2,2
7.4

2,0
7.2

1.9
6.4

1.9
5,9

1.9
5.5

1.9
5.1

3364-9
337
339

3,7
1.7
2,8
34,2
10.4
1.5
1.4
3,2
2.6
1.7
9,5
3,8
4,8
5,9
8.6
7.4
1.2

3,2
1.7
2.9
33.9
10.6
1.4
J.3
3. 1
2,6
1.8
9,3
3.7
4,8
7,1
8.9
7,6
1.4

3.7
1.7
3,1
34,6
11.3

3,5
1.8
3.3
35.3
11.3
1.4
1.0
3. 1
2.4
1.8
10,7
3,8
4,7
7,2
9,6
8,2
1.4

3.3
1.7
3,3
35.2
11.4

3,1
1.6
3.1
35.5
10.9

1.3

1.2

3,2
1.6
3.1
35,8
10.5
1.2
.6
2.6
2.0
4.2
11.3
3.3
4,1
10,7
9,8
8,0
1.8

3.3
1.5
3.1
35.7
10.4
1.0
,6
2,6
1.9
4,5
11.4
3.2
3,9
11.0
9.7
8.1
1.6

3.5
1.4
3.1
36.5
10,7
.9
.6
2.5
1.9
5,2
11.6
3.0
3,7
11.6
9,7
8.0
J.7

Materials" " . " " " " " " •. " " ,
Non-energy .,,""""" " ... .. .... ... ....
Durable ... ....... ...... ..... ....
Consumer parts . , .. ..... .. ... ..... ... .
Equipment parts ." " .. " . " " , " " " "
....... ..... .. ...
Other ".,, " "
.... .... ... .. ..
Nondurable , ,
.. . . . .. . .. .. . .. . .
Textile" " "
Paper ,. , .... . .. . . .. .. ..... ....... ...
Chentical ........... .... .... ... .....
Energy . . . . . . . . . . . . . . . . . .

1999
100.0

MARKET GROUPS
Final products and nonindustrial supplies ..
Consumer goods . . .. . . . . . . . . . . . . .. . . . . . . . .
Durable . . . . . ... . . . . ... . ... . .......... ..
Automotive products ....... .....
Home electronics ... ",."" ... , ..
App~ances. furniture. carpeting .. . .
Miscellaneous goods , ' , , , , , , , , ... " . ...
Nondurable ........... . . , .. , , , . ,
Non·energy .... . .... .. . ... . .
Foods and tobacco .. ",, " .'
Clothing " ... .. .. . " .. " ""
Chemical products
Paper products '''''' '' '''' ' ' ' ' ' '' '' '
Energy, , , , , , . , . , " , , ' , , ' " ... " . , . , ".
Business equipment " ........ ....... .. ....
Transit .................... , ... ..... .....
Information processing , , , " , . ' ... , , , , . " ,
Industrial and other " ""., .".
Defense and space equipment , ,
Construction supplies, , , , , , , , , , , , . '
Business supplies . . . . . . . . .

INDUSTRY GROUPS
Manufacturing2 "" . . , • . " ., .• " ... , . . . .
Manufacturing (NAICS) "" "" " ""
Durable manufacturing . , , , , , , , , . , , ,
Wood products " ." .. ""''',, ... .. ,,'
Nonmetallic ntineral products
Primary metal .. "" . , ,,,,, . ,. , , ., .. ,, .
Fabricated metal products . , , , . ,
Machinery ... .. .............. ..... ....
Computer and electronic products ..... .
Electrical equipment. appliances.
and components .... . ... " . , , . , , , , , , ,
Motor vehicles and parts .. , , , . " , , , , , , ,
Aerospace and miscellaneous
transponation equipment
Furniture and related products , , . , . . ' . ,
Miscellaneous . ",.", .,.", .. "."., ..
Nondurable manufacturing
Food. beverage. IUId tobacco products
Textile and product ntills ........ ......
Apparel and leather . , . , . , .. , . . , , , , .....
Paper " ,.,., ...... . .... ... , . , "".""
Printing and support ... """ ''',, .. ''
Petroleum and coal products ....... ....
Chentical ............... .....
Plastics and rubber products
Other manufacturing (non-NAICS)
Mining .. " , . , . , . , , , . , . , , , , , . , , , , , .. " , . ..
Utilities" . " " " , . , . , . .... , . , . , ....... . .. ' , . ,
Electric .. " . " " .. " .. . " " , ....... .. .....
Natural gas . ...... ... .... .......... ...

31-33

311.2
313,4
315.6
322
323
324
325
326
1133.5111
21
2211,2
2211
2212

NOTE: The IP proportion data are estimates of the industries ' relative contri·
butions to the overall IP change between the reference year and the follo wing
year, For example. a I percent increase in durable goods manufacturing between 2007 and 2008 wou ld account for a ,385 percent increase in total IP,

1.3

1.2
3,1
2.6
J.7
9,7
3.7
4.8
7,1
9.4
8,0
1.4

.9
2.9
2,2
2.1
10,8
3,6
4.5
8.5
9.8
8,2
1.6

,7
2,7
2. 1
3,2
11.2
3.4
4,3
9,8
9,7
8.0
1.7

J.3

2,2
22.2
16.5
9,0
,6
4,7
J.7
5.7
9.3
1.6
2,8
4,9
1.8
4,4
10,9
43.4
29,6
18,1
3.3

I. North American Industry Classifi cation System,
2, See table A.3. note 3,
, Not app~ ca ble,
"

1.1

2,1
22,6
16.3
9,0
.5
4.7
1.6
6.4
9.4
J.7
2,7
5,0
J.7
4,2
10.6
43.9
29.3
17.6
2.9
6.0
8,6
11.7
,5
2.2
5.8
14,6

Federal Reserve Bulletin 0 August 2008

A60

A.9. Annual produ l ion and plice indcxl.!s for elecLed comll1Un iC,llil n$ e(( ui pmelll. 199H-2007
Index, 2002=100
Year

Data networking
Production

1998
1999
2000
2001
2002
2003
2004
2005
2006
2007

........
.... ....
.....
... .. . .
...... .. I
........
........
........
........
.......

Prices
234.4
194.4
174.1
133.2
100.0
76.6
59.9
54. 1
51.3

n.a.
n.a.
n.3.
123.6
100.0
\13.2
124.6
161.5
255.6
287.8

n.n,

I Enterprise. and home I
VOice

IProduction I
n.a.
n.a.
n.a.
n.3.
100.0
84.5
71.0
63.2
59.7
56.5

Prices

TIansmjssion and
related'

IProduction I

141.3
130.5
123.7
111.1
100.0
94.6
87.6
80.9
78.8

118.7
153.5
229.6
202.5
100.0
80.7
76.5
61.7
69.5
76.5

n.3.

NOTE: The complete sel of annual prices necessary to compute the annual
price indexes for 2007 are nOI available. The estimates for the quarlerly price
indexes for 2007 (shown in table A.IO) are based on only incomplele data .

Prices
189.3
169.6
149.3
116.5
100.0
90.5
83.2
77.4
66.5

n.3.

Wireless system

IProduction I
n.3,

n.3.
n.3.
n.3 .
100.0
118. 1
151.3
168.9
134.8
127.5

Prices
167.7
146.2
131.3
110.5
100.0
88 .5
79.3
76.9
64.4
n.3.

Satellites and earth
station

Production
76.7
68.8
92.7
86.9
100.0
IOS.1
154.1
150.5
306.1
391.0

Other

Prices

IProduction I

Prices

163.1
145.2
131.7
124.4
100.0
99 .0
83.2
85.5
64.2
n.a.

83.4
86.1
110.7
95.4
100.0
98.4
90.6
71.3
67 .4
77.8

108.4
106.3
100.4
100.9
100.0
98.6
99.4
100.4
99.8
n.a.

I . Calegory consislS of lransmission , local loop, and legacy cenlral office
equipment.
n.a . NOI available.

A. IO. Quarterly produclion amI price indexes for selected communic, lions equipment. I 998:Q t-2008:Q I
Year and
quarter
ProduClion
1998:QI
Q2
Q3 ........
Q4 ........
1999:QI
Q2
Q3
Q4
2000:QI
Q2
Q3
Q4 ..
200I:QI
Q2
Q3
Q4
2002:QI
Q2
Q3

2003:QI
Q2
Q3
Q4
2004:QI
Q2
Q3
Q4
2005:QI
Q2
Q3
Q4
2006:QI
Q2
Q3 ..
Q4
2007:QI

Q3
Q4
2008:QI

Prices

n.n.

n.a.

n.a.
n.a.

n.a.
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.

ll.a.
n.a.

n.a.
n.a.
n.a.
n.a.
n.a.
n.a.

n.a.
n.a.
n.a.
150.8
126.7
110.0
107.6
104.5
99.6
98.4
97 .7
97.2
110.4
119.8
125.2
139.3
119.9
123.3
116.4
\32.0
147.7
162.1
203.6
217.2
247.6
270.0
286.8
281.1
287.2
288.2
294.9
297.1

n.a,

n.n.
n.n.

n.a.

n.a.
n.a.
o.a.
n.a.

n.a.
n.a.
n.a.
Il.a.
148.0
137.1
127.4
126.9
110.7
107.3
91.6
90.6
87.9
80.8
70.7
63.0
60.5
59.6
58.2
56.4
53.9
53.5
53.0
51.9
51.9
50.6
49.5
48.7
49.4
50.1
48.9
47.6
D.3.

n.a.

n.a.
n.a.
n.a.
n.3.
0.3.
115.7
102. 1
92.5
91.1
91.4
84.8
89.3
73.6
76.8
74.5
68.3
65.3
60.1
61.8
66.8
64.7
62.0
61.5
58.3
57.8
58.5
56.0
58.0
54.2
52.9

NOTE: Quarterly production and price indexes are nOl available for lwo calegories of communications equipmem shown in table A.9: "satelliles aod earth
slation" and "other."
I . Calegory consislS of lransmission, local loop. and legacy central office
equipment.

n.a.
n.3.
o.a.
n.a.
n.a.

n.a.

n.a.
n.a.
n.a.
n.3.
n.3.
n.a.
n.a.
n.a.
n.a.

n.a.
n.a.
104.3
100.7
97.9
97.2
97.2
95.4
90.9
89.4
86.4
86.7
82.9
82.1
82.1
81.1
80.5
79.9
80.4
78.0
77.5
76.6

n.a.

101.0
117.1
122.9
133.9
131.9
142.9
166.1
173.1
198.7
232.7
238.1
249.3
241.9
199.8
218.9
150.9
132.8
104.7
87.7
75.8
81.3
78.7
78.6
84.3
79.2
76.3
73.6
77.2
71.1
63.4
58.2
54.6
59.0
68.3
76.7
73.9
75.3
77.8
77.6
75.5
74.7
2. Index , 2003=100.
n.a. NOI available.

118.6
118.7
117.1
117.6
120.2
127.2
129.2
128.0
134.0
138.0
140.0
135.6
115.2
112.7
109.5
106.0
102.3
102.2
98.0
97.6
94.7
91.1
89.2
91.6
92.1
89.6
88.1
88.5
85.2
79.3
79.2
76.4
75.8
74.2
75.2
73.4
71.1
69.0
67.2
66.5
n.a.

n.a.
n.a.
n.a.
n.a.

o.a.
o.a.
n.a.

n.a.
n.a.
n.n.
n.3 .
n.a.
Il.a.
n.a.

n.a.

n.3.
n.n.

121.8
122.6
123.7
124.6
124.3
122.3
114.6
110.6
109.1
106.2
94.0
90.9
87.5
83.8
69.3
65.8
65.9
68.7
68.6
74.1
77.2
74.8
70.3
66.4
64.5
65 .3
68.4
71.2
70.9
68.7
58.3
48.7

n.a.
n.3.
n.a.
n .3 .

n.a.
n.a.
97.8
100.3
99.0
101.7
100.4
102.6
124.6
143.0
149.8
147.0
148.6
158.0
164.5
174.4
171.0
163.7
150.3
141.1
133.2
113.3
116.0
112.2
129.3
150.5
163.7

n.a.

A61

October 2008

Economic Development Incentives: Research
Approaches and Current Views
Dan Gorin, of the Board's Division of Consumer and
Community Affairs, prepared this article.
Economic development incentives-state and local
government efforts to encourage economic development-are one of a limited number of tools local
policymakers have for stimulating local economies.
Some broad measures-investments in infrastructure
(such as transportation), human capital (education,
for example), and social infrastructure (such as recreational facilities)-may produce significant results
over the long term. Targeted measures crafted to
attract or retain businesses-usually a tax preference
or financial assistance-offer the possibility of a
quick payoff.
Public interest in incentives has generally been
muted, except when very generous incentive packages, egregious practices, or legal issues have
prompted questions about their appropriateness and
effectiveness. Policymakers struggling with practical
decisions have frequently turned to economists for
guidance: Should incentives be offered? If so, how
large should they be? And how can an incentive
program be designed to increase its effectiveness?
Much of the research assessing the effectiveness of
incentives has been inconclusive or unsatisfactory, in
part because of methodological flaws and inadequate
data.
Interest in incentives surged in the 1980s and
1990s as a result of very public bidding wars among
localities to entice businesses to their communities. In
particular, the dollar amount of incentive packages
offered to automobile manufacturers looking to locate
new facilities soared during that period. In 1980,
Nissan received an estimated $33 million, or $8,000
per anticipated job, for locating a new facility in
Tennessee. The amount of subsequent incentive packages handed out to Mazda, Saturn, DiamondStar, and
Toyota, among others, rose over the next few years,
and by 1987, Toyota was receiving an estimated
$150 million, or $50,000 per anticipated job, for

locating a new facility in Kentucky.1 And the incentive packages were growing again before long. Although BMW's 1992 package to locate in South
Carolina was reportedly just $150 million, MercedesBenz reportedly received $258 million the next year
to locate a facility in Alabama. 2
News accounts of ever-larger incentive packages
caught the attention of economists and policy makers
as well as the public. An essay entitled "Congress
Should End the Economic War among the States"
appeared in the 1994 Annual Report of the Federal
Reserve Bank of Minneapolis. 3 A few years later, a
conference on the same topic brought together policymakers, economists, tax experts , economic developers, and business-site location consultants from around
the country to discuss the matter. 4 Many questions
were raised, and research goals were identified,
among them the goal of establishing good data with
which to answer the economic questions.
In the past ten years, case studies, input-output
analyses, and other research techniques have addressed some of the methodological flaws of earlier
incentives studies. The availability of better data on
both incentives and economic activity has also improved analyses of incentives research. The work
described in this article illustrates some of the fresh
ways that researchers have found to look at the
effectiveness of incentives. The focus is not on proving or disproving the effectiveness of incentives as a
1. Jeffrey A. Finkle (1996), "Location Incentives Are Unfair and
Poorly Justified," pp. 1-2, www.developmentalliance.comldoculpdf/
43300.pdf.
2. A delailed case study of the location of automobile assembly
plants can be found on the Good Jobs First website at
www.goodjobsfirst.orglcorporate_subsidy/
automobile3ssembly _plants .cfm.
3. Melvin L. Burstein and Arthur 1. Rolnick (1994), "Congress
Should End the Economic War Among the States," Essay in 1994
Annual Report of the Federal Reserve Bank of Minneapolis,
www.minneapolisfed.orglpubslar/arI994 .cfm?js=O
4. The conference, held in Washington, D.C., on May 21-22,1996,
was hosted by Minnesota Public Radio's Civic Joumal.ism Initiative.
For more information, see www.minneapolisfed.orglpublications_
paperslstudies/econwar/index .cfm and related links .

A62

Federal Reserve Bulletin 0 October 2008

means of spurring economic development. Rather, the
intent is to demonstrate that new ways are being used
to advance the discussion.

THE CONVENTIONAL WISDOM,
TEN YEARS AGO

In the 1990s, many academics and policymakers
expressed skepticism that state and local economic
development incentives could induce firms to add
jobs or invest in a particular locality. At the time,
researchers tended to conclude that incentives were
marginally effective at best. Such conclusions appeared to corroborate the general notion that incentives in the form of state and local tax breaks are
ineffecti ve because state and local taxes typically
constitute a small portion of a business's overall
costs. Furthermore, critics argued, if the incentives
increased the amount of income or profit subject to
federal income tax, a considerable portion of the
amount saved through state and local tax relief would
likely be offset by higher federal taxes.
Much research during the 1980s and 1990s was
based on flawed data or used independent variables
that did not accurately represent the dollar amount of
incentives. For example, several studies used the
number of incentive programs on a state's books as a
proxy for the state's total development effort. But
often this number does not provide a complete picture. Many states have on their books incentive
programs that are dormant, unfunded, or known to be
ineffective. And some states treat their incentives as
multiple programs, while others provide the same
benefits within a single program.
Other early research on incentives used the budget
of a state's lead development agency as a proxy for
development efforts. However, that amount is rarely
an accurate indicator of the amount spent directly on
incentives. For example, development agency funds
are typically used for other aspects of development,
such as marketing and staff payroll. Development
agency funds are also likely to be used for activities
not directly related to business development, such as
housing development or the promotion of tourism.
Moreover, funding for incentives may not come from
a development agency's budget. If the incentive takes
the form of a tax preference, an appropriation may not
be necessary. And if an appropriation is necessary, the
funding for incentives may come from the budget of a
different agency, such as education or transportation.
Economic development data concerning the state
of OkJahoma, provided by the National Association
of State Development Agencies (NASDA), illustrate
the inadequacy of some data collection efforts.

According to NASDA, the state spent $20.45 million
on economic development in fiscal 1997. But this
amount was simply the budget for the Oklahoma
Department of Commerce, the state's lead development agency. The state's single largest incentive that
year-worth just more than $1 billion-was a set of
sales tax exemptions available to all manufacturers
for purchasing machinery, equipment, and goods used
and consumed in manufacturing. An argument could
be made that these sales tax exemptions were not
truly incenti ves and, therefore, were appropriately not
included in the NASDA total because they were
nondiscretionary and fairly common among the states.
But there are other reasons to view the single NASDA
figure as inadequate. The most promoted incentive in
Oklahoma in fiscal 1997-a wage subsidy offered
under the state's Quality Jobs program-cost the state
$2l.l million that year. But again, that amount was
not part of the Department of Commerce's budget. A
second incentive, a local property tax abatement
costing $14.8 million in fiscal 1997, was a budget
item at the state level, as the state reimbursed local
governments providing the incentive; but this incentive was also not in the department's budget. A third
incentive in fiscal 1997-$13.2 million in tax credits
for investment and job creation-was a standard tax
preference, not an appropriated expenditure. Clearly,
the use of a narrowly focused budget figure as a proxy
for the state's financial commitment to its major
incentives, while seemingly logical, is problematic,
and it is unlikely to result in meaningful conclusions
as to the benefits of the incentives.

THE SEARCH FOR A
BEITER RESEARCH DESIGN
The work of several researchers began to change the
conventional wisdom that business incentives were
marginally effective at best, as Fisher and Peters
noted in 1997. 5 By conducting and identifying studies
that used more-detailed data and more-refined techniques, Newman and Sullivan compiled evidence of
the effectiveness of incentives. 6 Bartik's contribution
to incentives research was twofold: his comprehensive literature review brought to light a substantial
body of work-released up through the early 1990s5. Peter S. Fisher and Alan H. Peters (1997). "Tax and Spending
Incentives and Enterprise Zones," New England Economic Review
(March-April), pp. 109-130, www.bos.frb .org/economic/neer/
neer1997/neer297f.pdf.
6. Robert J. Newman and Dennis H. Sullivan (1988). "Econometric
Analysis of Business Tax. Impacts on Industrial Location: What Do We
Know. and How Do We Know It?" JOl/rnal of Urban Economics.
vol. 23 (2). pp. 215-234 .

Economic Development Incentives: Research Approaches and Current Views

that tracked the relationship between incenti ves and
state and local development; furthermore, his systematic analysis of such variables as employment, home
prices, and wages in metropolitan areas illustrated the
effect on these variables of economic growth that may
result from incentives and other development efforts. 7

Defining Economic Development Incentives
Although research on incentives improved through
the 1990s, more clarity was needed to ensure that
studies were based on complete data. At the root of
the problem, as the Oklahoma example shows, was
the lack of a comprehensive definition for "economic
development incentives." Fisher and Peters clarified
the problem by identifying five categories of incentives:8
1. one-time deals negotiated with individual firms ,
2. grants and loans provided under programs that
receive annual state appropriations,
3. programs establishing parameters and limits but
allowing some degree of local government discretion,
4. incentives that function as entitlements , whereby a
firm receives the benefit automatically provided its
investment is in an eligible sector and the size of
the investment or number of new jobs created
exceeds some threshold, and
5. code features that apply to all firms, but benefit
some more than others and are often advertised by
economic development agencies as reasons to
locate in a state.
To thi s list might be added changes to state statutes
that have the effect of opening markets to firms in
particular industries . Examples include statute changes
to allow certain industries, such as corporate farming ,
to begin or expand operations in a state; changes to
the apportionment formula for corporate income taxes
(to be discussed later); and relaxation of state usury
limits.9
7. Timothy Bartik (1991), "Who Benefits from State and Local
Economic Development Policies?" Upjohn Institute.
8. Fisher and Peters, "Tax and Spending Incentives and Enterprise
Zones."
9. Delaware and South Dakota, for example, relaxed their usury
limits in an effort to induce large banks to locate their credit card
operations within state borders-an effort that proved successful, as
evidenced by the cluster of large banks with high credit card volumes
located in Delaware and the South Dakota return address on many
credit card statements. For more information, see Steve Young (2002) ,
" Repealed Usury Law Helped Lure Industry," Argus Leader , March
24 ; and Diane Ellis (1998), "The Effect of Consumer Interest Rate
Deregulation on Credit Card Volumes, Charge-Olfs, and the Personal
Bankruptcy Rate," FDIC Bank Trends Series 98-{)S (Washington ,
D.C.: Federal Deposit Insurance Corporation, March ), www.fdic.gov/
bank/analyticallbanklbt_980S .html .

A63

Fisher and Peters noted that public interest in
economic development incentives tends to focus on
one-time deals (category 1).10 Much of the research
on incentives, however, has focused on tax-related
issues (categories 4 and 5), in part because identifying
special provisions in state tax codes, and then calculating effective tax burdens, is generally easier than
analyzing data for all the negotiated deals within a
specific geographic region or for a particular type of
program (assuming that all such data can even be
amassed). Yet when a study considers only tax incentives offered by a state and ignores local or non tax
incentives, any conclusions will likely be faulty, as
research has shown that local and nontax incentives
can easily account for more than half the value of an
incentive package.
The following examples, based on actual state and
local incentives, illustrate the need to consider the
specifics of an incentive package. The first case
involves property taxes, and the second, sales taxes.
• In one locality, a firm receives a property tax
abatement on a building (category 3); in a second
locality, a firm automatically qualifies for a similar
abatement (category 4) ; and in a third locality, a
firm receives reduced rent in a building owned by
an industrial authority and not on the property tax
rolls (category 1). The reported value of these
commonly offered incentives may be the same, but
researchers using different definitions or having
incomplete information may reach very different
conclusions about the effectiveness of these property tax incentives.
• One state has a sales tax provision that exempts, at
all times, all purchases by manufacturers of new
and used machinery and equipment; another state
exempts purchases of only new machinery and
equipment; a third state exempts purchases only
when a facility is built; and a fourth state limits the
exemption to certain geographic areas and to only
those firms that apply for it. Once again, analyses
that do not account for the differences among
incentive programs across jurisdictions may reach
different conclusions about the effectiveness of
those programs.

IMPROVING INCENTIVES RESEARCH: REFINED
APPROACHES, BETTER DATA SOURCES
Researchers have taken a number of approaches to
measuring the effectiveness of incentives. Economet10. Fisher and Peters, "Tax and Spending Incentives and Enterprise
Zones ."

A64

Federal Reserve Bulletin D October 2008

ric modeling has been a common approach, albeit one
with weaknesses. Misspecification of variables, for
example, can be a serious problem. Consider the
various property tax incentives in the first of our prior
examples. A model looking at only tax-based incentives will not capture the third type of property tax
incentive described, whereby the building is kept off
the property tax rolls altogether. Similarly, a model
that incorporates only state-level tax incentives may
be incomplete if local incentives constitute a large
portion of an incentive package (as might be the case
in the first type of property tax incentive described
earlier). However, when the incentives studied are
carefully identified and the data used are known to
accurately represent the total incentive package,
econometric modeling can provide a reliable picture
of the effectiveness of incentives. Models are often
used in conjunction with other research approaches,
such as case studies and input-output analyses. In
addition, incentives studies using all of these approaches may tap national, state, or local data sets.

Case Studies: Varied Approaches to
Analyzing Incentives
Fisher and Peters created a hypothetical manufacturing firm, and then used a case-study approach to look
at the effects of the incentives offered by enterprise
zones in more than 20 states and 100 cities. I I They
considered the details of the many incentive programs
they studied, specifically taking into account the type
and dollar amount of the incentives. This specificity
in defining the study's variables is notable. Fisher and
Peters found that such incentives cut the firm's combined state and local taxes, on average and as a
percentage of its new investment, by some 20 percent. Nevertheless, they believed the effect was too
small to affect business-location decisions.
Using the actual example of General Motors, Bartik looked at several competing incentive packages
and analyzed the benefit to the automaker (in terms of
its estimated transportation, labor, and tax costs) of
locating its Saturn plant in Spring Hill, Tennessee. 12
This actual case study is useful because it is limited to
a specific firm and a finite number of locations. In
another specific state case study, Loh considered the
incentives offered by different communities within
II. Fisher and Peters. ''Tax and Spending Incentives and Enterprise
Zones." Enterprise zones are areas specially designated for develop·
ment for various reasons. Businesses locating in enterprise zones are
typically exempt from certain taxes and receive other economic
assistance.
12. Timothy Bartik (1991). "Who Benefits from State and Local
Economic Development Policies?"

Ohio. I3 Limiting her analysis to one state allowed
Loh to examine mUltiple categories of incentives
available to businesses. Bartik's case study gauged
effectiveness by determining whether the presence of
an incentive made a particular location a better choice
for General Motors than competing locations. Looking at effectiveness from a different perspective, Loh
measured effectiveness in terms of the effect (such as
employment growth or increased tax receipts), if any,
on local economies. For a variation on Loh's approach, see the box "The Texas Local Economic
Development Sales Taxes," which describes a case
study focusing on a homogeneous region.

Illput-Output Analyses: Examining Linkages
Some recent studies employed input-output analyses
to examine how an incentive offered to a single large
firm can ripple through an economy, in turn affecting
such economic indicators as regional income and
employment. Alwang, Peterson, and Mills reported
on one such study, by the Virginia Economic Development Partnership, and then conducted further analysis.14 The initial study was conducted in compliance
with a Virginia requirement that a return-oninvestment analysis be undertaken whenever state
funds are to be used in an incentive package offered to
a single firm. Alwang, Peterson, and Mills explain
that they used Implan computer software to "examine
the linkages between the firm in question and its
suppliers, and expenditure patterns of people who
earn incomes from the firm."ls Their further analysis
is significant because they were able to identify both
the losers (such as firms that compete with the
business being recruited) and winners (such as suppliers to the newly relocating firm and purchasers of its
output) resulting from the awarding of an incentive.
Dauffenbach and Warner also used Implan software, in their case to develop a framework from
which to study two of Oklahoma's largest state-level
development incentives: wage subsidies provided
under the "Quality Jobs" program and an exemption
from the ad valorem tax. 16 They quantified the fiscal
13. Eng Seng Loh (1993). "The Effects of Jobs-Targeted Development Incentive Programs." Growth and Change. vol. 24 (Summer).
pp. 365-83.
14. Jeffrey Alwang. Everett B. Peterson. and Bradford Mills (2001).
"Assessing the Impacts of Incentives to Attract New Businesses: A
Case Study of the Scrap Recycling Industry" (October 23). Preliminary report available at dls.state.va.us/pubs/hjrl57.pdf.
15. Alwang. Peterson. and MiIJs. "Assessing the Impacts of Incentives to Attract New Businesses" p. 36.
16. Robert C. Dauffenbach and Larkin Warner (2004). "Oklahoma's Ad Valorem Tax Exemptions and the Quality Jobs Act: Analysis
of Economic Impacts and Tests for Differential Growth." in Robert
Dauffenbach. Alexander Holmes. Ronald L. Moomaw. Kent W. Olson.

Economic Development Incentives: Research Approaches and Current Views

benefits and costs of the two incentives and used the
results to determine the incentives' effectiveness. For
the Quality Jobs program, they calculated a benefitcost ratio of 6.60; in other words, each direct dollar of
incentive spending was associated with $6.60 of
increased tax revenue. They then examined statelevel employment data and found that industries that
received large shares of Quality Jobs payments grew
much faster than the national average for those industries. 17 Using the same approach to look at the ad
valorem tax exemption, Dauffenbach and Warner
concluded that it is a drag on the state budget and
"fares poorly."
In the Oklahoma example, input-output analysis
allowed Dauffenbach and Warner to estimate the
state's rate of return on its investment in the two
development incentive programs. The data generated
by such an analysis can also be used to address the
"but-for" question: but for the presence of the wage
subsidies provided under the Quality Jobs program
and by the tax exemption, would the employment
gains have occurred? In other words, were these
incentives a factor in the decision to invest in Oklahoma? Although it is a fundamental question in
incentives policy, researchers have had a very difficult
time answering the but-for question. No one has yet
been able to create a research design that randomly
assigns control and treatment groups. Still, Dauffenbach and Warner were able to quantify the economic
and fiscal effects of growth likely induced by an
incentive. Making the connection between incentives
and growth, though, is still an educated conjecture.

Data-Driven Analyses: Examining
Recently Available Data Sets
Many studies glean information from a local, state, or
national data set. These data sets are a relatively new
resource; many were unavailable to researchers until
the mid-1990s. The included Texas case study lists
local data from cities that did and did not adopt
special taxes in order to analyze the effectiveness of
the state's economic development sales taxes. In
another study not explicitly considering incentivesrather it served as an examination of the effects on
and Larkin Warner, Slate Policy and Economic Development in
Oklahoma: 2004 (Oklahoma City: Oklahoma 21st Century, Inc.),
pp.13-27 , www.okstatechamber.comlfile_uploadl0K2lst2004.pdf.
17. Dauffenbach and Warner's results are consistent with earlier
survey work by Gorin suggesting that about half of all jobs in the
Oklahoma program were induced by the presence of the incentive. See
Dan Gorin (2000), "State Economic Growth Incentives and the
Oklahoma Quality Jobs Program," Oklahoma Policy Studies Review,
vol. I, (Spring-Summer), pp. 7-12, www.libarts.ucok.eduJopsaJOPSRJ
Journal%20Voll-Numberl/page7-12.pdf.

A65

county employment-Edmiston used data on investments announced by firms adding at least 300 jobs at
new or existing facilities in Georgia. ls He corroborated the announcement data using state administrative records. Edmiston found that existing business
expansions had a greater net effect on county employment than did the creation of new locations. This
finding suggests that recruited businesses can crowd
out local investment, resulting in smaller (though still
positive) benefits for job growth.
Lee used a confidential national data set, the Longitudinal Research Database (LRD) compiled by the
Census Bureau, which includes information from the
quinquennial Census of Manufacturing. 19 This database allowed Lee to look at the effects of the initial
locations and relocations of plants owned by manufacturing firms having multiple plants throughout the
United States. Lee concluded that, for the years 1972
through 1992, plants located in states that implemented new incentive programs tended to increase
total employment, capital, and output only slightly
more than plants in other states.
Greenstone and Moretti drew on another national
database in order to look at the siting of new,
"million-dollar facilities" throughout the United
States. 20 Using information from Site Selection magazine on "winning" and "runner-up" counties, in combination with other data, they were able to measure
the consequences of a county winning such a facility.
According to Greenstone and Moretti, winning counties had greater increases than corresponding
runner-up counties in property values, wages, and
local government revenues and expenditures in the
years following a location. They noted that the possibility of winning a plant location invariably prompted
competitions between jurisdictions as they tried to
develop more-attractive tax packages for businesses.

New Tools and Resources: Providillg Better
and More-Comprehensive Ana/ysi
The 1996 "War Among the States" conference called
on state governments and other agencies to develop
better information on the costs and benefits of eco-

18. Kelly Edmiston (2004), "The Net Effects of Large Plant
Locations and Expansions on County Employment," Journal of
Regiunal Science, vol. 44 (2) , pp. 289-319.
19 . Yoonsoo Lee (2004), "Geographic Redistribution of U.S.
Manufacturing and the Role of State Development Policy," Working
Paper 04-15 (Cleveland: Federal Reserve Bank of Cleveland, December), www.clevelandfed.org/Research/Workpaper12004/wP04-15.pdf.
20. Michael Greenstone and Enrico Moretti (2004), "Bidding for
Industrial Plants: Does Winning a 'Million Dollar Plant' Increase
Welfare?" MIT Working Paper Series 04-39, (Cambridge, Mass. :
Massachusetts Institute of Technology. November) .

A66

Federal Reserve Bulletin

0 October 2008

The Texas Local Economic Development Sales Taxes
In 1989, the Texas legislature amended existing state law
to allow cities meeting certain criteria to adopt a dedicated sales tax to fund industrial development projects. 1
Follow-up legislation in 1991 allowed cities to adopt a
sales tax dedicated to quality-of-life improvements. These
two programs-known by their code designations as the
section 4A tax and the section 4B tax-are commonly
referred to as the Texas economic development sales
taxes. Cities in counties whose population is less than
500,000, and smaller cities in the six largest Texas
counties (Bexar, Dallas, EI Paso, Harris, Tan'ant, and
Travis), are eligible to levy the taxes.
The taxes may be imposed only if the citizens of a city
approve their use in a regular election; the taxes stay in
effect either for the period specified on the ballot or, if no
end date is specified, until they are repealed. Each of the
two taxes may be authorized in increments of one-eighth
of I percent, up to a maximum of 1/2 percent. A city may
have the two taxes in force simultaneously. However, the
combined rate of all local sales and use taxes, including
these special taxes, may not, under Texas law, exceed
2 percent. The uses for the two taxes, as defined in the
state laws creating them, are as follows:

• Section 4A. To acquire or pay for land, buildings,
equipment, facilities, expenditures, targeted infrastructure and improvements for purposes related to manufacturing and industrial development.
• Section 4B. To undertake projects for quality-of-life
improvements that will attract and retain primary
employers. Money may be spent on land, buildings,
equipment, and facilities expenditures and improvements for tourism, entertainment, recreation, athletic
facilities, and parks; affordable housing; and municipal
infrastructure.

Funds raised through a 4A tax are perhaps the clearest
example anywhere of a dedicated pool of funds that policymakers may use at their discretion to offer incentives.
Conversely, expenditures of funds raised through 4B taxes
are more representative of the type of public expenditures
for economic development desired by researchers and
policymakers who downplay the effectiveness of direct
business incentives. As of October 2007, of the more than
1,000 cities in Texas, the 4A tax was in place in 222, and the
4B tax was in place in 439. Because of the relatively high
rate of participation in the programs, Texas may be an ideal
case study for analyzing the effects of direct (4A) and
indirect (4B) economic development incentives.
Cities adopting one or both of the taxes are required to
establish a community corporation to administer the funds
raised. The practical difference between the 4A and 4B
taxes can be seen in the primary objectives of the community corporations as well as in the distribution of their
spending (tables I and 2). According to the most recent
state report on these incentives (covering fiscal 2(05), job
creation and job retention were the primary objectives in
nearly four out of five cities that had enacted a 4A tax,
compared with about half of the cities that had enacted a 4B
tax. Sports, recreation, and tourism development were
much more likely to be the focus of 4B cities. In fiscal
2005, about 24 percent of 4A tax revenues were spent on
direct business incentives (such as buildings and equipment
for businesses), compared with only 7 percent of 4B tax
revenues. In addition, almost 60 percent of 4A revenues were

1. Objectives of economic development reported by
adopting cities, by tax adopted, fiscal 2005
Percent

Tax adoplCd
Objective
4A

I. For information aboullhe Texas Economic Developmenl Sales laxes,
see www.window.Slale.lx.usllaxinfo/laxpubslIx96_302.hlml. Seclion 4A
and 4B program participalion, by communily, can be found al Ihe Texas
Complroller of Public AccounlS websile. 31 www.window.Slale.lx.us/
laXinfo/addil.hlml. Cily and counly sales lax dala used in Ihis analysis came
from a Freedom of Information requesl 10 Ihal office. New and expanding
inveslmenl records were provided by Ihe slale's Business and Induslry Dala
Cenler Ihrough Ihe Texas Office of Ihe Governor, Depanmcnl of Economic
Developmenl and Tourism www.governor.slale.lx.uslecodev.

nomic development incentives and to disclose more
information about incentives. Ten years ago, fewer
than half of states regularly published detailed reports
on their tax expenditures; but by 2006, according to
the Center on Budget and Policy Priorities , two-thirds
of states were regularly preparing such reports, with
most of them made available online.

Job creal ion and job relenlion
I.nfraslruclure projecls .. . .
Sporls facilities and recre8lion . ... .
Tourism . .. . . . .. ... ..... . . . . . ... .
Olher . . . . ......... ....... .. .

167
101
II
14
15

212
254
137
125
40

Number of cities .

211

413

NOTE: Respondellls were asked 10 indicale Iheir primary objective for
economic developmenl bUI were allowed 10 identify more Ihan one
primary objeclive.

State tax expenditure reports generally contain
information about budget outlays; some also contain
data specifically on incentives. The 2005-07 Oregon
tax expenditure report, for example, discusses the
state's Strategic Investment Program. Under this
major incentive program, in place since 1993, firms
may qualify for a IS -year exemption from property

Economic Development Incentives: Research Approaches and Current Views

A67

2. Distribution of expenditures of 4A and 4B funds by community development corporations, by type of expense and
type of corporation, fiscal year 2005

Type of expense

A II corporations
(588 cities)
Dollars

Direct business incentives ..... .
Marketing and promotion ......
Debt service ... . . . . . . . ... . .....
Capital costs .. ...... ...........
Personnel ... . .. .. . . .. ... .. .. ...
Administration ..... . ... . . ......
Atl'ordable housing ........ .. . . .
Payments to taxing units .. .. . . .
Job training ............. . . .. .
Other ... , .. ......... ... . . .. .
Total ........ .... ..............

Section 4A corporations
(208 cities)

Percent

Dollars

80,397 ,570
10,054. 118
112.558,737
221.698,352
25,879,928
25.727.296
2,429.992
31 ,264,632
1,771,460
39,106,266

14.6
1.8
20.4
40.2
4.7
4.7
.4
5.7
.3
7. 1

550,888,35 I

)00.0

Section 4B corporations
(380 cities)

Percent

Dollars

59,118.504
6,107,685
38,292.808
97.206.877
12.725,439
13.788,975
3,260
4,520,531
393, 192
10.384.887

24 .4
2.5
15.8
40.1
5.2
5.7
.0
1.9
.2
4.3

21.279.066
3,946,433
74.265,929
124,491.475
13. 154.489
11 .938,321
2,426,732
26,744,101
1,378,268
28.721 ,379

6.9
1.3
24.1
40.4
4.3
3.9
.8
8.7
.4
9.3

242,542,158

100.0

308,346,193

100.0

NOTE: Components may not sum to to\.1ls because of rounding.

spent on marketing and promotion, debt service, and
capital costs. Much of the spending on debt service and
capital costs is likely being used on land, the single most
prevalent capital asset reported by all 4A and 4B cities.
Ultimately, analyzing program data (data on the presence, duration, and size of the taxes) in combination with
general economic data (data on announced business
investments and growth in the tax base) provides information on the effects of the taxes. A starting point for such an
analysis would be to compare the growth of gross business sales in adopting and non-adopting cities. The data
show that the average annual rate of growth of gross sales
was higher in cities that had 4A taxes in at least half the
years from 1992 to 2004 than in those that did not
(table 3). The same relationship held for 48 cities and
non-48 cities and for cities having both taxes and those
having neither; in all three data sets, the differences were
statistically signi fkant.
Another way of looking at program performance is to
compare the number of announced investments by new
and expanding businesses in cities that had and had not
adopted the section 4A tax. Table 4 shows that by 2003
some 20 percent of eligible Texas cities had adopted the
4A tax.2 Those 4A cities accounted for more than 40 percent of the announcements by new businesses-the firms
most likely to be affected by the presence of a develop2. Developing an incentive takes some time. For this reason. cities in
this analysis were accorded 4A status in the third year after they voted to
enact the tax.

taxes for new investments having an assessed value
of more than $100 million. This exemption has been
used by six large semjconductor-fabrication establishments. The tradeoff for the state for the fiscal year
2005-D7 biennium was $159 million in lost property
tax revenue versus a gain of $5 .2 billion in continuing
investment, some $16 million in additional property
tax on related non-exempt investment, $24 million in

ment incentive. Among 4A cities, the prevalence of newfirm announcements was most pronounced in the cities that
had populations between 5,000 and 30,000. Specifically, the
86 4A cities with between 5,000 and 30,000 residents
accounted for 39.8 percent of all cities of this size and
54.2 percent of new-firm announcements. Among the cities
with more than 30,000 residents, the 4A cities' shares were
30.5 percent of the total number of cities and 34.7 percent of
new-firm announcements.
3. Average annual growth of gross sales in cities with
and without 4A and 48 taxes, 1992 to 2004

City status

Average
annual
growth
(percent)

T value for
difference
of means

Number

4A cities
With tax during period .......•.
Without tax during period . . .

6.51
5. 18

2.11

167
789

4B cities
With tax during period .. . . .
Without tax during period .. . .

6.87
4 .74

4.01

255
625

4A and 4B cities
With both taxes during period ..
With neither lax during period ..

8.80
4.58

2.88

48
503

All Texas cities ............ .. . . . .

5.48

1.012

NOTE: For cities without the tax(es), includes cities that did not have
the tax during the entire period 1992-2004. For cities with the tax(es), includes only those cities that had the tax(es) for at least six years during
the period 1992-2004. Excludes cities having either no population or no
reponed business sales in either 1992 or 2004.

community service fees paid in lieu of property taxes,
and unknown additional jobs, payroll , and spin-off
effects. These figures provide policymakers with hard
data in evaluating the incentive's efficacy.
Other groups are also making infonnation on incentives more widely available:
• The Council for Community and Economic Re-

A68

Federal Reserve Bulletin 0 October 2008

4. Distribution of announcements of large business investments in cities eligible to adopt the 4A tax, 1989 to 2003
Announcemenls of new inveslmenl

Eligible cities
Cily populalion and slatus
Number
Under 1,000
Wilh laX
.. . . .. . .. . • . . . . . • •...
WithoUl lax ... . . .... .•.... . • ....
Total . ... . . ...... .. .... . ...... . ... .

445
472

I Percenl of lOla I

Number

Announcemenls of expansions

Percenl

Number

Percenl

5.7
94.3
100.0

2
3
5

40.0
60.0
100.0

6
5
11

54.5
45.5
100.0

1,000 10 4,999
With lax . ... . . . . . .. . . . .. .. .. . . . . .
.. .. ... .. ... ..... . . .
Withoul lax
Total ........ . ... . ... . . ............ .

330
437

24.5
75.5
100.0

II
26
37

29.7
70.3
100.0

14
21
35

40.0
60.0
100.0

5,000 10 14.999
With 4A laX . . . . . .. . • • ......•.... .
Withoul laX
. .• •..... . . .. . . .
Total . ... ... . ....... . . . ...... .. .. . . .

65
94
159

40.9
59.1
100.0

57
38
95

60.0
40.0
100.0

40
42
82

48.8
51.2
100.0

15,000 lO 29.999
... . ... . . .. . . ... • •. . ..
With laX
Withoul lax .. . ... . ..... .. . . .. .. .
Total ........ . .... . . .. , .... . .... .

21
36
57

36.8
63.2
100.0

47
50
97

48.5
51.5
100.0

41
77
118

34.7
65 .3
100.0

30,000 and above
With laX ..... .... . . . . . . . . . . . . ..
WithoUl lax ....... .... .... . ..... .
Total ..... ........ .. .. . .. .... .. .. . .

18
41
59

30.5
69.5
100.0

126
237
363

34.7
65.3
100.0

116
273
389

29.8
70.2
100.0

238
946

20. 1
79.9
100.0

243
354
597

40.7
59.3
100.0

217
418
635

34.2
65.8
100.0

All eligible cities
Wilh lax
. .. ... .. ..... ..
Withoul lax .. ......
.. .. .. .
Percenl in 4A cities . .. . . . . .. . . .. ..

107

1.184

NOTE: For this lable, cilies were considered 10 have a 4A lax three years afler enacting the laX. Large inveslmenls are inveslmenls worth more lhan
$100,000 or adding more than 100 jObs.

The analysis of the effects of the Texas economic
development sales taxes is extremely preliminary, and
many questions remain unanswered. For example, what
other factors (such as the presence of other incentives)
could influence the finding that incentives made possible
by the special sales taxes are increasing business investment? Furthermore, growth of gross sales and announcements of business investment are not the only ways to

search (C2ER, formerly ACCRA) maintains a directory of state incentives that contains more than
1,500 records on di stinct programs, many with
contact information. Although this data set does not
currently contain measures of the effects of incentive programs, the descriptions, some including
citations of enabling legislation, are quite detailed.
Policymakers can use the directory to compare
incentive programs across states.
• The Census Bureau's Local Employment Dynamics database contains longitudinal data, by industry, on the formation, growth, and decline of establishments, as well as employee hirings and
separations.
• The Census Bureau's American Community Survey
(a new nationwide survey that will be an element of
future censuses) will allow researchers to look at
areas as small in size as a census tract and thereby

measure results. What other data, such as data on employment growth or property tax revenues. could be used as
proxies for the effects of the taxes? And finally, if further
studies confirm that the Texas economic development sales
taxes are effective tools for stimulating local economies,
can the relative effect of 4A and 48 spending in each major
category-marketing and promotion, direct business incentives, or capital costs-he determined?

improve researchers' ability to examine the effects
of site-specific incentives .
• An increasing number of jurisdictions make available to the public tax data on real estate parcels.
These databases provide such information as the
market value of land and equipment-information
that helps researchers examine business activity
related to incentives.
Good Jobs First (GJF), a national policy resource
center promoting corporate and government accountability in economic development, has been
instrumental in making incentive programs more
transparent to the public. Spurred at least by lobbying by GJF state affiliates, a dozen states now
disclose information about incentives provided to
specific companies. The GJF website tracks legislation relating to disclosure laws and offers model
text for state and local governments. GJF also

Economic Development Incentives: Research Approaches and Current Views

publishes reports on accountable development, that
is, development programs that are transparent and
include standards for evaluating the effectiveness of
incentives.

Current Thinking

011

In entives

The use of refined approaches and better data sets has
improved researchers' ability to evaluate the effectiveness of specific incentive programs. But fundamental concerns remain, and some researchers have
begun to write off economic development incentives
as ineffective or inefficient for a host of reasons.
Several arguments underlie their conclusions:
• The magnitude of any economic development incentive is generally too small to have a more-thanmarginal influence on the behavior of the typical
new, relocating, or expanding firm. As a result,
public resources flow to firms that do not produce
any economic benefits for the area.
• Incentives are distortionary, that is, they misallocate
private resources by leading firms to move to or
expand in suboptimal places.
• Incentives crowd out government spending on public goods.
• The provision of incentives is a zero-sum game:
gains in anyone location will be offset by losses in
other locations.
These arguments are not without their shortcomings, as the following discussion demonstrates.

"Incentives Are Too Small to Matter"
Fisher and Peters put forward the "too small to
matter" argument in their 2004 paper "The Failures of
Economic Development Incentives."21 In their analysis, they began by assuming that (1) an incentive that
reduces a firm's state and local taxes will have a
statistically significant effect on that firm's economic
activity and (2) this effect is represented by an
elasticity of -0.3 (the "consensus" elasticity put forward by Bartik), meaning that a 10 percent tax cut for
businesses will produce a 3 percent increase in investment or jobs by firms eligible for the tax cut. Applying this elasticity ratio to their research, Fisher and
Peters concluded that the incentives they analyzed
were responsible for only about one in ten new jobs
added in the enterprise zones: "Thus the best case is
that incentives work about 10 percent of the time, and
21 . Peter Fisher and Alan Peters (2004) , "The Failures of Economic
Development Incentives," Journal of the American Planning Associa·
tion, vol. 70, pp. 27-38 (Winter), http://locaJ.law.umn.eduJuploads/
images/22221PetersFisherFailureofEconomicIncentives .pdf.

A69

are simply a waste of money the other 90 percent."22
They calculated that each incentive-induced job in an
enterprise zone had a cost of some $42,000 over 20
years, and argued that even though the incentives did
create jobs, the cost threw doubt on the incentives'
effectiveness. Of course, this conclusion is based on a
"consensus" elasticity of -0.3. If the actual elasticity
were twice as large (-0.6), the success rate would be
doubled, meaning that the incentives would generate
20 percent of the new jobs in the enterprise zones and
could be revenue enhancing (under the reasonable
assumption that the incentive-induced jobs generate
$21,000 in tax revenue over 20 years, or slightly more
than $1,000 a year).
Is it possible to design an incentive that is twice as
successful as the across-the-board enterprise-zone tax
cuts Fisher and Peters analyzed? Proponents argue
that incentives can be made more effective by targeting them to the needs of a particular region or set of
firms rather than applying them broadly to a large
region or a wide range of businesses. One aspect of
targeting is designing an incentive in such a way as to
exclude from the program those firms that would
invest in the region even if they did not receive the
incentive. If a large enough number of such firms can
be excluded, the effectiveness of that incentive can be
improved. A second aspect of targeting is specifying
qualification requirements so as to reduce the possibility of extending the incentive to firms that are not
likely to change their behavior even if they do receive
it. Dauffenbach and Warner and Gorin studied an
incentive program with such a qualification requirement: recipients of the wage subsidy provided under
Oklahoma's Quality Jobs program were required to
create at least 100 new jobs, making the incentive
more restrictive than other incentive programs in the
state. 23 Both sets of researchers concluded that the
targeted program was as much as 50 percent effective,
that is, for every ten jobs created, five were induced
by the subsidy. While the conclusions were not the
statistically significant result of rigorously designed
studies, the findings do merit consideration-and
further study.
Although targeted incentives-such as those provided under Oklahoma's Quality Jobs program-may
be more effective, targeting does raise the "but-for"
question, as well as questions about fairness. To be
efficient as well as effective, incentives must be

22. Fisher and Peters, "The Failures of Economic Development
Incentives," p. 32.
23. Dautfenbach and Warner (2004), "Oklahoma's Ad Valorem Tax
Exemptions and the Quality Jobs Act"; and Gorin, "State Economic
Growth Incentives and the Oklahoma Quality Jobs Program."

A 70

Federal Reserve Bulletin 0 October 2008

Overcoming State-Tax-Related Market Distortions by Providing Local Incentives
Distortions Related to Corporate Income Tax
Apportionment Formulas
Firms that produce and sell goods or services in more
than one state generally are liable, in each of those states,
for taxes on some portion of their corporate profits. Many
states determine the proportion of a firm's profits subject
to state taxation on the basis of three equally weighted
factors: the percentage of the firm's (I) property located
in the state, (2) sales made to residents of the state, and
(3) payroll paid to residents of the state. Uniform application of this formula across the states would result in the
states, collectively, taxing all of a firm's profit exactly
once, and only once. Some states, however, emphasize
the sales factor in their formula by making it twice as
important as the other two factors, or double-weighting it.
And a few states take the so-called single-sales-factor
approach, basing the proportion of profits subject to state
taxation solely on the percentage of sales in the state.
Emphasizing the sales factor may increase a state's
attractiveness as a place for corporate expansion, but such
an approach results in market distortions compared with
situations where the once-standard three-factor approach
are employed.
Emphasis on the sales factor magnifies the problem of
"nowhere income"-income that ends up not being taxed

because a corporation has so little activity in a state to
which a sale is allocated. In such case, a "nexus" does not
exist and. therefore, the state does not have the authority
to tax the corporation. Some states have enacted a "throwback rule," under which profits from out-of-state salesprofits that are not taxed by other states-are re-allocated to
the enacting state.
Such tax code differences among states play into decisions by businesses planning new facilities and operations.
Suppose, for example, that a firm planning to build two
identical facilities tries to decide whether to locate both
facilities in state A, both in state B, or one facility in each
state. Assume that the firm knows that it will sell 5 percent
of its output in each state and 90 percent in the rest of the
country, and that both states tax corporate income at
6 percent of profits. State A will double-weight sales, while
state B weights sales at 100 percent. State B does not have a
throwback rule. Table I shows the firm's potential tax
liability under several scenarios, assuming annual profits of
$100 million.
Locating both facilities in state B would save either
$5.7 million or $2.85 million more than locating both in
state A, depending upon whether state A has a throwback
rule. Locating one facility in each state would result in a tax
liability either 20 or 5.5 times higher in state A than in state
B. Thus, the firm might locate in state B-regardless of the

I. State tax liability for a hypothetical firm, under different scenarios
Dollars except as noted
Finn's tax liability
Scenario

Comment
To state A

Both facilities in state A
With throwback rule .. . . .. . . .. •. . ... .. . . .
Without throwback rule .. . .... . .... .. . . .• .
Both facilities in state B .... . . . .... . . .
One facility in each state
State A with throwback rule . . . . .
Neither state with throwback rule ..

To state B

3,150,()()()

o
o

All profits revert to state A
52.5% of profits are assigned to state; the remainder are
unassigned

300,()()()

5% of profits are assigned to state B; the remainder are
unassigned

3.000,000

15Q,()()()

825,()()()

150,()()()

50% of profits revert back to state A
State A accepts 27.5% of its profit: state B. 5%

6 ,()()(),()()()

carefully targeted to exclude firms whose behavior
will not be affected by the presence of the incentive .
Can governments differentiate firms whose decisions
about growth are likely to be affected by incentives
(that is, businesses that would not locate or expand in
a region "but for" the incentive) from firms whose
decisions do not depend on inducements? And would
governments be willing to run the political risk of
offering incentives to some firms but not others (or to

offer different incentives to different firms)? Or would
the practice of targeting incentives be viewed as
inequitable? Gorin looked at both matters in connection with the Oklahoma Quality Jobs program . In a
survey of participating firms, he found that the incentive was nearly twice as important in securing the
location or expansion of firms planning to add at least
100 new jobs as it was in securing the location or
expansion of firms expecting to add fewer than 100

Economic Development Incentives: Research Approaches and Current Views

difference in its operating costs in that state relative to its
costs in state A-resulting in an inefficient allocation of
resources.
State A could, to make itself a more attractive location,
adopt the same apportionment formula and rules as state
B. a strategy that could allow the firm to allocate its
resources more efficiently; however, such a change could
radically affect many additional firms in state A. Alternatively, state A might choose to use targeted incentives to
overcome the distortions resulting from these differences
in state tax code structures. I

Distortions Resulting from Application of the
Freeport Exemption
The tax codes of most states include a "freeport exemption," which exempts from inventory tax or property tax
all property that is in the state for the purpose of being
assembled into other products (raw materials. for example) or for distribution (such as finished goods), provided that the property comes into the state and leaves the
state within a short period (typically three or nine
months). In practical terms, the exemption means that
inventory in warehouses located in a state also serving as
the "point of sale" generally is subject to property taxes.
Thus, the freepOit exemption can distort firms' decisionmaking by creating a preference to locate a warehouse or
distribution center some distance from the intended market, specifically, in a location across a state border. The
results of such a distortion can be seen in the proliferation
of warehouses and distribution centers in Oklahoma, just
north of the Oklahoma-Texas border, to serve markets
around Dallas.
I. Michael Mazerov notes that at least eleven states estimated revenue
loss attributable to adopting a sales-only formula. This loss of corporate
income tax revenue was estimated to be above $100 million in California.
Massachusetts. and New York. See Michael Mazerov (2005), "The 'Single
Sales Factor' Formula for State Corporate Taxes: A Boon to Economic
Development or a Costly Giveaway?" Center on Budget and Policy
Priorities report. rev. September I, www.cbpp.orgl3-27-0Isfp.htm. Smaller
businesses that do not benefit from the change to a sales-only fonnula
(because all of their sales are in-state) might even fare worse if their taxes
are raised to compensate for the state tax revenue lost because of the
change.

jobs.24 This finding suggests that by specifying a
readily identifiable criterion-number of new jobs to
be added-the state was able to effectively limit
participation in the incentive program. In other words,
the survey data suggest that the state should be able to
target the incentive. The question of political will was
a different matter. Gorin noted that political considerations prompted the issuance of numerous regulatory
24. Gorin, "State Economic Growth Incentives and the Oklahoma
Quality Jobs Program."

A 71

2. Property tax liability for a hypothetical firm, under
different scenarios
Dollars except where noted
Inventory
not eligible
for freeport
exemption
(percent)

Effective
property
tax rate
(percent)

Oklahoma Im:ation
100,000.000 .. ...

1.10

110,000

Texas location
100,000,000 .. ... .. ........

2.85

2,565.000

Inventory on hand

Property tax
liability

Suppose that a firm planning to build a warehouse to serve
the Dallas area market is trying to decide whether to locate
in Oklahoma or Texas. It will import its entire product from
outside both states and will selJ 10 percent of the product in
Oklahoma and 90 percent in Texas. The effective property
tax rate is 1.1 percent in Oklahoma and 2.85 percent in
Texas.2 Property tax liability on inventory is calculated as:
Inventory on hand x Share of inventory not eligible
for freeport exemption x Effective property tax rate.
Table 2 shows that, with an average inventory valued at
$100 million, the firm would save almost $2.5 million
annually in taxes by locating in Oklahoma-possibly more
than it could save in shipping costs by locating the warehouse in the Dallas area, close to its major market. 3 Should
a community in the Dallas area offer the firm an incentiveperhaps a partial property tax abatement-to locate closer
to Dallas, the incentive could well overcome the misallocation of resources resulting from application of the freeport
exemption.
2. The Oklahoma rate in this example is the average for Ardmore and
Marietta, the two largest Oklahoma communities on Interstate 35. just north
of the Oklahoma-Texas border (data from the Oklahoma Department of
Commerce community profiles). The Texas rale is the average of five
communities: Denton and Gainesville (two cities on Interstate 35 just south
of the Oklahoma-Texas border): Dallas: and two Dallas suburbs, Plano and
Carrohon (data from community websites).
3. The estimated annual property tax in Texas would be $100,000,000 x
90% x 2.85% , or $2.565,000. compared with $100.000.000 x 10% x 1.1%.
or $110.000 in Oklahoma.

proposals that would have weakened the targeting by
reducing the threshold for program participation from
100 new jobs to a much lower number.

"Incentives Resulf ill Misallocatioll oj

Private Resources"
Economic development incentives are intended to
induce capital investment in a jurisdiction in which
such investment might not otherwise take place.
Opponents of incentives argue that such inducements

A72

Federal Reserve Bulletin D October 2008

result in the misallocation of private resources because incentives cause capital to locate in a suboptimal location, one in which the market would not
naturally place the investment. Opponents further
argue that this incenti ve-induced distortion has a
negative effect on other firms in the same jurisdiction
(such as higher costs for purchased inputs, as discussed by Alwang, Peterson, and Mills 25).
However, not all incentives distort the allocation
of private resources. In fact, they can be used to
offset distortions resulting from differences in tax
bases across jurisdictions. Some jurisdictions may
rely primarily on personal income as a basis for
taxation , for example, while others may rely on
personal property or retail sales. Two examples (see
the box "Overcoming State-Tax-Related Market Distortions by Providing Local Incentives") illustrate
how variations in regional tax structures can result
in the misallocation of resources and how such
distortions might be overcome through carefully
designed incentives. These examples, representing
actual situations faced by firms and jurisdictions
(though the numbers used are hypothetical), suggest
that more research is needed to determine the extent
to which incentives actually distort the allocation of
private resources .

"Incentives Given to Private Entities Crowd
Public Spending"

resulting from a more robust economy) can make
spending on incentives as appropriate for a government as spending on traditional public goods .
Bartik recommends that governments focus on
productivity-enhancing incentives-such as job training and helping resident entrepreneurs prepare business plans-so that benefits might last longer.28 Economic development initiatives can also be used to
accomplish public objectives, and even save on costs,
without explicitly spending public dollars . Maine's
Progressive Alliance for Careers and Training program, for instance-a well-regarded effort targeted at
building up small manufacturing, health care, and
information technology industries in economically
depressed areas of the state-tied financial assistance
for participating firms to their hiring of newly trained
and dislocated workers. Other incentives that have a
public purpose include the zoning incentives offered
by some jurisdictions in the Washington, D.C. metropolitan area. These incentives gi ve developers the
right to build extra units of residential housing on
fixed parcels of land if the developer sets aside a
certain percentage of the units for affordable housing.
Contrary to the criticism that incentives necessarily
crowd out the spending of limited public resources
for public purposes, these examples show that incentives can induce the private sector to allocate resources for a public purpose.

alit

" Incefllil es Are a Zero-Sum Proposition 0'
Some critics argue that spending on incentives crowds
out spending on public goods and services, such as
education and transportation. Burstein and Rolnick,
for example, write that "[ w ]hen competition takes the
form of preferential treatment for specific businesses,
it misallocates private resources and causes state and
local governments to provide too few public goods."26
Fisher and Peters have echoed this sentiment, and
proposed that economic development incentives be
discontinued in favor of spending on infrastructure
and education .27 However, quantifying the effects of
spending on infrastructure and education may be just
as difficult as quantifying the effects of spending on
development incentives . And the presence of externalities associated with firm location (such as lower
social safety net costs and higher property values

25 . Alwang. Peterson. and Mills. "Assessing the Impacts of Incentives to Anract New Businesses."
26. Melvin L. Burstein and Arthur 1. Rolnick (1996). "Congress
Should End the Economic War for Sports and Other Businesses"
Federal Reserve Bank of Minneapolis. fedgazelle (January).
www.minneapolisfed.org/pubs/fedgazJ96-0 I lop in ion.c fm.
27. Fisher and Peters. "Tax and Spending Incentives and Enterprise
Zones."

Critics of incentives often invoke the "zero-sum"
argument. asserting that one locality's gain in jobs or
other benefits is another locality's loss. Supporters
counter that even if incentives simply move jobs from
one place to another and spur no additional economic
activity, they can still be beneficial overall. How is it
possible that the same business investment can raise
overall social welfare more in one place than another?
Such a situation can arise if one community values
the jobs and investment more than another.
Communities' respective valuations of an opportunity for a new or expanded business can differ for
a variety of reasons: economic objectives (such as
higher employment rates and improved workforce
skills), community goals (such as growth), and views
regarding externalities (for example, town A might
be more inclined to have a prison or casino than
town B, and city B might be more willing to accept
additional noise or other adverse side effects than
city A). One measure of this differing valuation or
28. Bartik. "Who Benefits from State and Local Economic Development Policies?"

Economic Development Incentives: Research Approaches and Current Views

intensity of preference is willingness to pay, which
has as its proxy the size of the incentive package
being offered by agents for a community. In some
cases, these agents may act, at least in part, on their
own preferences or perceptions about community
wishes. In other cases, community preferences are
affirmed explicitly through the democratic process
when the public has the chance to vote on general
or specific incentive packages. Community preference for a project may even be confirmed or dis proved after the fact by citizen response to employment opportunities.
THE DISCU SION GOING FORWARD

The composition of economic development incentives may evolve over time in response to business

A73

and community needs and public concerns, but incentives will undoubtedly remain a tool used by policymakers to stimulate local and state economic development. Good public policy requires that the details
of incentive packages be disclosed and that the effectiveness of incentives be measured. Policymakers can
then be held accountable for their decisions on the
basis of evidence rather than politics. New databases
allowing more-accurate analysis are becoming available, and new data sources are beginning to make
public the details of incentive packages. The research
described in this article shows the ways in which data
and methods have improved over the past ten years.
Furthermore, the studies suggest that incentives can
be effective in certain situations, and also buttress the
case for further research that makes use of the new
data and investigative tools.
0

A75

October 2008

Recent Payment Trends in the United States
Geoffrey R. Gerdes, of the Board's Division of
Reserve Bank Operations and Payment Systems, prepared this article, with assistance from Kathy C.
Wang.
Survey data collected for the Federal Reserve in 2007
show a continuation of significant changes in the way
consumers and businesses make payments. Data previously published by the Federal Reserve show that in
2003 the number of electronic payments in the United
States (made mostly through debit and credit card
networks and the automated clearinghouse system)
exceeded the number of check payments for the first
time. t The recent data indicate that by 2006 the
number of electronic payments was more than twice
the number of check payments, or about two-thirds of
all noncash payments (table 1, chart I). The value of
electronic payments has also grown substantially, but
in 2006 they still accounted for less than half the
value of noncash payments (45 percent).2
The use of checks has been declining since the
mid-1990s, generally because check payments-and
most likely some cash payments-are being replaced
by payments made with electronic instruments. The
latest data show a continuation of this trend. Consumers in particular are paying electronically much more
often than in the past, with most of the increase
between 2003 and 2006 due to a rapid rise in the
NOTE: Darrel W. Parke and May X. Liu, of the Board's Division of
Research and Statistics, provided valuable assistance with survey
design, sampling, and production of the statistical estimates.
I. Previous reports include Geoffrey R. Gerdes, Jack K. Walton II,
May X. Liu , and Darrel W. Parke (2005), "Trends in the Use of
Payment Instruments in the United States," Federal Reserve BIII/etin,
vol. 91 (Spring), pp. 180--20 I, www.federalreserve.gov/pubslbulletinJ
2005/spring()5_payment.pdf; and Geoffrey R. Gerdes and Jack K.
Walton II (2002), " The Use of Checks and Other Noncash Payment
Instruments in the United States," Federal Reserve BIII/etin, vol. 88
(August) , pp. 360--74, www.federalreserve.gov/pubslbulietinJ2002/
0802_2nd.pdf.
2. Payments transmitted over large-value funds transfer systems
(such as Fedwire, operated by the Federal Reserve, and the Clearing
House Interbank Payments System, or CHIPS, operated by the Clearing House Payments Company), sometimes called wholesale pay ments, are outside the scope of this article. These systems are used
primarily for large monetary and financial transactions, such as
overnight loans between depository institutions. Including such transactions in the calculations reported in this article would not meaningfully affect the total number of payments but would dramatically
increase the value . An unknown number of transactions of other types
are made over these systems by consumers and businesses.

number of debit card payments of relatively low
value (on average, $39). Consumers' checks are also
increasingly being "converted" into electronic payments made via the automated clearinghouse (ACH)
system.3 In 2006, about 8 percent of all checks
written were converted to ACH payments, compared
with fewer than 1 percent in 2003.
The interbank check-clearing system itself is also
rapidly becoming more electronic, as original paper
checks are increasingly being "truncated" and replaced with electronic images during the checkclearing process. 4 The apparent catalyst for the dramatic change in check clearing was passage of the
Check Clearing for the 21st Century Act (Check 21).
Signed into law in October 2003 and taking effect in
October 2004, Check 21 allows a collecting bank to
present a legally equivalent paper copy of an original
check-called a "substitute check"-if the paying
bank requires a check to be presented for payment in
paper form.5 In early 2007, an estimated 57 percent of
all interbank checks in the United States were presented in original paper form and about 43 percent
were truncated and ultimately presented to the paying
bank either electronically or as a substitute check. Of
the portion that were truncated, 66 percent were
presented electronically. The number of checks presented electronically in 2007 was approximately three
times the number presented electronically just one
year earlier. More recent data on the portion of
interbank checks presented by the Federal Reserve
Banks indicate that dramatic changes have continued
since the 2007 surveys. Data for June 2008, for
example, indicate that about 53 percent of checks
3. Most check conversions take place at "lockboxes" to which bill
payments are mailed; a small proportion take place at retail establishments when checks are tendered at the point of sale. Consumers whose
checks are going to be converted are permitted to " opt out." Under the
rules of the National Automated Clearinghouse Association (NACHA),
corporate and business-format checks are not eligible for conversion to
ACH payments.
4. Interbank checks are checks that pass between depository institutions .
5. Before Check 21, paying banks' requirement that the original
check be presented was a major barrier to the widespread use of
electronic check-clearing technology. The option of providing a
substitute check gives depository institutions and their agents the
freedom to use electronic check-processing methods for most or all of
a check's journey to the paying bank, as the substitute check is needed
only at the end of the process if the paying bank requires paper.

A 76

Federal Reserve Bulletin D October 2008

I . N nea h payments in the UniLed Stmes, by Iype of payment, 20m and 2006
Value
Number
Type of payment
Billions of
payments

Percent
of total

2003
Check' . , ...... ..... ...... ... ..
Electronic ........ .. ...... ... ..
Debit card .. ...... .. ....... .
Signature .. ........ ...... .
PIN . , .. , .. .. .. .. ...... ..
Credit card ................ .
General-pu!]l!lse' . . , .. .. . .
Private-label' ., . , .. , ... , ..
ACH 4
.. . . . . . . . . . .. ..
Retail
.. . . .. .... . ,
CCD .... . .. .. .. .. .. .. .. ..
EBT' ..................... .

37.3
44.1
15.6
10.3
5.3
19,0
15.2
3.8
8,8
7.3
1.4
,8

45.S
54.2
19.2
12.6

Total noncash payments " " . .

81.4
37,6
.3

Trillions of
dollars

41.1
26.5
,6
.4

6.6

23.3
18.7
4.6
10.7
9.0
1.7
1.0

1.7

Nominal
Percent
of total

60.9

39.1
.9
.6

I Average,
in
dollars

Constant 2006 dollars
Trillions of
dollars

1,103
599
40
42
38
89
93
76
2.754

45.1
29 .0
.7
.5

Percent
of total

60.9

39.1
.9
.6
.3

Average,
in dollars

1,209
656
44

46
42
98
102
83

1.4

.3
2.5
2.1

24,1
S. I
16.0

35.7
12.0
23 .7

11 ,272
26

100.0

67.6

100.0

830

74.1

100.0

909

46.2
.4

41.2
.1

61.0

1,095
187

45,1
.1

61.0

1,200
205

41.6

54.9
45.1
1.3
.8

1.363

54.9
45.1
1.3

.5
2.8

41.6
34.2
1.0
.6
.3
2.1
1.9
.3
31.0
12.1
18,9

25.0

•

.2
1.9
1.5
.3
26.4
8.9
17.5

l , t06

•

2.5
2.1
.4

35.7
12.0
23.7

•

3,017
1.211
t2,348
29

MEMO

Total checks written 6
Checks converted to ACH .,.

2006
Check' ........ .. .. .... .. .. , ..
Electronic . .. , . .... .. .. . .. , .. , .
Debit card ................ ..
Signature,.,., . . . .. . ,., . . ,
PIN .. ............ .. , .. .. '
Credit card ...... .... , ..... .
General-pu!]l!lse1 . . , . , ." .
Private-label' ... . , . , .. . . ,.
ACH 4 .. . . . . . . . . . . . . . . . . .. ..
Retail ...... ......... , ... '
CCD ............. .... .. .
EBT' ..... .... ........... ..

Total noncash payments ,., ..

32,7
67.3

30.5
62,8

27.1

25.3
16.0

17.1
10.0
23.3
20,3

9.4

21.7
19.0
2,S
14,6
12.6

3.0
15.7

34.2
1.0
,6

.3
2.1
1.9
.3

2.5
.3

31.0
12.1
18.9

40.9

544

39
40
98
99
92
2,121
959
9.384
27

.8
.5
2.8

2.5
.3
40.9
16.0

1,363
544

39
40
37
98
99
92
2,121
959
9,384
27

J.I

13,5
2.2
1.2

933

1000

758

1000

812

758

1000

812

33.1
2.6

35.5

42.3
.7

55.8
.9

1.277
267

42.3

55.8
.9

1,277
267

Nominal
Annual
rate of
change
(percent)7

2,0

•

16.0
25.0

•

MEMO

Total checks written"
Checks convened to ACH ..

2.8

Value

Number

Change. 2003 10 2006
Check . . . . . . . .. . .... .
Electronic . .. . . .. . .. .
Debit card .. .. .. .. .. ...... .
Signature .... ...... . .. .
PIN .. ........ ...... .. .. .
Credit card .............. .. .
General-purpose
Private-label ...... .. .... ..
ACH .. . ...... . . ... .
Retail .... ...... ...... , .. .
CCD .. .. .......... ..
EBT ...... ............ .

Total noncash payments .. . .

Constant 2006 dollars
Change
Annual
Change
over period
in average
rate of
over period
(trillions of
change
dollars)
(percent)'
(dollars)

Change
over period
(billions of
payments)

Annual
rate of
change
(percent)7

Change
over period
(trillions of
dollars)

-6.8
18.6
9.7
5,7
4.0
2,8
3.7
-1.0
5.9
5.3

-6.5
12,5
17.5

7 .7
,4

S.9
16.0
14.3

259
-55
-2
-2

19.5

-I

5.2
,3
,2
.1

12.4

10,0

15.8

20,6
4,6
7,6
-9.6
18.7
19,8

Change
in average
over period
(dollars)

-3,5

7.S

-2,6
5.6
12,6
10,9
15.9
4.6

9.9

6
16
-633
-147

6,6

- ,1

-6,6
5.5
10.8
2.6
7.S

.2
.1

6,9
4,0
2,9

•

-3,7
8,8

4,6

154
-112

-3
9
-896
-252
-2,964

-5

-6

-5

•

14.3
5,8

-1,888

11.1

1.7

-97

-2,S
,6

-2,1
117,0

77
62

11.9

4.6

8.2

3.9

-18

-4.5
2.3

-4.1

1.1
.6

,9
123.7

lSI

3.2

1.4

-2

MEMO

Total checks written . ........ . .
Checks converted to ACH . . .

98,7

NOTE: The number and value of checks and ACH payments for 2003 are revised from figures reported in Gerdes and Wallon, ''Trends in the Use of Pay,
ment Instruments in the United States," because of revisions to some banks'
reported data and because an adjustment was made to account for rapidly
changing ACH check conversion rates. The number and value of checks and
ACH payments for 2006 are revised from figures reponed in Federal Reserve
System, ''The 2007 Federal Reserve Payments Study." Components may not
sum to totals and may not yield percentages shown because of rounding.
I. Checks paid, that is, checks that were on-us (involving only one depository institution) and checks processed through the interbank check-clearing
system, including original paper checks and truncated checks presented either
electronically or as paper substitute checks. Includes checks paid by depository
institutions, U.S . Treasury checks, and U.S . Postal Service money orders .

2. Includes four widely accepted credit and charge card networks .
3. Includes private-label credit cards issued by oil companies and many
large retailers .
4. Retail ACH payments include payroll, bill payments, and some payments
associated with the retail sector of the economy. CCDs are cash concentration
or disbursement transactions, about half of which are most likely internal cor,
porate transfers . Retait includes all other ACH payments.
5. Electronic benefits transfer.
6, Total checks written includes checks paid through the check,clearing system and checks converted to ACH payments .
7. Compound annual growth rate.
• In absolute value, less than 0.05 .

Recent Payment Trends in the United States

oncash

payment~

in the United 'tates. se lected years

A77

oneash payments per capita in the United Stale .
selected year

BiIJioDa ofpayrmnta

Nurmcr per cap ita

70
Beetronic

.a-k

so
40

,...

0
1971

1979

1995

2000

2003

2006
1971

. NOTE: Check payments are checks paid, that is , checks that were on· us
(involving onty one depository institution) and checks processed through the
Interbank check-clearIng system, Including original paper checks and truncated
checks preseoted either electronically or as paper substitute checks. Includes
checks paid by depository institutions, U.S. Treasury checks, and U.S. Postal
ServIce money orders. Checks converted to ACH payments are included in
electronic payments.
SOU.RCES: The 1971 check figure is from a survey conducted for the Federal
DePOSit Insurance Corporation and reported in William R. Powers (1976), "A
Survey of Bank Check Volumes," Journal of Bank Research (Winter); for all
other years, Federal Reserve Board data.

presented to depository institutions through the Reserve Banks were presented electronically, compared
with about 30 percent in early 2007 .6
This article examines findings from two surveys on
the use of noncash payment instruments in the United
States conducted for the Federal Reserve-one of
depository institutions (the 2007 depository institution survey) and the other of electronic payment
networks, processors , and credit card issuers (the
~007 electronic payment survey). Analyses of change
IO recent years draw on similar surveys conducted in
2004 and 2001. The article also draws on a 2006
Board of Governors survey of checks paid by depository institutions. Information about the surveys is
given in the appendix .
TREND

IN NONCASH PA YMENTS

The total number of noncash payments in the United
States (payments by check, ACH, debit and credit
card, and electronic benefits transfer, or EBT) increased from 81 billion to 93 billion between 2003
and 2006, or 4,6 percent a year. The nominal value of
noncash payments increased from $68 trillion to
$76 trillion, or 3.9 percent a year, over the same
period. Restating values in constant 2006 dollars
thereby taking into account price inflation averagin~
3.1 percent a year over the period, shows that the
constant-dollar, or "real," value of noncash payments
increased only modestly between 2003 and 2006 ,
6. The Reserve Banks are estimated to have processed just over
40 percent of all interbank checks in early 2007 .

1979

2000

2003

2006

NOTE: Check payments are checks paid, that is, checks that were on-us
(involving only one depository institution) and checks processed through the
Interbank check-clearing system, including original paper checks and truncated
checks presented either electronically or as paper substitute checks. Includes
checks paid by depository institutions , U.S. Treasury checks, and U.S. Postal
ServIce money orders . Checks converted to ACH paymeots are included in
electromc payments.
SOURCES: The 1971 check figure is from a survey conducted for the Federal
DepOSIt Insurance Corporation and reported in William R. Powers (1976), "A
Survey of Bank ClJeck Volumes," Journal of Bank Research (Winter) ; for all
other years, Federal Reserve Board data.

about 0.8 percent a year.? With the number of noncash
payments rising faster than the aggregate value, the
constant-dollar average value of a payment declined
$97 over the period (3.7 percent a year), compared
with a decline of $56 between 2000 and 2003, These
trends indicate that much of the growth in the number
of noncash payments was due to a large increase in
the number of smaller-value noncash payments.
Driven by various socioeconomic factors, the annual number of noncash payments per capita has
more than doubled since the 1970s, rising from fewer
than 150 in 1971 to more than 300 in 2006 (chart 2).
Rising average wealth and income has allowed more
consumption, which has evidently led to a rising
number of payments for products and services that in
the past households either provided for themselves or
did without. Some of the increase in the number of
noncash payments per capita most likely also came
from the replacement of cash with noncash instruments, as many small-value payments once made in
cash were increasingly being made via checks, or
debit or credit cards. (There is, however, no direct
evidence to show whether cash payments themselves
increased or decreased overall.)
Growth in noncash payments may also be partly
explained by changing payment processing methods
themselves. In some cases, replacing a check with an
electronic payment increases the number of transac7 . Adjustments for inflation were made using the implicit price
deflator for u.s. gross domestic product. In this article, amounts not
identified as constant dollars are nominal amounts, meaning that they
are reported In actual dollars and have not been adjusted for inflation .

A78

Federal Reserve Bulletin 0 October 2008

tions needed to support a single payment. For example, paying a bill online through a bank sometimes
results in two ACH transactions (in contrast to only
one check payment in the past)-one to move the
funds from the payer's bank account to a service
provider's general payment account, and another to
move the funds from the general payment account to
the biller's account. Likewise, processing practices
that in the past might have involved consolidation of
several payments into one check (a practice called
"check and list") are in some cases being replaced by
practices that generate individual ACH payments.
While changes in processing methods undoubtedly
playa role in the growth of noncash payments, the
extent of such changes has not been measured.

Check Payments
The number of checks is declining both because
fewer are being written and because some are being
converted into electronic payments largely processed
through the ACH system. 8 Because of a rise in check
conversions, the number of checks being paid is
falling faster than the number of checks being written.
Tracking only paid checks, therefore, does not provide a complete picture of how checks are being used.
Thus, this article reviews data on two types of checks:
• Checks paid-Checks that are "on us" (those
involving only one depository institution) and checks
processed through the interbank check-clearing system, including original paper checks and truncated
checks (those replaced with electronic images) presented either electronically or as paper substitute
checks.
• Checks converted to electronic payments-Checks
not processed through the check-clearing system
but converted to electronic payments made via the
ACH. These items are ACH payments and do not
have or retain any legal status as checks. Instead,
the original paper check that was converted is
considered a "source document" for the ACH
payment it generated.
For purposes of analysis, the aggregation of these
two types of checks-paid checks and converted
checks-is termed checks written. 9

8. A small but unknown proportion of checks may also be being
converted into electronic payments processed over debit card networks.
9. Although counted as "checks written, " converted checks are not
necessarily written in a literal sense, but may merely be " tendered," or
offered in payment at the point of sale. A customer may fill in the

he k. Paid
The total number of checks paid in the United
States declined from an estimated 37.3 billion in
2003 to 30.5 billion in 2006, a decline of 6.5 percent a year compared with an estimated decline of
3.8 percent a year from 2000 to 2003 (table 1).10
The increase in the rate of decline can be explained
by the rapid rise in the conversion of check payments into (electronic) ACH payments. After decades of being the dominant noncash payment type,
by 2006 checks paid amounted to only one-third of
all noncash payments (chart I).
In 1971, approximately 112 consumer, business,
and government checks were paid per capita in the
United States (chart 2). At that time, cash was also
used extensively to pay bills and to make other
everyday payments, and the use of electronic payments was negligible by comparison. In subsequent
years, the number of checks paid per capita rose,
reaching 188 in 1995, with some checks replacing
cash as a means of payment. The number of electronic payments per capita also grew, but it was still
low relative to checks. After the mid-1990s, several
factors-the buildup of infrastructure for credit and
debit card payments, the expanding issuance of cards,
and the increasing use of the ACH to make payroll
and bill payments-combined to reduce the use of
checks, and by 2006 the annual number of checks
paid per capita had fallen to 102, which was 91 percent of the figure for 1971 and 54 percent of the figure
for 1995,11
Even as the number of checks paid was declining,
the nominal value of checks paid was increasing,
from $41.1 trillion in 2003 to $41.6 trillion in 2006.
In constant 2006 dollars, however, the value was
decreasing-by 2.6 percent a year from 2003 to 2006,
compared with a decrease of just 1.0 percent a year
from 2000 to 2003. Because the number of checks
paid was declining at a faster rate than the value, the
average constant-dollar value of a check increased
$154 over the latter period, reaching $1 ,363 in 2006.
As discussed below, the increase in average value
would not have been so great had the growth in

check or may simpl y hand a blank check to a cashier, who scans the
information imprinted on the check, voids the check , and returns it to
the customer.
10. The 2003 estimate (earlier reported as 36.6 billion) and the
2000 to 2003 rate of decline are restatements of figures reported in
Gerdes and others, " Trends in the Use of Payment Instruments." The
restatements are discussed in the appendix .
II. The number of checks per capita has declined not only in the
United States, but also in other countries. See the box "Payments in
Other Countries."

