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2009 Compilation
~"IW:"."
Federal Reserve
BULLETIN
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Volume 95 0 2009 Compilation
Federal Reserve
BULLETIN
Board of Governors of the Federal Reserve System, Washington, D.C.
PUBLICA nONS COMMITTEE
Rosanna Pi anallo, Chair D Scott G. Alvarez D Sandra F. Braunstein D Elizabeth A. Coleman D Lynn S. Fox
D Maureen Hannan D Jennifer J. Johnson D Brian F. Madigan D Stephen R. Malphrus D Patrick M. Parkinson
o H. Fay Peters 0 Louise L. Roseman D D. Nathan Sheets 0 Michelle A. Smith D David J. Stockton
The Federal Reserve 8"lIeti" Compilation is published annually under the directio n of the Federal Reserve Board's Publications Committee. Thi s comminee is
responsible for opinions expressed except in official state ments and signed an icles. It is assisted by the Publishing & Communications Services Depanment i n the
Office of Board Members. under the direction of Lucretia M. Boyee
Table of Contents
PREFACE
ARTICLES
Changes in US. Family Finances from 2004 to 2007: Evidence from the Survey of
Consumer Finances. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Al
Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach, and Kevin B. Moore
February 12
Profits and Balance Sheet Developments at US. Commercial Banks in 2008 ........... ..... . .. A57
Morten L. Bech and Tara Rice
June 2
US. Households' Access to and Use of Electronic Banking, 1989-2007 . . . . . . . . . . . . . . . . . . . . . .. A99
Catherine J. Bell, Jeanne M. Hogarth, and Eric Robbins
July 27
Industrial Production and Capacity Utilization: The 2009 Annual Revision .. . . . .... .. . ... ...... A 125
Anne Hall
August 13
The Financial Crisis and U.S. Cross-Border Financial Flows . .. ... .. .. ...... .... .. .. . ... . .... . A 147
Carol C. Bertaut and Laurie Pounder
November 18
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year .............. ... .. . . ... A 169
Robert B. Avery, Neil Bhutta, Kenneth P. Brevoort, Glenn B. Canner, and Christa N. Gibbs
April 2010 (revises 2009 draft release, includes revised data)
LEGAL DEVELOPMENTS
Fourth Quarter, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
BI
March 17
First Quarter, 2009 ......................... . .. . ... . .. .. . . . .. ..... .... . .. . ..... ..... ... . . B64
June 25
Second Quarter, 2009. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B 81
August 19
Third Quarter, 2009 ..... ....... .. ..... ............. .... .. . .... . ........... .. ... .. . . .. .... BIOI
November 6
INDEX .. . . .. .... .. ... .. .... .... .... ....... . ..... ... . . .. ... . . ... ..... . . .. . . .. . .. .........
CI
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
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Starting in 2004, the Bulletin was published quarterly rather than monthly. In 2006, in response to the
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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 2009 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
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The majority of data published in the Statistical Supplement are available elsewhere on the Federal Reserve
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Articles
Al
February 2009
Changes in U.S. Family Finances
from 2004 to 2007: Evidence from the
Survey of Consumer Finances
(Errata paragraph added on March 6, 2009; see p. A56)
Brian K. Bucks, Arthur B. Kennickell, Traci L. Mach,
and Kevin B. Moore, of the Board's Division of
Research and Statistics, prepared this article with
assistance from Gerhard Fries, Daniel J. Grodzicki,
and Richard A. Windle.
The Federal Reserve Board's Survey of Consumer
Finances for 2007 provides insights into changes in
family income and net worth since the 2004 survey. I
The survey shows that, over the 2004-07 period, the
median value of real (inflation-adjusted) family income before taxes was little changed; median income
had grown slightly in the preceding three-year period
(figure 1). Across most demographic groups, the
pattern of change was mixed, but a few changes stand
out: Income increased markedly for Hispanic or
nonwhite families, while it declined substantially for
families living in the Northeast or the Midwest and
for families headed by a person who was retired or
otherwise not working. In contrast to median income,
mean income in the recent period climbed 8.5 percent, and the increases were spread broadly across
demographic groups. The increases were most striking for families in the top 10 percent of the distribution of net worth and for families headed by a single
parent, a person who was self-employed, or a person
who was aged 65 to 74. Over the preceding three
years, mean income had declined broadly. Differences in the rates of change in the median and mean
signal a change in the distribution of income.
Unlike family income over the 2004-07 period ,
both median and mean net worth increased; the
median rose l7.7 percent, and the mean rose 13.0 percent (figure 2). The increases were fairly broadly
spread, but with a number of noteworthy exceptions,
some of which entailed changes in medians and
1.
Cbange in median and mean incomes, 1998-2007 SCF
Percent
--------------------------------• Median
Mean
20
15
\0
5
+
o
I I
I I
1998·2001
200\·04
2004-07
SOURCE: Federal Reserve Board, Survey of Consumer Finances.
means within demographic groups that differed substantially, either in terms of relative magnitude or in
the direction of change. Median and mean net worth
for the lowest 25 percent of the distribution of net
worth plunged 36.8 percent and 43.8 percent, respectively; median net worth for the lowest 20 percent of
the distribution of income fell 1.2 percent, but the
mean rose 31 .8 percent. Percentage increases in
2. Change in median and mean net worth, 1998-2007 SCF
Pert:CD!