Recent Payment Trends in the United States

A79

Payments in Other Countries
A comparison with selected industrialized economiesJapan, the European Monetary Union (EMU), the United
Kingdom, and Canada-helps put the use of noncash
payments in the United States in perspective. The number
of checks per capita declined from 2000 to 2006 in all five
economies (chart). I
Only in the United States, however, was there an
accelerating decline in terms of both annual growth
rate-a decline of 7.4 percent a year from 2003 to 2006
compared with a decline of 4.7 percent a year from 2000
to 2003-and absolute number of checks per capita- a
decline of 26 checks per capita from 2003 to 2006
compared with a decline of 20 checks per capita from
2000 to 2003. Nevertheless, the United States continued
to have a significantly higher number of checks per
capita, albeit to a lesser extent than the years 2000 and
2003.
Among the economies considered, the number of electronic payments per capita rose fastest in the United
States, at 11.4 percent a year from 2003 to 2006. By 2006,
the number of electronic payments per capita surpassed
the number per capita in all economies except Canada's.
The U.S. check-clearing system itself is becoming more
I. The payments reported were made by both businesses and consumers. To account for differences in size among the economies, each
economy's payment figures were put on a per capita basis by dividing
them by the population of that economy.

conversion of checks of relatively small value not
been so substantial.
Check. Converted to Ele tronj Payment ·
The number of checks converted to electronic payments in 2006 was 2.6 billion, up from 0.3 billion in
2003 (table 1), almost doubling each year. As noted
earlier, about 8 percent of checks written in 2006
were converted to ACH payments, compared with
fewer than 1 percent in 2003. These were typically
checks converted by companies receiving them
through the mail in payment of a bill. Some checks
were tendered at the point of sale in retail establishments and were converted either at the cash register
and returned to the customer once the electronic
information was captured, or in the back office and
then archived or destroyed.
The average value of converted checks in 2006 was
$267, up from $187 in 2003 , for a growth rate of
12.5 percent a year. In constant 2006 dollars, however, the average value increased only 9.2 percent a
year over the period. The average value of converted

electronic, as may also be the case in other countries.
Comparisons across economies of the number of checks
and electronic payments should therefore take into consideration the extent of electronification in the various checkclearing systems.
Noncash payments per capita in selected economies, 2000, 2003, and 2006
NUDer per capit8

000306

Japan

European
Monetary
Union I

Uniled
Kiagdom

Canada

United
States

I. The European Monetary Union is made up of Austria, Belgium.
Finland. France. Germany. Greece. Ireland, haly. Luxemburg, The Netherlands. Portugal. and Spain. Cyprus. Malta, and Slovenia joined the EMU
afler 2006 and were not included in calculations.
SOURCES: European Central Bank (2007), " Payment and Securities
Settlement Systems in the European Union," August: Bank for International Settlements (2008). "Statistics on Payment Systems in the Group of
Ten Countries," March: and Federal Reserve Board.

checks was substantially lower than the average value
of paid checks, in part because ACH rules prohibit
conversion of large-size business and other checks for
large amounts. 12 In fact, in 2006 the average value of
converted checks, which tend to be written by consumers, was very close to the average value of checks
paid by credit unions (reported below), which generally serve consumer customers.
Total

hecks Written

The total number of checks written (paid checks plus
converted checks) declined 4.5 billion, or 4.1 percent
a year, from 2003 to 2006, compared with 3.5 percent
a year from 2000 to 2003 (table 1). (Checks paid
declined even more-6.S percent a year from 2003 to
2006 and 3.8 percent a year from 2000 to 2003.) The
average value of checks written in 2006 was $1,277.

12. Large-size business checks are lypicaUy 8 or 9 inches long and
have an "auxiliary on-us " field on the MICR line. Such checks, and
any check for more than $25,000, are ineligible for conversion .

A80

Federal Reserve Bulletin 0 October 2008

In constant 2006 dollars, the average value increased
$77 (or 2.1 percent a year) from 2003 to 2006,
compared with an increase of $92 (or 2.7 percent a
year) from 2000 to 2003 .
The increase in the constant-dollar average value
of checks written combined with a substantial decline
in the number written suggests that most checks being
replaced with electronic payments were smaller-value
checks-typically, checks written by consumers and,
to some extent, by businesses to consumers. Businessto-business checks, on the other hand, were likely not
being replaced as rapidly. Evidence presented later
indicates that consumer-to-business debit card payments are probably responsible for most of the
replacement of checks written.

3. Electronic payments in the

Electronic Paymenrs

Auto mated Clea ring house Pay me nt

The number of payments made over the major electronic payment systems in the United States-the
ACH system, debit and credit card systems, and the
EBT system-grew from 44.1 billion to 62.8 billion
between 2003 and 2006, for an annual rate of growth
of 12.5 percent (table 1, chart 3). More than half the
growth occurred in the debit card networks. However,
among the major payment systems, the highest annual
rate of growth (1S.7 percent) was recorded by the
ACH system, which started the period with a much
smaller base than debit cards. Although the rate of
growth of electronic payments was somewhat slower
between 2003 and 2006 than between 2000 and 2003
(13.0 percent), the absolute increase in the number of
electronic payments was 5.1 billion greater over the
latter period.
The value of electronic payments increased more
slowly than the number (S.9 percent a year compared
with 12.5 percent a year) , and the average value of
electronic payments declined from $599 to $544 over
the period. In constant 2006 dollars , the average value
declined 6.1 percent a year. Some of this decline was
due to the replacement of smaller-value checks by
ACH payments, and some was due to the large
increase in relatively small debit card payments.
Increases in the number of payments made over the
major electronic payment systems are due to increasing use of both traditional and innovative ways of
initiating payments. In addition , the use of privatelabel prepaid cards, an innovation not included in the
figures for the major electronic payment systems, has
become significant. (See the box "Innovations in
Electronic Payments" for a discussion of prepaid
cards and other new ways of initiating payments.)

An automated clearinghouse payment can be either a
credit transfer or a debit transfer. A credit transfer is a
transaction in which the payer' s bank originates the
payment, sending funds to ( " crediting" ) the payee's
bank account. A typical use of an ACH credit transfer
is for payroll, with an employer initiating a "direct
deposit" from its bank account into that of an
employee. A debit transfer is a transaction originated
by the payee's bank, which draws funds out of
("debits") the payer's bank account. The processing
flow for a debit transfer is similar to the flow for a
check sent by the bank of first deposit to the payer' s
bank for collection. Converted checks are a relatively
new type of ACH debit transfer; another, more traditional type is an arrangement whereby a biller, such as
an insurance or mortgage company, by prior customer
authorization , periodically withdraws funds from a
customer's transaction account at a depository institution.
Most of the growth in ACH payments between
2003 and 2006 (approximately three-fourths) came
from ACH debit transfers, which increased 27 .7 percent a year and by 2006 had surpassed credit transfers
for the first time. Just over half the growth in debit
transfers came from an increase in check conversion.
The large majority of converted checks were checks
mailed to billers and converted at so-called lockboxes, identified within the ACH system as accounts
receivable check conversion (ARC) transactions
(table 2).13 Growth in the conversion of checks at the

Billions ofpaymmu:

70
• Bcclronic benc6,. Ir.... fer

ACH

•

Debit cord
Creelt card

30
20
10

0
2000
SOURCE:

2003

2006

Federal Reserve Board.

13. Rules for using the ACH system, promulgated by NACHA,
require banks to identify each payment according to a set of standard
ent.ry classification (SEC) codes. References to " ARC" and similar
abbreviations in this section are SEC codes.

Recent Payment Trends in the United States

point of purchase (POP transactions) lagged by comparison, and back-office conversion (BOC) was new
and relatively small in 2007.
An additional 1.4 billion of combined credit and
debit transfer growth came from traditional prearranged payment and deposit (PPD) transactions, most
likely many of which also replaced checks. Almost
1.0 billion of growth came from payments initiated
over the Internet (WEB transactions). WEB transactions made at retail websites may have replaced or
augmented payments made by credit or debit card,
while WEB transactions made at billers' websites
may have replaced checks sent through the mail.
Almost all the increase in the volume of transactions over the ACH system came from payments that
were smaller in value than typical ACH payments in
the past. In constant dollars , the average value of an
ACH payment dropped 11 percent a year from 2003,
falling to $2,121 in 2006. The constant-dollar average
value of the debit transfer portion of ACH fell more
than half, dropping 21.1 percent a year to reach
$1,535 in 2006. This huge drop in constant-dollar
average value is reflected in the growth rates for debit
payments, which grew less than 1 percent a year in
constant-dollar value-considerably less than the
27.7 percent annual growth in number of debit payments.
Distinguishing between large-value CCD (cash
concentration or disbursement) transactions (traditionally used for internal movement of corporate
account balances) and the more typical business and
consumer payments called "retail" (a category that
includes payroll, bill payments, and some payments
associated with the retail sector of the economy)
gives a different picture of change (tables 1 and 2).14
As a proportion of retail ACH payments, checks
converted to ACH payments (ARC and POP transactions) rose from only 4.5 percent in 2003 to a sizable
20 .7 percent in 2006. 15 The increase in such
payments-ACH payments arising from check
conversion-is the primary reason for the decline in

14. Traditionally, CCD transactions have been thought of as transfers initiated by large corporations to move funds between their own
accounts for internal business and financial purposes; as such, they are
not the focus of this article. However, a survey of members of the
Association of Financial Professionals (AFP) conducted by Dove
Consulting and the AFP in 2003 suggests that around half of CCDs are
payments between counterparties, and not just internal transfers. The
proportion of CCD value accounted for by payments between counterparties is unknown.
15. Coding for a third type of ACH payment arising from check
conversion-back office check conversion, SEC code BOC-took
effect in 2007 ; use of the code was not significant during the study
period.

A81

the average value of ACH payments (and of retail
ACH payments in particular).
While the number of CCD transactions rose
12.4 percent a year, the average value of a CCD
payment declined almost 9 percent in constant 2006
dollars over the period. The 2006 average value was
nearly one-fourth below the 2003 constant-dollar
average value. Changes in the use of CCD transactions are less understood than are changes in the use
of retail ACH payments. The decline in average value
may, for example, be a sign of growing use of such
transactions by smaller businesses, or a movement of
some very large ACH payments to on-us transactions
(internal to a depository institution) or to large-value
funds transfer systems.

Card Payments
The number of payments made by debit, credit, or
EBT card grew by 12.8 billion from 2003 to 2006,
reaching 48 .1 billion and exceeding the number of
checks paid by 17.6 billion (table 1, chart 3). Debit
card payments grew more than payments of other
types, rising 9.7 billion over the period and contributing three times more to card growth than other types
of cards combined . By 2006, the number of debit card
payments (25.3 billion) exceeded the number of
credit card payments (21.7 billion).
The value of debit card payments in 2006 ($1.0 trillion), however, was less than half the value of credit
card payments ($2.1 trillion). The average value of
debit card payments declined to $39 in 2006, a
decrease of about $1 from 2003. The average value of
credit card payments rose to $98, an increase of about
$8 from 2003. In constant dollars, the average value
of a debit card payment decreased about 4 percent a
year, while the average value of a credit card payment
decreased only slightly (0.01 percent a year).
The decline in the constant-dollar average value of
debit card payments and the virtually flat growth in
the constant-dollar value of credit card payments
suggest that much of the growth of payments by cards
derived from payments of relatively sma)) valuepayments that otherwise would quite likely have been
made in cash. Data reported by some card networks
suggest that a large share of card payments in 2006
were of relatively small value: an estimated 48 percent of combined debit and credit card payments
(almost 23 billion) were for amounts less than $25;
26 percent were for amounts less than $15; and
3 percent were for amounts less than $5. 16 Of the
16. Estimates are based on data collected by Dove Consulting for
the Cash Product Office at the Federal Reserve Bank of San Francisco.

A82

Federal Reserve Bulletin 0 October 2008

Innovations in Electronic Payments
The 2007 electronic payment survey collected information about several significant types of "emerging payments," including prepaid cards, online bill payments,
person-to-person Internet payments, con tactless payments, and other, less frequently used types such as
proprietary ACH card payments, deferred payments, and
mobile payments (those made from portable electronic
devices such as a cellular phone). I
Electronic prepaid cards have become increasingly
important replacements for paper-based payment instruments and related devices, such as gift certificates, paper
tickets and tokens. and check-based rebates.2 A substantial number of prepaid cards are private-label, so-called
"closed-loop" or "closed-system," cards. This type of
card can be used only for purchases at, for example, a
merchant's chain of stores (similar to private-label credit
cards) and are often given as gifts or used to access a
municipality's public transportation system. About 3 billion payments, with a total value of $36.6 billion and an
average value of $12, are estimated to have been made in
2006 with private-label prepaid cards? These payments
are not included in national card payment totals. If they
were, they would add more than 6 percent to the number
of card payments nationwide in 2006.
General-purpose. so-called " open-loop" or "opensystem," prepaid cards that can be processed on existing
general-purpose credit card or debit card networks also

I. Figures for prepaid card paymenls reported in this box are nalional
estimates because they include an estimaled amount for Ihe nelworks that
did nOI report. Figures for other emerging payments include only reported
amounts and therefore are lower bounds for the nalional totals. Data
collection and estimation are by Dove Consulting.
2. The term "prepaid" is associated with products for which the
prefunded value is recorded in a remote database that must be accessed for
pnyment authorization. The term describes most of the prefunded cards
currently in use in the United States. Most prepaid cards serve a single
purpose, but some may combine multiple funclions on one card. In
addition, some prepaid cards, such as payroll cards, government benefit
cards, and some girt cards, can be reloaded with value. For more
information on prepaid cards and related business and regulatory concerns, see a summary of the November 12, 2004, Federal Reserve System
Paymenl System Development Committee (PSDC) roundlable on storedvalue cards at www.federalreserve.gov/paymentsystemslstoredvalue/
default.hlm.
3. About one-third of the total was reporled directly; the remainder was
estimated on the basis of available information. Efforts were made to use
available information to keep estimates within reasonable boundaries, bUI
the amount of uncertainty is unknown.

more than 1.4 biIJion card payments made for amounts
of less than $5, the majority (53 percent) were debit
card payments authorized on the basis of a personal
identification number (PIN).
Although data from other years are not available, it
is likely that the share of relatively small payments

have been in use over the past decade.4 Uses include as
gifts and for new types of electronic benefit transfers
(including state-administered child support disbursement
programs and unemployment insurance), international
remittance payments, payment of health care expenses, and
payroll. An estimated 0.3 billion open-system prepaid card
payments, with a total value of $13 billion and an average
value of $41 , were made in 2006. 5 As the number of
closed-system prepaid card payments is estimated to have
been ten times the number of open-system payments and
the value three times that of open-system payments, it is
clear that closed-system cards have been relatively more
successful to date. The lower popularity of open-system
prepaid cards may be due in part to fees charged by
third-party issuers-designed to recoup costs-that are not
typically charged on closed-system cards, which are essentially issued by payees. These payments are included in,
but add an insignificant percentage to, national card payment totals and, depending on the network, are included in
either debit card or credit card payments.
The vast majority of card payments made within the
United States are still being made using magnetic stripe
technology. More advanced chip-based technology, though
available on so-called "smart cards" for years, remains in
limited use because merchants have not extensively adopted
terminals that can read them. Other technologies, such as
radio frequency identification (RFIO), are also being used
for making payments on a limited basis. RFlO technology
in the form of an electronic key fob has, for example, been
in use for more than a decade to make payments at the
retail outlets of one large oil company (Exxon-Mobil).6
Such devices can be used to initiate individual payments
from almost any debit card or credit card account. RFIO
technology is also being used by highway authorities to
make toll transactions more convenient. At least 2 billion
payments, with a value of $3.6 billion, were initiated with
RFIO transponders at toll authorities in 2006. Toll transponders (such as EZPass) carry a balance and typically are
4. Like debil cards that can be authorized with a signature, some prepaid
cards may bear the symbol of a major credit card network and may be used
like a credit card.
S. About one-third of the total was reported directly: the remainder was
estimated. Efforts were made to use available information to bound
estimates, but the amount of uncertainty is unknown.
6. The amount of use has not been reported.

has increased in recent years as card networks have
made infrastructure and policy changes that accommodate the needs of previously cash-only merchants.
For example, some quick-service restaurant chains,
including McDonald's, began accepting cards at most
of their locations in 2004 because of improvements

Recent Payment Trends in the United States

automatically reloaded with a fixed amount once the
balance drops below a set Iimit. 7
An RFID feature has also been added to existing smart
chip-based credit and debit card programs to create
"contactless" cards such as MasterCard's PayPass and
American Express's Express Pay. These and similar cards
can be used at some gas stations, quick-service restaurants (for example, McDonalds), convenience stores (for
example, 7-11 stores), and pharmacy chains (for example,
CVS). Using this technology, a consumer is able to
initiate a payment through the major credit or debit card
networks by waving either a card or an electronic key fob
near a payment terminal-rather than by swiping a card
and authorizing by either PIN or signature-thereby
reducing the amount of time and effort required to make a
purchase. MasterCard reported that by the first quarter of
2008, the number of cards that included PayPass technology and the number of merchants accepting them both
had at least doubled in a year. s While the number and
value of card payments initiated using this technology is
unknown, use is most likely still low at this time.
About 3.4 billion online bill payments, with a total value
of $1.2 trillion and an average value of $345, are estimated
to have been initiated from consumer banking websites in
2006. The first consumer banking websites allowing the
initiation of bill payment were reportedly introduced in the
mid-1990s, shortly after commercial use of web technology began to take hold. Since then, depository institutions
have increasingly offered websites capable of supporting
bill payment and other types of transactions. In early 2003,
fewer than half of commercial banks and state-regulated
savings institutions oltered transactional websites, but by
early 2008, over 80 percent offered them; in early 2004,
only 43 percent of federally regulated savings institutions
offered them, but by early 2008, 73 percent did; and in
early 2003, 29 percent of credit unions offered them, but
by early 2008, 58 percent did.9
7. The reloading may be done automatically by means of credit card or
through the ACH, or by the customer initiating a payment by cash or
check.
8. Although growth was significant, the totals are small compared with
the tolal number of credit cards and the number of merchants that accept
them. See Daniel Wolfe and Marc Hochstein (2008). "PayPass Issuance.
Acceptanoe Double." American Banker, vol. 178 (May 2), p. 8.
9. Data are from depository institution reports filed with the Federal
Reserve Board. These peroentages represent upper bounds on the percent·
ages of depository institution bill.payment websites because the share of
these transactional websites that offer bill payment is unknown.

allowing faster authorizations, new rules lifting signature requirements for low-value payments, and
lower fees for certain types of quick-service merchants. 17

17. For details see, for e xample, W.A. Lee (2004), " How Cards
Finally Won Reluctanl McDonald 's Over, " AmericaJl Banker, vol. 169
(59), pp. 1-2.

A83

The number of payments initiated directly from billers'
own websites, rather than depository institutions' websites,
is unknown. Industry research suggests that the number
was initially greater than the number of payments through
banking sites. Billers may credit accounts faster, and many
offer greater choice of payment instruments, allowing the
use of credit or debit cards while also offering payment
methods-such as online banking sites-that use the ACH
system (discussed above) or that generate a so-called
"remotely created check" written by the payees' bank.
Some studies also suggest that payments through online
banking sites could be growing faster than those made
directly at billers' websites. to Banks continue to work with
large billers to provide bill presentment along with payment for customers who use their online websites. In some
cases, switching to this payment method eliminates the
periodic mailing of paper statements as well as the return
of a check in the mail.
Over 0.5 billion emerging payments of other types, with
a value of about $35 billion and an average value of $67,
are estimated to have been made in 2006. A small number
were ACH payments initiated with proprietary, merchantissued cards (often associated with, for example, some
grocery store customer-loyalty programs), mobile payments, and deferred payments (such as those oltered by
Bill Me Later for certain web purchases), but the vast
majority of these were person-ta-person web payments.
The U.S. Department of Commerce estimates that Internet
(web) sales totaled about $128 billion in 2007, compared
with $28 billion in 2000. As a fraction of total retail sales,
e-commerce grew from less than I percent in 2000 to over
3 percent in 2007. Thus, while Internet commerce is
growing rapidly, it remains a small fraction of retail sales.
As e-commerce grows, new and innovative methods of
making electronic payments can also be expected to take
hold.

10. Several articles in American Banker, including the following. report
on some of these studies : Daniel Wolfe and Will Wade (2004), "CbeckFree:
Consolidators Will Win E·Billing Bailie," May 21; Daniel Wolfe (2004).
" Environment for EBPP Seen Shifting in Bankers' Favor," June 29; Steve
Bills (2004), "The Tech Sccne: Instnnt Credit Gives Billers Big Edge in
Web Payment," October 6; Chris Costanzo (2006). " Can Banks Catch Up
to Billers in Presentment?" March 28 : and Steve Bills (2007), "CheckFrce
Deal: A Biller Willing to Use Bank Sites." December 7.

Debit Card Payments. Debit card payments typically are authorized either with a PIN or, if it carries
the Visa or MasterCard brand, by the cardholder's
signature (like a credit card). In some cases, such as
when a purchase is made on a merchant's website or
over the telephone, the cardholder is not required to
authorize the payment with a PIN or a signature.
Because such payments are processed on the same

A84

Federal Reserve Bulletin 0 October 2008

2. ACH transactions in the United States. by type of transacti on. 200.1 and 2006
Number
Type of transaction

~O::~1 ... . .... . . •. .. .. . . .•. . . .. I!

Billions of
transactions

Percent
of total

Average,
in dollars

Percent returned

1.5
.8
2.0
1.1
54.5
7.0
1.8

.2
1.4

7.0
2.6
t6.2

.2
1.4
16.0

66.4

8.8

100.0

24.1

100.0

2,754

1.3

12.6

86.2

12.1

39.0

959

2.3

2.2

290
81

1.3
.4

.1
26,2

1,102

164

POP ... ...... . .. . ... ... . . .. .

.2
6.0

Total ACH transactions . .. . . . .

Trillions of
dollars

1.106
296
70
1.072
155
374
291
6,239
11,272

7.3

ARC . . .. . ... . ....... . ..... .

PPO .. ... . .... . . .. . ..... . . . .
RCK ....... . . . .. .. ... . .. . . .
TEL ........ .. . ... . . . . . . . . . .
WEB ..... . ... . .... • .... . . .
Other ....... .... . . ........ .
CCO . . ... . . ..... . . . ... .

Value
Percent
of total

2.0
1.8

336
.2

68.3

6.4

26.6

83.8

•

.3
L7

.2
.6

8.1

•

5.8

.2
.4

2006
Retail .. .. .. .. .. .. ...... .. ... ..
ARC . ..... . .. ...... .. .. .. . .

POP .. . ...... ... .. . .. .. .... .

15.9
2.0

PPO .. .. . .......... . .. .. ... .
RCK .......... ... ........ ..
TEL .......... .... ....... .. .
WEB .. . .. .. .... .... . .. . .. ..
Other .. . ... ....... . ... . ... ..
CCO . .. . ...... ........ .. .. .. ..

7.4

50.4

Total ACH transactions .... . . .

•

1.7

2. 1

386
4,194

18.9

9,384

100.0

31.0

100.0

2,121

1.1

Annual
rate of

Change
over period
(trillions of
dollars)

Annual
rate of
change
(percent)'

11.3

2.0

4.1
13.8

14.6

.6
2.5

403

Value

Number
Change
over period
(billions of
transactions)

•

8.0
61.0

2.4

.4
1.7
.6

8.1

•

57.6
6.5
1.5
.2

change

(percen!),

Percent returned
I

Change in
average
over period
(do llars)

Change
over period
(percentage
points)

Change. 2003 to 2006
Retail . .. ..... .............. .. .
ARC ... . ... . ..... . ... ..... .

POP .... .. .. .. .. .. ...... .. ..
PPO ....... ..... .... ...... . .
RCK .. .... .... ........... ..
TEL ... ...... .. ......... .. ..
WEB .... ......... .. ...... ..
Other . .... . .. ..... ..... .. .. .
CCO . .... .. .... .. ..... ....... .

Total ACH transactions ..... . .

5.3

19.8

2. 1
.1
1.4

137.6
22.1
7.2

•

.2
1.0
.4
.6

5.9

4.0
.6

14.3

- .2

1.7

8.2
-1.2

-147
--6
II
31
9

36.1

-.4

39.1
38.4

.1
.5
1.1

2.9

-2,045
-1 ,888

- .3
- .1

12.4

53.0
2 1.2
5.8

18.7

6.9

8.8

--633

-3.1
32.7

136.0
28.2

-.4
-.3

•

3.2

•

-.2

NOTE: Retai l ACH payments include pay roll. bill payments. and some payments ass ocjated with the retail sector of the econom y. ARC, aCCQunl S receivable check conversion ; POP. point-or-purchase check conversion; PPD. prearranged pa yment and deposit; RCK. re-presented check; TEL. telephone
"e-check"; WEB. web "e-check." CCDs are cash concentration or disburse-

ment transactions. about half of which are most like ly internal corporate transrefS. Components may not sum [0 totals and may Dot yield percentages sho wn
because or roundin g.
1. Co mpound annual growth rale .
• In absolute value. less than 0 .0 5.

networks as signature payments, they are included in
the figures for signature payments. Most debit cards
can be used not only to make payments, but also to
access an ATM network by entering a PIN.
The number of signature-based debit card payments in the United States grew from 10.3 billion in
2003 to 16.0 billion in 2006, for an annual growth
rate of 15.8 percent. The growth, which accounted for
most of the increase in debit card payments, reflects
incentives offered by issuing banks to users who
authorize payments with a signature rather than a
PIN. The average value of a signature-based debit
payment decreased from $42 in 2003 to $40 in 2006.
In constant 2006 dollars, the average value of a
signature-based debit payment was flat from 2000 to
2003 but dropped $6 from 2003 to 2006.

The number of debit card payments authorized
with a PIN grew from 5.3 billion in 2003 to 9.4 billion in 2006. In absolute numbers, growth was greater
for signature-based debit payments; but the rate of
growth was greater for PIN-based payments-20.6
percent a year versus 15.8 percent a year. The average
value of a PIN-based debit card payment declined
from $38 in 2003 to $37 in 2006. In constant 2006
dollars, the average value fell $12 from 2000 to 2003
and another $5 from 2003 to 2006.
When a debit card is used to make a purchase
authorized with a PIN, some merchants may, on
request by the user, return part of the payment in cash.
Debit card purchases involving the return of cash are
typically called "cash back" transactions. In such
cases, the value of the payment includes both the

Recent Payment Trends in the United States

value of the purchase and the value of the cash
returned. The values of PIN-based debit card payments for 2003 and 2006 reported above have been
adjusted to exclude an estimated portion of payment
value returned in cash. IS In 2006 an estimated 11.2 percent of PIN-based debit card payments involved the
return of cash to the card user, and an estimated
8.5 percent of the total value was returned as cash. 19
For PIN-based debit card payments that involved
cash back, the value of the cash returned averaged
about $31. 20

Credit Card Payments. Overall, the number of credit
card payments grew at a relatively modest 4.6 percent
a year from 2003 to 2006 . The number of payments
made by general-purpose credit card (Visa, MasterCard, American Express, and Discover) rose from
15.2 billion to 19.0 billion over the period, for a
growth rate of 7.6 percent a year. The number of
payments made by private-label credit card, typically
issued by retail merchants and oil companies, dropped
to 2.8 billion in 2006, declining 9.6 percent a year
from 2003 to 2006. The decline may have been
influenced by an expansion of programs that co-brand
store cards with general-purpose credit cards. 21
Users who have been issued a PIN with their credit
card can use the card to obtain a cash advance at an
ATM designed to accept credit cards. Credit cards are
used far less often than debit/ATM cards to obtain
cash. In 2006, the number of credit card cash advances, estimated at 87 million, amounted to 0.4 percent of total credit card payments and less than
0.8 percent of total credit card value. 22 These figures
suggest that credit cards are probably used primarily

18. Estimates of amounts returned to card users in 2003 and 2006
were based on data provided by a few large debit card networks. The
amount returned in 2000 is unknown . Therefore, how much of the
decline in the average value of a PIN-based debit payment between
2000 and 2003 should be attributed to a decline in cash back, and how
much to a decline in average purchase value, is unclear. All of the
decline in average value between 2003 and 2006 can be attributed to a
decline in average purchase value.
19. Estimates are based on information from the few debit. card
networks that were able to report the value of cash back and the
number of PIN-based debit payments that involved the return of cash.
20. Because cash back was reported as a separate aggregate, it is
not possible from the survey data to compare the average value of a
PIN-based debit card payment that involved cash back with the
a verage val ue of one that did not.
21. Payments by such "co-branded" cards are included in the totals
for general-purpose credit cards.
22. The estimated value does not include any cash given back by a
merchant as part of a credit card purchase at the point of sale. The
amount given back in this way is likely to be small, as the merchant
must pay the credit card network a percentage of the entire charge,
including a percentage of the amount of cash given back. At least one
very large merchant (Wal-Mart) reportedly allows up to $20 in cash
back on credit card purchases.

A85

to obtain cash in emergencies or when no other
effective alternative exists, most likely because of the
typically higher fees and lower limits on cash advances. The average value of such advances in 2006,
at $190, was considerably higher than the average
value of either ATM withdrawals or cash back on
debit card purchases.
TRENDS IN CASH PAYMENTS

Information on the use of cash for payments is
difficult to obtain directly. Data showing a large
increase in the number of card payments, in combination with reports that some formerly cash-only businesses are now accepting card payments, provide
some indirect evidence that cash is increasingly being
replaced by cards. Additional indirect evidence on the
use of cash comes from trends in cash obtained using
ATM, debit, and credit cards and from trends in per
capita currency in circulation.
The number of ATM withdrawals-data collected
as part of the 2004 and 2007 depository institution
surveys-dropped slightly between 2003 and 2006,
from 5.9 billion to 5.8 billion. The value of withdrawals rose, however, from $497 billion to $579 billion.
The average value of a withdrawal was $1.00 in 2006,
compared with $85 in 2003, for an annual rate of
growth of 5.6 percent (2.4 percent in constant dollars ).
Industry reports indicate that the number of ATMs
in the United States more than tripled from 1995 to
2005 (growing at 12.5 percent a year) but dropped for
the first time in 2006. 23 Industry data also indicate
that the number of ATM transactions overallincluding cash and check deposits, cash withdrawals,
electronic funds transfers, and balance inquiriesgrew from 1995 to 2004, though at a much slower
pace (1.4 percent a year). Reports that the number of
ATM transactions has declined since then are consistent with an increase in the number of debit card
purchases involving cash back as well as other factors, such as a decrease in the use of checks, some of
which would have been deposited at ATMs. The
number of daily cash withdrawals per ATM averaged
43 in 2003 but had dropped to 40 by 2006.
Consumers may have been replacing ATM withdrawals with cash-back transactions partly for conve23. The source for 1995-2003 information on the number of ATMs
is "Bank Network News and Debit Card News" (New York: Faulkner
and Gray). Information on ATMs for 2004-2006 is from "EFT Data
Book" (New York: Thomson Media) . Also see Committee on Payment
and Settlement Systems (2008) , Statistics on Payment and Selliement
Systems in Selected Countries: Figures for 2006 (Basel: Bank for
International Settlements, March) for a variety of statistics on currency
and other payment instruments (www.bis.orglpubUcpss82.pdt).

A86

Federal Reserve Bulletin 0 October 2008

3, Dehits LO IransacLion accounL held at de po ilory in. Ii lUI ions. hy type and si;:c of insLilulion. 2007
Check payments I

Type and size of
insurution (transaction
deposits in millions
of dollars)

Number of
instirutions

N mbe
(b~Uon:)

Value
(trillions of
dollars)

ACH payments'
Average
value
(dollars)

N be
(b~~on:)

Value
(trillions of
dollars)

Debit card payments
Average
value
(dollars)

(bi~:"O r)

be
ns

Average
Value
I, value
(trillions of I
dollars) I (dollars)

All inslilutions . . ......

13,316

29.38

41.164

1,401

18.07

142.688

7,896

30.35

1.244

........
.. ...... .

200-599 ....
100-199 ........ .... ..
0-99 ....... .. .. .. .....

106
225
475
12.510

17.34
2.50
1.92
7.62

30.679
2.752
1.848
5.883

1.770
1.100
963
772

13.05
1.26
.93
2.84

135.935
3.068
1.178
2.508

10,419
2,440
1.273
883

19.55
2.66
2.13
6.01

.812
.104
.085
.244

42
39

Commercial banks . . .

6,186

24.36

38.787

1,592

14.82

139.430

9,406

21.32

.887

600 and above

86
141
320
5.639

16.09
1.85
1.34
5.09

29.820
2.432
1.564
4.970

1.854
1,315
1. 167
977

11.95
.83
.57
1.47

134.011
2.675
.936
1.809

11.211
3,223
1,628
1,234

16.78
1.23
.98
2.34

.698
.049

200-599 ........ .... ..
100-199 .. . ...........
0-99 .. .. ...... . .. .....

.040
. 100

41
43

Savings instilutions . ..

1,072

2.28

1.588

696

1.57

2.643

1,684

3.33

.137

200-599 ......... .....
100-199 ..... . .. .. ....
0-99 .. .. ...... .. .....

15
28
50
979

1.13
.24
.22
.70

0.807
0. 175
0. 167
0.439

715
741
752
631

.98
. 16
. 11
.32

1.886
.281
.147
.329

1.929
1.767
1.295
1,030

2.29
.30
.24
.49

.095
.012
.010
.020

41
41
41
41

Credil unions .. . . ....

6,058

2.74

0.789

288

1.68

.615

367

5.70

.220

5
56
105
5.892

. 12
.42
.36
1.84

0.052
0. 145
0. 118
0.474

430
348
329
258

.11
.27
.24
1.06

.039
. 111
.096
.370

335
414
403
350

.48
1.13
.91
3.19

.019
.043
.035
. 124

39
38
38
39

600 and above

600 and above . ... .. ..

200-599 . . ..... .. ...
100-199 .. ..... .. ....
0-99 ........ .... .... ..

40
41

NOTE: Annualized fi gures based on survey data for March and April 2007 .
Excludes instirutioos that had no transaction deposits. The number and value of
debits to transaction accounts are re vised from figures reported in Federal Re·
serve System. ''The 2007 Federal Reserve Payments Srudy." See the appendix
for details. Components may not sum to totals because of rounding .

I. Checks paid. that is. checks that were on·us (involving only one de posi.
tory instirution) and checks processed through the interbank check·c1earing
system . including original paper checks and truncated checks presented either
electronically or as paper substirute checks. Does not include U.S. Treasury
checks and U.S. Postal Service money orders .
2. Electronic payments processed through the automated clearinghouse sys·
tern, including checks converted to electronic payments.

nience and partly to avoid ATM fees. Although the
number of ATM withdrawals has declined slightly,
growth in cash back from debit card purchases has
been quite strong. More than 1.0 billion PIN-based
debit card payments in 2006 involved a return of cash
to the card holder (average of $31), compared with
fewer than 0.6 billion in 2003.
The sum of the number of ATM withdrawals and
PIN-based debit card payments involving cash back
grew from 6.5 billion in 2003 to 6.9 billion in 2006.
As noted elsewhere, credit cards were used to obtain
cash advances a relatively small number of times in
2006 (87 million). The total amount of cash obtained
in 2006 from these sources-ATM withdrawals, cash
back from debit card purchases, and credit card cash
advances-was $628 billion.
Change in the constant-dollar value per capita of
low-denomination currency in circulation from 1960
to 2007 provides a long view of changes (chart 4).24
Generally, low-denomination currency has histori cally been used for making payments within U.S.

4. Value of low-tknomination curren y in circulation per
capita. 1960-2007

24. Currency in circ ulati on-which includes all currency in the
possession of consumers . businesses. and banks, except Ihe Federal
Reserve Banks. including vault cash and currency held inside ATMsreached $792 billion at the end of 2007.

Coostant 2006 doUani

~r--------------------------------------'
700
600

500

400
300

200
100

o~--------------------------------------~
1960 1965 1970 1975 1980 1985 1990 1995 2000 2005

NOTE : Includes $1. $2, $5, $10, and $20 notes.
SOURCE: Federal Reserve Board .

borders, while $50 and $100 notes have been used
primarily as stores of value both domestically and
abroad and have been used much less frequently for
domestic payments.25 The constant-dollar value of
low-denomination currency in circulation peaked at
25. An unknown and most likely small amount of lowdenomination currency is al so used abroad.

Recent Payment Trends in the United States

A87

3.-Cominucd

Number
(billions)

Value
(trillions of
dollars)

MEMO

Total debits to transaction accounts

ATM withdrawals
value
I Average
(dollars)

Number
(billions)

Value
(trillions of
dollars)

I Averag~
value
(dollars)

Transaction ;
deposits (billions
of dollars)

I Total
deposits I
(billions of
dollars)

Total assets
(billions of
dollars)

5.82

.579

100

83.62

185.7

2,220

843

7,177

11,196

3.59
.50

108
90
90
84

53 .53
6.92

1.30

.387
.045
.038
. 109

17.78

167.8
6.0
3. 1
8.7

3, 135
863
583
492

474
74
65
230

4.430
670
481
1,596

7.585
952
624
2,036

3.89

.404

104

64.40

179.5

2.787

658

5,590

8,952

3.08

109
89
90
82

47.90
4. 12
3.07
9.31

164.9
5.2
2.6
6.9

3,442
1,255
833
743

409
48
44
158

3,911
468
303

.334
.019
.016
.034

909

6,740
672
402
1.138

.67

.067

7.85

4.4

565

958

1,507

AI
.07
.06
. 13

.043
.007
.006
.011

104
95
93
90

4.81
.77
.64
1.63

2.8
.5
.3
.8

588
619
515
490

57
9
6
22

469
89
76
324

784
145
102
475

1.25

.108

11.37

1.7

152

629

737

.10
.21
. 19
.75

.010
.019
.017
.063

96
89
89
83

.81
2.02
1.69
6.84

.1
.3
.3
1.0

146
157
156
151

8
17
14

50
114
102
363

61
134
120
423

.22
. 18

5AO

around $700 per capita in the late 1960s and early
1970s and then dropped rel atively quickly until 1980,
when it was around $500 per capita. Except for small
fluctuations and a brief spike in 1999 due to a
temporary increase in currency stock held at banks in
response to the threat of a so-called millennium bug,
the constant-dollar value of currency in circulation
per capita has been flat since 1980. It is possible,
though only speculation, that if recent trends continue, the per capita number of cash payments may
begin to decline in the near future. 26
PAYMENTS AND WITHDRA WALS FROM
ACCOUNTS AT DEPOSITORY INSTITUTIONS

The 2004 and 2007 depository institution surveys
collected data on the number and value of several
types of debits to transaction accounts-including
check payments, ACH payments, debit card payments
(both signature-based and PIN-based), and ATM
withdrawals-from a representative sample of depository institutions of different types and sizes (table 3).27
The surveys provide enough information to study
trends and variation in account debits by type and size
26. For another look at trends in the use of cash. see Paul W. Bauer
and Daniel A. Linman (2007). " Are Consume rs Cashing Out?"
Federal Reserve Bank of Cleveland. Economic Commentary (October
I). www.clevelandfed.org/research/commentaryI2007/100107.cfm.
27. Other means of debiting transaction accounts include internal
transfers within a depository institution. wires over large- value funds
transfer systems. and cash payments by tellers that do not involve a
check.

of institution and by region, Combined with another
survey conducted in 2006, enough information was
available to study trends and variation in the use of
electronic images and paper in check processing,
The estimates reported in this section are annualized from data for March and April of 2004 and 2007
and are referred to as 2004 and 2007 estimates.

Shares of Account Debits
among Depository Institutions
For purposes of estimation and data analysis, depository institutions were grouped by type-commercial
banks, savings institutions, and credit unions-and,
within each type, by size-largest, large, medium,
and small. Collectively. the largest institutions (those
with transaction deposits of $600 million or more)
continued in 2007 to pay (on their customer's behalf)
the majority of account debits , with their shares of
each type of payment remaining nearly the same as in
2004. In 2007, this small group, comprising fewer
than 1 percent of the 13 ,316 depository institutions
that had transaction deposits at that time, held more
than 56 percent of total transaction deposits and paid
64 percent of account debits by number and more
than 90 percent by value (table 4). In fact, the largest
depository institutions paid most of the debits of each
payment type by both number and value. Among
types of account debits, the largest institutions' share
by number was highest for ACH payments, at 72 percent. and smallest for checks, at 59 percent.

A88

Federal Reserve Bulletin 0 October 2008

4. Distribution of d'bit5 LO transaction accounts among depository instituti ons. hy type and size

or institution. 2007

Perce nt
Type and size
of institution
(transaction
deposits in
millions of
dollars)

Number
of institutions

Check
payments'

Number

ACH
payments'

I Value

Number

ATM
withdrawals

Debit card
payments

I Value

Number

I Value

Number

Total debits
to transaction
aCCounts

Value

Number

I Value

ME,\!O

action
Total
Trans·
deposits deposlls

Total
1assets

All institutions . .

100.0

600 and above ..
200-599 .. . . ...
100-199 ........
0-99 ............

.8
1.7
3.7
93.8

59.0
8.5
6.5
25.9

74.5
6.7
4.5
14.3

72.2
7.0
5.1
15.7

95.3
2.1
.8
1.8

64.4
8.8
7.0
19.8

65.3
8.3
6.8
19.6

61.8
8.6
7.3
22.4

66.8
7.8
6.6
18.8

64.0
8.3
6.5
21.3

90.4
3.2
1.7
4.7

56.2
8.8
7.7
27.3

61.7
9.3
6.7
22.2

67.7
8.5
5.6
18.2

Commercial
banks .. . ....

46.5

82.9

94.2

82.0

97.7

70.2

71.3

66.9

69.8

77.0

96.7

78.1

77.9

80.0

600 and above
200-599 .. .. ....
100-199 . . .... .
0-99 .... .... .. ..

.7
1.2
2.8
41.9

54.7
6.3
4.6
17.3

72.4
5.9
3.8
12.1

66.2
4.6
3.2
8.1

93.9
1.9
.7
1.3

55.3
4.1
3.2
7 .7

56. 1
3.9
3.2
8.0

52.9
3.7
3.0
7.2

57.8
3.3
2.7
6.0

57.3
4.9
3.7
11.1

88.8
2.8
1.4
3.7

48.5
5.6
5.2
18.7

54.5
6.5
4.2
12.7

60.2
6.0
3.6
10.2

Savings
institutions ...

8.0

7.8

3.9

8.7

1.9

11.0

11.6

11.5

9.4

2.4

11.3

13.3

13.5

600 and above
200-599 .... .. ..
100-199 .... . ...
0-99 ............

.1
.3
.4
7.2

3.8
.8
.8
2.4

2.0
.4
.4
1.1

5.4
.9
.6
1.8

1.3
.2
.1
.2

7.6
1.0
.8
1.6

7 .6
1.0
.8
1.6

7.1
1.2
1.0
2.2

7.4
1.2
1.0
2.0

5.8
.9
.8
2.0

1.5
.3
.2
.4

6.8
1.1
.8
2.7

6.5

1.1
4.5

7.0
1.3
.9
4.2

Credit unions ...

45.4

9.3

1.9

9.3

18.8

17.7

21.5

18.7

13.6

10.6

8.8

6.6

600 and above ..
200-599 . . . . ... .
100-199 ..... .. . ,
0-99 .... .. .... .. 1

•

.4
1.4
1.2
6.3

.1
.4
.3
1.2

1.6
3.7
3.0
10.5

1.5
2.8
10.0

1.7
3.6
3.2
13.0

1.7
3.3
2.9
10.9

1.0
2.4
2.0
8.2

.1
.2
.1
.6

.9
2.0
1.7
5.9

.7
1.6
1.4
5. 1

.2
.6
44.6

1.5
1.3
5.8

•

.1
.1
.3

3.4

1.2

1.2
1.1
3.8

NOTE : Percentages based on annualized figures derived from survey data for
March and April 2007 . Excludes institutions that had no transaction deposits .
The number and value of debits to transaction accounts are revised from fig ·
ures reported in Federal Reserve System. "1loe 2007 Federal Reserve Payments
Study." See the appendix for details. Components may not sum to totals be·
cause of rounding.

I. Checks paid. that is. checks that were On-uS (involving only one depository institution) and checks processed through the interbank check·c1earing
system. including original paper checks and truncated checks presented either
electronically or as paper substitute checks. Does not include U.S. Treasury
checks and U.S. Postal Service money orders.
2. Electronic payments processed through the automated clearinghouse sys·
tem. including checks converted to electronic payments.
• In absolute value. less than 0.05.

By type, commercial banks, which serve a broad
range of customers, including consumers and large
corporations, held the majority of transaction deposits
(78 .1 percent) and assets (80.0 percent) in 2007 .
About 77 .0 percent of account debits by number, and
96.7 percent by value, were paid from accounts at
these banks. The second largest type of depository
institution, as measured by both transaction deposits
(11.3 percent) and assets (13.5 percent), were savings
institutions, which generally serve consumer and
business customers, but not the largest corporations;
9.4 percent of account debits, representing 2.4 percent
of total account debit value, were paid from accounts
at these institutions. Credit unions, which generally
serve consumer customers rather than businesses, had
the smallest share of transaction deposits (10.6 percent) and assets (6.6 percent). Although they accounted for a larger proportion of account debits by
number (13.6 percent) than did savings institutions,
they accounted for a smaller proportion by value (less
than 1 percent).

As in 2004, the average value of account debits in
2007 varied with depository institution size. For ACH
payments in particular, a substantial amount of value
(93 .9 percent) was concentrated at the largest commercial banks, compared with 66.2 percent by number. A substantial portion of this value can be explained by unusually high average ACH values at a
handful of institutions. As discussed later in the
section "On Us Payments," much of this concentration in ACH value is from internal payments.
Generally, the average values of ACH and check
payments increase in tandem with increasing commercial bank size because of the greater presence of
large business customers at larger commercial
banks. 28 The group with the lowest average values for
ACH and check payments was credit unions, which,
28. In 2000 the average value of checks written by consumers was
about $350. and by businesses, $1 ,700. These are the author's own
estimates based on a study in which individual checks that could be
classified were sorted by payer. See Federal Reserve System (2002),
" Retail Payment Research Project: A Snapshot of the U.S . Payments

Recent Payment Trends in the United States

as previously noted, typically do not handle transaction accounts for businesses. The average value of
debit card payments did not vary significantly with
depository institution type or size, while average
ATM withdrawals generally were larger at the largest
institutions.
Changes in Share from 2004 to 2007
The share of checks paid by commercial banks
increased 2.6 percentage points from 2004 to 2007,
reaching 82.9 percent (despite a decline of almost
4.7 billion in the number of checks paid). The share of
checks paid by credit unions dropped 2.2 percentage
points over the period, to 9.3 percent. The share of
checks paid by savings institutions remained relatively flat, dropping only 0.4 percentage point. This
pattem-decreasing share of checks for credit unions,
which generally serve only consumers, and increasing
share for commercial banks, which serve businesses
in addition to consumers-provides evidence that
consumers' use of checks is declining faster than
businesses' use of checks. The decrease for credit
unions is due both to fewer checks being written by
credit union customers and to more of these customers' checks being converted to ACH payments.
The share of ACH payments at savings institutions
increased markedly from 2004 to 2007 (from 4.9 percent to 8.7 percent) because of a relatively large
increase in the number of such payments at those
institutions (from 0.5 billion to 1.6 billion, about
45 percent a year). In contrast to the 3.8 percentage
point annual increase in share by number was a
0.6 percentage point annual decline in share by value,
leading to a steep drop in the average value of ACH
payments at savings institutions (26.4 percent a year).
A significant increase in the conversion of smallvalue consumer checks into ACH payments and a
decrease in the number of large-value ACH payments
reported (due to greater accuracy on the part of some
institutions) most likely were factors in these
changes. 29

Distribution of
Depository lnstitutiolls' Account Debits
Overall, in 2007 about 36 percent of account debits
were made by debit card, 35 percent were made by
check, 22 percent were ACH payments, and 7 percent

Landscape," pp. 12-14, www.frbservices.org/ftles/communicationsi
pd flresearc hlRetai IPa ymen ts Research Project.pd f.
29. See the appendi)( for details on changes in reporting accuracy.

A89

were cash withdrawals from ATMs (table 5).30 The
distribution had changed substantially from 2004,
when 26 percent of account debits were made by
debit card, 51 percent were made by check, 15 percent were ACH payments, and 8 percent were cash
withdrawals from ATMs. In 2004, checks were the
predominant payment type at institutions of all types;
by 2007, debit cards had become the predominant
payment type overall, and predominant at credit
unions, savings institutions, and the largest commercial banks, while checks continued to be predominant
at smaller commercial banks.
At institutions of all types, check payments as a
proportion of all debits to transaction accounts declined between 2004 and 2007-from 43 percent to
24 percent at credit unions; from 47 percent to
29 percent at savings institutions; and from 53 percent to 38 percent at commercial banks. 31 In 2007, as
in 2004, there was an inverse relationship between the
size of a given type of institution and its proportion of
the total that were check payments: generally, the
larger the institution, the smaller the share of checks
with respect to total account debits. For commercial
banks, the proportion of check payments at small
banks (those with less than $100 million in deposits)
was about 55 percent, and at the largest banks,
34 percent. The proportion of checks may be smaller
at larger depository institutions because larger institutions may provide for (and perhaps encourage) greater
use of ACH and debit cards. Larger depository institutions may also serve more-sophisticated or larger
customers that may be more willing or able than
less-sophisticated or smaller customers to take advantage of cost savings or other benefits afforded by other
types of payment.
In contrast to checks, ACH payments as a proportion of all debits to transaction accounts increased at
institutions of all types between 2004 and 2007from 9 percent to 15 percent at credit unions; from
8 percent to 20 percent at savings institutions; and
from 17 percent to 23 percent at commercial banks.
At commercial banks, the proportion of ACH payments by number increased with increasing size,
possibly because of greater use of ACH by large
corporate account holders. The proportion of ACH

30. The shares of account debits at depository institutions overall
differ from the shares of corresponding payments in total noncash
payments (as reported in table I), mainJy because debits to deposit
accounts include ATM withdrawals and do not include credit card
payments.
31. Generally, ACH and debit card payments grew as a proportion
of account debits between 2004 and 2007, and check payments and
ATM withdrawals declined as a proportion, across institutions of all
types and sizes .

A90

Federal Reserve Bul1etin 0 October 2008

5. Di ·tribution of debits

transaction accounts at depositor)' institutions. hy lype of debit. 2007

Percent
Type and size of
institution (transaction
deposits in millions
of dollars)

Check payments I
Number

ACH payments'

Value

Number

Debit card payments

Value

Number

Vatue

ATM withdrawals
Number

Total debits to
transaction accounts

Value

Number

Value

.....

35.1

22.2

21.6

76.8

36.J

7.0

100.0

100_0

600 and above
..... .
200-599 .. .... . . . ... .
tOO-t99 . .. . . . . ... .
0--99 . . . . . . . . . . . . . . . . .

32.4
36.2
35.5
42.9

18.3
46. 1
58.7
67 .3

24.4
18.2
17.1
16.0

81.0
51.4
37.4
28.7

36.5
38.4
39.5
33.8

6.7
7.2
7.8
7.3

.2
.8
1.2
1.2

tOO.O

2.7
2.8

100.0
100.0
100.0

100.0
100.0
100.0
100.0

All institutions . .

1.7

...

37.8

21.6

23.0

77.7

33.1

6.0

100.0

600 and above
.... .
200-599 .. .. .... .. ....
100-199 .... .... .....
0--99 .... ........ ......

33.6
44.8
43.7
54.7

18.1
47.0
61.2
71.9

25.0
20.1
18.7
15.7

81.3
51.7
36.6
26.2

35.0
29.8
31.8
25.1

.4
.9
1.6
1.4

6.4
5.2
5.7
4.5

.2
.4
.6
.5

100.0
100.0
100.0
100.0

Savings institutions .. .

29.1

35.8

20.0

59.6

42.4

3.1

8.6

1.5

100.0

600 and above . ... . . . .
200-599 ........... ...
100-199
... ....
0--99 .. ....... ........

23.5
30.8
34.7
42.6

28.5
36.9
50.7
54.9

20.3
20.7
17.7
19.6

66.6
59.1
44.6
41.2

47.7
39. 1
38.1
30.0

3.4
2.6
3.0
2.5

8.6
9.4
9.5
7.8

1.5
1.4
1.7
1.4

100.0
100.0
100.0
100.0

......

24.1

45.6

14.8

35.5

50.2

12.7

n.o

6.2

100.0

600 and above
200-599 .... ..... .. . . .
. .. .. . .. ...
100-199
0--99 .. .... ...... ... . .

15.0
20.6
21.1
26.9

44.0
45.7
44.4
46.0

14. 1
13.3
14.0
15.5

32.4
35.0
36.1
35.9

58.6
55.7
53.9
46.6

15.6
13.4
13.2
12.0

12.3

8. 1
5.9
6.3
6.1

100.0
100.0
100.0
100.0

Commercial banb

Credit uniom ..

10.5
11.0
11.0

NOTE : Percentages based on annualized fi gures derived from survey data for
March and April 2007 . Excludes institutions that had no transaction deposits.
The number and value of debits to transaction accounts are revised from figures reported in Federal Reserve System, "The 2007 Federal Reserve Payments
Study." See the appendi x fo r details. Components may not sum to toUlIs because of rounding.

I. Checks paid, that is, checks that were on-us (involving only one deposilOry institution) and checks processed through the interbank check-clearing
system , including original paper checks and truncated checks presented either
electronically or as paper substitute checks. Does not include U.S. Treasury
checks and U.S. Postal Service money orders.
2. Electronic payments processed through the automated clearinghouse system , including checks converted to electronic payments .

payments for savings institutions and credit unions
did not show a clear relationship with size.
The proportion of debit card payments in account
debits for credit unions was just over 50 percent,
higher than the proportion for savings institutions
(42 percent) and commercial banks (33 percent).
Similarly, the proportion of ATM withdrawals was
greater for savings institutions and credit unions9 percent and 11 percent, respectively-than for
commercial banks (6 percent). That debit card payments and ATM withdrawals are proportionally more
prevalent at credit unions than at other types of
institutions is not unexpected, given their base of
primarily consumer customers.
Estimates from the 2007 depository institution
survey indicate that signature-based debit card payments, at 19.1 billion (63 percent of total debit card
payments), were not quite twice as common as PINbased debit card payments, at 11.2 billion (37 percent
of total debit card payments). Estimates from the
2004 depository institution survey were in similar
proportion-I 1.7 billion (65 percent) signature-based
and 6.3 billion (35 percent) PIN-based. The ratio of
signature-based to PIN -based debit card payments
was roughly simi lar across institutions of different

types and sizes. There was, however, substantial
variation among responding institutions within size
and type categories.

Electroni and Paper Check Processing
The traditional method of collecting a check is to
deposit it at a depository institution, which, if the
check is drawn on a different institution (an "interbank check"), then collects the funds by presenting
the original paper check to the institution responsible
for paying it, the " paying bank." Presentment to the
paying bank is done either directly or through one or
more intermediaries or agents , such as a Federal
Reserve Bank or a private clearinghouse . Use of
original paper checks requires timely physical sorting
and transportation, often to remote, small-volume
locations, making this method of check clearing
relatively costly compared with modern electronic
methods.
As an alternative to the presentment of original
checks, some depository institutions have for decades,
by agreement, transmitted electronic information
about the checks they present. In this form of check
presentment-a method historically called electronic

Recent Payment Trends in the United States

A91

hecks paid by depository institu ti ons. by rorm of presentm nt, and electronic checks depo ilcd, 2007
Value

Number
Item

Billions of
checks

Checks paid I . . . ...... .• ,.. . . ... .... . . . .
Interbank checks .. . .. , .. . . . . . . . .. . .. .. .
Paper . .. . . .. ..... . , .. . . . . . .. . . .. . . . ,

29.4
23.3
16.7

Original .. . . . .... . . . . . ..... .... .. .

13.3
3.0
.5

Substitute . . .. .. . _..... ... , . . .. . .. .
ECP ......... . .. .. . . . . . . ......... .
Electronic . . . . .. . ... . . . . ........ .. . .
Image .. ...... .. .. . . . . .. . . . . . .. . .
M~R . ... ..... .. ...... . _.. . . ... . .
On-us checks .. . .............. , ..... .. .

Percent of
interbank checks

6.6
6.4
.2

100.0
71.7
56.9
12.6
2.2
28.3
27.5
.8

Trillions of
dollars

41.2
29.3
21.8
15.6
5.7

Percent of
illlerbank checks

100.0
74.4

Average,
in dollars

1,401
1.256

53. 1

1.303
1,172

19.5
1.9

1.936
1,064

7.5
7.4

25.6
25 .4

1,161

1,137

280

6.1

11.9

1,958

Electronic checks depositecf
. , .. . .. ... .
Client image ......
Branch/ATM image ... ...... . , .

1.4
2.1

2.5
2.0

t,697

MEMO
Checks convened to ACH ..... .

3.3

260

927

NOTE: Annualized figures based on survey data for March and April 2007.
Excludes institutions that had no transaction deposits. The number and value of
checks are re vised from fig ures reported in Federal Reserve System, ''The 2007
Federal Reserve Payments Study." See the appendix for details. Compone nts
may not sum to to tals because of rounding.
1. Does not include u .S. Treasury checks and U.S. Postal Service money
orders. A substiMe check is a special paper copy of the original check. ECP is
electronic check presentment with a paper check to follow, also called

same-day settlement. Electronic checks do not involve presentment of a paper
check and include checks presented as images as well as checks preseoted using only data from the mag neti c ink character recognition (MICR) tine at the
bottom of the check.
2. Client images are checks remotel y deposited electronically as images by
bank customers. Branch/ATM images are chec ks imaged either at an ATM or
within a branch and forwarded on for collection .
.. . Not applicable .

check presentment (ECP)-the paper checks are typically also delivered to the paying bank. But doing this
for all checks would require banks to obtain agreements with all counterparties-including a very large
number of institutions to which checks are presented
infrequently and in small volume. Further, as noted,
ECP typically includes the delivery of the paper
checks to the paying bank, limiting the amount of cost
savings that can be obtained. In the past, many
depository institutions preferred the status quoexchanging original paper checks, which increased
float for the paying bank-to adopting electronic
check-clearing methods. 32 Thus, even with some
potential benefits, depository institutions and their
agents were unable to substantially expand the proportion of checks they presented electronically. In
2007, an estimated 0.5 billion checks were presented
by ECP (table 6).
With the changes governing check processing
resulting from the Check 21 law, banks may now
truncate all checks and replace them with electronic
images, presenting them electronically to paying
banks that agree or as paper substitute checks to those

that require paper,33 The Reserve Banks and some
private clearinghouses are facilitating the transition to
the use of electronics by offering incentives for
depositing electronic images of checks and accepting
electronic images for presentment.
The costs and benefits of adopting electronic check
image processing vary, are changing rapidly, and can
be influenced by a variety of factors. For institutions
that outsource some part of check processing, the
timing of adoption may depend on when correspondent banks or third-party processors adopt. Each
depository institution chooses a time to adopt on the
basis of the expected future costs and benefits of
adopting at that time. In the long run, all depository
institutions that process checks most likely will adopt
electronic image processing methods .
Survey data collected in 2006 and 2007 indicate
that there have already been rapid changes in the
number of checks deposited and presented electronically and in the percentage of depository institutions
accepting electronic image presentment. Data from
early 2007 show that at that time there were meaningful differences in the level of adoption of electronic

32. See James McAndrews and William Roberds (2000), "The
Economics of Check Float ," Federal Reserve Bank of Atlanta, Economic Review, vol. 85 (4th quarter), pp. 17- 27 , for a discussion of the
issues.

33. As noted in the introduction to this article, Check 21 (Check
Clearing for the 2 1st Century Act) removed a legal impediment to the
replacement, during the collection process, of paper checks with
electronic information (" check truncation "). Under Check 21 , a
paying bank that does not accept electronic images of checks for
payment must accept a "substitute check ." For additional information,
see www.federalreserve.gov/p aymentsystemsJtruncationJdefault.htm.

A92

Federal Reserve Bulletin 0 October 2008

7. Oi Iribulinn of interbank check ' paid hy de po itory institution '. by form of presenlmenL 2007
Percent
Type and size of institution
(transaction deposi ts
in millions of doll=)

Electronic

Paper
Number

All institutions ...

.... .. ... ... ....

71.7

Commercial banks

..... ....... ....

Value

Number

74.4

Total

Value

Number

Value

28.3

25.6

100.0

69.8

73.7

30.2

26.3

100.0

600 and above . . . . . . . . . . . . .. . . . . .
200-599 ... .. ..... . .... .. ........ ..
100-199
... ..... .... ..... ......
0--99 .... .......... ... .. ... ..... . ...

69.2
84.3
72.2
65.6

73.9
83 .6
68.4
69.6

30.8
15.7
27 .8
34.4

26. 1
16.4
31.6
30.4

100.0
100.0
100.0
100.0

Savings institutions . ... .. . . . .. .. ...

91.9

8.1

100.0

600 and above .. ....... ........ .. ..
200-599 ......... .... ... .. .. .. .. ...
100-199 .... ... ....... ... ..... .....
0--99 .. ....................... ......

96.7
94 .2
89.2
83.9

96.6
94.0
91.1
82.6

3.3
5.8
10.8
16.1

3.4
6.0
8.9
17.4

100.0
100.0
100.0
100.0

Credit unions ... .. . .. . .. . . . . .. . .. ..

70.4

71.8

29.6

28.2

100.0

....... ... ...... .. ...

98.0
78 .0
78.6
65.2

97.9
80.3
80.6
64.0

2.0
22.0
21.4
34.8

2.1
19.7
19.4
36.0

100.0
100.0
100.0
100,0

100.0
100.0
100.0
100.0

600 and above

200-599 .. ... ... ....... ..... ... .. .
, .. .... ....... ... ... .
100-199
0--99 ...... . .. ... .... . ..............

NOTE : Percentages based on annual ized figures derived from survey data for
March and April 2007.

image processing among groups of institutions, revealing that the timing of adoption was related to institution size and type . However, there were also substantial differences between institutions within groups,
evidence that size and type are not the only important
indicators of the timing of adoption.
Monthly data also reveal that between the reference period of the 2007 survey (March and April) and
June 2008, the proportion of checks deposited with
and presented by the Federal Reserve Banks as
electronic check images increased substantially, as
did the proportion of institutions depositing and
receiving such images through the Reserve Banks.
The rapid increases reflect more-recent changes within
the interbank check-clearing system overall and suggest that the differences among groups of institutions
are less pronounced now. If, as expected, the rapid
adoption of electronic check image processing continues, the check-clearing system will become predominantly electronic within only a few years. 34

Check Paid, by Fonn of Presentment
A depository institution that requires presentment of a
paper check receives either the original check or, if
the check was truncated and replaced with an electronic image, a substitute check. Figures based on
data for March and April 2007 suggest that at that
time, an annualized 13.3 billion original interbank
34. Checks converted to electronic ACH payments and therefore
not processed within the check -clearing system are outside the scope
of this discussion.

checks and about 3.0 billion substitute interbank
checks were being presented (table 6).35 Another
6.6 billion interbank checks were being presented
electronically (28.3 percent of interbank checks).
Most of these (6.4 billion) were presented as images;
the remainder were "MICR presentments," whereby
only limited information about the check (account
number and dollar amount) is provided to the paying
bank at the time of presentment. 36 In all, an annualized 9.S billion checks, or 40.9 percent of interbank
checks, were truncated and presented electronically
or as substitute checks in 2007 .
Commercial banks and credit unions paid paper
and electronic interbank checks in about the same
proportions in 2007: roughly 70 percent paper and
30 percent electronic (table 7). Savings institutions, at
over 90 percent paper and fewer than 10 percent
electronic, paid a much smaller proportion of checks
electronjcally or as substitute checks.
For each type of depository institution, the proportion of checks presented to them electronically generally increased with decreasing size. One explanation
could be that small institutions are more likely than
medium-size and large institutions to use intermediaries, such as third-party processors or correspondent
banks, that take advantage of the economies of scale
and scope available with electronic check processing.
35. Another 0.5 billion checks were presented using ECP, that is,
same· day settlement with paper to follow.
36. Additional information, such as an image of the check, is not
routinely provided with MICR presentments but generally can be
provided on request.

Recent Payment Trends in the United States

Such intermediaries play an important role in the
adoption of electronic check image processing because they can help depository institution customers
adopt sooner by, for example, providing incentives
and standardized processes for receiving electronic
check image presentment. Smaller institutions may
also be better able to use "off-the-shelf" electronic
check processing solutions that can help speed adoption. Among commercial banks, the largest received a
high proportion of electronic check images compared
with large and medium-size banks . The largest commercial banks may have adapted their proprietary
check-processing systems to handle electronic check
presentments sooner because they have greater opportunities for cost savings from economies of scale and
scope and the capacity to manage multiple platforms.
When a depository institution adopts technology
enabling it to accept electronically presented interbank checks, the extra cost of simultaneously supporting two technologies (traditional paper and new electronic technology) creates incentives to stop
supporting paper technologyY The survey data provide evidence that most depository institutions use
mainly one or the other technology. About 85 percent
of institutions received nearly all check presentments
in either paper or electronic form in April 2007 . A plot
of survey respondents by the proportion of interbank
checks they received in electronic form reveals that
most respondents were concentrated at the tails of the
distribution, meaning that most responding institutions in the sample received almost all check presentments in one form or the other (chart 5). At least some
depository institutions, however, apparently supported both forms of check presentment, as an estimated 15 percent received between 10 and 90 percent
of interbank checks as truncated checks .38 Some of
these institutions may have continued the exchange of
local paper checks through clearinghouses when it
was cost effective to do so while receiving other
checks in electronic form , and some may have been in
the midst of a transition to receiving all interbank
checks electronically.
Overall, an estimated 42 percent of depository
institutions received at least some interbank check
presentments in electronic form (table 8).39 The pro37. Because a paper check presented over the counter at a bank may
not be refused , some paper processing is inevitable. But depository
institutions may create electronic images of any paper checks they
receive.
38. Depository institutions that receive some paper mayor may not
create electronic images of the checks for internal processing purposes.
39. Estimates are based on the portion of complete survey responses
for check payments that did not require the use of imputed data (see
the appendix) .

A93

5. Distribution of responding instituti ons by t.he proportion
of inlerbank checks Ihey received in e lectron ic form.

2007
Pen:enl

Decile
NOTE: The proponion of interbank checks presented electronically to the
depository institutions ranged from 0 to toO percent. In this chart. the range is
divided into deciles, and each bar shows the percentage of respondents whose
proportions fell within that increment. For example, the bar labeled decile I
shows the percentage of depository institutions that reponed receiving up to
10 percent of the interbank checks presented to them in electronic form .

portion receiving some or all checks in paper or
electronic form varied by size and type of ,institution.
About half of the largest and medium-size commercial banks received at least some electronic checks,
while about 40 percent of the large and small ones
did . For credit unions, the proportion of institutions
accepting electronic presentment increased with decreasing size, rising from about 25 percent of the
largest to 46 percent of the smallest. Only 17 percent
of the largest savings institutions received some
8. Depository institutions receiving interbank check
presentments in eleCLr ni fo rm . 2007
Percent

Type and size of institution
(transaction deposits in
millions of dollars)

Some electronic

All electronic

All institutions . . ... .

41.6

24.4

Commercial banks .....

40.8

22.0

600 and above ......... .
. . .. .... ....... ..
200-599 .....
100-t99 ...... . ... .. . .. .. .. ...... .
(}"'99 . . . . ... . ..... . . ...... .

50.9
38.6
50.6
40.2

.0
5.3
18.4
23.0

Savings institutions .........• ....

25.6

16.1

600 and above . ....... . . .. . ..
200-599 ...... .... .. . .... ... ... ..
100-199 .............. ........ .. .
(}"'99 ........ .
.. .. ... .. ..

16.7
50.0
35.3
24.5

.0
12.5
5.9
17.0

Credit unions ..... . .. .. .. .... . .. .

45.3

28.3

600 and above .... . . .. . . .... .. .. ..
200-599 .
.. ..... . .. .......... ..
100-199 . ....... .. . ........ . ... ..
(}"'99 ... .......... .... ..... .... ..

25.0
27.8
30.4

.0
11.1
13.0
28.7

45.7

NOTE: Percentages based on annuatized figures derived from survey data for
April 2007.

A94

Federal Reserve Bulletin 0 October 2008

electronic checks, while about half of the large ones
did, and the proportion declined as size declined from
large to small.
An estimated 24 percent of depository institutions
reported receiving all interbank check presentments
in electronic form . (A depository institution reporting
that it received all check presentments electronically
may have designated a third-party processor, a correspondent bank, or a Reserve Bank as its presentment
point. Given that the probability of receiving a paper
check was still high during the survey period, that
designee likely received some paper checks, which it
forwarded to the customer as electronic images.)
None of the largest institutions of any type received
all checks in electronic form. Commercial banks and
credit unions showed a pattern of increasing proportions of institutions receiving all checks electronically
with decreasing size, while for savings institutions
there was no clear relationship between size and the
proportion receiving all checks electronically.
Credit unions as a group had the highest proportion
of institutions receiving at least some interbank
checks electronically (45 percent) and the highest
proportion receiving all electronically (28 percent).
Many credit unions traditionally have provided information about checks paid only as line-item entries on
customers' bank statements and likely have faced the
fewest obstacles to receiving electronic information
in place of paper checks. 40 The smallest credit unions
were more likely to accept some or all checks electronically than larger ones. Smaller institutions, including smaJler credit unions, are more likely to use
correspondent banks, corporate credit unions , thirdparty processors, or Reserve Banks as their presentment point and to outsource some of the processing,
receiving all checks in electronic form. Thus , in some
cases the agent designated as the presentment point
may have received checks in paper form and sent
them to client institutions in electronic form.
While the use of electronic check processing methods was not universal in 2007, comparison with
earlier data shows that substantial growth had occurred over a period of one year. Estimates from a
survey conducted by the Board in 2006 show that an
annualized 2.4 billion checks were presented electronically in March 2006, implying year-to-year

40, Commercial banks and savings institutions, after paying the
original canceled checks, have traditionally mailed them to account
holders along with their periodic statements, Many depository institutions of all types now offer access to check images on online banking
websites and have reduced the mailing of checks to customers, (In
2007, about three-fourths of commercial banks and two-thirds of
savings institutions had online banking websites capable of supporting
transactions; over half of credit unions did.)

hccks ocpositt:u and pre en ted eleclronically through
the Reserve Banks, 2005-2008

Percent

80
70
60

- - OeposilOd elcctrooically
(Fc~d)

•••• Pre.eDled electrooically
(FecReceipl)

so
40

,
.
.
..' •

30
20
10

...
.
..
, •

,
.
..
,

O~-===~~~~----r-------~----2005

2006

2008

SOURCE: Federal Reserve System Retail Payments Office,

growth of 273 percent. An annualized 1.0 billion
substitute checks were presented that same month,
implying year-to-year growth of 304 percent. The
proportion of depository institutions receiving electronically presented checks also increased substantially; overall, the proportion receiving some checks
electronically increased about 10 percentage points
and the proportion receiving all electronically, which
was relatively low in early 2006, increased about
16 percentage points from 2006 to 2007 .
Other data show that electronic presentment of
checks processed by the Reserve Banks has increased
rapidly.41 Presentment of electronic check images to
depository institutions by the Reserve Banks, referred
to as Fed Receipt, was first offered in 2005. 42 The
percentage of FedReceipt checks in all checks presented by the Reserve Banks grew somewhat during
the initial months, reaching only 1.44 percent by
March of 2006 (chart 6). During March and April
2007, the same time period as the 2007 survey,
around 20 percent of checks presented by the Reserve
Banks were presented by electronic image, a lower
proportion than estimated for interbank checks overall (about 28 percent). The proportion of images in all
checks presented by the Reserve Banks was over
53 percent by June 2008, for an annualized growth
rate of 119 percent since the 2007 survey, likely
reflecting a high overall growth rate for check presentments using electronic images.
41. The Reserve Banks are estimated to have processed 42 percent
of all interbank commercial checks processed in the United Slates in
2006. down from 54 percent in 2003 ,
42, Reported figures include electronic check images presented
using the FedReceipt and Fed Receipt Plus products, Fed Receipt users.
at no charge, received checks as electronic images or as paper.
depending on the way the check was deposited and processed ,
FedReceipt Plus customers received all check presentments as images
and paid for imaging those checks that were not deposited as images,

Recent Payment Trends in the United States

Electroni Check Dep sit
Some depository institutions have begun to allow
check depositors (businesses and even, perhaps, consumers) to truncate checks and make deposits by
sending electronic check images (known as "client
images") from a remote location rather than by
physically depositing the paper checks. During the
study period, 1.4 billion checks were deposited as
client images (table 6). Another means of check
electronification is for a depository institution to
image check deposits at special image-capable ATMs,
or at the branch at which the check was deposited,
and then forward the image on for collection. During
the study period, 2.1 billion checks were replaced
with such "branchlATM" images. Collectively, these
methods of imaging check deposits remotely are
referred to as "remote deposit capture."
Depository institutions can also image checks at
their central processing locations, combine them with
any images deposited by customers or captured at
ATMs or branches, and electronically deposit an
electronic bundle of individual check images (known
as a cash letter) for collection through a Reserve
Bank, private clearinghouse, or third-party processor.
The 2007 survey did not collect information on
methods used for check collection, and industry-level
data are incomplete.
Depository institutions' electronic depositing of
check images with the Reserve Banks, through FedForward, began in 2004 (chart 6). During March and
April 2007, the same time period as the 2007 study,
around 33 percent of checks deposited by Reserve
Bank customers were contained in electronic image
cash letters. The proportion of checks deposited by
electronic image with the Reserve Banks had grown
an annualized 93 percent since April 2007, reaching
about 74 percent by June 2008.
The number of checks deposited electronically
with the Reserve Banks has always led the number of
electronic checks presented, likely reflecting the transition costs to depository institutions before receiving
check presentments electronically and the lower
prices charged by the Reserve Banks and other intermediaries for electronic check deposits.43 Some paying banks may also prefer to receive paper check
presentments because they mail canceled paper checks
back to account holders along with periodic state43. Although prices for electronic check deposits were generally
lower than those for paper check deposits, they were higher if
substitute checks had to be created because the paying bank required
paper.

A95

7. Depository institutions d ~posi lin g .:hccks electronically.
and recei ing checks presented electronically, through
the Re erve Banks, 2005-2008
Pen;enl

90
- - Dcpaoited cl..,troaically

80
70

(Fe~

•••• Preseuted electronically

(FelRoceipl)

60
50

40
30

to
o~~~~--~~------~------~~-----

2005

2006

2007

2008

SOURCE : Federal Reserve System Retail Payments Office.

ments. Until February 2008, the proportion of depository institutions depositing electronic check images
with the Reserve Banks had exceeded the proportion
receiving them (chart 7). In that month the proportions were about equal, and by June 2008 the proportion of depository institutions using FedReceipt
reached almost 81 percent, compared with 69 percent
using FedForward.
The figures indicate that the check-clearing system
is rapidly transitioning to electronic processes and
that the variation in adoption by size and type of
institution has most likely changed dramatically since
March and April 2007.

"On Us " Payments
Clearing and settlement of on-us paymentspayments that involve only one depository
institution-occurs internally at the depository institution, so many of the costs associated with coordinating payments with other depository institutions are
not incurred. 44
Among depository institutions, commercial banks,
which typically have business customers, generally
had the highest proportion of on-us account debits, by
both number and value, while credit unions, which
typically do not have business customers, had the
lowest (table 9). Most checks involved a business and
44. For checks and ACH, " on us" means that the payer and the
payee use the same depository institution. For ATMs , the term means
that the withdrawal occurred at a proprietary ATM (an ATM owned by
the account holder' s depository institution) . Data on on-us debit card
payments were not collected. On-us account debits plus interbank
account debits sum to total payments.

A96

Federal Reserve Bulletin D October 2008

9. Proportion

or sl!iected debits

to transaction account: at depository in ·tiLlIti ons that were on-u , 2007

Percent
Type and size of institution
(transaction deposits in
ntillions of dollars)
All institutions ... .

.. .. .... .....

Check paymenls I
Number

ACH payments'

Value

Number

ATM withdrawals

Value

Number

Value

20.6

28-8

11-0

74.0

61.1

65.0

Commercial banks

.... .... .... .. ..
......... .... ... .. ...

23.3

29.7

17.6

74_6

68.4

71.4

600 and above
200-599 ... , ....... . . .. . . . .. . .. .. . .
100-199 ., ...... .. .. .. .. .... .. ....
~99 .. .. .. .... .. ... ....... .. ... ...

21.0
26.4
24.8
29.2

28. 1
37.4
33.8
33.7

20.0
12.2
12.3
3.0

76.1
54.4
35.6
12.8

69.9
68.0
66.8
58.4

73.0
67 .6
66.6
60. 1

Savings institutions ...... . . ... .. .. .

12.0

19.0

28.1

60.7

62_7

6S_5

600 and above .. .. ...... ..........
200-599 . . . .. .. . . ... . ... . . . ..... . .
.. .... .... ....... .
100-199
~99 ...... .. .. . , .... .......... ... .

10.9
12.9
12.4

13.3

18.2
19.1
19.1
20.4

36.1
27 .8
12.0
9.3

69.3
51.6
38.4
29.5

65.4
64.8
59.2
54.3

68.7
67 .3
61.8
54.2

Credit unions ... . . ..... ... . .. . . .. .

3_7

6.8

1.1

1-6

37.6

40.9

600 and above , ... ... .. .... .......
200-599 .... . ..... . ... .... .... ....
100-199 .. ..... , ..... ..... ... .. ..

1.2
4.0
4. 1
3.7

2.3
7.4
7.1
7.0

1.9
1.2
1.8
.9

1.6
1.5
1.8
1.5

52.4
48.2
44.8
30.8

51.7
49.8
47.2
34.9

~99 .

.. . .. .. ........ . . ... .... . . .. .

NOTE: Percentages based on annualized fi gures derived from survey data for
March and April 2007 . Excludes institutions that had no transaction deposits .
The number and value of debits to transaction aCCOWlts are revised from figures reported in Federal Reserve System , "The 2007 Federal Reserve Payments
Study." See the appendix for details.

I. Checks paid, that is, checks that were on-us (involving only one depository institution) and checks processed through the interbank cheek-clearing
sys tem, including original paper checks and truncated checks presented either
electronically or as paper substitute checks. Does not include U.S. Treasury
checks and U.S. Postal Service mooey orders .
2. Electronic payments processed through the automated clearinghouse system, including checks converted to electroni c payments.

a consumer, so banks with both business and consumer customers were more likely to have on-us
payments. 45
Overall, 21 percent of checks paid in 2007 were
on-us checks, about 2 percentage points lower than
the estimate from the 2004 depository institution
survey. The on-us proportion declined overall for
commercial banks and increased overall for savings
institutions and credit unions. Commercial banks had
a higher on-us proportion (23 percent) in 2007 than
both savings institutions (12 percent) and credit
unions (4 percent). In light of the dramatic growth of
check conversion, one possible explanation for increases in the proportion of on-us account debits at all
but the largest commercial banks and savings institutions is that smaller proportions of those institutions'
on-us checks were eligible-for-conversion consumerto-business checks .
The proportion of on-us ACH payments fell from
20 percent to 17 percent between 2004 and 2007. By
value, however, the proportion increased substantially, from 43 percent to 74 percent. For both years ,
the estimated on-us proportion by value was overstated, apparently because a handful of very large
institutions included internal account-balancing and
settlement transactions, called offset entries, in their

reported ACH values. The increase in the proportion
by value was due to a change in the survey form,
which allowed the separate reporting of network and
on-us ACH volumes for 2007, leaving the overstatement to affect mainly the on-us amounts. 46
Excluding the overstated ACH values, the largest
proportions of on-us account debits, by both number
and value, were consistently for ATM withdrawals.
Most check and ACH transactions involve payments
to other parties, who choose the depository institution
in which to deposit funds . In the case of ATM
withdrawals, the account holder plays the role of
payee and payer, choosing the depository institution
in both cases . Not surprisingly, therefore , these
account debits are more likely to be on-us. Between
2004 and 2007, the on-us portion of ATM withdrawals overall increased slightly, from less than 60 percent to over 61 percent by number, and from over
62 percent to 65 percent by value. For commercial
banks, more than 68 percent of ATM withdrawals

45. Gerdes and Walton, "The Use of Checks and Other Non cas h
Payment Instruments."

46. Because the 2004 survey form intermingled interbank and
on -us figures, institutions that had problems distinguishing offset
entries appeared to have overestimated the value of both on-us and
interbank ACH . While offset entries continued to appear in the on-us
figures for 2007 and apparently have grown substantially larger for a
few very large institutions, network value was not as overstated in
2007 as it was in 2004, owing in part to clarification of the survey
instrument and to heightened efforts to inform survey respondents
through additional communications.

Recent Payment Trends in the United States

were on-us in 2007 (71 percent by value). The larger
on-us shares for ATM withdrawals also reflect account holder avoidance of the fees commonly charged
for using an ATM owned by another depository
institution or other company (non-proprietary ATMs).
Commercial banks generally have the large'st networks of ATMs, making their ATMs more accessible
to customers. Even credit unions, which own relatively few ATMs and for which the on-us ratios for
checks and ACH were quite small, as a group had a
relatively large on-us share for ATM withdrawals of
38 percent (41 percent by value).

Regional Variation
Use of debit cards, checks, ACH, and ATM withdrawals differed among the four major regions of the
United States defined by the U,S. Census Bureau:
Northeast, South, Midwest, and West. Use of these
instruments also varied between urban and rural
locations.
Variation by Ge graphic Region
In 2007 , the number of payments by check as a
proportion of total account debits ranged from a low
of 31 percent in the West to a high of 38 percent in the
South (table 10). The proportion of payments by debit
card ranged from a low of 33 percent in the Northeast
to a high of 42 percent in the West. While the
proportion of debit card payments nationwide (36 percent) was greater than the proportion of check payments nationwide (35 percent), by region that relationship held only in the West. 47 In fact, in the West
the number of debit card payments exceeded the
number of check payments by almost 37 percent. The
proportion of ACH payments by number ranged from
a low of 20 percent in the South to a high of
25 percent in the Northeast. The proportion of ATM
withdrawals by number also was lowest in the South,
at 6 percent, and highest in the Northeast, at 8 percent.
In terms of value, check payments as a proportion
of total account debits ranged from a low of 14 percent in the West to a high of 33 percent in the South.
ACH payments followed the opposite pattern, accounting for a low of 66 percent of total account
debits by value in the South and a high of 85 percent
in the West. The opposite pattern was due mainly to
an especially high average ACH value in the West.
47. National data for 2006 show that the number of card payments
the number of check payments. However. data on the
regional use of credit cards are unavailable. so it is not possible to
assess the relative use of cards overall among regions .
e~ceeded

A97

(The average ACH value ranged from a low of $5,211
in the South to a high of $13,381 in the West.) The
average value of check payments ranged from a low
of $1,226 in the Midwest to a high of $1,646 in the
Northeast. By contrast, the average value of debit
card payments differed little across regions, ranging
from a low of $39 in the Midwest to a high of $42 in
the Northeast and West. For ATM withdrawals, the
lowest average value was also in the Midwest, at $95,
and the highest was in the West, at $104.
Some differences across regions may be due to
differences in population size. The number of account
debits per capita in 2007 ranged from a low of 252 in
the South to a high of 304 in the Northeast (the
Midwest, at 303 account debits per capita, was a close
second).48 For debit card payments, the annual number per capita was highest in the West, at 119, and
lowest in the South, at 90. The annual value of debit
card payments per capita also was highest in the West,
at $4,987, and lowest in the South, at $3,675. For
check payments, the annual number per capita was
lowest in the West, at 87, and highest in the Midwest,
at 109. The value of checks per capita was also lowest
in the West, but it was highest in the Northeast. For
ATM withdrawals, both annual number and annual
value per capita were highest in the Northeast and
lowest in the South.
Other differences across regions may be due to
differences in economic output (defined as the sum of
gross state output for the states in the region) . To
address this possibility, the regions were put on a
comparable basis by calculating payment figures in
terms of number or value of account debits per $1,000
of economic output. The number of account debits
per $1 ,000 of regional output in 2007 ranged from a
low of 6.0 in the South to a high of 7.3 in the
Midwest. The number of checks per $1,000 of economic output was lowest in the West, at 1.9, and
highest in the Midwest, at 2.6. The value of checks
per $1,000 of economic output was also lowest in the
West, at $2,806, but was highest the Northeast, at
$3,477.
Urban and Rural Variation
In 2007, both the total number and the total value of
payments were much smaller for rural areas than for
urban areas, reflecting the smaller population and

48. Note that per capita figures are based on the entire population
and include all payments. not just those made by consumers. Thus.
figures do not represent the behavior of adult consumers or heads of
household.

A98

Federal Reserve Bulletin D October 2008

10. Debits

l()

lranaction accounls at depository institu li on . hy geographic region. 2007
Nonheast

Item

I Single I A~Iions

Multi.

region

Number
(billions)

South

region

inS 1lUi

Multiregion

Midwest

I Singl~ I t~~~o~s
.A~I
region

Multi•

Singl~
.

region f region

West

I tutions
.A:I
mSI-

Multi.

region

Total

I Single I tulions
.A:I
.

region

mSI-

Multiregion

I Single
region

A:!

t~~fo~s

...

11.0

5.5

16.6

15.7

11.8

27.5

10.5

9.6

20.0

13.7

5.9

19.5

SO.9

32.8

83.6

Check ........
ACH .... .. ...
Debit card ... .
ATM ........

3.7
3.0
3.6
.8

2.0
1.2
1.8
.5

5.7
4.1
5.4

5.1
2.1
3.9
.7

10.5
5.5
9.8
1.7

3.4
2.9
3.6
.6

3.9
1.6

1.3

5.4
3.4
5.9
1.0

7.2
4.5
7.0
1.3

4.0
2.9
5.8
1.0

2.0
1.0
2.4
.4

6.0
3.9
8.2
1.4

16.4
12.2
18.8
3.4

12.9
5.9
11.5
2.4

29.4
18.1
30.4
5.8

Value (trillions
of dollars) . .

29.9

3.3

33.2

33.3

9.9

43.2

41.9

5.3

47.3

56.8

5.3

62.1

161.8

23.8

185.7

Check ........
ACH . .... . . ..
Debit card ....
ATM ....... ..

7.7
21.9
.2
.1

1.7
1.5
.1

9.4
23.4
.2
.1

8.9
24.0
.2
.1

5.2
4.5
.2
.1

14.1
28.5
.4
.2

5.8
35.9
.1
.1

3.1
2.1
.1
.1

8.9
38.0
.3
.1

6.5
49.9
.2
.1

2.3
2.9
.1

8.8
52.8
.3

12.2
11.0
.5
.2

41.2
142.7

29.0
131.7
.8
.4

Distribution
by number
(percent) ...

100.0

Check ........
ACH .........
Debit card ....
ATM ... ......

33.5
26.9
32.3
7.3

36.2
21.0
33.0
9.8

34.4
24.9
32.6
8.1

34.1
21.7
37.7
6.5

43.4
17.6
32.9
6.1

38.1
19.9
35.6
6.3

32.3
27.5
34.2
6.0

40.2
17.2
35.5
7.2

36.0
22.6
34.8
6.6

29.3
21.5
42.1
7.1

33.9
17.0
41.6
7.5

30.7
20.2
41.9
7.2

32.3
24.0
37.0
6.7

39.5
17.9
35.2
7.3

35.1
21.6
36.3
7.0

Distribution
by value
(perunt) ...

100.0

25.8
73.4

51.2
45 .1
2.3
1.5

28.3
70.6
.7
.4

26.8
72.1
.7
.3

52.1
45 .8
1.6
.6

32.6
66.0
.9

13.8
85.7
.3
.2

57.8
38.6
2.4

18.7
80.4
.6
.3

11.5
87 .9
.4
.2

42.9
54.3
2.0
.8

14.2
85.0
.6
.2

17.9
81.4
.5
.2

51.2
46.0
2.0
.9

22.2
76.8
.7
.3

Check . ......
ACH .. .. .... .
Debit card . . ..
ATM .........

3.4

1.\

Number per
capita . .. . . .

202

101

304

144

108

252

158

145

303

198

Check ........
ACH .........
Debit card ....
ATM .. .. .. ..

68
54
65
15

37
21
33
10

104
76
25

49
31
54
9

47
19
36
7

%
50
90
16

51
43
54
10

58
25
51
10

109
68
106
20

58
43
83
14

Value per
capita
(dollars) .... 546,933

60.329

607,262

305,563

91,302

396,865 634.262

80,374

714,636

821,110

Check .. ...... 141.109
ACH ..... . ... 401 .403
Debit card .. .. 2.808
ATM ..... .. . . 1.612

30.868
27.195
1.381
885

171.977
82.006
428,598 220.289
4.190
2.252
2,497
1.016

47,540
41.781
1.423
558

129.546
262.070
3.675
1.575

87.532
543.611
2. 130
990

46,461
31,049
1,%8
8%

133.993
94.669
574,659 721 .467
3.454
4.098
1.519
1.886

1.2

283

170

110

280

87
57
119
20

55
41
63
II

43
20
39
8

98
60
102
19

76,335

897,445 541.738

79,760

621,498

32.717
41.488
1.532
597

127.387 96.959
762.955 440.938
4.987
2.605
1,236
2.116

40.824
36,672
1.561
702

137.784
477.611
4.166
1,937

8S
29
14
35
6

Average value
(dollars) ....

2,702

596

2.000

2.119

844

1,573

4,013

SS4

2,358

4.152

901

3,177

3,181

71:1

2,220

Check .. .... ..
ACH .... .....
Debit card ....
ATM .. .......

2,OSI
7,379
43
109

842
1.279
41
89

1.646
5.665
42
101

1.667
7,()45
41
lOS

1,013
2.197
40

1.348
5.211
41
98

1.717
12.516
39
104

797
1,245
38
86

1.226
8,405
39
95

1.634
16.933
41
109

1.140
2,879
43
93

1,470
13.381
42
104

1.762
10.804
41
108

942
1.864
40
88

1.401
7.896
41
100

lower economic output of rural areas (table 11 )49
Check payments constituted 46 percent of debits to
transaction accounts in rural areas and 34 percent in
urban areas. In contrast, electronic debits-ACH and
debit card payments and ATM withdrawals-were
relatively more common in urban areas . Among electronic debits, the urban-rural difference was greatest
for debit card payments, which accounted for 37 percent of account debits in urban areas compared with
31 percent in rural areas.
For all types of account debits, the number and
value of payments per capita was higher in urban
areas, reflecting greater wealth and business activity.
The average value of debit card payments was
49 . Note that by definition, rural areas include some suburban areas
surrounding cities.

roughly the same in urban and rural areas ($41 versus
$40), but the average value of check payments, ACH
payments, and ATM withdrawals was smaller in rural
areas.

Comparison with Earlier Findings
The annual number of check payments declined in all
regions between 2004 and 2007 (data not shown).
The most pronounced decline occurred in the
Midwest-almost 35 checks per capita. The smallest
decline was in the Northeast--over 21 checks per
capita. The number of checks declined faster in rural
areas over the period, at 10.7 percent a year, than in
urban areas, at 5.7 percent a year.
For debit card payments, the largest increase in the
annual number per capita was in the Northeast, at

A99

Recent Payment Trends in the United States

1O,-Conlinued
Northoast
hem

Muhi-

region

Single

region

Midwest

South

I I~~:O~S
.A~I

Multiregion

Single
region

A:I

t~~~o~s

MUlti- 1
region

Sin~le

regIOn

West

I i~:L

tUlions

Multi-

region

Total

J Sin~le I
region

i:':L

lui ions

MU.llireg,on

I sin~le.1 i:'~L
regton

tut ions

Number per
51 ,000 ,or
outpul .....

4_1

2-0

6.1

3.4

2.6

6.0

3.8

7.3

4.4

1.9

6.2

3_9

2-S

6.4

Check ........
ACH ..... ...
Debit card .. ..
ATM ...... ..

1.4
1.I
1.3
.3

.7
.4
.7
.2

2. 1
1.5
2.0
.5

1.2
.7

1.I
.5
.8
.2

2.3
1.2
2. 1
.4

1.2
1.0
1.3
.2

1.4
.6
1.2
.3

2.6
1.6
2.5
.5

1.3
.9
1.8
.3

.6
.3
.8
.1

1.9
1.3
2.6
.4

1.3
.9
1.4
.3

1.0
0.4
0.9
0.2

2.2
1.4
2.3
0 .4

Value per
51 ,000 or
oulpul
(dollars) . .. . 11,057
Check ........
ACH .........
Debit card ....
ATM ... . . ..

2.853
8. 115
57
33

1.3
.2

1,220

12,277

7,294

2,179

9,473

15,260

1,934

17,194

18.090

1,682

19,772

12,309

1,812

14,121

624
550
28
18

3.477
8.665
85
50

1.958
5.258
54
24

1.135
997
34
13

3.092
6.256
88
38

2.106
13.079
51
24

1.118
747
47
22

3.224
13.826
99
45

2.086
15.895
76
33

721
914
34
13

2.806
16.809
110
47

2.203
10.018
59
28

928
833
35
16

3.131
10.852
95
44

Number-Iode~ils

ratiol

.. . ..

95.5

965

95.8

127.6

72.7

96-4

124.9

8\,7

99_7

124.1

79.6

106.3

117.6

79.9

99-2

Check .. .. . .. .
ACH ... .. . ..
Debit card ....
ATM ........ .

32.0
25 .7
30.9
7.0

34.9
20.3
31.8
9.5

33.0
23.9
31.2
7.8

43.5
27.7
48.1
8.3

31.5
12.8
23.9

36.7
19.2
34.4
6. 1

40.3
34.3
42.8
7.5

32.8
14. 1
29.0
5.9

35.9
22.5
34.7
6.6

36.4
26.7
52.2
8.8

26.9
13.5
33.1
6.0

32.6
21.4
44.6
7.7

38.0
28.2
43.5
7.9

31.6
14 .3
28.1
5.8

34.9
21.4
36.0
6.9

4.4

Value-toils

:!aToJ

. .... 258,098

57,506

191.675

270,333

61,401

151,632

501,318

45,293

235,101

515,268

71.682

337,579

374,115

58.094

220,312

Check .. ..... . 66.590
ACH ........ . 189.423
Debit card ... . 1,325
ATM . ....... .
761

29.424
25.922
1,317
843

54.283
135.282
1.322
788

72,551
194.891
1.992
899

31.971
28.098
957
376

49.496
100.130
1.404
602

69.185
429.668
1.684
782

26. 183
17.497
1.109
505

44.081
189.051
1.348
620

59.408
452.740
2.168
953

30.723
38.959
1.439
561

47.917
286,990
1.876
796

66,958
304.504
1.799
853

29,735
26.711
1,137
511

48.842
169.306
1.477
687

1.958

162

2. 120

4.385

265

4.650

4.705

308

5.013

1.859

205

2.064

12.907

940

13.847

.. .

...

.. .

. ..

.. .

...

. ..

...

299

...

.. .

2.700

.. ,

.. .

4.562

.. .

2.749

.. .

3.138

. ..

.. .

13.149

173

162

285

117

201

184

410

843

Number of
institutions ..
Population
(millions) ...
Output (billions
of dollars) ..
Transaction
deposits
(billions of
dollars) . . ...

116

54 .6

123

108.9

66. 1

110

69.1

433

NOTE : Annuali zed figures based o n survey da ra fo r March and April 2007 .
Multiregio n institutions are those that have deposits in more than o ne region ;
single- region institutions have deposits in only one region. The Northeast region includes Connecticut, Maine, Massachusetts, New Hampshire, New 1ersey, Ne w York, Pennsylvania, Rhode Island, and Vermo nt. The South region
includes Alabama, Arkansas, Delaware, District of Columbia, Florida, Georgia,
Kentucky, Loui siana, Maryland, Mississippi, North Caro lina. Oklahoma, South
Carolina, Tennessee , Te xas, Virginia, and West Virginia. The Midwest re gion
includes llIinois, Indiana, Iowa, Kansas, Mic higan, Minnesora, Missouri , Nebraska, North Dakora, Ohio, South Dakora, and Wisconsin . The Wes t region
includes Alaska, Arizona, California. Colorado, Hawaii, Idaho, Monrana, Ne-

vada, New Mexico, Orego n, Utah, Washington, and Wyoming. ComponenL'
may not sum to torals and may not yield pe rcentages shown because of
rounding.
\. Output is measured as the sum of the gross state products in the region.
2. Annu al number of debits per $ 1,000 o f transaction deposits.
3. Annual value of debits pe r $ I ,000 o f transaction deposits.
• In abso lute value. less than 0 .05 .
. . . Not appli cable.
SOURCES : Federal Rese rve; and U.S . Department of Commerce, Bureau of
Economic Analysis and Bureau of the Census.

47.7 per capita, followed closely by the Midwest, at
46.5 per capita; the smallest increase was in the
South, at 31 .3 payments per capita, followed by the
West, at 39.3 per capita. In 2004, the Northeast had
the lowest number of debit card payments per capita;
by 2007 that region, at 99 payments per capita, had
surpassed the South, at 90 per capita-but both
regions remained behind the Midwest, which at 106
payments per capita had come closer to the West, at
119 per capita. The proportion of account debits that
were debit card payments increased faster in rural
areas, at 14.4 percent a year, than in urban areas, at
11.9 percent a year.

RETURNED CHECKS AND ACH PAYMENTS

Some checks that are presented for payment are
returned unpaid because of insufficient funds, closed
accounts, fraud, or other reasons. The same is true for
ACH payments.50 Because some payments returned
for insufficient funds are presented aga,in ("represented"), and may be returned yet again if funds
50. Credil card and debit card payments may fail because of credit
limits or insufficient funds, closed acco unts, disputes, or fraud .
Because most card payments are approved in real time and are not
returned in the same sense as are checks and ACH payments, they are
outside the scope of this discu ssion.

AIOO

Federal Reserve Bulletin D October 2008

II . Debits to tran 'action accounts at depository in tiLUlioll .
by urban or rurallucalioll, 2007
Item

Urban

Total

Number (billions) ...... .

72.2

11 .4

83.6

Check ........ .............. .... ..
ACH ..... ... ....... .. .
Debit card ... . .. .. .. .. . .. . .... .. .. .
ATM ... . .. .. ... .

24.2
16.0
26.8
5.2

5.2
2.0
3.5
.6

29.4
18.0
30.4
5.8

Value (trillions of dollars) . . .. .. . . .

169.3

16.2

185.5

Check .. ..
ACH ... .
Debit card .. ... .. ...... .. .. .. . ... ..
ATM .... .

36.2
131.4
1.1

4.9
11.1

41.1
142.6
1.2

Distribution by number (percent) . .

100.0

Check .... .. . ... .. .. . .. .....
ACH ... ....... ..... . . . . ....... . .. .
Debit card .. .. ...... .. ..
ATM ....... .......... .. ..... .... .

33.5
22.2
37.2
7.2

45.9
31.0
5.4

35.2
21.5
36.3
6.9

Distribution by value (percent) .. . .

100.0

21.4
77.6

30.1
68.7
.9
.3

22.2
76.9
.7
.3

Check.... ....... . .. .. ..
ACH .... ...... ...... .. .. ...... ... .
Debit card.. ..... .. .. .. .. .. .
ATM ... .. .... . ....... . .. .... .. ...

.7
.3

17.7

Number per capita .... ... .. .. .....

298

201

280

Check .... ... ...... .. .... ..... ....
ACH .... .... .. ....... ... .. . .. .. .
Debit card ... ............ .. .. .. ... .
ATM ...... ........
.... .. .....

100
21

92
36
62
II

98
60
102
19

Value per capita (dollars) . . . . . . . . . . 699,174

286,358

620,961

Check ......... ............ ...... .. 149.619
ACH
542.828
4.563
Debit card ... .. .... .... ..
ATM ......... .... .. .. ..
2.164

86.232
196.703
2.468
955

477 .250
4.166
1.935

111

137.609

Average value (dollars) ..

2,344

1,424

2,219

Check .. . .. .
ACH
Debit card
ATM

1,497
8,215
41
101

934
5.532

1.397
7.915
41

Number.to.dcposits ratio I

Check ........ ..
ACH .. . ..... . .. .. . .... .. .. ... ... ..
Debit card ....... ..
ATM .. .... .. .... ... ..

100

102.4

83.0

99.2

34.3
22.7
38.0
7.4

38.1
14.7

34.9
21.4
36.0
6.9

25.7
4.5

Value.to-deposits ratio' ...... .. . .. . 239,919

264,263

220,122

Check
.. .. .. .. .. .. .
51.341
ACH
.. .. . .. • .. .. .. .. .... 186.269
Debit card ........ ... .. ... .. . .....
1,566
ATM ...... . ...... .... .. .. .........
743

35.602
81 .210
1.019
394

48.781
169, 179
1,477

Number of institutions . . . . . . . . . . . . . .
Population (millions) ...... . .. .• .. . .
Transaction deposits
(billions of dollars) . .

686

9.934
242.2

5,467
56.6

15.401
298.8

706

137

843

NOTE: Annualized figures based on survey data for March and April 2007.
Excludes institutions that had no transaction deposits. Urban areas are defined
as metropolitan s!atistical areas or New England county metropolitan s!atistical
areas. and rural areas as all other areas. Rural areas include some urbanized areas, such as oullying suburbs that surround metropolitan statistical areas . Components may not sum to total s and may not yield percentages shown because
of rounding .
I. Annual number of debits per $ 1,000 of transaction deposits.
2. Annual value of debits per $ \,000 of transaction deposits.
SOURCES: Federal Reserve; and U.S. Depanment of Commerce, Bureau of
Economic Analysis and Bureau of the Census.

are still unavailable, the same returned payments may
have been counted more than once. Therefore, the
ratio of the number of times a payment, say a check,
is returned to the total number of check payments is
an upper bound on the probability that a check will be
returned .

Returned Checks
Checks were returned an estimated 187 million times
in 2003, compared with 153 million times in 2006. It
is estimated that check returns accounted for, at most,
0.51 percent of the estimated total number of checks
paid in 2006, or about 5.1 returns for every 1,000
checks paid-about the same proportion as in 2003compared with about 5.8 returns for every 1,000
checks paid in 2000.
Some checks returned for insufficient funds are
re-presented through the ACH system. When such
ACH payments, identified by SEC code as RCK
("re-presented check"), are themselves returned , they
are returned through the ACH system and are no
longer identified as check returns. In 2006, about
21 million checks were re-presented through the ACH
system. More than half of these ACH check representments (about 12 million) were themselves
returned. The number and value of RCK ACH payments that were returned changed little between 2003
and 2006. The number of returned checks processed
through the check collection system (153 million) and
theACH system in 2006 totaled close to 165 million,
or 5.5 returns for every 1,000 checks presented, also
virtually unchanged since 2003.

Returned ACH Payments
About 1.3 percent of retail network ACH payments
were returned in 2006, or 12.7 returns for every 1,000
payments, over twice the rate for checks (table 2).
Only about 0.4 percent of large-value CCD (cash
concentration or disbursement) transactions were
returned , a smaller proportion than for checks or retail
ACH payments. The percentage of retail ACH payments returned declined from 2003 (when it was
1.5 percent), willie the percentage of CCD transactions returned remained flat. 5 I Most ACH returns in
2006 were PPDs (prearranged payment and deposit
entries) , by far the largest type of ACH payment by
number, with a rate of 1. 1 percent. The second and
5 I. The 2003 percentages for retail ACH payments and CCD
transactions referred to in lhis sentence are revised from those reported
in Gerdes and others, "Trends in the Use of Payment Instruments, "
due 10 a revision to the estimate of total ACH payments and a change
in Ihe method of calculation.

Recent Payment Trends in the United States

third most returns were for WEB (web e-check) and
TEL (telephone e-check) transactions, which had
return rates of 1.5 percent and 6.5 percent, respectively. RCK (re-presented check) payments had the
highest return rate, at 58 percent.
After having risen between 2000 and 2003, the
return rates for all types of ACH transactions examined except ACH RCKs declined between 2003 and
2006. The reversal may confirm anecdotal evidence
that in response to earlier increases in ACH fraud, the
banking industry stepped up measures to reduce the
incidence of fraud and to hold depository institutions
more accountable for customer abuse of the ACH
network. The declines suggest that such efforts are
having an effect on returns.

SUMMARY AND CONCLUSIONS
At some point between 2003 and 2006, the number of
payments made by credit or debit card in the United
States for the first time surpassed the number of
checks paid. And also for the first time, the number of
debit card payments surpassed the number of credit
card payments. Among the major payment types, the
greatest percentage increase, by number of payments,
was for payments made using the automated clearinghouse system, in part because of a rapid increase in
the conversion of checks into electronic ACH payments. The number of checks written continued the
decline observed in earlier periods, and the decline
accelerated because of ACH check conversion. By
2006, the number of payments made by electronic
means was twice the number of payments made by
check.
Later data show that by March and April 2007, the
number of debit card payments exceeded the number
of check payments. Debit card payments accounted
for more than half of all debits to transaction accounts
at credit unions, which serve mainly consumer customers, while checks continued to be predominant at
commercial banks, which also serve business customers. The number of debit card payments per capita in
the Northeast and Midwest regions had begun to
catch up to the West, while growth in the South
lagged by comparison.
Electronic methods of check clearing are rapidly
replacing traditional paper methods. From early 2006
to early 2007, the number of checks presented electronically tripled. The number of substitute checkswhich are created for banks that demand paper after a
check has been replaced with an electronic imagealso tripled during the period. The creation of substitute checks allows banks to electronify their processes even if their paying bank counterparties are not

AlOI

ready to do so. In the first quarter of 2007, about
41 percent of interbank checks were electronified for
some part of the check-clearing process (28 percent
were presented as images, and 13 percent were
presented as substitute checks). More recent data
show very rapid increases in the proportions of
checks presented by and deposited with the Federal
Reserve Banks as electronic images.
Implementation of changes that enable the electronic processing of checks requires the commitment
and coordination of substantial resources. Depository
institutions, third-party processors, and the Reserve
Banks have been investing in new technological
capabilities to support electronic check processing.
Despite the substantial cost of making the transition,
electronic processing of checks is moving ahead at a
rapid pace.
Changes in payments behavior are due to a number
of factors, including technology, preferences, and
costs as well as the regulations, policies, and practices
that govern the payments system. The recent rapid
growth in electronic payments was supported by a
very long buildup of technical infrastructure and by
spreading acceptance of traditional electronic payment instruments. Legal and regulatory changes have
removed significant barriers to the growth of electronic payments. Against this backdrop, rapid changes
in the payment system will likely continue through
the rest of this decade-and into the next.

APPENDIX: SOURCES OF DATA AND
METHODS OF ESTIMATION
Recent estimates of the number and value of noncash
payments came from two surveys conducted in
2007-one of depository institutions (the 2007 depository institution survey) and the other of electronic
payment networks, card issuers, and card processors
(the 2007 electronic payment survey). Similarly, the
estimates for earlier years came from 2004 and 2001
surveys of depository institutions (the 2004 and 2001
depository institution surveys) and electronic payment networks, card issuers, and card processors (the
2004 and 2001 electronic payment surveys).52
52. The 2001, 2004, and 2007 surveys were conducted by the Retail
Payments Office at the Federal Reserve Bank of Atlanta in collabora·
tion with Board staff. Global Concepts assisted with all three deposi·
tory institution surveys; in addition, International Communications
Research (lCR) assisted with the 2007 and 2004 surveys, and Westat
assisted with the 200 I survey. Dove Consulting assisted with all three
electronic payment surveys.
The report of the 2007 depository institution survey, "The Depository Institutions Payments Study: A Survey of Depository Institutions
for the 2007 Federal Reserve Payments Study" (March 2008), and the
report of the 2007 electronic payment survey, "The Electronic Pay-

A 102

Federal Reserve Bulletin D October 2008

The 2004 and 2007 depository institution surveys
were similar in most respects. However, the 2007
survey collected additional information on paper and
electronic methods of clearing checks. In this article,
that additional information is compared with information on methods of clearing checks collected by the
Board in a 2006 survey on check losses incurred by,
and the funds availability and check-clearing practices of, depository institutions. 53 The 2001 depository institution survey collected information only
about checks and did not collect information about
other debits to transaction accounts.

2007 Depository Institution Survey
Survey Design
The 2007 depository institution survey collected
information from three types of institutions: commercial banks (including agencies and branches of foreign banks) ; savings institutions (savings banks and
savings and loan associations); and credit unions.
Information was collected on several types of debits
to transaction accounts: checks paid, ACH payments,
debit card payments (both signature-based and PINbased), and ATM withdrawals. (Large-value transfers
and teller window withdrawals, which create debits,
as well as credit card and currency payments were
outside the scope of the survey.)
Depository institutions were asked to report, via
questionnaire, the number and dollar value of debits
to their accounts , by type of debit, during each of the
months March and April 2007. They were also asked
to report the number and value of returned checks
and, for all debit types except debit card payments,
the number and value of on-us debits (debits for
which the payee ' s account and the payer' s account
are at the same depository institution). As noted
earlier, detailed information about methods of check
clearing was requested, including number and value
of checks presented by form of presentment (paper,
either original or substitute, and electronic, either
image or MICR line) and number and value of
deposited checks (with number of client images and
branch/ATM images identified separately).

ments Study: A Survey of Electronic Payments for the 2007 Federal
Reserve Payments Study" (March 2008). as well as documents related
to the earlier surveys. are available at www.frb services.orgl
communicationslpayment_system_research.html.
53 . The 2006 survey was conducted by the Board for a report to
Congress. See Board of Governors of the Federal Reserve System
(2007) . Reporl to Ihe Congress on the Check Clearing f or Ihe 21s1
Century Act of 2003 (Washington: Board of Governors. April).
www.federalreserve.govlboarddocsfRptCongress/check21/
check21.pdf.

The population from which the 2007 sample was
drawn comprised 13,319 depository institutions (bank
subsidiaries of multi bank holding companies were
treated as a single entity) that reported transaction
deposits greater than zero as of September 2006 (June
2006 for credit unions). Based on experience with the
200 I and 2004 depository institution surveys, which
had overall response rates higher than 50 percent, a
stratified random sample of 2,700 depository institutions was estimated to be needed to produce national
estimates of the number and value of debits made via
check with a desired precision of at least ±5 percent at
a 95 percent level of confidence.
For sampling and estimation purposes, depository
institutions were separated into four groupscommercial banks; credit unions; and two types of
savings institutions, those federally regulated by the
Office of Thrift Supervision and those regulated by
states .54 The largest institutions in each group, as
determined by the value of their transaction deposits,
and some institutions known to have highly unusual
check volumes , such as issuers of rebate checks, were
sampled with certainty, meaning that all were included in the sample. The remaining institutions in
each group were then stratified by the value of their
transaction deposits-eight strata for commercial
banks, seven strata for credit unions, and ten strata for
savings institutions (five for federally regulated and
five for state regulated).
The final sample allocation was determined so as to
minimize the approximate standard error of the estimated total number of checks. Because the strata
containing the larger depository institutions typically
accounted for more paid checks in the 2001 and 2004
samples and had greater variance, they were assigned
a larger proportion of the sample. The al1ocation of
the sample between the institution types gave more
weight to commercial banks because they were
expected to account for a disproportionate share of
checks and other account debits, but it also took into
account the desirability of producing estimates by
depository institution type .
In all, 1,554 commercial banks, 333 savings institutions, and 813 credit unions were included in the
sample. Responses were received from 853 commercial banks (including all of the 38 largest), 191
savings institutions (including the 18 largest), and

54 . The 200 I and 2004 surveys included a fifth group-domestically chartered branches of foreign banks. Those institutions
had low rates of response and collectively accounted for a very small
number and value of payments. and it was determined that they could
be excluded from the 2007 survey without a significant loss of
information.

Recent Payment Trends in the United States

393 credit unions (including the 5 largest), for a total
of 1,437 respondents.
By the time survey responses had been received,
later data on transaction deposits-data as of
March 31, 2007-had become available. Using those
later data, the sample and population were restratified
to produce estimates for the 13,316 depository institutions that reported transaction deposits greater than
zero as of April 30, 2007, the end of the period for
which data were collected. The major change resulting from the restratification was an adjustment to the
largest size stratum for each depository institution
group so that it would be a certainty stratum (that is,
all members of the stratum must have responded to
the overall survey, although not necessarily to each
item). Strata also changed somewhat because of the
entry and exit of some institutions between November 2006, when the sample was drawn, and April
2007, and also because of changes in the value of
transaction deposits between September 2006, when
transaction deposits used for the sample were reported, and March 2007.
Item Nome ponse and Imputation
Each respondent was asked to provide four figures
(number and value for March and April of 2006) for
each item in three questionnaire sections-16 items
concerning checks, 9 concerning ACH payments, and
5 concerning ATM withdrawals and debit card
payments-for a total of 120 figures. With 1,437
institutions responding overall, there was a potential
for 172,440 completed figures.
Each item included in the survey had logical
relationships with other items. For example, groups
of subtotals should add up to-or, for incomplete sets,
be less than-totals; and number-value pairs should
not have a zero amount accompanied by a nonzero
amount. In order to use the variety of standard
statistical methods that require a rectangular dataset
and to make the estimates adhere to logical relationships, missing figures needed to be estimated using a
statistical process called imputation. Prior to imputation, responses were checked, and for any violations
of identified logical constraints, respondents were
contacted and, when appropriate, data edits were
made. In most cases in which logical inconsistencies
could not be resolved, figures were considered missing and subsequently were imputed.
Of the 1,437 respondents, one-fourth provided all
the requested figures, half reported at least 70 percent
of the figures , and about two-thirds reported at least
33 percent of the figures. Almost all of the remaining
one-third reported only 8 percent or fewer of the

A I 03

requested figures. As a result, some responses were
not complete enough to produce reliable imputed
figures.
Because some respondents were able to provide
reasonable responses for some survey sections but not
for others, imputation and estimation was conducted
by section. For the checks section to be considered
"complete" (that is, eligible for the imputation process), a response was needed for at least one of the
four figures for total paid checks. A total of 1,281
responses met this criterion, for a potential of 81,984
figures; of these, 34,597 figures (42 percent) were
missing and were imputed. For the ACH payments
section, a response needed to provide at least one
figure for number of network or on-us ACH debits or
credits to be considered complete. (A response providing value figures only was not deemed sufficient
because some respondents' total ACH value was
known to be overstated due to problems distinguishing ACH payments from other types of transactions,
as reported elsewhere in this appendix.) A total of
1,287 responses met this criterion, for a potential of
46,332 figures; of these, 19,232 figures (42 percent)
were missing . For the ATMldebit card section, a
response needed to provide at least one number or
value for total ATM withdrawals, PIN-based debit
card payments, or signature-based debit card payments to be considered complete. A total of 904
responses met this criterion, for a potential of 18,080
figures; of these , 2,146 figures (12 percent) were
missing.
For imputation, respondents were grouped by type
(commercial bank, savings institution, or credit union)
and a matrix of covariances between figures in each
section was estimated using a method that produces
maximum-likelihood estimates in the presence of
missing data through the use of an iterative technique
called the EM algorithm. 55 A value was imputed for
each missing figure, and after adjustments were made
to ensure that logical relationships were not violated,
the imputed values produced on the final iteration of
the EM algorithm were used for estimation. The
imputation model for each missing figure was a linear
regression on a related figure from 50 other respondents closest in size as measured by value of transaction deposits. Imputations were performed in a hierarchical fashion , by filling in totals first , followed by
subtotals. Independent variables for the regressions
were selected by identifying the closest reported

55 . For information on the technique, see Roderick 1.A. Linle and
Donald B. Rubin (2002), Statistical Analysis with Missing Data, 2nd
ed. (Hoboken, N.J .: Wiley), sections 11.2.1-11 .2.2 (pp. 223-25).

AI04

Federal Reserve Bulletin 0 October 2008

figure in a set of four or, if a subtotal was to be
imputed, a total within a logical relationship.
Each fitted regression yielded a predicted value and
an associated standard deviation for the missing item .
Six datasets containing both actual responses and
imputations were created. The first dataset contained
imputations that used the predicted, or expected,
value only. To arrive at an imputed value for the other
five datasets, a random deviate was added to the
predicted value, drawn from a normal distribution
having a mean of zero and the standard deviation
from the fitted regression. This imputation procedure
was repeated five times , each time using a newly
drawn deviate in the calculation, to create the five
additional datasets. All the summary statistics based
on the 2007 depository institution survey are estimates calculated from the first dataset. The variation
among the estimates calculated using the other five
datasets provided information about the uncertainty
in the overall estimate arising from the imputations
and was used to compute standard errors.

E timation
The actual and imputed data for respondents were
converted to estimates for the population using a
separate ratio estimator for each stratum, with the
value of transaction deposits being the covariate for
each item. That is, for a given item and within a
stratum, the sum of the respondents' data was multiplied by the ratio of the transaction deposits in the
population to the transaction deposits at the respondino institutions . The associated sampling standard
'"
error was based on a classical statistical formula that
accounts for the uncertainty arising from the use of a
sample rather than a census, and on the variation
among imputed figures that accounts for the uncertainty arising from the fact that some items needed to
be imputed.
The 95 percent confidence intervals for the national
estimate of checks were ±1.9 percent of the number
of checks paid and ±2.3 percent of the value of checks
paid. Both confidence interval half-widths were just
one-tenth of one percentage point larger than those
for the 2004 estimates, despite having used data from
fewer respondents (l,281 versus 1,501). The confidence intervals for the national estimates of other
account debits were generally larger than those for the
2004 depository institution survey.

Estimates by Geographic Region and by Urban or
Rural Location of Deposits. Although the survey
was not explicitly designed to facilitate geographic
analysis of account debit patterns, the responses were

sufficient, when combined with external data on each
depository institution's total deposits distributed by
region, to make broad comparisons possible. For each
of four regions-Northeast, South, Midwest, and
West-separate estimates were calculated for singleregion depository institutions (those having deposits
in only one region) and multi region depository institutions (those having deposits in more than one
region).
The survey did not directly collect regional data
from multiregion depository institutions. Information
on the distribution of each depository institution's
total deposits (transaction plus savings deposits) was
available, so each type of account debit for each
multiregion depository institution in the population
was assumed to be distributed across regions in
proportion to the location of the institution's deposits,
and its data were allocated to regions accordingly.56
Separate estimates were produced for each region
using the data from single-region depository institutions and the allocated portion of multi region depository institutions. New, separate ratio estimators were
produced following the procedure described in the
preceding section. It turned out that national estimates
obtained from aggregating these regional estimates
were about the same as those obtained from the
original analysisY For presentation purposes, any
difference was proportionally allocated to the regional
estimates so that the sums of the regional estimates
added up precisely to the national estimates.
The assumption that the payments and transaction
deposits of depository institutions are regionally distributed in proportion to the distribution of their total
deposits is consistent with the hypothesis that customers of multi region depository institutions are more
similar to each other in their payments behavior, even
when they are located in different regions, than they
are to customers of different depository institutions.
To put it another way, the regional estimates assume
that the regional fractions of a depository institution's
customers exhibit similar payments behavior. While
no better alternative for constructing regional estimates appears to exist given available data, the
assumption could affect the accuracy of regional
estimates, as the allocation of transaction deposits (or
account debits) would be too large (too small) for a
region if the actual ratio of total deposits to transac-

56. For credit unions. the geographic distributions of an institution ' S branches served as a proxy for the geographic distribution of its
total depOsits .
57 . Differences between the sum of regional estjmates and the
corresponding national estimates did not exceed I percent.

Recent Payment Trends in the United States

tion deposits (or account debits) for a multiregion
institution was higher (lower) in that region.
The uncertainties that arise from allocation of data
to regions described above cause difficulties for the
statistical analysis of the estimated differences among
regions. Sampling standard errors were, therefore, not
calculated for the regional estimates. 58
Estimates of urban and rural debit activity were
constructed using a method similar to that used to
construct regional estimates. Urban areas were defined as metropolitan statistical areas, and rural areas
as all other areas. Thus, some urbanized areas, such as
some outlying suburbs that surround metropolitan
statistical areas, were included in the rural regions.

2007 Electronic Payment Survey
For the 2007 electronic payment survey, questionnaires were sent to all 73 well-established electronic
payment networks, card issuers, and card processors
in order to estimate the number and value of electronic payments originated in the United States in
2006 by means of commonly used payment
instruments-general-purpose and pri vate-Iabel credit
cards, signature-based and PIN-based debit cards,
ACH payments, and electronic benefits transfers.
Electronic payment networks, card issuers, and
card processors can generally supply accurate data on
the number and value of the payments they process
from business records, and 89 percent of established
entities responded with information. Known information on nonrespondents showed that, collecti vely, the
number and value of payments processed by this
group were likely very small. An informal method
based on publicly available information was used to
estimate number and value of payments for nonrespondents; overall, the estimated portion of the total
for nonrespondents was 0.2 percent by number and
0.1 percent by value. 59
Questionnaires were also sent to 33 emerging
payments companies that handle online bill payment
transactions, RFIO transponder-initiated payments,
and a variety of other kinds of payments that appear
to have potential for growth in the United States, such
as person-to-person Internet payments, proprietary
cards issued by merchants that can initiate an ACH
payment, mobile payments, and deferred payments.
Surveys were returned by 16 companies. Number or
58. For addilional details on the regional estimates see Gerdes and
others. " Trends in lhe Use of Payment Instruments."
59. Because of the informal estimation approach. no statistical
method of estimating uncertainty was available. Public information
about nonrespondents, however, suggests that the number and value of
payments they process constitute very small portions of the totals.

A 105

value of payments for nonrespondents was not estimated , so reported totals for emerging payments are
lower bounds for the national totals.
For the 2006 estimates, special efforts were made
in estimating the number and value of payments using
prepaid cards. A total of 52 prepaid card companies
were sent questionnaires, and 38 responded. 60 National totals were constructed using respondent information as well as public information about nonrespondents. Nevertheless, the totals for payments by
prepaid card are not as reliable as the totals for
payments by established types of payments, as the
reported portion of totals for prepaid cards was only
58 percent, by both number and value, compared with
an overall reported portion for established payments
of greater than 99 percent.

Comparison of 2006 and 2007 Estimates
This article reports estimates of the national number
and value of payments in two ways-annualized
March and April 2007 estimates of debits from
accounts at depository institutions (check, ACH, and
debit card payments and ATM withdrawals) and
calendar-year 2006 estimates for check, ACH, debit
card, and credit card payments, electronic benefits
transfers, and ATM withdrawals. The 2007 estimates
of account debits are based only on the 2007 depository institution survey, whereas the 2006 estimates for
checks and ACH payments also use information from
the 2007 electronic payment survey. The 2006 estimates of debit and credit card payments and EBTs are
based solely on the 2007 electronic payment survey.
The 2007 estimates of ATM withdrawals from the
depository institution survey are used for the 2006
estimates.
Estimates of checks paid in 2007 are for commercial checks only (checks reported by depository institutions), whereas estimates of total checks paid in
2006 are the sum of U.S . Treasury checks, U.S. Postal
Service money orders, and commercial checks. The
estimates of commercial checks paid for 2006 are
adjusted versions of the estimates of commercial
checks paid for 2007. The adjustment involved the
use of NACHA data showing rapid changes in the
number of checks converted per month throughout
2006 and early 2007. As a result, the annualized total
number of checks converted in March and April 2007
was an estimated 3.39 billion, compared with 2.61 billion in 2006, a difference of 778 million. The differ60. States were also surveyed about the use of prepaid cards for
state-provided benefit programs, and 37 states provided information.
Payments made with such cards are a subset of total prepaid payments.

A 106

Federal Reserve Bulletin 0 October 2008

ence in value was $178 billion. These differences
represent a lower bound estimate (because of the
decline in checks) of checks that would have been
counted as paid checks if data had been collected
durjng 2006. Based on this argument, the 2006 estimates for commercial checks were calculated as the
sums of these differences and the 2007 estimates for
commercial checks paid. Based on the same argument, sirilllar adjustments were made for the 2003
estimates of checks prud.
The 2007 electronic payment survey collected
information on the number and value of network
(interbank) ACH payments. The 2007 depository
institution survey collected information on the number and value of network , on-us , and direct (bilaterally exchanged) ACH payments . Separate proportions
of ACH debits and credits by number estimated from
the depository institution survey, combined with network ACH debit and credit data from the 2007
electronic payment survey, were used to estimate total
on-us ACH payments in 2006. Direct ACH payments
were negligible and were included in the on-us figures. The total number of ACH payments in 2006 was
calculated as the sum of these on-us figures and the
estimates of the number of network ACH payments
from the 2007 electronic payment study.
The 2007 estimates for the total value of ACH
payments are much rugher than the estimates for
2006. Some of the large commercial banks that
responded to the depository institution surveys had

difficulty distinguishing ACH payments from largevalue funds transfers called offset entries, inflating the
value of on-us ACH payments by an unknown
amount. 61 The 2006 estimates of the value of on-us
ACH payments were calculated based on the assumption that the average value of on-us ACH payments is
equal to the average value of network ACH payments.
Actual on-us ACH value may be somewhere between
the two estimates . These estimates-appropriately
adjusted-were used in conjunction with annual 2006
totals provided by electronic payment networks in the
electronic payment surveys to estimate the 2006
figures.
For estimates of total ACH, data from the 2007
depository institution survey were used to estimate
the fractions of ACH transactions, by number, that
were on-us and cleared in-house (separately for debit
and credit transfers). The estimated fractions were
applied to 2006 network ACH payment estimates
from the electronic payment survey to estimate on-us
ACH payments for 2006. These were added to the
network ACH payments in 2006 to yield estimates for
0
total ACH.

61. The difficulty in separating offset entries from ACH payments
was due to the use of a shared platform to process both, a common
practice at some of the largest depository institutions. The difficulty,
which involves a small number of very large value entries, did not
substantially affect the estimates of the number of ACH payments.

A 107

December 2008

The 2007 HMDA Data
Robert B. Avery, Kenneth P Brevoort, and Glenn B.
Canner, of the Division of Research and Statistics,
prepared this article. Cheryl R. Cooper, Christa N.
Gibbs, Rebecca Tsang, and Sean Wallace provided
research assistance.
The Home Mortgage Disclosure Act of 1975 (HMDA)
requires most mortgage lending institutions with
offices in metropolitan areas to publicly disclose
information about their home-lending activity. The
information includes characteristics of the home
mortgages that lenders originate or purchase during a
calendar year, the geographic location of the properties related to these loans, and demographic and other
information about the borrowers .l The disclosures are
intended not only to help the public determine
whether institutions are adequately serving their communities' housing finance needs but also to facilitate
enforcement of the nation's fair lending laws and to
inform investment in both the public and private
sectors.
Under the 1975 act, the Federal Reserve Board
implements the provisions of HMDA through regulation .2 In addition , the Federal Financial Institutions
Examination Council (FFlEC) is responsible for collecting the HMDA data and facilitating public access
to the information.3 Each September, the FFIEC
releases summary tables pertaining to lending activity
from the previous calendar year for each reporting
lender and an aggregation of home-lending activity
by metropolitan statistical area (MSA) .4 The FFlEC
also makes available a consolidated data file contain-

I. A description of the items reported under HMDA is provided in
appendix A.
2. HMDA is implemented by Regulation C (12 C.F.R. pt. 203) of
the Federal Reserve Board. More information about the regulation is
available at www.federalreserve .gov.
3. The FFIEC (www.ffiec.gov) was established by federal law in
1979 as an interagency body to prescribe uniform examination procedures, and to promote uniform supervision, among the federal agencies responsible for the examination and supervision of financial
institutions. The member agencies are the Board of Governors of the
Federal Reserve System, the Federal Deposit Insurance Corporation,
the National Credit Union Administration, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision.
4. For the 2007 data, the FFIEC prepared more than 63,000
MSA-specific reports on behalf of reporting institutions. These and
other reports are made available to the public by the FFIEC.

ing virtually all the reported information for each
lending institution .s
The HMDA data consist of information reported by
about 8,600 home lenders, including all of the nation's largest mortgage originators. The loans reported
are estimated to represent about 80 percent of all
home lending nationwide; thus, they likely provide a
broadly representative picture of home lending in the
United States.
This article presents key findings from the 2007
HMDA data. In doing so, it highlights the notable
changes in relationships that are revealed when the
2007 data are compared with data from earlier years.6
Because of the importance of the loan-pricing information included in the HMDA data and because of
the recent turmoil in the residential mortgage market,
particularly the higher-priced segment of the market,
much of the focus here is on the data pertaining to that
market segment. 7

5. The only reported items not included in the data made available
to the public are the date of application and the date on which action
was taken on the application. These items are withheld to help ensure
that the individuals involved in the application cannot be identified .
6. Previously published assessments include Robert B. Avery,
Kenneth P. Brevoort , and Glenn B. Canner (2007), "The 2006 HMDA
Data," Federal Reserve Bulletin, vol. 93 (December 21), pp. A73A109; Robert B. Avery, Kenneth P. Brevoort, and Gtenn B. Canner
(2006), "Higher-Priced Home Lending and the 2005 HMDA Data,"
Federal Reserve Bulletin, vol. 92 (September 8), pp. AI23-66 ; and
Robert B. Avery, Glenn B. Canner, and Robert E. Cook (2005),
"New Information Reported under HMDA and Its Application in Fair
Lending Enforcement," Federal Reserve Bullerin, vol. 91 (Summer),
pp.344-94.
7. Borrowers in the higher-priced market segment generally fall
into one of two market categories-"subprime" or "near prime"
(sometimes referred to as "alt-A"). Individuals in the subprime
category generally pay the highest prices because they tend to pose the
greatest credit or prepayment risk. Statistics prepared by the lending
industry do not characterize lending as higher priced but rather use the
terms subprime or air-A . Thus, when presenting data from industry
sources on loan performance or other aspects of the mortgage market,
this article will often refer to data on the subprime, alt-A, or prime
lending market.
Mortgages with annual percentage rates (APRs , which encompass
interest rates and fees) above designated thresholds are referred to here
as "higher-priced loans"; all other loans are referred to as "lower
priced." For loans with spreads above designated thresholds, revised
Regulation C requires the reporting of the spread between the APR on
a loan and the rate on Treasury securities of comparable maturity. The
thresholds for reporting differ by lien status: 3 percentage points for
first liens and 5 percentage points for junior, or subordinate, liens.
Further details are in note 12, p. A126, of Avery, Brevoort, and
Canner, " Higher-Priced Home Lending and the 2005 HMDA Data."

A108

Federal Reserve Bulletin 0 December 2008

TURMOIL IN THE MORTGAGE MARKET
Both primary and secondary mortgage markets experienced considerable stress in 2007, a condition that
has continued into 2008. 8 Delinquency rates on
higher-priced home loans, particularly those with
adjustable-rate features, first began to increase notably in 2006; those rates then rose sharply during 2007
and far outpaced the performance problems that also
emerged in the lower-priced segment of the market. 9
One consequence of deteriorating loan performance and widespread declines in home values was a
sharp contraction in 2007 in the willingness of lenders and investors to offer loans to higher-risk borrowers or, in some cases, to offer certain loan products
that entailed features associated with elevated credit
risk. to Moreover, to the extent that credit was still
available, loan prices rose sharply, largely because of
concerns about repayment prospects. In addition,
many lenders whose business models relied on a
robust secondary market to purchase the loans they
originated were forced to cease or curtail operations,
as they could no longer obtain funds to operate or find
investors willing to purchase their loan originations.
Difficulties in the higher-priced portion of the
mortgage market spilled over to other market segments , including the market for loans for large
amounts (the so-caUed jumbo market), in which
credit spreads widened substantially. The widening of
spreads led to higher interest rates on such loans,
which effectively reduced credit availability. I I
The 2007 HMDA data reflect the difficulties in the
housing and mortgage markets. Many reporting institutions experienced a sharp reduction in loan applica8. See, for example, Randall S. Kroszner (2007) , 'The Challenges
Facing Subprime Mortgage Borrowers." speech delivered at the
Consumer Bankers Association 2007 Fair Lending Conference. Washington. November 5. www.federalreserve .gov/newsevents/speech/
kroszner2007I 105a.htm.
9. Data from LoanPerformance. a subsid iary of First American
Core Logic. Inc .• show that 20.4 percent of the subprime loans with
adjustable-rate features were seriously delinquent at the end of 2007.
By comparison, 8.2 percent of fixed-rate subprime loans. 1.0 percent
of fixed-rate prime loans. and 4.2 percent of adjustable-rate prime
loans were seriously delinquent at the end of that year.
10. Industry sources indicate that the dollar amount of originations
of subprime loans fell 68 percent from 2006 to 2007 . to a level of only
$191 billion . Subprime loan originations in 2007 were the smallest
since 2001. See Inside Mortgage Finance (2008). The 2008 Mortgage
Market Statistical Annual. vol. 1: The Primary Market (Bethesda.
Md.: Inside Mortgage Finance Publications).
II. 1umbo loans are loans that exceed the size limits set for loans
that Fannie Mae and Freddie Mac are permined to purchase (conforming loans). Fannie Mae and Freddie Mac are government-sponsored
enterprises that focus on conventional loans that meet certain size
limits and other underwriting criteria. Available data indicate that the
dollar amount of originations of jumbo loans fell nearly 30 percent
from 2006 to 2007. See Inside Mortgage Finance. The 2008 Mortgage
Market Statistical Annual.

tions and ongmations, particularly in the higherpriced segments of the mortgage market. Also, some
lenders that had previously reported HMDA data
ceased operations during 2007 and did not file a
HMDA report even though they extended loans during part of that year.'2 Although nonreporting by
lenders that ceased operations affects the comprehensiveness of the HMDA data each year to some extent,
nonreporting in 2007 had a much larger effect than in
previous years. For 2007 , many more lenders than in
earlier years ceased operations because of a bankruptcy or other adverse business event, and the nonreporting institutions accounted for a significant
minority of the loans originated in 2006 and an even
larger share of the higher-priced loans made that year.
Most important, the effects of nonreporting in the
2007 HMDA data amplified the measured decline in
higher-priced lending from 2006. The amplification
occurred because some of the lenders that ceased
operations originated loans in 2007, and according to
these institutions' lending profiles in 2006, a disproportionate share of those originations consisted of
higher-priced loans. For this reason , some caution
should be exercised in using the 2007 data to docu ment the full extent of the disruptions in the higherpriced lending market in that year. The effects of
nonreporting are difficult to quantify. This issue,
among others, is addressed later in the article.

GENERAL FIND INGS FROM THE 2007 HM DA
DATA
For 2007 , lenders covered by HMDA reported information on 21.4 million applications for home loans.
Almost all of the applications were for loans to be
secured by one- to four-family (referred to here as
"single family " ) houses (table 1). These applications
resulted in more than 10.4 million loan extensions
(data not shown in table). Lenders also reported
information on 4 .8 million loans that they had purchased from other institutions and on 433,000 requests for pre-approvals of home-purchase loans that
had not resulted in a loan origination (data not shown
in table); the pre-approval requests were turned down
by the lender or were granted but not acted on by the
applicant.
The total number of reported applications feU
about 6.0 million, and the number of reported loans
fell 3.5 million-or 22 percent and 25 percent,
12. As in earlier years . some institutions ceased operations because
of a merger or acquisition . Lending by these institutions is reported . in
most cases. by the acquiring institution on a consolidated basis or as
two distinct filings .

The 2007 HMDA Data

l. Home loan and report ing act ivity

or lending

A 109

insti tutions covered under the Home Mortgage Oi closure Act. 1990-2007

Number
Applications received for home loans on 1-4 family propenies,
and home loans purchased from another institution (millions)
Year

Applications
Home
purchase

Refinance

1.1

Home
I
I improvement

Total'

Loans
purchased

Reponers
Total'

3.3
3.3
3.5
4.5
5.2

2.1
5.2
7.7
3.8

1.2
1.2
1.2
1.4
1.7

5.5
6.6
10.0
13.6
10.7

1.2
1.4
2.0
1.8
1.5

6.7
7.9
12.0
15.4
12.2

9.858

24,041
25,934
28,782
35,976
38,750

1995 . ... . . .. ......
1996 ..... .... .... ... ..
1997 ........ .. ..........
1998. ....... .. ...... ..
1999 .......... .. .. .... ..

5.5
6.3
6.8
8.0
8.4

2.7
4 .5
5.4
11.4
9.4

1.8
2. 1
2.2
2.0
2.1

10.0
13.0
14.3
21.4
19.9

1.3
1.8
2.1
3.2
3.0

11.2
14.8
16.4
24.7
22.9

9.539
9,328
7.925
7,836
7,832

36,611
42,946
47,416
57.294
56.966

2000 ........ .. . .... . .. .
2001 ...... .. .. ...... ...
2002 .......... . .......
2003.
... ....... .. ...
2004 ........ . ..........

8.3
7.7
7.4
8.2
9.8

6.5
14.3
17.5
24.6
16.1

2.0
1.9
1.5
1.5
2.2

16.8
23.8
26.4
34.3
28. 1

2.4
3.8
4.8
7.2
5.1

19.2
27.6
31.2
41.5
33.3

7.713
7,631
7.771
8,121
8,853

52,776
53,066
56.506
65,808
72,246

2005 .......... ... .. .....
2006 ...... .............
2007 ....................

11.7
10.9
7.6

15.9
14.0
11.5

2.5
2.5
2.2

30.2
27.5
21.4

5.9
6.2
4.8

36.0
33.7
26.2

8,848
8.886
8.610

78,193
78.638
63,055

1990
1991
1992
1993
1994

. . . .................
.. .......... .. .... ..
.... .. .... .... ......
. ... , ............ ..
.... . ..... .. .... ..

...

9,332
9,358
9,073

Disclosure
repons 2

9,650

NOlO: He re and in all subsequent tables, components may not sum to totals
because of rouodio g, and, except as noted, appli cations exclude requests for
pre·approval that were denied by the lender or were acce pted by the lender but
not acted upon by the borrower. In this article, applications are defined as be·
ing for a loan on a specific propeny; they are thus distinct from requests for
pre·approval. which are not related to a specific propen y.
I. Applications for multifamily homes are included only in the total col·
umns; for 2007 . these applications numbered 54 ,232.

2. A repon covers the mongage lending activity of a lender in a single met·
ropolitan statistical area in which it had an office during the year.
SOURCE: Here and in the subsequent tables and figure except as noted, Fed·
eral Financial Institutions Examination Council , data re poned under the Home
Mortgage Disclosure Act (www.ffiec.govlhmda).

respectively-from 2006 (2006 data not shown in
tables). Lending for both home purchase and refinancing fell as slower house price appreciation and, in
some areas, outright declines in property values
diminished the attractiveness of buying and selling
properties or limited opportunities to refinance outstanding loans. The imposition of tighter underwriting standards, an increase in mortgage interest rates,
and the elimination of some loan products used to
stretch affordability also contributed to the reduction
in lending. Finally, a portion of the decline in lending
activity was due to the nonreporting of loans made by
institutions that reported data for 2006 but discontinued operations during 2007.

affiliates of bank or savings association holding companies that reported data.
In total, 169 institutions that reported 2006 data did
not report data pertaining to 2007 lending activity
(these institutions ceased operations and were not
merged into, or acquired by, another reporting entity).
Some of the institutions that did not report were
high-volume originators. In the aggregate, these nonreporting institutions accounted for about 2.4 million
loans or applications that did not result in a credit
extension, or about 7 percent of all the loan and

Reporting Institutions
For 2007, 8,610 institutions reported under HMDA :
3,910 commercial banks, 929 savings institutions
(savings and loans and savings banks), 2,019 credit
unions, and 1,752 mortgage companies (table 2). In
total, the number of reporting institutions fell about
3 percent from 2006, primarily because of a relatively
large decline in the number of independent mortgage
companies-that is, mortgage companies that were
neither subsidiaries of depository institutions nor

2. DislribUlion of reporter covered by the Home Mortgage
Disclosure Act, by type of in titution. 2006.....07

2006
Type
Number

Percent

2007
I
Number
I Percent
I

Depo.<ilOry ins/i/lI/ion
Commercial bank .....
Savings institution ....
Credit union
All ........... ..

3,900
946
2.036
6.882

43.9
10.6
22 .9
77.4

3,910
929
2.019
6.858

45.4
10.8
23.4
79.7

MOr/guge company
Independent . .... ..
Affiliated'
All ........ . .. .. . . .

1,328
676
2,004

14.9
7.6
22.6

1.124
628
1,752

13.1
7.3
20.3

All institutions .... . . .

8,886

100

8,610

100

I. Subsidiary of a depository institution or an affiliate of a bank holding
company.

Alto

Federal Reserve Bulletin 0 December 2008

application records included in the 2006 HMDA data.
(The effects of such nonreporting on the 2007 data are
discussed in more detail later in the article.)

Di.\positioll of Applications, Loan Types. alld
Activities Related to the Home Ownership
and Equity Protection Act
For purposes of analysis, loan applications and loans
reported under HMDA can be grouped in many ways;
here the analysis focuses on 25 distinct product
categories characterized by loan and property type,
purpose of the loan, and lien and owner-occupancy
status. Each product category contains information on
the number of total and pre-approval applications,
application denials, originated loans, loans with prices
above the reporting thresholds established by Regulation C for identifying higher-priced loans, loans covered by the Home Ownership and Equity Protection
Act (HOEPA), and the mean and median annual
percentage rate (APR) spreads for loans priced above
the reporting thresholds specified in Regulation C
(tables 3 and 4).13 The following sections highlight
some notable aspects of the HMDA data for 2007
and, where relevant, earlier years .
Conventional and Government-Backed Loans
As in earlier years, most reported home loan activity
in 2007 involved conventional loans-that is, nongovernment-backed loans (table 3). Such loans accounted for about 94 percent of all loan extensions in
2007 .
The share of all HMDA-reported loans backed by
the Federal Housing Administration (FHA) had fallen
over the past several years, from about 16 percent in
2000 to less than 3 percent in 2005 and 2006.
More-limited product availability and the imposition
of tighter underwriting standards in the higher-priced
segment of the conventional mortgage market in 2007
encouraged borrowers to take out FHA loans. Also,
toward the latter part of 2007, the FHA created a new
lending program. FHASecure, to help qualified individuals with higher-priced conventional loans refi-

13. HOEPA is implemented by Federal Reserve Board Regulation Z (12 C.F.R. pI. 226). Transition rules governing the reporting of
the expanded HMDA data create problems for assessing the data on
loan pricing. manufactured-home lending. and pre-approvals. The
transition rules had a large influence on the data reported for 2004 and
much smaller effects on the 2005 and 2006 data . In the 2007 data,
transition rules affected only about 2 ,100 applications and 192 loans;
the analyses here exclude those applications and loans when considering data on loan pricing, manufactured-home lending, and preapprovals.

nance into an FHA loan. J4 The number of FHAbacked first-lien loans used to purchase homes or
refinance a home loan increased nearly 20 percent
from 2006, and the FHA's share of all home lending
increased to 4.6 percent in 2007 (data not shown in
tables).15 The sharp curtailment of credit availability
in the subprime portion of the market, recent steps to
increase the maximum loan values that are eligible
for FHA loan insurance, and a newly enacted foreclosure prevention law are likely to result in a higher
incidence of FHA-insured lending in 2008. 16
Loan Size and BOITower Incom
For each loan made, the HMDA data include the
amount borrowed and the incomes of the borrowers
that were relied on in the loan underwriting decision.
The analysis in this section considers four loan categories : (I) conventional loans that met the threshold
for reporting as higher-priced loans under HMDA,
(2) all other conventional loans, (3) FHA-insured
loans, and (4) loans guaranteed by the Department of
Veterans Affairs. The analysis is limited to site-built,
owner-occupied. one- to four-family units, and the
four categories are applied separately to homepurchase loans and to refinancings.
For 2007, about 91 percent of conventional loans
for home purchase and about the same proportion of
such loans for refinancing, whether higher priced or
not, were within the conforming loan-size limits
established for Fannie Mae and Freddie Mac
(table 5). t7 Higher-priced loans tended to be somewhat smaller than others; for example, among conventional home-purchase loans, the mean size of
higher-priced mortgages was $208,000, compared
with $248,000 for others (table 5, memo item).
FHA-insured loans tend to be considerably smaller
than conventional loans; the difference reflects the
relatively low insurance limits of the FHA and the
focus of the program on lower- and middle-income
borrowers who tend to buy more modestly priced
14. See U.S . Department of Housing and Urban Development,
Federal Housing Administration (2007), " Bush Administration to
Help Nearly One-Quarter of a Million Homeowners Refinance, Keep
Their Homes," press release , August 31 , www.hud.gov/news/
release .cfm?content=pr07 -123.cfm.
15. In contrast, the number of reported first -lien home-purchase
loans or refinancings that in volved loans guaranteed by the Department of Veterans Affairs fell about 2 percent from 2006.
16. Housing and Economic Recovery Act of 2008, Pub. L. No .
110-289 (2008).
17. For 2007, the conforming loan-size limit was $417,000 for a
single-unit property, with limits 50 percent higher for properties in
Alaska and Hawaii. Higher limits are also established for two- , three-,
and four-unit properties ; however, because the HMDA data do not
distinguish among properties with fewer than five units, the analysis
here uses the $417,000 limil.

The 2007 HMDA Data

homes. For 2007, the mean size of FHA-insured
home-purchase loans was $142,000.
Borrower incomes differ substantially by loan
product and loan pricing (table 6). Most notably, the
mean income of borrowers with conventional loans,
regardless of loan pricing, was about 72 percent
higher than that of borrowers with FHA-insured loans
(data derived from memo items in table). Among
those obtaining conventional home-purchase mortgages, the mean income of individuals meeting the
conforming loan-size limit established for Fannie
Mae and Freddie Mac was $83,600, versus a mean
income of $293,100 for those exceeding the conforming loan-size limit. Again , among borrowers with
conventional loans, those using higher-priced loans to
purchase a home or to refinance had a mean income
about 20 percent lower than that of borrowers not
paying higher prices.
Non-Owner-Occupant Lendi ng
Part of the strong performance of housing markets
over the first half of this decade was due to the growth
in sales of homes to investors or individuals purchasing second or vacation homes, units collectively
described as "non-owner occupied." HMDA data help
document the role of investors and second-home
buyers in the housing market because the data indicate whether the subject property is intended as the
borrower 's principal dwelling-that is, as an owneroccupied unit. ls
The share of non-owner-occupant lending among
first-lien loans to purchase one- to four-family sitebuilt homes rose in every year between 1996, when it
was 6.4 percent, and 2005, when it reached a high of
17.3 percent (table 7). For 2006, the share fell somewhat, to 16.5 percent, and in 2007 it declined further,
to 14.9 percent. Falling non-owner-occupant lending
likely reflected the reduced incentives for such borrowing as house prices weakened or fell in many
parts of the country and as the imposition of tighter
lending standards for borrowers in this market segment reduced access to credit.
Piggyback Lending

In recent years, so-called piggyback loans emerged as
an important segment of the conventional mortgage
18. An investment property is a non -owner-occupied dwelling that
is intended to be continuously rented. Some non-owner-occupied
units-vacation homes and second homes-are for the primary use of
the owner and thus would not be considered investment properties.
The HMDA data do not , however, distinguish between these two types
of non-owner-occupied dwellings.

AlII

market, particularly regarding loans to purchase
homes. In piggyback lending, borrowers simultaneously recei ve a first-lien mortgage and a junior-lien
(piggyback) loan. The piggyback loan finances the
portion of the purchase price not being financed by
the first mortgage and sometimes any cash payment
that might have been made; the junior-lien loan may
amount to as much as 20 percent of the purchase
price.
Piggyback loans are generally used to reduce the
cost of financing a home purchase. Often, they are
designed to have a first-lien loan that can be financed
at a lower price than a single loan for the total amount
borrowed, such that the gains from the reduced
finance costs on the first-lien loan outweigh the
higher finance costs on the junior-lien loan portion of
the total borrowing. A prime example is the practice
of structuring the first-lien loan to avoid paying for
private mortgage insurance (PMI) (for more information about PMI, see appendix B). Many of these loan
transactions are structured so that the first-lien loan is
eligible for sale to Fannie Mae or Freddie Mac, both
of which require PMI on first-lien loans for amounts
that exceed 80 percent of the value of the property
backing the loan. Another example is the structuring
of the loan transaction so that the first-lien loan can be
more readily securitized in the secondary market.
This practice has been common in the secondary
market for subprime loans. Yet another example
arises when the total amount requested exceeds the
loan-size limits for Fannie Mae and Freddie Mac,
thereby requiring the borrower to pay the higher
interest rate usually charged on jumbo loans. Keeping
the size of the first-lien loan within the amount that
conforms to the loan-size limits of Fannie Mae and
Freddie Mac can possibly result in lower overall
financing costs.
The HMDA data can be used to help document
the extent of piggyback lending over time. However, because not all lenders submit HMDA data,
some of the junior-lien loans that are reported may
not have the corresponding first-lien loan reported,
and some of the first-lien loans that are reported
may not have the associated junior-lien loan reported. Also, some piggyback loans may be home
equity lines of credit (HELOCs) rather than closedend loans. Under the provisions of Regulation C,
lenders need not report HELOCs. Nonetheless, a
loan-matching process can be undertaken to determine which reported junior-lien loans appear to be
associated with a reported first-lien loan. A juniorlien loan was identified as a piggyback to a reported
first-lien loan if both loans (1) were conventional

A 112

Federal Reserve Bulletin 0 December 2008

3. Disposition of applications for hume luans. and origination and pricing of loans. by type of home and type of loan, 2007

Applications

Loans originated

Loans with APR spread above the threshold'
Type of home and loan

Acted upon by lender

Number
submined
N

)

I Number
I Percent
r
denied
denied

Distribution, by percentage points of APR spread

Number
Number

Percent
3-3.99

I 4-4.99 I 5-6.99 I 7-8.99 I

9 or
more

1-4 FAMILY
NONBUSINESS RELATED'

Owner occupied
Site· built
Home purchase
Conventional
First lien . . .. . . .....
Junior lien .... .....
Government backed
First lien .. . . .. . . ....
Junior lien . . . . . . . . .

Refinance
Conventional
First lien .. ........ .
Junior lien ...... . . . .
Government backed
First lien. ..... ....
Junior lien . ... ....
Home improvement
Conventional
First lien .. . ....
..
Junior lien ... . .
..
Governmen t backed
First lien . ... . .... ..
Junior lien ... . . ... ..
Unsecured
(conventional
or government
backed) . . . . . . . . . . . .
Manufactured
Conventional, first lien
Home purchase .. .. . ...
Refinance . . ............
Other ............... .. ..

4,654,084 4,120,941
927 ,255
828,053

783,972
170,231

19.0
20.6

2.928.820
548.567

411.263
118,673

14.0
21.6

49.4

79,818
85

16.2
7.5

392. 157
1,008

11,504
65

2.9
6.4

91.1

3.5

.. .

...

8,550,904 6.920,906 2,758,715
1.408,232 1,228,245 450,348

39.9
36.7

3,391,604
636,443

735, 150
120,854

21.7
19.0

39.1

550,551
1,348

493.260
1,138

. ..

.. .

17.1

26.8
65 .8

6.5
30.0

4.3

1.7
76.9

3.6
18.5

.1
4.6

19.6

33.8
58.0

7.4
32.4

.1
9.5

...

. ..

342,768
710

288,814
527

91,106
151

31. 5
28.7

179,330
3 16

11.893
63

6.6
19.9

92.1

.. .

...

4.3

2.7
65 . 1

.9
31.7

.0
3.2

721 ,417
949,861

627,577
863,800

277,983
341 ,244

44.3
39.5

291 ,043
429,624

87,774
72.114

30.2
16.8

38.8

21.7

.. .

...

30.3
45.3

8.8
32.5

.5
22.2

to,962
3,407

9,614
2,789

2,347
866

24.4
31.1

6,666
1,577

410
1,044

6.2
66.2

59.5

...

22.7
39.8

8.0
31.6

2.2
28.5

347,359

340,661

167,456

49.2

146,395

.. .

...

359,351
146.597
141 ;807

347,819
132,750
127,179

175,3 12
64,384
48,899

50.4
48.5
38.4

94.247
55.069
69,077

57,954
30,880
16,142

61.5
56. 1
23.4

25 .8
29.1
36.0

23 .9
26.2
12.2

31.0
32.9
24.8

13.5
9.8
16.5

5.8
2.0
10.4

908,416
927 ,485
275.273

813,364
799,914
244, 145

167,875
269.634
87,984

20.6
33.7
36.0

564,719
447,071
129,959

112,711
79,204
31 ,73 1

20.0
17.7
24.4

59.4
52.8
15.5

20.0
18.5
7.3

15.6
21.8
45.0

4.5
6.5
21.6

.5
.4
10.6

19.798
27.267
7;156

17.626
24,630
6,867

1.983
2,977
1,074

11 .3
12. 1
15.6

14.863
20,707
5.463

881
1, 112
149

5.9
5.4
2.7

60.5
60.0
28.9

14.5
16.5
11.4

23.7
20.2
45.0

1.0
2.7
12.1

.2
.5
2.7

48,635
43 , 127
15,488

46,057
37.951
13,356

1.991
4,333
1.728

4.3
11.4
12.9

43 ,063
32,401
11 , 164

2,904
2.808
491

6.7
8.7
4.4

44.7
51.1
34.6

23.0
27.9
13.4

11.6
13.2
31.6

15.1
7.5
13.8

5.6
.3
6.5

Z1,389,258 18,331,983 5,952,496

32.5

10,441,353 1,'J07,114

18.3

36.4

15.1

34.1

11.5

2.4

7.6

N Oll-owner occupied 4

Conventional, first lien
Home purchase ... .....
Refinance .......... . ...
Other .... .. . .. . ... .... ..
BUSINESS RELATED'
Conventional , first lien
Home purchase . . ......
Refinance .... . ...... . ..
Other. . .. . . .... . ... . .. 0.
MULTIFAMILY'
Conventional, first lien
Home purchase . .. .. . ..
Refinance . . . . . . ....... .
Other .... ..... ..... ... ..
Total .. .. ..............

... .

NOTE: Excludes lransition-period applications (those submitted before 2004)
and transiti on-period loans (those for which the application was submined before 2004).
I . Annual percentage rate (A PR) spread is the difference between the APR
on the loan and the yield on a comparable-maturity Treasury security. The
threshold for first-lien loans is a spre ad of 3 percentage points; for junior-lien
loans, it is a spread of 5 percentage points.
2. Loans covered by the Home Ownership and Equity Protection Act of
1994 (HOEPA), which does not ap ply to home-purchase loans.

3. Business-re lated applications and loans are those for which the lender reported that the race, ethnicity, and sex of the app licant or co-appticant are "not
applicable"; all other applications and loans are nonbusiness related.
4. Includes applications and loans for which occupancy StatuS was missing.
5. [ncludes business-related and nonbusiness-related applications and loans
for owner-occupied and non-owner-occupied properties.
Not applicable .

loans involving property in the same census tract,
(2) were originated by the same lender with approximately the same dates of loan application and c1os-

lng, and (3) had the same owner-occupancy status
and identical borrower income, race or ethnicity,
and sex.

The 2007 HMDA Data

Al13

3. Dipo ilion of !lpp l ieution~ for home loans. und origination and prici ng of IOUIlS, by type f home and type of loun, 2007-Conlillued

Loans originated

MEMO
Tmnsition-period applications (those submitted before 2004)

Loans wilh APR spread above the threshold'
APR spread (percentage points)

Mean

Median

Number of
HOEPAcovered
loans'

4.5
6.6

4.0
6.3

.. .
..

3.5
6.7

3.2
6.4

.. .

4.8
6.9

4.5
6.6

3.4
6.7

Loans originated
Number
submitted

Number
denied

Percent
denied

Number

Percent with
APR spread
above threshold

Number of
HOEPAcovered
loans'

5.9
9. 1

67
6

6.0
0

...
.. .

0
0

12
0

50.0
0

. ..
.. .

17
I

1.6
4.2

30
4

20.0
25.0

0
0

16
I

2
0

22 .2
0

4
0

25.0
0

0
0

1.214
2,827

3
I

0
0

2
0

0
0

6
6

0
0

5.0
4.8
5.1

...
1.184
810

4
9
4

0
0
0

I
I
I

0
0
0

...

4.2
4.4
6.2

3.8
3.9
5.9

...
156
73

50
94
6

0
3
0

0
5.0
0

II
9
4

0
33.3
50.0

. ..
0
0

4.2
4.3

.. .
I

5
5
I

0
0
0

5
5
I

0
0
0

.. .

5.3

3.7
3.8
5.2

5.0
4.4
5.5

4.2
4.0
5.1

32
I
9

0
0
0

25
I
3

16.0
0
0

.. .

6
2

5.1

4.8

11,504

2,IlS

192

14.1

305
19

10
I

26
0

0
0

3,145
1,951

1,488
36

3.2
6.4

120
0

4.8
7.5

4.5
7.3

4.5
7.5

3.6
7.4

.. .

...

5.5
5. 1
5.6

.. .

Extent afpiggyback lending. The HMDA data show
that lenders extended a substantial number of juniorlien loans to help individuals purchase homes (for
both owner-occupied and non-owner-occupied purposes) in 2005 and 2006 but that such lending
contracted sharply in 2007. 19 For 2005 , lenders
19. A similar matching process was used to idenlify piggyback
loans used for refinancing. HMDA reporting requirements , however,
are less comprehensive for refinance loans, and therefore junior-lien
loans used for refinancing are less likely to be reponed . As a result, we
do not report data on piggyback loan transactions used for refinancing .

2.3

0
0

reported on about 1.37 million junior-lien loans used
to purchase homes; for 2006, they reported on about
1.43 mjllion (data not shown in tables). In 2007,
lenders covered by HMDA reported information on
only about 600,000 junior-lien loans to purchase
homes, a decline of nearly 60 percent from the 2006
level.
Regarding piggyback lending, our matching algorithm indicates that about 12 percent of the 2.9 million 2007 first-lien home-purchase loans on owneroccupied site-built homes for one to four families

A 114

Federal Reserve Bulletin D December 2008

4. Home-purchase lendi ng that began with a reque t for pre-approval: Disp
Requests for pre-approval

~i li on

and pricing, by lype of home, 2007
Applications preceded by requests for pre-approval'

Type of home

Number
denied

Percent
denied

Number
submitted

Number

754,318
95,782

209,478
28,538

27.8
29.8

420,435
54,088

371 ,847
48,760

37.300
5,585

85,606
95

31 ,821
13

37.2
13.7

55.236
84

48,944
72

5,524
4

Manufactured
Conventional , first lien ...... . . . ..
Other ...... . .......... .. .. .. _... .

45,358
6,418

22,802
2,361

50.3
36.8

42,728
4,918

37,831
3,632

20,624
1,094

Non-owner occupied 4
Conventional, first lien ...... .....
Other ............................

69.916
6:040

16,237
1,850

23.2
30.6

48,688
4.637

42,576
4,020

6,639
1,032

3
BUSINESS RELATCo
Conventional, first lien . . .... .... ... .
Other .. .. ................ ...... .. -

1,169
209

131
19

11 .2
9. 1

1,126
202

943
161

102
12

MULTIFAMILY'
Conventional, first lien . . . . ....... .
Other .. .. .. ..... . .. . . .... ..... ..

321
35

109

34.0
2.9

220
34

164
22

23
I

... ....... ..

1,065,267

313,360

29.4

632,396

558,972

77,940

Number acted
upon by lender

I
1-4 FAMILY
RELATEO)
occupied
Site-built
Conventional
First lien .. . . . . . . . . . . . . . . . . . .
Junior lien ....... . .. .. ..... ...
Government backed
First lien .. .. . ... ... ... .. ... ,.
Junior lien ........ . . . .. ... . .. . .

:
I

Acted upon by lender
Number denied

NONBUSINESS

Ow".,

Total ... .. .......... . .

N OTE: Excludes transition-period requests for pre-approval (those submitted
before 2004). See general note to table \.
\. These applications are included in the total of 21,389,258 reported in
table 3.
2. See note I, table 3.
3. Business·related applications and loans are those for which the lender reo
ported that the race , ethnicity, and sex of the applicant or co-applicant are " not
applicable"; all other applications and loans are nonbusiness relaled.

4. Includes applications and loans for which occupancy status was missing.
5. Includes business-related and nonbusiness-related applications and loans
for owner-occupied and non-owner-occupied properties.
. .. Not applicable.

involved a piggyback loan reported by the same
lender, a proportion that was down 45 percent from
2006 (data not shown in tables).

category if three conditions were satisfied: (I) The
first-lien loan in a piggyback loan transaction was not
higher priced, (2) the amount of the first-lien loan was
under the conforming loan-size limit, and (3) the
combined loan amount of the first- and junior-lien
loans exceeded the conforming loan-size limit. For
the first two categories of piggyback loans, the presumption is that the piggyback loan was used to
facilitate sales to Fannie Mae or Freddie Mac. Consequently, in the analysis, we distinguish between loans
that have been sold to Fannie Mae and Freddie Mac
and those that might be sold. The third category of
piggyback loans consists of those that do not appear
eligible to be sold to these two entities because the
first-lien loan is higher-priced or the loan amount
exceeds the conforming loan-size limit. 2o
The analysis indicates that the share of piggyback
loans used to keep the first-lien loan within the

Changing nature of piggyback lending. A comparison of the 2007 HMDA data with the HMDA data for
earlier years suggests that the nature of piggyback
lending has changed. The HMDA data for 2005,
2006, and 2007 can be used to distinguish three types
of piggyback loan arrangements: (1) those likely to be
used as substitutes for PMI, (2) those intended primarily to keep the size of the first-lien loan within the
limits set for loans that Fannie Mae and Freddie Mac
are allowed to purchase in a given year, and (3) those
used for other purposes, most likely to facilitate sale
of the loan to the secondary market.
For purposes of this analysis, piggyback loans were
assumed to be in the first category if two conditions
were satisfied: (1) The first-lien loan in a piggyback
loan transaction was not higher priced, and (2) the
combined loan amount of the first- and junior-lien
loans was less than the conforming loan-size limit.
Piggyback loans were assumed to be in the second

20. Higher-priced loans are generally not eligible for purchase by
Fannie Mae or Freddie Mac. Such loans typically involve elevated
credit risk or have other features that tend to make them ineligible for
purchase by these institutions.