--------------------------------• Median
Mean
35
30
25
20
15
\0
I. For a detailed discussion of the 200 I and 2004 surveys as well as
references to earlier surveys, see Brian K. Bucks, Arthur B. Kennickell, and Kevin B. Moore (2006), "Recent Changes in U.S. Family
Finances: Evidence from the 200 I and 2004 Survey of Consumer
Finances," Federal Reserve Bu lie till , vol. 92, pp. A I-A38,
www.federaJreserve.gov/pubslbullelinldefaull.hlm.
5
SOURCE: Federal Reserve Board, Survey of Consumer Finances.
A2
Federal Reserve Bulletin 0 February 2009
median and mean net worth were similar for white
non-Hispanic families, while the increase in the
median for nonwhite or Hispanic families was only
about one-fifth of that for other families, and the
increase in the mean was nearly three times the size
of that for other families. Relative to other regions,
both the Northeast and the Midwest saw sizable
declines in median net worth. The clearest gains in
both median and mean net worth were for high-networth families, high-income families, families headed
by a person aged 65 or older, and families headed by a
person who worked for someone else or who worked
in a technical, sales, or service occupation. In the
preceding three years, median net worth had increased
only slightly (1.0 percent), while the mean had risen
more strongly (6.0 percent); over that time, the data
had shown a more complex pattern of mixed increases
and decreases in wealth .
Unrealized capital gains were a particularly important factor in the increase in net worth over the
2004-07 period . The share of total assets attributable
to unrealized capital gains from real estate, businesses, stocks, or mutual funds rose 5.1 percentage
points, to 35.8 percent in 2007. Although the level of
debt owed by families rose noticeably, debt as a
percentage of assets was little changed. The largest
percentage change in debt was in borrowing for
residential real estate other than a primary residence.
With median and mean debt advancing faster than
income, payments relative to income might be expected to increase substantially. In fact, total payments relative to total income barely increased, and
the median of payments relative to income rose at a
slower pace than it did between 200] and 2004.
Nonetheless, the share of families with high payments
relati ve to their incomes increased notably.
This article reviews these and other changes in the
financial condition of U.S. families between 2004 and
2007. 2 The discussion draws on data from the Federal
Reserve Board's Survey of Consumer Finances (SCF)
for those years; it also uses evidence from earlier
years of the survey to place the 2004-07 changes in a
broader context.
ECONOMIC BACKGROUND
Families' finances are affected by both their own
decisions and the state of the broader economy. Over
the 2004-07 period, real gross domestic product
(GOP) increased, on average, about 2.5 percent per
2. See box "The Data Used in This Article" for a general description of the data. The appendix to this article provides a summary of
key technical aspects of the survey. See also Bucks, Kennickell , and
Moore, " Recent Changes in U.S. Family Finances."
year. However, toward the end of 2007, the pace of
economic activity slowed noticeably. The unemployment rate stood at 5.5 percent in mid-2004, fell to
4.5 percent by late 2006, and then increased to
5.0 percent at the end of 2007. The rate of inflation, as
measured by the consumer price index for all urban
consumers (CPI-U-RS), increased somewhat over the
period, from an annual average of 2.7 percent in 2004
to 2.9 percent in 2007; the increase was driven , in
part, by the escalation of food and energy prices.
Developments in financial markets over the threeyear period were varied. The major stock market
indexes climbed over most of the period before
beginning a decline in late 2007; from September
2004 to September 2007, the Wilshire 5000 index
rose 41.7 percent. Interest rates on new consumer
loans generally increased ; for example, the interest
rate on a new 30-year fixed-rate mortgage averaged
5.75 percent in September 2004, when about one-half
of the interviews for the 2004 survey had been
completed, and was 6.38 percent three years later.
Yields also rose on liquid deposits, time deposits, and
bonds; for example, the rate on a three-month certificate of deposit rose from an average of 1.86 percent
in September 2004 to 5.46 percent in September
2007.
The national purchase-only LoanPerformance
Home Price Index, produced by First American CoreLogic , increased more than 12.4 percent between
September 2004 and September 2007. Price increases
varied sharply across areas of the country. The largest
increase in the index was a 49.9 percent rise for
Hawaii. While most states saw an increase, the index
declined 8.0 percent for Michigan and by smaller
amounts for Ohio, Rhode Island, and Massachusetts.
Homeownership rates were little changed over the
period after a long and steady increase. Nonetheless,
the number of homeowners rose with population
growth, and subprime mortgages are generally thought
to have played an important part in financing home
purchases.
No major tax legislation was passed during the
period , but other important institutional changes
occurred. The Bankruptcy Abuse Prevention and Consumer Protection Act of April 2005 altered the rules
for liquidation of consumers' liabilities under bankruptcy. In particular, the new rules require that consumers with a certain level of income pay back at
least part of their outstanding debts , whereas in the
past the entire amount might have been liquidated.
The law also mandated financial counseling for anyone declaring bankruptcy. Continuing innovation in
financial markets over the period supported further
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A3
The change in real before-tax family income between
2004 and 2007 diverged from the pattern seen in the
preceding three-year period. 3 While median income
declined slightly over the more recent period, the
mean rose 8.5 percent (table 1).4 Over the preceding
three-year period, the median had increased 1.7 percent, and the mean had declined 2.3 percent. The
changes for both periods stand in much stronger
contrast to a pattern of substantial increases in both
the median and the mean dating to the early 1990s.