The 2007 HMDA Data

AIlS

4. Home-p urchase lending that began with n request for pre-approval: Disposition and pricing. by type of home , 2007-CmuillLled

MEMO
Applications with transition-period requests for preapproval (request submitted before 2004)

Loan originations whose applications were preceded by requests for pre-approval

Loans with APR spread above the threshold 2
Distribution, by percentage points of APR spread

Number

Percent
3-3.99

4--4.99

5--{j.99

7--S.99

APR spread
(percentaoe points)

Mean
spread

Median
spread

9 or

Loans originated
Number Number
submitted denied

Percent
denied

Percent
with APR
Number
spread
above
threshold

302.513
35.759

19,003
3,609

6.3
10.1

65.5

18.6

12.9
71.9

2.5
21.9

.4
6.2

4.0
6.4

3.6
5.9

7
3

0
0

2
2

0
0

41,437
64

1,357
I

3.3
1.6

74.3

9.7

3.5
100

12.5
0

0
0

4.0
5.3

3.4
5.3

8
0

0
0

7
0

85.7
0

9,754
2,425

6,999
331

71.8
13.6

14.3
73.7

23.2
.3

45.2
6.0

15. 1
19.9

2.1
0

5.6
4.3

5.5
3.3

0
0

31,846
2,209

3.856
405

12.1
18.3

60.6
.2

20.4
0

14.7
52.6

3.7
32.3

.5
14.8

4.2
7.1

3.7
6.8

I
0

0
0

I
0

0
0

803
140

53
12

6.6
8.6

58.5
33.3

17.0
0

15.1
33.3

9.4
25.0

0
8.3

404
5.9

3.8
5.8

I
0

0
0

125
20

13
2

lOA
10.0

76.9
0

7.7
0

7.7
100

7.7
0

0
0

3.9
6.0

3.2
6.0

0
0

427,095

35,641

8.3

48.0

17.1

25.4

8.0

1.5

4.6

4.1

50.0

umulativc distribution

or borne loan

. by loan amount and hy purpose. lype, and pricing of loan. 2007

Percent

Upper bound
of loan amount
(thousands of
dollars) '
24 ... . . .. ... . . . . .. .
49 .. ...... ... .......
74 .. ...... ..... .....
99 . . . . . . . . . . . . . . . . .
124 ....... . .. .. . . ...
t49 ........... . .....
174 . ...... .. .. .. ....
199 .. ...... .. .. .. ...
224 .... . . .... .. .. .. .
249 .......... .. .....
274 .......... . ......
299 ...... .. .. .. .....
324 .... .. .... .... . ..
349 .... ........ . ....
374 .. ...... .. . ......
399 .......... .. .....
417 .. ... .. .. .. .. ....
449 .. .. .. . .. .. .. .. ..
499 .... .. ... . . . . . . . .
549 ....... . .. . ..... .
599 .......... .. .... .
649 .... . .... .. , .... .
699 .. ....... .. ......
749 .. ... .. .. .... ....
799 ............. .. ..
More than 799 . . . . . .

Home purchase

Refinance

Lower
priced

Conventional
Higher
I priced I

Total

.2
1.8
6.3
13.3
23.2
33.5
43.2
51.4
59.1
65.0
70.2
74.3
78.3
81.3
84.0
86.2
90.5
91.2
92.7
94.2
95.2
96.2
96.8
97.3
97.7
t OO

1.0
5.5
15.5
26.4
37.0
47.3
55.6
62.3
68.2
73.1
77.2
80.5
83.4
85.7
87.9
89.8
91.4
92.7
94.6
96.1
97.0
97.8
98.3
98.6
98.8
100

.3
2.3
7.6
15.1
25 .2
35.5
45 .0
53.0
60.4
66.t
71.2
75.2
79.0
81.9
84.5
86.7
90.6
91.4
93.0
94.5
95.5
96.4
97 .0
97.5
97.9
100

.1
2.2
11.3
26.6
42.6
60.6
75.0
85.1
90.9
94.2
96.3
97.7
98.5
99.1
99.7
99.7
99.8
99.9
99.9
100
tOO
tOO
100
100
100
100

2.5
8.8
18.5
32.9
47.8
60.6
7004
78.9
85.0
89.3
92.5
94.9
96.7
98.0
99.5
99.6
99.8
99.9
99.9
100
100
tOO
100
tOO

.7
3.3
8.9
t6.4
25.7
34.5
43.5
51.1
58.5
64.2
69.6
73 .7
77.9
80.9
83 .8
86.1
90.3
91.2
92.9
94.5
95.5
96.5
97.2
97.6
98.0
100

2.3
7.1
16.1
26.2
37.2
47.0
55.8
62.8
69.0
73.9
77.9
81.2
84.1
86.4
88.5
90.1
91.5
92.9
94.9
96.3
97.2
97.9
98.4
98.7
98.9
tOO

1.1
4.1
10.5
18.5
28.2
37.2
46.2
53.7
60.8
66.3
7104
75.3
79.2
82.1
84.8
87.0
90.5
91.6
93.3
94.9
95.9
96.8
97.4
97.8
98.2
100

.1
1.0
6.0
17.3
32.7
50.2
65 .t
76.5
84 .8
89.8
93.4
95 .7
97.3
98.4
99.6
99.7
99 .7
99.8
99.9
100
100
tOO
100
100
100
100

.1
.9
4.7
t3 .5
25.2
40.1
53.0
64.5
74.3
81.7
87.5
91.0
93 .9
95.8
97.5
98.6
99.6
99.8
99.9
99.9
100
100
100
100
100
tOO

247.9
194

207.9
157

242.3
189

t42.3
134

t93.t
t79

243.9
195

203.2
157

235.0
186

160.3
t49

181.7
168

Conventional
FHA

I
.0

Lower
priced

Higher
priced

Total

FHA

VA
I

MEMO
Loan amorml
(thousands
of dollars)

Mean ...............
Median' ...... . .. . . .

NOTE: For definitions of lower- and higher-priced lending, see text note 7.
I. Loan amounts are reported under the Home Mortgage Disclosure Act to
the nearest $1,000.

FHA Federat Housing Administration.
VA Department of Veterans Affairs.

Federal Reserve Bulletin 0 December 2008

All6

6. Cumulative dislribution of home loans, by borrower income and by purpose. type. and pricing of loun. 2007
Percent

Upper bound of
borrower income
(thousands of
dollars)'
24 .. ....... .... . ....
49 .... .... .. .... ... ..
74 ........ .. .. ......
99 ........ . ... ..... .
124 ...... ..... ... . ..
149 ..................
199 ... ......... ... .. .
249 .. ...... .. .. .....
299 .... ........ .....
More than 299 .. .. . ..

Home purchase
Conventional
Lower
priced

Higher
priced

Tot,,1

Refinance
FHA

Lower
priced

Conventional
Higher
I priced I

Total

FHA

2.4
24.2
48.2
65.9
77.4
84.1
91.5
94.7
96.3
100

5.3
35.1
61.0
76.6
85.3
90.0
94.9
96.9
97.8
100

2.8
25.7
49.9
67 .4
78.5
84.9
91.9
95.0
96.5
100

4.6
43.5
78.1
92.4
96.9
98.4
99.3
99.6
99.7
100

.7
28.2
66.3
87.5
95.7
98.5
99.8
99.9
100
100

2.7
22.6
48.2
67.4
79.4
85.9
92.7
95.6
96.9
100

5.1
33.6
61.9
78.9
87 .7
92.0
96. 1
97.6
98.4
100

3.2
25.0
51.2
69.9
81.2
87.3
93 .5
96.0
97.2
100

2.9
34.2
72.2
91.1
97.4
99.0
99.7
99.8
99.8
100

3.6
29.4
65.8
86.4
95.5
98.5
99.6
99.9
99.9
100

105.5

85.5
62

102.8
75

59.8
53

68.3
62

101.3
76

80.6
63

96.8
73

64.2
59

67.7
63

85.7
71

70.5
59

83.6
70

.. .
...

84.5

68.2

80.9
69

.. .

...
. ..

298.1
210

256.3
181

293.1
205

...
.. .

259.1
184

218.2
163

251.2
180

MEMO
Borrower income,
by selected
loan type
(thousands
of doUars)2

All
Mean . ............ .. .
Median' ..... .... ... .

Be/ow Ihe conforming
loan size)
MeaD . ......... .. ....
Median' . . . . . . . . . . .

Above Ihe conforming
loan size"
Mean .... .. .. . . . . ...
Median'

... ...... ...

.. .

. ..

NOTE: For loans with two or more applicants, HMDA·covered lenders report
data 00 only two. Income for two applicants is reported jointly. For definitions
of lower· and higher.priced lending, see text note 7.
I. Income amounts are reponed under HMDA to the nearest $1 ,000.
2. By size, all loans backed by the FHA or VA are conforming.
3. The confOrming loan·size limit established for most loan purchases by
Fannie Mae and Freddie Mac is $417,000. For more information, see text
note 17.

4. Loans above $417,000, the conforming loan-size limit established for
most loan purchases by Fannie Mae and Freddie Mac, are sometimes referred
to as jumbo loans. For more information, see text notes II and 17 .
. Not applicable.
FHA Federal Housing Administration.
VA Depanment of Veterans Affairs.

priced piggyback loans used to keep the first-lien loan
within the conforming loan-size limits increased from
8.8 percent in 2006 to 12.3 percent in 2007 (data
derived from table 8). The number of piggyback loans
sold to Fannie Mae or Freddie Mac that were used to
keep the first-lien loan within the conforming loansize limits also increased from 2006 to 2007-by
some 63 percent-despite a sharp decline in the total
number of piggyback loans over this period. These
results suggest that in 2007 relatively more borrowers
used their piggybacks to take advantage of the lower
rates available on the first-lien portion of their piggyback arrangements than to obtain a needed source of
down payment.
In contrast, the data suggest that the use of piggyback loans as a substitute for PMI declined in 2007
from 2006. This was true of the loans sold to Fannie
Mae and Freddie Mac as well as those that potentially
were eligible for sale. The use of piggyback loans for
purposes that made the loans non-eligible for sale to
Fannie Mae and Freddie Mac also declined significantly. The decrease was most precipitous for higher-

n-owner-occupied lending as a hare of' al l first liens
to purcbase one- to four- family ice-built home. hy
numb r ilntl dollar amount of loan ', 1990-2()07
Pe rcent
Number

Dollar amount

1990 .
1991
1992. . . . . . . . . . . . . . .
1993 .......... ..... .
1994 ........... .....

6.6
5.6
5.2
5.1
5.7

5.9
4.5
4 .0
38
4.3

1995
t996 .. ..... .... ... ..
1997 .. ... .. ..... .. ..
1998 ...... .... ..... .
1999 . .. .... ...... .. .

6.4
6.4
7.0
7.1
7.4

5.0
5.1
5.8
6.0
6.4

2000 .... .. ... .. .. .. .
2001 .... , .... ...... .
2002 ... .... .. ..... ..
. . . . . . . . . ..
2003
2004 ... .. .. ...

8.0
8.6
10.5
11 .9
14.9

7.2
7.6
9.2
10.6
13.1

.... ..... ....

17.3
16.5
14.9

15.7
14.8
13.8

Year

2005

2006 .......... .... ..
2007 ................

conforming loan-size limit increased in 2007 from
2006 and 2005 . For example, the share of lower-

The 2007 HMDA Data

Distribulion of piggyback loan Lransactions in volvi n g home purch ases.

Number

Higher priced .... . . . . . . . ...... ...... . .
Lower priced
Sold /0 Fannie Mae or Freddie Mac
Combined with junior-lien loan
Total is above the conforming
loan size . . . . .... . ...... . ......... .. .
Total is less than or equal to the
conforming loan size . . ... .... .. . . .... . ...
No/ sold /0 Fannie Mae or Fn:cklie Mat'
Above the confonning loan size .......... ....
Less than or equal to the conforming loan size
Combined with junior-lien loon
Total is above the conforming
loan size .......... ........ ....
Total is less than or equal to the
confonning loan size ....... . .... .... .
Total lower priced ....... . . ...... ... . . .
Total .......

... ......... .

2004

Status of first-lien loan

. ... . ..........

Percent

by . talus

2005
Number

of first-lien loan .

Percent

2004-07

2006
Numbo:r

Al17

Percent

2007
Number

Percent

105,463

18.88

535.004

50.90

465.154

43.75

62.461

16.05

4.503

.81

7.691

.73

to.l54

.95

16.546

4.25

55.233

9.89

76.804

7.31

121,821

11.46

103.831

26.68

62.104

11.12

60.666

5.77

57.138

5.37

32,301

8.30

40,725

7.29

43,734

4.16

42.704

4.02

23.761

6.11

290.602

52.02

327.270

31.13

366.306

34.45

150.254

38.61

453.167
558,630

81.12

)(JO

516. 165
1,051,169

49. 10
100

598. 123
1,063,277

56.25
100

326,693
389,154

83 .95
100

NOTE: In piggyback lending. borrowers simultaneously receive a first· lien
loan and a junior-lien (piggyback) loan to purchase a home from the same
lender. For definitions of ltigher- and lower-priced lending, see text note 7; for
explanation of the conforming loan size established for most loan purchases by
Fannie Mae and Freddie Mac. see note 3. table 6; for definition of jumbo
loans. see note 4, tablo 6.

priced first-lien loans, which fell 87 percent. This
development was consistent with, and indeed part of,
the more general mortgage market turmoil in 2007.
Piggyback Lending and mortgage market difficuLties .
Piggyback loans have contributed to the current mortgage market difficulties. As noted, many home purchases financed with piggyback loans were used to
minimize the cash contributions of borrowers toward
the purchase of the property. Because loan arrangements involve little borrower equity at the time of
purchase, if housing prices fall, as they have in many
areas of the country for the past year or so, borrowers
may find that they owe more on their combined firstand junior-lien loans than the value of the property.
Borrowers in these circumstances are much more
likely to default than those with an equity stake in the
property.21
Piggyback loan arrangements also can make it
much more difficult to work out loan difficulties
should borrowers fall behind on their loan payments.
If property values have fallen below the amount owed
on the combined loans, the junior-lien holder often
has little prospect of recovering any money if the
property is sold-either through a short sale or as a
consequence of foreclosure. If the holders of the first-

21. See Ronel Elul (2006), "Residential Mortgage Default," Federal Reserve Bank of Philadelphia, Business Review (Third Quaner),
pp. 21-30; and Kerry D. Yandell (1995), "How Ruthless [s Mortgage
Default? A Review and Synthesis of the Evidence," Journal of
Housing Research, vol. 6 (2), pp. 245-M.

and junior-lien loans are different parties, the interests
of the two loan holders may conflict, and the juniorlien holder may have little interest in working with
the borrower or the holder of the first lien on a short
sale or loan modification unless the first-lien holder
provides the junior-lien holder with some financial
incentive.
Little information is available on the frequency
with which holders of first liens and junior liens
differ. The HMDA data provide an opportunity to
examine the relationships among loan holders in
piggyback loan arrangements, as the data include
information on whether or not a reported loan was
held in portfolio or sold; if the loan was sold, the data
also indicate the type of purchaser.
The analysis here divides lenders into groups based
on the type of originator. The analysis focuses on
piggyback loan transactions in which the first- and
junior-lien loans were used to buy a property and the
dates of the loan originations occurred in the first
10 months of the calendar year. The date restriction
addresses the concern that loan sales may not be
immediate and that originations near the end of the
year that are reported in the data as retained in
portfolio may not be, as at least some of the loan sales
do not occur until the next calendar year. Because the
pattern of loan holding and sale may differ by the
credit risk embedded in the loans, the analysis is
conducted separately for home-purchase transactions
in which the first-lien loan was higher priced (table 9).
For each group, the analysis indicates the proportion of loan originations in which the lender held both

A 118

Federal Reserve Bulleti n 0 December 2008

9. Distribu tion of lower- and higher-priced first-Hcn l oan~ in piggyhack loan lransactionl> involving home purcha
of lender and lien statuS of loan thaI lender held at year-end. 2004-07

Cl>.

by lype

Percent

Lien status of loan
that lender held
at year-end

Type of lender
Depository

Mortgage company
affiliate of
depository

Independent
mortgage
company

Total

Lower-priced first-tien loans involved in piggyback loan transactions
2004
First lien and junior lien ........ . _. .. ... _..... . . .
First lien only .............. .... .... .. ........ .. .
Junior lien only . .. . . ....
. . ..... . .. .
Neither'
Different purchaser type ...... .. .. . . ..... .. . . . .
. . . _...... . .
Same purchaser type
Total .. .......... .. .. ...... ... ..... . .. .. . . ..... .

31.3
29.S
11.5

13.5
21.0
2.S

10.4
5.4
3.5

17.2
15.4
5.S

6.9
20.5
100

32.3
30.4
100

12.7
67.9
100

14.4
47 .3
100

29.7

17.2

53.0

3S.4
33.S
3.2

20.0
25.1
3.5

10.7
2.S
5.2

21.6
17.2
4.2

6.6
IS.O
100

23.2
2S.2
100

12.4
68.9
100

12.5
44.5
100

32.9

IS.7

4S.4

35.7
3S.3
I.S

11.1
21.5
6.1

20.7
5.2
1.9

23.6
19.5
2.S

S.9
15.3
100

35.S
25.5
100

II.S
60.4
100

16.0
3S.1
100

32.9

21.3

45.8

40.9
43.0
.5

7.2
67.2
.4

19.3
11.0
1.3

7.3

12.8
12.4
100

11.7
56.7
100

100

IS.7

29.4

100

MEMO

Percentage of piggyback
loan originations

100

2005
First lien and junior lien ...... .. ... ... ...... .
First lien only ...................... . . .. .. . . .
Junior lien only .......... .. .. . ..... . . .... .... . . .
Neither'
Different purchaser type ...... .. .. .. .... .. ... ..
Same purchaser type . . .
. . .. ....... .
Total .... .. .. . . . . . .... . . ........ . . ......... . . .. ..
MEMO

Percentage of piggyback
loan originations .... . . . ..... .. .. .. . . .. . .

2006
First lien and junior lien ..... ...... . .... . .. .
First lien only .. . . .. .. ... .. .. . .. .. ..... .. .. .. . ..
Junior lien only
. ................ . .. ...... .
Neither'
Different purchaser type . .. .. .. .. . .... .. . . ... ..
Same purchaser type . . . . . .... .. . ............ .
Total . .. . .. . ..... .. . ... . . .. .. .. . .... ....... . . . .. .

100

MEMO

Percentage of piggyback
loan originations

100

2007
First tien and junior lien ........ ........ .. ..
First lien onty ..... .. .. ........... ... .. .... .... ..
Junior lien only .. . ... ... . . ..... ... .... . ... ..... .
Neither'
Different purchaser type .... .. . .. .. ... ....... ..
Same purchaser type ......... . .. . . . .. .. ...... .
Total ... .......... . ........... . . . . .. .. ... .. . ... . .

8.3

100

2S.3
3S.1
.7
9.6
23.3

MEMO

Percentag!' of ~iggyback
loan ongmatlons . . .. .. . . .. . ..... .... . ... . .. . . .

51.9

Higher-priced first-lien loans involved in piggyback loan transactions
2004
First lien and junior lien .. .. . ... ... .. .. .. ..... . . .
First lien only . ........ .... . ............... ..
Junior lien only .. ...... ....... . .. . . .. .. . .
Neither'
Different purchaser type ..... . ... . . ..... ..... ..
Same purchaser type . . . . . . ... .... ... . .. . . .... .
Total ...... . ... ........ . . . . ...... .... . . ... . . . ... .

6.4
3.4
2.2

7.2
2.9
1.7

11.7
7.5
1.5

9.5
5.7
1.7

S.4
79.5
100

42.6
45.7
100

6.3
73.0
100

12.3
70.S
100

2S.7

14.9

56.3

20.7
25.1
1.5

14.7
16.7
1.7

16.5
4.4
4.5

17.1
10.7
3.5

2.4
50.3
100

22.7
44.3
100

14.1
60.5
100

13.1
55.7
100

20.5

16.2

63.3

MEMO

Percentage of piggyback
loan originations .. .... . ..... . .

100

2005
First lien and junior lien ....... . ..... ... .
First lien only .
. . ..... ........ ... ..
Junior lien only . .. .. ....
.. ....... .. .
Neither'
Different purchaser type . . . .... .... ..... . .. . .
Same purchaser type ..
. .. ........ . . .. .
Total .... . . .... .......... .. . .. . . . . .. ... .. . . ..... .
MEMO
Percentag~

?f ~iggyback
loan onglOatlons .. . .. .. .. .... . ... . . ....... ... .

100

The 2007 HMDA Data

A1l9

or lower- and highcr-pn ed lirst-lien loan ' in piggyback loan lransacti ons involving home purchases. by type
of lender and lie n status of loan that lender held at year-end. 2004-07- onrirltled

9. Distrihulion
Percent

Lien status of loan
that lender he Id
at year-end

Type of lender
Depository

Mongage company
affiliate of
depository

Independent

mongage
company

2006
First lien and junior lien ..... ........... . . .. .. .. .
First lien only .. ....... . . . .. ........ . . .
Junior lien only . .... .... ..... . . ...... . .. .. .. . .. .
Neither'
Different purchaser type .. ..... . . .. . . . . . .... .. .
Same purchaser type
..... . . . . . . ... ... .. .
Total .. . ........ .. .. ......... . .. ... . . ... .... ... . .

Total
I

15. 1
10.5
.9

9.8
2 1.5
2.6

13.9
6.4
1.7

13.3
10.6
1.7

6.2
67.2
100

10.0
56.1
100

12.5
65.5
100

10.5
63.9
100

23.2

21.6

55.2

60.2
12.5
1.8

64.2
8.0
1.7

28.0
2.7
4.5

52.6
8.0
2.5

7.0
18.5
100

.7
25.4
100

5.4
59.5
100

4. 1
32.7
100

33.3

38.5

28.2

M EMO

Percentage of piggyback
loan originations . . ... . ... ... . . . .. .... ... . . .. . .
2007
First liell and junior lien .. .. .. .... . ..... . .. .. ... .
First lien only
Junior lien only ...... .
Neither '
Different purchaser type . . ... .... ...... .... .. . .
Same purchaser type .. ... .
. . . . ....... ..... .
Total ........... .... ..

100

M EMO

Percentage of piggyback
loan originations .... . ... . .. . . ... ... . ... .. . ... .

100

To!..1

2004
First lien and junior lien . . . ... .. .. .. .. .. ... ..... .
First lien only . .... ' " .... ......... ........ .. .. ..
Junior lien only . . .. ... ... . . . .... . . . .. . ..... .. .. .
Neither'
Different purchaser type . . ......... .. .. . . .. . . . .
Same purchaser type .. ..... . . .... ..
Total ... ...... ........ .. . ... .... ..... .. . .. .. .... .

27 .7
26.0
10.2

12.7
18.6
2.7

10.6
5.7
3.2

16.0
13.9
5.2

7.2
29.0
100

.\3.6
32.4
100

11 .7
68.7
100

14.1
50.8
100

29.6

16.9

53.5

31.4
30.4
2.6
93 .9

17.5
21.1
2.6
58.1

14.1
3.8
4.8
76.2

19.3
13.8
3.8
36.9

5.0
30.7

23.0
35.9

13.4
64.0

12.8
50.3

26.6

17.4

56.0

28.3
28.3
1.5

10.5
21.5
4.5

17.4
5.8
1.8

19.0
15.6
2.3

7.9
33.9
100

243
39.2
100

12. 1
62.9
100

13.5
49.5
100

28.6

21.5

49.9

43.2
39.4
.6

24 .0
49.7
.8

20.7
9.6
1.8

32.4
33.0
1.0

7.3
9.5
100

9.2
16.3
100

10.7
57.2
100

8.7
24.9
100

48.8

22.0

29.2

M EMO

Percentage of piggyback
loan originations ..... . . . ... .... . .... .... .. .. ..

100

2005
First lien and junior lien
.. .... .. ..... . . . .... .. .
First lien only .......... ..
Junior lien only .... .. ............ ... .. ... .. .... .
Neither'
Different purchaser type
Same purchaser type .. .. . . . . . . ... .. .. . .. ..
To!.'I . . ...... .... . . . . .... .. . .. . .. . . ........ .. .
M EMO

Percentage of piggyback
loan originations

100

2006
First lien and junior lien ... .. ....... . . . ... . .. . . ..
First lien only .. . .... ..... . ..... . ... . .... ....... .
Junior lien only . .. ..... . ..... .. ....... .. ... . .. ..
Neither'
Different purchaser type . . . . . . ... ....... .. . . .
Same purchaser type . . . . .. . ................ .. .
Total .. . . . .. .. ........ . . . ...... ... .. .... .. .. .... .
M EMO

Percentage of piggyback
lonn originations ................. ...... . . . . . . .

100

2007
First lien and junior lien .. . ... . . .. .. ..... . . .. . .. .
. ........ .. ..... ... .. .
First lien only ..
Junior lien only ... . . . . . .... .... ... . .. .
Neither'
Different purchaser type .. . .. .. . .. .. ... .. ..... .
Snme purchaser type .. . . .
Total ...... ... . .... ...... .
M EMO

Percentage of piggyback
10.1n originations

NOTE: For defi nition of piggyback le nding, see note to table 8; for defini·
tions of lower· and higher-priced lending, see text note 7.
I. For purchaser types, see appendix A in the text.

100

A 120

Federal Reserve Bulletin 0 December 2008

the first-lien loan and the piggyback loan at the end of
the year or the incidence in which the loan holders
differed. The following three lender categories are
considered: (1) depository institutions, (2) mortgage
company affiliates of depositories, and (3) independent mortgage companies. The analysis examines
loan originations from 2004 through 2007 (excluding
originations from the final two months of each year).
The analysis focuses on these four years because data
on lien status were not included in the HMDA data
for the years before 2004.
As mentioned earlier, the mortgage market turmoil
that deepened greatly during 2007 affected many
aspects of the market, including the market for piggyback loans. The HMDA data reflect these events.
Regarding piggyback lending patterns, relationships
found in 2004, 2005, and 2006 are in some respects
similar to, but in others notably different from , relationships found in 2007. For example, independent
mortgage companies were a significant source of
piggyback credit until 2007. Before 2007, independent mortgage companies extended between 46 percent and 53 percent of the lower-priced piggyback
loans and , depending on the year, between 55 percent
and 63 percent of the higher-priced piggyback loans.
From 2004 to 2006, depository institutions accounted
for about 30 percent of the lower-priced piggyback
loans and about 20 percent to more than 28 percent of
the higher-priced piggyback loans. In 2007, the
depositories accounted for a much larger share of the
piggyback loans that were reported-about 52 percent of such loans that were lower priced and about
33 percent of those that were higher priced.
The HMDA data indicate that in most piggyback
loan transactions one or both loans were sold by the
lender. Overall, for loans originated in 2004, 2005, or
2006, both loans in higher-priced piggyback transactions were held in portfolio less than 20 percent of the
time. For lower-priced piggyback transactions, both
loans were held in portfolio somewhat more often.
The experience in 2007 was different, particularly
regarding piggyback transactions in which the firstlien loan was higher priced: Here, in more than
one-half of the transactions , both loans were held in
the originating institutions' portfolios. The relati vely
low incidence of piggyback loan holding for loans
originated before 2007 means that for those loan
transactions in which defaults occur, loss mitigation
problems are likely to be more difficult.
Patterns of loan holding or sale differ some by
originator. For each of the years considered, depository institutions were more likely than independent
mortgage companies to hold in portfolio both loans in

a piggyback loan transaction. For example, in 2006,
depositories held both loans in lower-priced piggyback transactions about 36 percent of the time; independent mortgage companies held both loans about
21 percent of the time. Al so, in 2006, depositories
were more likely than other originators to hold in
portfolio both loans in a piggyback transaction when
the first-lien loan was higher priced. In 2007, the
likelihood of a depository's holding both loans in
portfolio when the first-lien loan was higher priced
increased substantially, from about 15 percent of the
transactions in 2006 to about 60 percent. Mortgage
company affiliates of depositories also experienced a
similar substantial increase in the incidence of holding both loans in a piggyback transaction involving
higher-priced first-lien loans: The incidence rose from
10 percent in 2006 to 64 percent in 2007.

Loans Covered by HOEPA
Under HOEPA , certain types of mortgage loans that
have rates or fees above specified levels require
additional disclosures to consumers and are subject to
various restrictions on loan terms. Under the 2002
revisions to Regulation C, the expanded HMDA data
include a code to identify whether a loan is subject to
the protections of HOEPA.22
Before the release of the 2004 data, little information was publicly available about the extent of
HOEPA-related lending or the number or types of
institutions involved in that activity.23 For 2007,
roughly 1,050 lenders reported extending about 11,500
loans covered by HOEPA (data not shown in tables).
Only II lenders made 100 or more HOEPA loans, and
most lenders did not report any such loans (data not
shown in tables). In the aggregate, HOEPA-related
lending accounts for a very small proportion of the
mortgage market: HOEPA loans made up less than
0 .2 percent of all the originations of home-secured
refinancings and home-improvement loans reported
for 2007 (data derived from table 3) .24

22. This reporting requirement relates to whether the loan is subject
to the original protections of HOEPA, as determined by the coverage
test in the Federal Reserve Board' s Regulation Z. 12 C.F.R. pI.
226.32(a). The required reporting is not triggered by the more recently
adopted protections for "higher-priced mortgage loans" under Regulation Z . notwithstanding that those protections were adopted under
authority given to the Board by HOEPA . See 73 Federal Register
44522 (July 30. 2008).
23. Although the expanded HMDA data provide important new
information. the data do not capture all HOEPA-related lending. Some
HOEPA loans are extended by institutions not covered by HMDA. and
some HOEPA loans made by HMDA-covered institutions are not
reported under Regulation C. which implements HMDA. The extent of
HOEPA-related lending not reported under HMDA is unknown .
24. HOEPA does not apply to home-purchase loans .

The 2007 HMDA Data

A 121

The 2007 HMDA Data on Loan Pri ing

Incide1lce of Higher-Priced Lending

The following sections assess the loan-pricing information in the 2007 HMDA data. The analysis considers changes in the incidence of higher-priced lending ,
APR spreads paid on loans above the price-reporting
thresholds, and a description of the institutions involved in higher-priced lending.

As in earlier years, most loans reported in 2007 were
not higher priced as defined under Regulation e.
Among all the HMDA-reported loans, 18.3 percent
were higher priced in 2007, down significantly from
28.7 percent in 2006 (data for 2007 shown in table 3;
data for 2006 not shown). The incidence of higherpriced lending fell or was little changed across all
loan product categories.
A number of factors account for the decline in the
incidence of higher-priced lending as measured in the
HMDA data. After increasing mildly in the first part
of 2007, interest rates generally fell during the
remainder of 2007 and ended the year well below the
initial levels; the decrease likely contributed to the
observed decline from 2006 in the incidence of
higher-priced loans reported in 2007 . Previous analyses of changing patterns in the reported incidence of
higher-priced lending from 2004 through 2005 found
that increases in short-term interest rates relative to
longer-term rates help explain a portion of the increase over the period in the incidence of higherpriced lending, as more higher-risk adjustable-rate
loans moved above the HMDA price-reporting thresh01ds. 25 From 2006 to 2007 , the pattern reversed as
short-term rates fell more than longer-term rates,
which suggests that some higher-risk adjustable-rate
loans likely fell below the HMDA price-reporting
thresholds . However, given the magnitude of the
difficulties in the mortgage and housing markets, it
seems very likely that changes in lender and investor
circumstances and risk tolerances, changes in borrower conditions and preferences, and nonreporting
by certain lenders explain most of the reported decline
in the incidence of higher-priced lending. 26

Factors That Influence Higher-Priced
Lending
The reported incidence of higher-priced lending under
HMDA can be affected by three broad factors (to be
explained shortly) that are related to mortgage market
conditions and the general economic environment
prevailing in a given year. In addition, the extent of
nonreporting by lenders that cease operations during,
or shortly after the end of, a calendar year can
influence the incidence of higher-priced lending.
The three broad, market-environment-related factors that influence the incidence of higher-priced
lending are (1) changes in the interest rate environment, particularly changes in short-term rates relative
to longer-term rates; (2) changes in the business
practices of mortgage lenders and investors, particularly in the array of products offered and the willingness or ability of the parties to bear credit risk (for
example, the willingness to offer loans with high
loan-to-value ratios or adjustable-rate loans with initial discounted interest rates); and (3) changes in the
borrowing practices and perceptions of consumers
(such as changes in preferences for investment properties or in perceptions of future house price movements) or in consumers' credit-risk profiles (for
example, changes in the distribution of credit risks for
those seeking and obtaining loans).
Aside from the effects that these broad economic
factors may have on the incidence of higher-priced
lending, changes in the number, size, and product
offerings of reporters can matter. Of particular import
for users of the HMDA data are the effects on the
incidence of higher-priced lending of lenders that
extended loans during a portion of 2007 but ceased
operations during that year or in early 2008 and,
consequently, did not report any data to the FFIEe. In
most years, nonreporting has little effect on the
HMDA data overall or on any particular aspect of the
data. But, as discussed later, it has a significant
influence on the 2007 data because the institutions
that ceased operations were generally focused on
higher-priced loans, and some of these lenders extended large numbers of such loans in previous years.

Rate Spreads for Higher-Prj ed Lending
Most higher-priced loans have APR spreads within
1 or 2 percentage points of the HMDA reporting
thresholds. For example, for higher-priced conventional first-lien loans for owner-occupied site-built
25 . See Avery, Brevoort, and Canner, "Higher-Priced Home Lending and the 2005 HMDA Data."
26 . Some of the change in lender behavior may stem from
regulatory guidance provided by the bank regulatory agencies to
banking institutions regarding their subprime and nontraditional lending activities. See Board of Governors of the Federal Reserve
System (2007), "Federal Financial Regulatory Agencies Issue Final
Statement on Subprime Mortgage Lending," press release, June 29,
www.federalreserve.gov/newsevents/press/bcregl20070629a.htm ; and
Board of Governors of the Federal Reserve System (2006), "Federal
Financial Regulatory Agencies Issue Final Guidance on Nontraditional Mortgage Product Risks," press release , September 29,
www.federalreserve.gov/newsevents/press/bcregl20060929a.htm .

A122

Federal Reserve Bulletin 0 December 2008

homes, two-thirds of the loans have spreads within
2 percentage points ofthe reporting threshold (table 3).
As in earlier years, only a relatively small proportion of first-lien loans have very large spreads7 percentage points or more. Similarly, only a relatively small proportion of junior-lien loans have
spreads of 9 percentage points or more.

sis finds that 243 of the 987 lenders reporting at least
100 higher-priced loans, or about 3 percent of all
reporting institutions, might be classified as specialists (data not shown in tables). These specialized
lenders accounted for nearly 40 percent of all the
higher-priced lending reported in the 2007 HMDA
data .

Lenders and Higher-Priced Lending
TURMOIL IN MORTGAGE MARKETS AND
Most institutions covered by HMDA do little or no
higher-priced lending. For 2007, 56 percent of the
8,610 reporting institutions extended fewer than 10
higher-priced loans, and 33 percent of them originated no higher-priced loans (table 10). At the other
end of the spectrum, nearly 1,000 lenders reported
making at least 100 higher-priced loans, and these
institutions accounted for 94 percent of all such loans.
The share of higher-priced lending attributable to the
10 lenders with the largest volume of higher-priced
loans dropped from 59 percent in 2005 to 35 percent
in 2006 and then to 31 percent in 2007 (data not
shown in table) .

COVERAGE OF THE

2007 HMDA DATA

Excluding government-backed lending, the HMDA
data for 2007 show a substantial decline in mortgage
lending activity from 2006 in all segments of the
market. These declines are apparent whether the
metric used to measure lending activity is loan applications, loan originations, loan purpose or type, or
lending categorized by loan pricing . The HMDA data
can be used to gauge the changes in lending activity
by type of lender, population group, and geographies
sorted along a number of dimensions , including
demographic characteristics or measures of housing
and mortgage market conditions.

Higher-Priced Lending Specialists
Another way to assess the higher-priced lending
market is to examine the extent to which institutions
that originate higher-priced loans may be consjdered
"specialists" in that acti vity-that is, institutions that
have a large proportion of their lending in the higherpriced category. Such spec ialized institutions can
have a business orientation that is quite different from
that of other lenders. For example, many of these
institutions hold relati vely few loans in portfolio and
rely greatly on their ability to sell loans to the
secondary market.
Taking 60 percent of loan originations as a benchmark for defining higher-priced specialists, the analy10. Higher-priced lending: Distribution by number of
higher-priced loans e .tended and by the number and
percenl of HMDA reporter' and higher-priced loans.

2007
Number of
higher-priced
loans e~lended

o ... .. ..... ... ....

HMDA reponers
Number

1-4 . .. ......... ...
5-9 ...
10-24 ...
25-49 .... ...
50-99 .... . .. .. .. ..
100 or more ...... .

2,804
1,282
726
1,212
881
718
987

..... ........

8,610

Total

Percent
32.6
14.9
8.4
14.1
10.2
8.3
11.5

100

I
I

Higher-priced loans
Number

0
2.788
4;925
19,425
31,127
50,742
1,798,767
1,907,774

Non;;: For definition of higher-priced lending, see te xt note 7.
HMDA Home Mortgage Disclosure Act of 1975.

Percent
.0
.1
.3
1.0
1.6
2.7
94.3

The Effects of Lenders That Ceased
Opera/ion
As noted earlier, an issue when using the 2007
HMDA data is that some lenders ceased operations
partway through 2007, yet none of their lending
activity is included in the 2007 data because they
did not report. As part of the HMDA data collection
effort, staff members of the Federal Reserve Board
track each financ ial institution that is expected to
report (including all lenders that reported data for
the previous calendar year) and contact, or attempt
to contact, those that did not submit a report.27 In
some cases, nonreporting is due to a cessation of
business; in others, it is the result of a merger,
acquisition, or consolidation . When a merger, acquisition, or consolid ation occurs, all lending by the
institutions covered by HMDA in that year is reported by the surviving entity; only when an institution goes out of business is the volume of reported
loans possibly affected. In some cases, a business
closure does not compromise the completeness of
the HMDA data because some of the closed institutions report lending activity for the portion of the
year in which they extended loans .

100

27. Sometimes contacting a non reporting lender is impossible
because the firm has ceased operations.

The 2007 HMDA Data

M easuring the A Li vil Y of No nreporter
The Federal Reserve's respondent tracking report
records what happened to each institution that failed
to report. For institutions that ceased operations, the
tracking report also records, to the extent possible, the
month that operations were discontinued. The tracking report indicates that 169 institutions that reported
HMDA data for 2006 ceased operations during 2007
(or the very end of 2006) and did not report lending
activity for 2007 (for a list of the institutions that
ceased operations and did not report, see appendix
table A.l, which has been posted separately as an
Excel file).28 Of these institutions, two were subsidiaries of banking institutions, and the remainder were
independent mortgage companies. (All other lenders
that ceased operations in 2007 either reported data for
2007 or were merged or acquired, and their 2007
lending activity was reported by the surviving entity.)
It appears impossible to know how many loans
these 169 institutions originated in 2007 before discontinuing operations. To help gauge their potential
importance, an analysis of the lending activity of
these institutions as recorded in the 2006 HMDA data
was undertaken. Specifically, the 2006 HMDA data
were reaggregated to exclude the lenders that ceased
operations and did not report in 2007. Although many
of these lenders extended relatively few loans (30 percent of the lenders extended fewer than 250 conventional first-lien loans for site-built properties in 2006),
a few were among the nation's leading lenders in
2006. Moreover, some of these institutions were
particularly active in the higher-priced segment of the
home-purchase or refinance market. In the aggregate,
these companies accounted for nearly 15 percent of
the higher-priced conventional first-lien loans for
site-built properties reported in 2006, and they accounted for about 8 percent of all conventional firstlien loans for such properties (data not shown in
tables).29
Time Pattern of Le nding Ac li vily
The dates of loan origination reported in the HMDA
data can be used to review the pattern of monthly loan
extensions over the course of 2006 and 2007 to help
distinguish the effects of the mortgage market turmoil
on reported loan activity from the effects of closed
lenders not reporting 2007 activity. For this analysis,

28. The list of lenders that ceased operations and did not report is as
comprehensive as possible at this time . If additional information
becomes available, the list will be updated .
29. Calculations exclude home-improvement loans and businessrelated loans .

A123

we focus on home-purchase and refinance lending for
site-built properties. The volume of home-purchase
originations peaked in June 2006 and declined over
the rest of the year (figure 1). The pattern for refinancings was less consistent, as monthly originations
varied over the course of the year, with high points
reached in both March and October 2006.
Data for 2007 show a substantial falloff in activity
from December 2006. The abrupt decline from December 2006 to January 2007 is likely a result of a
combination of nonreporting by the 169 institutions
that ceased operations and the mortgage and housing
market turmoil in 2007 that caused most lenders to
reduce origination activity. Among home-purchase
loans, the greatest falloff in reported activity was in
the higher-priced segment, in which originations
dropped some 32 percent from December 2006 to
January 2007. Overall, home-purchase lending fell
I.

V olum\! of home-purchase and refinance It1an
original..:d: H igher- and lower-priced loans. and . uch
loans excluding those ori gi nated by closed lenders, hy
month
origi nation, 2006-07

Lower priced ((ho"sands of loans)

Home purchase
-

400

300

200

150

1011 -

50 100

I I "

IJIl:her prltro (U"""""dJ, or 100.

)

I I

Lower priced (thousands of loa~)

Refinance

200

150 - ~

300

200

100

Lower priced*

IflO

511

NOTE: The data are monihly. Loans are convenlional first-lien mortgages
for site-buill properties and exclude business loaos. Closed lenders are
lenders thai reported data for 2006 under the Home Mortgage Disclosure Act
(HMDA) but that subsequently ceased operations and did not report HMDA
data for 2007. For definitions of higher- and lower-priced loans, see text
note 7.
* Excluding loans originated by closed lenders.

A 124

Federal Reserve Bulletin 0 December 2008

27 percent over this period. A similar pattern was
found for refinancings.
To better evaluate the effects of nonreporting on
loan volumes in the early part of 2007, the loans of
the 169 lenders th at ceased operations and did not
report were re moved from the total loan volumes
reflected in the 2006 HMDA data. Excluding these
lenders reduces by about 25 percent the differences in
the level of home-purchase (and refinance) lending
reported between the end of 2006 and January 2007.
The reduction is larger for the higher-priced loan
segment (about 42 percent), a finding that reflects the
greater focus of these institutions on that segment of
the market. The fact that a large drop in lending
activity is still observed after removing from the 2006
data the institutions that ceased operations indicates

that most of the decline in reported lending from 2006
to 2007 was due to the effects of the market turmoil
and not nonreporting.

Higher-Priced Lending by Lender Typ
Lending activity can be described by type o f lender.
Four groups of lenders are considered here: depository institutions and three types of mortgage
companies-namely, independents, direct subsidiaries of depository institutions, and affiliates of deposi tory institutions. In 2004 and 2005 . independent
mortgage companies originated about one-half of the
higher-priced conventional first-lien loans related to
site-built homes and about 30 percent of all conventional first-lien loans (table II ). Depository institutions extended about one-fourth of the higher-priced

I I . Oi tribuli on of higher-priced lending. by lype of lender, Jnd incidence at each type of lemler. 2004-07
Percen! except as noted

Higher.priced loans

Type of lender
Number

Distribution

Incidence

MEMO: All loans

Number

Distribution

2004
Independent mongage company . . ..... ...
Depository .. . . .......... . . .. .... . . . . . .. .
Subsidiary of depository ....... ... .......
Affiliate of depository ......... . . ..... . . .
Total ... ..... . . . . ...... . .... . . . . . . . .

789,337
403 .661
179;375
187.296
1.559,669

50.6
25.9
11.5
12.0
100

Independen! mongage company . .. .... ...
Deposi tory ., . ... .. . .. . . . . ... .. . ..........
Subsidiary of depository ... . ... ... ..... ..
Affiliate of depository . . . . . . . . . . .....
Total ............... . .......... .......

1,525,424
670,024
381 .228
357,689
2.934,365

52.0
22.8
13.0
12.2
100

25.5
8.0
9.0
18.6
14.0

3,093,777
5,017,334
1,993,212
1.006,481
11,110,804

27.8
45 .2
17.9
9.1
100

3.684,489
5,2 17,810
1,842,652
1.157.421
11.902.372

31.0
43.8
15.5
9.7
100

2005

41.4
12.8
20.7
30.9
24.7

2006
Independent mOrlgage company ...........
Depository ......................... .. ....
Subsidiary of depository .... . ....... .. ....
Affiliate of depository ....... .... .. .. .....
Total ........... . . ........ .. . ..........

1,280,987
800,421
346,882
377,286
2,805,576

45 .7
28.5
12.4
13.4
100

41.5
18.7
22.9
37.9
28.4

3,083,947
4,285,896
1.517,564
996,614
9.884.021

31.2

43.4

15.4
10. 1
100

I
2006 (excluding loans by closed lenders)
Independent mOrlgage company .... . . .. . . .
Depository ...... . . .. . .... . .... . . . . . . . . .
Subsidiary of depository ........... .. .... .
Affiliate of depository .. . , . . . . . . . . . . . . . .
Total ..... .. ........ .. ......... .. ... ..

880.927
800,421
338,758
377,286
2,397.392

36.7
33.4
14.1
15.7
100

Independent mongage company . ...•......
Depository .. .... ... . ..... .. ...... . ... . . ..
Subsidiary of depository ... . . . .. . .. . . . ....
Affiliate of depository ...... .. .. .. .. ......
Total .. ..... . .......... ...... ....... ..

292,571
654,176
229,340
252,739
1,428,826

20.5
45 .8
16. 1
17.7
100

37 .6
18.7
22.5
37 .9
26.3

2.341 ,193
4.285.896
1,508.23 1
996,614
9, 131 ,934

25.6
46.9
16.5
10.9
100

1.453,385
4,408,656
1,158,064
622,571
7.642,676

19.0
57.7
15.2
8.1
100

2007

NOTE: Conventional first·lien mongages for site-built propenies ; excludes
business loans . For defi nition of higher-priced lending. see te xt note 7.

20. 1
14.8
19.8
40.6
18.7

L Closed lenders are lender.; that reponed dala for 2006 under the Home
Mongage Di sclosure Act (HMDA) but that subsequently ceased operations and
did nol repon HMDA data for 2007.

The 2007 HMDA Data

loans and about 45 percent of all loans. The HMDA
data for 2006 show that independent mortgage companies accounted for a somewhat smaller share of the
higher-priced loan market (but a nearly equivalent
share of the entire market): In that year, these companies extended 46 percent of the higher-priced loans
and 31 percent of all loans.
As noted earlier, in 2007, turmoil in the subprime
mortgage sector caused a number of lenders to cease
operations, curtail their activities, or transfer their
business to others; all but two of the institutions that
ceased operations were independent mortgage companies. The HMDA data portray the diminished role of
independent mortgage companies in the homelending market: In 2007, these companies originated
21 percent of the reported higher-priced loans and
19 percent of all loans.
The reduced role of the independent mortgage
companies in the 2007 HMDA data is due partly to
some of these lenders ceasing operations and partly to
a curtailment of activity among surviving institutions
of this type. Because the independent mortgage companies that ceased operations in 2007 did not report
any activity, it is impossible to determine the magnitude of their lending in 2007. To help gauge their
potential importance, the 2006 HMDA data were
re-aggregated to exclude the independent mortgage
companies that ceased operations during 2007 and
did not report. Excluding these closed institutions
reduces by some 31 percent the number of higherpriced loans originated by lenders in the independent
mortgage company category in 2006 and raises by
between about 14 percent and 17 percent the share of
higher-priced lending accounted for by the other
types of lenders in that year (data deri ved from
table 11).
In the 2007 HMDA data, depository institutions are
the leading providers of higher-priced loans . In part,
this finding is a reflection of the sharp reduction in
lending by independent mortgage companies (both
those that continued to operate throughout 2007 and
those that closed and did not report). The increased
role of depository institutions in the higher-priced
segment of the market is not an indication of expanded lending; the number of higher-priced loans
that depository institutions extended in 2007 was
some 18 percent below the corresponding total for
2006. Rather, the increased role of such institutions
reflects the large contraction in activity of other
institutions in this part of the market.

AI25

2006 Lending Profile f the 169 Clo ed
Institutions That Did Not Report
One way to learn about the activities of the institutions that ceased operations in 2007 and did not report
data is to examine the nature of their lending activities in 2006 and to compare it with the lending of the
other reporting institutions for that year. For the
analysis, lending activities are described by a wide
range of borrower, location, and loan characteristics
and by local housing or mortgage market conditions
(table 12).
The analysis identifies many differences between
the lending activities of the 169 institutions in 2006
and those of the other HMDA reporters. Most striking
is the much higher incidence of higher-priced lending
for the 169 institutions than for the other reporters.
This difference is revealed in the profile of lending
arrayed by either borrower income or by race or
ethnicity of the borrower. For all income categories,
the incidence of higher-priced lending for the 169
institutions is about double the rate for the other
HMDA reporters. Also striking is the very high
incidence of higher-priced lending for blacks (74 percent) and Hispanic whites (63 percent) among the 169
lenders. Regarding their overall lending, the 169
lenders extended a higher share of their loans to
blacks and Hispanic whites than the other HMDA
reporters, and they also extended a higher share of
loans to borrowers in census tracts with larger fractions of minority populations or lower incomes.
In 2006, the 169 institutions tended to extend
somewhat larger loans and nearly double the share of
piggyback loans. The loans they originated also were
more likely to be for properties in the western region
of the country and in metropolitan areas that experienced greater recent declines in home values and
greater increases in mortgage delinquencies.

Changes in Lending Activity b.v Borrower
and Ceo mphy
The HMDA data can be used to track changes in
mortgage market activity between 2006 and 2007.
Over this period, the mortgage market transitioned
from one characterized by a relatively high incidence
of higher-priced lending and of mortgage loan sales to
one with a substantially lower share of both higherpriced lending and loans sold to the secondary mar-

Federal Reserve Bulletin 0 December 2008

A126

12. Distribulion of all loans and of lower- and higher-priced loans. ant! inciden ~ of lowcr- and higher-priced lending. for the
169 closed lenders and for all other lender. . by characlt'rislic of horrowcr and nr loan and by localion of property. 2006
Percent
Closed lenders
Characteristic and slatus

All loans

Lower-priced loans

Higher-priced loans

All loans

All other lenders
Lower-priced loans

Higher-priced loans

Distribution IDistribution Ilncidence I IDistribution I Incidence I Distribution IDistribution I Incidence I IDistribution I Incidence I
BORROWF.R
Income ralio (percent of urell
mediunf
Lower ..... .... ... .. .. . ...

12.1
9.0
70.5
S.4
100

11.2
7.5
70.3
11.1
100

45.2
40.7
4S.6
64.2
4S.S

12.9
10.4
70.S
5.9
100

54.8
59.3
51.4
35.8
51.2

14.5
10.6
69.0
5.9
100

14.4
10.4
69.3
6.0
100

72.7
71.8
73.6
74.7
73.3

14.9
11.2
68 .3
5 .6
100

27.3
28.2
26.4
25.3
26.7

16.7
22.1
4.3
56.9
100

9.5
I7.S
5.2
67.5
100

26.1
36.6
55.1
54.1
45.6

22.7
25 .S
3.5
4S.0
100

73.9
63.4
44.9
45.9
54.4

9.7
14.6
4.5
71.2
100

6.5
12.5
5. 1
76.0
100

49.3
63 .0
83.4
78.9
73 .9

18.9
20.7
2.9
57.5
100

50.7
37.0
16.6
21.1
26. 1

31.1
40.0
28.8
100

27 .7
36.7
35.7
100

40.4
41.7
56.3
45.5

34.0
42.9
23.1
100

59.6
58.3
43.7
54.5

24.8
33.0
42.2
100

23.2
30.7
46.0
100

68 .9
68.4
80.2
73.5

29. 1
39.4
31.5
100

31.1
31.6
19.8
26.5

15.3
49.0
35.7
100

8.7
50.4
40.9
100

26.3
47.3
52.7
46.0

20.8
47.9
31.3
100

73.7
52.7
47.3
54.0

20.5
48.0
31.5
100

17.8
48.5
33.7
100

63 .6
74.2
78.3
73.3

28.0
46.4
25 .6
100

36.4
25.8
21.7
26.7

85.1
14.9
100

46.0
45 .9
46.0

85.0
15.0
100

54.0
54.1
54.0

86.2
13.8
100

86.3
13.7
100

73.4
73 .2
73.3

86.2
13.8
100

26.6
26.8
26.7

99.6
.4
100

99.3
.7
100

45 .9
73.8
46.0

99.8
.2
100

54.1
26.2
54.0

98.0
2.0
100

98.6
1.4
100

73.8
49.9
73.3

96.2
3.8
100

26.2
50.1
26.7

Piggybacks .. . . . . . . ... .. ....
Not piggyback .. .. . .. . . . . . . .
Total5 . . . .. .. . . .. .. . . . ...

23.2
76.8
100

19.8
80.2
100

39.3
4S.0
46.0

26.1
73.9
100

60.7
52.0
54.0

12.7
87.3
100

10.3
89.7
100

59.3
75.4
73.3

19.5
80.5
100

40.7
24.6
26.7

LocATION Of PROPERTY,
FREDDIE MAC REGION9
Northeasl ..... .... ... ... ....
Southeast .......... . .. . .....
North Central .... ... .. .... ..
Southwest . . ... .. . .... . ... . ..
West .. . ..... . .... .... .. .....
Total5 . . . . . . . . . . . . . . . . . . . .

18.9
20.8
13.1
12.7
34.5
100

19.5
IS.3
10.3
12.1
39.S
100

46.9
39.S
35.5
43.2
52.2
45.3

IS.3
22.9
15.5
13.1
30.2
100

53 .1
60.2
64.5
56.S
47.8
54.7

22.1
22.1
16.7
13.7
25.5
100

22.6
21.2
16.4
13.2
26.6
100

74.9
70.6
72.0
70.6
76.7
73.3

20.8
24.4
17.5
15.1
22.3
100

25.1
29.4
28.0
29.4
23.3
26.7

24.2
49.2
26.6
100

IS.O
4S.4
33.6
100

33.7
44.4
57.0
45.2

29.3
49.9
20.9
100

66.3
55.6
43 .0
54.S

17.9
50.9
31.2
100

14.7
50.2
35. 1
100

60.4
72.2
82.6
73.3

26.5
53 .1
20.4
100

39.6
27.8
17.4
26.7

Middle ........ . .............
High ...... ... ....... ..... ...
Missing) . ..... ... .... .. ....
Total . . . . . . . . . . . ........
Minorily SllllIlS·

Black or African American ...
Hispanic white . . . . . . .. . .. .
Asian ............ . , .. , ' , ...
Non-Hispanic while .. .. . ..
TOlal5 . ... .. . . . . . . . . .. .

Sex

Single female .. . .. . ,. .... ..
Single male .. ...... .. . . . . . .
Joint female and male6 .. ....
Total5 . . . . . . .. . . . . . . . . . . . .

loAN
Amounl of loan (thousa1lds

t~~/tf::~\OO

.... .. .........

100-249
.. . . . ......
250 or more .. ......... .. .. ..

Total5

.... ............ ....

Owner-occllpanty s1UII<5

Owner . .. . .. . . . .. .. ... . . . .. .
Non-owner7 . • ..... . ...•.•...
Total 5 .... ............ ....
Type of property
1-4 family site-built .. . . •. ...
Manufactured home .. . ... . . .

Total

.. ...... .. .........

Pigg)'huck slalus

CENSUS ThAn OF PROI'ERTY
Income ralio (percenl of ureu
median) 10
Lower .... .. .... .. ...... . .. .

Middle .. . ......... ... ..... ..

Hi~~u.i; . : : : : : : : : : : : : : : : : : : ..

ket. As noted , a comparison of lending activity in
these two years is complicated by an underreporting
of loans in 2007 because some lenders went out of
business during the year and did not report HMDA
data. Most of the lenders that did not report data for
2007 exited the market by the middle of that year, and
therefore underreporting of data is much less likely to
be a problem for the last half of the year. Conse-

quently, to reduce the uncertain effects of underreporting, we compare mortgage market activity in the first
six months of 2006 with that in the last six months of
2007.
The comparison focuses primarily on the changes
in the number of originated loans, although changes
in the number of applications and of denials are also
examined. Comparisons of loan originations are made

The 2007 HMDA Data

A 127

12. Distribution of all loans and of lower- and higher-priced loans. and incidence or low 'r- and higher-priced lending, for the
169 closed lender. and for all other lenders, by characteristi c of borr()wer and
loan and by location or properly,

2006-Conlilllled
Percenl
Ctosed lenders
Characteristic and status

All loans

Lower-priced loans

All other lenders
Higher-priced loans

All loans

Lower-priced loans

Higher-priced loans

Distribution Distribution Incidence I Distribution Incidence I Distribution DislIibution Incidence ' Distribution Incidence I
Racial or ethnic compositioll
(minorities as a pen'elll of

r'!s~/f~:'~o ..... ...........

1{}-50 .. ............ .........
50 or more .. . ... ..... .... ...
Total' .. .......... ........

22.0
48.5
29.5
100

23.9
53.5
22.6
100

49.0
49.9
34.7
45 .2

20.5
44.3
35.1
100

51.0
50_1
65.3
100

32.4
47.9
19.7
100

34.5
49.2
16.3
100

78.0
75.3
60.8
73.3

26.7
44.3
28.9
100

22 .0
24.7
39.2
26.7

Credit SCOTl! of borrowers
(percent of mongage
borrowers with scores
below 600)"
20 or more .. ........ . ... ....
1{}-20 . . . . . ... . ... _...
Less than 10 ..... .. .. ... ....
Total' . . . . . . . . . . . . . . . . ...

17.3
32.8
49.9
100

9.8
30.0
60.1
100

26.0
42.1
55.5
46 .0

23.7
35.2
41.1
100

74.0
57.9
44.5
54.0

13.9
30.6
55.5
100

10.2
28.5
61.3
100

53.7
68.4
81.0
73.3

24.1
36.3
39.6
100

46.3
31.6
19.0
26.7

MSA 0 1' PROPERTY
Real price appreciatioll oj
real estate (pen'en/)'2
-8orless ..... .. .... .... . ..
-8-0 . .. .... ..... .... ...... ..
o or more .... .. . .. .... .. .. ..
Total' ......... ... ........

54 .6
33.8
11.6
100

55.9
32.4
11.7
100

46.4
43.6
45.7
45.4

53.6
34.9
11.6
100

53.6
56.4
54.3
54.6

44.3
41.9
13.8
100

44.4
41.8
13.8
100

73.6
73.5
74.0
73.6

44.3
42.1
13.6
100

26.4
26.5
26.0
26.4

27 .9
44.9
27.2
100

27.3
43.0
29.7
100

44 .2
43.3
49.5
45.2

28.5
46.5
25.1
100

55.8
56.7
50.5
54.8

37.0
42.9
20.1
100

36.7
42.4
20.9
100

72.7
72.3
76.4
73.3

37.8
44.5
17.8
100

27.3
27.7
23.6
26.7

•••• 4

••

Change in delinquincy rate

[~rcb~II{j~; .. ........... ......
0.5-2 ......... _.. ... .. . . ....
2 or more ............. . .
Total' ............ ...... ..
f •• •

NOTE: Conventional firsl-lien mongages for home purchase or refinance for
single-family houses; excludes business loans. For defini tio n of closed lenders,
see nOle I. table II ; for definitions of lower- and higher-priced lending, see
lexI nOle 7.
I. DislribuLion sums horizontally.
2. Borrower inco me is the lotal income relied upon by the lender in the loan
underwriting. Income is expressed relative 10 the median family income of the
melIopolilan statistical area (MSA) or slatewide non-MSA in which Ihe propen y being purchased is localed . "Lower" is less than 80 percem of the median;
"middle" is 80 percenl 10 119 percenl ; and "high" is 120 percent or more.
3. Information for income Or propeny location was missing on the
application.
4. Categories for race and ethni cilY reftecI the revised standards established
in 1997 by the Offi ce of Managemenl and Budge!. Applicanls are placed under
only one category for race and ethnicily, generally according 10 the race and
ethnicily of the person listed firsl on the application . However. under race, the
application is designated as j oillt if one applicam reponed the single designalion of while and the other reponed one or more minority races. If Ihe application is nOI joinl but more than one race is reponed, Ihe fo llowing designations
are made: If al least IWO minorily races are reporled. Ihe application is designaled as fWO or more minority races; if the firsl person lis led on an applicaLion
repons two races, and one is while, the application is calegorized under the minority race. For loans with two or mOre applicanlS, lenders covered under the
Home Mongage Disclosure ACI reporl dala on only IWO.
5. Excludes loans for which the information for the characleristic was missing on the application and loans deemed business relaled or multifamily.

for both lower-priced and higher-priced loans. Within
the category of higher-priced loans, differentiation is
made by the size of the reported APR spread. Loans
for home purchase and for refinancing are examined
separately, and the analysis is restricted to first-lien
loans secured by a site-built property. Unlike some of

6. On Ihe applications for these loans , One applicant reported " male," and
the other reported "female ." For female and for male. only sole applicanls
were considered. Excludes loans for whi ch sex was missing on the application
and loans inVOlving two females or Iwo males.
7. Includes loans for which occupancy Slarus was missing.
8. For definition of piggyback lending. see nOIe 10 table 8.
9. Freddie Mac defines ilS regions as follows : N Or/ileas/: N.Y, NJ ., Pa. ,
Del. , Md., D.C , Va., Wv., P.R., Maine, N.H., VI. Mass., RI.. Conn. , v.i. ;
SOIl/heast: N.C, S.C, Tenn., Ky., Ga., Ala., Aa. , Miss.; Nonh Cell/ral: Ohio,
Ind. , lll., Mich., Wi s., Minn., Iowa, N.D., S.D.; Sourhwest: Texas, La. , N.M.,
Okla., Ark .. Mo .. Kan.. Colo .. Neb., Wyo.: West: Calif. , Ariz., Nev., Ore.,
Wash., U!ah, Idaho, Mon!. , Hawaii, Alaska, Guam.
10. The income category of a census lIacI is the median family income of
the lIaCI relali ve 10 thai of the melfopolitan stati stical area (MSA) or slatewide
non-MSA in which the tracI is localed. "Lower" is less than 80 percent of the
median: "middle" is 80 percenl 10 119 percem; and "high" is 120 percem or
more.

II . Data from Equifax drawn from credil records of individuals as of December 31 , 2006. A score below 600 generally conforms with borrowers in the
subprime portion of the mongage marke!. Includes all borrowers with an oulstanding mongage regardless of the year in which the loan was laken OUI.
12. Housing price index from the Office of Federal Housing EllIerprise
Oversigh!. House price changes calculaled using the percenl change in the index from the founh quaner of 2006 through the firsl quarter of 2008. Based on
the change in median home values for a constanl 2000-defined geography.
13. Delinquency rales from Trend Data, a producI of TransUnion LLC The
change in the mongage delinquency rate is calculated using delinquency rates
from the fourth quarter of 2003 10 the founh quaner of 2007 .

the earlier analyses, we do not differentiate between
government-backed and conventional loans. Changes
in the number of loan originations are examined by
borrower race or ethnicity, borrower income, censustract income, and owner-occupancy status of the
property securing the loan.

A 128

Federal Reserve Bulletin D December 2008

13. Change in the numb..:r of loan applications. denials. and originations, and 'honge in the number of lower- and higherpriced originations. for all loans and for jumbo loans. by characteristic of borrowe l' and or census tra t,
2006:HI through 2007:H2
A. Home purchase
Percent

Higher priced

Characteristic
of borrower and
of census tract, by
owner-occupancy
stalUS of property

Loans originated

Applications

Number
acted INumber
upon by denied
tender

All

Lower
priced

Jumbo

Distribution, by percentage
points of APR spread I
Applications
All
1

3- 3.99

4-4.99

5 or
more

Number
Number
acted
upon by denied
lender

All

Lower
priced

Higher
priced

OWNER OCCUPIED
BORROWER

Minori'" Slatll.\· 2
-31.9
-42. [
-23 .1
-20.1
-27 .5

-25.7
-30.7
-20.7
-18.0
-29.2

-35.2
-48.8
-26.2
-21.8
-26.3

-2.3
-26.8
-15.3
-[4.3
-9.8

-69.4
-75.7
-73.4
-60.0
-71.1

11.2
-25.0
- 24.7
-11.4
-[1.2

-46.7
-66.4
-71.2
-47.6
-56.0

-89.0
-94.0
-93.1
-88 .5
-91.1

-37.3
-57.3
-35.9
-31.7
-31.5

-10.7
-32.5
-26.9
-12.1
-19.0

-57.2
-72.8
-43.4
-40.2
-38.8

-39.7
-65.[
-36.2
-37. [
-31.2

-74.5
-83.1
-75.6
-62.3
-71.4

-30.8
-24.6
-14.0
-19.8
-22.9

-30.3
-21.7
-12.0
-20.3
-24.1

-30.0
- 27.3
-16.4
-20.3
-22.6

5.2
-4.7
-6.0
-11.7
-9.2

-65.7
-60.5
-61.6
-54.6
-59.2

43 .7
-1.2
6.1
13.7
15.4

-32.8
-44.6
-54.6
-35 .8
-38.0

-88.0
-90.6
-90.6
-88.8
-88.9

-15.0
-30.9
-36.5
-20.7
-26.9

-7.4
-12.2
-30.5
1.9
-13.3

-25.9
-70.2
-53.7
-38.6
-42.6

.0
-65.0
-53.9
-34.9
-37.8

-87.5
-82.4
-50.0
-63.3
-70.0

-29.5
-36.9
-17.5
-20.0
-23.6

-24.7
-28.8
-14.7
-19.7
-23.2

-31.8
-42.1
-20.2
-21.1
-24.7

7.7
-13.1
-8.8
-12.2
-10.1

-64.4
- 70.3
-75.1
-71.0
-67.9

28.9
-6.4
-3.1
.6
3.0

-47 .0
-64.0
-68.9
-49.7
-54.0

-90.0
-94.7
- 93.4
-90.1
-91.3

-14.1
-44.4
-27.8
-33.8
-31.7

2.8
-29.6
-11.7
-12.9
-15.5

-29.2
-58.3
-35.6
-42.0
-40.9

-14.6
-46.8
-31.4
-40.6
-36.1

-55.6
-80.5
-SO.3
-56.9
-68.2

-31.8
-48.8
-23.6
-16.9
-23.9
-61.6

-20.3
-35.4
-23.9
- 12.9
-21.7
-36.4

-38.7
-57.3
-27.0
-19.6
-26.6
-68.4

-6.9
-35.8
-15.8
-13.3
-14.6
-67.7

-72.9
-81.5
-77.1
-61.2
-71.3
-70.3

-.3
-29.7
- 23.9
-15.7
-17.6
-70.2

-57.5
-75.1
-75.9
-51.1
-61.9
-64.8

-89.6
-94.7
-93.6
-87 .0
-90.9
-80.7

-38.1
-57.7
-34.6
-30.7
-35.9
-51.2

-13.4
-34.3
-27.9
-12.5
-20.6
-2.9

-57.2
-72.9
-42.0
-39.1
-44.9

-64.3

-36.6
-64.3
-34.4
-36.1
-37.7
-64.6

-76.4
-83.9
-75.7
-62.3
-73.6
-63.6

Income CaleKOT),6
Lower .. ..... . . .. .. ... . . . . ...
Middle .. , ..... .... ...........
High ....... .. .. .. ...... .. ....

-32.9
-24.8
-24.8

-29.5
-22.6
-18.5

-26.2
-27.2
-27.1

-13.2
-13.2
-16.3

-70.0
-65.8
-66.7

-8.1
-10.3
-20.4

-53.9
-52.7
-57.7

-90.8
-90.3
-90.0

-36.8
-37.2
-36.4

-19.3
-19.3
-19.8

-46.5
-47.0
-45.5

-38.8
-40.0
-38.8

-73.0
-72.9
- 72.8

TOlal owner occupied .. . .... . .

-25.2

-23.4

-26.9

-14.4

-67.1

-12.4

-54.1

-90.4

-36.6

-19.5

-45.9

-39.0

-72.9

Total .... ......... ... .. , ... ...

-38.2

-29.2

-41.5

-32.6

-64.5

-52.0

-57.1

-86.1

-37.5

-25.3

-44.5

-40.2

-64.7

Total .... .. . . . . .... . . .... .. . ..

-27.4

-24.4

-29.3

-17.3

--06.6

-25.7

-54.7

-89.9

-36.7

-20.2

-45.7

-39.2

-71 .9

B[ack or African American .. . .
Hispanic white) ... . . .. . .......
Olher nunonty . ..............
Non-Hi~aJlic white .... . .. . . ..
Missing "" "" " " " " " . "

Minorily StaIUS. by income
categor),'
Lower
Black or African American "
Hispanic white . " . ..... .
Other n1inority' ..... . .. ... .
Non-Hispanic white . .....
Total , . . . . . . . . . . . . . . . . . "
Middle
Black or African American "
Hispanic white .... . .. . . ... .
Other n1inority' .. .. . ... " .
Non-Hispanic while .. ... ...
Total .. .. ...... ... .......
High
B lack or African American ..
Hispanic white . . .. .. .... .
Other nlinorily' .... .... ....
Non-Hispanic wllite .. . . .. . .
TOlal . . . . . . . . . . . . . . . . . . .
Missing4 ... ......... ... .... ..

CENSUS TRACf OF PROPERTY

NON-OWNER OCCUPIED?

NOTE: Conventional firsl-Iien mOrlgages for sile-buill properties; excludes
business loans and applications. applications in U.S. terrilories, and applications
n1issing cenSUS-ifact information . For definitions of lower- and higher-priced
lending, see text nOle 7 ; for definition of jumbo loans, see nole 4, table 6.
I. See note I , table 3.
2. See note 4, lable 12.

3. Olller n1inoriry cons isis of American Indian or Alaska Native, Asian , and
Native Hawaiian or other Pacific Islander.
4. Informatio n for Ille characleristic was missing on Ille applicatio n.
5. See note 2, table 12.
6. See note 10, table 12.
7 . Includes applications and loans for which occupancy slatus was n1issing.

hange in Lending Activity by Characteristic of
Borrower and Cell Ll Tract

Hispanic whites and for blacks. For example, homepurchase loans to Hispanic white and black borrowers
fell 49 percent and 35 percent respectively, while such
loans to non-Hispanic white borrowers fell 22 percent
over the same period. Even when changes for borrowers of similar income levels are compared, differences
across racial or ethnic groups are found. However, the
overall differences across income classes, whether

All borrower and census-tract groups, whether characterized by race or ethnicity, income, or owneroccupancy status, experienced a decline in the number
of loan originations for home purchase and for refinancing (tables 13.A and 13.B, column 3). The percentage decline in loan originations was largest for

The 2007 HMDA Data

A129

13 . Change in Lhe number of Joan applications. denials. and origination', and chang~ in Ihe number of lower- and higherpriced riginal ions. for all 1 ans and for jumbo loans. by ch ~IJacteri lie of borrower anu of census U-aCL.
2006:1-11 through 2007:1-12-Colllillued
B. Refinance
Percenl
Applications
Characteristic
of borrower and
of census Iract, by
owner-occupancy
status of property

Number
acted Number
upon by denied
lender

Loans originated
I

Higher priced
Distribution. by percentage
poinrs of APR spread I
All

Lower
priced

All
3-3.99

4-4.99

5 or
more

Jumbo
Applications
Numbe
acted Number
upon by denied
lender

All

Lower
priced

Higher
priced

OWNER OCCUPIED
BORROWF.R

Minority status 2

Black or African American .
Hispanic. wh.ite, .. ............
Other mmonty' ...............
Non-Hi~anic white . . .. . . . . . ..
Missing . .... . ..... . .........

-9.8

-{i1.8
-58.9
-49.1
-49.6
-47.3

-57 .2
-55 .2
-45.2
-48.4
-44.4

-{i8.6
-{i7.4
-{i6.6
-55.7
-57.0

6.2
20.3
23.7
-4.6
-4.9

19. 1
42.4
36.8
4.5
5.1

-{iO.8
-54.2
-SO.O
-27.0
-38.2

-32.0
- 39.2
-49.0
-17.6
-28.0

-88.5
-90.5
-55.6
-{i3.9
-71.6

-72. 3
-82.4
-78.5
-71.7
-74.9

-9.3
-12.8
-11.3
- 33.5
- 26.0

37.9
40.8
35.0
3.7
7.3

-{i9.8
-{i3.7
-54.8
-{i7.3
-{i4.9

-58.7
-55.7
-49.4
-{i2.2
-58.3

-80.9
-84.2
-81.5
-83.7
-82.3

-44.7
-50.1
-51.5
-35 .2
-41.6
-50.3

-70.5
-81.4
-81.8
-70.0
-74.2
-57.3

-27.6
- 24.0
-24.1
-27 .7
- 26.3
-3S.1

13.0
23.2
13.8
12.1
9.7
.8

-{i2.0
-S8.8
-48.5
-49.0
-SO.4
-S2.3

-57.9
-55.1
-44.4
-47.7
-47.9
-53.9

-{i7.9
-{i7.3
-{i6.0
-55 .2
-{iO.O
-44.2

- 22.0
- 21.2
-17.6

-51.4
-46.7
-48.3

-74.8
-73.0
-77.8

- 2S.7
-26.4
- 26.3

10.1
8.9
8.7

-SI.S
-51.7
-50.7

-49.9
-49.3
-48.0

-59.1
-{iO.9
-{i1.0

-20.6

-48.2

-74.4

-26.4

9.0

-51.1

-48.5

-{iO.6

-{iO.5

-37.4

-49.9

-81.3

-19. 1

16.2

-40.0

-32.8

-{i6.2

-56.9

-22.9

-48.3

-75.0

-25.8

9.5

-so. I

-47.2

-41.1

-18.3
-15 .7
-12 .2
-15.6
-29.4

-. 1
19.1
14.6
-3.8
-28.8

- 37.4
-40.6
-30.9
- 24.4
-33 .1

-16.0
-28.4
-22.3
-15.5
-16.8

-59.0
-{i3.4
-{iO.8
-51.9
-{i2.5

- 23.8
-17.9
- 25.6
- 2003
- 19.5

-51.6
-55.2
-51.2
-42.9
-57.4

-71.8
-81.9
-79.5
-71.2
-79.5

- 25.3
- 22.1
- 23.2
- 28.2
- 27.0

-23.6
-16.2
-13 .4
-24.6
- 26.6

-11.4
4.0
- 1.6
-19.4
-21.6

- 39.3
-35.5
-27.2
-29.9
- 32.7

-9.8
-14.3
-13.8
-18.7
-16.9

-{il.!
-{i6.0
-{iO.6
-54.8
-58.9

- 25.9
-22.6
- 34.2
- 22.8
- 24.0

-55.3
- 58.0
-53.5
-47.5
-52.2

-72.6
-82.6
-75.0
-72.3
-74.7

-14 .5
-14.0
-10.5
-16.0
-17.8

9. 1
24.5
16.7
-3.3
-4.1

-36.5
- 39.5
-30.1
-25.3
-29.5

-11.7
-23.8
-19.8
-14.4
-15.S

-59.6
-{is.8
-{i1.2
-54.3
-S8.S

-21.0
-16.9
-25.4
- 21.9
-21.5

-51.8
-59. 1
-49.1
-46.3
-50.7

-10.5
-13.5
-9.9
-{i. I
-9.6
-40.8

19.1
29.1
25.0
15.0
11.0
-32.8

-36.3
-41.9
-30.6
-18.4
-24.1
-44.5

-21.9
-32.9
-23 .0
-11.3
-IS. I
-42.7

-SS.3
-{iO.9
-{iLl
-47.0
-52.7
-54.2

-16.4
- 7.7
-17 .9
-10.1
-10.3
- S4.4

CF.NSUS TRACf OF PROPERTY
Income categor,, 6
Lower . . ............. .. .......
Middle ....... . ... . . . . . .. . . . . .
High ... .. ............ .

-23.2
-17.9
-15.4

-10.6
-75
-1.1

-29.0
-28.9
-28.8

-21.0
-15.9
-17.8

-59.3
-55.1
-56.8

Total owner occupied

-18.3

-{i.8

- 28.8

-17.3

-56.5

-7.8

23 .9

- 23 .0

-8.3

15.0
26.5
16.2
II.!

Minority status. by income
categor),!5

Lower
Black or African American ..
Hispanic white, .. .. .. . ...... I
Other mmonty ... .. . . . . .. . . I
Non-Hlspamc while . .. ... . . I
Total ........ . ... . . . . . . . .
Middle
Black or African American ..
Hispanic white ........ . . . ..
Other minority' . .. .. . . . . . . .
Non-Hispanic white ... .. ...
Total ...... . . . ... . . . . . . . .
High
Black or African American ..
Hispanic white ..... .. . .....
Other minority' . .. ... . . . ...
Non-Hispanic white
Total . .. . . . .. .... . . . .....
Mjssing' . .. ... . . . .... . .....

NON-OWNER OCCUPIED
..... .... ..........
Total
Total ..... ...... . ... . . .. ... . . .

-17.4

-4.8

-28.2

-16.4

NOTE: See notes to table 11A

measured by the borrower's income or the median
income for the census tract, are much smaller than the
differences across racial or ethnic groups. There are
two notable exceptions: (1) The number o f refinance
loans to high-income borrowers declined less than the
number to middle- or lower-income borrowers, and
(2) lending to borrowers with missing income declined
much more than that to borrowers whose income was
reported. Loans to borrowers with nonreported income
may include a disproportionate share of stated-income

or no-documentation loans , two products that experienced a sharp decline in 2007.
Most of the reduction in loan volume appears to be
driven by declines in the number of applications . A
portion of the decline in loan originations is also
accounted for by a modest increase in denial rates .
The increase in the denial rate is due to a smaller
reduction in the number of denials (tables 13 .A and
13.B , column 2) than in the number of applications
(column 1).

Al30

Federal Reserve Bulletin 0 December 2008

The falloff in loan volumes differed substantially
across loan-pricing categories. For example, the number of home-purchase loans with APR spreads of
5 percentage points or above declined almost 90 percent, whereas the number of lower-priced homepurchase loans declined only 17 percent. Differences
in declines across pricing categories appear to explain
at least a portion of the racial differences described
earlier. For example, when comparisons are made for
borrowers within each of the 12 combinations of
borrower income and loan-pricing categories, the
decline in home-purchase lending to blacks was
lower than the decline in such lending to nonHispanic whites in 10 of the 12 cases. Thus, the much
larger overall decline in lending to blacks must be
driven by the fact that blacks in 2006 were disproportionately in loan-pricing categories that experienced
very large rates of decline . This pattern was less
evident for refinance loans: Black borrowers tended
to have greater declines than non-Hispanic whites,
even when the comparison was made for borrowers
of the same borrower income and loan-pricing category. However, these within-category differences
were much smaller than the overall racial differences
between black and non-Hispanic white borrowers.
Generally, the large differences in the rates of decline
in lending to Hispanic whites and non-Hispanic
whites persisted across the loan-pricing categories.
These differences appear to have been driven primarily by geography. For example, the rate of decline in
higher-priced home-purchase lending to Hispanic
whites was 15 percentage points greater than the
decrease in such lending to non-Hispanic whites.
More than two-thirds of this difference can be attributed to differences in the distribution of Hispanic
whites and non-Hispanic whites across MSAs (data
not shown in tables). This finding suggests that the
higher rates of decline in lending to Hispanic whites
can be attributed primarily to a higher proportion of
Hispanic white borrowers in MSAs where lending
has declined the most.
The recent mortgage market turmoil has raised
concerns about the condition of the market for loans
above the conforming loan-size limit established by
Fannie Mae and Freddie Mac (jumbo loans). The
2006 and 2007 HMDA data provide an opportunity to
profile changes in this market segment. The number
of jumbo loan originations declined from the first half
of 2006 to the last half of 2007 by a larger percentage
than overall lending (46 percent compared with
29 percent), and it did so for every demographic
category. Further, for both lower-priced and higherpriced loan categories, declines in loan originations

were greater for jumbo loans than for overall lending.
The difference was particularly large for lower-priced
loans. For example, jumbo lower-priced refinance
loans fell by almost one-half, while overall lowerpriced refinance loans declined 16 percent.
Changes in Lending by Type of Lend r
Changes in the number of loan originations differ
substantially across types of lenders (tables 14.A and
14.B). For example, the number of higher-priced
refinance loans originated by independent mortgage
companies declined 85 percent between the first half
of 2006 and the last half of 2007. In contrast, the
number of such loans originated by depository institutions within their assessment areas actually rose
8 percent over the same period. 3o These differences
are indicative of depository institutions' larger market
shares (in total lending and higher-priced lending) in
their assessment areas. However, the data in these
tables show that the shift in market share from
independent mortgage companies to depositories in
their assessment areas has had very different patterns
across racial or ethnic groups. For example, depository institutions experienced an increase in their
volume of lower-priced home-purchase lending to
black borrowers in their assessment areas by about
one-fifth for each income category. In contrast, lowerpriced home-purchase lending by depositories to nonHispanic white borrowers in their assessment areas
fell for each income class. Similar differences are
shown for higher-priced loans. Overall, higher-priced
home-purchase lending by depository institutions in
their assessment areas fell 17 percent, whereas higherpriced lending to black borrowers fell only 3 percent.
Another way of looking at differences in loan
originations across types of lenders is to examine how
the changes differed across geographies that were
predominantly served by specific lender types in 2006
(tables 15.A and 15.B). Here we identify those census
tracts where 50 percent or more of the loans in 2006
were originated by (1) independent mortgage companies, (2) depository institutions in their assessment
areas, or (3) lenders that went out of business during
2007 (this group includes the 1691enders that did not

30. Larger commercial banks and savings associations covered by
the Community Reinvestment Act of 1977 (CRA)-generally those
with assets of $1 billion or more-are required to identify the census
tracts in their CRA assessment areas as of the end of each calendar
year. That information was used to determine which loans in the
HMDA data were for properties within the lenders' CRA assessment
areas. When lenders were part of a bank or lIuift holding company, the
combined assessment areas of all banks in the holding company were
used for the analysis.

The 2007 HMDA Data

report HMDA data for 2007 as well as those lenders
that went out of business and either reported 2007
HMDA data or were merged or acquired).
Higher-priced home-purchase or refinance lending
declined more than the overall market in census tracts
that in 2006 were primarily served by lenders that
went out of business by 2007. This was also true for
census tracts that had been heavily served by independent mortgage companies. In contrast, the decline in
higher-priced lending in census tracts that were primarily served by depository institutions in their
assessment areas was smaller than the declines in
other census tracts. Patterns for lower-priced loans
are less consistent. For example, the number of
lower-priced home-purchase loans in census tracts
that in 2006 were primarily served by lenders that
went out of business in 2007 declined less than the
number of such loans extended to borrowers in other
census tracts. In contrast, the number of lower-priced
refinance loans in census tracts that were primarily
served by lenders that went out of business in 2007
declined at a higher rate than the number of these
loans in other census tracts.
Differences in the rates of decline across racial or
ethnic groups for these census tracts characterized by
concentrated lending are sometimes quite large. For
example, higher-priced home-purchase loans to black
borrowers in census tracts primarily served by lenders
that went out of business decl ined 70 percent between
the first half of 2006 and the last half of 2007 . In
contrast, higher-priced home-purchase loans to nonHispanic whites declined 53 percent over the same
period. Interestingly, the number of lower-priced
home-purchase loans to black borrowers in these
census tracts increased 7 percent, while the number
extended to non-Hispanic whites in the tracts decreased 3 percent.
We also look at census tracts concentrated by
factors other than lender type. Specifically, we examine census tracts of two types: (I) those where 50
percent or more of the originated loans in 2006 were
higher priced and (2) those where 50 percent or more
of the loans were sold in the secondary market. The
data indicate that the decline in the number of higherpriced loan originations in the second half of 2007
was greater in census tracts with a high concentration
of sold loans in 2006 (72 percent) than in census
tracts with a high concentration of higher-priced
lending (57 percent). For both home-purchase and
refinance loans, and for both higher-priced and lowerpriced loans, census tracts with high concentrations of
sold loans showed higher-than-average declines.

Al31

hange in Lendin o by HOLlse Price Movement
To investigate the potential relationship between
changes in housing market conditions and changes in
lending activity from 2006 to 2007, metropolitan
statistical areas were grouped into two categories
corresponding to the percentage changes in the House
Price Index of the Office of Federal Housing Enterprise Oversight (OFHEO) from the first quarter of
2003 through the fourth quarter of 2006.31 Each of the
two groups was split again according to the percentage changes in the index from the fourth quarter of
2006 through the first quarter of 2008. This process
grouped census tracts in MSAs into those that, in the
initial period , had either relatively weak growth or
strong growth in home values and, in the more recent
period, had small decreases, large decreases, or
increases in home values.
As noted, the HMDA data show a marked decline
in lending from 2006 to 2007. The fallolf in lending
activity is related to the pattern of house price changes
over the previous few years. MSAs that experienced
larger declines in house prices from the fourth quarter
of 2006 through the first quarter of 2008 generally
experienced larger declines in loan activity than
MSAs in which house prices did not fall (tables 16.A
and 16.B). Furthermore, in MSAs where house prices
declined, the fall in home mortgage activity was
relatively greater in those MSAs that had experienced
larger house price appreciation from the first quarter
of 2003 through the fourth quarter of 2006. Thus, the
MSAs that experienced both the sharpest declines in
recent house prices and the largest increases in house
prices in the preceding four years experienced the
largest declines in mortgage activity. For example, the
volume of lower-priced home-purchase lending for
owner-occupied properties fell 53 percent in MSAs
that experienced large recent declines in home values
after experiencing significant run-ups in such values
in the preceding four years. By comparison, areas that
also had large recent declines in house prices but
smaller house price appreciation before 2006 experi·
enced a decline of lower-priced home-purchase lending for owner-occupied propert1ies of about 5.3 percent. The severity of declines in home lending was
larger for higher-priced loans than for lower-priced
loans regardless of the changes in house price patterns in recent years.

31. OFHEO 's House Price Index has been renamed the Federal
Housing Finance Agency House Price Index. More information about
the index is available at www.ofheo.gov/hpi.aspx .

A132

14.

Federal Reserve Bulletin D December 2008

hange in Lhc number of lowcr- and higher-pri ccd loan originati ons, hy Lype of lender and by Chan.lCleri 'lic of borrower
and of censu. Iracl. 2006:H I Ihrough 2007:H 2

A. Home purchase
Percent
Lower-priced loans

Characteristic
of borrower and
of census tract, by
owner-occupancy
status of property

All

Type of lender
Depository, by
property location
Within
Outside of
assessment
assessment
areal
area

Higher-priced loans
Type of lender
Depository, by
property location
Within
Outside of
assessment
assessment
areal
area

Independent
mortgage
company

All

4.8
-30.2
- 17.4
-14 .1
-3.9

-27.0
-47 .6
- 35.5
-29.5
-33.7

-{i9.4
-75.7
- 73.4
-{i0.0
-7 J.I

-2.7
-24.0
-16.7
-17.4
-23.0

-{i3.0
-{i9.9
-{i8.0
- 52.1
-53.7

-87.0
-91.5
-90.4
-82.7
-89.2

-18.6
-17.5
-16.5
-22.9
-23.7

-{i5.7
-{iQ.5
-{i1.6
-54.6
-59.2

-1.6
-17.2
-16.1
-20.5
-17 .4

-{iQ.0
-55.0
-57 .2
-47.7
-52.1

-84.3
-83.6
-83.3
-77.9
-81.2

Independent
mortgage
company

OWNER OCCUPIED
BORROWER
Minority status 2
Black or African American .. ..
Hispanic White, . ... . . . . . . . ....
Other mtnonty .. . . . ......... .
Non-Hi~anic white . ....... . . .
Missing .. ... ........ .. ......

Mi,wriry sla/us, bv income
.
category'
Lower
Black or African American ..
Hispanic white ... .... .. .. . .
Other minority' ..... .. .....
Non-Hispanic white .... ....
Total .... . . ... ...... . . .. .
Middle
Black or African American . .
Hlsparuc whIte . ..... , ....
Other mtnOnly'
.. ......
Non-Hispanic white ..... ...
Total ... , .... . . . . . . .. .
High
Black Or African American ..
Hispanic white . .
.. ... ...
Other minority'
..
..
Non-Hispanic white ...... ..
Total .. . . .. . ........ . ....
Missing· .. ..... .... . . .... . .. .

-2.3
-26.8
-15.3
-14.3
-9.8

17.8
- .9

1.5
-4.2
7.0

5.2
-4.7
-{i.0
-11.7
-9.2

20.6
8.2
-5 .1
- .4

12.3
- 11.8
- 7.5
-11.2
-8.0

7.7
-13.1
-8.8
-12.2
-10.1

22.5
9.1
5.9
-2.2
1.5

11.9
-19.1
-12.4
- 13.0
-10.8

-9.4
- 27.7
-22.6
-24.3
-23.2

-{i4.4
- 70.3
-75.1
-71.0
-{i7.9

1.7
-13.8
-16.2
- 20.9
-16.7

-{i4.6
-{i9.9
-{i6.2
-54.8
-{i0.3

-87.0
-90.5
-87.3
-82.6
- 86.1

-{i.9
-35 .8
-15 .8
-13.3
-14.6
-{i7.7

17. 1
-7.1
1.5
-2.7
-1.0
-40.8

- .7
-37.5
-19.0
-13.2
-14.8
-{i4.9

- 33.3
-58.2
-36.6
-29.9
-33.5
-86.4

-72.9
-81.5
-77.1
-{i1.2
-71.3
- 70.3

- 3.5
-29.5
- 15.5
-5.7
-12.5
-48.7

-{i6.7
-77.0
-73 .1
-53.9
-{i3.8
-48.8

-89.2
-94.0
-92.5
-85.0
-89.8
-91.1

CENSUS TRACT OF PROPERTY
Income category 6
Lower .. ... .. . .... .... ........
Middle ............ ..... .... ..
High ..... .... .... . . , ... ....

-13 .2
-13.2
-16.3

6.5
-1.0
-4.7

- 14.3
-11.9
-16.4

-35.9
-30.7
-32.4

-70.0
-{i5.8
-{i6.7

-14.5
-19.2
-15.5

-{i2.3
- 57.5
-58. 1

-88.9
-85.8
-86.8

Total owner occupied ..... . . . .

-14.4

-1.5

-13.9

- 32. 1

-{i7.1

-17.2

-58.8

- 86.9

NON-OWNER OCCUPIED'
Total . . . . ... ... . . . . .... .. . . ..

-32.6

- 15.3

-33 .6

-56.9

-{i4.5

-16.0

-57.4

-91.8

Tolal . .. . ... . ..... . .. . . . .. , . . .

-17-3

-3_6

-17-4

-35-5

-66.6

-16.9

-58_6

-87.7

J.3

NOTE: Conventional first-lien mortgages for site-built properties; excludes
business loans. For de fi nitions of lower- and hi gher-priced lending, see text
note 7.
1. Includes lending by nonbank affiliates in the assessment areas of depository instirulions covered by the Community Rein ves tment ACI of 1977. For
more information, see tex t note 30.
2. See note 4. table 12.

3. Other minority consists of American Indian or Alaska Nati ve. Asian, and
Nati ve Hawaiian or other Pacific Islander.
4. Information for the characteristic was missing on the application.
5. See note 2, table 12.
6. See note 10. table 12.
7. Includes loans for which occupancy starus was missing .

House price changes in the initial period affected
the magnitude of c hanges in refinance and homepurchase markets differently. Markets that experienced strong gains in home values from 2003 to 2006
experienced smaller declines in refinance lending
relative to the declines in home-purchase lending than
did markets that witnessed the same recent changes in
home values but weaker initial house price increases.
This may be because those refinancing benefited from

the earlier increase in home values and had more
equity to extract or to offer as a down payment on the
new loan.
C hange in Lendi ng by the Severi ty of Changes

in Mortgage Delinquency Rates
To investigate the potential relationship between
changes in mortgage market conditions and changes

The 2007 HMDA Data

A 133

14. Change in thl! numher of lower- and higher-pri ed loan originations. by lype of lender and by characteri tic of borrower
and of census tract. 2(Xl6:H I through 2007:1-12- Conlinued
B. Refin ance
Percent
Higher-priced loans

Lower-priced loans
Characteristic
of borrower and
of census tract. by
owner-occupancy
status of property

All

Type of lender
Depository. by
proPerty location
Outside of
Within
assessment
assessment
areal

Independent
mortgage
company

All

Type of lender
Depository. by
property location
Within
Outside of
assessment
3SS<!ssment
area'
area

area

Independent
mortgage
company

OWNER OCCUPIED
BORROWER
Minorit)' stlllU?

Black or African American ....
Hispanic. white, .... .. .. .. ... ..
Other mlOonty ", ' , . , .,", .. ,
Non-,Hi'Panic white . , , , • , , , . , .
Mlssmg ,., .. ,., .. , .... ,.,. , .

-16.0
- 28.4
-22.3
-15.5
-16.8

-12.5
-15.6
-13.6
-13,2
-10,6

- 5.7
-17 ,6
-16.2
-8.3
2.0

-33.6
-56,7
-45.0
-30,3
-48,6

-59.0
-63,4
-60.8
-51.9
-62.5

-1.5
18,6
3,5
7.2
6,7

-46.3
-52,5
-51.2
-38.9
-44.6

-84.1
-89.0
-87.6
-83.4
-81.2

-9,8
-14.3
-13,8
-18,7
-16.9

-9,6
-8.2
-8,7
-21.0
-17,9

-2. 1
-1.4
-10.4
-11.5
- 7.4

-20,6
-38.5
-27.9
-25 ,7
-28.9

-61.1
-66.0
-60,6
-54,8
-58.9

-16,4
-10,8
-26.7
-10.5
-13 ,5

-49.4
-53,1
-48.7
-42.8
-45.5

-84,5
-89,9
-85 ,8
-84,2
-84.2

-11.7
-23.8
-19,8
-14.4
-15.5

-10.9
-16,6
-18.3
-14.9
-15 ,2

1.7
-8.8
-11.8
-6,9
-4.9

-28.9
-49.2
-32.8
-25 ,0
-30,7

-59.6
-65.8
-61.2
-54.3
-58.5

1.6
9.5
-8.4
,8
,7

-46,3
-55,5
-51.9
-41.2
-44,7

-84.2
-89.1
-86,1
-83.4
-83,9

-21.9
- 32,9
-23,0
-11 ,3
-15,1
-42,7

-15.3
- 16.3
-12,5
-7,0
-8.5
-24.1

-12. 1
-24.2
-16.3
-2.7
-5.3
-38.8

-43.0
-63,7
-49.8
-31.2
-39.3
-68.3

-55.3
-60.9
-61.1
-47.0
-52,7
-54,2

23.9
52,6
26.4
34,6
37,6
-20,0

-41.0
-53,0
-53.2
-33.0
-39,0
-35.3

-84.3
-88,9
-89,1
-82.9
-84,1
-80A

Lower .... ,.,., .... , ... ,.,., ..
Middle .... .. .... ... " . .. , .. ..
High .. .... . .. . ... .. , ... ... ..

-21.0
-15,9
-17.8

-14.7
-13.5
-12.0

-10,8
-6,2
-9.7

-42,2
-33.8
-38.8

-59,3
-55 , 1
-56.8

4.7
5,7
14,7

-45.9
-40,9
-44.4

-85,2
-83,5
-83.7

.. .. ... ..

-17.3

-13 ,2

-8.0

-36,8

-56.5

7,2

-42.8

-84,0

NON-OWNER OCCUPIED'
Total .. ,.,., . , ... " .. , , .... ..

-8.3

7.8

-2.2

-46,9

-60.5

17.3

-47.0

-92,8

Total., .... ,. , " ' , ., .. ," ',. , .

-16.4

-11.0

-7.4

-37.7

-56-9

8.3

-43.2

-84.9

Minority statlts. hI' income

categon'.5
.
Lower'
Black or African American, .
Hispanic. wh!te, .. ... .. ......
Other nunonty " . , ...... , '
Non-Hispanic white .. ......
Total .... .. ........ ......
Middle
Black or African American "
Hispanic. white) .... .. .... .. ,
Other mmonty ...... , , , , , .
Non-Hispanic white . . . . .. . .
Total .... ..... . . . ... .. . . .
High
Black or African American . '
Hispani~ white) ............ ,
Other nunonty , ., .. " .,,"
Non-Hisp.1nic white , . .. . . , .
Total , .. , .. . .. ,., .,. , ....
Missing· ...... ...... .... .....
CF.NSUS TRAer or PROPERTY
Income ell/ellor)'·

Total owner occupied

NOIT: See notes to table 14,A.

in lending activity from 2006 to 2007. census tracts in
MSAs were grouped into three categories according
to the percentage change in their MSA-wide rate of
serious mortgage delinquency from the fourth quarter
of 2003 through the fourth quarter of 2007. 32 This
process grouped census tracts in MSAs into those that
32. Mortgage market delinquency rates by MSA were obtained
from the Trend Data database; Trend Data is a registered trademark of
TransUnion LLC (produclS.trendatatu.comlfaqs,asp) , Trend Data are
based on Ihe credil records of a geographically stralified random
sample of aboul 30 million anonymous individuals drawn each quarter
since 1992, The rate of serious mortgage delinquency is the percentage
of outstanding mortgages thai are 90 or more days delinquent or in
foreclosure at the time the sample is pulled.

had relatively healthy. moderate. or weak-performing
mortgage markets over the past few years.
The 2006 and 2007 HMDA data show that changes
in lending activity across MSAs were related not only
to the magnitude and timing of changes in home
prices but also to changes in mortgage performance.
In particular, the falloff in loan activity was larger in
MSAs that experienced the largest percentage increases in their rates of serious mortgage delinquency
from the fourth quarter of 2003 through the fourth
quarter of 2007 (table 17). This pattern held for both
lower- and higher-priced lending and for virtually all
demographic groups . For example, for lower-priced

A134

Federal Reserve Bulletin 0 December 2008

15 . Change in the number of lower- and higher-priced loan originalions, by lype or loan com;cnlration and by charnel ' listie
of borrow(;r and or eensu ' Iract. 2006:H I Lhrough 2007:H2
A. Home purchase
Percent
Lower-priced loan originations
Characteristic
of borrower and
of census tract, by
owner-occupancy
status of propeny

All
lowerpriced

pnced

loan
con~en·

tratlon

I
r

Hi~her- I
I

Sold
loan

concen.
lIalion I

Higher-priced loan originations

DeposLender
ilory
within
out-ofmongage
assessbusiness
company ment area
loan
loan
loan
concen·
conCt!ntration2
concentration
Independent

All
higherpriced

Higherpriced
loan
concentration

Sold
loan
concentration I

tration:'\

OWNER OCCUPIED
BORROWER
Milloritv statu.,,"
Black ~r African American ... .
Hispanic. white, ... . .. ...... . . .
Other nu nOnlY .......... . ....
Non-Hi~nic white .. ... .• • ...
Missing ...... ... . . ..........

DeposIndeLender pendent
ilory
out-ofwithin
mongage
business company assessment area
loan
loan
concenloan
concen2
lration
concenI tration
tration'

-2.3
-26.&
-15.3
-14.3
-9.S

-10.9
-34.4
-9.7
-15.2
-7.2

-1.9
-29.0
-17.3
-14.1
-10.5

6.S
-27.1
4.0
-2.&
-7.1

-2.6
-30.3
-21.2
-16.4
-17.3

5.1
-10.&
10.7
-9.1
-2.4

--{)9.4
-75.7
-73.4
--<>0.0
-71.1

--{)2.2
-75.4
-70.3
-49.9
--{)2.&

-72.2
-7&.3
-76.7
--{)6.1
-75.2

-70.1
-82.7
-76.0
-52.9
-82.0

-71.9
-79.1
-7S.7
--{)6.1
-7&.3

-39.0
-45.6
-37.1
-30.6
-35.7

5.2
-4.7
-6.0
-11.7
-9.2

6.&
-.2
4.3
-9.9
-7.3

6.5
-5.7
-5 .3
-10.&
-7.7

11.5
-S.O
24.S
-9.4
-5.7

&.0
2.2
2.2
-&.1
-4.4

9.5
-8.1
-10.1
-9.5
-9 .2

--{)5.7
--<>0.5
--{)1.6
-54.6
-59.2

-44.&
-42.1
-54.&
-34.7
-3&.4

--{)8.5
--{)3.&
--{)6.&
--<>0.6
--{)4,4

--{)7.0
--{)6.7
-56.7
-44.6
--{)1.6

--{)7.3
--{)2.2
--{)7.5
-57.4
--{)2.9

-37.3
-41.7
-34.4
-33.5
-35.2

7.7
-13.1
-&.&
-12.2
-10.1

5.3
-2.2
-.&
-11.&
-8.9

7.6
-19.3
-11.7
-12.7
-10.7

7.9
31.7
-.2
2.&

12.1
-S.9
-3.2
-11.4
-8.0

15.2
-10.2
12.6
-9.0
--{).4

--{)4.4
-70.3
-75.1
-71.0
--{)7.9

-4S.&
-65.7
-5S.3
-47 .S
-51.9

-73.&
-7S.6
-74.5
--{)&.7
-73.4

--{)9.4
-S3.7
--{)9.4
-51.5
-72.9

-71.4
-76.7
-75.3
--{)6.6
-72.4

-24.2
-43.5
-3S.&
-32.6
-34.5

--{).9
-35.8
-15.8
-13.3
-14.6
--{)7.7

-17.&
-42.3
-10.4
-15.1
-15.2
-59.3

--{).S
-38.2
-19.3
-12.8
-16.0
-73.4

9.7
-36.0
-4.0
1.4
--{).7
--{)2.0

-10.9
-42.1
-25,4
-17.6
-22.1
-75.8

,4
-10.7
15.0
-7.6
-3 .6
-41.5

-72.9
-81.5
-77.1
--{)1.2
-71.3
-70.3

-70.7
-SO.3
-72.9
-54.5
--{)5.2
-59.&

-75.4
-S3.5
-81.0
--{)8. 1
-76.9
-72.6

-75.2
-86.6
-79 .6
-59.1
-79.9
--<>0.6

-76.4
-S4.5
-81.5
--{)9.4
-78.8
-73.3

-50.6
-51.1
-35.6
-24.9
-29.8
-51.7

-9.3
-12.7
-16.3

-14.S
-14.7
-14.8

-2.5
--{).3
-11.2

-17.6
-17.0
-20.0

-3.4

-13.2
-13.2
-16.3

-3.1
-9.3

-70.0
--{)5.8
--{)6.7

--<>0.0
-56.5
--{)1.0

-73.8
-71.6
-71.3

-77.0
--{)8.5
-73.2

-76.2
-73.0
-71.6

-38.3
-31.2
-34.7

.. .

-14.4

-14.7

-14.8

--{),4

-18.2

--{).2

-<>7.1

-59.1

-72.3

-73 .S

-73.8

-33.6

NON· OWNER OCCUPlED
Total ..... . , . . . . . . . . . . . . . . ...

-32.6

-23.8

-39.5

-16.6

-40.4

-13.S

--{)4.5

-45.9

--{)9.6

--{)6.7

--{)9.9

-40.6

Total ... . . .. ... . .... ..... . . ...

-17.3

-16.0

-18.8

-7.9

-21.7

-7.3

-'6.6

-57.0

-71.7

-72.6

-73.1

-35.1

Minority status, by income
calel/or)' 7
.

Lower
Black or African American ..
Hispanic white .. . ...... .. . .
Other minority" . .... ...... .
Non-Hispanic white . .. . .. . .
Total .. .... .... . ...... . .
Middle
Black or African American . .
Hispanic. wh!te, .. .. .......
Other nu non ty- .. . ..... . .. .
Non-Hispanic white ..... .. .
Total .. .... . ...... ... ... .
High
Black or African American . .
Hispanic white . ............
Other minority" ............
Non-Hispanic white . . . . . . .
Total .. . .. ... . . . . . . .... ..
Missing" .... .. .. ... .. ........

CENSUS TRACT

--{).3

PROPERTY

Income categoryt!o

Lower . . . . . . ...... ... .. .. .... .
Middle ... . .... . ...... . .. . . . ..
High .. ... . . . ...... ... . . . . . .
Total owner occupied

... , .

NOTE: See general note 10 table 14.A. Loan concentration is by census tract.
Lending in a census tract is defined as concentrated if 50 percent or more of
the loans originated in the tract in 2006 had a particular characteristic or if 50
percent or more of the loans originated in the tract in that year were originated
by a particular type of lender.
I. Sold loans are loans sold by the originator within the calendar year of

origination.
2. Lenders thaI went out of business consist of lenders that ceased opera·
tions during 2007 (this group includes the 169 lenders that did not repon data
for 2007 under the Home Mongage Disclosure Act as well as those lenders
that went out of business and either reponed 2007 HMDA data or were merged
or acquired).

home-purchase loans, the decline in lending in MSAs
experiencing smaller increases in delinquency rates
was about one-half of that in MSAs experiencing
very significant changes in delinquency rates. The
decline in lending was particularly severe for higherpriced loans in MSAs with very significant increases

3. For explanation of lending within assessment area. see note I, table 14.A.
4. See note 4, table 12.
5. Other minority consists of American Indian or Alaska Native, Asian. and
Native Hawaiian or other Pacific Islander.
6. Information for the characteristic was missing on the application.
7. See note 2, table 12.
8. See note 10, table 12.
9. See note 7. table 12.

in delinquency rates: Lending of such loans fell more
than 81 percent from 2006 to 2007 . The relationship
between the decline in lending activity and the severity of changes in mortgage delinquency was similar
for refinancings, although the falloff in activity was
more muted.

The 2007 HMDA Data

15.

A135

hange in the number of lower- and higher-priced loan originations, by type of loan concentration and by chanK'lcristic
of borrower and of census tract. 2006:H I through 2CXJ7:H2- Coll lill!/ed
B. Refinance
Percem
Lower-priced loan originations
Characteristic
of borrower and
of census tract. by
owner-occupancy
status of property

All
lowerpriced

Higherpriced
loan
concentration

Sold
loan
concen-

tration'

Higher-priced loan originations

DeposIndeLender
itory
pendent
out-ofwithin
mortgage
All
assessbusiness
company ment area higherloan
loan
priced
loan
concenconcentration'
concentration
tration'

Higherpriced
loan
concen-

tration

Sold
loan
concentration'

DeposIndeLender
itory
pendent
out-ofwithin
mortgage
business
assesscompany ment area
loan
loan
concenloan
concentration'
concentration
tration'

OWNER OCCUPIED
BORROWER
Minorit), .< lotus·

Black or African American .
Hispanic. White, .. .............
Other nunonty .... .. .. . ... ...
Non-Hispanic white . . ... . . . ...
Missing . ...... ..............
Minorit,· .flalus. by income
category-7
•
Lower
Black or African American .
Hispanic white . . .. . ........
Other minority' . ...... . . . ..
Non-Hispanic white . . .... .
Total . . ... . ... . ...... . . . .
Middle
Black or African American ..
Hispanic white ............ .
Other minority' .... . ...... .
Non-Hispanic white .. ..... .
Total .. ...... ... .. .....
High
Black or African American ..
Hispani~ white, . ............
Other mmonty ...........
Non-Hispanic white ... .... .
. ...
Total .. .. .. . . .
Missing" . . . . . . . . . . . . . . . . . . . . .

-16.0
- 28.4
-22.3
-15.5
-16.8

-32.0
-40.2
-20.1
-21.8
-20. 1

-15.7
-27.0
-25 .9
-17.7
-19.0

-30.6
-35.9
-27 .3
-19.8
-29.7

-27 .5
-34.5
-34.9
-26.3
-28.7

-3.5
-20.2
7.2
-9.0
-10.3

-59.0
-{i3.4
-{i0.8
-51.9
-{i2.5

-43.7
-55.3
-51.2
-39.9
-48.0

-{i3.4
-{i6.2
-{i5.8
-59.9
-{i6.9

-{i1.0
-{i4.2
-{i().4
-SO.8
-{i4.0

-{i5. I
-{i6.4
-{i8.4
-{i2.3
-{i6.8

-12.7
-32.6
-31.2
-15.8
-30.2

-9.8
-14.3
-13.8
-18.7
-16.9

-18.9
-20.8
3.5
-21.5
-19.7

-10.1
-16.3
-20.5
-20.5
-18.1

-22.5
-23.0
-26.2
-18.4
-22.2

-4.9
-8.1
-11.4
-8.6
-23.1

-{i.5
-12.9
59.9
-13.9
-11.4

-{il.l
-{i6.0
-{i().6
-54.8
-58.9

-31.4
-45 .2
-46.0
-37.0
-39.6

-{i5.8
-{i9.0
-{i5.3
-{i2.0
-{i4.9

-{i().9
-{i8.7
-50.9
-51.9
-{i1.3

-{i7.3
-{i9.5
-{i7 .1
-{i3.5
-{i6.8

-19.1
-41.0
-50.5
-22.0
-25.4

-11.7
-23.8
-19.8
-14.4
-15.5

-24.9
-31.7
-21.8
-20.1
-21.2

-12.7
-24.9
-21.5
-17.0
-17.8

-32 .1
-34.2
-22.5
-19.6
-26.7

4.9
7.7
-3.9
.4
-26.0

3.0
-21.8
-{i. 3
-{i.9
-7.4

-59.6
-{is.8
-{i1.2
-54.3
-58.5

-45.2
-57.6
-56.1
-44.5
-48.1

-{i4.0
-{i9.2
-{i5.8
-{i1.0
-{i4,4

-{i4.8
-{i3.4
-{i().5
-54.6
-{i2.5

-{i5.9
-{i8.5
-{i7.9
-{i4.6
-{i6.6

-2.4
-26.2
-39.7
-22.3
-21.8

-21.9
-32.9
-23.0
-11.3
-15. 1
-42.7

-37.3
-43.8
-20.4
-20.2
-22.0
-46.7

-21.4
-29.0
-27.0
-12.1
-16.8
-45.3

-34.6
-38.3
-25 .8
-17.2
-25.8
-51.2

19.5
38.2
31.5
18.8
-29.8
-50.8

1.8
-16.4
6.7
-5.3
-4.7
-39.5

-55 .3
-{i().9
-{il.l
-47.0
-52.7
-54.2

-SO.7
-56.8
-51.2
-39.2
-43.5
-36.7

-59.5
-{i3.2
-{i6.5
-56.3
-{i().0
-56.7

-58.1
-{i2 .5
-{i3.7
-48.4
-57.4
-39.0

-{i2.6
-{i4.4
-{i9.3
-{i().0
-{i2.5
-54.6

-8.5
-29.1
-20.0
-{i.4
-11.1
-13.6

-21.0
-15.9
-17.8

-28.8
-23.6
-21.7

-22.1
-18.5
-18.3

-31.4
-24.9
-21.5

-30.7
-28.0
-28.7

-11.4
-2.3
-12.2

-59.3
-55.1
- 56.8

-37 .7
-40.9
-47 .6

-{i3.8
-{i2.5
-{i3.2

-{i2.7
-54.9
-57.9

-{i6.0
-64.2
-{i3.8

-19.8
-17.2
-22.4

-17.3

-22.9

-19.3

-26.9

-28.8

-8.3

-56.5

-43.6

-{i3.0

-59.6

-{i4.7

-18.8

-8.3

-11.7

-10,2

-12.2

19.8

3.5

-{i().5

-48 .7

-{i5.8

-{i7.3

-{i8.7

-29.4

-\6.4

-2\.8

-\8.3

-25_2

-27.4

-4.9

-56.9

-44.1

-6J.3

-60.7

-65_2

-\9.9

CENSUS TRACT Of PROPERTY
Income <"Otegor),·

Lower ...... ..... . . . .. .... . . ..
Middle .... ............... .. ..
High ...... ........... .. . . . ..
Total owner occupied

... .....

NON-OWNER OCCUPIED"
TOlal ... ........ ....
...
Total ... .......... ..... .......
NOTE: See nOles to table 15.A.

DIFFERENCES IN L ENDING OUTCOMES BY
RACE, ETHNICITY, OR SEX OF THE

BORROWER
The HMDA data allow comparisons of the outcomes
of the lending process across borrowers grouped by
their race, ethnicity, or sex. Three outcomes are
considered here: (I) the incidence of higher-priced
lending, (2) the mean APR spreads paid by borrowers
with higher-priced loans, and (3) denial rates. Analyses of HMDA data from earlier years revealed substantial differences in the incidence of higher-priced
lending and in denial rates across racial and ethnic

lines; analyses further showed that such differences
could not be fully explained by factors included in the
HMDA data. 33 Studies also found that difJerences
across groups in mean APR spreads paid by those
with higher-priced loans were generally small.
The analysis here uses the 2007 HMDA data to
examine these three lending outcomes across racial,
ethnic, and gender groups. The analysis focuses on
conventional first-lien home-purchase and refinance
33. See Avery, Brevoort, and Canner, "The 2006 HMDA Dala" and
"Higher-Priced Home Lending and Ihe 2005 HMDA Dam"; see also
Avery. Canner, and Cook, "New Information Reported under HMDA ."

A 136

Federal Reserve Bulletin 0 December 2008

16. Change in the number of' lower- and higher-priced loan origina ti ons. hy recent change in house price i.ndex in

melropolitan statistical area and by characteristic of borrower and of censlIs tracl. 2006:H I through 2007:H2
A. Home purchase
Percent
Lower priced

Characteristic
of borrower and
of census tract, by
owner-occupancy
status of propeny

Loans
to all
MSAs

Higher priced

Change :~~use pri~Qitdex in MSA.
2006:
to 2008: I (percent)
Increase
Large decn:ase Small decn:ase
(-8-0)
(-8 or less)
(0 or more)

Change in house price index in MSA.
2006:Q4 to 2008:Q I (percent)
Large decrease
Small decrease
Increase
(-8-0)
(-8 or less)
(0 or more)

Loans
ChanllO in house price index in MSA.
Change in house ~e index in MSA.
to all
2003:01 to 2
:Q4 (percent)
2 3: 01 to 2006:~ (percent)
MSAs
Large
Small
Large
Small
Large
Small
Large
Small
Large
Small
Large
Small
increase increase increase increase increase increase
increase increase increase increase increase increase
(less
(less
(less
(30 or
(less
(30 or
(less
(30 or
(30 or
(30 or
(less
(30 or
than 30) more) than 30) more) than 30) more)
than 30) more) than 30) more) than 30) more)

OWNER OCCUPIED
BORROWER
Minority status I
-2.9
Black or African American ... .
Hispanic. white .. .... .. ....... -27.7
Other nunonty 2 .. . ...... ... .. . -15.9
Non-.His.panic white ..... . .... . -15.6
MlSSlOg~ . . ...... . ...... . ... . . -10.2

-31.7

1.6
-5.8
-4.8
-11.7
-5.4

-3.6
-30.6
-12.9
-18.8
-11.3

-4.5
-8.0
-11.0
1.5

2.8
-1.2
-S. I
-10.1
6.5

--{i9.9
-76.3
-74.5
--{i2.7
-72.6

-57.9
--{iO.2
-57.4
-46.7
-76.5

-81.2
-85.6
-83.5
-76.9
-S3.6

--{is. 8
--{iO.8
--{i6.5
-57.4
-70.1

-71.9
-77.3
-74.4
--{is.2
-73.5

--{i7.5
-56.8
--{iQ.I
-55.3
--{i2.6

--{i1.2
-5S.8
-58.9
-57.0
--{iO.1

-15.3
-27.4
-18.4
-14.1
-15.9

20.9
21.5
43.3
6.9
12. 1

-1.2
-9.9
-2.8
- 13.6
-12.5

\3.7
-5.7
-3.0
-13.2
-8.7

2.5
-7.3
-19.1
-14.1
-11.6

-.2
-3.9
-10.4
-10.6
-8.7

--{i6.0
--{il.l
--{i2.8
-56.8
--{iQ.9

-58.8
-57.6
--{iO.7
-42.5
-52.4

--{i9.7
--{i5 .6
--{i5.8
--{i5.8
--{i6.2

--{i5.S
--{iO.8
--{i5,4
-54.5
-59.4

--{i7.0
--{i7.0
--{i4.9
--{i4.4
--{;6.4

--{i8.2
-56.6
--{iO.6
-54.5
-59.6

--{iO.3
-54.0
-58.9
-57.2
-57.8

7.2
-14.0
-9.6
-13.4
-11.0

6.4
-12.1
-\3.0
-17.1
-14.8

18.6
-3.6
11.7
-7.9
-4.0

5.5
-7.1
-7.8
-13.0
-11.3

2.9
-26.0
-13.3
-17.2
-15.7

10.2
-2.1
-14.4
-12.1
-8.8

7.5
.5
-8.2
-9.5
--{i.5

-71.0
-75.7
-72.5
--{i5. 1
--{i9.9

-57.7
-70.5
-49.1
-49.7
-56.7

-79.9
-79.7
-77.9
-73.8
-77.9

-72.1
-71.3
-74.6
--{i1.7
--{i6.3

-72.6
-80.0
-75.0
-71.0
-74.8

--{i9.9
-57.7
--{i7.1
--{iO.2
--{i3.3

--{i3.9
--{i3.0
-58.3
--{i1.6
--{i2.4

-7.9
-36.9
-16.4
-14.8
-16.0
--{is.5

--{i.4
-11.5
-3.8
-13.2
-10.4
-50.6

-33.9
-54.6
-36.5
-33.5
-3S.0
-79.7

7.6
8.1
.4
-5.9

6.0
12.t
6.4
-5.1
-1.8
--{i1.6

7.9
7.1
-2.9
-7.2
-3.9
-56.9

-73.4
-81.9
-78.0
--{i4.4
-73.5
-70.6

-53.3
-4S.3
--{iO.S
-49.5
-58.1
--{i6.7

-83.6
-87.9

-58.3

-10.7
-34.1
-10.2
-18.0
-17.2
-70.6

-78.4
-84.5
-77.5

-72.2
3
--{i2.8
-56.6
-59.S
--{iO.8

-74.8
-79.2
-75.7
--{i7.4
-73.4
-72.2

--{i2.4
-51.8
-51.2
-49.8
-54.1
--{i5.3

-58.9
-58.1
-59.0
-50.7
-53.6
--{i5.2

CENSUS TRACr OF PROt'ERTY
Income category S
Lower. ........... . . .... .
-14 .0
Middle ............ .. ... .... .. -14.8
High . . . . . . . . . . . - . . . . . . . . . . . . . -16.8

-30.2
-15.4
-7.9

-32.4
-33.1
-32.1

-11.7
-9.6
-100

-14.8
-19.1
-17.5

-2 .8
--{i.5
-12.1

-3.2
-5.5
-11.7

-70.9
--{i8.7
--{i7.7

--{i2.2
-53.3
-45.4

-84.9
-82.5
-79.0

--{i4.6
--{iO.6
-59.4

-73.5
-72.7
-70.1

-58.5
-58.9
--{i1.8

-58.3
-58.5
-58.0

-36.1

-5.3

-52.9

-15.4

-41.0

-19.0

-28.8

--{i6.3

--{il.l

-80.2

-5S.6

--{i9.6

-56.3

-59.5

-15.5

-14.6

-32.6

-10.0

-17.8

-8.6

-7.4

--{i9.1

-55.1

-82.4

--{i1.5

-72.4

-59.6

-58.4

Total ........ .. . .. .. .. . .... . . -18.5

-14.0

-37.1

-10.5

-21.5

-9.8

-10.8

--{is.5

-56.6

~.O

-60.9

-71.9

-59,0

-58.6

Minority SlatllS, by income
category'
Lower
Black or African American ..
Hispanic. white • .. • .• •• .... •
Other nuoonty 2 ...... . .... .
Non-Hispanic white .. ......
Total ........... .... . ....
Middle
Black or African American ..
Hispanic. white .. . . . . . . . . .
Other mmonty 2 . . ... . . . ....
Non-Hispanic white ...... ..
Total ... ... ..... ....... .
High
Black or African American ..
Hispanic. white . •. •.. .• . ... .
Other mmonty 2 .. .... . ... . .
Non- Hispanic white .. .. . .. .
Total ... ... .... ... ..... ..
Missing' . . .. . .. . .. ....... . ...

Total owner occupied

. . . . . . .. .

NON-OWNER OCCUPlED"
Total ...... . ... ...... .... ..

-8.5
-20.7
-12. 1
-15.4
-14.0

5.1
-4.5
--{i. I
-12.5
-9.6

-21.7
-45.4
-31.3
-29.1

-3.4

-84.5

-so.

NOTE: See general note to table 14.A.
I. See note 4, table 12.
2. Other minority consists of American [ndian or Alaska Native, Asian, and
Native Hawaiian or other Pacific Islander.
3. Information for the characteristic was missing on the application .
4. See note 2, table 12.

5. See note 10, table 12.
6 . Includes loans for which occupancy starus was missing.
MSA Merropolitan slatistical area.
SOURCE: For house price index , Office of Federal Housing Enterprise Oversight (www.ofheo.gov/hpi .aspx).

loans for owner-occupied, one- to four-family, sitebuilt homes, as these are the loan product categories
included in the HMDA data with the largest number
of reported loans.
Although the HMDA data include a variety of
detailed information about mortgage transactions,
many key factors that are considered by lenders in
credit underwriting and pricing are not included.

However, analysis using the HMDA data can account
for some factors likely related to the lending process.
Specifically, the HMDA data allow an accounting for
property location (for example, the same metropolitan area), income relied on in underwriting, loan
amount, time of year when the loan was made, and
the presence of a co-applicant. To the extent that
some of these HMDA factors are not used directly in

The 2007 HMDA Data

AI37

16. Change in the number or lower- and higher-priced lonn llriginaLions, by recent change in house price index in
metropolitan tatistical area and by characteristic of bOITOwer and of census traCl. 2006:H I lhrough 2007:Hl-

Contillued
B. Refinance
Percen!
Lower priced

Characteristic
of borrower and
of census tracl, by
owner-occupancy
status of property

OWNER OCCUPIED
BORROWER

Minority status'
I
Black or African American ....
Hispanic white ...... ........ .
Other minority' ...... ... .. .. ..
Non-Hispanic while . .. ........
Missing' ...... .. .. .... ......

Minor;t\" status, by income
category·
.
Lower
Black. or African American . .
Hispanic white . . . ... .. . . . . .
Other minority' . . . . . .. ... . .
Non-Hispanic white .. . . . .. .
TOlal ............... . . . .
Middle
Black or African American ..
HispaniC. white .... . . . . . . . . .
Other mmomy2 .. ........ . .
Non-Hispanic while .. . .... .
Total .............. . . ... .
High
Black or African American ..
Hispanic while .......... . ..
Other minority' ....... . . . . .
Non-Hispanic while . ...... .
TOlal .... .. .. . .... ...... .
Missing) . . . . . . .. .. .. .. . .... ..
CENSUS TRAer OF

Higher priced

Change i'!.,~ouse price~i.ndex in MSA.
Change in house pricc;..index in MSA,
2006:1,l't to 2008:1.l1 (percenl)
2006:Q4 10 2008:l.ll (percent)
Large decrease Small decrease
Increase
Large decrease
Small decrease
Increase
""_'_)__1 Loans f--'-(--=S....:o"_r..:.:le;.:.ss'-'-)_L-----'(~-S=_-O.:c)'_____'_(::..::O....:o"_r..:.:m.:..::o.:..::re:..:..)_
Loans f--'-(-8-"-'o''_r..:.:le;.:.ss'-'-)--.JL-----'(~-8=_-.:cO)'_____'_(::..::O....:o:.;.r..:.:m.:..::ore
to all
Change in house price index in MSA.
to all
Change in house price index in MSA.
MSAs
2003:Q I to 2006:Q4 (percenl)
MSAs f----:.,..,.-:-=2:.::,OO:=3:..:,:...
:J::"
I .:.:to...:2:.::006-T=,:Q4.::o....:..",,(pe:..;:-:rrc:;:;en::.:t)<.,,-.,.,-_ _
Small
Large Small
Large
Small
Large
Small
Large Small
Large Small
Large
increase increase increase increase increase increase
increase increase increase increase increase increase
(less
(30 or
(less
(30 or
(less
(30 or
(30 or
(less
(30 or
(less
(30 or
(less
than 30) more) than 30) more) than 30) more)
than 30) more) than 30) more) than 30) more)

-16.S
-29 .2
-23.2
-17.1
-IS.5

-37 .9
-18.6
14.3
-24.6
-32.4

-49.4
-44.4
-42.4
-42.7
-37.7

-<i.3
-2.0
.6
-11.1
-5.7

- 16.4
-20.1
-14.7
-17.3
-15.7

14.2
5.0
10.2
.6
10.1

13.7
28.4
10. 1
.6
8.8

-<i0.7
-<i4. 1
-<i2.5
-55.4
-<i3.3

-10.2

-38.5
-IS.8
-19.8
-32.5
-33.3

- 38.7
-28.3
-28.5
-37.2
-34.4

- 11.0
-12.0
-19.4
-17.5

-12.5
-12.6
- 12.0
- 20.4
-17.6

7.8
-5.7
-4.5
-II.S
_8.5

13.2

-14.4
-14.4
-19.3
-17.3

23.6
-1.1
-7.5
-3.0

-<i2.S
-<i6.7
-<i2.7
-58.2
-<i1.4

-12.3
-24.8
-20.6
-15.5
-16.7

-40.5
-30.5
-<i.0
-2S.S
-29.S

-46.6
-38.4
-3S.5
-39.9
-39.5

-10.6

-13 .0
- IS.3
-IS.4
-17.4
-16.9

27.8
10.2
11.8
.7
4.2

15.0
27 .1
10.6
.S
3.S

-<i1.0
-<i6.6
-<i3 .0
-57.4
-<iO.S

-23.6
-33 .S
-23.9
-13.S

-36.6

-52.8
-48.3
-43.4
-42.S
-43.6
-<i1.0

-1.1
15.0
16.8
.1
1.6
- 31.7

- 20.2
- 18.9
-10.1
-11.8
-12.6
-46.4

20.6
31.1
24.6
12.7
15.2
-20.9

23.7
47.1
22.3
10.3
13.4
-33.S

-17.6
-43.2

-4.6
39.6
-15.4
-14.3
-12.0

-3.6

-2.0
-7.9
-3.5
-11.9

-72.0

-73.1
- 70.8
-73.2
-<i8.9
-<i7.0

-57 .2
-53.1
- 55.2
-54.7
-<i5.5

-<i4.2
-<i3 .5
-<iO.8
-59.7
-<i4.7

-52.8
-55.6
-46.9
-46.2
- 56.4

-39.8
-35.2
-40.6
-39.3
-53.8

-76.4

-72.0

-74.3
-74.1
-73.9

-<i1.0
-<i3.6
-<iO.7
-5S.4
-<iO.3

-<i6.6
-<is.5
-<i5.1
-<i4.S
-<i6.4

-58.9
-<i2.8
-53.7
-50.1
-54.4

-46.3
-48. 1
-52.7
-45.4
-47.7

-70.5
-82.1
-<i7.2
-<is.6
-71.5

-75.2
-74.0
-74.S
-73.4
-73.8

-54.9
-59.5
-57.0
-55.S
-57.5

-<i5.2
-<i6.3
-<i3.4
-<i2.3
-<i4.4

-50.2
-51.8
-48.6
-47.3
-49.1

-38.0
-35.9
-40.9
-41.1
-42.9

-57.4
-<i1.7
-<i2.5
-51.2
-55.7
-54.5

-<i5.5
-<i5 .9
-4.S
-<i5.9
-<i6.4
-79.7

-71.8
-<i9.5
-73.1
-<i6.1
-<i7.7
-55.4

-49.4
-34.4
-47.9
-47 .6
-4S.9
-57.5

-<iO.6
-58.5
-58.0
-53.8
-56.7

-50.4

-39.0
-39.8
-37.4
-3S.5
-40.4
- 58.5

-19.9
- 15.7
-26.2
-29.3
-30.2
-55.0

-<iO.6
- 58.6
-58.3

-72.3

-<iO.1
-55.3
-54.6

-<i2.4
-<i2.2
-<i1.2

- 50.5
-4S.0
-51.4

-42.S
-41.0
-41.9

-73.S
-43.9
-<i8.5
-81.0

-73.9
-70.4
-57.7
-<i9.4

-72.8

PROPIiRIT

Income Calt1Nory!li

Lower.. .. .. ..... .. ....... ....
Middle...... ............... ..
High.. ................

-21.9
-18.0
-IS.7

-36.4
-27.7
-16.2

-43.3
-43.6
-41.1

- 15.2
-11.1
-4.7

-15.0
- 16.7
-18.8

-4.0
2.4

6.2

5.1
4.6
1.4

-<i7. 1

-70.S
-71.0
-<i6.4

Total owner occupied .. .......

-10. 1

-15.3

-24.S

-7 .1

-7.1

- .5

S.3

-<i2.6

-<i5.5

-74.0

-<iO.4

-<i3.0

-54.4

-53.2

- IS.S

-24.S

-42.6

-9.7

- 17.1

2.9

3.6

-59.1

- 70.8

-<i9.9

-56.4

-<i2.0

-49.4

-41.7

-18.0

-24.2

-40.7

-9.5

-16.2

2.6

4.1

-59.4

-70.1

-70.3

- 56.9

-62.1

-50.0

-42.8

NON-OWNER OCCUPIED
TOIaI ............ .

-71.3

Total
NOTE: See nOles to table 16.A.

loan underwriting or pricing, they are included in the
analysis as proxies for at least some of the factors that
are considered. Because of the focus here on specific
loan product categories, the analysis already accounts
In broad terms for loan type and purpose, type of
property secunng the loan, lien status, and owneroccupancy status. Given that lenders offer a wide
variety of conventional loan products for which basi c
terms can differ substantially, the analysis can only be
viewed as suggestive.

The pricing analysis focuses on both the incidence
of higher-priced lending and the mean APR spreads
paid by borrowers with higher-priced loans. Comparisons of average outcomes for each racial, ethnic, or
gender group are made both before and after accounting for differences In the borrower-related factors
cited earlier (income; loan amount; location of the
property, or MSA; presence of a co-applicant; and, in
the comparisons by race and ethnicity, sex) and for
differences in borrower-related factors plus the spe-

Federal Reserve Bulletin D December 2008

A 138

17. Change in the number of lower- and higher-priced loan originmions for home purchase and ror rdl nancing. by change in
mortgage delinquency rale in melropoli tan statistical arell and by characteristic of bOil-ower and of censu. IraCI,
2006:H I lh rough 2007:H2
Percen!
Refinance

Home purchase
Lower priced

Higher priced

Change in rnongage delinquency rate in MSA (percent)'
Small
Very large Small
Very large Small
Very large
Large Very large Small
Large
Large
Large
change
change
increase change
increase change
increase
increase increase
increase
increase
increase
(less than (50--200) (200 or (less than (50--200) (200 or (less Ihan (50--200) (200 or (less than (50--200) (200 or
SO)
more)
SO)
more)
50)
more)
SO)
more)

I
~

Higher priced

Lower priced

Characteristic
of borrower and
of census tract, by
owner·occupancy
status of propen y

OWNER OCCUPIED
BORROWER
Minoril), slalllS 1

Black or African American ....
Hispanic. white, ... . ..... .. ....
Olher mooorny' .......... . .. . .
Non-Hi,anic white . .... ... ...
Missing .. .... . .......... ....

2.7
-4.4
-14.1
-12.3
3.4

-4.4
-27.4
-12.7
-16.8
-12.6

-18 .5
-46.9
-22.4
-22.1
-25.9

--{)3 .7
-58.6
--{)2.5
-57.3
--{)2.2

- 70.7
-74.8
-73.5
--{)3.6
-72.7

--81.5
-86.3
--82.0
-74.7
-83.6

10.9
19.0
4.9
-1.6
8.8

-17.7
-21.2
-17.6
-17.3
-18.5

-49.0
-45.1
-35.0
-37.7
-35.5

-46.9
-41.5
-43 .1
-43.4
-55 .7

--{)6.2
--{)6.0
--{)4.6
--{)1.3
--{)7.5

-73.3
-70.7
-70.5
--{)6.7
--{)5.7

2.6
-4.8
-12.7
-13.1
-10.5

5.9
-7.9
-8.9
-13.5
-10.8

24.6
22.0
27.3
-3.1
3.1

--{)2.3
-54.9
-57.5
-56.1
-58.1

--{)9.0
--{)3.6
--{)5.6
-56.6
--{)2.7

--{)9.0
--{)6.0
--{)7.9
--{)4.8
--{)6.8

8.7
14.8
-2.7
-10.1
-5 .5

-15.4
-15.6
-20.5
-22.5
-20.8

-38.5
-28.3
-13.5
-30.9
-29.8

-51.5
-49.5
-52.3
-49.2
-51.3

--{)9.7
-71.0
-65.4
--{)3.8
--{)7.2

-77.7
-73.4
-74.1
-70.2
-72.2

8.7
-2.1
-14.9
-11.6
-8.8

4.3
-23.2
-12.5
-16.3
-14.6

19.4
-3.1
tl.l
-8.1
-4.4

--{)5.6
--{)3.7
--{)5.5
--{)1.7
--{)3.2

-72.0
-77.6
-74.5
--{)6.5
-71.9

--81.6
--80.8
-77.3
-72.8
-78.1

15.5
18.9
3.0
-1.8
1.5

-13.3
-19.0
-16.2
-18.0
-17.6

-45 .0
-39.8
-35.4
-33 .8
-36.1

-45.3
-41.9
-46.0
-45.0
-46.8

--{)6.4
--{)8.8
--{)6.0
-63.3
--{)5.7

-75.5
-74.2
-73.2
-71.0
-72.6

3.9
3.1
-10.6
-9.2
--{).4
-59.8

-7.1
-30.9
-8.0
-14.8
-14.5
-71.3

-34.1
-56.3
-28.3
-26.9
-32.6
-74.0

--{)3.8
-55.2
--{)4.4
-52.9
-56.2
--{)6.7

-71.6
-78.8
-75.1
--{)5.5
-71.9
-71.9

-84.1
-88.4
--83.3
-77.4
-84.5
-72.9

15.4
33.9
14.4
7.8
10.3
-28.9

-20.2
-19.7
-13.2
-10.6
-12.3
-41.9

-52.9
-48.8
-35.9
-39.0
-40.3
-58.6

-36.3
-30.1
-31.8
-34.4
-36.7
-53.5

--{)0.5
--{)Q.I
-64.3
-57.0
-59.4
-56.3

-71.7
-69.4
-69.8
--{)4.2
--{)6.3
-52.1

Lower ..... . .. . . .. .. .. .. .. . .. .
Middle .... . .... .. ..... .. .....
High . ............ . . .... . ....

-4.8
-8.6
-13.0

-15.0
-16.6
-16.4

-26.8
-26.3
-26.3

-58.4
-59.9
-59.5

-70.6
--{)9.0
--{)8.6

--84.3
-81.9
-77.8

4.8
1.9
-1.0

-18.5
- 18.3
-17.0

-42.0
-39.5
-36.6

-45.5
-45.5
-47.8

-64.5
--{)4.0
--{)3 .2

-7l.l
-69.2
-63.2

.....

-28.3

-39.5

-43.6

-58 .8

--{)8.4

-76.8

5.8

- 1I.3

-24.5

-51.9

--{)5.1

-73.7

NON·OWNER OCCUPIED
Total ..... .. ... .... ..... . ....

-9.8

-16.3

-26.4

- 59.4

--{)9.4

-81.8

1.3

-17.9

-39.0

-46.0

--{)4.0

--{)8.5

Total ..... .. . . . .. . .. . .. . . ....

-12.5

-19.7

-29.2

-59.3

-4\9.2

--81.1

1.8

-17.2

-37.5

-46.6

-64.1

-4\9.0

Minority

SIOIUS,

calegoryS

b)' income
-

Lower
Black or African American ..
Hispanic. white, .. . . .. . . ... . .
Olher mmonty' . .. . . . . . . . . .
Non.Hispanic white .. ......
Total .... .... ........ .. . .
Middle
Black or African American ..
Hispanic. wh!te, .......... ...
Omer mooonty· .. . . . .... . ..
Non-Hispanic white . . . .. ...
Total ...... .. ...... ... ...
High
Black or African American . .
Hispanic. white, . .. ......... .
OIher rrunonty' . .. . . . . . . ...
Non.Hispanic white . . .... . .
Total . ...... .. ...... . . . ..
Missing" . . .. . ..... .. . . ...... .
CENSUS TRACT or

PROPERTY

Income calegO/)' 6

Total owner occupied ...

NOTE: See general note to table 14.A.
I . Mortgage deUnquency rate is me percentage of mortgage borrowers 90
days or more delinquent ; calculated using delinquency rates for each metro·
politan statistical area (MSA) from 2003 :Q4 to 2007:Q4.
2. See note 4. table 12.
3. Other minority consists of American Indian or Alaska Nalive, Asian, and
Native Hawaiian or olher Pacific Islander.

4. Information for me characteristic was missing on me application.
S. See nOle 2, table 12.
6. See nole 10, lable 12.
7. Includes loans for which occupancy starus was missing.
SOURCE: For delinquency rale statistics, Trend Data, a producl of TransUnion LLC

cific lending institution used by the borrower.34 The
method of controlling for these factors is to group
borrowers into cells in which the individuals in each
cell are similar along each dimension considered.

Comparisons for lending outcomes across groups
are of three types: gross (or "unmodified"), modified
to account for borrower-related factors (or "borrower
modified"), and modified to account for borrowerrelated factors plus lender (or "lender modified") . For
purposes of presentation, the borrower- and lendermodified outcomes shown in the tables are normalized so that, for the base comparison group (non-

34. Excluded from the pricing analysis are applicants residing
outside the 50 states and the District of Columbia as well as applications deemed to be business related.

The 2007 HMDA Data

Hispanic whites in the case of comparison by race
and ethnicity and males in the case of comparison by
sex) , the mean at each modification level is the same
as the gross mean. Consequently, the borrower- and
lender-modified outcomes for any other group represent the expected average outcome under the assumption that the members of that group had the same
distribution of control factors (income, loan amount,
and the like) as the base comparison group.
As noted earlier, mortgage market conditions
changed significantly over the course of 2007 . To
help account for the possible effects of these changing
conditions on the patterns of lending outcomes across
population groups, the tables presented in this section
show loan activity by half-year for both 2006 and
2007. Our analysis of the lenders that did not report in
2007 but that did so in 2006 indicates that by the
second half of 2007 virtually all of these lenders had
gone out of business. As noted, these lenders tended
to be relatively more focused on the higher-priced
segment of the market and on lending to minority
borrowers. Consequently, the lending data for the
second half of 2007 likely reflect a "truer" picture of
the entire market for that period than the data for the
first half of 2007, which do not include loans extended
during this period by lenders that ultimately ceased
operations and did not report.
Although the focus of the discussion that follows is
on differences in lending outcomes across groups, it is
important to keep in mind that, as shown earlier, the
overall , or gross, incidence of higher-priced lending
in 2007 fell sharply from 2006. This drop was
experienced by all groups of borrowers regardless of
race, ethnicity, or sex. The decline is apparent when
comparing the unmodified incidences in higher-priced
lending in 2007 for different groups with the unmodified incidences experienced by these groups in 2006.

Incidence oj Higher-Priced Lending by Race
and Elhnicity
The 2007 HMDA data, like those from earlier years,
indicate that black and Hispanic white borrowers are
more likely, and Asian borrowers less likely, to obtain
loans with prices above the HMDA price-reporting
thresholds than are non-Hispanic white borrowers.
These relationships are found for both home-purchase
loans and refinancings regardless of the specific
period considered (tables 18.A and I8.B). Gross
differences in the incidence of higher-priced lending
between non-Hispanic whites, on the one hand, and
blacks or Hispanic whites, on the other, are large, but
these differences are substantially reduced after controlling for borrower-related factors plus lender. Dif-

A 139

ferences in the incidences of higher-priced lending
between Asians and non-Hispanic whites are generally relatively small.
In the second half of 2007, for conventional homepurchase loans, the gross mean incidence of higherpriced lending was 29.5 percent for blacks and
9.2 percent for non-Hispanic whites, a difference of
20.3 percentage points (table 18.A). Borrower-related
factors included in the HMDA data accounted for
4.3 percentage points of the difference. Controlling
further for the lender reduces the remaining gap to
11 .1 percentage points. The results for Hispanic
whites are similar to those for blacks. The difference
between the gross mean incidence of higher-priced
lending for Hispanic whites (24.3 percent) and the
corresponding incidence for non-Hispanic whites
(9.2 percent) is 15.1 percentage points. Borrowerrelated factors included in the HMDA data accounted
for 5.7 percentage points of the difference. Controlling further for the lender reduces the remaining gap
to 6.2 percentage points . The situation for Asians
differs greatly from that for blacks or Hispanic whites:
Compared with non-Hispanic whites, Asians had a
lower mean incidence of higher-priced lending for
home-purchase loans on both a gross and a modified
basis.
Comparing the differences in the incidences of
higher-priced lending between the various minority
groups and non-Hispanic whites in the second half of
2006 with the differences between these groups in the
second half of 2007 reveals relatively little change in
the gaps modified for borrower-related factors plus
lender. For example, the fully modified gap between
blacks and non-Hispanic whites was 13.4 percentage
points in the second half of 2006 and 11.1 percentage
points in the second half of 2007 . Similarly, the fully
modified gap between Hispanic whites and nonHispanic whites was 6.6 percentage points in the
second half of 2006 and 6.2 percentage points in the
second half of 2007.

Rate Spreads by Race and Ethnicity
The 2007 data indicate that among borrowers with
higher-priced loans, the gross mean prices paid by
black borrowers are moderately higher than-and
those paid by Hispanic white borrowers are nearly the
same as-those paid by non-Hispanic white borrowers (tables 19.A and 19.B). Asian borrowers with
higher-priced loans also paid about the same mean
prices, on average, as non-Hispanic whites with such
loans. These relationships are little influenced by an
accounting for borrower-related factors or the specific
lender used by the borrowers.

A140

Federal Reserve Bulletin 0 December 2008

18. Incidence of highl:r-priced lending. unmodified and modified for horrowcr- and lender-related faclOrs. for conventional
first liens on owner-occupied. onc- to four- r~'mily, si te-buill homes. by half-year in which loan was originated and by
race. elhnicily. (lnd e. of borrower, 2006-07
A. Home purchase
Percent e<cept as noted

Number of
loans

Race, ethnicity, and sell I

Modi fied incidence, by
modification factor

Unmodified
incidence

Borrowerrelated

Number of
loans

I Borrowerrelated

Modified incidence, by
modificalion faclor

Unmodified
incidence

B rro e
o w rrelated

plus lender

I Borrowerrelaled
plus lender

2006

Race other than white only
American Indian or Alaska Nati ve ..... ...
Asian ... .. .. . ... . . . . . . . .... . ........... . .
Black or African American . ....... . ... . ...
Native Hawaiian or other Pacific Islander ..
Two or more minorilY races ... ..... ... ....
Joinl . ...... . .. ....... ..... ..... ... . .. . . .
Missing ........... ... . .. ........ ..... ..

11 ,059
96,781
156,337
9,427
1,038
22,638
187,627

35.4
16.8
56.5
34.4
29.6
17.7
28.5

30.9
15.8
SO. I
30.4
30.5
24.4
31.2

25.4
17.3
30.8
23.4
19.8
20.0
23.6

10,557
90,424
162.369
9.348
1,074
22,033
190.450

32.9
16.7
51.1
33.5
25.7
17.3
29.9

30.8
14.7
45.9
28. 1
26.7
23.0
32.3

23 .4
16.5
30.7
21.9
20.6
19.6
23.2

White. hy ethnicit),
Hispanic while ...... . . .. ................
Non-Hispanic while . . .. .. ..... .. .. ... ...

235,283
1,219,990

48.1
18. 1

36.9
18.1

24.5
18. 1

229,008
1,186,928

45.1
17.3

34.0
17.3

23.9
17.3

635,262
461 ,907
18,871
15.819

33.2
31.8
24.6
26.9

33.2
30.9
24.6
23.8

33.2
32.0
24 .6
24.4

620,402
463 ,186
17,541
15,248

31.4
30.0
23.3
25.5

31.4
29.3
23.3
21.5

31.4
30.2
23.3
22.6

Sex
One
One
Two
Two

male .. ... .... .... ....... .... .. ......
.......... ..... .... ... ,. , '
female
males .... .. .. .... ... ... ...... ... ....
females .. ' ... .. ... .... .... ........
~

2007

R{/£'I! other th,m white OIU\,
American Indian or Alask3 Nati ve . .... .. . .
Asian .... ................ ...... . . ........
Black or African American . . . ... ........ ..
Native Hawaiian or other Pacific Islander ..
Two or more minority races . . . .. .. .... .. .
Joinl .. ........... . .... ..... . ...... . . ..
Missing ... .. . ... . . . ...... .. .. . .. .... ..

HI
7,437
75,6 10
110,747
6,410
902
18,781
146,171

22.0
9.6
37.8
20.8
15.5
10.4
16.7

21.1
9 .9
34.1
19.5
13.6
15.2
21.3

17.2
11.0
24.5
15.4
15.7
13.0
16.2

6,241
70,801
86,220
5.347
974
17.769
131 , 177

17.5
5.6
29.5
14. 1
10.6
7.3
11.4

14.7
6.9
25.2
14.4
11.8
11.3
15.4

15.1
7.8
20.3
12.8
12.7
10.5
12.3

. .....

152,90 1
1,031 ,059

31.8
11.8

23.9
11.8

17.6
11.8

Hl9.034
919:507

24.3
9.2

18.6
9.2

15.4
9.2

Sex
One male .. .. .. ... .... ........... . . . . .. .
One female ...... ...... ..... ... .. .... .
Two males ...... .. ... ... .. . .. ... . .. .
Two females . . . . . . . . . . , . . . . .. ... . . ... . .

500,468
362.266
14,504
12,553

20.8
19.3
16.4
17.7

20.8
18.7
16.4
15.0

20.8
19.5
16.4
16.5

405,659
301,836
14.145
11 .886

15.9
14.4
12.8
12.8

15.9
13.6
12.8
11.4

15.9
14.3
12.8
12.6

White, hy ethnicit),
Hispanic while
Non-Hispanic while

... .... .... .
.... .. .... ...

. . . .. .

.
.

NOTE : Excludes transition-period loans (those for which the applicalion was
submitted before 2004). For definiti on of higher-priced lending, see 1e<1 nOIe 7;
for e<planation of modification facl ors, see tex!.

I . See note 4, table 12. Loans laken out jointly by a male and female are
nol tabulaled here because Ihey would not be directly comparable with loans
taken oul by one borrower or by Iwo borrowers of the same se<.

Pricing Differences by Sex

cants grouped by race or ethnicity. For each broad
loan product category in 2007 (first or second half),
American Indians, blacks, and Hispanic whites had
higher gross denial rates than non-Hispanic whites ;
blacks generally had the highest rates, and Hispanic
whites had rates between those for blacks and those
for non-Hispanic whites (tables 20.A and 20.B). The
pattern for Asians was somewhat different, as the
gross denial rate for them was either lower than, or
very similar to, the rate for non-Hispanic whites,
depending on the period and the loan purpose.
Controlling for borrower-related factors in the
HMDA data reduces the differences among racial and
ethnic groups. Accounting for the specific lender used
by the applicant almost always reduces differences

The 2007 HMDA data, like those in previous years,
reveal relatively little difference in pricing outcomes
when borrowers are distinguished by sex, although
single males experienced a somewhat higher modified incidence of higher-priced lending than single
females (tables l8.A and 18.B). The mean APR
spreads paid by females are virtually the same as
those paid by males after accounting for the presence
or absence of a co-borrower (tables 19.A and 19.B).

Denial Rates by Race, Ethnicity, lind Sex
Analyses of the HMDA data from earlier years have
consistently found that denial rates vary across appli-

The 2007 HMDA Data

A141

18 . Incidence of highcr-priceu lending. wln1odit1ed and mod i lieu for borrower- and lender-rduled faclU,rs. for conventional
firsl liens on owner-occupieu. onc- 10 four-family. site-buil l home , by hal f-year in which loan was originated and by
race. ethnicity. lind sex of horrower, 2Q06-07- Continlled
B. Refinance
Percent except as noted

Number of
loans

Race, ethnicity, and sex 1

Modified incidence. by
modification factor

Unmodified
incidence

Borrowerrelated

Borrowerrelated
plus lender

Number of
loans

Modified incidence. by
modification factor

Unmodified
incidence

B
0r;owerre ated

Borrowerrelated
plus lender

2006
H2

Race orher rhe/ll ",hire olily
American Indian or Alaska Native ..... .. . .

Asian . . .. .. . .. . ... . . .......... ... . . . . . .

....
Black or African American .........
Native Hawaiian or other Pacific Islander.
Two or more minority races . .. . .. ...... ..
Joint . . .. ........... ........... . .. ... ...
.... ...
Missing ... ........... .........
Whire, by erhnicir),
Hispanic white ....
Non-Hispanic white

. . . . . . . .. . . ... . .. ..
.... ... ... . .. . ... ..

Sex

.......

One male . . ..... ... . .. . . .. .. ....
One female ... ... ..... .. ........ .... .... .
Two males ... ............ .. .. .. .... ... ..
Two females
.... .. ..... .. .. . . . . . . . . . .

14.030
61 ,485
195,050
12,282
1,474
21 ,091
281.183

31.2
17.6
52.0
31.1
27.1
25.4
36.3

34.9
22.2
49.4
36.5
29.5
32.5
42.3

28.6
24.7
31.9
28.3
28.6
26.4
29.6

13,718
66,388
202,412
11 ,796
1,439
20,784
289,263

34.4
21.5
53.6
36.3
28.8
27.0
40.1

37.6
25.2
50.8
38.9
29.3
34.1
45.1

29.9
25.8
34.4
31.4
33.4
27.8
32.0

213,338
1.296.597

35.4
25 .0

36.4
25.0

28.4
25.0

223.825
1.300:339

39.9
26.5

37.7
26.5

31.0
26.5

591,436
506.018
13.457
15.620

33.4
34.1
26.3
33.2

33.4
32.8
26.3
28.9

33.4
33.1
26.3
27 .2

605,743
527,701
13.879
15.559

35.8
36.6
27.0
35.1

35.8
35.6
27.0
30.6

35.8
35.8
27.0
26.0

2007
H2

R(lce orher rhan whire onh'

American Indian or Alaskil Native ..... ...
Asian .. ........ . .. ........ . . ......... . . ..
Black or African American .... . ... ... .. . . .
Native Hawaiian or other Pacific Islander . .
Two or more minority races .. ...... ... ...
Joint .. ..... . ...... .......... . . ..... . . ..

11 ,480
63.999
158.416
9,518
1,434
19,892
258.895

28.1
15.4
44.6
25.7
20.2
19.6
29.5

31.0
17.5
41 ,6
29.1
23.2
24.8
35.3

22.1
18.8
27.1
24.3
22.2
20.4
25.2

8,028
44,318
108,245
6.283
1.122
14,413
179.528

23.9
8.4
36.8
18.9
14.1
17.2
20.6

26.2
13.5
35.4
24.3
16.1
21.6
25.7

18.2
14.9
22.6
19.0
18.7
17.0
20.1

.. . . .. . .. .. - ... .. .. ,

180,394
1,238,650

30.2
19.8

28.3
19.8

23.4
19.8

121 ,618
935.658

22.3
16.2

21.9
16.2

19.1
16.2

male
..... .. ..... . .... ..... . . ..
female .. ......... .. ....... .... .. .
males .. ........ . .. . .. . .. ........ . . . .
females ...... .. ..... ...... .... ......

546,140
451.279
12.931
13.992

26.6
27.6
21.0
28.5

26.6
26.7
21.0
24.0

26.6
26.5
21.0
22.7

381,204
327.198
10.216
11,371

19.9
21.1
17.4
24.2

19.9
19.8
17.4
20.2

19.9
19.4
17.4
18.8

Missing . . ............ . . ...... .
Whir •. by erhnicir),
Hispanic white
Non-Hispanic white

Sex
One
One
Two
Two

... .... .

... ..... .
. ... ..

.. . .

NOTE: See notes to table 18.A.

further, although unexplained differences remain between non-Hispanic whites and other racial and ethnic groups .
With regard to the sex of applicants, sole male
applicants have marginally higher gross and modified
denial rates than single females. Also, dual male
borrowers and dual female borrowers generally have
very similar denial rates, which are somewhat lower
than those for single applicants.

Some Limitations of the Data in AssessillR
Fair LendilZg Compliance
Information in the HMDA data, including borrower
income , loan amount, location of the property, date of
loan origination, and the specific lender used, is

insufficient to account fully for racial or ethnic differences in the incidence of higher-priced lending; significant differences remain unexplained. Similar patterns are shown in racial or ethnic differences in
denial rates . In contrast, only small differences across
groups were found in the mean APR spreads paid by
those receiving higher-priced loans . Regarding the
sex of borrowers, some very small differences were
found in lending outcomes.
Both previous research and experience gained in
the fair lending enforcement process show that unexplained differences in the incidence of higher-priced
lending and in denial rates among racial or ethnic
groups stem in part from credit-related factors not
available in the HMDA data, such as measures of

A 142

19.

Federal Reserve Bulletin 0 December 2008

lean APR spreads, unmotlifietl and modifieu for bOlT(lWCf- <Inti lenuer-relateu factors. for higher-priced convcnLional lirsf
liens on owner-occupied. onc- 10 four-family. ill.:-huilt home.• hy half-year in which loan was originatcd and by race.
elhnicily. and sex of borrower. 2006-07

A. Home purchase
Percentage points except as noted

Number of
higher-priced Unmodified
mean spread
loans

Race, ethnicity. and sex I

Modified mean spread. by
modification factor
Borrowerrelated

I Borrowerrelated

Number of
higher-priced Unmodified
mean spread
loans

plus lender

Modified mean spread. by
modification factor
Borrowerrelated

I Borrowerrelated

plus lender

2006
HI

Race other than while only
American Indian or Alaska Native . ...... . .
Asian .. . . .... .... ' ........ .... .. .. .... ...
Black or African American . ....... . . ...
Native Hawaiian or other Pacific Islander ..
Two or more minority races . . . . . . . ... ....
Joint . .. . . . . . ... . . . ... ... . .. . , .. . . . . . . . . .
Missing .. . . . . . . . ..... . .. ...... .... .....

3.911
16.307
88.335
3.247
307
3.999
53 ,557

5.25
5.11
5.69
5.25
5.42
5.30
5.41

5.23
5.13
5.64
5.22
5.38
5.34
5.43

5.17
5.15
5.34
5.14
5.16
5.19
5.28

3,478
15.089
82,903
3. 130
276
3.803
56.977

5.12
4.97
5.66
5.17
5.43
5.30
5.51

5. 13
5.07
5.59
5.15
5.45
5.29
5.55

5.11
5. 11
5.31
5. 17
5.37
5.12
5.26

White. by ethniciry
Hispanic white
. . . . . . . . . .. . . . . . . . .
Non-Hispanic white ... .... .. ... ....... ..

113.136
221.352

5.28
5.16

5.20
5.16

5.18
5.16

103,286
204,795

5.24
5.13

5.16
5.13

5.14
5.13

210.792
147,065
4.634
4.254

5.33
5.35
5.15
5.41

5.33
5.34
5.15

5.33
5.31
5.15
5.24

194.624
138.876
4,084
3,889

5.30
5.31
5.23
5.45

5.30
5.31
5.23
5.35

5.30
5.29
5.23
5.32

Sex

One male .. .... ..... ... .. .... ... ...... ...
One female .... ...... ... .. ....... ......
Two males . . . . . . . . . . . . . ... .. ... ........
Two females .... ............. ...... ... .. .

5. ~3

2007
HI

Race other rhan whire only
American Indian or Alaska Native ....... . .
Asian .. . . .. . . .... . . . ..... . .. ... . ... . . . . . .
Black or African American .. ...... . . . .. . ..
Native Hawaiian or other Pacific Islander . .
Two or more minority races ....... . .. . ....
Joint . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Missing ... . .. . . . . .. .. . . . . .. . .. ... . . • . . . ..

1,634
7,295
41 ,836
1.332
140
1.958
24.339

4.71
4.50
5.24
4.80
5.05
4.96
4.96

4.68
4.59
5.19
4.81
5. 17
4.92
5.09

4.73
4.67
4.92
4.77
4.91
4.80
4.86

1,093
3,968
25,395
754
103
1,306
14,928

4.07
3.90
4.44
4.02
4.40
4.19
4.21

4.17
3.94
4.47
4.17
4.35
4.19
4.33

4.08
4.01
4.32
4.10
4.34
4.08
4.23

Whir., by erhniciry
Hispanic white .. . .. . ... . . . .. .. ... . ..... . .
Non-Hispanic white .. . .... .... .. .... ... .

48.619
121 .526

4.77
4.66

4.70
4.66

4.71
4.66

26,484
84.943

4.06
4.06

4.13
4.06

4.07
4.06

Sex
One male . .. ... . . . . . . .... ... ..... .... ....
One female ..... . . . . .. . . .. . . .. ... ... .... .
Two males .......... . . .. . .. ... .. . . .. . . . ..
Two females . .. . . . . . . . . . . . . . . . . . . . . . . . . . .

104.020
69,928
2.377
2,219

4.80
4.80
4.85
5.18

4.80
4.82
4.85
4.99

4.80
4.81
4.85
4.88

64.664
43.499
1,812
1.524

4.14
4.11
4. 14
4.26

4.14
4.10
4.14
4.10

4. 14
4.12
4.14
4.40

NOTE: Spread is the difference between the annual percentage rate (APR) on
the loan and the yield on a comparable-maturity TreasW')' security. Excludes
transiti on-period loans (those for which the application was submitted before
2004). For definition of higher-priced lending, see text note 7; for explanation
of modification factors, s~ text See also note I, table 18.A.

credit history (including credit scores), loan-to-value
and debt-to-income ratios, and differences in choice
of loan products. Differential costs of loan origination
and the competitive environment also may bear on
the differences in pricing, as may differences across
populations in credit-shopping activities.
Differences in pricing and underwriting outcomes
may also reflect discriminatory treatment of minorities or other actions by lenders, including marketing
practices. The HMDA data are regularly used to
facilitate the fair lending examination and enforcement processes. When examiners for the federal
banking agencies evaluate an institution's fair lending
risk. they analyze HMDA price data in conjunction

with other information and risk factors, as directed by
the Interagency Fair Lending Examination Procedures .35 Risk factors for pricing discrimination include, but are not limited to, the relationship between
loan pricing and compensation of Joan officers or
brokers, the presence of broad pricing discretion, and
consumer complaints.
It is difficult to draw conclusions from the HMDA
data about changes in the fair lending environment
from 2006 to 2007. For example, denial rate differences between non-Hispanic whites and minorities
35. The Interagency Fair Lending Examination Procedures are
a vailable at www.ffiec .gov/PDF/fairle nd .pd f.

The 2007 HMDA Data

Al43

II). Mean APR 'preads, un mod iri ed and modified for hnrrower- and lender-related racl(lr ·. for higher-priced conventional lirst
liens on owner-occupied. one- to four-family. site-buill home, by half-year in which loan wa origin:lted and by ra e.
elhni city. tlnd SI.:X of borrower. "2CKl6-07-Colllillued
B. Refinance
Percentage points except as noted

Number of Unmodified
higher-priced mean
spread
loans

Race. ethnicity. and sex I

Modified mean spread. by
modification factor
Borrowerre lated

I Borrowerre lated

Number of Unmodified
higber-priced mean
spread
loans

plus lender
2006

Modified mean spread. by
modification factor
BorrowerBorrowerrelated

plus lender

Race OIher than ...hile only

American Indian or Alaska Native ..... • . .
Asian .... .... . . ........ .... .. .... . .. .....
Black or African American ... . . .. .. . ..... .
Native Hawaiian or other Pacific Islander . .
Two or more minority races . . ...... . ......
...... .. ., .... . ...
Joint .... .. .. .. ...
Missing ... .... ...... .. ......... .... .... ..

4.376
10.815
101.506
3;819
400
5.354
101 .960

5.14
5.11
5.42
5.29
5.27
5.08
5.35

5.09
5.09
5.37
5.21
5.18
5.14
5.36

5.14
5. 14
5.23
5.21
5.20
5.16
5. 16

4.720
14.281
108.406
4.283
415
5.604
115,955

4.98
4.68
5.30
5.01
5.20
4.96
5.20

5.05
4.91
5.24
5.07
5.31
5.07
5.25

5.09
5.00
5.08
5.03
5.11
5.03
5.02

75.512
324.384

5.27
5.13

5.22
5.13

5.17
5.13

89.236
343,955

5.00
4.98

5.04
4.98

197.567
172.442
3,533
5.185

5.29
5.30
5.08
5.17

5.29
5.28
5.08
5.11

5.29
5.29
5.08
4.99

216,821
192.926
3.743
5.461

5.09
5.12
5.02
5.11

5.09
5.09
5.02
5.00

5.09
5.09
5.02
5.09

While. by ethnicil)'

Hispanic white ..... . ...... ... .. ..... ....
Non-Hispanic white . .... ... .. . . . . . .. . . . .
Sex

One male . . . . . . .. . . .. ..... ....... , ......
One female ... ...... .... ....... ..... .. .. .
Two males . . . . . . . ... . . ... .. .. .. .. .. .....
Two females ... ... ... ..... ... . .... .....

2007

Race olher Ihan ...hile onll'

American Indian or Alaskil Native .. . . . . . .
Asian ....... . . . ....... .. .... . . . . .. .. . .. . .
Black or African American ...... . ...... . . .
Native Hawaiian or other Pacific Islander . .
Two or more minority races . . . .. ...... . . . .
Joint . .. .. .. . ..... . ..... .... .. . .... .. ...
Missing .... . . . .. . ... . . .. . ....... .... ..
While. by elhniciTy

Hispanic white . . ..
Non-Hispanic white

Sex

One male
One female
Two males .. . . .... .
Two females . . .

3.227
9.848
70.628
2.450
289
3.891
76,469

4.79
4.37
5. 12
4.70
4.85
4.85
5.02

4.77
4.72
5.07
4.79
4.86
4.92
5.09

4.88
4.80
4.92
4.88
4.89
4.91
4.82

1.918
3.733
39.836
1.189
158
2.474
37.003

4.73
4.11
4.96
4.49
4.82
4.69
4.60

4.79
4.44
5.00
4.81
4.94
4.82
4.72

4.67
4.51
4.75
4.67
4.63
4.64
4.59

... .. ... ..... ... ... ..
, . . . . . . . . .. ..... ..

54,477
245.074

4.79
4.79

4.87
4.79

4.89
4.79

27.151
151 .120

4.46
4.58

4.60
4.58

4.62
4.58

.. ... ....... .... .....
.. ..... ....... .. .... .
.... .. ... . .. .....

145.314
124.764
2721

4.88
4.88
4.90
5.04

4.88
4.85
4.90
4.91

4.88
4.87
4.90
4.91

75.729
68,930
17
• 8I
2.756

4.56
4.60
4.57
4.72

4.56
4.56
4.57
4.59

4.56
4.54
4.57
4.61

.. .

NOTE: See note to table 19.A.

widened from 2006 to 2007, although this development may have reflected differences in the credit
characteristics or other circumstances of the pools of
borrowers in the two years and not unfair treatment
by lenders. Similarly, differences between nonHispanic whites and minorities in the incidence of
higher-priced lending generally declined , although
the fully modified differences narrowed proportionately Jess than the gross differences . Given the substantial decrease in overall higher-priced lending, it is
difficult to know if this narrowing of the differences in
the incidence of higher-priced lending was due to any
change in the relative treatment of minorities or to
changes in the credit profiles of marginal borrowers
resulting from declines in applications and increased
denial rates.

APPENDIX A :
REQUIREMENTS OF REGULATION C

The Federal Reserve Board's Regulation C requires
lenders to report the following information on homepurchase and home-improvement loans and on refinancings:

For each applicatiol/ or loan
• application date and the date an action was taken on
the application
• action taken on the application
- approved and originated
- approved but not accepted by the appli cant
- denied (with the reasons for denial-voluntary
for some lenders)

A 144

Federal Reserve Bulletin 0 December 2008

20. Deni al rates on applicati ons, unmodi fied and mod ified for borrower- and lender-re lutctl factors . for convenl ional lin liens
on owner-uc upied, onc- to four-fumil y, site-built h l mc . by hal f-year in which applicati on was acted upun by lender and
by race. elhnicity, and sex of applican t, 2006-07
A . Home purchase
Percent except as noted

Race, ethnicity. and sex I
I

Number of
applications
acted upon
by lender

Modified denial rate, by
modification faclor

Unmodified
denial rate

Borrowerrelated

Number of
applications
acted upon
by lender

I Borrowerrelated
plus lender

Modified denial rate. by
modification factor

Unmodified
denial rate

Borrowerrelated

Borrowerrelated
plus lender

2006

Race olher Ihan while only
American Indian or Alaska Nalive .. ... ... .
Asian . . . . . ... . . ......... . . . . . . . . .. .... ..
Black or African American .. .. . . .. ...... .
Native Hawaiian or other Pacific Islander ..
Two or more minority races . .. . . . . .. . . .. ,.
Joint ... .. .. ... ... . .. ...... . ..... .. .... . . .
Missing .. .. ... . .. .... .. .......... .. .. .. ..