Underlying the recent change was a shift in the
composition of income between 2004 and 2007
(table 2). The share of family income attributable to
wages and salaries fell 5.2 percentage points over the
period, which approximately balanced a 3.5 percentage point rise in the share of realized capital gains and
a 2.7 percentage point increase in income from
self-employment, a farm, or a business. These shifts
were seen across all wealth groups except the group
between the 75th and 90th percentiles. As may be
seen across the years shown in the table, wage income
tends to be a smaller factor for the highest wealth
group.
Some patterns of income distribution hold generally across the years of SCF data shown in table 1.5
Across age classes, median and mean incomes show a
life-cycle pattern, rising to a peak in the middle age
groups and then declining for groups that are older
and increasingly more likely to be retired. Couples
tend to have higher incomes than single persons, in
part because couples have more potential wage earners. Income also shows a strong positive association
with education; in particular, incomes for families
headed by a person who has a college degree are
substantially higher than for those with any lesser
amount of schooling. Incomes of white non-Hispanic
families are substantially higher than those of other
families. 6 Families headed by a self-employed worker
consistently have the highest median and mean
incomes of all work-status groups. Families headed
by a person in a managerial or professional
3. To measure income. the interviewers request information on the
family's cash income, before taxes, for the full calendar year preceding the survey. The components of income in the SCF are wages;
self-employment and business income; taxable and tax-exempt interest; dividends; realized capital gains; food stamps and other, related
support programs provided by government; pensions and withdrawals
from retirement accounts; Social Security; alimony and other support
payments; and miscellaneous sources of income for all members of the
primary economic unit in the household.
4. Over the 2004--07 period, estimates of inflation-adjusted household income for the previous year from the Current Population Survey
(CPS) of the Census Bureau show an increase in both the median
(1.4 percent) and the mean (2.7 percent). Typically, the SCF shows a
higher level of mean income than does the CPS; for 2007, the SCF
yields an estimate of $84,300, while the CPS yields an estimate of
$68,400. As discussed in more detail in the appendix, the two surveys
differ in their definitions of the units of observation and in other
aspects of their methodologies. Most relevant here is the fact that a
CPS household can contain more people than a corresponding SCF
family. If the SCF measure is expanded to include income of household members nOl included in the SCF definition of a family, the
median rises 2.7 percent (to $49.400) over the three-year period, and
the mean rises 11.0 percent (to $86,900). The substantial difference in
mean levels is likely the result of the truncation of large values in the
CPS data above a certain amount, which is done with the intent of
minimizing the possibility that participants in that survey might be
identifiable.
5. Tabular information from the survey beyond that presented in
this article is available at www.federalreserve.gov/pubs/oss/oss2/2007/
scf2007home.html. This information includes versions of all of the
numbered tables in this article, for all of the surveys from 1989 to 2007
where the underlying information is available. Mean values for the
demographic groups reported in this article are also provided. The
estimates of the means, however, are more likely to be affected by
sampling error than are the estimates of the medians. In addition, some
alternative versions of the tables in this article are given. For those
who wish to make further alternative calculations, this website provides a utility ("tabling wizard") that may be used to compute
estimates of customized tables based on the variables analyzed in this
article, as well as data files that may be used as inputs to more
sophisticated statistical software.
6. See the appendix for a discussion of racial and ethnic identification in the SCF.
proliferation of hedge funds and other sophisticated
instruments for money management.
Several demographic shifts had important consequences for the structure of the population. The aging
of the baby-boom population from 2004 to 2007
drove a 12.5 percent increase in the population aged
55 to 64. Overall population growth was about
2.9 percent, and, according to figures from the U.S.
Census Bureau, 37.3 percent of that growth was due
to net immigration. Also according to Census Bureau
estimates, the number of households increased 2.3 percent-about the same pace as in the 2001-04 periodand the average number of persons per household
rose slightly, from 2.59 people in 2004 to 2.61 in
2007.
Only a small fraction of the 2007 SCF interviews
took place in 2008. Thus, the survey data are largely
unaffected by the declines in economic activity in
2008, the fall in the market price of corporate equities, and the continued slide in house prices. Nonetheless, readers' views of the survey results may be
colored by the knowledge that, in the first three
quarters of 2008, a broad measure of the value of
corporate equities declined more than one-third, and
house prices overall declined approximately an additional 5 percent. At a few places in the article, an
attempt is made to gauge the first-order effects of
these changes on families' finances.
INCOME
A4
I.
Federal Reserve Bulletin 0 February 2009
B efore-t ax family income, percentage
familie', 1998-2007
of
families
that
saved. and di tribulion
or
families, by se lec ted c h aracteris ti cs
of
urveys
Thousands of 2007 dollars except as noted
1998
Family characteristi c
Income
Median
.. ... . . . .......