17,523
135.942
265,677
14,401
1,470
29,107
300,767

26.7
17.3
30.9
23.1
20.5
13.8
24.3

22.6
14.8
27.2
21.0
18.8
17.0
23.4

19.3
14.9
21.5
18.3
16.3
14.9
17.9

17,123
128.455
287,491
14.703
1,669
28.674
310,302

25.0
16.8
32.3
23.8
19.9
13.4
24.1

21.7
14.0
28.2
19.3
18.0
16.8
23.8

17. 1
14.8
21.5
16.6
16.8
14.6
17.8

While. by elhnicit)'
Hispanic while . .. ..... ... .. ...... ...... .
Non-Hispanic while ... . . . . . . . ...........

357,209
1,543,650

24 .7
13.2

20.0
13.2

17.5
13.2

361 ,957
1,519,786

26.2
13.1

20.7
13.1

17.6
13.1

Sex
One male .. ..... ... ... .... ..... ..........
One female . . ... . . . . ... . . .. . ... . ... . ... . .
Two males
... ...... ..... , ........ ... ..
Two females , . ..... . . . . .. ..... . ...... . ...

915,120
658,209
26,074
21 ,860

21.3
20.7
19.8
19.5

21.3
20. 1
19.8
18.0

21.3
20.6
19.8
18.6

918,501
676,289
24,431
21,462

22.1
21.3
18.6
19.4

22.1
20.8
18.6
16.9

22. 1
21.2
18.6
16.9

2007
HI
Race olher than white 0111)'
American Indian or Alaska Native . . ... . . • .
Asian .... .. . . . . . . .. .. . " . , ... ......
Black or African American .. . ..... .. . .....
Native Hawaiian or other Pacific Islander . .
Two or more minority races .. . . .. . . . ......
Joint . . . . . . . . , . . . . . . . . . . . . . , . . . . . . . . . . . .
Missing .. . . ... , .... . . ..... ... ... ... ....

12,326
106,595
206,186
10.540
1,384
24.610
233,947

28.6
17. 1
36.0
28.2
25.9
14.7
25.4

25.1
14.6
31.6
23.0
24.7
18.5
24.4

21.4
15.0
23.9
21.1
21.9
15.4
18.1

10,301
104.233
158,701
8,896
1,440
23,715
207,299

27.0
17.7
34.2
26.7
2 1.3
14.4
23.6

23.8
15.2
29.3
21.4
19.3
17.6
21.5

20.0
15.1
22.9
19.5
19.3
15.3
16.7

..... ... .... .. .. ..
...... ..... .... ... .

257, 135
1,307,913

29.9
13.3

22.4
13.3

19.7
13.3

191,838
1,187.866

30.0
13.2

22.0
13.2

19.7
13.2

Sex
One male , . , ... .... ....... .. ....... ... ...
One female ... ..... ....... , . . .. ... . . . . . .
Two males
.. . ... . ... .. .. ...... ....
Two females ., . ... .. . ... .. .... ...... , ...

739,062
527.172
20,708
18,053

22.9
22.2
21.4
22.1

22.9
2 1.7
21.4
20.6

22.9
22.1
21.4
20.2

610,149

22.4
20.9
20.6
20.0

22.4
20.6
20.6
18.1

22.4
21.2
20.6
18.7

White. by ethnicil),
Hispanic white . . ...
Non-Hispanic white ..

440.646
20,420
17,131

NOTE: Includes tranSition-period applications (those submitted before 2004).
For explanation of mOdification factors, see text. See also note I, table 18.A.

- withdrawn by the applicant
- file closed for incompleteness
• pre-approval program status (for home-purchase
loans only)
- pre-approval request denied by financial institution
- pre-approval request approved but not accepted
by individual
• loan amount
• loan type
- conventional
- insured by the Federal Housing Administration
- guaranteed by the Veterans Administration
- backed by the Farm Service Agency or Rural
Housing Service

• lien status
- first lien
- junior lien
- unsecured
• loan purpose
- home purchase
- refinance
- home improve ment
• type of purchaser (if the lender subsequently sold
the loan during the year)
- Fannie Mae
- Ginnie Mae
- Freddie Mac
- Farmer Mac
- Private securitization
- Commercial bank, savings bank, or savings
association

The 2007 HMDA Data

A145

20. Denial rale~ on applic3lion.s. unmodified and modified for borrower- and It!nder-relaled faclors. for conventional fir I lien
on owner-occupied. one- to four-family. ~it -buill homes. by hnlf-year in which application was a ted upon by lender and
by race. eLhnicilY. and ex of applicanl. 2(X)6-{)7- Colllillued
B. Refinance
Percent except as noted

Race. ethnicity. and sex I

Number of
applications
acted upon
by lender

Modified denial rate, by
modification factor

Unmodified
denial rate

Borrower.
related

Borrower·
related
plus lender

Number of
applications
acted upon
by lender

Modified denial rate . by
modification factor
B 11' er·
Borrower·
o ow
related
related
plus lender

Unmodified
denial rate

2006
H2

HI
Race olher lira" while

Oil/)'

American Indian or Alaska Native .....
Asian ..... . ...... . .. . ... ... . .. . . . . . .
Black or African American .. . .. .. . . ... . ...
Native Hawaiian or other Pacific Islander ..
Two or more minority raceS ... . ... . .. .
Joint .......... ..... ......... ..... ... . . ..
Missing . .. .. . ..... .. . . . . . . . . ..... . .. ..

31 ,582
104.007
431 .030
23.560
2.804
37,091
736,949

44.3
28.3
44.8
35.8
40.0
34.0
50.2

44.8
33.6
46.1
41.7
43.0
40.5
51.3

38.7
35.3
39.0
37.8
36.1
35.0
39.1

32,175
111 ,165
452.812
23,877
3,074
36,939
711 ,665

45.0
27.1
44.9
37.0
40.9
34.1
45.7

44.2
33.0
46.0
41.9
43.4
39.9
47.6

35.7
33.8
38.1
37.0
36.8
33.7
37.2

387,469
2.180,168

33.3
31.3

36.4
31.3

36.7
31.3

414,344
2.163,111

33.7
30.0

37.1
30.0

35.2
30.0

1.151 .237
950.223
25.064
29,707

38.3
37.0
36.5
38.8

38.3
35.8
36.5
36.3

38.3
36.6
36.5
36.3

1.172,849
975,866
25.806
30.478

36.9
35.2
36.5
40.2

36.9
34.2
36.5
37.7

22.1
21.2
36.5
35.7

While. by elh"icit)"

Hispanic white ..... . ... ...... .... .. ......
Non-Hispanic white ...... .... ..... .... .
Sex

One male ....... ... ... .. . . . .. ... .. .......
One female ... ... ... ....... ........ .... ..
Two males
..... ...... ........ .... .
Two females .. ...... .. ... .... ... .........

2007

HI
Race other thall while o"ly

American Indian or Alaska Native .. . . . ... .
Asian ......... . ......... . .. .. . .. . .. . ...
Black or African American .. . . . . . .. . .. . ...
Native Hawaiian or other Pacific Islander . .
Two or more minority races . . ... . . . .. . . . . .
Joint ....... ....... . . . . .. . . .. ...... . . . . . . .
Missing .... ... . . .. . .... ....... ..... ......
White. by ethlliciry

Hispanic white
Non-Hispanic white

44.5
49.8

41.4
36.4
42.2
41.3
41.8
37.1
39.4

27.626
90.733
329.444
17.394
2.928
32.643
500.917

60.2
35.6
55.9
49.7
53.0
44.5
50.7

56.1
38.8
56.4
51.5
53.9
48.8
49.7

43.6
39.5
44.9
44.6
47.0
40.3
41.2

40.1
32.7

42.0
32.7

39.8
32.7

318.369
1,767.691

47.3
35.7

46.6
35.7

43.4
35.7

40.6
39.1
40.1
43.4

40.6
38.1
40.1
40.8

40.6
39.1
40.1
40.5

891.020
717,686
22.436
26.193

44.2
42.3
43.1
46.2

44.2
41.4
43.1
43.8

44.2
42.6
43.1
41.7

32.148
111.681
408.342
21 ,457
3.276
38,339
646.545

54.2
30.1
51.3
43.6
49.2
38.9
48.5

51.0
35.5
51.4
46.5

. . . ... . . . . . . . . . . . . . .
377.168
.... ......... ......... 2.149.801

50.4

Sex

One male
...... ... . . .• . . . .. .. .
One female
...... . . . . . . .... .... .
Two males ...... . .. . .. . ... . . . . . .. . .. . . . . .
Two females ......... .... ..... .... .. .....

1.125.730
888.877
25.663
29.119

NOTE: See nOle to table 20.A.

Life insurance company. credit union , mortgage
bank. or finance company
Affiliate institution
Other type of purchaser

For eac/z applicant or co-applicant
•
•
•
•

race
ethnicity
sex
income relied on in credit decision

For each properlY
• location, by state, county, metropolitan statistical
area, and census tract

• type of structure
- one- to four-family dwelling
- manufactured home
- multifamily property (dwelling with five or more
units)
• occupancy status (owner occupied, non-owner occupied, or not applicable)

For loans subject to price reporting
• spread above comparable Treasury security

For loans subject 10 tlze Home OlVnership
and Equity Protection Act
• indicator of whether loan is subject to the Home
Ownership and Equity Protection Act

A 146

Federal Reserve Bulletin 0 December 2008

APPENDIX B:
PRIVATE MORTGAGE INSURANCE DATA
Historically, mortgage lenders have required prospective borrowers to make a down payment of at least
20 percent of a home's value before they will extend a
loan to buy a home or refinance an existing loan. Such
down payments are required because experience has
shown that homeowners with little equity are substantially more likely to default on their mortgages .
Private mortgage insurance (PMI) emerged as a
response to creditors' concerns about the elevated
credit risk of lending backed by little equity in a home
as well as to the difficulties that some consumers
encounter in accumulating sufficient savings to meet
the required down payment and closing costs.
PMI protects a lender if a borrower defaults on a
loan; it reduces a lender's credit risk by insuring
against losses associated with default up to a contractually established percentage of the claim amount.
The costs of the insurance are typically paid by the
borrower through a somewhat higher interest rate on
the loan.
In 1993, the Mortgage Insurance Companies of
America (MICA) asked the Federal Financial Institutions Examination Council (FFIEC) to process data
from PMI companies on applications for mortgage
insurance and to produce disclosure statements for
the public based on the data .36 The PMI data largely
36. Founded in 1973. MICA is the trade association for the PM!
industry. The FFlEC prepares disclosure statements for each of the
PM! companies. The statements are available at the corporate head-

mirror the types of information submitted by lenders
covered by HMDA. However, because the PMI companies do not receive all the information about a
prospective loan from the lenders seeking insurance
coverage, some HMDA items are not included in the
PMI data. In particular, loan-pricing information,
requests for pre-approval, and an indicator of whether
a loan is subject to the Home Ownership and Equity
Protection Act are unavailable in the PMI data.
The seven PMI companies that issued PMI during
2007 submitted data to the FFIEC through MICA. In
total, these companies acted on nearly 2 million
applications for insurance: 1.4 million applications to
insure mortgages for purchasing homes and about
540,000 applications to insure mortgages for refinancing existing mortgages. PMI companies approved
92 percent of the applications they received. Approval
rates for PMI companies are notably higher than they
are for mortgage lenders because lenders applying for
PMI are familiar with the underwriting standards
used by the PMI companies and generally submit
applications for insurance coverage only if the applications are likely to be approved.
0

quarters of each company and at a central depository in each metropolitan statistical area (MSA) in which HMDA data are held . The
central depository also holds aggregate data for all the PM! compames
active in that MSA. In addition, the PMI data are avail.able from the
FFlEC at www.ffiec .gov/reports.htm.

Legal Developments

March 2008

Legal Developments: Fourth Quarter, 2007
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT

First Citizens Bane Corp
Sandusky, Ohio
The Citizens Banking Company
Urbana, Ohio
Order Approving Merger of Bank Holding
Companies, Merger of Banks, and
Establishment of Branches
First Citizens Banc Corp ("First Citizens"), a financial
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act! to merge with
Futura Banc Corporation ("Fillura") and acquire its subsidiary bank, Champaign National Bank ("Champaign Bank"),
both of Urbana, Ohio.2 In addition, First Citizens' subsidiary state member bank, The Citizens Banking Company
("Citizens Bank"), also of Sandusky, has requested the
Board's approval under section 18(c) of the Federal Deposit
Insurance Act 3 ("Bank Merger Act") to merge with Champaign Bank, with Citizens Bank as the surviving entity.
Citizens Bank also has applied under section 9 of the
Federal Reserve Act ("FRAn) to establish and operate
branches at the main office and branches of Champaign
Bank. 4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
accordance with the relevant statutes and the Board's Rules
of Procedure (72 Federal Register 60,019 (2007».5 As
required by the Bank Merger Act, a report on the competi1. 12 U.S.c. § 1842.
2. First Citizens proposes to acquire the shares of the nonbanking
subsidiaries of Futura in accordance with section 4(kJ of the SHC Act
and the post-transaction notice procedures in section 225.87 of
Regulation Y (12 U.S.c. § 1843(k); 12 CPR 225.87).
3.12 U.s.c. § 1828(c).
4. 12 U.S.c. § 321. These branches are listed in the appendix.
5. 12 CFR 262.3(b).

tive effects of the merger was requested from the United
States Attorney General and a copy of the request was
provided to the Federal Deposit Insurance Corporation. The
time for filing comments has expired, and the Board has
considered the applications in light of the factors set forth
in section 3 of the BHC Act, the Bank Merger Act, and the
FRA.
First Citizens has total consolidated assets of approximately $776.5 million and is the 27th largest depository
organization in Ohio, controlling deposits of approximately
$678.4 million, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the state ("state deposits"}.6 First Citizens operates one
subsidiary depository institution, Citizens Bank, with
branches only in Ohio.
Futura, a small bank holding company with banking
assets of approximately $274.2 million, operates one
insured depository institution, Champaign Bank, in Ohio.
Futura is the 67th largest depository organization in Ohio,
controlling deposits of approximately $232.8 million.
On consummation of this proposal, First Citizens would
become the 23rd largest depository organization in Ohio,
with total consolidated assets of approximately $1.1 billion.
First Citizens would control deposits of approximately
$911.2 million, which represent less than 1 percent of the
total amount of state deposits.

COMPETITIVE CONSIDERATIONS
The BHC Act and the Bank Merger Act prohibit the Board
from approving a proposal that would result in a monopoly
or would be in furtherance of any attempt to monopolize
the business of banking in any relevant banking market.
Both acts also prohibit the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by its probable effect in meeting the convenience
and needs of the community to be served. 7
First Citizens and Futura have subsidiary depository
institutions that compete directly in the Logan County,

6. Asset data are as of September 30. 2007. Statewide deposit and
ranking data are as of June 30. 2007. and reHeet merger activity
through November 20, 2007. In this context, insured depository
institutions include commercial banks, savings banks, and savings
associations.
7, 12 U.S.c. § 1842(c)(l); 12 U.S.C. § 1828(c)(5).

Federal Reserve Bulletin 0 March 2008

Ohio banking market. s The Board has reviewed carefully
the competitive effects of the proposal in this banking
market in light of all the facts of record. In particular, the
Board has considered the number of competitors that would
remain in the market, the relative shares of total deposits in
depository institutions ("market deposits") controlled by
First Citizens and Futura in the market,9 the concentration
levels of market deposits and the increases in these levels
as measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"),10 and other characteristics of the market.
In the Logan County banking market, Citizens Bank is
the second largest depository institution, controlling deposits of approximately $119.6 million, which represent
approxi mately 21.6 percent of market deposits. Champaign
Bank is the fifth largest depository institution in the market,
controlling deposits of approximately $42 million, which
represent approximately 7.6 percent of market deposits.
Based on deposit data as of June 30, 2007, Citizens Bank
would become the largest depository institution in the
market, controlling deposits of approximately $161.6 million, which would represent 29.1 percent of market deposits. The HHI would increase 326 points to 1963.
Several factors indicate that the increase in concentration in this banking market, as measured by the HHI,
overstates the potential competitive effects of the proposal.
The Board notes that First Citizens did not enter the Logan
County banking market until October 4, 2007, when Citizens Bank assumed the insured deposits of a failed bank. I I
The record shows that the offices of the acquired bank
incurred a significant run-off of deposits in the market
between June 30, 2007, and the October 4 acquisition date,

8. The Logan County banking market is defined as Logan County.
Ohio.
9. Deposit and market-share data are based on data reported by
insured depository institutions in the summary of deposits data as of
June 30, 2007, adjusted to reflect mergers and acquisitions through
November 20, 2007, and are based on calculations in which the
deposits of thrift institutions are included at 50 percent. The Board
previously has indicated that thrift institutions have become, or have
the potential to become, significant competitors of commercial banks.
See, e.g., Midwest Financial Group, 75 Federal Reserve Bulletin 386
(1989); National City Corporation, 70 Federal Reserve Bulletin 743
(1984). Thus, the Board regularly has included thrift institution
deposits in the market-share calculation on a 50 percent weighted
basis. See, e,g.. First Hawaiian, Inc., 77 Federal Reserve Bulletin 52
(1991).
10. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800, The Department of Justice has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
pOints. The Department of Justice has stated that the higher-thannormal HHI thresholds for screening bank mergers for anticompetitive
effects implicitly recognize the competitive effects of limited-purpose
lenders and other non depository financial entities.
II. See Press Release, Federal Deposit Insurance Corporation,
FDIC Approves the Assumption of the Insured Deposits of Miami
Valley Bank, Lakeview, Ohio (October 4, 2007).

which other competitors in the market did not experience.
This decline in the deposits assumed by Citizens Bank
indicates that using June 30, 2007, deposit data to calculate
the effects of this proposal on market concentration would
overstate to some degree the actual market presence of First
Citizens. In addition, nine other insured depository institutions would continue to compete in the market after
consummation.
Moreover, the Board notes that one community credit
union also exerts a competitive influence in the Logan
County banking market. 12 This institution offers a wide
range of consumer products, operates street-level branches,
and has membership open to almost all the residents in the
market.
The DO] also conducted a detailed review of the potential competitive effects of the proposal and advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposaL
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Logan County banking market,
where First Citizens and Futura compete directly, or in any
other relevant banking market. Accordingly, the Board has
determined that competitive considerations are consistent
with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSlDERA TIONS
Section 3 of the BHC Act and the Bank Merger Act require
the Board to consider the financial and managerial resources and future prospects of the companies and depository institutions involved in the proposal and certain other
supervisory factors. The Board has carefully considered
these factors in light of all the facts of record, including
confidential supervisory and examination information from
the primary federal and state banking supervisors of the
organizations involved in the proposal, publicly reported
and other financial information, and information provided
by First Citizens and Futura.
In evaluating financial resources in expansion proposals
by banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary depository institutions and the organizations' significant nonbanking operations. In this
evaluation, the Board considers a variety of information,
including capital adequacy, asset quality, and earnings
12. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See, e.g., Regions
Financial Corporation, 93 Federal Reserve Bulletin CI6 (2007);
Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006);
RN.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway
Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004).

Legal Developments: Fourth Quarter. 2007

performance. In assessing financial factors. the Board
consistently has considered capital adequacy to be especially important. The Board also evaluates the financial
condition of the combined organization at consummation,
including its capital position, asset quality, and earnings
prospects, and the impact of the proposed funding of the
transaction.
The Board has carefully considered the financial factors
of the proposal. First Citizens, Futura, and their subsidiary
depository institutions are well capitalized and would
remain so on consummation of the proposal. Based on its
review of the record, the Board also finds that First Citizens
has sufficient financial resources to effect the proposal. The
proposed acquisition is structured as a partial share exchange and a partial cash purchase of shares. First Citizens
will use a combination of existing resources and debt to
fund the cash purchase of shares.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of First Citizens, Futura, and their subsidiary
depository institutions, including assessments of their management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the other relevant banking supervisory
agencies with the organizations and their records of compliance with applicable banking laws and with anti-moneylaundering laws. First Citizens, Futura, and their subsidiary
depository institutions are considered to be well managed.
The Board also has considered First Citizens' plans for
implementing the proposal, including the proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors the Board must consider under the BHC
Act and the Bank Merger Act.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATION
In acting on a proposal under section 3 of the BHC Act and
the Bank Merger Act, the Board also must consider the
effects of the proposal on the convenience and needs of the
communities to be served and take into account the records
of the relevant insured depository institutions under the
Community Reinvestment Act ("CRA").13 Citizens Bank
received a "satisfactory" rating at its most recent CRA
performance evaluation by the Federal Reserve Bank of
Cleveland ("Reserve Bank"), as of September 25, 2006.
Champaign Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the Office of
13. 12 U.S.c. § 2901 et seq.; 12 U.S,c. § 1842(c)(2).

the Comptroller of the Currency, as of July 22, 2003. After
consummation of the proposal, Citizens Bank plans to
implement its CRA policies at Champaign Bank. First
Citizens has represented that the proposal would provide
greater convenience to customers through a larger network
of branches and ATMs and a broader range of financial
products and services over an expanded geographic area.
Based on all the facts of record, the Board concludes that
considerations relating to the convenience and needs of the
communities to be served and the CRA performance
records of the relevant depository institutions are consistent
with approval.
ESTABLISHMENT OF BRANCHES
As previously noted, Citizens Bank has also applied under
section 9 of the FRA to establish branches at the locations
of Champaign Bank's existing main office and branches.
The Board has assessed the factors it is required to consider
when reviewing an application under section 9 of the FRA
and the Board's Regulation H and finds those factors to be
consistent with approval. 14
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the applications should be, and
hereby are, approved. In reaching its decision, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act, the Bank
Merger Act, and the FRA. The Board's approval is specifically conditioned on compliance by First Citizens and
Citizens Bank with the conditions imposed in this order and
the commitments made to the Board in connection with the
applications. For purposes of this action, the conditions and
commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transactions may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Reserve Bank, acting pursuant to delegated authority.
By order of the Board of Governors, effective November 30, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin,
ROBERT DEY. FRIERSON

Deputy Secretary of the Board
14,12 U.S.c. §322; 12 CFR 20S.6(b).

Federal Reserve Bulletin 0 March 2008

Appendix
BRANCHES IN OHIO TO BE ESTABLISHED BY
CITIZENS BANK
Urbana
601 Scioto Street
504 North Main Street
Russells Point
330 South Orchard Island Road
West Liberty
205 South Detroit Street
Troy
115 South Market
Dublin
6400 Perimeter Drive
Hilliard
4501 Cemetery Road
Plain City
320 South Jefferson Avenue
Akron
529 North Cleveland Massillon Road

KeyCorp
Cleveland, Ohio
Order Approving the Merger of Bank
Holding Companies
KeyCorp, a financial holding company within the meaning
of the Bank Holding Company Act ("BHC Act"), has
requested the Board's approval under section 3 of the BHC
Act l to acquire U.S.B. Holding Co., Inc. ("USB"), Orangeburg, and its subsidiary bank, Union State Bank, Nanuet,
both of New York,2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 52,129 (2007». The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act.
KeyCorp, with total consolidated assets of approximately $93.5 billion, is the 24th largest depository organi-

L 12 U.S.C § 1842.
2. In connection with this proposal, KYCA, Cleveland, Ohio, a
wholly owned subsidiary of KeyCorp, has applied to become a bank
holding company by merging with USB. The resulting institution will
merge with KeyCorp, with KeyCorp as the surviving institution.
KeyCorp also proposes to acquire the nonbanking subsidiaries of USB
in accordance with section 4(k) of the BHC Act, 12 U.S.C § I 843(k).

zation in the United States. 3 KeyCorp's only insured
depository institution, Key Bank National Association
(HKeyBank"), also of Cleveland, operates in 14 states. 4 In
New York, KeyCorp is the 12th largest depository organization, controlling $11.5 billion in deposits, which represents 1.4 percent of the total amount of deposits of insured
depository institutions in the state ("state deposits").5
USB, with total consolidated assets of approximately
$3 billion, controls one subsidiary bank, Union State Bank,
which operates in New York and Connecticut. In New York,
USB is the 30th largest depository organization, controlling
approximately $1.8 billion in state deposits.
On consummation of the proposal, KeyCorp would
remain the 24th largest depository institution in the United
States, with total consolidated assets of approximately
$96.7 billion. KeyCorp would control deposits of approximately $59.2 billion, which represent less than I percent of
the total amount of deposits of insured depository institutions in the United States. In New York, KeyCorp would
become the ninth largest depository organization, controlling deposits of approximately $13.3 billion, which represent approximately 2 percent of state deposits.

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the bank
holding company's home state if certain conditions are
met. For purposes of the BHC Act, the home state of
KeyCorp is Ohio,6 and USB is located in New York and
Connecticut. 7
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that the conditions
for an interstate acquisition enumerated in section 3(d) of
the BHC Act are met in this case. 8 In light of all the facts of
3. Asset and asset ranking data are as of June 30, 2007; national
deposit and ranking data are a~ of March 31, 2007; statewide deposit
and ranking data are as of June 30, 2006.
4. Key Bank operates branches in Alaska, Colorado, Florida, Idaho,
Indiana, Kentucky, Maine, Michigan, New York, Ohio, Oregon, Utab,
Vermont, and Washington.
5. In the context of this order, insured depository institutions
include commercial banks, savings banks, and savings associations.
6. See 12 U.S.c. § 1842(d). A bank holding company's horne state
is the state in which the total deposits of all banking subsidiaries of
such company were the largest on July I, 1966, or the date on which
the company became a bank holding company, whichever is later.
7. For purposes of section 3(d) of the BHC Act, the Board considers
a bank to be located in the states in which the bank is chartered or
headquartered or operates a branch. See 12 U.S.c. §§ 1841(0)(4)-(7)
and 1842(d)(I)(A) and I 842(d)(2)(B).
8.12 U.S.c. §§ 1842(d)(I)(A)-(B) and I 842(d)(2)-(3). KeyCorp is
adequately capitalized and adequately managed, as defined by applicable law. Union State Bank ha~ been in existence and operated for the
minimum period of time required by applicable New York law, and the
proposal is not subject to an age requirement under Connecticut law.
See N.Y. Banking Law § 223-a (2001) (five years). On consummation
of the proposal, KeyCorp would control less than 10 percent of the
total amount of deposits of insured depository institutions in the
United States and less than 30 percent of the total amount of deposits
of insured depository institutions in New York (12 U.S.C.

Legal Developments: Fourth Quarter, 2007 C5

record, the Board is permitted to approve the proposal
under section 3(d) of the BHC Act.
COMPETITIVE CONSIDERATIONS
Seetion 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be servedY
KeyCorp and USB have subsidiary depository institutions that compete directly in the Metropolitan New YorkNew Jersey banking market. 10 The Board has reviewed
carefully the competitive effects of the proposal in this
banking market in light of all the facts of record. In
particular, the Board has considered the number of competitors that would remain in the market, the relative shares of
total deposits in depository institutions controlled by KeyCorp and USB in the markets ("market deposits"),l1 the
concentration level of market deposits and the increases in
these levels as measured by the Herfindahl-Hirschman
Index ("HHI") under the Department of Justice Merger
Guidelines ("DOJ Guidelines" ),12 and other characteristics
of the markets.
§ I 842(d)(2)(B)). The proposed transaction is not subject to any
deposit cap in Connecticut under the BHC Act because KeyCorp does
not operate in Connecticut or subject to any other relevant deposit cap
under Connecticut law. See 12 U.S.C. § I 842(d)(2)(B)-(C). All other
requirements of section 3(d) of the BHC Act would be met on
consummation of the proposal.
9.12 U.S.c. § 1842(c)(I).
10. The Metropolitan New York-New Jersey banking market is
defined as Bronx, Dutchess. Kings. Nassau, New York, Orange,
Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan, Ulster, and
Westchester counties, all in New York; Bergen, Essex, Hudson,
Hunterdon, Middlesex, Monmouth, Morris, Ocean, Passaic, Somerset,
Sussex, Union, and Warren counties and the northern portions of
Mercer County, all in New Jersey; Monroe and Pike counties in
Pennsylvania; Fairfield County and portions of Litchfield and New Haven counties in Connecticut.
II. Deposit and market share data are as of June 30, 2006, adjusted
to reflect mergers and acquisitions through August I, 2007, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). Thus, the Board
regularly has included thrift deposits in the market share calculation on
a 50 percent weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal
Reserve Bulletin 52, 55 (1991).
12. Under the DOJ Guidelines, a market is considered unconcentrated ifthe post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice (HDOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI

Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Metropolitan New York-New Jersey
banking market 13 On consummation of the proposal, the
market would remain moderately concentrated as measured
by the HHI, and numerous competitors would remain in the
market.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
the banking market. In addition, the appropriate banking
agencies have been afforded an opportunity to comment
and have not objected to the proposaL
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the banking market where KeyCorp and
USB compete directly or in any other relevant banking
market Accordingly, the Board has determined that competitive considerations are consistent with approval.
FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors, The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination and
other supervisory information received from the relevant
federal and state supervisors of the organizations involved
in the proposal, and publicly reported and other financial
information, including information provided by KeyCorp.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary depository institutions and the organizations' nonbanking operations. In this evaluation, the
Board considers a variety of information, including capital
adequacy, asset quality, and earnings performance. In
assessing financial factors, the Board consistently has
is at least 1800 and the merger increases the HHI more than 200
points. The DOJ has stated that the higher-tban-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
13. On consummation, the HHI would remain unchanged at 1226
for the Metropolitan New York-New Jersey banking market. KeyCorp
operates the 45th largest depository institution in the market, controlling deposits of approximately $1.6 billion, which represent less than
1 percent of market deposits. USB controls $1.9 billion in deposits,
which also represents less than I percent of market deposits. Key Bank
would become the 29th largest depository institution in the market.
controlling deposits of approximately $3.5 billion, which represent
approximately I percent of market deposits. On consummation of the
proposal, 276 depository institutions would remain in the banking
market.

Federal Reserve Bulletin 0 March 2008

considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has considered the proposal carefully under
the financial factors. KeyCorp, USB, and their subsidiary
depository institutions are well capitalized, and KeyCorp
and its subsidiary depository institutions would remain so
on consummation of the proposal. Based on its review of
the record, the Board finds that KeyCorp has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a combination share exchange
and cash purchase, and KeyCorp will use existing resources
to fund the cash portion of the purchase.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of KeyCorp, USB, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant bank supervisory agencies with the
organizations and their records of compliance with applicable banking law, including anti-money-Iaundering laws.
KeyCorp, USB, and their subsidiary depository institutions
are considered to be well managed. The Board also has
considered KeyCorp's plans for implementing the proposal, including the proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.
CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").'4 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome ("LMI") neighborhoods, in evaluating bank expansionary proposals,!5
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
14. 12 U.S.C. §2901 et seq.; 12 U.S.C. § 1842(c)(2).
15.12 U.S.C. §2903.

records of the subsidiary depository institutions of KeyCorp and USB, data reported by KeyCorp and USB under
the Home Mortgage Disclosure Act ("HMDA"),'6 other
information provided by KeyCorp, confidential supervisory
information, and a public comment received on the proposal. The commenter generally alleged that KeyCorp and
USB have failed to meet the credit needs of the communities they serve, particularly the needs of LMI and predominantly minority communities in Westchester County,
New York. In addition, the commenter contended that USB
had not adequately served LMI communities due to an
alleged insufficient number of branches and services in
LMI communities. The commenter also alleged that KeyCorp and USB made an insufficient number of home
mortgage and small business loans in LMI areas in
Westchester County and the City of Newburgh in Orange
County, New York. Furthermore, the commenter asserted,
based on HMDA data reported in 2003, that Union State
Bank had engaged in disparate treatment of minority
individuals in home mortgage lending.

A. eRA Performance Evaluations
As provided in the CRA, the Board has reviewed the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, on-site
evaluation of the institution's overall record of performance under the CRA by its appropriate federal supervisor. 17
KeyBank received an "outstanding" rating at its most
recent CRA performance evaluation by the Office of the
Comptroller of the Currency ("OCC"), as of September 1,
2003 (HKeyBank 2003 Evaluation").ls Union State Bank
received a "satisfactory" CRA performance rating by the
Federal Deposit Insurance Corporation ("FDIC"), as of
June 27, 2005 ("Union 2005 Evaluation").1 9 KeyCorp
proposes to merge Union State Bank into KeyBank soon
after consummation of the transaction and has represented
that it will implement KeyBank's CRA program at the
combined institution. 20
CRA Peiformance of KeyBank. In addition to the overall
"outstanding" rating that Key Bank received in the KeyBank 2003 Evaluation, the bank received an "outstanding"
rating on each of the lending, investment, and service tests
for its overall CRA performance. The bank also received
16. 12 U.S.c. § 2801 et seq.
17. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36.620 and 36,639 (2001).
18. The evaluation period was January 1, 1999, through December 31, 2002, for the lending test and March 1. 1999, to August 31,
2003, for the service and investment tests.
19. The evaluation period was generally from January l, 2003, to
June 27, 2005.
20. Key Bank has filed an application under the Bank Merger Act
with the GCC for approval of the merger (12 U.S,c. § 1828(c».

Legal Developments: Fourth Quarter, 2007 C7

"outstanding" ratings for its overall CRA perfonnance in
New York and in each of the eleven other states reviewed.
Examiners reported that KeyBank's overall lending performance with respect to HMDA-reportable loans and small
loans to businesses 21 was very good and that the geographic distribution was excellent in assessment areas
representing 70 percent of the bank's deposits. They further
noted that KeyBank's distribution of HMDA-reportable
loans and small loans to businesses among borrowers of
different income levels was excellent in the majority of the
assessment areas that were rated. Examiners also reported
that the bank had a substantial volume of community
development lending in every rated area as well as an
excellent level of qualified investments in every state it
served.
Examiners commented that in New York, the bank's
overall distribution of loans to borrowers of different
income levels was excellent and that its geographic distribution of loans was good. 22 In the bank's Newburgh and
New York MSAs assessment areas, examiners concluded
that KeyBank's perfonnance under the lending test was
consistent with the bank's overall excellent perfonnance
statewide under that test. Examiners commended the bank's
record of extending lending small loans to business in the
Newburgh and New York MSAs and noted that the bank
extended a higher percentage of its business loans in LMI
census tracts than the percentage of businesses that were in
such tracts. They also noted KeyBank's high volume of
community development loan originations in the Newburgh and New York MSAs.
Since the KeyBank 2003 Evaluation, KeyBank has
maintained its high level of lending activity. For example,
KeyBank's HMDA-reportable loans throughout its assessment areas totaled more than $2.8 billion in 2005 and 2006.
In Orange and Westchester counties and the assessment
areas in New York, KeyBank's percentage of those loans to
LMI individuals exceeded the percentage of loans made by
lenders in the aggregate ("aggregate lenders")23 during this
period. KeyBank also made a substantial portion of its
small loans to businesses in amounts of less than $100,000
in 2005 and 2006. In addition, Key Bank represented that it
made approximately $2.4 billion in total qualified community development loans throughout its assessment areas,
which included $475 million in loans in the state of
New York, since the KeyBank 2003 Evaluation.

21. "Small loans to businesses" are loans with original amounts of
$1 million or less that are either secured by nonfarm, nonresidential
properties or classified as commercial and industrial loans.
22. KeyCorp's statewide rating for New York was based on a
full-scope evaluation conducted in KeyCorp's Buffalo and Niagara
Falls Metropolitan Statistical Area ("MSA") assessment area. Limitedscope evaluations were conducted in KeyCorp's ten other New York
assessment areas and in particular, in the New York MSA, which
includes Westchester County and the Newburgh MSA, including the
city of Newburgh.
23. The lending data of the aggregate lenders represent the cumulative lending for all financial institutions that reported HMDA data in
a given market.

In the KeyBank 2003 Evaluation, examiners noted that
KeyBank had an excellent level of qualified investments in
every state it served. Examiners concluded that KeyBank's
performance under the investment test in the Newburgh
and New York MSAs assessment areas was consistent with
the bank's overall excellent performance under the investment test in the assessment areas in New York. KeyCorp
represented that its qualified investments have totaled
$112 million in the bank's New York assessment areas
since the KeyBank 2003 Evaluation and noted that the bank
had actively participated in the New Market Tax Credit
Program.
In the Key Bank 2003 Evaluation, examiners stated that
overall, KeyBank had provided excellent accessibility to its
branches and ATMs in LMI areas and for people of
different income levels in states representing 66 percent of
its bank-wide deposits and good accessibility in the remaining states. Examiners rated the bank's perfonnance under
the service test in New York as "high satisfactory." They
commended KeyBank's level of community development
services and the overall accessibility of the bank's depository facilities in the state. Since the KeyBank 2003 Evaluation, Key Bank represented that it has expanded its services by allowing LMI customers to cash payroll and
government checks for a special low fee and by offering
them free checking accounts with no minimum deposit
requirement.
eRA Performance of Union State Bank. As noted, Union
State Bank received an overall "satisfactory" rating in the
Union 2005 Evaluation. 24 Under the lending test, Union
State Bank received a "high satisfactory" rating, and
examiners reported that the bank's distribution of loans in
its assessment area reflected a good penetration among
retail customers of different income levels and business
customers of varying sizes. Examiners noted that the high
cost of housing and low levels of owner-occupied housing
units in those tracts available for originations limited
lending opportunities. They reported that USB made ongoing efforts to increase lending in LMI areas, including
Union State Bank's continued use of the Federal Home
Loan Bank's ("FHLB") First Home Club program for LMI
borrowers. 25
Examiners concluded that Union State Bank's overall
lending levels reflected good responsiveness to its assessment area's credit needs. They commended the bank's
perfonnance for originating loans of varying amounts to
businesses of different sizes. In addition, the examiners

24. During the Union 2005 Evaluation, USB's single assessment
area included all of the areas in New York and Connecticut where USB
operated branches. The FDIC's review of Union State Bank under the
lending test in this evaluation included one of USB's nondepository
subsidiaries for grants and donations.
25. UBS offered a first-time homebuyer's program to LMI individuals. Under this program, the FHLB provided down-payment and
closing-cost assistance by granting up to $3 in matching funds for each
$1 saved by the household. USB also offered participants a reduced
interest rate and application fees as well as lower closing costs.
Applicants were required to attend homeownership counseling with a
local community housing organization.

Federal Reserve Bulletin 0 March 2008

noted that a significant majority of Union State Bank's
business loan originations in 2003 were small loans to
businesses with revenues of $ I million or less. They also
noted that Union State Bank's level of community development lending was outstanding.
Examiners rated Union State Bank's community development investment efforts as "outstanding" under the
investment test and reported that Union State Bank had
maintained an excellent level of qualified investments
(approximately $24 million) within the areas under review.
In addition, they also noted that Union State Bank purchased approximately $16.9 million in CRA-qualified
investments since its previous evaluation, a substantial
amount of investments that evidenced USB's efforts to
address qualified investment opportunities and to promote
affordable housing within its assessment area. Examiners
also noted that USB participated in a consortium of lending
institutions operating in New York and New Jersey that
provided affordable housing assistance by offering construction and permanent financing for identified community
affordable housing projects, such as single-family, apartment, or elderly housing throughout the two states.
In the Union 2005 Evaluation, Union State Bank received a "high satisfactory" rating on the service test.
Examiners reported that the bank's delivery systems were
reasonably accessible to essentially all portions of the
institution's assessment area, including LMI census tracts.
They noted that Union State Bank's services, including
business hours, were tailored to the convenience and needs
of the bank's assessment area, particularly LMI areas, and
included Spanish-language services for Latino customers.
Examiners also commended USB for providing a relatively
high level of community development services. In addition,
they noted that Union State Bank personnel provided free
technical assistance to small business owners and entrepreneurs in connection with the bank's establishment of a
Community Business Lending Team to increase lending in
LMI communities. 26

B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of KeyCorp and USB in light of the public
comment received on the proposal. The commenter alleged,
based on HMDA data, that USB had denied the home
mortgage loan applications of African American and Latino
borrowers more frequently than those of nonminority applicants. The Board has focused its analysis on the 2005 and
2006 HMDA data reported by KeyCorp and USB.27

26. The commenter also challenged the location and record of
opening Union State Bank's branches. As noted above, Union State
Bank will be merged into Key Bank, and the OCC will review
KeyBank's record of opening branches in New York in connection
with the merger application and during the course of conducting CRA
evaluations.
27. The Board analyzed HMDA data for KeyBank's assessment
areas nationwide, KeyBank's and Union State Bank's assessment
areas in New York, and specifically in Westchester and Orange coun-

Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial or ethnic groups
in certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not KeyCorp
or USB are excluding any group on a prohibited basis. The
Board recognizes that HMDA data alone, even with the
recent addition of pricing information, provide only limited
information about the covered loans. z8 HMDA data, therefore, have limitations that make them an inadequate basis,
absent other information, for concluding that an institution
has engaged in illegal lending discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race or ethnicity.
Because of the limitations of HMDA data, the Board has
considered these data carefully and taken into account other
information, including examination reports that provide
on-site evaluations of compliance with fair lending laws by
KeyCorp, USB, and their subsidiaries. The Board also has
consulted with the GCC, the primary federal supervisor of
KeyCorp's subsidiary bank, and the FDIC, the primary
federal supervisor of USB's subsidiary bank,
KeyCorp has stated that its fair lending and consumer
compliance policies and procedures will apply to the
combined organization after consummation of the proposal. KeyCorp also will continue to use its loan origination, underwriting, processing, and servicing systems, The
record, including confidential supervisory information,
indicates that KeyCorp has taken steps to ensure compliance with fair lending and other consumer protection laws.
KeyCorp has corporate-wide policies and procedures to
help ensure compliance with all fair lending and other
consumer protection laws and regulations, and its ongoing
monitoring is designed to ensure compliance with policies
and procedures. In addition, KeyCorp represented that its
compliance staff members frequently receive education on
best compliance practices and that USB personnel will
receive the same training.
The Board also has considered the HMDA data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of KeyCorp and USB under the CRA. These
established efforts and records of performance demonstrate

ties, New York. The Board's analysis of HMDA data for Union State
Bank's assessment area also included Fairfield County, Connecticut.
28. The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

Legal Developments: Fourth Quarter. 2007

that the institutions are active in helping to meet the credit
needs of their entire communities.

C. Conclusion on Convenience and Needs and
CRA Performance
The Board has considered carefully all of the facts of
record, including reports of examination of the CRA
records of the institutions involved, information provided
by KeyCorp, comments received on the proposal, and
confidential supervisory information. KeyCorp represented
that the proposal will result in greater convenience for
KeyCorp and USB customers through KeyCorp's exploration of new methods and approaches to enhance the level of
service provided to the communities currently served by
USB, such as working to encourage residents who depend
on alternative financial service providers for banking services to establish a customer relationship with KeyBank. In
addition, KeyCorp stated that its customers would benefit
from a more extensive network of branch offices, ATMs,
telephone call centers, and other facilities. Based on a
review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating to
the convenience and needs factor and the CRA performance records of the relevant insured depository institutions are consistent with approval of the proposaL 29
CONCLUSION
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the applications
should be, and hereby are, approved. In reaching its
conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BHC Act and other applicable statutes. The Board's
approval is specifically conditioned on compliance by
KeyCorp with the conditions in this order and all the
commitments made to the Board in connection with the
proposaL For purposes of this transaction, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective November 2,2007.

29. The commenter also requested that KeyBank demonstrate that
the compositions of its employees and board of directors reflect the
community which it serves. The Board notes that the racial, ethnic, or
gender makeup of a banking organization's staff or management is not
a factor that the Board is permitted to consider under the BHC Act. See
Western Bancshares, inc. v. Board of Governors, 480 F.2d 749 (lOth
Cir. 1973).

Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

Midwest Regional Bancorp, Inc.
Festus, Missouri
Order Approving the Fonnation of a Bank
Holding Company
Midwest Regional Bancorp, Inc. ("Midwest") has requested the Board's approval under section 3 of the Bank
Holding Company Act ("BHC Act")1 to become a bank
holding company and to acquire all the voting shares of
Federated Bancshares, Inc. ("Federated"), Stilwell, Kansas, and thereby acquire control of its subsidiary bank, The
Bank of Otterville ("Bank"), Otterville, Missouri. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 19,705 (2007». The time for filing
comments has expired, and the Board has considered the
application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Midwest is a newly organized corporation formed for
the purpose of acquiring control of Federated and Bank.
Bank, with total assets of approximately $20 million, is the
298th largest insured depository institution in Missouri,
controlling deposits of approximately $18.7 million, which
represent less than I percent of the total amount of deposits
of insured depository institutions in the state. 3

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
that would be in furtherance of an attempt to monopolize
the business of banking in any relevant banking market.
The BHC Act also prohibits the Board from approving a
proposal that would substantially lessen competition in any
relevant banking market, unless the anticompetitive effects
of the proposal are clearly outweighed in the public interest
by the probable effect of the proposal in meeting the
convenience and needs of the community to be served. 4
Midwest does not currently control a depository institution. Based on all the facts of record, the Board has
concluded that consummation of the proposal would not
have a significantly adverse effect on competition or on the

l. 12 U.S.C. § 1842.
2. Federated owns approximately 93 percent of the voting shares of
Bank.
3. Asset data, deposit data, and state rankings are as of June 30,
2007. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
4. See 12 U.S.C. § I 842(c)(1).

ClO

Federal Reserve Bulletin 0 March 2008

concentration of banking resources in any relevant banking
market and that competitive considerations are consistent
with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination and
other confidential supervisory information from the Division of Finance of the State of Missouri and the Federal
Deposit Insurance Corporation ("FDIC"), the primary
state and federal supervisors of Bank, and information
provided by Midwest.
In evaluating financial factors in bank holding company
proposals, the Board reviews the financial condition of the
applicant and the target subsidiary depository institutions,
particularly with respect to capital adequacy, asset quality,
and earnings performance. In addition, for proposals involving small bank holding companies, the Board evaluates the
institutions' compliance with the Board's Small Bank
Holding Company Policy Statement ("Policy Statement"),
including compliance with those measures that are used to
assess capital adequacy and overall financial strength. s In
assessing financial factors, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has considered carefully the financial factors
of the proposal. Bank currently is well capitalized and
would remain so on consummation of the proposal, and
Federated is in compliance with relevant capital standards.
Based on its review of the record, the Board also finds that
Midwest would have sufficient financial resources to effect
the proposal and to comply with the Board's Policy Statement. The proposed transaction is structured as a cash
purchase funded from the proceeds of an issuance of new
holding company stock.
The Board also has considered the managerial resources
of Midwest, Federated, and Bank. The Board has reviewed
the examination records of Federated and Bank, including
assessments of their management, risk-management systems, and operations. In addition, the Board has considered
its supervisory experiences and those of the other relevant
bank supervisory agencies with the organizations and their
records of compliance with applicable banking laws and
with anti-money-Iaundering laws. The Board also has
considered Midwest's plans to implement the proposal,
including the proposed management after consummation,

5. 12 CFR 225. Appendix C.

and has consulted the other relevant supervisory agencies
concerning those plans. 6
Based on all the facts of record, including comments and
information received from regulators and interested parties,
the Board has concluded that considerations relating to the
financial and managerial resources and future prospects of
the institutions involved in the proposal are consistent with
approval, as are the other supervisory factors under the
BHCAct.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on proposals under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").7 Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the FDIC, as
of August 1, 2004. After consummation of the proposal,
Midwest does not plan to alter Bank's current CRA policies. Midwest has represented that the proposal would
provide greater convenience to Bank's customers by offering Internet access for their accounts and electronic balance
transfers, automatic bill paying, and other services not
currently offered by Bank.
Based on all the facts of record, the Board has concluded
that considerations relating to the convenience and needs
factor and the eRA performance record of the relevant
depository institution are consistent with approval.

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the application should be, and hereby
is, approved. In reaching its conclusion, the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act. The Board's
approval is specifically conditioned on compliance by
Midwest with the conditions in this order and all the
commitments made to the Board in connection with the
proposal. For purposes of this action, these commitments
and conditions are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Federal Reserve Bank of Kansas City,
acting pursuant to delegated authority.
6. The Board received a comment regarding a member of Midwesfs
proposed management from a fonner employer. The Board has
considered carefully the management record in banking of the individual identified by tbe commenter and hru; consulted with the primary
federal and state supervisors of the banks where that individual wru;
previously employed.
7. 12 U.S.c. §2901 et seq.

Legal Developments: Fourth Quarter, 2007 Cll

By order of the Board of Governors, effective November S, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board
ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT

Allied Irish Banks, p. I. c.
Dublin, Ireland
M &T Bank Corporation
Buffalo, New York
Order Approving Acquisition of a Savings
Association and a Bank, Merger of
Depository Institutions, Establishment of
Branches, and Notice to Engage in
Nonbanking Activities
Allied Irish Banks, p.Lc. (HAlIied Irish") and its subsidiary,
M&T Bank Corporation (HM&T") (collectively, "Applicants"), bank holding companies within the meaning of the
Bank Holding Company Act ("BHC Act"), have requested
the Board's approval under sections 4(c)(8) and 4(j) of the
BHC Act to merge M&T with Partners Trust Financial
GrouP. Inc. ("Partners") and acquire its subsidiary savings
association, Partners Trust Bank ("Partners Bank"), and
Partners' other non banking subsidiaries, all of Utica,
New York. 1 Applicants also have requested the Board's
approval under section 3 of the BHC Act to acquire
Partners' indirect subsidiary bank, Partners Trust Municipal Bank ("Municipal Bank"),2 also of Utica. 3
In addition, M&T's subsidiary state member bank,
Manufacturers & Traders Trust Company ("M&T Bank"),
also of Buffalo, has requested the Board's approval under
section IS( c) of the Federal Deposit Insurance Act4 ("Bank
Merger Act") to merge with Partners Bank and Municipal
Bank, with M&T Bank as the surviving entity. M&T Bank
also has applied under section 9 of the Federal Reserve Act
("FRA") to establish and operate branches at the main
office and branches of Partners Bank. s

I. 12 U.S.c. §§ 1843(c)(8) and (j); 12 CFR 225.24. The nonbanking
subsidiaries of Partners and activities for which Applicants have filed a
notice under sections 4(c)(8) and 40) of the BHC Act are listed in
Appendix A.
2. Municipal Bank, a wholly owned subsidiary of Partners Bank, is
a limited-purpose bank that accepts only municipal deposits.
3. 12 U.S.C. § 1842.
4. 12 U.S.C. § 1828(c).
5. 12 U.S.C. § 321.

Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
accordance with the relevant statutes and the Board's Rules
of Procedure (72 Federal Register 56,762 (2007».6 As
required by the Bank Merger Act, a report on the competitive effects of the mergers was requested from the United
States Attorney General and a copy of the request was
provided to the Federal Deposit Insurance Corporation
("FDIC"). The time for filing comments has expired. and
the Board has considered the proposal and all comments
received in light of the factors set forth in the BHC Act, the
Bank Merger Act, and the FRA.
Allied Irish, with total consolidated assets equivalent to
approximately $252 billion, is the largest depository organization in Ireland and provides a full range of banking,
financial, and related services primarily in Ireland, the
United Kingdom, and the United States. 7 Allied Irish
operates a branch in New York and through M&T controls
two subsidiary banks, M&T Bank and M&T Bank, National
Association, Oakfield, New York, which operate in eight
states. M&T, with total consolidated assets of $57.4 billion.
is the 30th largest depository organization in the United
States, controlling $33.1 billion in deposits, which represents less than I percent of the total amount of deposits of
insured depository institutions in the United States. M&T is
the seventh largest depository organization in New York,
controlling deposits of approximately $20.4 billion in
New York, which represent approximately 2.6 percent of
the total amount of deposits of insured depository institutions in the state ("state deposits").
Partners has total consolidated assets of approximately
$3.7 billion, and its subsidiary insured depository institutions operate only in New York. Partners is the 28th largest
depository organization in New York, controlling deposits
of approximately $2.3 billion.
On consummation of the proposal, and after accounting
for proposed divestitures, Allied Irish would become the
28th largest insured depository organization in the United
States, with total consolidated assets of approximately
$61.1 billion. Allied Irish would control deposits of approximately $35.3 billion, representing less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States. In New York, M&T would remain the
seventh largest insured depository organization, controlling
deposits of approximately $22.S billion, which represent
approximately 2.9 percent of state deposits.
The Board previously has determined by regulation that
the operation of a savings association by a bank holding
company is closely related to banking for purposes of
section 4(c)(S) of the BHC Act. 8 The Board requires that
savings associations acquired by bank holding companies

6. 12 CFR 262.3(b).
7. Asset and nationwide deposit-ranking data are as of June 30,
2007. Statewide deposit and ranking data are as of June 30, 2006, and
reflect merger activity through June 30, 2007. In this context, insured
depository institutions include commercial banks. savings banks, and
savings associations.
8. 12 CPR 225.28(b)(4)(ii).

C 12

Federal Reserve Bulletin 0 March 2008

conform tbeir direct and indirect activities to tbose permissible for bank holding companies under section 4 of tbe
BHC Act. 9 M&T has acknowledged that it is required to
conform all the activities of Partners Bank to those that are
permissible under section 4(c)(8) of the BHC Act and
Regulation Y. The Board also has determined that the
activities conducted by the nonbanking subsidiaries of
Partners are closely related to banking, and M&T has
acknowledged that it must conduct those activities in
accordance with the Board's regulations and orders. to
Section 4(j)(2)(A) of the BHC Act requires the Board to
determine that the proposed acquisition of Partners Bank
and the nonbanking subsidiaries of Partners "can reasonably be expected to produce benefits to the public that
outweigh possible adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices." II As part
of its evaluation under these public interest factors, the
Board reviews the financial and managerial resources of the
companies involved, the effect of the proposal on competition in the relevant markets, and the public benefits of the
proposal. 12 In acting on a notice to acquire a savings
association, the Board also reviews the records of performance of the relevant insured depository institutions under
the Community Reinvestment Act ("CRA").13 The Board
has considered the proposal under these factors in light of
all the facts of record, including confidential supervisory
and examination information, publicly reported financial
information, and other information provided by Applicants.

COMPETITIVE CONSIDERATIONS
The Board has considered carefully the competitive effects
of Applicants' proposed acquisition of Partners, including
the acquisition of Partners Bank, Municipal Bank, and
Partners' non banking subsidiaries in light of all the facts of
record. Section 3 of the BHC Act and tbe Bank Merger Act
prohibit the Board from approving a proposal that would
result in a monopoly or would be in furtherance of any
attempt to monopolize the business of banking in any
relevant banking market. Both acts also prohibit the Board
from approving a bank acquisition unless the anticompetitive effects of the proposal are clearly outweighed in the
public interest by its probable effect in meeting the convenience and needs of the community to be served. 14 In
addition, the Board must consider the competitive effects of
a proposal to acquire a savings association and other
nonbanking companies under the public benefits factor of
section 4 of the BHC Act.

9.Id.
10. 12 CFR 225.28(b)(I), (2)(vi), and (7)(i).
II. 12 U.S.C. § 1843(j)(2)(A).
12. See 12 CFR 225.26; see, e.g., BancOne Corporation, 83 Federal Reserve Bulletin 602 (1997).
13. 12 U.S.c. § 2901 et seq.
14. 12 U.S.C. § 1842(c)(1); 12 U.S.c. § 1828(c)(5).

A. Acquisition of Insured Depository Institutions
Applicants and Partners have subsidiary insured depository
institutions that compete directly in three banking markets
in New York: Binghamton, Syracuse, and Utica-Rome. The
Board has reviewed carefully the competitive effects of the
proposal in each of these banking markets in light of all the
facts of record. In particular, the Board has considered the
number of competitors that would remain in the markets,
the relative share of total deposits of Applicants and
Partners in the markets (Hmarket deposits"),15 tbe concentration level of market deposits and the increase in this
level as measured by the Herfindahl-Hirschman Index
("HHl") under the Department of Justice Guidelines
("DOJ Guidelines"), 16 other characteristics of the markets,
and commitments made by Applicants to divest three
branches of M&T Bank in the Binghamton market.
Banking Market with Divestiture. M&T Bank is the
largest depository institution in the Binghamton banking
market, controlling deposits of approximately $650.1 million, which represent approximately 25.4 percent of market
deposits.1 7 Partners Bank controls deposits of approximately $680.6 million, which when weighted at 50 percent
represent 13.3 percent of market deposits, making Partners
Bank the fifth largest depository institution in the market.
To reduce tbe potential adverse effects on competition in
the Binghamton banking market, Applicants have committed to divest three branches of M&T Bank that have at least
15. Deposit and market-share data are as of June 30, 2006, and
reflect merger activity through June 30, 2007. The deposits of thrift
institutions are included at 50 percent, except as noted below. The
Board previously has indicated that thrift institutions have become, or
have the potential to become, significant competitors of commercial
banks. See, e.g., Midwest Financial Group, 75 Federal Reserve
Bulletin 386 (1989); National City Corporation, 70 Federal Reserve
Bulletin 743 (1984). Thus, the Board regularly has included thrift
institution deposits in the market-share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 77 Federal Reserve
Bulletin 52 (1991), In this case. Partners Bank's deposits are weighted
at 50 percent pre-merger and at 100 percent post-merger to reflect the
resulting ownership by a commercial banking organization.
16. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DO]") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The DOl has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
17. The Binghamton banking market is defined as Broome and
Tioga counties and the townships of Afton, Coventry, German,
Greene, Lincklaen, McDonough, Otselic, Oxford, Pharsalia. Pitcher.
Preston, and Smithville, all in Chenango County, New York; and the
townships of Apolacon. Bridgewater, Choconut, Franklin, Forest
Lake. Friendsville Borough, Great Bend, Great Bend Borough, Hallstead Borough, Harmony, Jackson, Jessup, Lanesboro Borough, Liberty, Little Meadows Borough, Middletown, Montrose Borough,
New Milford, New Milford Borough, Oakland, Oakland Borough,
Silver Lake. and Susquehanna Depot Borough, all in Susquehanna
County, Pennsylvania.

Legal Developments: Fourth Quarter. 2007

$94.5 million in total deposits.1 8 On consummation of the
proposed merger, and after accounting for the proposed
divestiture, M&T Bank would remain the largest depository institution in the market, controlling deposits of
approximately $1.2 billion, which would represent not
more than 42.7 percent of market deposits. The HHI would
increase not more than 876 points to 2365.
The Board has considered whether other factors either
mitigate the competitive effects of the proposal or indicate
that the proposal would have a significantly adverse effect
on competition in the Binghamton market. 19 A number of
factors indicate that the increase in concentration in this
banking market, as measured by the HHI and market share
of the combined organization, overstates the potential
competitive effects of the proposal in the market. On
consummation of the transaction and the proposed divestiture to a competitively suitable insured depository institution, at least nine other insured depository institutions
would continue to compete in the market, including two
banks with branch networks that are larger than Partners
Bank's network.
Moreover, the Board notes that three community credit
unions also exert a competitive influence in the Binghamton banking market. 20 Each institution offers a wide range
of consumer products, operates street-level branches, and
has memberships open to almost all the residents in the
market. The Board concludes that their activities in this
banking market exert a sufficient competitive influence to
mitigate, in part, the potential competitive effects of the
proposa\.2 1
18. Applicants have committed that, before consummation of the
proposed merger, they will execute an agreement for the proposed
divestiture in the Binghamton banking market with a purchaser that
the Board determines to be competitively suitable. Applicants also
have committed to complete the divestiture within 180 days after
consummation of the proposed merger. In addition, Applicants have
committed that, if they are unsuccessful in completing the proposed
divestiture within such time period, they will transfer any unsold
branches to an independent trustee who will be instructed to sell the
branches to an alternate purchaser or purchasers in accordance with
the terms of this order and without regard to price. Both the trustee and
any alternate purchaser must be deemed acceptable by the Board. See.
e.g., BankAmerica Corporation, 78 Federal Reserve Bulletin 338
(1992); United New Mexico Financial Corporation, 77 Federal
Reserve Bulletin 484 (1991).
19. The number and strength of factors necessary to mitigate the
competitive effects of a proposal depend on the size of the increase and
resulting level of concentration in a banking market. See NationsBank
Corp., 84 Federal Reserve Bulletin 129 (1998).
20. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See, e.g., Regions
Financial Corporation, 93 Federal Reserve Bulletin CI6 (2007);
Wachovia Corporation, 92 Federal Reserve Bulletin CI83 (2006);
F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway
Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004).
21. The three community credit unions control approximately
$1 billion in deposits in the market, which represents approximately
16 percent of market deposits on a 50 percent weighted basis.
Accounting for the revised weightings of these deposits and taking the
proposed divestitures into account, Applicants would control approximately 36.3 percent of market deposits on consummation of the
proposal, and the HHI would increase not more than 631 points to
1886.

Cl3

Moreover, the record of recent entry into the Binghamton banking market evidences its attractiveness for entry.
Since 2003, one depository institution has entered the
market de novo. Other factors also indicate that the market
remains attractive for entry. For example, the market's
average annualized income growth from 2001 to 2005
exceeded the average annualized income growth for the
same period for all metropolitan areas in New York.
Banking Markets without Divestiture. The concentration
levels on consummation of the proposal in the remaining
banking markets, Syracuse and Utica-Rome, would be
consistent with Board precedent and within the thresholds
in the DOJ Guidelines without divestiture. 22 On consummation of the proposal, the Syracuse and Utica-Rome banking
markets would remain moderately concentrated and numerous competitors would remain in each market.

B. Other Nonbanking Activities
The Board also has carefully considered the competitive
effects of M&Ts proposed acquisition of Partners' other
nonbanking subsidiaries in light of all the facts of record.
M&T and Partners both engage in credit extension, asset
management, and securities brokerage activities. The markets for those activities are regional or national in scope
and unconcentrated, and there are numerous providers of
these services.

C, Agency Views and Conclusion on Competitive
Considerations
The DOJ also reviewed the probable competitive effects of
the proposal and advised the Board that consummation of
the transaction would not likely have a significantly adverse
effect on competition in any relevant banking market where
the subsidiary depository institutions of Applicants and
Partners compete directly or in any relevant market for the
other proposed nonbanking activities. In addition, the
appropriate banking agencies have been afforded an opportunity to comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposed transaction, including the
acquisition of Partners Bank, Municipal Bank, and Partners' other nonbanking subsidiaries, would not have a
significantly adverse effect on competition or on the concentration of resources in any relevant banking market or in
any other relevant market.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
In reviewing the proposal under sections 3 and 4 of the
BHC Act and the Bank Merger Act, the Board is required to
consider the financial and managerial resources and future
prospects of the companies and depository institutions
involved in the proposal and certain other supervisory
22. The effects of the proposal on the concentration of banking
resources in these markets are described in Appendix B.

Cl4

Federal Reserve Bulletin 0 March 2008

factors. The Board has carefully considered these factors in
light of all the facts of record, including confidential
supervisory and examination information from the various
U.S. banking supervisors of the institutions involved, publicly reported and other financial information, and information provided by Applicants. The Board also has consulted
with the Central Bank of Ireland ("CBI"), the agency with
primary responsibility for the supervision and regulation of
Irish financial institutions, including Allied Irish.
In evaluating the financial resources in expansion proposals by banking organizations, the Board reviews the
financial condition of the organizations involved on both a
parent-only and consolidated basis, as well as the financial
condition of the subsidiary insured depository institutions
and significant nonbanking operations. In this evaluation,
the Board considers a variety of measures, including capital
adequacy, asset quality, and earnings performance. In
assessing financial resources, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has carefully considered the financial resources of the organizations involved in the proposal. The
capital levels of Allied Irish would continue to exceed the
minimum levels that would be required under the Basel
Capital Accord and are considered to be equivalent to the
capital levels that would be required of a U.S. banking
organization. In addition, M&T, Partners, and the subsidiary depository institutions involved are well capitalized
and would remain so on consummation. Based on its
review of the record, the Board finds that Applicants have
sufficient financial resources to effect the proposal. The
proposed transaction is structured as a partial share exchange and partial cash purchase of shares. Applicants will
use existing resources to fund the cash purchase of the
shares.
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of Applicants, Partners, and their
subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of other relevant banking supervisory agencies, including the Office of Thrift Supervision
("OTS") and the FDIC, with the organizations and their
records of compliance with applicable banking law and
with anti-maney-laundering laws. Applicants, Partners, and
their subsidiary depository institutions are considered to be
well managed. The Board also has considered Applicants'
plans for implementing the proposal, including the proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
.in the proposal are consistent with approval, as are the other

supervisory factors. 23 Section 3 of the BHC Act also
provides that the Board may not approve an application
involving a foreign bank unless the bank is subject to
comprehensive supervision or regulation on a consolidated
basis by the appropriate authorities in the bank's home
country.24 As noted, the CBI is the primary supervisor of
Irish financial institutions, including Allied Irish. The Board
previously has determined that Allied Irish is subject to
comprehensive supervision on a consolidated basis by its
home-country supervisor.2.5 Based on this finding and all
the facts of record, the Board has concluded that Allied
Irish continues to be subject to comprehensive supervision
on a consolidated basis by its home-country supervisor.

CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act and
the Bank Merger Act, the Board also must consider the
effects of the proposal on the convenience and needs of the
communities to be served and take into account the records
of the relevant insured depository institutions under the
CRA. As noted, the Board also must review the records of
performance under the CRA of the relevant insured depository institutions when acting on a notice under section 4 of
the BHC Act to acquire a savings association. 26 M&T Bank
received an "outstanding" rating at its most recent CRA
23. Section 3 of the BHC Act also requires the Board to determine
that an applicant has provided adequate assurances that it will make
available to the Board such information on its operations and activities
and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act (12 U.S.C.
§ I 842(c)(3)(A»). The Board has reviewed the restrictions on disclosure
in the relevant jurisdictions in which Applicants operate and has
communicated with relevant government authorities concerning access
to information. In addition, Allied Irish previously has committed that,
to the extent not prohibited by applicable law, it will make available to
the Board such information on the operations of its affiliates that the
Board deems necessary to determine and enforce compliance with the
BHC Act, the International Banking Act, and other applicable federal
laws. Allied Irish also previously has committed to cooperate with the
Board to obtain any waivers or exemptions that may be necessary to
enable its affiliates to make such information available to the Board. In
light of these commitments. the Board has concluded that Allied Irish
has provided adequate assurances of access to any appropriate information the Board may request.
24. 12 U.S.c. § 1843(c)(3)(B). As provided in Regulation Y, the
Board determines whether a foreign bank is subject to consolidated
home-country supervision under the standards set forth in Regulation K See 12 CFR 225.13(a)(4). Regulation K provides that a foreign
bank will be considered subject to comprehensive supervision or
regulation on a consolidated basis if the Board determines that the
bank is supervised or regulated in such a manner that its home-country
supervisor receives sufficient information on the worldwide operations
of the bank, including its relationship with any affiliates, to assess the
bank's overall financial condition and its compliance with laws and
regulations. See 12 CFR 2IL24(c)(I).
25. See Anglo irish Bank Corporation, p.l.c., 85 Federal Reserve
Bulletin 587 (1999); Allied irish Banks. p.l.c., 83 Federal Reserve
Bulletin 607 (1997).
26. See. e.g., North Fork Bancorporation. inc., 86 Federal Reserve
Bulletin 767 (2000).

Legal Developments: Fourth Quarter; 2007

performance evaluation by the Federal Reserve Bank of
New York, as of May 8, 2006.27 Partners Bank received a
"satisfactory" rating at its most recent CRA performance
evaluation by the OTS, as of January IS, 2005. 28 After
consummation of the proposal, M&T Bank plans to maintain its CRA policies at Partners Bank. Based on all the
facts of record, the Board concludes that considerations
relating to the convenience and needs of the communities
to be served and the CRA performance records of the
relevant depository institutions are consistent with approval.

PUBliC BENEFIT
As part of its evaluation of the public interest factors under
section 4 of the BRC Act, the Board also has reviewed
carefully the public benefits and possible adverse effects of
the proposal. The record indicates that consummation of
the proposal would result in benefits to consumers and
businesses currently served by Partners. Applicants have
represented that the proposed transaction would provide
Partners' customers with expanded products and services,
including discount broker services, mutual funds, and
insurance products, and an expanded branch network.
The Board has determined that the conduct of the
proposed non banking activities within the framework of
Regulation Y and Board precedent is not likely to result in
adverse effects, such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, or
unsound banking practices. Based on all the facts of record,
the Board has concluded that consummation of the proposal can reasonably be expected to produce public benefits
that would outweigh any likely adverse effects. Accordingly, the Board has determined that the balance of the
public benefits under section 4(j)(2) of the BRC Act is
consistent with approval.

C 15

notice should be, and hereby are, approved. In reaching this
conclusion, the Board has considered all the facts of record
in light of the factors it is required to consider under the
BRC Act, the Bank Merger Act, and the FRA. The Board's
approval is specifically conditioned on compliance by
Applicants with the conditions in this order and with all the
commitments made to the Board in connection with this
proposal, including the branch divestiture commitments
discussed above, and receipt of all other regulatory approvals. The Board's approval of the nonbanking aspects of the
proposal also is subject to all the conditions set forth in
Regulation Y and to the Board's authority to require such
modification or termination of the activities of a bank
holding company or any of its subsidiaries as the Board
finds necessary to ensure compliance with, and to prevent
evasion of, the provisions of the BRC Act and the Board's
regulations and orders issued thereunder. For purposes of
this action, the commitments and conditions are deemed to
be conditions imposed in writing by the Board in connection with its findings and decision and, as such, may be
enforced in proceedings under applicable law.
The banking acquisitions shall not be consummated
before the 15th calendar day after the effective date of this
order, and no part of the proposal may be consummated
later than three months after the effective date of this order,
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of New York, acting
pursuant to delegated authority.
By order of the Board of Governors, effective November 7, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

ESTABliSHMENT OF BRANCHES
As previously noted, M&T Bank has also applied under
section 9 of the FRA to establish branches at the locations
of Partners Bank's main office and branches. The Board has
assessed the factors it is required to consider when reviewing an application under section 9 of the f'RA and the
Board's Regulation R and finds those factors to be consistent with approval. 29

CONCLUSION
Based on the foregoing and in light of all the facts of
record, the Board has determined that the applications and
27. M&T, National Association was rated "satisfactory" by the
Office of the Comptroller of the Currency, as of May 26, 2006.
28. Municipal Bank is a special-purpose bank not subject to the
CRA. See 12 CFR 345. II (c)(3).
29. 12 USc. § 322; 12 CFR 208.6(b).

Appendix A
NONBANKING ACTIVITIES OF PARTNERS
(I) Extending credit and servicing loans, pursuant to section 22s.28(b)( 1) of Regulation Y (12 CFR
22s.28(b)(1)), through Partners Preferred Capital Corporation, Utica;
(2) Asset management, servicing, and collection activities,
pursuant to section 22s.28(b)(2)(vi) of Regulation Y
(12 CFR 225.28(b )(2)( vi)), through Partners NEWPRO,
Inc., Utica;
(3) Operating savings associations, pursuant to section 22s.28(b)(4)(ii) of Regulation Y (12 CFR
22s.28(b)(4)(ii», through Partners Bank; and
(4) Securities brokerage activities, pursuant to section 22s.28(b )(7)(i) of Regulation Y (12 CFR
22s.28(b )(7)(i)), through Partners Trust Investment Services, Inc., Utica.

C 16

Federal Reserve Bulletin 0 March 2008

Appendix B
NEW YORK BANKING MARKETS WITHOUT DIVESTITURES

Bank:

Market
deposit
nk: i
Amount
I
shares
Ra _L:deposits .....
(percent)

Resulting

HHI

113
113
113

27
27
27

489
489
489

15
15
15

Syracuse-Cayuga, Onorulaga, arul
Oswego counties; the townships of
Cortlarulville, Cuyler, Homer,
Preble, Scott, Solon, Taylor, arul
Truxton in Cortlarul County; and the
townships of Cazenovia, DeRuyter,
Eaton. Fenner, Georgetown.
Lebanon, Lenox, Lincoln, Nelson,
Smithfield, and Sullivan in Madison
County
Applicants Pre-consummation .......
Partners ....................................
Applicants Post-Consummation .....

1
10
I

$1.8 bi!.
$311.3 mil.
$2.1 bi!.

20.7
23.9

1,308
1,308
1,308

Utica-Rome-Herkimer arul Oneida
counties; the townships of Greig.
Lewis, Leyden, Lyonsdale,
Martinsburg, Montague, Osceola,
Turin, Watson, arul West Turin in
Louis County; arul the townships of
Brookfield, Hamilton, Madison,
Oneida, and Stockbridge in Madison
County
Applicants Pre-Consummation .......
Partners ....................................
Applicants Post-Consummation .....

13
I
I

$63.7 mi!.
$1.3 bi!.
$1.4 bi!.

1.7
18.2
32.3

1,590
1,590
1,590

l.8

Remaining
number of
Competitors

Change in
HHI

NOTE: All rankings. market deposit shares, and HHls are based on thrift in·

stitution deposits weighted at 50 percent, except that Partners Bank', thrift in·
stitiution deposits are weighted at 50 percent pre·merger and 100 percent post·
merger.

Citigroup Inc.
New York, New York
Order Determining That Certain Pension
Activities are Financial in Nature
Citigroup Inc. ("Citigroup"), a financial holding company
("FHC") within the meaning of the Bank: Holding Company Act ("BHC Act"), I has proposed to acquire, manage,
and operate in the United Kingdom defined benefit pension
plans established and maintained by unaffiliated third parties ("third-party U.K. pension plans"). These activities
would be conducted by or through a nonbank: subsidiary of
Citigroup. Citigroup proposes to acquire third-party U,K.
pension plans in stand-alone transactions and not as part of
1. 12 U.S.c. §§ 1841 et seq.

the acquisition of all or part of the ongoing business
operations of the third parties,
Section 4 of the BHC Act generally prohibits a bartk
holding company, including an FHC, from directly or
indirectly engaging in, or acquiring the shares of a company engaged in, any nonbanking activity unless the activity is otherwise permissible under the act. Section 4(k) of
the BHC Act, as amended by the Gramm-Leach-Bliley Act
("GLB Act"), permits a bank holding company that qualifies to be an FHC to engage in, and acquire and retain
shares of any company engaged in, a broad range of
activities that are defined by statute to be financial in
nature. 2 The BHC Act also permits an FHC to engage in,
and acquire and retain shares of any company engaged in,
any activity that the Board determines, by order or regulation and in consultation with the Secretary of the Treasury,
2. See 12 U.S.c. § 1843(k)(4).

Legal Developments: Fourth Quarter, 2007

Cl7

to be financial in nature or incidental to a financial activity.3
As the Board previously has noted, the "financial in nature
or incidental" standard represents a significant expansion
of the "closely related to banking" standard that the Board
previously was required to apply in determining the permissibility of nonbanking activities for bank holding companies. 4
The BHC Act directs the Board to consider a variety of
factors in considering whether an activity is financial in
nature or incidental to a financial acti vity, including: (1) the
purposes of the BHC and GLB Acts; (2) the changes or
reasonably expected changes in the marketplace in which
FHCs compete; (3) the changes or reasonably expected
changes in technology for delivering financial services; and
(4) whether the proposed activity is necessary or appropriate to allow an FHC to compete effectively with companies
seeking to provide financial services in the United States,
efficiently deliver financial information and services through
the use of technological means, and offer customers any
available or emerging technological means for using financial services or for the document imaging of data. s The
Board also may consider other factors and information that
it considers relevant to its determination.
As noted above, Citigroup proposes to acquire, manage,
and operate third-party defined benefit pension plans in,
and subject to the laws of, the United Kingdom. Citigroup
initially proposes to acquire, through a nonbank subsidiary,
a third-party pension plan in the United Kingdom with
approximately $400 million in gross liabilities to the plan's
existing beneficiaries.
A defined benefit pension plan generally is a plan
established by or on behalf of an employer (the plan
"sponsor") that provides for the payment to employees,
typically beginning on their retirement or other termination
of service, of benefits in an amount that is specified in and
determinable under the plan, typically through a formula
that takes into account the employee's pay, years of
employment, age at retirement, and other factors. 6 The
terms of the plan itself also typically specify the circumstances under which benefits will be paid under the plan to
an employee, former employee, or related person (such as a
spouse) (collectively a "beneficiary"), and the length of
time such payments will be made to a beneficiary. The
benefits payable under a plan typically take the form of a
specified stream of payments that begin on retirement or, at
the employee's option, a lump sum payable at retirement,

and may include other ancillary benefits provided under
plan rules, such as spousal or survivor benefits.7
The nonbank subsidiary of Citigroup that directly acquires a third-party U.K. pension plan would assume the
responsibilities of the plan's sponsor under applicable U.K.
law. In the United Kingdom, defined benefit pension plans
are regulated by the U.K. Pensions Regulator under the
Pensions Act of 1995, the Pensions Act of 2004, and the
general law of trusts. These laws provide that pension plans
must be managed and administered by a trustee that is
independent of the plan sponsor. Plan sponsors also must
provide sufficient assets to a pension plan to pay all benefits
under the plan, 8 consult with the trustees for the pension
plan concerning the investment strategy of the plan, and
agree with the plan trustees on a statement of funding
principles that sets out the plan's funding target, methods,
and assumptions. In addition, trustees and plan sponsors
must agree on amendments to any part of the plan.
Citigroup proposes to acquire a third-party U.K. pension
plan only if no additional beneficiaries may be added to the
plan and existing beneficiaries may not accrue additional
benefits under the plan (a "hard-frozen" plan). In addition,
Citigroup proposes that it would acquire a third-party U.K.
pension plan only if the plan at the time of acquisition is
fully funded by the selling sponsor based on the plan's
assets and projected liabilities (using appropriate actuarial
assumptions).9 Citigroup has indicated that, as part of its
due diligence process for each transaction, Citigroup will
employ qualified actuaries to review and analyze the
present value of benefits owed to plan beneficiaries to
ensure that all pension plans acquired are fully funded by
the selling sponsor.
The activity of acquiring, operating, and managing
third-party pension plans has not been determined to be
financial in nature or incidental to a financial activity for
purposes of the BHC Act. The proposed activity is broader
than the pension plan activities that FHCs currently are
permitted to conduct for third parties. For example, as
discussed above, a nonbank subsidiary of Citigroup would
assume the rights and obligations of the sponsor of an
acquired third-party U.K. pension plan and would do so in
transactions that do not represent the acquisition of a going
concern or ongoing business operations by Citigroup. In
addition, the assets and liabilities of an acquired third-party
U.K. pension plan (unlike assets held by an FHC as trustee
for third parties or assets held by the pension plans

3. [d. at § I 843(k)(I)(A) and (2). In addition, the BHC Act permits
an FHC to engage in any activity that the Board (in its sole discretion)
determines, by regulation or order, is "complementary to a financial
activity and does not pose a substantial risk to the safety or soundness
of depository institutions or the financial system generally." ld. at
§ 1843(k)(l)(B).
4. See 66 Federal Register 307,308 (Jan. 3, 2001).
5. 12 U.S.c. § 1843(k)(3).
6. On the other hand, a defined contribution plan is a benefit plan
under which an individual account is established for each participant
and the benefits payable to each participant are based on the amount
contributed to the participant's account, plus or minus income, gains,
expenses, and losses allocated to that account.

7. For purposes of this order, the term "defined benefit pension
plan" does not include a plan that provides health insurance to
employees or that guarantees or indemnifies employees for healthcare costs.
8. On the other hand, the sponsor may recover assets contributed to
or held on behalf of a plan after all of the plan's obligations to
beneficiaries have been satisfied and the plan is closed out.
9. For purposes of this order, the term "fully funded" means that, at
the time of acquisition, the current value of the plan's assets is at least
equal to the present value of the plan's projected liabilities, The selling
sponsor may issue debt to the plan or Citigroup to fully fund the plan
at acquisition. [n some situations, the requirement of this order that a
plan be fully funded may require funding in excess of the statutory
funding requirements of the relevant jurisdiction.

Cl8

Federal Reserve Bulletin 0 March 2008

maintained for Citigroup's own employees) would be fully
consolidated with the assets and liabilities of Citigroup on
its balance sheet. 10
The Board concludes for the reasons set forth below,
however, that there is a reasonable basis for determining
that the acquisition, management, and operation by Citigroup of hard-frozen, fully funded third-party U.K. pension
plans is an activity that is financial in nature within the
meaning of the BHC Act. The activity involves, at its core,
the types of investment advisory and investment management skills that are routinely exercised by banking organizations and the types of operational and investment risks
that banking organizations routinely incur and manage.
FHCs currently are permitted by the BHC Act to engage
in activities that are related or operationally and functionally similar to the proposed activity and that involve similar
risks. For example, an FHC already is permitted to provide
a wide variety of services to third-party pension plans,
including acting as trustee, custodian, or investment adviser
(with or without investment discretion) for a third-party
benefit plan, as well as designing, assisting in the implementation of, providing administrative services to, and
developing employee communication programs for thirdparty benefit plans. I I FHCs engaged in these activities have
gained substantial expertise with the laws, regulations, and
fiduciary obligations associated with providing fiduciary,
custodial, and administrative services to pension plans.
Moreover, FHCs engaged in these plan-related activities
have developed risk-management systems and internal
controls to monitor, manage, and address the legal, operational, and reputational risks associated with managing the
investments of and administering third-party pension plans.
The proposed acti vity also bears a strong functional
resemblance to issuance of a group annuity contract. The
BHC Act, as amended by the GLB Act, expressly states that
providing and issuing annuities is an activity that is financial in nature. I2 A company that issues a fixed annuity
becomes obligated to make periodic payments to the
annuitant during his or her lifetime and to pay any death or
survivor benefits in accordance with the terms of the
annuity contract. The company that issues a fixed annuity
assumes responsibility for investing and managing the
funds received from the annuitant and bears the risk that
such funds and the returns earned on the funds will not be
sufficient to payout the full amount of benefits promised
under the annuity contract. The company also assumes
10. Because Citigroup would acquire each third-party U.K. pension
plan in a stand-alone transaction, and not as part of a business
combination involving Citigroup and the selling sponsor, Citigroup
has stated that it will fully reflect the assets and liabilities of an
acquired plan as a~sets and liabilities of Citigroup on its balance sheet.
This treatment differs from the manner in which the assets and
liabilities of an internal pension plan of an employer typically are
accounted for on the balance sheet of the employer under U.S.
generally accepted accounting principles. See FAS 158, Accounting
for Defined Benefit Pension and Other Post Retirement Plans.
II. See 12 CFR 22S.28(b)(5), (6), and (9)(ii).
12. See 12 U.S.C. § 1843(k)(4)(8).

responsibility for administering the annuity contract both
before and during its payout period.
In connection with these activities, the issuer of fixed
annuities is exposed to certain types of risks, which are part
of the activity determined to be financial in the GLB Act.
These risks include the risk that (I) the life expectancy of
annuitants, on average, will exceed the actuarial estimates
used in establishing the terms of and funding for the
annuities; (2) the inflation rate and other assumptions used
to determine the expected obligations under the annuity
contracts underestimate these obligations; and (3) payments from the annuitant and the return obtained through
the investment of such payments will fall short of estimates.
Citigroup would perform essentially the same financial
functions and assume essentially the same financial obligations and risks through the acquisition of a third-party U.K.
pension plan as an insurance company performs and
assumes in connection with the issuance of fixed annuities.
The functional similarity between a plan sponsor's obligations under a defined benefit pension plan and an insurance
company's obligations under an annuity contract is especially close where, as proposed, the pension plan is both
fully funded and hard-frozen. In situations where a pension
plan's obligations to plan beneficiaries are hard-frozen and
the plan is fully funded, one method commonly used by a
plan sponsor to close out a plan is to purchase a terminal
funding group annuity contract from an insurance company. Through such an annuity contract, the provider of the
annuity becomes obligated to satisfy the responsibility to
pay the benefits promised under the plan to the plan's
beneficiaries. Accordingly, Citigroup's proposed activities
would be specifically permitted under the BHC Act if
provided through an annuity contract or other form of
insurance. By permitting Citigroup to provide these services in an alternative way, the proposed activities shOUld
help Citigroup respond to changes or reasonably expected
changes in the marketplace for financial products and
services.
In evaluating this proposal, the Board considered that,
under U.K. law, the nonbank subsidiary established by
Citigroup to acquire a third-party U.K. pension plan generally will bear sole responsibility for making additional
contributions to the plan if the plan assets are not sufficient
to meet the plan's expected or actual liabilities. However,
U.K. law also permits the u.K. Pensions Regulator in
certain circumstances to commence proceedings to hold an
affiliate of a plan sponsor (including a depository institution
affiliate) responsible for the sponsor's obligations to the
plan. 13

13. See U.K. Pensions Act of 2004, § 38 (contribution notices) and
§ 43 (financial support directives). The U.K. Pensions Regulator may

issue a contribution notice or financial support directive to an affiliate
of a sponsor only if, among other things, the Pensions Regulator
determines that it is reasonable to impose the proposed financial
obligations on the affiliate.

Legal Developments: Fourth Quarter. 2007 Cl9

The Board generally has taken the position that, when a
depository institution is secondarily liable for a financial
obligation of an affiliate, even if the depository institution's
liability is created by statute or regulatory action, the
institution has issued a guarantee on behalf of an affiliate
for purposes of section 23A of the Federal Reserve Act and
the Board's Regulation W.14 Section 23A and Regulation W impose quantitative and qualitative limits on covered transactions between a depository institution and its
affiliates. Covered transactions include, among other things,
an extension of credit by a depository institution to an
affiliate and the issuance of a guarantee by a depository
institution on behalf of an affiliate. IS The limitations in
section 23A and Regulation W provide imponant protections against a depository institution suffering losses due to
covered transactions with its affiliates, and also limit the
ability of a depository institution to transfer to its affiliates
the subsidy arising from the institution's access to the
federal safety net.
To address the potential section 23A and Regulation W
issues presented by its initial proposed transaction, and in
accordance with U.K. law,16 Citigroup has obtained written
assurances from the U.K. Pensions Regulator that it will
not seek to hold any of Citigroup's depository institution
subsidiaries that are subject to section 23A responsible for
any shortfalls that may occur in the pension plan proposed
to be acquired by Citigroup in this initial transaction. As a
condition of this order, Citigroup must obtain similar
written assurances from the u.K. Pensions Regulator before
acquiring any additional third-pany U.K. pension plan,l7
Based on the foregoing and other facts of record, the
Board concludes that the acquisition, management, and
operation by Citigroup of hard-frozen, fully funded thirdpany U.K. pension plans, when conducted in accordance
with the conditions and limitations set fonh in this order, is
an activity that is financial in nature within the meaning of
section 4(k) of the BHC Act. Any investment made by a
14. See 12 U.S.c. § 37 Ic(b)(7)(E); 12 CFR 223.3(h)(5); Board
Letter dated October 25, 2005, to Carl V. Howard, Esq. (Citigroup).
15. See 12 U.S.C. §37Ic(b)(7); 12 CFR 223.3(h).
16. The Pensions Act of 2004 expressly authorizes the U.K.
Pensions Regulator, on application by a plan or other person, to issue a
"clearance statement" that determines that it would be unreasonable to
issue a contribution notice or financial support directive to the plan or
person under the circumstances described in the application. See
Pensions Act of 2004, §§42 and 46. Citigroup has received such a
clearance statement with respect to its initial proposed acquisition of a
third-party pension plan in the United Kingdom.
17. Citigroup has indicated that the written assurances provided by
the U.K. Pensions Regulator are subject to review and renewal by the
regulator no later than five years after issuance. Before the expiration
of any written assurances provided by tbe U.K. Pensions Regulator in
connection with the acquisition by Citigroup of a third-party U.K.
pension plan, Citigroup must either ensure that its activities conform
with those permitted under section 23A and Regulation W or obtain an
exemption from the Board from the limitations of section 23A and
Regulation W with respect to the plan. The Board has not determined
that section 23A applies to the contingent liabilities that may arise
under applicable pension law from the establishment or operation by
an affiliate of a depository institution of employee benefit plans in the
ordinary course of its other business to provide benefits to the
employees or former employees of the affiliate.

third-party U.K. pension plan acquired by Citigroup must
otherwise be permissible for an FHC under the BHC Act
and the Board's Regulation y'18 The statutory and regulatory framework governing the establishment, operation,
and management of pension plans varies considerably
across jurisdictions and, accordingly, the nature and scope
of risks associated with such activities may differ materially depending on the jurisdiction involved. 19 To provide
for the consideration of any special issues that may be
associated with the acquisition of third-pany pension plans
in jurisdictions other than the United Kingdom, the authorization and determination granted by this order are limited
to the acquisition, management, and operation by Citigroup
of third-pany pension plans in the United Kingdom.20
Under the BHC Act, the Board may not determine, by
regulation or order, that an activity is financial in nature or
incidental to a financial activity if the Secretary of the
Treasury ("Secretary") notifies the Board in writing that
the Secretary believes the activity is not financial in nature,
incidental to a financial activity, or otherwise permissible
under section 4 of the BHC ACt,21 The Board has provided
the Secretary notice of Citigroup's proposal in accordance
with the BHC Act, and the Secretary has informed the
Board in writing that the Secretary does not intend to
prevent the Board from authorizing Citigroup to engage in
the proposed U.K. pension activities, subject to the conditions and limitations set fonh in this order.
The Board's determination and approval is subject to all
the conditions set fonh in Regulation Y, including those in
section 225.7,22 and to the Board's authority to require
modification or termination of the activities of a bank
holding company or any of its subsidiaries as the Board
finds necessary to ensure compliance with, or to prevent
evasion of, the provisions and purposes of the BHC Act and
the Board's regulations and orders issued thereunder. The
Board's decision is specifically conditioned on compliance
with all the commitments made to the Board in connection
with the request, including the commitments and conditions discussed in this order. The commitments and conditions relied on in reaching this decision shall be deemed to
be conditions imposed in writing by the Board in connec18. See, e.g., 12 U.S.c. § 1843(c)(S), (c)(6), and (k)(4)(H).
19. In the United States, for example, the establishment and
operation of defined benefit pension plans are subject to extensive
regulation under the Employee Retirement Income Security Act of
1974, as amended ("ERISA"). See 29 U.S.c. §§ 1400 et seq. ERISA
provides that all entities under common control with the sponsor of a
defined benefit plan are jointly and severally liable for the obligations
of the plan at termination. For ERISA purposes, companies under
common control with a plan sponsor include any company that
directly or indirectly owns 80 percent or more of the voting stock of
the plan sponsor (the "parent company") and any company in which
the parent company directly or indirectly owns 80 percent or more of
the voting stock. See 29 U.S.C. §§ 1301(a)(I4)(A) and (B), (b)(I), and
1362(a); 26 CFR 1.4l4(c)-2.
20. Other FHCs may seek approval to engage in similar activities
by requesting a determination with respect to their own proposed
activities under section 4(k)(2)(A) of the BHC Act and section 225.88
of the Board's Regulation Y (12 CFR 225.88).
21. See 12 U.S.C. § I 843(k)(2)(A).
22. 12 CFR 225.7.

C20

Federal Reserve Bulletin 0 March 2008

tion with its findings and decision and, as such, may be
enforced in proceedings under applicable law.
By order of the Board of Governors, effective October 12, 2007.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn.
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Fortis S.A.IN. V.
Fortis, N. V.
Fortis Brussels S.A.IN. V.
Fortis Bank S.A.IN. V.
All of Brussels, Belgium
Order Approving Notice to Engage in
Activities Complementary to a Financial
Activity
Fortis S.A.IN.V. ("Fortis"), a financial holding company
("FlIC") for purposes of the Bank Holding Company Act
(HBHC Act"), Fortis, N.V., Fortis Brussels S.AIN.V., and
Fortis Bank S.AIN.V. (collectively, "Fortis") have requested the Board's approval under section 4 of the BHC
Act! and the Board's Regulation y2 to provide energy
management services ("Energy Management Services") to
owners of power generation facilities under energy management agreements ("EMAs") as an activity that is
complementary to the financial activities of engaging as
principal in commodity derivatives and providing financial
and investment advisory services for derivatives transactions. 3

BACKGROUND
Regulation Y permits bank holding companies ("BHCs")
(i) to act as principal in derivative contracts based on
1. 12 V.S.C. § 1843.
2. 12 CFR Part 225.
3. In connection with its acquisition of Cinergy Marketing &
Trading LP ("CMT") from Duke Energy Corp., Fortis received
approval to engage in the Vnited States in physical commodity trading
activities, on a limited basis, as an activity that is complementary to
the financial activity of engaging in commodity derivatives activities.
See Board Letter to David R. Sahr, Esq., dated September 29, 2006. [n
addition to its physical commodity trading activities, CMT, now Fortis
Energy Marketing & Trading GP ("FEMT"), also serves as an energy
manager under EMAs with several power generators. At the time
Fortis's request was approved. Fortis was informed that FEMT's
activities under the EMAs would continue to be reviewed fOf permissibility as an FHC activity.

financial and nonfinancial assets ("Commodity Derivatives
Activities") and (ii) to provide information, statistical
forecasting, and advice with respect to any transaction in
foreign exchange, swaps, and similar transactions; commodities; and any forward contract, option, future, option
on a future, and similar instruments ("Deri vati ves Ad visory
Services").4 Energy Management Services combine many
of these permissible financial activities and other activities
that the Board has not previously determined to be permissible for a BHC. Energy Management Services generally
entail acting as a financial intermediary for a power plant
owner to facilitate transactions relating to the acquisition of
fuel and the sale of power by the power plant owner and
providing advice to assist the owner in developing its
risk-management plan.
The BHC Act, as amended by the Gramm-Leach-B1iley
Act (the "GLB Act"), permits BHCs that qualify as FlICs
to engage in an expanded set of acti vities that are defined
by statute to be financial in nature, S as well as any
additional activity that the Board determines, in consultation with the Secretary of the Treasury, to be financial in
nature or incidental to a financial activity.6
The BHC Act also permits FlICs to engage in any
activity that the Board determines is complementary to a
financial activity and does not pose a substantial risk to the
safety or soundness of depository institutions or the financial system generally? The Congress intended that the
Board use this complementary authority to allow FlICs to
engage, on a limited basis, in activities that, although not
necessarily financial in nature, are so meaningfully connected to financial activities that they complement those
activities. In this way, FlICs would not be disadvantaged
by market developments if commercial activities evolve
into financial activities or competitors find innovative ways
to combine financial and nonfinancial activities. The BHC
Act provides the Board with exclusive authority to determine that an activity is complementary to a financial
activity.
The BHC Act further provides that any FlIC seeking to
engage in a complementary activity must obtain the
Board's prior approval. In reviewing such a proposal, the
BHC Act requires the Board to consider whether performance of the activity by the FlIC can reasonably be
expected to produce public benefits that outweigh possible
adverse effects. S The Board has approved physical commodity trading ("Physical Commodity Trading") for Fortis
and other FlICs, on a limited basis, as an activity that is

4. 12 CFR 22S.28(b)(8) and (b)(6).
S. 12 V.S.c. § 1843(k)(4). This set of financial activities includes
any activity that the Board had determined to be closely related to
banking. by regulation or order, prior to November 12, 1999. Commodity Derivatives Activities and Derivatives Advisory Services were
determined to be closely related to banking before that date and,
accordingly. providing those services are financial activities for purposes of the BHC Act (12 V.S.c. § 1843(k)(4)(F».
6. 12 V.S.C. § 1843(k)(l)(A).
7. 12 V.S.c. § 1843(k)(I)(B).
8. 12 V.S.c. § 1843(j)(2)(A).

Legal Developments: Fourth Quarter, 2007 C2l

complementary to the financial activity of engaging in
Commodity Derivatives Activities. 9
Fortis currently engages in Commodity Derivatives
Activities and Derivatives Advisory Services (as noted,
both financial activities) in the United States and has
requested approval to provide Energy Management Services as an activity that is complementary to those activities.

FORTIS'S ENERGY MANAGEMENT SERVICES
Under FEMT's current EMAs, FEMT, as energy manager,
assists power plant owners by providing transactional and
advisory services. The transactional services consist primarily of FEMT acting as a financial intermediary, substituting its credit and liquidity for those of the owner to
facilitate the owner's purchase of fuel and sale of power.
FEMT's advisory services include providing market information to assist the owner in developing and refining a
risk-management plan for the plant.
FEMT provides services under an EMA within a strategic framework established by the owner. The owner, in
consultation with FEMT, establishes an energymanagement plan and risk-management policy to govern
how the generation facility should be operated. The energymanagement plan sets out the amount of power the plant
should generate and determines how the plant will meet its
reliability obligations to the power transmission grid. The
plant owner must approve all commodity contracts, including all contracts for the purchase of fuel or the sale of
electricity. In some cases, authority to enter into power or
fuel contracts may be delegated to FEMT if the contracts
satisfy specific criteria established by the owner; other
contracts must be approved by the owner. The owner also
maintains the right, subject to FEMT's right of first refusal,
to market and sell power directly to third parties. The
owner ultimately retains all decisionmaking authority,
including decisions relating to the facility's generation
output and, in particular, whether the facility should be shut
down for any period of time.
An EMA's compensation structure reflects this allocation of responsibilities. When the facility is in operation,
FEMT is typically compensated on a monthly basis at the
greater of a monthly fixed fee or a stated percentage of the
spread between delivered fuel prices and the realized power
revenues (adjusted to reflect certain fees and costs). When
the facility is not in operation, FEMT is not responsible for
9. Board Letters to Gregory A. Baer, Esq., dated April 24, 2007
(Bank of America Corp.); Paul E. Glotzer, Esq., dated March 27, 2007
(Credit Suisse Group); and Elizabeth T. Davy, Esq., dated April 13,
2006 (Wachovia Corporation); and Societe Generale, 92 Federal
Reserve Bulletin CI13 (2006); Deutsche BankAG, 92 Federal Reserve
Bulletin CS4 (2006); JPMorgan Chase & Co., 92 Federal Reserve
Bulletin C57 (2006); Barclays Bank PLC, 90 Federal Reserve Bulletin
511 (2004); UBS AG, 90 Federal Reserve Bulletin 215 (2004); and
Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003).

the fixed costs of the facility and is not entitled to revenues
or other compensation, apart from the monthly fees.
FEMT does not provide day-to-day operational services
to the facility. Those tasks are generally performed by the
owner or by an operator who is hired directly by the owner
and is not affiliated with FEMT. The operator manages and
maintains the facility on a daily basis, which typically
includes providing labor and support services. The operator
provides FEMT with information on the operating status of
the facility, maintenance issues that might affect the availability of the facility to generate power, and scheduled
outage and maintenance periods.
FEMT may buy fuel for the facility from third parties
and enter into a mirror transaction for the fuel with the
owner. The owner may then sell the power generated by the
facility to FEMT, and FEMT generally resells the power in
the market. In these circumstances, FEMT would be acting
as the financial intermediary for the owner, providing credit
and liquidity support, including posting any required collateral for transactions. Because FEMT substitutes its name
and credit rating for the owner's, the terms of the transactions are generally more favorable than the owner could
negotiate on its own.
In addition, FEMT assumes responsibility for administrative tasks related to the fuel and power transactions so
that the owner does not have to maintain an administrative
infrastructure to support its transactions with third parties.
These services include arranging for third parties to provide
fuel transportation or power transmission services, scheduling those services, and resolving any resulting imbalances;
ensuring that fuel deliveries and power sales are properly
coordinated; negotiating contracts with and monitoring the
credit support and collateral requirements of the owner's
counterparties; assisting in complying with power tariffs;
and paying fuel suppliers. FEMT also may enter into
transactions with third parties as necessary to ensure that
the owner meets its power generation obligations to the
power grid in accordance with the energy-management
plan.
FEMT may also provide risk-management and hedging
services to the owner in connection with both the purchase
of fuel and the sale of power. These transactions may be
entered into with third parties back to back (with FEMT in
the middle) or may be direct hedging transactions between
the owner and FEMT in which FEMT retains the risk that
the owner is hedging. In the first type of transaction, the
owner would inform FEMT of its intention to hedge the
price of fuel or power for a specified term, and FEMT
would then solicit bids or offers. After reviewing the
competing bids or offers, the owner would make a selection
and direct FEMT to enter into the transaction with that
counterparty. FEMT and the owner then would enter into a
mirror transaction so that FEMT would not retain any risk
exposure on the overall transaction. In the second type of
transaction, FEMT would submit the offer for a hedging
transaction to the owner, who can accept or reject the offer.

e22

Federal Reserve Bulletin 0 March 2008

If the owner accepts the proposal, FEMT may enter into the
transaction directly with the owner. All these transactions
would be governed by International Swaps and Derivatives
Association master agreements between the owner and
FEMT. The owner may also enter into hedging transactions
directly with a third party without FEMT's involvement.
FEMT generally provides two types of marketinformation services to the owner. First, FEMT provides
market and risk information to assist the owner in developing its risk-management plan and strategy. Because FEMT
is a direct market participant, it has access to information
that may help the owner refine its risk-management strategies. Second, FEMT provides the owner with day-to-day
market information that the owner, in consultation with the
operator of the power facility, uses to determine its shortterm dispatch guidelines (that is, the amount of power the
facility should generate to meet its contractual requirements and reliability obligations).

ENERGY MANAGEMENT AS A COMPLEMENTARY
ACTIVITY
For the reasons set forth below, the Board believes that
Energy Management Services are complementary, within
the meaning of the OLB Act, to the financial activities of
Commodity Derivatives Activities and Derivatives Advisory Services. Energy Management Services would add to
these financial activities a number of agency and administrative services that would facilitate providing Commodity
Derivatives Activities and Derivatives Advisory Services
on behalf of the plant owner. This combination of services
would complement and enhance Fortis's Commodity Derivatives Activities and Derivatives Advisory Services by
allowing Fortis to offer power plant owners an integrated
approach to managing the commodity-related aspects of
their business. Many owners need assistance in devising
energy-management strategies and a market participant that
can substitute its credit and liquidity for the owner's to
facilitate transactions, and they would prefer to receive
those services from a single source. Fortis also would gain
additional information about energy markets in the course
of providing Energy Management Services that would
improve Fortis's ability to manage its own commodity risks
and to advise its clients on their commodity-related activities.
A number of non-BRC participants in the energy trading
markets, including diversified financial services companies, offer Energy Management Services to clients in
connection with their commodity derivatives business.
These companies can, and regularly do, provide Energy
Management Services to owners. Permitting FIfCs to provide these services in connection with their commodity
derivatives business and commodity trading activities,
therefore, would enable FIfCs to offer the same integrated
services that are provided by a number of their competitors.
Based on the foregoing and all other facts of record, the
Board concludes that Fortis's Energy Management Ser-

vices complement its Commodity Derivatives Activities
and Derivatives Advisory Services.

RISKS AND PUBLIC BENEFITS OF ENERGY
MANAGEMENT SERVICES
As noted above, to authorize Fortis to provide Energy
Management Services as a complementary activity under
the OLB Act, the Board must determine that the activities
do not pose a substantial risk to the safety or soundness of
depository institutions or the financial system generally. In
addition, the Board must determine that the performance of
Energy Management Services by Fortis "can reasonably be
expected to produce benefits to the public, such as greater
convenience, increased competition, or gains in efficiency,
that outweigh possible adverse effects, such as undue
concentration of resources, decreased or unfair competition, conflicts of interests, or unsound banking practices." 10
Moreover, the Board previously has stated that complementary activities should be limited in size and scope relative to
an FIfC's financial activities. I I
Revenues attributable to FEMT's Energy Management
Services have been small relative to Fortis's total revenues
on a consolidated basis. To limit the size, scope, and safety
and soundness risks of Energy Management Services,
Fortis has committed that the revenues attributable to
FEMT's Energy Management Services will not exceed
5 percent of Fortis's total consolidated operating revenues. 12
Fortis's authority to provide Energy Management Services is subject to several conditions that limit the responsibilities and potential liabilities Fortis may assume under
an EMA. Specifically, Fortis may only act as energy
manager if the relevant EMA provides that:
• owner retains the right to market and sell power directly
to third parties, which may be subject to the energy
manager's right of first refusal;
• owner retains the right to determine the level at which the
facility will operate (Le., to dictate the power output of
the facility at any given time);
• Neither the energy manager nor its affiliates guarantee
the financial performance of the facility; and
• Neither the energy manager nor its affiliates bear any risk
of loss if the facility is not profitable.
Permitting Fortis to engage in Energy Management
Services in the limited amounts and situations described
above would not appear to pose a substantial risk to Fortis,
depository institutions, or the U.S. financial system generally. As an energy manager, Fortis would enter into the
10. 12 U.s.c. § I 843(j)(2)(A).
II. See 68 Federal Register 68493, 68497 (Dec. 9, 2003); see also
145 Congo Rec. H1I529 (daily ed. Nov. 4, 1999) (Statement of
Chainnan Leach) (Hit is expected that complementary activities would
not be significant relative to the overall financial activities of the
organization. ").
12. Total operating revenues are defined as net interest income and
all non-interest revenue, including net securities gains but excluding
extraordinary items.

Legal Developments: Fourth Quarter, 2007 C23

same type of commodity derivatives transactions that it is
permitted to enter into currently, only it would enter into
these transactions to facilitate the business strategies of a
third-party owner. Through its existing authority to engage
in Commodity Derivatives Activities, Fortis already may
incur the price risk of commodities. Allowing Fortis to
expand its activities to enter into back-to-back commodity
transactions in connection with advice given as part of its
Energy Management Services would not appear to increase
its potential exposure to commodity price risk but only to
counterparty risk. Granting Fortis the authority to act as an
energy manager also would not expand its ability to engage
in Physical Commodity Trading beyond what has been
authorized by the Board. The potential safety and soundness risks of entering into these transactions are already
mitigated by the limits imposed on Fortis's Commodity
Derivatives Activities and Physical Commodity Trading by
regulation and order. l3
In addition, Fortis would remain subject to the securities,
commodities, and energy laws and to the rules and regulations (including the antifraud and anti manipulation rules
and regulations) of the Commodity Futures Trading Commission and the Federal Energy Regulatory Commission
generally and specifically to the extent applicable to Fortis's Energy Management Services.
The advisory services Fortis would provide under the
EMAs also would not expose it to significant additional
risks. The added risk to Fortis from providing these services would principally be legal and reputational risks that
are generally present in any contractual relationship. Because Fortis would assume specific responsibilities under
an EMA, it could be subject to claims for breach of contract
if it fails to perform its duties under the contract or does so
in a negligent fashion (for example, by providing bad
advice).
The Board believes that Fortis has the managerial expertise and internal control framework to manage the risks of
providing Energy Management Services. Fortis has shown
it has the expertise and internal controls necessary to
effectively integrate the risk management of Energy Management Services into its overall risk-management framework.
As noted above, to approve this proposal, the Board
must find that the public benefits from Fortis's performance
of these services outweigh the potential adverse effects,
such as undue concentration of resources, decreased or
unfair competition, or conflicts of interests. Approval of the
proposal would likely benefit Fortis's customers by enhancing its ability to provide efficiently a full range of

commodity-related services consistent with existing market
practice. Approval would likely enable Fortis to improve its
understanding of physical commodity and commodity
derivatives markets and its ability to serve as an effective
competitor in those markets.
The Board has considered the market for Energy Management Services and the potential adverse effects arising
from Fortis's provision of those services. Fortis's Energy
Management Services should not result in an undue concentration of resources or other adverse effects on competition because the market for Energy Management Services
is regional or national in scope. Any potential conflicts of
interests associated with Fortis's Energy Management Services should be mitigated by the anti-tying provisions in
section 106 of the Bank Holding Company Act Amendments of 1970.
For these reasons, and based on Fortis's policies and
procedures for monitoring and controlling the risks of
Energy Management Services, the Board concludes that
consummation of the proposal does not pose a substantial
risk to the safety or soundness of depository institutions or
the financial system generally and can reasonably be
expected to produce benefits to the public that outweigh
any potential adverse effects.

13. The scope of Fortis's Commodity Derivatives Activities is
limited by the restrictions in 12 CFR 22S.28(b)(8)(ii) and its Physical
Commodity Trading is limited hy its commitment to the Board that the
market value of commodities it holds as a result of these activities will
not exceed 5 percent of its consolidated tier 1 capital and by several
other commitments designed to address potential risks associated with
the activities.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.

CONCLUSION
Based on all the facts of record, including the representations and commitments made by Fortis to the Board in
connection with the notice, and subject to the terms and
conditions set forth in this order, the Board has determined
that the notice should be, and hereby is, approved. The
Board's determination is subject to all the conditions set
forth in Regulation Y and to the Board's authority to
require modification or termination of the activities of a
BHC or any of its subsidiaries as the Board finds necessary
to ensure compliance with, or to prevent evasion of, the
provisions and purposes of the BHC Act and the Board's
regulations and orders issued thereunder. The Board's
decision is specifically conditioned on compliance with all
the commitments made in connection with the notice,
including the commitments and conditions discussed in this
order. The commitments and conditions relied on in reaching this decision shall be deemed to be conditions imposed
in writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
By order of the Board of Governors, effective December4,2oo7.

ROBERT DEV. FRIERSON

Deputy Secretary of the Board

C24

Federal Reserve Bulletin 0 March 2008

ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT

China Merchants Bank Co., Ltd.
Shenzhen, People's Republic of China
Order Approving Establishment of a Branch
China Merchants Bank Co., Ltd. ("CMB"), Shenzhen,
People's Republic of China, a foreign bank within the
meaning of the International Banking Act ("IBA"), has
applied under section 7(d) of the IBA 1 to establish a branch
in New York, New York. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, provides that a foreign bank must obtain the approval of the
Board to establish a branch in the United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspaper of general circulation in New York, New York
(New York Post, March 7, 2007). The time for filing
comments has expired, and the Board has considered all
comments recei ved.
CMB, with total assets of approximately $145.6 billion,
is the sixth largest bank in China. 2 CMB is indirectly
controlled by the Government of China through a number
of wholly owned companies. One of these companies,
China Merchants Group, Limited, Shenzhen, People's
Republic of China, indirectly owns approximately 17.6 percent of CMB's total outstanding shares. 3 Two other
government-owned companies, China Ocean Shipping
(Group) Company and China Shipping (Group) Company,
own 6.4 percent and 5.4 percent, respectively, of the shares
of CMB. No other shareholder owns more than 5 percent of
the shares of CMB.
CMB engages primarily in corporate and retail banking
and treasury operations throughout China and operates a
branch and an investment advisor subsidiary in Hong
Kong. In the United States, CMB operates a representative
office in New York. CMB would be a qualifying foreign
banking organization under Regulation K.4
The proposed New York branch would engage in wholesale deposit-taking, lending, trade finance, and other banking services. Under the IBA and Regulation K, in acting on
an application by a foreign bank to establish a branch, the
Board must consider whether (1) the foreign bank engages
directly in the business of banking outside the United
States; (2) has furnished to the Board the information it
needs to assess the application adequately; and (3) is
l. 12 U.S.c. §3105(d).
2. Asset and ranking data are as of June 30, 2007.
3. China Merchants Group Limited has six director interlocks with
CMB and is considered to control CMB for purposes of the Bank
Holding Company Act (12 U.S.C. § 1841 et seq).
4. 12 CFR 211.23(a). China Merchants Group Limited and CMB
would also together meet the standards to be a qualifying foreign
banking organization.

subject to comprehensive supervision on a consolidated
basis by its home-country supervisors.5 The Board also
considers additional standards as set forth in the IBA and
Regulation K. 6
The IBA includes a limited exception to the general
standard relating to comprehensive, consolidated supervision. 7 This exception provides that, if the Board is unable to
find that a foreign bank seeking to establish a branch,
agency, or commercial lending company is subject to
comprehensive supervision or regulation on a consolidated
basis by the appropriate authorities in its home country, the
Board may nevertheless approve the application if: (i) the
appropriate authorities in the home country of the foreign
bank are actively working to establish arrangements for the
consolidated supervision of such bank; and (ii) all other
factors are consistent with approval. 8 In deciding whether
to exercise its discretion to approve an application under
authority of this exception, the Board must also consider
whether the foreign bank has adopted and implemented
procedures to combat money laundering.9 The Board also
may take into account whether the home country of the
foreign bank is developing a legal regime to address money
laundering or is participating in multilateral efforts to
combat money laundering. 10 This is the standard applied by
the Board in this case.
As noted above, CMB engages directly in the business
of banking outside the United States. CMB also has
provided the Board with information necessary to assess
the application through submissions that address the relevant issues.
Based on all the facts of record, the Board has determined that CMB' s home-country supervisory authority is
actively working to establish arrangements for the consolidated supervision of CMB and that considerations relating
to the steps taken by CMB and its home jurisdiction to
combat money laundering are consistent with approval
under this standard. The China Banking Regulatory Commission ("CBRC") is the principal supervisory authority
ofCMB, including its foreign subsidiaries and affiliates, for

5. 12 U.S.C §3105(d)(2); 12 CFR 211.24. In assessing this standard, the Board considers, among other indicia of comprehensive,
consolidated supervision, the extent to which the home-country supervisors: (i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide; (ii) obtain information on the
condition of the bank and its subsidiaries and offices through regular
examination reports, audit reports, or otherwise; (iii) obtain infor~a
tion on the dealings with and relationship between the bank and Its
affiliates, both foreign and domestic; (iv) receive from the bank
financial reports that are consolidated on a worldwide basis or
comparable information that permits analysis of the bank's financial
condition on a worldwide consolidated basis; and (v) evaluate prudential standards, such as capital adequacy and risk asset exposure, on a
worldwide basis. No single factor is essential, and other elements may
inform the Board's determination.
6.12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2).
7. 12 U.S.C. § 3105(d)(6).
8. 12 U.S.c. §3105(d)(6)(A).
9.12 USc. §3105(d)(6)(B).
1O.ld.

Legal Developments: Fourth Quarter, 2007 C25

all matters other than laws with respect to money laundering. lI The CBRC has the authority to license banks,
regulate their activities, and approve expansion, both
domestically and abroad. It supervises and regulates CMB,
including its subsidiaries and overseas operations, through
a combination of targeted on-site examinations and continuous consolidated off-site monitoring. Since its establishment in 2003, the CBRC has enhanced existing supervisory
programs and developed new policies and procedures
designed to create a framework for the consolidated supervision of banks in China.
On-site examinations by the CBRC cover, among other
things, the major areas of banks' operations: corporate
governance and senior management responsibilities, capital
adequacy, asset structure and asset quality (including structure and quality of loans), off-balance-sheet activities,
earnings, liquidity, liability structure and funding sources,
expansionary plans, internal controls (including accounting
control and administrative systems), legal compliance,
accounting supervision and internal auditing (including
accounting control and administrative systems), and any
other areas deemed necessary by the CBRe.
Off-site monitoring is conducted through the review of
required annual, semiannual, quarterly, or monthly reports
on, among other things, asset quality, capital adequacy,
liquidity, corporate governance, affiliate transactions, and
internal controls.
CMB is required to be audited annually by an accounting firm approved by the PBOC, and the results are shared
with the CBRC and the PBOC. The scope of the required
audit includes a review of CMB's financial statements,
asset quality, and internal controls. The CBRC may order a
special audit at any time. In addition, in connection with its
listing on the Shanghai and Hong Kong stock exchanges,
CMB is required to have external audits conducted under
both International Financial Reporting Standards and generally accepted accounting practices under Chinese law.
CMB is required to publish its financial statements annually. CMB conducts internal audits of its offices and
operations, including its overseas operations, generally on
an annual schedule. The internal audit results are shared
with the CBRC, the PBOC, and CMB's external auditors.
The proposed branch would be subject to internal audits.
Chinese laws impose various prudential limitations on
banks, including limits on transactions with affiliates and
large exposures. The CBRC is authorized to require any
bank to provide information and to impose sanctions for
failure to comply. The CBRC also has authority to impose
administrative penalties, including warnings, fines, and
removal from office, for violations of applicable laws and

II. Before April 2003, the People's Bank of China ("PBOC")
acted as both China's central bank and primary banking supervisor.
including with respect to anti-money-laundering matters. In April
2003, the CBRC was established as the primary banking supervisor
and assumed the majority of the PBOC's regulatory functions. The
PBOC maintained its roles as China's central bank and primary
supervisor for anti-money-Iaundering matters.

rules. Criminal violations are transferred to the judicial
authorities for investigation and prosecution.
In recent years, the Chinese government has enhanced
its anti-money-laundering regime, In 2005, the Chinese
government took initial steps to adopt an anti-moneylaundering law, the PRC Anti-Money Laundering Law
("AML Law"), The AML Law and two related rules, the
Rules for Anti-Money Laundering by Financial Institutions
("AML Rules") and the Administrative Rules for the
Reporting of Large-Value and Suspicious Transactions by
Financial Institutions ("LVT/STR Rules") were enacted in
October 2006 and December 2006, respectively. The AML
Law and AML Rules became effective on January I, 2007,
and the LVT/STR Rules became effective on March 1,
2007, Together, the law and two related rules establish a
regulatory infrastructure to assist China's anti-moneylaundering effort.
An Anti-Money Laundering Bureau ("AML Bureau")
was established within the PBOC in 2003. 12 The AML
Bureau coordinates anti-money-laundering efforts at the
PBOC and among other agencies. The AML Bureau also
supervised the creation in September 2004 of the China
Anti-Money Laundering Monitoring and Analysis Center
("AML Center"), The AML Center collects, monitors,
analyzes, and disseminates suspicious transaction reports
and large-value transaction reports, The AML Center sends
suspicious transaction reports to the AML Bureau for
further investigation, The PBOC issued additional rules in
June 2007 providing clarification on reporting suspicious
transactions to the AML Center and on customer due
diligence and recordkeeping,
China participates in international fora that address the
prevention of money laundering and terrorist financing,
China is a member of the Financial Action Task Force
(,'FATF")13 and is a party to the 1988 U,N, Convention
Against the Illicit Traffic of Narcotics and Psychotropic
Substances, the U.N. Convention Against Transnational
Organized Crime, the U,N. Convention Against Corruption, and the U.N. International Convention for the Suppression of the Financing of Terrorism.
As noted, the PBOC is China's primary supervisor for
anti-money-Iaundering matters. Like the CBRC, the PBOC
supervises and regulates CMB through a combination of
on-site examinations and off-site monitoring. On-site examinations focus on CMB's compliance with anti-moneylaundering laws and rules, including the AML Law and the
AML and LVT/STR Rules. Off-site monitoring is conducted through the review of periodic reports. In performing its responsibilities, the PBOC may require any bank to
provide information and can impose administrative penalties for violations of applicable laws and rules.

12. The AML Bureau conducts administrative investigations and
handles violations of AML Rules. Money laundering cases are referred
to the Ministry of Public Security, China's main law enforcement
body, for investigation and prosecution.
13. China became a member of FATF in lune 2007.

C26

Federal Reserve Bulletin 0 March 2008

CMB has policies and procedures to comply with Chinese laws and rules regarding anti-money laundering. CMB
has represented that it has taken additional steps on its own
initiative to combat money laundering and other illegal
activities. CMB states that it has implemented measures
consistent with the recommendations of FA1F and that it
has put in place policies, procedures, and controls to ensure
ongoing compliance with all statutory and regulatory
requirements, including designating anti-money-laundering
officers and conducting employee training at the head
office, branch, and sub-branch levels. CMB's compliance
with anti-money-Iaundering requirements is monitored by
the PBOC and by CMB's internal and external auditors.
The Board also has taken into account the additional
standards set forth in section 7 of the IBA and Regulation K,14 The CBRC has no objection to CMB' s establishment of the proposed branch.
The Board has also considered carefully the financial
and managerial factors in this case. China has adopted
risk-based capital standards that are consistent with those
established by the Basel Capital Accord ("Accord").
CMB's capital is in excess of the minimum levels that
would be required by the Accord and is considered equivalent to capital that would be required of a U.S. banking
organization. Managerial and other financial resources of
CMB are consistent with approval, and CMB appears to
have the experience and capacity to support the proposed
branch. In addition, CMB has established controls and
procedures for the proposed branch to ensure compliance
with U.S. law. In particular, CMB has stated that it will
apply strict anti-money-laundering policies and procedures
at the branch consistent with U.S. law and regulation and
will establish an internal control system at the branch
consistent with U.S. requirements to ensure compliance
with those policies and procedures.
With respect to access to information about CMB's
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which CMB operates
and has communicated with relevant government authorities regarding access to information. CMB has committed
to make available to the Board such information on the
operations of CMB and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act, and other
applicable federal law. To the extent that the provision of
such information to the Board may be prohibited by law or
otherwise, CMB has committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In light of these commitments and other facts

of record, and subject to the condition described below, the
Board has determined that CMB has provided adequate
assurances of access to any necessary information that the
Board may request.
On the basis of all the facts of record, and subject to the
commitments made by CMB, as well as the terms and
conditions set forth in this order, CMB's application to
establish a branch is hereby approved. Should any restrictions on access to information on the operations or activities of CMB and its affiliates subsequently interfere with
the Board's ability to obtain information to determine and
enforce compliance by CMB or its affiliates with applicable
federal statutes, the Board may require termination of any
of CMB's direct or indirect activities in the United States.
Approval of this application also is specifically conditioned
on compliance by CMB with the commitments made in
connection with this application and with the conditions in
this order. IS The commitments and conditions referred to
above are conditions imposed in writing by the Board in
connection with its decision and may be enforced in
proceedings under 12 U.S.c. § 1818 against CMB and its
affiliates.
By order of the Board of Governors, effective November 8,2007.

14. See 12 U,S,C, §3105(d)(3)-(4); 12 CFR 2 [1.24(c)(2). The
additional standards set forth in section 7 of the lBA and Regulation K
include the following: whether the bank's home-country supervisor
has consented to the establishment of the office; the financial and
managerial resources of the bank; whether the appropriate supervisors
in the home country may share information on the bank's operations
with the Board; whether the bank and its U.s. affiliates are in
compliance with U.S. law; the needs of the community; and the bank's
record of operation,

15. The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the state of
New York to license offices ofa foreign bank. The Board's approval of
this application does not supplant the authority of the state of
New York or its agent, the New York State Banking Department
(HDepartment"), to license the proposed office of eMB in accordance
with any terms or conditions that the Department may impose.

Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner. and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

ICICI Bank Limited
Mumbai, India
Order Approving Establishment of a Branch
ICICI Bank Limited (HBank"), a foreign bank within the
meaning of the International Banking Act ("IBA"), has
applied under section 7(d) of the IBA I to establish a federal
branch in New York, New York. The Foreign Bank Supervision Enhancement Act of 1991, which amended the IBA,
provides that a foreign bank must obtain the approval of the
Board to establish a branch in the United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in a newspaper of general circulation in New York, New York (The
Daily News, June 21, 2004). The time for filing comments
has expired, and all comments received have been considered.

L 12 U.S ,C. § 3105(d).

Legal Developments: Fourth Quarter, 2007 C27

Bank, with total assets of approximately $91.5 billion, is
the second largest bank in India. 2 The Government of India
and the Government of Singapore own approximately
9.6 percent and 8.3 percent of Bank's shares, respectively. 3
No other shareholder owns directly more than 5 percent of
Bank's shares.
Bank is a private sector bank and engages primarily in
corporate and retail banking and foreign exchange operations. Bank also provides through its subsidiaries insurance, brokerage, investment banking, and asset management services in India. Outside India, Bank operates
subsidiary banks in the United Kingdom, Canada, and
Russia and branches in Bahrain, the Dubai International
Financial Center, Hong Kong S.A.R., Singapore, and Sri
Lanka. In the United States, Bank operates a representative
office in New York, New York, and engages indirectly in
nonbank activities in the United States through a number of
subsidiaries. 4 Bank would be a qualifying foreign banking
organization under Regulation K. 5
The proposed New York branch would engage in a
wholesale banking business, including providing lending,
trade financing, and factoring services to U.S.-based subsidiaries of Indian companies.
Under the rnA and Regulation K, in acting on an
application by a foreign bank to establish a branch, the
Board must consider whether (1) the foreign bank engages
directly in the business of banking outside the United
States; (2) has furnished to the Board the information it
needs to assess the application adequately; and (3) is
subject to comprehensive supervision on a consolidated
basis by its home-country supervisors. 6 The Board also
considers additional standards as set forth in the rnA and
Regulation KJ
The rnA includes a limited exception to the general
requirement relating to comprehensive, consolidated super-

2. Asset data are as of March 31, 2007. Ranking data are as of
March 31,2006.
3. The Life Insurance Corporation of India and other governmentowned companies collectively own approximately 9.6 percent of
Bank's shares. The Government of Singapore directly owns approximately 1.8 percent of Bank's shares. Allamanda Investments Pte.
Limited, an investment company wholly owned by the Ministry of
Finance of Singapore, indirectly owns 6.5 percent of Bank's shares.
4. See ICICf Bank Limited, 88 Federal Reserve Bulletin 227 (2002).
5. 12 CFR 211.23(a).
6. 12 U.S.c. § 3105(d)(2); 12 CFR 211.24. In assessing this standard, the Board considers, among other indicia of comprehensive,
consolidated supervision, the extent to which the home-country supervisors: (i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide; (ii) obtain information on the
condition of the bank and its subsidiaries and offices through regular
examination reports, audit reports, or otherwise; (iii) obtain information on the dealings with and relationship between the bank and its
affiliates, both foreign and domestic; (iv) receive from the bank
financial reports that are consolidated on a worldwide basis or
comparable information that permits analysis of the bank's financial
condition on a worldwide consolidated basis; and (v) evaluate prudential standards, such as capital adequacy and risk asset exposure, on a
worldwide basis. No single factor is essential, and other elements may
inform the Board's determination.
7. 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3).

vision.s This exception provides that, if the Board is unable
to find that a foreign bank seeking to establish a branch,
agency, or commercial lending company is subject to
comprehensive supervision or regulation on a consolidated
basis by the appropriate authorities in its home country, the
Board may nevertheless approve the application, provided
that (i) the appropriate authorities in the home country of
the foreign bank are actively working to establish arrangements for the consolidated supervision of such bank; and
(ii) all other factors are consistent with approval. 9 In
deciding whether to exercise its discretion to approve an
application under authority of this exception, the Board
shall also consider whether the foreign bank has adopted
and implemented procedures to combat money laundering. lo The Board also may take into account whether the
home country of the foreign bank is developing a legal
regime to address money laundering or is participating in
multilateral efforts to combat money laundering. II
As noted, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the application through submissions that address the relevant issues.
Based on all the facts of record, the Board has determined that Bank's home jurisdiction supervisory authority
is actively working to establish arrangements for the consolidated supervision of Bank and that considerations relating to the steps taken by Bank and its home jurisdiction to
combat money laundering are consistent with approval
under this standard. The Reserve Bank of India ("RBI") is
the principal supervisory authority of Bank, including its
foreign subsidiaries and affiliates. The RBI has the authority to license banks, regulate their activities, and approve
expansions, both domestically and abroad, It supervises
and regulates Bank through a combination of regular
on-site reviews and off-site monitoring. On-site examinations cover the major areas of operations, capital adequacy,
management (including risk-management strategies), asset
quality (including detailed loan portfolio analysis), earnings, liquidity, and internal controls and procedures (including anti-money-Iaundering controls and procedures). The
frequency of on-site examinations depends on a bank's risk
profile, but generally all Indian banks, including Bank, are
examined at least annually.
Off-site monitoring is conducted through the review of
required quarterly or monthly reports on, among other
things, asset quality, earnings, liquidity, capital adequacy,
loans, and on- and off-balance-sheet exposures. The RBI
monitors the foreign activities of Indian banks using guidelines designed to ensure that banks identify, control, and
minimize risk in the bank and in its joint ventures and
subsidiaries. The RBI also periodically audits Indian banks'
foreign operations.
Bank is required to be audited annually by a firm of
chartered accountants approved by the RBI, and the audit
8. 12 U.S.c. § 3105(d)(6).
9. 12 U.S.C. § 3 !05(d)(6)(A).
10. 12 U.S.c. § 3105(d)(6)(B).

11.

/d.

C28

Federal Reserve Bulletin 0 March 2008

report is submitted to the RBI. The scope of the required
audit includes a review of financial statements, asset quality, internal controls, and anti-money-Iaundering procedures. The RBI may order a special audit at any time. In
connection with its listing of American Depositary Shares
on the New York Stock Exchange, Bank files a financial
report with the Securities and Exchange Commission that
also is subject to annual external audit. In addition, Bank
conducts internal audits of its offices and operations generally on an annual schedule. The proposed branch would be
subject to internal audits to determine compliance with
internal controls and RBI guidelines.
Indian laws impose various prudential limitations on
banks, including limits on transactions with affiliates and
large exposures. The RBI is authorized to request and
receive information from any bank and its domestic and
foreign affiliates and to impose penalties for failure to
comply with a disclosure request or for providing false or
misleading information. The RBI also has the authority to
impose conditions on licensees and to impose penalties for
failure to comply with the RBI's rules, orders, and directions. Penalties include monetary fines, removal of management, and the revocation of the authority to conduct
business.
In recent years, the Indian government has enhanced its
anti-money-laundering regime. In January 2003, India took
initial steps to adopt an anti-money-laundering law, the
Prevention of Money Laundering Act. The law, related
amendments, and implementing rules (collectively, the
"PMLA") became effective in July 2005 and established a
regulatory infrastructure to assist the anti-moneylaundering effort. In accordance with the PMLA, India has
established the Financial Intelligence Unit, India ("FlUIND"), which reports directly to the Economic Intelligence
Council headed by the Finance Minister of India. The
FlU-IND is responsible for receiving, processing, analyzing, and disseminating information related to cash and
suspicious transaction reports. The Directorate of Enforcement, a department within the Ministry of Finance, is
responsible for investigating and prosecuting money laundering cases. In addition, the RBI issued "Know Your
Customer (KYC) Guidelines-Anti-Money Laundering
Standards" ("Guidelines") in November 2004 that require
financial institutions to establish systems for the prevention
of money laundering. Indian banks were required to be
fully compliant with the Guidelines by December 31,2005.
The RBI issued further guidelines in February 2006 providing clarification on reporting cash and suspicious transactions to the flU-IND.
India participates in international fora that address the
prevention of money laundering and terrorist financing.
India is a member of the Asia/Pacific Group on Money
Laundering (Financial Action Task Force for the AsiaJ
Pacific region), an observer organization to the Financial
Action Task Force ("FATF"), and is actively seeking to
join FATF as a member. 12 India is a party to the 1988 U.N.
12. India became an observer to FATF in February 2007.

Convention Against Illicit Traffic in Narcotic Drugs and
Psychotropic Substances and the U.N. International Convention for the Suppression of the Financing of Terrorism.
Bank has policies and procedures to comply with Indian
laws and regulations and the RBI's Guidelines regarding
anti-money laundering. Bank has also taken additional
steps on its own initiative to combat money laundering and
other illegal activities. Bank states that it has implemented
the relevant recommendations of the FATF and that it has
put in place enterprise-wide, risk-based anti-moneylaundering policies and procedures to ensure ongoing compliance with all statutory and regulatory requirements,
including designating compliance officers and conducting
training for staff at all levels. Bank's compliance with
anti-money-laundering requirements is monitored by the
RBI and by Bank's internal and external auditors.
The Board also has taken into account the additional
standards set forth in section 7 of the IBA and Regulation K.13 The RBI has no objection to Bank's establishment
of the proposed branch.
The Board has also considered carefully the financial
and managerial factors in this case. India's risk-based
capital standards are consistent with those established by
the Basel Capital Accord. Bank's capital is in excess of the
minimum levels that would be required by the Accord and
is considered equivalent to capital that would be required of
a U.S. banking organization. Managerial and other financial
resources of Bank are consistent with approval, and Bank
appears to have the experience and capacity to support the
proposed branch. In addition, Bank has established controls
and procedures for the proposed branch to ensure compliance with U.S. law.
With respect to access to information about Bank's
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which Bank operates
and has communicated with relevant government authorities regarding access to information. Bank has committed
to make available to the Board such information on the
operations of Bank and any of its affiliates that the Board
deems necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act ("BHC Act"),
and other applicable federal law. To the extent that the
provision of such information to the Board may be prohibited by law or otherwise, Bank has committed to cooperate
with the Board to obtain any necessary consents or waivers
that might be required from third parties for disclosure of
such information. In light of these commitments and other
facts of record, and subject to the condition described

13. See 12 U.S.c. § 3105(d)(3)-(4); 12 CFR 21 L24(c)(2). The
additional standards set forth in section 7 of the IBA and Regulation K
include the following: whether the bank's home- country supervisor
has consented to the establishment of the office; the financial and
managerial resources of the bank; whether the appropriate supervisors
in the home country may share information on the bank's operations
with the Board; whether the bank and its U.S. affiliates are in
compliance with U.S. law; the needs of tile community; and the bank's
record of operation.

Legal Developments: Fourth Quarter, 2007

below, the Board has determined that Bank has provided
adequate assurances of access to any necessary information
that it may request
On the basis of all the facts of record, and subject to the
commitments made by Bank, as well as the terms and
conditions set forth in this order, Bank's application to
establish a branch in New York, New York, is hereby
approved. Should any restrictions on access to information
on the operations or activities of Bank and its affiliates
subsequently interfere with the Board's ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require termination of any of Bank's direct or indirect
activities in the United States, or in the case of any such
operation licensed by the Office of the Comptroller of the
Currency ("OCC"), recommend termination of such operation. Approval of this application also is specifically conditioned on compliance by Bank with the commitments l4
made in connection with this application and with the
14. Bank Ilas committed that it will confonn its existing direct and
indirect nonbanking activities and investments to the requirements of
the BHC Act Bank owns subsidiaries that engage in activities in the
United Stales that are not pennissible for a bank holding company.
Indian laws and rules restrict Bank's ability to conform its holdings of
these companies within the time period provided for in section 4(a)(2)
of the BHC Act. The Board has granted Bank an exemption under

C29

conditions in this order. IS The commitments and conditions
referred to above are conditions imposed in writing by the
Board in connection with this decision and may be enforced
in proceedings under 12 U.S.c. § 1818 against Bank and its
affiliates.
By order of the Board of Governors, effective October 19, 2007.
Voting for this action: Chairman Bernanke. Vice Chainnan Kolln,
and Governors Warsh, Kroszner. and Mishkin,
JENNIFER 1. JOHNSON
Secretary of the Board

section 4(c )(9) of the BHC Act that will pennit Bank to hold its shares
of these companies for a temporary period.
15, The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the acc to
license offices of a foreign bank, The Board's approval of this
application does not supplant tile authority of the acc to license the
proposed office of Bank in accordance with any tenns or conditions
tllat it may impose.

_ ~.

__-,,_ _

.M _~

_ ___ '·

C31

June 2008

Legal Developments: First Quarter, 2008
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION

3 OF THE

BANK HOLDING COMPANY ACT

First National Bank Group, Inc.
Edinburg, Texas
Order Approving the Acquisition of
Additional Shares of a Bank Holding
Company
First National Bank Group, Inc. ("First National"), a bank
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
approval under section 3 of the BHC Act l to acquire up to
9.9 percent of the voting shares and control of Southside
Bancshares, Incorporated ("Southside"), Tyler, and acquire
indirect control of Southside's subsidiary banks, Southside
Bank, also of Tyler, and Fort Worth National Bank, Fort
Worth, all of Texas. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in the
Federal Register (72 Federal Register 70862 (2007)). The
time for filing comments has expired, and the Board has
considered the proposal and all comments received in light
of the factors set forth in section 3 of the BHC Act.
First National, with total consolidated assets of $4.1 billion, is the 18th largest depository organization in Texas,
controlling deposits of $3.3 billion, which represent less
than 1 percent of total deposits of insured depository
institutions in Texas ("state deposits").3 Southside, with
total consolidated assets of $1. 9 billion, is the 29th largest
depository organization in Texas, controlling deposits of
$1.4 bilIion.4 On consummation of the proposal, First
I. 12 U.S.C. § 1842.
2. Southside has two intermediate bank holding companies in
Delaware, Southside Delaware Financial Corporation, Dover. and Fort
Worth Bancorporation, Inc., Wilmington. In addition, Southside has an
intermediate bank holding company in Texas. Fort Worth Bancshares.
Inc .. Fort Worth.
3. Asset data are as of September 30, 2007, and statewide deposit
and ranking data are as of June 30, 2007.
4. Southside acquired Fort Worth Bancshares, Inc. (a small bank
holding company) in October 2007. Fort Worth Bancshares' subsid-

National would become the 12th largest depository organization in Texas, controlling deposits of approximately
$4.7 billion, which would represent 1.1 percent of state
deposits.
First National, together with its related interests and
principal shareholders, currently owns 8.62 percent of
Southside's voting shares and proposes to acquire the
additional voting shares (up to 1.28 percent) through
purchases on the open market. First National received
approval from the Board to acquire up to 9.9 percent of the
voting shares of Southside on September 11, 2006. 5 As part
of the approval, First National agreed to abide by certain
commitments previously relied on by the Board in determining that an investing bank holding company would not
be able to exercise a controlling influence over another
bank holding company or bank for purposes of the BHC
Act ("Passivity Commitments").
First National is proposing again to acquire up to
9.9 percent of the voting shares of Southside and has also
requested approval to control Southside for purposes of the
BHC Act. 6 On acquiring control, First National would be
required to treat Southside Bank as a subsidiary of First
National and would be subject to certain obligations
imposed by the BHC Act and other federal statutes, including obligations to serve as a source of financial and
managerial strength to Southside.1
The Board received a comment from the management of
Southside objecting to the proposal and questioning First
National's compliance with the Passivity Commitments.
Southside also expressed concems about the management
of First National. The Board has considered carefully First
National's application and Southside's comments in light
of the factors it must consider under section 3 of the BHC
Act.
FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS

Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and banks involved in the proposal and
certain other supervisory factors. The Board has considered
iary bank. Fort Worth National Bank, Fort Worth, has assets of
$125 million. These assets were not included in Southside's September 30, 2007, asset figures.
5. 91 Federal Reserve Bulletin C164 (2006) ("2006 Order").
6. As part of the proposal, First National requests relief from the
Passivity Commitments.
7. See 12 CFR 225.4; 12 U.S.C. § 1815(e)(I).

C32

Federal Reserve Bulletin D June 2008

carefully these factors in light of all the facts of record,
including, among other things, confidential reports of
examination and other supervisory information received
from the primary federal supervisors of the organizations
and institutions involved in the proposal, publicly reported
and other financial information, information provided by
First National, and public comment received on the proposaL
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of information, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board also evaluates the effect
of the transaction on the financial condition of the applicant, including its capital position, asset quality, earnings
prospects, and the impact of the proposed funding of the
transaction.
Based on its review of the financial factors, the Board
finds that First National has sufficient resources to effect the
proposal. First National, Southside, and their subsidiary
banks are well capitalized and would remain so on consummation of this proposal. g The proposed transaction is
structured as a share purchase, and the consideration to be
received by Southside's shareholders would be funded
from First National's existing liquid assets.
The Board also has considered the managerial resources
of the organizations involved in the proposed transaction.
The Board has reviewed the examination records of First
National, Southside, and their subsidiary banks, including
assessments of their management, risk-management systems, and operations. In addition, the Board has considered
its supervisory experiences and those of the other relevant
banking supervisory agencies with the organizations and
their records of compliance with applicable banking law,
including anti-money-laundering laws. First National,
Southside, and their subsidiary banks are considered to be
well managed.
As noted, Southside has alleged that certain actions
taken by the management of First National violated the
Passivity Commitments. 9 Specifically, Southside alleged
that requests made by First National for employment and
compensation information on employees who are related to

8. As previously noted, the proposal provides that First National
would acquire only up to 9.9 percent of Southside. Under these
circumstances, the financial statements of Southside and First National
would not be consolidated, Moreover, because First National will not
acquire a majority of the voting shares of Southside in this transaction,
First National must obtain the Board's approval before acquiring more
than 9.9 percent of Southside's voting shares.
9. Southside also criticized the management of First National. as
trustee of First National's employee stock ownership plan ("ESOP").
for causing the ESOP to purchase shares of Southside. The amount of
shares acquired by the ESOP did not exceed the percentage of shares
authorized by the Board in the 2006 Order,

the president of Southside violated these commitments.
Southside also asserted that a filing made by First National
with the Securities and Exchange Commission ("SEC")
evidenced First National's intent to change or influence
control of Southside and was a prima facie violation of the
Passivity Commitments, In addition, Southside alleged that
the filing contained statements intended to force Southside
to change its business and operations. JO The Board has
reviewed the information provided by Southside and First
National as well as public and confidential supervisory
information. Based on all the facts of record, the Board
finds that neither First National's request for information
nor its mandatory filing with the SEC violated the Passivity
Commitments.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and the future
prospects of First National, Southside, and their subsidiaries are consistent with approval of this application, as are
the other supervisory factors the Board must consider under
section 3 of the BHC Act.
COMPETITIVE CONSIDERATIONS

Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of any attempt to monopolize the
business of banking in any relevant banking market. Section 3 also prohibits the Board from approving a proposal
that would substantially lessen competition in any relevant
banking market, unless the Board finds that the anticompetiti ve effects of the proposal clearly are outweighed in the
public interest by the probable effect of the proposal in
meeting the convenience and needs of the community to be
served. II
First National's subsidiary bank, First National Bank,
Edinburg. and Southside Bank compete directly in the
Dallas banking market. In addition, First National Bank
and Fort Worth National Bank compete directly in the Fort
Worth banking market. The Board has reviewed carefully
the competitive effects of the proposal in both banking
markets in light of all the facts of record. In particular, the
Board has considered the number of competitors that would
remain in the markets. the relative shares of total deposits
10. The SEC requires the owners of more than 5 percent of a class
of equity securities of a registered company to file certain forms. See
15 U.S.C. §78m(d); Rule 13d·l, 17 CFR 240.13d-l (2007). First
National filed a Schedule l3D report with the SEC, which is required
for a 5 percent shareholder who "holds the securities with a purpose or
effect of changing or inlluencing control of the issuer, or in connection
with or as a participant in any transaction having that purpose or effect
. , .". (17 CFR 240.13d-l(e)(1)(i) (2007», In its Schedule 13D report,
First National stated that, after making its 2006 investment in Southside, it wanted to change its investment goals with respect to Southside
and, accordingly. filed this application with the Board requesting
approval to increase its investment in Southside and to be relieved of
the Passivity Commitments. First National also stated that it did not
intend to take any action inconsistent with the Passivity Commitments
until after the Board approved this application and the applicable
statutory waiting period expired.
II. 12 U.S.c. § I842(c)(1).

Legal Developments: First Quarter, 2008

of depository institutions in the markets ("market deposits") controlled by First National and Southside,12 the
concentration level of market deposits and the increase in
this level as measured by the Herfindahl-Hirschman Index
("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 13 and other characteristics of the
markets.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in both the Dallas
and Fort Worth banking markets. 14 On consummation of
the proposal, the Dallas banking market would remain
moderately concentrated and the Fort Worth banking market would remain unconcentrated, as measured by the HHI.
There would be no change in the HHI's measure of
concentration in either market, and numerous competitors
would remain in both banking markets.
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
Board that consummation would not likely have a significantly adverse effect on competition in any relevant banking market. In addition, the appropriate banking agencies
have been afforded an opportunity to comment and have
not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in either the Dallas or Fort Worth banking
market or in any other relevant banking market and that
competitive considerations are consistent with approval.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
12. Deposit and market share data are as of June 30. 2007. are
adjusted to reflect subsequent mergers and acquisitions as of January 28. 2008. and are based on calculations in which the deposits of
thrift institutions are included at SO percent. The Board previously has
indicated that thrift institutions have become. or have the potential to
become. significant competitors of commercial banks. See. e.g..
Midwest Financial Group. 75 Federal Reserve Bulletin 386 (1989);
National City Corporation. 70 Federal Reserve Bulletin 743 (1984).
Thus. the Board regularly has included thrift institution deposits in the
market share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
13. Under the DOJ Guidelines. a market is considered moderately
concentrated if the post-merger HHI is between 1000 and 1800 and
highly concentrated if the post-merger HHI exceeds 1800. The Department of Justice has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post·merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The Department of Justice has stated that the higher-thannormal HHI thresholds for screening bank mergers for anticompetitive
effects implicitly recognize the competitive effects of limited-purpose
lenders and other nondepository financial institutions.
14. Those banking markets and the effects of the proposal on the
concentrations of banking resources are described in the appendix.

C33

take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA" ),15 The Board has considered carefully all the
facts of record, including evaluations of the CRA performance records of First National's and Southside's subsidiary banks, other information provided by First National,
and confidential supervisory information. First National
Bank received an "outstanding" rating at its most recent
CRA evaluation by the Office of the Comptroller of the
Currency ("OCC"), as of September 9, 2006. Southside
Bank also received an "outstanding" rating at its most
recent CRA performance evaluation by the Federal Deposit
Insurance Corporation, as of March 12, 2007. 16 Based on
all the facts of record, the Board concludes that considerations relating to the convenience and needs factor and the
CRA performance records of the relevant depository institutions are consistent with approval.

CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. 17 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act and other
applicable statutes. The Board's approval is specifically
conditioned on compliance by First National with the
conditions imposed in this order and the commitments
made to the Board in connection with the application. The
conditions and commitments are deemed to be conditions
imposed in writing by the Board in connection with its
findings and decision herein and, as such, may be enforced
in proceedings under applicable law.
The acquisition of additional Southside voting shares
may not be consummated before the 15th calendar day after
the effective date of this order, or later than three months
after the effective date of this order, unless such period is
extended for good cause by the Board or the Federal
Reserve Bank of Dallas, acting pursuant to delegated
authority.
By order of the Board of Governors, effective February 4,2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner. and Mishkin.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board

IS. 12 U.S.C. §2901 et seq.
16. Fort Worth National Bank received a "satisfactory" rating at its
most recent CRA performance evaluation by the OCC, as of February 21,2006.
17. In granting this approval. the Board hereby relieves First
National of the Passivity Commitments it provided in connection with
the 2006 Order.

C34

Federal Reserve Bulletin 0 June 2008

Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES
,

Bank

Rank

Amount

I of(dollars)
deposits

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

.~------~~-----

TEXAS BANKING MARKETS

Dallas-Dallas County, the
southeastern quadrant of Denton
County (including Denton and
Lewisville), the southwestern
quadrant of Collin County
(including McKinney and Plano),
Rockwall County, the communities
of Forney and Terrell in Kaufman
County, and Midlothian,
Waxahachie, and Ferris in Ellis
County
First National Pre-Consummation .. .
Southside ................................ ..
First National Post-Consummation ..

52
119
52

$118 mil.
687 tho
$118.8 mil.

.14

Fort Worth-The Fort WorthArlington Metropolitan division,
which consists of Tarrant, Johnson,
Parker, and Wise counties and
excludes Mineral Wells in Parker
County
First National Pre-Consummation .. .
Southside ................................. .
First National Post-Consummation ..

76
29
29

Minimal
$100.1 mil.
$110.1 mil.

Minimal
.45
.45

.14

1,604
1,604
1,604

o
o

129
129
129

886
886
886

o
o
o

79
79
79

NOTE: Deposit data are as of lune 30, 2007. and include mergers as of lanuary 28, 2008. Deposit amounts are unweighted. Rankings. market deposit

shares. and HHIs are based on thrift institution deposits weighted at SO percent.

Frandsen Financial Corporation
Arden Hills, Minnesota
Order Approving the Acquisition of a Bank
Frandsen Financial Corporation ("Frandsen"), a bank holding company within the meaning of the Bank Holding
Company Act (HBHC Act"), has requested the Board's
approval under section 3 of the BHC Act l to acquire First
National Bank of Montgomery ("Bank"), Montgomery,
Minnesota.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 492 (2008)). The time for filing
comments has expired, and the Board has considered the
1. 12 U.S.C. § 1842.

application and all comments received in light of the
factors set forth in section 3 of the BHC Act.
Frandsen, with total consolidated assets of $1.2 billion,
operates seven subsidiary insured depository institutions in
Minnesota, Wisconsin, and North Dakota. In Minnesota,
Frandsen is the 12th largest depository organization, controlling deposits of $758.6 million, which represent less
than 1 percent of total deposits of insured depository
institutions in the state ("state deposits").2
Bank is the 221st largest insured depository institution in
Minnesota, controlling deposits of approximately $55 million. On consummation of this proposal, Frandsen would
become the 11 th largest depository organization in Minne2. Asset data are as of December 31, 2007, and statewide deposit
and ranking data are as of June 30, 2007. In this context, insured
depository institutions include commercial banks, savings banks, and
savings associations.

Legal Developments: First Quarter, 2008 C35

sota, controlling deposits of approximately $813.6 million,
which represent less than 1 percent of state deposits.

COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly or
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a
proposal that would substantially lessen competition in any
relevant banking market, unless the anticompetitive effects
of the proposal are clearly outweighed in the public interest
by the probable effect of the proposal in meeting the
convenience and needs of the community to be served. 3 In
evaluating the competitive factors in this case, the Board
has considered the assertion by several commenters that the
proposal would create a monopoly or substantially lessen
competition for banking services by eliminating Frandsen's
only competitor in Montgomery.
Frandsen and Bank compete directly in the MinneapolisSt. Paul banking market, as delineated by the Federal
Reserve Bank of Minneapolis ("Reserve Bank").4 Frandsen Bank and Trust ("Frandsen Bank"), Lonsdale, Minnesota, a subsidiary bank of Frandsen, operates a branch in
Montgomery. Frandsen Bank and Bank are the only two
insured depository institutions operating in Montgomery.
In defining the relevant geographic market, the Board
and the courts have consistently found that the relevant
geographic market for analyzing the competitive effects of
a proposal must reflect commercial and banking realities
and should consist of the local area where customers can
practicably tum for altematives. 5 In reviewing this proposal
and the comments received, the Board has considered the
geographic proximity of the Minneapolis-St. Paul banking
market's population centers and the worker commuting
data from the 2000 census. The data indicate that more than
40 percent of the labor force residing in Montgomery (and
Montgomery Township) commute to work in the
Minneapolis-St. Paul banking market. Montgomery is
approximately 55 miles from the city center of Minneapo-

3. 12 U.S.c. § 1842(c)(l).
4. The Minneapolis-St. Paul banking market is defined as Anoka,
Hennepin, Ramsey, Washington, Carver, Scott, and Dakota counties;
the townships of Lent, Chisago Lake, Shafer, Wyoming, and Franconia
in Chisago County; the townships of Blue Hill, Baldwin, Orrock,
Livonia, and Big Lake and the city of Elk River in Sherburne County;
the townships of Monticello, Buffalo, Rockford, and Franklin and the
cities of Otsego, Alhertville, and Sl. Michael in Wright County; and
the townships of Lanesburgh, Derrynane, and Montgomery and the
city of Montgomery in Le Sueur County, all in Minnesota; and the
township of Hudson in St. Croix County, Wisconsin.
5. See United States v. Phillipsburg National Bank, 399 U.S. 350
(1970); United States v. Philadelphia National Bank, 374 U.S. 321,
357 (1963). See also First York Ban Corp, 88 Federal Reserve Bulletin
251, (2002); First Union Corporation, 84 Federal Reserve Bulletin
489, 491-92 (1998); First Union Corporation. 83 Federal Reserve
Bulletin 1012, 1013-14 (1997); Chemical Banking Corporation,
82 Federal Reserve Bulletin 239, 241 (1996); and WYoming Bancorporation, 68 Federal Reserve Bulletin 313, 314 (1982).

lis.6 Residents of the area also have highway access to the
Minneapolis-St. Paul banking market for shopping and
other purposes. These and other factors indicate that the
Minneapolis-St. Paul banking market, which includes
Montgomery, is the appropriate local geographic banking
market for purposes of analyzing the competitive effects on
this proposalJ
The Board has reviewed carefully the competitive effects
of the proposal in the Minneapolis-SL Paul banking market
where Frandsen and Bank compete directly in light of all
the facts of record. In particular, the Board has considered
the number of competitors that would remain in the banking market, the relative shares of total deposits in depository institutions in the market ("market deposits") controlled by Frandsen and Bank, 8 the concentration level of
market deposits and the increase in that level as measured
by the Herfindahl-Hirschman Index ("HHI") under the
Department of Justice Merger Guidelines ("DOJ Guidelines"),9 and other characteristics of the market.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOl
Guidelines as applied in the Minneapolis-St. Paul banking
market. On consummation, the HHI of the Minneapolis-St.
Paul banking market would remain highly concentrated,
and the HHI would increase less than 1 point as a result of
this transaction. 10 In addition, numerous competitors would
remain in the market.
6. Montgomery Township is the unincorporated area that surrounds
Montgomery.
7. The Board also considered the significantly lower percentage of
residents in Montgomery and Montgomery Township commuting to
other population centers in the surrounding counties outside the
Minneapolis-St. Paul banking market and the availability and variety
of shopping alternatives in the surrounding area.
8. Deposit and market share data are based on data reported by
insured depository institutions in the summary of deposits data as of
June 30, 2007, and are based on calculations in which the deposits of
thrift institutions are included at 50 percent. The Board previously has
indicated that thrift institutions have become. or have the potential to
become, significant competitors of commercial banks. See, e.g.,
Midwest Financial Group. 75 Federal Reserve Bulletin 386 (1989);
National City Corporation, 70 Federal Reserve Bulletin 743 (1984).
Thus, the Board regularly has included thrift institution deposits in the
market share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
9. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is hetween 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("001") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The DOJ has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
10. Frandsen operates the 77th largest depository institution in the
Minneapolis-St. Paul banking market, controlling deposits of approximately $72 million, which represent less than I percent of market
deposits. Bank is the 87th largest depository institution in the market,
controlling deposits of approximately $55 million. After the proposed
acquisition, Frandsen would operate the 50th largest depository institution in the market, controlling deposits of approximately $127 mil-

C36

Federal Reserve Bulletin 0 June 2008

The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the proposal would not likely
have a significantly adverse effect on competition in any
relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment
and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in the Minneapolis-St. Paul banking
market, where Frandsen and Bank compete directly, or in
any other relevant banking market. l l Accordingly, the
Board has determined that competitive considerations are
consistent with approval. 12

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has considered these factors in light of all the facts of
record, including confidential reports of examination, other
supervisory information from the primary supervisors of
the organizations involved in the proposal, publicly reported and other financial information, and information
provided by the applicant.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of information, including capital adequacy, asset quality,
and earnings performance. In assessing financial factors,
the Board consistently has considered capital adequacy to
be especially important. The Board expects banking orgalion, which represent less than 1 percent of market deposits. One
hundred and forty-seven insured depository institutions would remain
in the banking market. The HHl is 1858 and would increase less than I
point as a result of this proposal.
11. Until recently, the Reserve Bank included Montgomery and
Montgomery Township in the definition of the Mankato banking
market. After a review of the facts and for the reasons discussed above,
the Board reaffirms the Reserve Bank's inclusion of Montgomery and
Montgomery Township in its revised definition of the Minneapolis- St.
Paul banking market. If Montgomery and Montgomery Township
were included in the Mankato banking market, the competitive effects
of the proposal also would be consistent with approval, Frandsen's
market share in the Mankato banking market would increase to
8.3 percent, and the HHI would increase 29 points to 650,
12, A commenter contended that the elimination of banking options
in Montgomery would adversely affect a customer's ability to ensure
the confidentiality of personal and business banking information, As
noted above, Montgomery is in the Minneapolis-St. Paul banking
market and numerous banking options would remain for customers in
the market. Moreover, Frandsen has an established privacy policy and
customer information security policy and has represented that it will
implement these policies at Bank.

nizations contemplating expansion to maintain strong capital levels substantially in excess of the minimum levels
specified by the Board's Capital Adequacy Guidelines. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has considered carefully the proposal under
the financial factors. Frandsen, its subsidiary depository
institutions, and Bank are well capitalized and would
remain so on consummation. Based on its review of the
record, the Board also finds that Frandsen has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a cash purchase that will be
funded through dividends from its subsidiary insured
depository institutions.
The Board also has considered the managerial resources
of Frandsen, its subsidiary depository institutions, and
Bank, The Board has reviewed the examination records of
these institutions, including assessments of their management, risk-management systems, and operations. In addition, the Board has considered its supervisory experiences
and those of the other relevant banking supervisory agencies with the organizations and their records of compliance
with applicable banking law, including anti-moneylaundering laws. Frandsen and its subsidiary depository
institutions are considered to be well managed. The Board
also has considered Frandsen's plans for implementing the
proposal, including the proposed management at Bank after
consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant insured
depository institutions under the CRA. All of Frandsen's
insured depository institutions received "outstanding" or
"satisfactory" ratings at their most recent CRA performance evaluations by the institutions' primary federal
supervisors, Frandsen's lead bank, Frandsen Bank, received
an "outstanding" rating at its most recent CRA performance evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of September 15,2003. 13 The examiners noted that Frandsen Bank had an excellent distribution
of residential lending to borrowers of different incomes and

13. Frandsen Bank is the result of a merger involving affiliate banks
in 2004, The FDIC conducted the last CRA performance evaluation of
Frandsen Bank while the bank was doing business as Valley Bank and
Trust. The most recent CRA performance evaluation ratings of Frandsen's other subsidiary insured depository institutions are listed in the
appendix,

Legal Developments: First Quarter; 2008

commended the bank's involvement in special home loan
programs to meet the needs of low- and moderate-income
families. They also reported that the bank had a good
distribution of lending to businesses of different sizes.
Bank received an "outstanding" rating at its most recent
CRA performance evaluation by the Office of the Comptroller of the Currency, as of March 4, 2003. Frandsen
represented that the proposal would expand the availability
of credit and the products and services available to Bank's
customers. 14 Based on all the facts of record, the Board
concludes that considerations relating to the convenience
and needs factor and the CRA performance records of the
relevant depository institutions are consistent with approval.
CONCLUSION

Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. IS In reaching its conclusion, the Board
14. Some commenters expressed concern that the proposed acquisition would result in a loss of jobs and businesses in Montgomery. A
proposed transaction's effect on those matters for a community is not
among the factors that the Board is authorized to consider under the
BHC Act, and the federal banking agencies, courts, and the Congress
consistently have interpreted the convenience and needs factor to
relate to the effect of a proposal on the availability and quality of
banking services in the community. See, e.g., Wells Fargo & Company, 82 Federal Reserve Bulletin 445, 447 (1996).
15. The commenters requested that the Board hold a public meeting
or hearing on the proposal. Section 3 of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authorities. Under its rules, the Board also may, in its discretion, hold a
public meeting or hearing on an application to acquire a bank if

C37

has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act. The
Board's approval is specifically conditioned on compliance
by Frandsen with the conditions imposed in this order and
the commitments made to the Board in connection with the
application. For purposes of this action, the conditions and
commitments are deemed to be conditions imposed in
writing by the Board in connection with its findings and
decision herein and, as such, may be enforced in proceedings under applicable law.
The proposed transaction may not be consummated
before the 15th calendar day after the effective date of this
order, or later than three months after the effective date of
this order, unless such period is extended for good cause by
the Board or the Reserve Bank, acting pursuant to delegated authority.
By order of the Board of Governors, effective February 25, 2008.
Voting for this action: Chairman Bernanke and Governors Warsh,
Kroszner, and Mishkin. Absent and not voting: Vice Chairman Kohn.
ROBERT DEY. FRIERSON

Deputy Secretary of the Board
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
225.l6(e), 262.25(d»). The Board has considered carefully the commenters' requests in light of all the facts of record. In the Board's view,
the commenters had ample opportunity to submit their views and, in
fact, submitted written comments that the Board has considered
carefully in acting on the proposal. The commenters' requests fail to
demonstrate why written comments do not present their views
adequately or why a meeting or hearing otherwise would be necessary
or appropriate. For these reasons, and based on all the facts of record,
the Board has determined that a public meeting or hearing is not
required or warranted in this case. Accordingly. the requests for a
public meeting or hearing on the proposal are denied.

Appendix
CRA PERFORMANCE EVALUATIONS

Subsidiary Bank
Queen City Federal Savings Bank,
Virginia, Minnesota
Rural American Bank,
Braham, Minnesota
Valley Bank,
Waterville, Minnesota
Community Bank of the Red River Valley,
East Grand Forks, Minnesota
Rural American Bank-Luck,
Luck, Wisconsin
Valley Bank Minnesota,
Jordan, Minnesota

CRA Rating

Date

Supervisor

Outstanding

3/29/2004

Satisfactory

3/1212003

Office of Thrift
Supervision
FDIC

Satisfactory

10/3112007

FDIC

Satisfactory

12115/2003

FDIC

Satisfactory

9/23/2002

FDIC

Satisfactory

112112003

FDIC

C38

Federal Reserve Bulletin 0 June 2008

The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania
PNC Bank Delaware
Wilmington, Delaware
Order Approving the Mergers of Bank
Holding Companies and Banks and the
Establishment of a Branch
The PNC Financial Services Group, Inc. ("PNC"), a
financial holding company within the meaning of the Bank
Holding Company Act (HBHC Act"), has requested the
Board's approval under section 3 of the BHC Act to merge
with Sterling Financial Corporation ("Sterling"), 1 Lancaster, Pennsylvania, and acquire Sterling's two subsidiary
banks, BLC Bank, National Association ("BLC NA"),
Strasburg, Pennsylvania; and Delaware Sterling Bank &
Trust Company ("DE Sterling Bank"), Christiana, Delaware.
In addition, PNC Bank Delaware ("PNC Bank DE"),
Wilmington, Delaware, a state member bank, has requested
the Board's approval under section 18(c) of the Federal
Deposit Insurance Act2 ("Bank Merger Act") to merge
with DE Sterling Bank, with PNC Bank DE as the surviving entity. PNC Bank DE also has applied under section 9
of the Federal Reserve Act ("FRA") to retain and operate a
branch at the main office of DE Sterling Bank. 3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published in
accordance with relevant statutes and the Board's Rules of
Procedure (72 Federal Register 45,426 (2007)).4 As required by the Bank Merger Act, a report on the competitive
effects of the bank merger was requested from the United
States Attorney General, and a copy of the request was
provided to the Federal Deposit Insurance Corporation
("FDIC"). The time for filing comments has expired, and
the Board has considered the proposal and all comments
recei ved in light of the factors set forth in the BHC Act, the
Bank Merger Act, and the FRA.
PNC, with total consolidated assets of approximately
$125.7 billion, is the 20th largest depository organization in
the United States, controlling deposits of approximately
$74.4 billion, which represent less than I percent of the
total amount of deposits of insured depository institutions
in the United States. s PNC operates three subsidiary insured
depository institutions in nine states and the District of
1. 12 U.S.C. § 1842. PNC proposes to acquire the nonbanking
subsidiaries of Sterling in accordance with section 4(k) of the BHC
Act, 12 U.S.C. § 1843(k).
2. 12 U.S.C. § 1828(c).
3. 12 U .S.c. § 321. The office is at 630 Churchrnans Road, Suite
#204, Christiana.
4. 12 CFR 262.3(b).
5. National asset, deposit, and ranking data are as of June 30, 2007.
Statewide deposit and deposit ranking data are as of June 30, 2007,
and reflect merger activity through January 9, 2008. [n this context,

Columbia6 and engages in numerous nonbanking activities
that are permissible under the BHC Act. PNC is the largest
depository organization in Pennsylvania, controlling deposits of approximately $35.2 billion. In Delaware, PNC is the
eighth largest depository organization, controlling deposits
of approximately $2.6 billion.
Sterling has total consolidated assets of $3.2 billion, and
its subsidiary banks operate in Delaware, Maryland, and
Pennsylvania. In Pennsylvania, Sterling is the 22nd largest
depository organization, controlling state deposits of approximately $2.3 billion. In Delaware, Sterling is the 27th
largest depository organization, controlling deposits of
approximately $45.6 million.
On consummation of the proposal, PNC would become
the 18th largest depository institution in the United States,
with total consolidated assets of approximately $128.9 billion. PNC would control deposits of approximately $77 billion, which represent less than I percent of the total amount
of deposits of insured depository institutions in the United
States. In Pennsylvania, PNC would remain the largest
depository organization, controlling deposits of approximately $37.5 billion, which represent approximately
14.5 percent of the total amount of deposits of insured
depository institutions in the state ("state deposits"). In
Delaware, PNC would remain the eighth largest depository
organization, controlling deposits of approximately $2.6 billion, which represent approximately 1.6 percent of state
deposits.