All families
42.6
(1.0)
I
Mean
I
I
2001
Percentage
of families
that saved
I Percentage
of families
Median
46.7
(.9 )
67.7
(1.4)
55.9
100.0
10.5
25.8
42.6
67.8
100.6
166.3
10.1
25.7
43.3
69. 1
101.3
279.5
32.1
45.5
56. 1
67.9
73.7
82 .0
20.0
20.0
20.0
20.0
10.0
10.0
34.9
53.6
64.5
49.1
31.0
21.3
46.0
76.4
88.9
91.4
59.5
37.2
53.0
57.3
57.8
61.1
56.3
48.6
25.8
29.7
21.0
64.5
61.4
33.6
37.6
33.0
85.6
92.0
19.8
37.2
45.2
70.0
I
Income
I
Mean
I
Percentage
of families
that saved
I
Percentage
of fanHhes
79.5
(2.3)
59.2
100.0
12.0
28.5
46.7
75 .8
115,4
198. 3
11.7
28.2
47 . 1
76.2
114.7
354. 1
300
53.4
6U
72.0
74 .9
84.3
20.0
20.0
20.0
20.0
10.0
10.0
23 .3
23.3
19.2
12.8
11.2
10.2
39. 1
60. 1
63.7
52.9
32.5
26.2
51.7
90.2
109.0
101.7
68.0
43.0
52 .9
62.3
61.7
62.0
61.8
55.5
22.7
22.3
20.6
13.2
10.7
lOA
42.1
48.3
47.8
62.1
62.1
6.8
20.4
14.3
12.3
46.2
28.4
31.5
19.7
66.1
67 . 1
36.1
43.5
37 .9
98.6
106.8
47 .3
52 .5
49.4
63 .3
65 .3
6.0
20.4
13.3
11.8
48.5
27.6
47.1
64.7
109.0
39.5
53.7
56.7
65.6
16.5
31.9
18.5
33.2
19.8
39.7
47.9
79.4
29.4
52.4
64.9
1.l6.4
38 .7
56.7
61.7
70.0
16.0
31.7
18.3
34.0
48.6
29.7
75.4
42.3
60.0
42.3
76.8
23 .2
52.9
30. 1
90.0
47.6
63.1
47.4
75.4
24.6
51.6
67.1
24.5
14.8
68.2
139.2
42.0
27.7
59.8
61.1
48 .7
33.3
59.2
11.3
24.4
5. 1
55 .3
74. 1
24 .6
19.3
78.8
161.8
46.8
42.6
61.6
70.4
50.6
42.3
60.9
11.7
22 .9
4.5
77.5
39.1
47.8
22.6
123. 1
59.7
54.2
39.7
68.4
55.6
55.6
46.1
24.2
21.0
25.3
29.5
83 .2
42. 1
48. 1
24.2
146.4
62.3
72.4
46. 1
58.2
56.6
49.2
27 . 1
23.7
21.8
27.4
45.2
41.9
40.2
46. 1
77.6
62.4
63.0
72.7
53.5
58.3
55.0
56.9
19.3
23.6
35.7
21.3
48.3
51.3
42. 1
47.6
90.9
75.7
71.8
86.6
58. 1
63.0
57.3
59.5
19.0
23.0
36.2
21.8
45.2
35.6
71.9
43.2
56.3
53.6
85.3
14.7
48. 1
35.4
84 .6
47 .9
59.7
563
86.2
13.8
55.7
25.8
84.9
34.0
62.2
43.4
66.2
33 .8
60.9
28.9
99.5
37.7
66.7
43.6
67 .7
32.3
20.3
38 .7
51.6
72.3
112.5
25.9
43. 1
59.6
86.0
226.6
36.3
50.3
61.8
72.0
80.0
25.0
25.0
25.0
15.0
10.0
23 .0
40.9
59.8
81.4
147.9
28.1
46.2
68.9
91.9
299.5
34.5
54.2
68. 2
77.4
84. 1
25.0
25.0
25.0
15.0
10.0
PI!n:entile of income
Less than 20
20-39.9 .
40-59.9 ....
60-79.9 ..
80-89.9 ..
90-100 " , .
.......... .
,
Age of head (years )
Less than 35 ............. . ... .. .
35-44 . . . . . . . . . . . . . . . . . . . . .
.
45-54 .
55-64 ..
. ..... ..... ...
65-74
. .. ....... . ..
75 or more .. . .. .... . .... . . . .. . ... . .
~
Family slruclllre
Single with child(ren)
Single, no child, age less than 55 .
Single, no ch.ild. age 55 or more
Couple with child(ren) .
Couple, no child.
&/ucarioll of head
No high school diploma
High school diploma
........... ... ...
Some college
College degree . . . . . . . . . . , .
Race or er/llliciT), of responde'"
White non-Hispanic
. . . . . . . . . ..
Nonwhite or Hispanic
..
Current work ,wrus of head
Working for someone else
Self·employed . . ... . . . . .... . . .
Retired .
Other not working
Currenr occuparioll of head
Managerial or professional .... . ..... .
Technical, sales. or services
Other occupation
... .. ... . . .
Retired or other not working
Region
Northeast
Midwest
South ...
West ..
...... ... ... .......... ...
...... ........ ..
. .. .... .... ... .. ..... .. ...
573
Url)(micir),
Metropolitan s!atistical area (MSA) .
Non·MSA ..
Hous;nR slatus
Owner .... .
Renter or other ..... .
Pen:enrile of lIer worrh
Less than 25
25-49.9 . . ..
50-74.9 .. ..
75-89.9 .... .. . .
90-100 ..... ...
.. ...... .. ..
....... . , ....
. ..... ... ...
NOTE : For questions on income, respondents were asked to base their answers on the calendar year preceding the interview. For questions on saving,
respondents were asked to base their answers on the 12 months preceding the
interview.
Percentage distributions may not sum to 100 because of rounding. Dollars
have been converted to 2007 values with the current-met.hods consumer price
index for all urban consumers (see box "The Data Used in This Anicle"). See
the appendi, for details on s!'lndard errors (shown in parentheses below the
first row of data for the means and medians here and in table 4) and for defini ·
tions of family and family head.
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
AS
I. Before-tax family income. percentage of familie. that saved, and distribution of families , by elected characteristic, of
familie . J 998-2007 . urvey - COli till lied
Thousands of 2007 dollars except as noted
2007
2004
Family characteristic
Median
All families .
I Percentage I Percentage
f f T
Income
..... .. . - . . . . . . . . . . .
47.5
(.9 )
I
Mean
77.7
(1.3)
I
Income
~hat~~~eJ
of families
Median
56.1
100.0
47.3
(.8)
I
Mean
84.3
Percentage
Percemage
I of families I of families
I that saved
56.5
100.0
( 1.3)
Percelllile '!f ill come
Less thall 20 " . " . " . ... ....... ... ..
20-39.9 . . . . . . . . . . . . . . . . . . . . . ,
40-59.9 . .. . .
.. ' 1' ''''' .. . . . .. . .. .
60-79.9 . .. . , . .. .. . . .... ... . .. ....
80-89.9 . .
..
." ... . .
90-100 . . . . . . . . . . . . . . . . . .... ..... .
t2.2
28.2
47.5
74.9
11 5 .1
203 .0
11.9
28 .6
47 .7
76.0
117.0
331.9
34.0
43.3
54.5
69.3
77.8
80.6
20.0
20.0
20.0
20.0
10.0
10.0
12.3
28.8
47.3
75.1
114.0
206.9
12. 3
28.3
47.3
76.6
116.0
397 .7
33 .7
45 . 1
57.8
66.8
72.9
84 .8
20.0
20.0
20.0
20.0
10.0
10.0
Less than 35 ... ........ . ... . . . . . ..
3~4 ... .. ........ ...
.. . , . . 45-54 .. .. .. ... .. ........
.... . .
... .
55-64 . ... . .. . . . .. . ... ,
65-74 ..
.... . ... .. . .. .. . .
75 or more . ... . ... ,. . . . . . . . " . . .
..
36.1
54.9
67.1
59.8
36.6
26.0
49 .6
81.1
103.6
110.2
65.6
44.9
55.0
58.0
58.5
58.5
57. 1
45.7
22.2
20.6
20.8
15.2
10.5
10.7
37.4
56 .6
64.2
54 .6
39 .0
22.8
51.7
83 .7
112.4
111 .2
92.4
45.7
58.9
56.4
55 .8
58.4
56.7
49.4
21.7
19.6
20.8
16.8
10.5
10.6
Family structure
Single with child(rcn) ... . .... . . . . . ..
Single, no child. age less than 55 . .. . .
Single . no child. age 55 or more ... .
Couple with child(ren) ... .... . ... ..
Couple, no child . . . .. . . . . . . . . . . . . . . .
31.6
30.5
2 3.4
71.1
67 .7
38 . t
40.8
37.4
99.8
107.4
40.7
49.2
46.0
61.6
63.3
7.2
20.0
14.8
12.6
45.4
30.9
30.9
24.6
67.9
66.5
46.0
44.9
36 .3
105.4
116.2
45.8
50.1
48.0
61.8
62.0
6.4
19.3
15.4
12.3
46.5
N0hioh sch oodpo ma .... .
I i I
. ..
",
High school diploma
Some college.. . . .......... . , .. .
College degree
21.3
39.3
45 . 1
80.5
2.
85
49.2
61.6
129.1
15.9
54.0
51.0
68.3
14.4
30.6
18.4
36.6
22.2
36.7
45 .6
78 .2
11.1
51.1
68 . 1
141.8
41 .6
51.1
53.6
68.6
13.5
32.9
18.4
35.3
Rac~ or et/lllicily of respondelll
White non-Hispanic ...... .
Nonwhite or Hispanic
54.3
32.7
88.6
49.4
60.1
45 .6
72.2
27.8
51.8
36.8
96.9
53.7
58.8
50.8
70.7
29.3
Current work .\"tatu.f of head
Working for someone else
Self-employed . . .. .. . . . . . .
Retired .
. .. .
Other not working ...
54.1
73 .3
26.8
22.6
77.0
155.5
47.5
41.0
59.2
68.7
44.0
44.9
60.1
11.8
23.7
4.4
56.6
75.7
24.7
20.4
83 . 1
191.8
51.1
35.4
60.3
62.8
46.6
45.4
59.9
10.5
25.0
4.6
84 .8
41.1
49.6
26 .2
140.9
58.3
55 .6
46.5
67.7
55.4
57.3
44 . 1
28.3
22. 1
21.6
28. 1
85.4
44 .2
49.4
23 .8
156. 1
67.6
57.9
48.7
70.2
55.6
53.6
46.4
27.5
21.8
21.1
29.6
55 .9
49.6
40.6
50.7
96. 1
74 . 1
68 .0
81.9
59 .5
59.9
52.5
55.2
IS.8
22.9
36.3
22.0
51.4
44 .2
42.9
51.9
100.4
74 .9
79.3
88.7
53.5
58.2
56.9
56.3
18.3
22.8
36.7
22. 1
50.8
32.8
84.5
45 .0
56.9
52.3
82.9
17. 1
50.4
36.0
91.3
50.2
57.0
54.0
82.9
17.1
60.6
27.1
96.0
37.0
62.3
42.3
69.1
30.9
61.7
27 .8
105.6
37.5
60.9
46.7
68.6
31.4
22.6
40.6
57.5
84.6
157.9
27.5
46.4
66.5
96.5
281.4
34.8
53 .6
62.2
72.4
76.0
25.0
25.0
25.0
15.0
10.0
23 .6
41.0
56.7
82 .3
158.4
29.2
46.5
66.6
92.9
347.5
40.4
52.9
59.0
69.0
80.2
25.0
25 .0
25.0
15.0
10.0
.