INTERSTATE ANALYSIS

Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home state
of such bank holding company if certain conditions are
mel. For purposes of the BHC Act, the home state of PNC
is Pennsylvania, 7 and Sterling is located in Delaware,
Maryland, and Pennsylvania. s
Based on a review of all the facts of reeord, including the
relevant state statutes, the Board finds that the conditions
for an interstate acquisition enumerated in section 3(d) of

insured depository institutions include commercial banks, savings
banks, and savings associations.
6. PNC's largest subsidiary bank, PNC Bank National Association
("PNC Bank"), Pittsburgh, Pennsylvania, operates branches in Delaware, Florida, indiana, Kentucky, Maryland, New Jersey, Ohio, Pennsylvania, Virginia, and the District of Columbia. PNC Bank DE
operates in Delaware and Pennsylvania. On October 26, 2007, PNC
acquired Yardville National Bancorp, Hamilton, New Jersey, and its
subsidiary bank, Yardville National Bank, which operates in New Jersey and Pennsylvania.
7. A bank holding company's home state is the state in which the
total deposits of all subsidiary banks of the company were the largest
on July I, 1966, or the date on which the company became a bank
holding company, whichever is later (12 U.S.c. § 1841(0)(4)(C».
8. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.C. §§ 1841(0)(4)-(7) and 1842(d)(l)(A) and
(d)(2)(B )).

Legal Developments: First Quarter, 2008

the BHC Act are met in this case. 9 In light of all the facts of
record. the Board is permitted to approve the proposal
under section 3(d) of the BHC Act.

COMPETITIVE CONSIDERATIONS
The BHC Act and the Bank Merger Act prohibit the Board
from approving a proposal that would result in a monopoly
or would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. Both
statutes also prohibit the Board from approving a bank
acquisition that would substantially lessen competition in
any relevant banking market, unless the anticompetitive
effects of the proposal are clearly outweighed in the public
interest by the probable effect of the proposal in meeting
the convenience and needs of the community to be served. \0
PNC and Sterling have subsidiary depository institutions
that compete directly in six banking markets: Wilmington
in Delaware and Maryland; Baltimore, Maryland; Harrisburg, Lancaster, and York, Pennsylvania; and Philadelphia
in Pennsylvania and New Jersey. The Board has reviewed
carefully the competitive effects of the proposal in each of
these banking markets in light of all the facts of record. In
particular, the Board has considered the number of competitors that would remain in the markets, the relative shares of
total deposits in depository institutions in the markets
("market deposits") controlled by PNC and Sterling, II the
concentration level of market deposits and the increase in
that level as measured by the Herfindahl-Hirschman Index
("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"), 12 and other characteristics of the
markets.
9. 12 U.S.C §§ I 842(d)(l)(A)-(B) and l842(d)(2)-(3). PNC is
adequately capitalized and adequately managed, as defined by applicable law. Tllere are no minimum periods of time for which Sterling's
subsidiary banks are required to have been in existence under any
relevant state law. On consummation of the proposal, PNC would
control less than 10 percent of the total amount of deposits of insured
depository institutions in the United States (12 U.S.C § 1842(d)(2)(A».
In addition, PNC would controiiess than 30 percent. or the applicable
percentage established under state law. of the total amount of deposits
of insured depository institutions in Maryland and Delaware. See
12 U.S.C § I 842(d)(2)(B)-(C); Md. Fin. Inst. §5-905. All other
requirements of section 3(d) of the BHC Act would he met on
consummation of the proposal.
10. 12 U.S.C. § 1842(c)(I).
II. Deposit and market share data are as of June 30, 2007, adjusted
to rellect mergers and acquisitions through January 14. 2008, and are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated tllat thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
75 Federal Reserve Bulletin 386, 387 (1989); National City Corporation. 70 Federal Reserve Bulletin 743. 744 (1984). Thus, the Board
regularly has included thrift institution deposits in the market share
calculation on a 50 percent weighted basis. See, e.g., First Hawaiian,
Inc., 77 Federal Reserve Bulletin 52, 55 (1991).
12. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is under 1000, moderately concentrated
if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI exceeds 1800. The Department of
Justice ("DOJ") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other

C39

Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in each of the six banking markets. 13 On
consummation of the proposal, one market would remain
concentrated, four markets would remain moderately concentrated, and one market would remain highly concentrated, as measured by the HHL The change in the HHI's
measure of concentration would be less than 100 points in
each market, and numerous competitors would remain in
all six banking markets.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the banking markets where PNC
and Sterling compete directly or in any other relevant
banking market. Accordingly, the Board has determined
that competitive considerations are consistent with approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act and the Bank Merger Act require
the Board to consider the financial and managerial resources and future prospects of the companies and depository institutions involved in the proposal and certain other
supervisory factors. The Board has considered these factors
in light of all the facts of record, including confidential
reports of examination and other supervisory infonnation
received from the relevant federal and state supervisors of
the organizations involved in the proposal, and publicly
reported and other financial infonnation, including infonnation provided by PNC,
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary depository institutions and the organizations' nonbanking operations. In this evaluation, the
Board considers a variety of infonnation, including capital
adequacy, asset quality, and earnings performance. In
assessing financial factors, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the comfactors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points, The DOJ has stated that tile higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
13. Those banking markets and the effects of the proposal on their
concentrations of banking resources are described in Appendix A.

C40

Federal Reserve Bulletin 0 June 2008

bined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has considered the proposal carefully under
the financial factors. PNC and its subsidiary depository
institutions are well capitalized. PNC has represented that it
will merge BLC NA into PNC Bank after consummation of
this acquisition. On consummation of the proposed mergers
of the parent companies and banks, PNC and its subsidiary
banks would remain well capitalized. Based on its review
of the record, the Board finds that PNC has sufficient
financial resources to effect the proposal. The proposed
transaction is structured as a combination share exchange
and cash purchase, and PNC will use existing resources to
fund the cash portion of the purchase.
The Board also has considered the managerial resources
of the organizations involved and the proposed combined
organization. The Board has reviewed the examination
records of PNC, Sterling, and their subsidiary depository
institutions, including assessments of their management,
risk-management systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of the other relevant bank supervisory agencies with the
organizations and their records of compliance with applicable banking law, including anti-money-Iaundering laws.
PNC and its subsidiary depository institutions are considered to be well managed. The Board also has considered
PNC's plans for implementing the proposal, including the
proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval. as are the other
supervisory factors under the BHC Act and the Bank
Merger Act.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act and
the Bank Merger Act, the Board also must consider the
effects of the proposal on the convenience and needs of the
communities to be served and take into account the records
of the relevant insured depository institutions under the
Community Reinvestment Act ("CRA").14 The CRA requires the federal financial supervisory agencies to encourage insured depository institutions to help meet the credit
needs of the local communities in which they operate,
consistent with their safe and sound operation, and requires
the appropriate federal financial supervisory agency to take
into account a relevant depository institution's record of
meeting the credit needs of its entire community, including
low- and moderate-income ("LMI") neighborhoods, in
evaluating bank expansionary proposals. IS
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of the subsidiary banks of PNC and Sterling,
14. 12 U.S.C. § 2901 et seq.; 12 U.S.C. § 1842(c)(2).
15. 12 U.S.c. §2903.

data reported by PNC and Sterling under the Home Mortgage Disclosure Act ("HMDA"),16 as well as small business lending data reported under the CRA, other information provided by PNC, confidential supervisory information,
and public comments received on the proposal. A commenter criticized the CRA-related activities of PNC and
Sterling and alleged that their banks' mortgage lending to
LMI minority families in the New York-New JerseyPennsylvania regional area ("Tri-State Region") was insufficient. In addition, the commenter criticized PNC's and
Sterling's general records of home mortgage lending to
minorities in the Tri-State Region. 17

A. eRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the insured depository institutions of
PNC and Sterling. An institution'S most recent CRA performance evaluation is a particularly important consideration
in the applications process because it represents a detailed,
on-site evaluation of the institution's overall record of
performance under the CRA by its appropriate federal
supervisor. IS
PNC Bank received an "outstanding" rating at its most
recent CRA performance evaluation by the Office of the
Comptroller of the Currency ("OCC"), as of May 16, 2006
("PNC 2006 Evaluation"). PNC Bank DE also received an
"outstanding" rating at its most recent CRA evaluation. 19
BLC NA, Sterling's largest bank based on both assets
and deposits, was formed in 2007 by the consolidation of
four Sterling subsidiary banks, including its largest bank at
that time, Bank of Lancaster County, National Association
("Lancaster Bank").20 The CRA performance of BLC NA
has not yet been evaluated. The Board's analysis takes into
consideration the eRA performance record of all of Ster16. 12 U.S.C. § 2801 et seq.
17. The commenter also urged the Board to require PNC to provide
specific CRA pledges or plans or to require it to take certain actions in
the future. The Board consistently has stated that neither the CRA nor
the federal banking agencies' CRA regulations require depository
institutions to make pledges or enter into commitments or agreements
with any organization and that the enforceability of any such thirdparty pledges. initiatives, or agreements are matters outside the CRA.
See, e.g., Wachovia Corporation, 91 Federal Reserve Bulletin 77
(2005). Instead, the Board focuses on the existing CRA performance
record of an applicant and the programs that an applicant has in place
to serve the credit needs of its assessment areas at the time the Board
reviews a proposal under the convenience and needs factor.
18. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
19. PNC Bank DE's most recent evaluation was as of January 21,
2003, by the FDIC In 2006, PNC Bank DE became a member of the
Federal Reserve System and has not been examined since its membership. Yardville National Bank received a "satisfactory" rating at its
most recent performance evaluation by the acc, as of January 3,
2006.
20. On May 25,2007, the OCC approved the consolidation of the
four depository institutions into BLC NA. In addition to Lancaster
Bank, Sterling's other subsidiary banks in the consolidation were
Bank of Hanover and Trust Company, Pennsylvania State Bank, and

Legal Developments: First Quarter; 2008

ling's unconsolidated CRA-reporting depository institutions and focuses on Lancaster Bank's record of performance as the largest of the four banks. Lancaster Bank
received an "outstanding" rating at its most recent performance evaluation by the acc, as of June 13, 200S
("Sterling 200S Evaluation"). DE Sterling Bank also
received a "satisfactory" rating at its most recent performance evaluation by the fTIIC, as of November 6, 2006.
PNC has represented that it will implement its program for
managing community reinvestment activities at Sterling's
subsidiary banks on consummation of the proposal.
CRA Peiformance of PNC Bank. In addition to PNC
Bank's overall "outstanding" rating in the PNC 2006
Evaluation,21 the bank received an overall "outstanding" in
the Pennsylvania and Multi-State MA assessment areas and
"high satisfactory" ratings in each of the lending, service,
and investment tests in its New Jersey assessment area.
Examiners reported that PNC Bank's overall lending performance was good, as reflected by the bank's loan volume
and loan distribution by geography and borrower income.
They further noted that PNC Bank's overall community
development lending was strong and had a significant
positive impact on the bank's overall lending test.
Examiners reported that the bank's overall distribution
of loans in the Multi-State MA to borrowers of different
income levels and businesses of different sizes and the
geographic distribution of those loans was excellent. They
noted that the bank's percentage of small loans to businesses represented a significant percentage of the bank's
lending to businesses in each year of the evaluation period.
Examiners noted that in the Multi-State MA, PNC Bank
focused such lending on affordable housing and that the
bank also made a significant volume of community development loans for revitalization and stabilization of LMI
areas.
In the PNC 2006 Evaluation, examiners also commended PNC Bank's overall level of qualified investments
and concluded that the bank's performance under the
investment test in the Multi-State MA assessment area was
outstanding. They noted that the bank's level of qualifying

Bay First Bank, National Association. The most recent CRA performanee ratings of those four banks before consolidation are in Appendix B.
21. Examiners considered the performance of certain relevant PNC
subsidiaries in the PNC 2006 Evaluation. References to PNC Bank in
the Board's convenience and needs analysis incorporate these entities.
The PNC 2006 Evaluation focused on PNC Bank's performanee in
assessment areas in Pennsylvania and New Jersey and the PhiladelphiaCamden-Wilmington, PA-NJ-DE-MD Metropolitan Area ("MultiState MA"), which together represented approximately 83 percent of
the bank's deposits. Examiners considered PNC's HMDA-reportable
loans and small loans to businesses for the period of January 1, 2002,
through Deeember 31, 2005. "Small loans to businesses" are loans
with original amounts of $1 million or less that are either secured by
nonfarm, nonresidential properties or classified as commercial and
industrial loans. PNC Bank's community development loans, investments, and services were evaluated for the period beginning April I,
2002, through April 30, 2006.

C4l

investments represented excellent responsiveness to the
needs of the Multi-State MA community, particularly for
affordable housing.
Examiners also concluded that the bank's delivery systems overall were accessible to all customers. In the
Multi-State MA assessment area, examiners rated PNC
Bank's performance under the service test as "high satisfactory" and reported that the bank offered an excellent
level of community development services that benefited
LMI individuals. They noted that PNC employees provided
community development services to approximately 200
different organizations and groups and in educational settings, including finaneial-literacy assistance to LMI individuals.
CRA Peiformance of Lancaster Bank. As noted, Lancaster Bank received an overall "outstanding" rating in the
Sterling 2005 Evaluation. 22 Under the lending test, Lancaster Bank also received an "outstanding" rating, and
examiners reported that the bank's distribution of loans in
its assessment areas reflected a good penetration among
retail customers and an excellent distribution among retail
customers of different income levels and business customers of varying sizes. They stated that the bank's lending
levels reflected excellent responsiveness to community
credit needs.
Examiners reported that Lancaster Bank's community
development lending was responsive to the Lancaster AA's
need for affordable housing in LMI geographies, to the
credit needs ofLMI individuals in the assessment area, and
to the revitalization needs of distressed communities. They
also commended the bank's performance for originating
small loans to businesses, despite strong competition from
five large lenders in the Lancaster AA.
Examiners rated Lancaster Bank's community development investment activities as "high satisfactory" under the
investment test and reported that Lancaster Bank's qualified investments reflected a good responsiveness to community revitalization needs. During the exam's evaluation
period, Lancaster Bank made investments and donations
totaling $1.4 million in the Lancaster AA. They also noted
that Lancaster Bank had good investment performance
despite limited investment opportunities in the Lancaster
AA. For instance, the bank took the initiative to form
Sterling Community Development Corporation LLC to
help meet the affordable housing needs of LMI individuals.
In the Sterling 200S Evaluation, Lancaster Bank received
a "high satisfactory" rating on the service test. Examiners
found that the bank's services were accessible to all
portions of the Lancaster AA, including LMI geographies,
and they noted that Lancaster Bank provided Spanish

22. Of Lancaster Bank's three assessment areas, examiners focused
on the Lancaster assessment area ("Lancaster AA") in the Sterling
2005 Evaluation. Lancaster Bank obtained the majority of its deposits
from, and originated most of its loans in, the Lancaster AA. The
evaluation period was from January I, 2002, to June 13, 2005, for the
lending, investment, and service tests.

C42

Federal Reserve Bulletin 0 June 2008

language services, including services for Latino LMI customers. They reported that the bank's employees provided
a high level of community services in the bank's assessment areas. Examiners also commended Lancaster Bank
for providing technical and financial expertise to qualified
community organizations involved in activities that included assisting with support services and skill training
targeted to LMI individuals; addressing redevelopment
issues, urban revitalization, and property rehabilitation;
assisting start-up businesses; and helping families gain
access to affordable housing.
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of PNC and Sterling in light of public
comments received on the proposal. A commenter alleged
that in the Tri-State region, PNC and Sterling provided an
insufficient number of home mortgage loans to African
American and Hispanic borrowers or otherwise engaged in
disparate treatment of those minority individuals in home
mortgage lending. The Board has focused its analysis on
the 2005 and 2006 HMDA data reported by PNC Bank and
Sterling's predecessor banks. 23
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial or ethnic groups
in certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not PNC or
Sterling is excluding or imposing higher costs on any group
on a prohibited basis. The Board recognizes that HMDA
data alone, even with the recent addition of pricing information, provide only limited information about the covered
loans.24 HMDA data, therefore, have limitations that make
them an inadequate basis, absent other information, for
concluding that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race or ethnicity.
23. The Board reviewed the HMDA data reported by PNC in its
assessment areas in New Jersey and Pennsylvania, the Pittsburgh
Metropolitan Statistical Area (HMSA"), and the Philadelphia-Camden
Metropolitan District C"MD"), as well as the New Jersey portion of
the New York-White Plains-Wayne MD. In addition, the Board
reviewed the 2005 and 2006 HMDA data reported by Sterling's
institutions in their assessment areas in Pennsylvania and the Lancaster MSA.
24, The data, for example, do not account for the possibility that an
institution's outreach efforts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

Because of the limitations of HMDA data, the Board has
considered these data carefully and taken into account other
information, including examination reports that provide
on-site evaluations of compliance with fair lending laws by
PNC, Sterling, and their subsidiaries. The Board also has
consulted with the acc about the fair-lending compliance
record of PNC Bank.
The record of this proposal, including confidential supervisory information, indicates that PNC and Sterling have
taken steps to ensure compliance with fair lending and
other consumer protection laws, PNC has a fair-lending
compliance program that includes a second review process
to identify any discriminatory practices with respect to the
company's home mortgage lending. In addition, PNC has a
process for resolving fair lending complaints and conducts
periodic internal audits of its fair lending program. PNC
requires its employees to complete fair-lending training
sessions.
Sterling's compliance program is handled by a consulting firm that provides services regarding regulatory changes
and that is responsible for overseeing the implementation
of regulatory changes. The firm monitors bank initiatives
and products, including a review of all marketing and
advertising. In addition, the firm performs compliance
monitoring, prepares risk assessments, and oversees compliance training.
PNC has represented that after the conversion of relevant Sterling financial systems to PNC systems, PNC's
policies, procedures, processing systems, and personnel
will be used to ensure regulatory compliance, and PNC
plans to employ its lending system and processes across its
expanded network of branches. In addition, Sterling employees will receive PNC's fair lending and compliance
training.
The Board also has considered the HMDA data in light
of other information, including the CRA-related small
business lending, and the overall performance records of
the subsidiary banks of PNC and Sterling under the CRA.
These established efforts and records demonstrate that the
institutions are active in helping to meet the credit needs of
their entire communities.

Legal Developments: First Quarter, 2008

ESTABUSHMENT OF A BRANCH
As noted, PNC Bank DE also has applied under section 9 of
the FRA to establish a branch at DE Sterling Bank's main
office. The Board has assessed the factors it is required to
consider when reviewing an application under section 9 of
the FRA and the Board's Regulation H and finds those
factors to be consistent with approval. 25

CONCLUSION
Based on the foregoing and all facts of record, the Board
has determined that the applications should be. and hereby
are. approved. In reaching its conclusion. the Board has
considered all the facts of record in light of the factors that
it is required to consider under the BHC Act, the Bank
Merger Act, and the FRA. The Board's approval is specifically conditioned on compliance by PNC and PNC Bank
DE with the conditions imposed in this order, the commit-

C43

ments made to the Board in connection with the applications. and receipt of all other regulatory approvals. For
purposes of this action, the conditions and commitments
are deemed to be conditions imposed in writing by the
Board in connection with its findings and decision herein
and, as such, may be enforced in proceedings under
applicable law.
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order,
unless such period is extended for good cause by the Board
or the Federal Reserve Bank of Cleveland, acting pursuant
to delegated authority.
By order of the Board of Governors, effective January 25. 2008.
Voting for this action: Chairman Bernanke. Vice Chairman Kahn.
and Governors Warsh, Kroszner. and Mishkin.

ROBERT DEV. FRIERSON
Deputy Secretary of the Board

25. 12 V.S.c. §322; 12 CFR 208.6(b).

Appendix A
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDEUNES

Bank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

2.0 bil.
169.1 mil.
2.1 bil.

6.5
.6
7.1

2
34
2

4.8 bil.
IlO.3 mil.
4.9 bil.

4
II
2

968.2 mil.
274.1 mil.
1.2 bi!.

Rank

Change in
HHI

Remaining
number of
competitors

3,580
3,580
3,580

7
7
7

21
21
21

12.1
.3
12.4

1,214
1,214
1,214

7
7
7

74
74
74

9.8
2.8
12.6

765
765
765

55
55
55

31
31
31

I
I

DELAWARE AND MARYLAND
BANKING MARKETS

Wilmington-New Castle County.
Delaware and Cecil County.
Maryland
PNC Pre-Consummation ..............
Sterling ....................................
PNC Post-Consummation .............
Baltimore-The Baltimore Ranally
Metro Area (RMA) and the nonRMA portions of Harford and
Carroll counties in Maryland
(except that part in the Washington,
DC RMA)
PNC Pre-Consummation ... ... ... ..
Sterling ....................................
PNC Post-Consummation .............
~

3
13

PENNSYLVANIA BANKING MARKETS

Harrisburg-Cumberland, Dauphin,
Juniata, Lebanon, and Perry
counties
PNC Pre-Consummation ..............
Sterling ....................................
PNC Post-Consummation .............

C44

Federal Reserve Bulletin 0 June 2008

Appendix A-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND

Bank

Rank

Amount
of deposits
(dollars)

DO] GUIDELINES-Continued

Market
deposit
shares
(percent)

Resulting
HHI

Change in
HHI

Remaining
number of
competitors

Lancaster-Lancaster County
PNC Pre-Consummation ..............
Sterling ....................................
PNC Post-Consummation .............

14
3
3

55.3 mil.
1.3 bil.
1.4 bil.

.7
16.5
17.2

1,422
1,422
1,422

23
23
23

18
18
18

10
3
2

273.4 mil.
675.9 mil.
949.3 mil.

4.3
10.8
15.1

1,170
1,170
1,170

94
94
94

13
13
13

4
91
4

9.8 bil.
45.6 mil.
9.8 bil.

1,075
1,075
1,075

York-Includes Adams and York
counties, excluding the Baltimore
RMA
PNC Pre-Consummation ..............
Sterling ....................................
PNC Post-Consummation .............

Philadelphia and South JerseyBucks, Chester, Delaware,
Montgomery, and Philadelphia
counties in Pennsylvania;
Burlington, Camden, Gloucester,
and Salem counties in New Jersey;
and the city of Trenton and Ewing,
Hamilton, and Lawrence townships
in Mercer County, New Jersey
PNC Pre-Consummation ..............
Sterling ....................................
PNC Post-Consummation .............

.1
9.1

121
121
121

NOTE: Deposit data are as of June 30. 2007. and include mergers as of Janu·
ary 14, 2008. Deposit amounts are unweighted. Rankings. market deposit
shares. and HHIs are based on thrift institution deposits weighted at 50 percent.

Appendix B
CRA PERFORMANCE EVALUATIONS OF THE STERLING BANKS CONSOLIDATED TO FORM BLC
BANK, NATIONAL ASSOCIATION
Bank
Bank of Hanover and Trust Company,
Hanover, Pennsylvania
Pennsylvania State Bank,
Camp Hill, Pennsylvania
Bay First Bank, National Association,
North East, Maryland
Bank of Lancaster County, National Association,
Strasburg, Pennsylvania

CRA Rating

Date

Supervisor

Satisfactory

111612006

FDIC

Satisfactory

6/612005

FRB

Satisfactory

212212002

OCC

Outstanding

611312005

OCC

Legal Developments: First Quarter, 2008

Royal Bank of Canada
Montreal, Canada
Order Approving the Acquisition of a Bank
Holding Company
Royal Bank of Canada (HRBC") and its subsidiary bank
holding companies (collectively, "Applicants"), including
RBC Centura Banks, Inc. (HRBC Centura"),! Raleigh,
North Carolina, all financial holding companies within the
meaning of thc Bank Holding Company Act ("BHC Act"),
have requested the Board's approval under section 3 of the
BHC Act2 to acquire Alabama National BanCorporation
("ANB"), Birmingham, Alabama, and its ten subsidiary
banks. 3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(72 Federal Register 68,163 (2007». The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act.
RBC, with total consolidated assets equivalent to
$569.8 billion, is the largest depository organization in
Canada. 4 RBC operates branches in New York City and
Miami and through RBC Centura controls RBC Centura
Bank ("Centura Bank"), Raleigh, which operates in six
states. 5 RBC Centura, with total consolidated assets of
$25.5 billion, is the 53rd largest depository organization in
the United States, controlling $13.6 billion in deposits. 6
RBC Centura is the sixth largest depository organization in
Alabama, controlling deposits of approximately $1.7 billion. In Florida, RBC Centura is the 35th largest depository
organization, controlling deposits of approximately $1.1 billion, and in Georgia, RBC Centura is the 9th largest
depository organization, controlling deposits of approximately $2.2 billion.
ANB has total consolidated assets of approximately
$7.8 billion, and its subsidiary banks operate in Alabama,
Florida, and Georgia. In Alabama, ANB is the sixth largest

I. Applicants also include the following companies: Royal Bank
Holding, Inc., Toronto, Canada; RBC Holdings (USA), Inc. and RBC
USA Holdco Corporation, both of New York, New York; and Prism
Financial Corporation, Wilmington, Delaware.
2. 12 U.S.c. § 1842.
3. ANB's largest subsidiary bank, as measured by both assets and
deposits, is First American Bank ("ANB Lead Bank"), Birmingham.
ANB's other subsidiary bank in Alabama is Alabama Exchange Bank,
Tuskegee. ANB's subsidiary banks in Florida are Community Bank of
Naples, National Association, Naples; CypressCoquina Bank, Ormond
Beach; First Gulf Bank, National Association, Pensacola; Florida
Choice Bank, Mount Dora; Indian River National Bank, Vero Beach;
and Millennium Bank. Gainesville. ANB's subsidiary banks in Georgia are Georgia State Bank, Mableton. and The Peachtree Bank,
Duluth.
4. Canadian asset and ranking data are as of October 31, 2007, and
are based on the exchange rate as of that date.
5. Centura Bank operates branches in Alabama. Florida. Georgia,
North Carolina, South Carolina, and Virginia.
6. Asset data and nationwide deposit ranking data are as of
September 30, 2007. Statewide deposit and ranking data are as of
June 30, 2007, and reflect merger activity as of that date.

C45

depository organization, controlling deposits of $2.8 billion. ANB is the 23rd largest depository organization in
Florida, controlling deposits of $2.1 billion, and is the 18th
largest depository organization in Georgia, controlling
deposits of $866.9 million.
On consummation of the proposal, RBC Centura would
become the 47th largest depository organization in the
United States, with total consolidated assets of approximately $33.3 billion. RBC Centura would control deposits
of approximately $ I 9.3 billion, which represent less than
I percent of the total amount of deposits of insured
depository institutions in the United States. In Alabama,
RBC Centura would become the fifth largest depository
organization, controlling deposits of approximately $4.5 billion, which represent approximately 6 percent of the total
amount of deposits of insured depository institutions in the
state ("state deposits"). In Florida, RBC Centura would
become the 21 st largest depository organization, controlling deposits of approximately $3.3 billion, which represent
less than I percent of state deposits. In Georgia, RBC
Centura would become the eighth largest depository organization, controlling deposits of approximately $3.1 billion, which represent approximately 1.7 percent of state
deposits.

INTERSTATE ANALYSIS
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the bank
holding company's home state if certain conditions are
met. For purposes of the BHC Act, the home state of
Applicants is North Carolina,7 and ANB is located in
Alabama, Florida, and Georgia. 8
Based on a review of all the facts of record, including
relevant state statutes, the Board finds that the conditions
for an interstate acquisition enumerated in section 3(d) of
the BHC Act are met in this case. 9 In light of all the facts of
7. See 12 U.S.c. § 1842(d). A bank holding company's home state
is the state in which the total deposits of all banking subsidiaries of
such company were the largest on July I, 1966, or the date on which
the company became a bank holding company, whichever is later.
8. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.c. §§ 1841(0)(4H7) and 1842(d)(l)(A) and
(d)(2)(B)).
9. 12 U.S.c. §§ I 842(d). Applicants are adequately capitalized and
adequately managed, as defined by applicable law. All of ANB's
subsidiary banks have been in existence and operated for the minimum
period of time required by applicable state laws. See Ala. Code
§5-13B-6(d) (five years); Fla. Stat. §658.295(8)(a) (three years); Ga.
Code § 7-1-622(b)(l) (three years). On consummation of the proposal, Applicants would control less than 10 percent of the total
amount of deposits of insured depository institutions in the United
States and less than 30 percent of the total amount of deposits of
insured depository institutions in each of Alabama, Florida. and
Georgia (12 US.c. § 1842(d)(2)(AHB). On consummation, Applicants also would be in compliance with the deposit caps under relevant
state law in Alabama, Florida, and Georgia, each of which is 30 percent. See 12 U.S.c. § 1842(d)(2)(C); Ala. Code §5-13B-6(b); Fla. Stat.
§ 658.295(8)(b); Ga. Code § 7-1-622(b)(2). All other requirements of
section 3(d) of the BHC Act would be met on consummation of the
proposal.

C46

Federal Reserve Bulletin 0 June 2008

record, the Board is permitted to approve the proposal
under section 3( d) of the BHC Act.

10. 12 U.S.C. § 1842(c)(1).
II. Deposit and market share data are based on data reported by
insured depository institutions in the summary of deposits data as of
June 30, 2007, adjusted to reflect mergers and acquisitions through
January 11, 2008, and are based on calculations in which the deposits
of thrift institutions are included at 50 percent. The Board previously
has indicated that thrift institutions have become, or have the potential
to become, significant competitors of commercial banks. See, e.g.,
Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989);
National City Corporation. 70 Federal Reserve Bulletin 743 (1984).
Thus. the Board regularly has included thrift institution deposits in the
market share calculation on a 50 percent weighted basis. See, e.g.,
First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
12. Under the DOJ Guidelines, a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800. The Department of Justice ("DOl") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHI more than 200
points. The DOl has stated that the higher·than-normal HHI thresholds
for screening bank mergers for anti competitive effects implicitly
recognize the competitive effects of limited-purpose lenders and other
nondepository financial entities.

Guidelines in all eight banking markets. 13 On consummation of the proposal, six of the banking markets would
remain moderately concentrated. The Mobile area banking
market would remain highly concentrated, and the Decatur
area would become highly concentrated, as measured by
the HHI, but the changes in the HHls in each market would
be less than 200 points. Moreover, numerous competitors
would remain in each of the eight banking markets.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significant adverse effect on competition in
any relevant baking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a signifi·
cantly adverse effect on competition or on the concentration of resources in any of the eight banking markets where
Applicants and ANB compete directly or in any other
relevant banking market. Accordingly, the Board has deter·
mined that competitive considerations are consistent with
approval.

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has carefully considered these factors in light of all the
facts of record, including confidential supervisory and
examination information from the various U.S. banking
supervisors of the institutions involved, publicly reported
and other financial information, information provided by
Applicants, and public comment received on the proposal.1 4 The Board also has consulted with the Office of the
Superintendent of Financial Institutions ("OSFI"), the
agency with primary responsibility for the supervision and
regulation of Canadian banks, including RBC.
In evaluating the financial resources in expansion proposals by banking organizations, the Board reviews the
financial condition of the organizations involved on both a
parent-only and consolidated basis, as well as the financial
condition of the subsidiary insured depository institutions
13. Those banking markets and the effects of the proposal on the
concentration of banking resources therein are described in Appendix A.
14. A commenter expressed concern about RBC Centura's relationships with unaffiliated pawn shops and other nontraditional providers
of financial services. As a general matter, the activities of the consumer
finance businesses identified by the commenter are permissible, and
the businesses are licensed by the states where they operate. RBC
Centura has stated that it conducts substantial due diligence reviews of
its customers who provide alternative financial services, including
reviews of anti-money-laundering and Bank Secrecy Act compliance,
and that it does not play any role in the lending practices, credit review
processes, or other business practices of those firms.

Legal Developments: First Quarter, 2008

and significant nonbanking operations. In this evaluation,
the Board considers a variety of measures, including capital
adequacy, asset quality, and earnings performance. In
assessing financial resources, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has carefully considered the financial resources of the organizations involved in the proposal. The
capital levels of RBC would continue to exceed the minimum levels that would be required under the Basel Capital
Accord and are considered to be equivalent to the capital
levels that would be required of a U.S. banking organization. In addition, RBC Centura, ANB, and the subsidiary
depository institutions involved in the proposal are well
capitalized and would remain so on consummation. Based
on its review of the record, the Board finds that Applicants
have sufficient financial resources to effect the proposaL
The proposed transaction is structured as a partial share
exchange and partial cash purchase of shares. Applicants
will use existing resources to fund the cash purchase of
shares.
The Board also has considered the managerial resources
of the organizations involved. IS The Board has reviewed
the examination records of Applicants, ANB, and their
subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. In addition, the Board has considered its supervisory
experiences and those of other relevant banking supervisory agencies, including the Office of Comptroller of the
Currency and the Federal Deposit Insurance Corporation,
with the organizations and their records of compliance with
applicable banking law and with anti-money-Iaundering
laws. Applicants, ANB, and their subsidiary depository
institutions are considered to be well managed. The Board
also has considered Applicants' plans for implementing the
proposal, including the proposed management after consummation. 'o
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors. 17
15, The commenter expressed concern about pending litigation in
Canada involving RBC and a Canadian asset management firm that is
in receivership. The Board notes that the litigation will be resolved by
a Canadian court with jurisdiction to adjudicate such matters,
16, The commenter expressed concern that Applicants have exercised control over ANB before the Board's consideration of this
application, Commenter cited ANB's notice to some employees that
their jobs would be eliminated as a result of the proposed transaction,
Applicants have stated that they have taken no action with respect to
ANB employees, and the record does not support a finding that
Applicants have prematurely attempted to control ANB for purposes
of the BHC Act.
17. Section 3 of the BHC Act also requires the Board to determine
that an applicant has provided adequate assurances that it will make
available to the Board such information on its operations and activities

C47

Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate
authorities in the bank's home country. IS As noted, the
aSFI is the primary supervisor of Canadian banks, including RBC. The Board previously has determined that RBC is
subject to comprehensive supervision on a consolidated
basis by its home-country supervisor. 19 Based on this
finding and all the facts of record, the Board has concluded
that RBC continues to be subject to comprehensive supervision on a consolidated basis by its home-country supervisor.

CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA").20 The CRA requires the federal financial
supervisory agencies to encourage insured depository institutions to help meet the credit needs of the local communities in which they operate, consistent with their safe and
sound operation, and requires the appropriate federal financial supervisory agency to take into account a relevant
depository institution's record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, in evaluating bank expansionary
proposals. 21
and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHe Act (12 U,S,C.
§ 1842(c)(3)(A)), The Board has reviewed the restrictions on disclosure in the relevant jurisdictions in which RBC operates and has
communicated with relevant government authorities concerning access
to information, In addition, RBC previously has committed that, to the
extent not prohibited by applicable law, it will make available to the
Board such information on the operations of its affiliates that the Board
deems necessary to determine and enforce compliance with the BHC
Act, the International Banking Act, and other applicable federal laws,
RBC also previously has committed to cooperate with the Board to
obtain any waivers or exemptions that may be necessary to enable its
affiliates to make such information available to the Board, In light of
these commitments, the Board has concluded that RBC has provided
adequate assurances of access to any appropriate information the
Board may request.
18, 12 U,S,c. § 1843(c)(3)(B). As provided in Regulation Y, the
Board determines whether a foreign bank is subject to consolidated
home-country supervision under the standards set forth in Regulation K. See 12 CFR 225, 13(a)(4). Regulation K provides that a foreign
bank will be considered subject to comprehensive supervision or
regulation on a consolidated basis if the Board determines that the
bank is supervised or regulated in such a manner that its home-country
supervisor receives sufficient information on the worldwide operations
of the bank, including its relationship with any affiliates, to assess the
bank's overall financial condition and its compliance with laws and
regulations, See 12 CFR 211.24(c)(1).
19, See Royal Bank of Canada, 89 Federal Reserve Bulletin 139
(2003); Royal Bank of Canada, 83 Federal Reserve Bulletin 443
(1997),
20, 12 U,S,c. § 2901 et seq,; 12 U,S,c. § 1842(c)(2),
21. 12 U,S,C, § 2903,

C48

Federal Reserve Bulletin 0 June 2008

The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of the subsidiary banks of Applicants and ANB,
data reported by RBC Centura and ANB under the Home
Mortgage Disclosure Act ("HMDA"),22 other information
provided by Applicants, confidential supervisory information, and a public comment received on the proposal. The
commenter alleged, based on HMDAdata reported in 2006,
that RBC Centur:;l had engaged in disparate treatment of
minority individuals in home mortgage lending.

A. CRA Performance Evaluations
As provided in the CRA, the Board has reviewed the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent CRA performance evaluation is a particularly important consideration in the
applications process because it represents a detailed, on-site
evaluation of the institution'S overall record of performance under the CRA by its appropriate federal supervisor.23
Centura Bank received a "satisfactory" rating at its most
recent CRA performance evaluation by the Federal Reserve
Bank of Richmond, as of April \7,2006. 24 ANB Lead Bank
received a "satisfactory" CRA performance rating by the
Federal Reserve Bank of Atlanta, as of May I, 2006. 25
ANB's other subsidiary banks received ratings of "satisfactory" or "outstanding" at their most recent CRA performance evaluations. 26 Applicants have represented that RBC
Centura will implement its current CRA program at ANB ' s
subsidiary banks.

B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of RBC Centura in light of the public
comment received on the proposal. The commenter alleged,
based on HMDA data, that RBC Centura had denied the
home mortgage loan applications of African American and
Latino borrowers more frequently than those of nonminority applicants. The Board has focused its analysis on the
2006 HMDA data reported by Centura Bank.27

22. 12 U.S.C. §2801 et seq.
23. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
24. The evaluation period was January I, 2004, through December 31, 2005, for the lending test and March 24, 2004, through
December 31, 2005, for the service and investment tests.
25. The evaluation period was January I, 2004, through December 31, 2005, for the lending test and January 1,2004, through May I,
2006, for the service and investment tests.
26. Appendix B lists the most recent CRA performance ratings of
these banks.
27. The Board reviewed HMDA data for Centura Bank's assessment areas nationwide and in the Charlotte-Gas tonia-Concord and the
Atlanta-Sandy Springs-Marietta Metropolitan Statistical Areas.

Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial or ethnic groups
in certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not RBC
Centura is excluding or imposing higher costs on any group
on a prohibited basis. The Board recognizes that HMDA
data alone, even with the recent addition of pricing information, provide only limited information about the covered
10ans.28 HMDA data, therefore, have limitations that make
them an inadequate basis, absent other information, for
concluding that an institution has engaged in illegal lending
discrimination.
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race or ethnicity.
Because of the limitations of HMDA data, the Board has
considered these data carefully and taken into account other
information, including examination reports that provide
on-site evaluations of compliance with fair lending laws by
RBC Centura and its subsidiaries. The Board also has
consulted with the Federal Reserve Bank of Richmond
about the fair-lending compliance record of Centura Bank.
The record of this application, including confidential
supervisory information, indicates that RBC Centura has
taken steps to ensure compliance with fair lending and
other consumer protection laws. RBC Centura's compliance program includes statistical data analysis and file
reviews to ensure that mortgage lending and pricing decisions are not made on a prohibited basis. In addition, RBC
Centura provides annual online fair lending training to all
its employees, supplemented by ongoing in-person fair
lending training for mortgage-lending employees. Applicants have stated that RBC Centura will review the fair
lending programs of ANB's subsidiary banks and the
combined organization after consummation of the proposal, and they will adopt any of ANB' s fair lending
programs determined to be more effective than RBC Centura's programs.
The Board also has considered the HMDA data in light
of other information, including the overall performance
records of the subsidiary banks of Applicants and ANB
under the CRA. These established efforts and records of
performance demonstrate that the institutions are active in
helping to meet the credit needs of their entire communities,
28. The data, for example, do not account for the possibility that an
institution's outreach etIorts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMDA data.

Legal Developments: First Quarter, 2008

C49

conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BHC Act and other applicable statutes, The Board's
approval is specifically conditioned on compliance by
Applicants with the conditions in this order and all the
commitments made to the Board in connection with the
proposal. For purposes of this transaction, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law,
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of Richmond, acting
pursuant to delegated authority,
By order of the Board of Governors, effective February 5, 2008.

C. Conclusion on Convenience and Needs and
CRA Performance
The Board has considered carefully all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Applicants,
comment received on the proposal, and confidential supervisory information. Applicants state that the proposal will
result in increased credit availability and access to a
broader range of financial services for customers of RBC
Centura and ANB. Based on a review of the entire record,
and for the reasons discussed above, the Board concludes
that considerations relating to the convenience and needs
factor and the CRA performance records of the relevant
insured depository institutions are consistent with approval
of the proposal.

CONCLUSION
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the application
should be, and hereby is, approved. 29 In reaching its

Voting for this action: Chairman Bernanke. Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEV. FRIERSON

29. The commenter requested that the Board hold a puhlic meeting
or hearing on the proposal. Section 3 of the BHe Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authorities. Under its rules, the Board also may, in its discretion, hold a
public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the
application and to provide an opponunity for testimony (12 CFR
225.16(e), 262.25(d»). The Board has considered carefully the commenter's request in light of all the facts of record. In the Board's view,

Deputy Secretary of the Board
the commenter had ample opportunity to submit its views and. in fact,
submitted written comments that the Board has considered carefully in
acting on the proposal. The commenter's request fails to demonstrate
why written comments do not present its views adequately or why a
meeting or hearing otherwise would be necessary or appropriate. For
these reasons, and based on all the facts of record, the Board has
determined that a public meeting or hearing is not required or
warranted in this case. Accordingly, the request for a public meeting or
hearing on the proposal is denied.

Appendix A
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES

Rank

Amount
of deposits
(dollars)

Decatur area-Morgan County and
the portion of the city of Decatur in
Limestone County
RBC Centura Pre-Consummation .. .
ANB ...................................... .
RBC Centura Post-Consummation ..

6
2
2

288.8 mil.

Gulf Shores area-the towns of
Elberta, Foley, Gulf Shores, Lillian,
Magnolia Springs, and Orange
Beach in Baldwin County
RBC Centura Pre-Consummation .. .
ANB .............................. , ...... ..
RBC Centura Post-Consummation ..

14
3
3

Bank

Resulting
HHI

Increase in
HHI

Remaining
number of
competitors

3.5
19.5
23

1,913
1,913
1,913

137
137
137

11
II
II

1,704
1,704
1,704

12
12
12

ALABAMA BANKING MARKETS

52.1 mil.
340.9 miL

01
273.4 mil,
273.4 mil.

19.3
19.3

o
o

C50

Federal Reserve Bulletin 0 June 2008

Appendix A-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND

Bank

Rank

Amount
of deposits
(dollars)

Market
deposit
shares

DO] GUIDELINES-Continued

Resulting

Increase in
HHI

I Remaining
number of
competitors

ALABAMA BANKING MARKETSCONTINUED
Huntsville area-Madison County
and Limestone County, excluding the
town of Ardmore and the city of
Decatur
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..

7
5
3

186.5 miL
464.9 mil.
651.4 mil.

3.4
8.4
11.8

1,738
1,738
1,738

56
56
56

21
21
21

Mobile area-Mobile County and
the towns of Bay Minette. Daphne,
Fairhope, Loxley, Point Clear,
Robertsdale, Silverhill, Spanish
Fort, and Summerdale in Baldwin
County
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..

3
8
2

953.1 mil.
186.7 mil.
1.1 bi!.

13.1
2.6
15.7

2,040
2,040
2,040

68
68
68

19
19
19

FLORIDA BANKING MARKETS
Brevard-Brevard County
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..

14
12
10

72 mil.
148.0 mil.
220.0 mil.

1
2.1
3.2

1,461
1,461
1,461

4
4
4

18
18
18

23
12

156.4 mil.
476.0 mil.
632.4 mil.

.5
1.7
2.2

1,159
1,159
1,159

2
2
2

48
48
48

10
44
9

392.1 mil.
12.2 mil.
404.3 mil.

2.4
.1
2.5

1,141
1,141
1,141

1
1
1

49
49
49

Orlando area-Orange, Osceola,
and Seminole counties; the western
half of Volusia County; and the
towns of Clermont and Groveland in
Lake County
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..
Sarasota-Manatee and Sarasota
counties, excluding that portion of
Sarasota County that is both east of
the Myakka River and south of
Interstate 75 (currently the towns of
Northport and Port Charlotte); the
peninsular portion of Charlotte
County west of the Myakka River
(currently the towns of Englewood.
Englewood Beach, New Point
Comfort, Grove City, Cape Haze,
Rotonda, Rotonda West, and
Placida); and Gasparilla Island (the
town of Boca Grande) in Lee
County
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..

Legal Developments: First Quarter, 2008

C51

Appendix A-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND

Bank

DO] GUIDELINES-Continued

Rank

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HIll

Increase in
HHI

Remaining
number of
competitors

8
13
7

1.9 bil.
857.9 mil.
2.7 bil.

1.7
.8
2.5

1,460
1,460
1,460

3
3
3

135
135
135

GEORGIA BANKING MARKET

Atlanta-Bartow, Cherokee, Clayton,
Cobb, Coweta, DeKalb, Douglas,
Fayette, Forsyth, Fulton, Gwinnett,
Henry, Newton, Paulding, Rockdale,
and Walton counties; Hall County,
excluding the town of Clermont; the
towns of Auburn and Winder in
Barrow County; and the town of
Luthersville in Meriwether County
RBC Centura Pre-Consummation ...
ANB .......................................
RBC Centura Post-Consummation ..

:-IOTE: Deposit data are as of lune 30, 2007, and include mergers as of Janu·
ary II. 2008, Deposit amounts are unweighted. Rankings. market deposit
shares, and HHIs are based on thrift deposits weighted at 50 percent.

I, Centura Bank opened a de novo branch in the Gulf Shores area market
on September 9, 2007,

Appendix B
CRA PERFORMANCE EVALUATIONS OF ANB'S SUBSIDIARY BANKS
CRA Rating

Date

Supervisor

Alabama Exchange Bank,
Tuskegee, Alabama
Community Bank of Naples, National Association,
Naples, Florida
Cypress Coquina Bank,
Ormond Beach, Florida
First Gulf Bank, National Association,
Pensacola, Florida
Florida Choice Bank,
Mount Dora, Florida
Georgia State Bank,
Mableton, Georgia
Indian River National Bank,
Vero Beach, Florida
Millennium Bank,
Gainesville, Florida
The Peachtree Bank,
Duluth, Georgia

Outstanding

November 2006

Federal Reserve

Satisfactory

August 2007

FDIC

Satisfactory

May 2006

FDIC

Satisfactory

January 2004

OCC

Satisfactory

March 2007

FDIC

Satisfactory

March 2004

FDIC

Satisfactory

December 2003

OCC

Satisfactory

May 2007

FDIC

Satisfactory

October 2004

Federal Reserve

The Toronto-Dominion Bank
Toronto, Canada

ULC (HTD ULC"), Calgary, Canada, and ID BankNorth,
Inc. (HID Banknorth"), Portland, Maine (collectively,
"Applicants"), have requested the Board's approval under
section 3 of the Bank Holding Company Act ("BHC Act")!
to acquire Commerce Bancorp, Inc. ("Commerce"), Cherry
Hill, New Jersey, and its two subsidiary banks, Commerce

Subsidiary Bank

Order Approving the Acquisition of a Bank
Holding Company
The Toronto-Dominion Bank ("ID") and its subsidiary
bank holding companies, including TD US P&C Holdings

1. 12 U,S,C. § 1842.

C52

Federal Reserve Bulletin 0 June 2008

BankINorth (HCB North"), Ramsey, New Jersey, and
Commerce Bank, National Association (HCB NA"), Philadelphia, Pennsylvania. 2 In addition, Applicants have applied to acquire Commerce's minority interest in Pennsylvania Commerce Bancorp, Inc. ("PCB"), Harrisburg, a
bank holding company that controls Commerce Bank:!
Harrisburg National Association ("PCB Bank"), Lemoyne,
both of Pennsylvania. 3
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 2,255 (2008». The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act.
TD, with total consolidated assets equivalent to
$434.3 billion, is the second largest depository organization
in Canada. 4 TD operates a branch in New York City and an
agency in Houston and through TD Banknorth, controls TD
Bank NA and TD Bank USA, National Association (HTD
Bank USA"), New York, New York. TD Banknorth, with
total consolidated assets of $63.5 billion, is the 25th largest
depository organization in the United States, controlling
$43.9 billion in deposits. s TD Banknorth's subsidiary banks
operate in eight states. 6 TD Banknorth is the eighth largest
depository organization in New York, controlling deposits
of approximately $18.2 billion, and in Connecticut TD
Banknorth is the sixth largest depository organization,
controlling deposits of approximately $3.9 billion. In
New Jersey, TD Banknorth is the 11th largest depository
organization, controlling deposits of approximately $3.9 billion, and in Pennsylvania, TD Banknorth is the 45th largest
depository organization, controlling deposits of approximately $575 million.
Commerce has total consolidated assets of approximately $49.4 billion, and its subsidiary banks operate in
eight states, including New York, Connecticut, New Jersey,
and Pennsylvania; and the District of Columbia. In
New York, Commerce is the 13th largest depository organization, controlling deposits of $12.0 billion, and in
2. Applicants also include the following intennediate holding companies formed by TD to facilitate the Commerce acquisition: Cardinal
Top Co., Cardinal Intermediate Co., and Cardinal Merger Co., all of
New York, New York (collectively, "HCs"). HCs have requested the
Board's approval under Section 3 of the BHC Act to become bank
holding companies and to acquire or merge with Commerce. TD, TD
ULC, and TD Banknorth are all financial holding companies within
the meaning of the BHC Act. TD filed applications with the Office of
the Comptroller of the Currency ("OCC") on January 25, 2008, for
approval, under the Bank Merger Act 02 U.S.C. § I 828(c», to merge
CB NA and CB North into TD's indirect subsidiary bank, TD
BankNorth, National Association, ("TD Bank NA"), Portland.
3. Commerce holds voting securities and warrants that collectively
represent 14.6 percent of PCB's voting shares.
4. Canadian asset and ranking data are as of January 31, 2008, and
are based on the exchange rate as of that date.
5. Asset data and nationwide deposit ranking data are as of
December 31, 2007. Statewide deposit and ranking data are as of
June 30, 2007, and reflect merger activity as of February 26, 2008.
6. TD Bank NA operates in Connecticut, Maine, Massachusetts,
New Hampshire, New Jersey, New York, Pennsylvania, and Vermont.
TD Bank USA operates only in New York.

Connecticut, Commerce is the 43rd largest depository
organization, controlling deposits of approximately
$125.6 million. Commerce is the third largest depository
organization in New Jersey, controlling deposits of $22.3 billion, and in Pennsylvania, Commerce is the fifth largest
depository organization, controlling deposits of $8.4 billion.
On consummation of the proposal, TD Banknorth would
become the 19th largest depository organization in the
United States, with total consolidated assets of approximately $115 billion. TD Banknorth would control deposits
of approximately $90.1 billion, which represent less than
I percent of the total amount of deposits of insured
depository institutions in the United States. In New York,
TD Banknorth would become the sixth largest depository
organization, controlling deposits of approximately
$30.2 billion, which represent approximately 4.4 percent of
thc total amount of deposits of insured depository institutions in the state ("state deposits"). In Connecticut, TD
Banknorth would remain the sixth largest depository organization, controlling deposits of approximately $4.1 billion,
which represent approximately 5.9 percent of state deposits. In New Jersey, TD Banknorth would become the third
largest depository organization, controlling deposits of
approximately $26.2 billion, which represent approximately 13.5 percent of state deposits. In Pennsylvania, TD
Banknorth would become the fifth largest depository organization, controlling deposits of approximately $9 billion,
which represent approximately 3.8 percent of state deposits.
PCB has consolidated assets of approximately $2 billion, and PCB Bank operates only in Pennsylvania. PCB is
the 23rd largest insured depository institution in Pennsylvania, controlling deposits of approximately $1.5 billion,
which represent less than I percent of state deposits. If TD
Banknorth were deemed to control PCB on consummation
of the proposal, TD Banknorth would become the fifth
largest banking organization in Pennsylvania, controlling
approximately $11.1 billion in deposits, which would represent less than 5 percent of state deposits.
TD has stated that it does not propose to control or
exercise a controlling influence over PCB or PCB Bank and
has made certain commitments to the Board designed to
limit the influence TD may exercise.'
7. See, e.g., Emigrant Bancorp. Inc., 82 Federal Reserve Bulletin
555 (1996); First Community Bancshares. Inc., 77 Federal Reserve
Bulletin 50 (1991). Although the acquisition of less than a controlling
interest in a bank or bank holding company is not a normal acquisition
for a bank holding company, the requirement in section 3(a)(3) of the
BHC Act that the Board's approval be obtained before a bank holding
company acquires more than 5 percent of the voting shares of a bank
suggests that Congress contemplated the acquisition by bank holding
companies of between 5 percent and 25 percent of the voting shares of
banks. See 12 U.S.c. § I 842(a)(3). On this basis, the Board previously
has approved the acquisition by a bank holding company of less than a
controlling interest in a bank or hank holding company. See, e.g.,
Brookline Bancorp, MCH, 86 Federal Reserve Bulletin 52 (2000)
(acquisition of up to 9.9 percent of the voting shares of a bank holding
company), The BHC Act would require TD to file an application and
receive the Board's approval before the company could directly or

Legal Developments: First Quarter; 2008

COMPETITIVE CONSIDERATIONS
The BHC Act prohibits the Board from approving a
proposal that would result in a monopoly or would be in
furtherance of any attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a bank acquisition that
would substantially lessen competition in any relevant
banking market, unless the anticompetitive effects of the
proposal are clearly outweighed in the public interest by its
probable effect in meeting the convenience and needs of the
community to be served. 11
Applicants and Commerce have subsidiary depository
institutions that compete directly in four banking markets:
Atlantic City, New Jersey; Metropolitan New YorkNew Jersey-Connecticut-Pennsylvania; New Haven, Conindirectly acquire additional shares of PCB or attempt to exercise a
controlling influence over PCB.
8. See 12 U.S.c. § I 842(d). A bank holding company's home state
is the state in which the total deposits of all banking subsidiaries of
such company were the largest on July I, 1966, or the date on which
the company became a bank holding company, whichever is later.
9. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch (12 U.S.c. §§ 1841(0)(4)-(7) and I 842{d)(l)(A) and
(d)(2)(B )).
10. 12 U.S.c. §§ 1842(d)(I)(A)-(B) and 1842(d)(2)-{3). TO is
adequately capitalized and adequately managed, as defined by applicable law. Both of Commerce's subsidiary banks have been in
existence and operated for the minimum period of time required by
applicable state laws and for more than five years. See 12 U.S.c.
§ I 842(d)(l)(B)(i)-(ii). On consummation of the proposal, Applicants
would control less than IO percent of the total amount of deposits of
insured depository institutions in the United Stales (12 U .S.c.
§ I 842(d)(2)(A». Applicants would control less than 30 percent, or a
greater percentage established under applicable state law, of the state
deposits in Connecticut, New Jersey, New York, and Pennsylvania
(12 U.S.c. § I 842(d)(2)(B)-(D». In addition, Applicants would not
hold deposits in excess of an applicable deposit cap under the law of
any other stales where Commerce is located. All other requirements of
section 3(d) of the BHC Act would be met on consummation of the
proposaJ.
II. 12 U.S.c. § I 842(c)(l).

C53

necticut; and Philadelphia and South Jersey, in New Jersey
and Pennsylvania. 12 The Board has reviewed carefully the
competitive effects of the proposal in each of these banking
markets in light of all the facts of record and public
comment received on the proposal,I3 In particular, the
Board has considered the number of competitors that would
remain in the banking markets, the relative shares of total
deposits in depository institutions ("market deposits")
controlled by Applicants and Commerce in the markets, 14
the concentration levels of market deposits and the increases in those levels as measured by the HerfindahlHirschman Index ("HHI") under the Department of Justice
Merger Guidelines ("DOl Guidelines"),15 and other characteristics of the markets.
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in all four banking markets. 16 On consummation, each of the banking markets would remain moderately
12. Applicants and PCB do not have subsidiary depository institutions that compete directly in any banking market.
13. SeveraJ commenters asserted that the proposal would result in
an undue concentration of resources in Camden, New Jersey, which is
part of the Philadelphia and South Jersey banking market, a~ defined
by the Federal Reserve Bank of Philadelphia ("Reserve Bank"). The
Reserve Bank's definition of this market is set forth in the appendix. In
reviewing this proposal and the comments received, the Board has
considered whether to include Camden in this banking market.
Camden is directly across the Delaware River from Philadelphia and
has been included in the Reserve Bank's definition of the Philadelphia
and South Jersey banking market for over a decade. According to data
from the 2000 census, more than 65 percent of the labor force residing
in Camden commutes to other counties in the Philadelphia and South
Jersey banking market. These and other factors indicate that the
Philadelphia and South Jersey banking market. including Camden, is
the appropriate locaJ geographic market for purposes of analyzing the
competitive effects of this proposaJ.
14. Deposit and market share data are based on data reported by
insured depository institutions in the summary of deposits data as of
June 30. 2007, adjusted to reflect mergers and acquisitions as of
February 26, 2008, and are based on caJculations in which the deposits
of thrift institutions are included at SO percent. The Board previously
has indicated that thrift institutions have become, or have the potential
to become, signilicant competitors of commercial banks. See, e.g.,
Midwest Financial Group, 75 Federal Reserve Bulletin 386 (1989);
National City Corporation, 70 Federal Reserve Bulletin 743 (1984).
Thus, the Board regularly has included thrift institution deposits in the
market share calculation on a SO percent weighted basis. See, e.g.,
First Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
IS. Under the DOJ Guidelines, a market is considered unconcen·
trated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHl is between 1000 and 1800, and highly
concentrated if the post-merger HHI is more than 1800. The Department of Justice ("DOJ") has informed the Board that a bank merger or
acquisition generaJly will not be chaJlenged (in the absence of other
factors indicating anticompetitive effects) unless the post-merger HHI
is at least 1800 and the merger increases the HHi more than 200
points. The DOJ has stated that the higher-than-normaJ HHI thresholds
for screening bank mergers for anticompetitive effects implicitly
recognize the competitive effects of limited-purpose lenders and other
non depository financial entities.
16. Definitions of the other three banking markets and the effects of
the proposaJ on concentrations of banking resources in all the markets
are described in the appendix.

C54

Federal Reserve Bulletin 0 June 2008

concentrated as measured by the HHI, and the HHI changes
would increase less than 200 points in each market. In
addition, numerous competitors would remain in all the
banking markets.
The DOJ has conducted a detailed review of the potential competitive effects of the proposal and has advised the
Board that consummation of the transaction would not
likely have a significantly adverse effect on competition in
any relevant banking market. In addition, the appropriate
banking agencies have been afforded an opportunity to
comment and have not objected to the proposaL
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the four banking markets where
Applicants and Commerce compete directly or in any other
relevant banking market. Accordingly, the Board has determined that competitive considerations are consistent with
approvaL

FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERATIONS
Section 3 of the BHC Act requires the Board to consider the
financial and managerial resources and future prospects of
the companies and depository institutions involved in the
proposal and certain other supervisory factors. The Board
has carefully considered these factors in light of all the
facts of record, including confidential supervisory and
examination information from the U.S. banking supervisors
of the institutions involved, publicly reported and other
financial information, information provided by Applicants,
and public comment received on the proposaL 17 The Board
also has consulted with the Office of the Superintendent of
Financial Institutions ("OSFI"), the agency with primary
responsibility for the supervision and regulation of Canadian banks, including TD.
In evaluating the financial resources in expansion proposals by banking organizations, the Board reviews the
financial condition of the organizations involved on both a
17. Several commenters expressed concern about pending and
prospective litigation in Canada and the United States involving TD
and the effect of such litigation on TD' s managerial and financial
resources. The Canadian litigation involves a class action lawsuit
against TD based on allegations that credit cardholders were overcharged on foreign currency conversions and a lawsuit for allegedly
improperly withholding deposited funds. These pending cases will be
resolved by a Canadian court with jurisdiction to adjudicate such
matters.
The U.S. lawsuits include a discrimination case that has been
settled. Another lawsuit involving the amount of consideration TD
offered to shareholders in connection with a previous acquisition is
currently under review by a court of competent jurisdiction. The Board
does not have authority to resolve the shareholders' dispute. See
Western Bancshares, Inc. v. Board of Governors, 480 F.2d 749 (10th
Cir. 1973).
Board action on this proposal would not interfere with Canadian or
U.S. courts' ability to resolve the pending lawsuits. Moreover, the
Board has taken these comments into account in its assessment of the
financial resources and future prospects of the companies and depository institutions involved in the proposaL

parent-only and consolidated basis, as well as the financial
condition of the subsidiary insured depository institutions
and significant nonbanking operations. In this evaluation,
the Board considers a variety of information, including
capital adequacy, asset quality, and earnings performance.
In assessing financial resources, the Board consistently has
considered capital adequacy to be especially important. The
Board also evaluates the financial condition of the combined organization at consummation, including its capital
position, asset quality, and earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has carefully considered the financial resources of the organizations involved in the proposal. The
capital levels of TD exceed the minimum levels that would
be required under the Basel Capital Accord and are therefore considered to be equivalent to the capital levels that
would be required of a U.S. banking organization. In
addition, the subsidiary depository institutions involved in
the proposal are well capitalized and would remain so on
consummation. Based on its review of the record, the
Board finds that Applicants have sufficient financial resources to effect the proposal. The proposed transaction is
structured as a partial share exchange and partial cash
purchase of shares. Applicants will use existing resources
to fund the cash purchase of shares. IS
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of Applicants, Commerce, and their
subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. 19 In addition, the Board has considered its supervisory experiences and those of other relevant banking
supervisory agencies, including the OCC and the Federal
Deposit Insurance Corporation ("FDIC"), with the organizations and their records of compliance with applicable
banking law and with anti-money-Iaundering laws. Applicants, Commerce, and their subsidiary depository institutions are considered to be well managed. The Board also
has considered Applicants' plans for implementing the
acquisition, including the proposed management after consummation. 20

18. One commenter claimed that the amount of consideration TD is
offering in connection with the proposal is excessive. The amount of
consideration offered is a matter decided by the parties involved, and
the Board has reviewed this aspect of the proposal in its assessment of
the financial resources of the reSUlting organization.
19. Several commenters expressed concern about TD Banknorth's
relationships with unaffiliated pawnshops and other nontraditional
providers of financial services. As a general matter, the activities of the
consumer finance businesses identified by the commenters are permissible, and the businesses are licensed by the states where they operate.
TD noted that it has established a detailed review program for
pawnshops and other money-service businesses ("MSBs"), including
reviews for compliance with anti-money-Iaundering, Bank Secrecy
Act, fair lending, and consumer protection requirements. Furthermore,
TD stated that TD Banknorth does not have any role in the lending
practices, credit review, or other business practices of MSBs and does
not purchase any loans originated by MSBs.
20. Several commenters expressed concern that the proposal would
jeopardize the combined organization's ability to serve as the desig-

Legal Developments: First Quarter, 2008

Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of the organizations involved
in the proposal are consistent with approval, as are the other
supervisory factors. 21
Section 3 of the BHC Act also provides that the Board
may not approve an application involving a foreign bank
unless the bank is subject to comprehensive supervision or
regulation on a consolidated basis by the appropriate
authorities in the bank's home country.22 As noted, the
OSFI is the primary supervisor of Canadian banks, inclUding TD. The Board previously has determined that TD is

nated bonding authority ("DBA") for the Department of Education's
("DOE's") Historically Black Colleges and Universities Capital
Financing Program ("CFP"). A Commerce subsidiary serves as the
DBA and administers the CFP. Several commenters asserted that
Commerce had performed poorly as the DBA, had insufficient managerial controls over the CFP, and had mismanaged the program. In
addition, several commenters alleged that Commerce, through its
insistence on certain loan payment terms, had risked violating fair
lending laws and that certain terms and conditions of loans under the
CFP were abusive.
TO represented that key elements of the CFP, including pricing and
repayment, were established by a division of the Department of the
Treasury, and not by the DBA. Final determinations on credit approvals and denials are determined by the DOE. Moreover, TO stated that
the DBA has an extremely diligent loan review process and that no
loan has defaulted under the CFP while the Commerce subsidiary has
served as the DBA. The Board expects all banking organizations to
conduct their operations in a safe and sound manner with adequate
systems to manage operational, compliance, and reputational risks and
will take appropriate supervisory actions to prevent and address
abusive lending practices.
21. Section 3 of the BHC Act also requires the Board to determine
that an applicant has provided adequate assurances that it will make
available to the Board such information on its operations and activities
and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act. (12 U.S.C.
§ I 842(c)(3)(A). The Board has reviewed the restrictions on disclosure in the relevant jurisdictions in which TO operates and has
communicated with relevant government authorities concerning access
to information. In addition, TO previously has committed that, to the
extent not prohibited by applicable law, it will make available to the
Board such information on the operations of its affiliates that the Board
deems necessary to determine and enforce compliance with the BHC
Act, the International Banking Act, and other applicable federal laws.
TO also previously has committed to cooperate with the Board to
obtain any waivers or exemptions that may be necessary to enable its
affiliates to make such information available to the Board. Based on all
facts of record, the Board has concluded that TD has provided
adequate assurances of access to any appropriate information the
Board may request.
22. 12 U.S.c. § 1842(c)(3)(B). As provided in Regulation Y, the
Board determines whether a foreign bank is subject to consolidated
home-country supervision under the standards set forth in Regulation K. See 12 CFR 225. \3(a)(4). Regulation K provides that a foreign
bank will be considered subject to comprehensive supervision or
regulation on a consolidated basis if the Board determines that the
bank is supervised or regulated in such a manner that its home-country
supervisor receives sufficient information on the worldwide operations
of the bank, including its relationship with any affiliates, to assess the
bank's overall financial condition and its compliance with laws and
regulations. See 12 CFR 211.24(c)(I).

C55

subject to comprehensive supervlslOn on a consolidated
basis by its home-country supervisor.23 Based on this
finding and all the facts of record, the Board has concluded that TD continues to be subject to comprehensive
supervision on a consolidated basis by its home-country
supervisor.

23. See The Toronto-Dominion Bank, 92 Federal Reserve Bulletin
C100 (2006); The Toronto-Dominion Bank, 91 Federal Reserve Bulletin 277 (2005).
24. 12 U.S.c. § 2901 et seq.; 12 U.S.c. § I 842(c)(2).
25. 12 U.S.c. §2903.
26.12 U.S.C. §2801 et seq.
27. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).

C56

Federal Reserve Bulletin 0 June 2008

TD Banknorth's subsidiary banks each received a "satisfactory" rating at its most recent CRA performance
evaluation by the OCC.28 Both of Commerce's subsidiary
banks received "outstanding" CRA performance ratings at
their most recent evaluations by the relevant federal supervisors.29 PCB's subsidiary bank, PCB Bank, received a
"satisfactory" rating at its most recent CRA performance
evaluation by the OCC, as of January 3, 2005. Applicants
have represented that no significant changes to the CRA
programs at any subsidiary bank will take place until CB
NA and CB North are merged into TD Bank NA, at which
time the banks will adopt the CRA program ofTD Bank, as
modified to address issues specific to the banks' markets. 30

B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of TD Banknorth in light of the public
comments received on the proposal. Two commenters
alleged, based on HMDA data, that TD Banknorth denied
the home mortgage refinance and home improvement loan
applications of African American borrowers more frequently than those of nonminority applicants. The Board
has focused its analysis on the 2006 HMDA data reported
by TD Banknorth NA.3J
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, and
denials among members of different racial or ethnic groups
in certain local areas, they provide an insufficient basis by
themselves on which to conclude whether or not TD
Banknorth is excluding or imposing higher costs on any
group on a prohibited basis. The Board recognizes that
HMDA data alone, even with the recent addition of pricing
28. The most recent CRA performance evaluations were as of
December 30,2004, for TO Bank NA and as of January 16.2007, for
TO Bank USA.
29. The most recent CRA performance evaluation for CB NA by the
OCC was as of October 2, 2006. The most recent CRA performance
evaluation for CB North by the FDIC was as of May 15, 2006.
30. Two commenters expressed concern regarding the impact of the
acquisition on the types of loans, investments, and services provided
by the subsidiary banks of TO Banknorth and Commerce. One
commenter also requested that Applicants make specific commitments
with regard to the products and services olIered in the New York City
Metropolitan Statistical Area ("MSA"). The Board has stated that the
CRA neither requires a depository institution to provide any specific
types of products or services nor prescribes the fees charged for them.
See Bank of America Corporation, 90 Federal Reserve Bulletin 217,
226 footnote 49 (2004). The Board also has consistently found that
neither the CRA nor the federal banking agencies' CRA regulations
require depository institutions to enter into pledges, commitments, or
agreements with any organization and that the enforceability of any
such third-party pledges, initiatives, and agreements are matters
outside the CRA. See Bank of America Corporation, 93 Federal
Reserve Bulletin C109, C1l2 footnote 28 (2007); Citigroup Inc.,
88 Federal Reserve Bulletin 485 (2002). Instead, the Board focuses on
the existing CRA performance record of an applicant and the programs
that an applicant has in place to serve the credit needs of its assessment
areas at the time the Board reviews a proposal under the convenience
and needs factor.
31. The Board reviewed HMDA data for TO Bank NA's assessment
areas in Connecticut, Maine, Massachusetts. New Hampshire, New Jersey, New York, Pennsylvania. Vermont, and the MSAs noted in the
comments.

information, provide only limited information about the
covered loans. 32 HMDA data, therefore, have limitations
that make them an inadequate basis, absent other information, for concluding that an institution has engaged in
illegal lending discrimination,
The Board is nevertheless concerned when HMDA data
for an institution indicate disparities in lending and believes
that all lending institutions are obligated to ensure that their
lending practices are based on criteria that ensure not only
safe and sound lending but also equal access to credit by
creditworthy applicants regardless of their race or ethnicity.
Because of the limitations of HMDA data, the Board has
considered these data carefully and taken into account other
information, including examination reports that provide
on-site evaluations of compliance with fair lending laws by
TD Banknorth and its subsidiaries. The Board also has
consulted with the OCC about the fair-lending compliance
record of TD Bank NA, TD Bank USA, and CB NA and
with the FDIC about the fair-lending compliance record of
CB North.
The record of these applications, including confidential
supervisory information, indicates that TD Banknorth has
taken steps to ensure compliance with fair lending and
other consumer protection laws. TD Banknorth's board of
directors annually approves a fair-lending policy statement,
which serves as a reference document for all employees.
TD Banknorth's compliance program includes risk assessments, annual monitoring, monthly business line selfmonitoring, complaint tracking, and reviews by regulatory
compliance and fair lending committees. The program
includes statistical data analysis quarterly and annually to
identify trends and fair lending concerns. In addition, TD
Banknorth provides annual training covering compliancerelated regulations to all employees based on job function.
Applicants stated that they would not change the fairlending compliance programs of TD Banknorth's and
Commerce's subsidiary banks until consummation of the
proposed merger of those banks, at which time the banks
will adopt the fair-lending compliance programs of TD
Banknorth, as modified to address issues specific to each
bank's markets.
The Board also has considered the HMDA data in light
of other information, including the overall performance
records of the subsidiary banks of Applicants and Commerce under the CRA. These established efforts and records
of performance demonstrate that the institutions are active
in helping to meet the credit needs of their entire communities.

32, The data, for example, do not account for the possibility that an
institution's outreach elIorts may attract a larger proportion of marginally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. In addition, credit
history problems, excessive debt levels relative to income, and high
loan amounts relative to the value of the real estate collateral (reasons
most frequently cited for a credit denial or higher credit cost) are not
available from HMOA data.

Legal Developments: First Quarter, 2008

C. Conclusion on Convenience and Needs and
CRA Performance
The Board has considered carefully all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Applicants,
comment received on the proposal, and confidential supervisory information. Applicants represented that the proposal would result in increased credit availability and
access to a broader array of financial products and services
for customers of TD Banknorth and Commerce. Based on a
review of the entire record, and for the reasons discussed
above, the Board concludes that considerations relating to
the convenience and needs factor and the CRA performance records of the relevant insured depository institutions are consistent with approval of the proposal.

CONCLUSION
Based on the foregoing, and in light of all the facts of
record, the Board has determined that the applications
should be, and hereby are, approved. 33 In reaching its

C57

conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BHC Act and other applicable statutes. The Board's
approval is specifically conditioned on compliance by
Applicants with the conditions in this order and all the
commitments made to the Board in connection with the
proposal. For purposes of this transaction, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The proposal may not be consummated before the 15th
calendar day after the effective date of this order, or later
than three months after the effective date of this order,
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of New York, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 13,
2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Mishkin.
ROBERT DEY. FRIERSON

33. Several commenters requested that the Board hold a public
meeting or hearing on the proposal. Section 3 of the BHC Act does not
require the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
written recommendation of denial of the application. The Board has
not received such a recommendation from the appropriate supervisory
authorities. Under its rules, the Board also may, in its discretion, hold a
public meeting or hearing on an application to acquire a bank if
necessary or appropriate to clarify factual issues related to the
application and to provide an opportunity for testimony (12 CFR
22S.l6(e), 262.2S(d)). The Board has considered carefully the commenters' requests in light of all the facts of record. In the Board's view,

Deputy Secretary of the Board
the commenters had ample opportunity to submit their views and, in
fact, submitted written comments that the Board has considered
carefully in acting on the proposal. The commenters' requests fail to
demonstrate why written comments do not present their views
adequately or why a meeting or hearing otherwise would be necessary
or appropriate. For these reasons, and based on all the facts of record,
the Board has determined that a public meeting or hearing is not
required or warranted in this case. Accordingly, the requests for a
public meeting or hearing on the proposal are denied.

Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO] GUIDELINES

Bank

Rank

Atlantic City-Atlantic and Cape
May counties in New Jersey
TD Banknorth Pre-Consummation ..
Commerce ................................
TD Banknorth Post-Consummation ..

17
2
2

Amount
of deposits
(dollars)

48 mil.
1.3 bil.
1.3 bil.

Market
deposit
shares
(percent)

Resulting
HHI

Increase in
HHI

Remaining
number of
competitors

.8
20.5
21.3

1,325
1,325
1,325

33
33
33

21
21
21

C58

Federal Reserve Bulletin D June 2008

Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES-Continued
I

Amount
of deposits
(dollars)

Market
deposit
shares
(percent)

Resulting
HHI

Increase in
HHI

Remaining
number of
competitors

Bank

Rank

Metropolitan New York-New JerseyPennsylvania-Connecticut-Bronx,
Dutchess, Kings, Nassau, New York,
Orange, Putnam, Queens,
Richmond, Rockland, Suffolk,
Sullivan, Ulster, and Westchester
counties in New York; Bergen,
Essex, Hudson, Hunterdon,
Middlesex, Monmouth, Morris,
Ocean, Passaic, Somerset, Sussex,
Union, and Warren counties and the
northern portions of Mercer County
in New Jersey; Monroe and Pike
counties in Pennsylvania; and
Fairfield County and portions of
Litchfield and New Haven counties
in Connecticut
TD Banknorth Pre-Consummation ..
Commerce ................................
TD Banknorth Post-Consummation ..

9
8
4

20.8 bil.
26.1 bi!.
46.9 bil.

2.6
3.3
5.9

1,118
1,118
1,118

17
17
17

272
272
272

New Haven-Clinton, Killingworth,
and Westbrook townships in
Middlesex County; and Bethany,
Branford, Cheshire, East Haven,
Guilford, Hamden, Madison,
Meriden, New Haven, North
Branford. North Haven, Orange,
Wallingford, West Haven, and
Woodbridge townships in
New Haven County, all in
Connecticut
TD Banknorth Pre-Consummation ..
Commerce ................................
TD Banknorth Post-Consummation ..

8
19
8

772 mil.
14 mil.
786 mil.

.1
7.3
7.5

1,290
1,290
1,290

2
2
2

20
20
20

Philadelphia and South JerseyBucks, Chester; Delaware.
Montgomery, and Philadelphia
counties in Pennsylvania;
Burlington, Camden, Gloucester;
and Salem counties in New Jersey;
and the city of Trenton and Ewing,
Hamilton, and Lawrence townships
in Mercer County, New Jersey
TD Banknorth Pre-Consummation ..
Commerce ................................
TD Banknorth Post-Consummation ..

13
2
2

1.2 bil.
13.7 bil.
14.9 bil.

1.4
14
15.4

1,032
1,032
1,032

39
39
39

118
118
118

NOTE: Deposit data are as of June 30, 2007, and include mergers as of feb·
ruary 26, 2008. Deposit amounts are unweighred. Rankings, market deposit
shares, and HHIs are based on thrift institution deposits weighred at SO percent.

Legal Developments: First Quarter; 2008

ORDERS ISSUED UNDER SECTION
BANK HOLDING COMPANY ACT

OF THE

Bank of America Corporation
Charlotte, North Carolina
Notice of Public Meetings
Los Angeles, California
Chicago, Illinois
BACKGROUND AND PUBLIC MEETINGS NOTICE
On February 15, 2008, Bank of America Corporation,
Charlotte, North Carolina ("Bank of America"), requested
the Board's approval under the Bank Holding Company
Act (12 U.S.c. § 1841 et seq.) ("BHC Act") and related
statutes to acquire Countrywide Financial Corporation,
Calabasas, California ("Countrywide"), and thereby acquire Countrywide's wholly owned savings association
subsidiary, Countrywide Bank, FSB, Alexandria, Virginia,
and its other non banking subsidiaries. The Board hereby
orders that public meetings on the Bank of America!
Countrywide proposal be held in Los Angeles, California,
and Chicago, Illinois.
The public meeting in Los Angeles will be held at the
Los Angeles Branch of the Federal Reserve Bank of San
Francisco, 950 South Grand Avenue, Los Angeles, California, on Monday, April 28, and Tuesday, April 29, 2008,
beginning at 8:30 a.m. Pacific Daylight Time ("PDT").
The public meeting in Chicago will be held at the
Federal Reserve Bank of Chicago, 230 South LaSalle
Street, Chicago, Illinois, on Tuesday, April 22, 2008,
beginning at 8:30 a.m. Central Daylight Time ("CDT").
In addition, the comment period on the application has
been extended to close of business on Tuesday, April 29,
2008.

PURPOSE AND PROCEDURES
The public meetings will collect information relating to
factors the Board is required to consider under the BHC
Act. The factors the BHC Act requires the Board to
consider include whether the notificant's performance of
the activities can reasonably be expected to produce benefits to the public (such as greater convenience, increased
competition, and gains in efficiency) that outweigh possible
adverse effects (such as undue concentration of resources,
decreased or unfair competition, conflicts of interests, and
unsound banking practices). Consideration of the above
factors includes an evaluation of the financial and managerial resources of the notificant, including its subsidiaries,
and any company to be acquired; the effect of the proposed
transaction on those resources; and the management expertise, internal control and risk-management systems, and
capital of the entity conducting the activity. In acting on a
notice to acquire a savings association, the Board also
reviews the records of performance of the insured depository institutions involved in the proposal under the Com-

C59

munity Reinvestment Act, which requires the Board to take
into account a relevant institution's record of meeting the
credit needs of its entire community, including low- and
moderate-income neighborhoods, consistent with the safe
and sound operation of the institution (12 U.S.c. § 2903).
Testimony at the public meetings will be presented to a
panel consisting of a presiding officer and other panel
members appointed by the presiding officer. In conducting
the public meetings, the presiding officer will have the
authority and discretion to ensure that the meetings proceed
in a fair and orderly manner. In contrast to a formal
administrative hearing, the rules for taking evidence will
not apply to the public meetings. Panel members may
question witnesses but no cross-examination of witnesses
will be permitted. The public meetings will be transcribed,
and the transcripts will be posted on the Board's public
website within several days after the meetings. Information
regarding the procedures for obtaining a copy of the
transcript will be announced at the public meetings.
All persons wishing to testify at the public meeting in
Los Angeles must submit a written request to Scott Turner,
Community Affairs Officer, Federal Reserve Bank of San
Francisco, !O1 Market Street, San Francisco, California
94!O5 (facsimile: 415/393-1920) no later than 5:00 p.m.
PDT on April 8, 2008. All persons wishing to testify at the
public meeting in Chicago must submit a written request to
Alicia Williams, Vice President, Federal Reserve Bank of
Chicago, 230 South LaSalle Street, Chicago, Illinois 60604
(facsimile: 312/913-2626) no later than 5:00 p.m. CDT on
April 8, 2008.
The request to testify must include the following information: (i) identification of which meeting (and which day
for the Los Angeles meeting) the participant wishes to
attend; (ii) a brief statement of the nature of the expected
testimony (including whether the testimony will support or
oppose the proposed transaction or provide other comment
on the proposal) and the estimated time required for the
presentation; (iii) the address and telephone number (and
e-mail address and facsimile number, if available) of the
individual testifying; and (iv) identification of any special
needs, such as individuals needing translation services,
individuals with a physical disability who may need assistance, or individuals requiring visual aids for their presentation. To the extent available, translators will be provided
for those wishing to present their views in a language other
than English if so requested in the request to testify.
Individuals interested only in attending the meeting, but not
testifying, need not submit a written request.
On the basis of the requests received, the presiding
officer will prepare a schedule for participants who will
testify and establish the order of presentation. To ensure an
opportunity for all interested commenters to present their
views, the presiding officer may limit the time for presentation. Individuals not listed on the schedule may be
permitted to speak at the public meeting if time permits at
the conclusion of the schedule of witnesses, at the discretion of the presiding officer. Copies of testimony may, but
need not, be filed with the presiding officer before a
participant's presentation.

C60

Federal Reserve Bulletin D June 2008

By order of the Board of Governors, effective March 27,
2008.
ROBERT DEY. FRIERSON

Full text of Federal Reserve Bulletin : Compilation 2008

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