... .. .
A~e
..
.
".
..
of head Iyear.,)
.. .. .
..
... .... ..
... ... ..
Edllcation of head
...:1
'
Currenr oCCllp(J/ion of head
Managerial or prolessional
Technical. sales. or services .
Other occupalion . . . ... . .. .
Retired or other not working
Region
Northeast . .
Midwest
South ......
West .
Urbanicif'l'
Metropolitan statistical area (MSA) .
Non-MSA.
HousinR xtwus
Owner ............ .
Renter or other
Percentile of "el worth
Less than 25
25-49.9
50-74.9 ..
75-89.9
90-100
A6
Federal Reserve Bulletin D February 2009
The Data Used in This Article
Data from the Survey of Consumer Finances (SCF) are
the basis of the analysis presented in this article. The SCF
is a triennial interview survey of U.S. families sponsored
by the Board of Governors of the Federal Reserve System
with the cooperation of the U.S. Department of the
Treasury. Since 1992, data for the SCF have been collected by NORC, a research organization at the University of Chicago, roughly between May and December of
each survey year.
The majority of statistics included in this article are
related to characteristics of "families." As used here, this
term is more comparable with the U.S. Census Bureau
definition of "households" than with its use of "families," which excludes the possibility of one-person families. The appendix provides full definitions of " family"
for the SCF and the associated family "head." The survey
collects information on families ' total income before
taxes for the calendar year preceding the survey. But the
bulk of the data cover the status of families as of the time
of the interview, including detailed information on their
balance sheets and use of financial services as well as on
their pensions, labor force participation, and demographic
characteristics. Except in a small number of instances
(see the appendix and the text for details), the survey
questionnaire has changed in only minor ways relevant to
this article since 1989, and every effort has been made to
ensure the maximum degree of comparability of the data
over time.
The need to measure financial characteristics imposes
special requirements on the sample design for the survey.
The SCF is expected to provide reliable information both
on attributes that are broadly distributed in the population
(such as homeowners hip) and on those that are highly
concentrated in a relatively small part of the population
(such as closely held businesses). To address this requirement, the SCF employs a sample design, essentially
unchanged since 1989, consisting of two parts: a standard, geographically based random sample and a special
oversample of relatively wealthy families. Weights are
used to combine information from the two samples to
make estimates for the full population. In the 2007
survey, 4,422 families were interviewed. and in the 2004
survey, 4,522 were interviewed.
This article draws principally upon the final data from
the 2007 and 2004 surveys. To provide a larger context,
some information is also included from the final versions
of earlier surveys. I Differences between estimates from
earlier surveys as reported here and as reported in earlier
Federal Resen'e Bulletin articles are attributable to additional statistical processing, correction of minor data
errors, revisions to the survey weights, conceptual changes
in the definitions of valiables used in the articles, and
adjustments for inflation. In this article, all dollar amounts
from the SCF are adjusted to 2007 dollars using the
"current methods" version of the consumer price index for
all urban consumers (CPl-U-RS) . The appendix provides
additional detail on the adjustments.
Tile principal detailed tables describing asset and debt
holdings focus on the percentage of various groups that
have such items and the median holding for those that
have them .2 This conditional median is chosen to give a
sense of the " typical" holding. Generally, when one deals
with data that exhibit very large values for a relatively
small part of the population-as is the case for many of the
items considered in this article--estimates of the median
are often statistically less sensitive to such outliers than are
estimates of the mean.
One liability of using the median as a descriptive device
is that medians are not additive; that is, the sum of the
medians of two items for the same population is not
generally equal to the median of the sum (for example,
median assets less median liabilities does not equal median
net worth). In contrast. means for a common population are
additive. Where a comparable median and mean are given,
the gain of the mean relative to the median may usually be
taken as indicative of relatively greater change at the top of
the distribution: for example, when the mean increases
more rapidly than the median , it is typically taken to
indicate that the values in the top of the distribution rose
more rapidly than those in the lower part of the distribution .
To provide a measure of the significance of the developments discussed in this article, standard errors due to
sampling and imputation for missing data are given for
selected estimates. Space limits prevent the inclusion of the
standard errors for all estimates. Although we do not
directly address the statistical significance of the results, the
article highlights findings that are significant or are interesting in a broader context.
1. Additional information about the survey is available at
www.federalreserve.gov/pubsiossloss2nOO7/scf2007home.html .
2. The median of a distribution is defined as the value at which equal pans
of Ule population considered have values larger or smaller.
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A7
2. Amount of before-lax family income, dLtrihuted hy income source , by percenlile of net worth . 2004 and 2007urvey '
Percent
hlCome source
Percentile of net worth
Less than 25
I
25-49.9
I
50--74.9
I
75-89.9
I
90--100
J
I
All families
2004 SlITYey of Consumer Finall ces
Wages.
. . _.
Interest or dividends .. . . . . . . . . ... ..... . . •
Business, farm, self·employment .
CapilaJ gains
Social Security or retirement .
Transfers or othe r
Total .......... .. .. .
82. 1
85.4
.3
2.7
79.3
.7
5.0
72.4
t
t
96
7.2
100
9.2
2.5
100
13.2
1.7
100
1.8
85
1.2
15.4
.7
100
79.9
79.9
.3
5.3
.4
10.9
3.2
100
77.8
.7
6.9
1.3
11.8
1.6
100
72.4
1.9
7.9
2.9
14.1
.8
100
T
1.1
53.0
8.2
21.5
8.3
8.2
.8
100
69.7
3.5
10.9
3.2
10.9
1.8
100
46.2
7.8
24.7
14.4
6.2
64.5
2007 Survey ,,{ Consumer Finances
Wages _.. _. . . _.. _.... __ .. .
Interest or dividends .. . .. .
Business. farm. self·employment .
Capital gains
. ....
Social Security or retirement . . ...... .. . .
Transfers or other ...
Total . .
.1
1.8
.1
9.5
8.6
100
.7
100
U
13.6
6.7
9.6
1.9
100
t Less than 0.05 percent.
occupation have higher incomes than families in the
three remaining occupation categories. Income is also
higher for homeowners than for other families, and it
is progressively higher for groups with greater net
worth.? Across the four regions of the country as
defined by the Census Bureau, the ordering of median
incomes over time has varied, but the means generally show higher values for the Northeast and the
West than for the Midwest and the South. Finally,
families living in metropolitan statistical areas
(MSAs), which are relatively urban areas, have higher
median and mean incomes than those living in rural
areas. s
In come by Demographic Category
Across the income distribution between 2004 and
2007, only the second quintile and the top decile
experienced substantial percentage changes in median
income; the medians for both groups rose approximately 2 percent, though the dollar amount of the
increase for the second quintile was only about $600. 9
For other groups, changes in the median varied in
direction, and in all instances they were less than
1 percent in absolute value. Similarly, the direction of
changes in mean income was mixed, and the only
substantial increase in dollar terms occurred for the
top decile of the income distribution; the mean for
that group rose almost 20 percent, more than twice
the rate of change in the overall mean. Median
7. In this article, a family is treated as a homeowner if at least one
person in the family owns at least some part of the family's primary
residence.
8. For the Office of Management and Budget's definition of MSAs,
see www.whitehouse.gov/omblbulletins/fy2008Ib08·01.pdf.
9. Selected percentiles of the income distribution for the past four
surveys are provided in the appendix. along with definitions of
selected subgroups of the distribution .
income measured in the survey had been relatively
flat for all income groups since 2001 after an earlier
period of growth before 1998. Over this longer
period, the rise in the mean was greatest for the top
decile of the income distribution despite a dip for this
group between 200 I and 2004. For the rest of the
distribution, the increase of the mean more closely
resembled that of the median.
Substantial proportional gains or losses in median
income occurred across all age groups in the recent
three-year period. The median declined for the age
groups between 45 and 64 and for the 75-or-more age
group, while it rose for the rest. For the 75-or-more
age group, the decline was 12.3 percent. Since 1998,
the age groups between 55 and 74 experienced the
largest proportional rises in the median. In contrast to
the recent changes in the median, the mean rose for
all groups but especially for the 45-to-54 age group
(8.5 percent) and the 65-to-74 age group (40.9 percent); these groups had experienced a decline in the
mean between 2001 and 2004.
By family structure, median incomes declined over
the 2004-07 period for all groups except childless
single families (those headed by a person who was
neither married nor living with a partner); median
income rose the most (5.1 percent) for childless
families headed by a person aged 55 or older. The
largest decline (4.5 percent) was for couples (families
in which the family head was either married or living
with a partner) with children. In contrast, mean
income rose for all types of families except childless
single families headed by a person aged 55 or older,
for whom it fell 2.9 percent. Mean income rose the
most (20.7 percent) for single families with children.
Across education groups, median incomes rose
only for families headed by a person with less than a
high school diploma and for families headed by a
A8
Federal Reserve Bulletin 0 February 2009
person with only some college education (who attended college but did not receive a degree); the
increase of median income was relatively strong for
the former group-4.2 percent-but that group still
had the lowest median income of all education
groups. Mean incomes rose substantially for all education groups after declines in the preceding threeyear period. The increases were particularly pronounced for the groups with families headed by a
person with only some college education (10.6 percent) or by a person with a college degree (11.4 percent).
In the 2004-07 period, the median income for
white non-Hispanic families fell 4.6 percent, and the
mean rose 9.4 percent. In contrast, the median for
nonwhite or Hispanic families rose 12.5 percent, and
the mean rose 8.7 percent. However, both the median
and the mean values for nonwhites or Hispanics were
substantially lower than the corresponding figures for
non-Hispanic whites. Since 1998, the total gain in
median income for nonwhite or Hispanic families
was 23.9 percent, whereas it was 6.6 percent for other
families; the gain in the mean over this period was
larger and more similar for the two groups-27.0
percent for nonwhite or Hispanic families and 28.5 percent for other families. to
Median income rose from 2004 to 2007 for families headed by a person who was working for someone else (a rise of 4.6 percent) or was self-employed
(a rise of 3.3 percent) ; the median fell for the retired
group (7.8 percent) and the other-not-working group
(9.7 percent).' J In contrast, the mean over this period
rose for all groups except the other-not-working
group, for which it fell 13.7 percent. Of the increases
in the mean, the largest proportional change was the
23.3 percent rise for the self-employed group-the
group with the highest levels of median and mean
income by far. Over the previous three years, median
10. As noted in the appendix , the questions underlying the definition of race or ethnicity chan ged in earlier surveys. When restrictions
are placed on the definition of the variable for racial and ethnic
classification used in the tables in the article to make the series more
comparable over time , the estimates change only slightly.
11. To be included in the retired gro up, the family head must repon
being retired and not currently working at any job or repon being out
of the labor force and over the age of 65. The other-not-working group
comprises family heads who are unemployed and those who are out of
the labor force but are neither retired nor over age 65; the composition
o f this group shifted from 2004 to 2007 to include fewer families with
a head who had a college degree, thereby reversing a change seen
between 2001 and 2004. In 2007. 66.9 percent of the other-notworking group was unemployed. and the remainder was out of the
labor force; in 2004, 62.2 percent of the group was unemployed (data
not shown in the tables).
incomes had risen only for the retired and other-notworking groups, and the mean had risen only for the
retired group.
Across occupation groups, median income rose
moderately for families headed by a person working
in a technical, sales, or service job (an increase of
7.5 percent), and it fell strongly for families headed
by a person who was not working (a decline of
9.2 percent). For the other-occupation group, a group
that predominantly comprises workers in traditional
blue-collar occupations, the median was barely
changed. In contrast, mean income rose for all groups ,
particularly for families headed by a person in a
managerial or professional position (an increase of
10.8 percent) and for those headed by a person ina
technical , sales, or service position (an increase of
16.0 percent), the groups with the highest mean
incomes in 2007. Since 1998, the only substantial
changes in the median were the increases for the
managerial or professional group and for the technical, sales, or service group. The means for the groups
showed a general pattern of increase over the period
since 1998.
By region , median family incomes in the Northea st
and the West converged from different directions to
about the same value in 2007 , and the medians in the
Midwest and the South similarly converged. The
median increased between 2004 and 2007 for families
living in the South and the West, and it fell for others.
The 8.1 percent decline for families in the Northeast
offset only about one-half of a steep increase between
2001 and 2004_ The rise for the West continued the
only uninterrupted trend in the median across regions
for the period shown . Declines in the median income
in the Midwest since 2001 erased most of the substantial gains between 1998 and 200 I. In 2007, mean
income was highest in the Northeast, followed by the
West. In 2001 , the two had been closer, but growth
Aattened out for the West, while it continued for the
Northeast. The mean incomes in the Midwest and the
South have been comparable with one another since
1998, though the mean for the South increased
strongly over the recent period while the mean for the
Midwest feJl back slightly since 2001.
In the recent three-year period, families in MSAs
saw a 0.8 percent decline in median income, while
those living in other areas saw a rise of 9.8 percent.
Mean income has shown a general rise for both
groups since 1998.
By housing status, median and mean incomes rose
both for homeowners and for other families from
2004 to 2007. All the increases were modest except
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
the 10.0 percent increase in the mean for homeowners. As noted later in this article, homeownership
declined slightly in the recent three-year period after
rising for a number of years. Thus, changes in the
composition of the group are likely to be smaller than
in earlier years. Nonetheless, such changes were
sufficient to cause the change in the median for both
groups to be positive at the same time that the change
in the overall median was negative.
By percentile of net worth, median income rose
more than 1 percent over the recent three-year period
only for the lowest quartile, for which the median
increased 4.4 percent; the median declined somewhat
for the third quartile and for the group between the
75th and 90th percentiles. 12 The mean increased over
the period for the lowest quartile (an increase of
6.2 percent), but it rose much more strongly (23.5 percent) for the top decile. Over the earlier years shown
in the table, the most dramatic cumulative gains in the
median were clearly for the top two groups. The mean
rose at least somewhat for all groups, but the change
was largest by far for the wealthiest 10 percent.
Income Variability
For a given family, income at a particular time may
not be indicative of its "usual" income. Unemployment, a bonus, a capital loss or gain, or other factors
may cause income to deviate temporarily from the
usual amount. Although the SCF is a cross-sectional
survey, it does provide some information on income
variability. In 2007, 23.7 percent of families reported
that their income for the preceding year was unusual9.2 percent reported it was unusually high, and
14.5 percent reported it was unusually low (data not
shown in the tables). For those reporting unusual
income, the median deviation of actual income from
the usual amount was negative 17.3 percent of the
normal level. A larger fraction of families in 2004
reported that their income was unusual-8.7 percent
reported it was unusually high, and 19.8 percent
reported it was unusually low.
Although a family's income may vary, such variability may be a well-recognized part of its financial
planning. In 2007, 31.4 percent of families reported
that they did not have a good idea of what their
income would be for the next year, and 27.2 percent
reported that they do not even usually have a good
idea of their next year's income. The figures for 2004
were similar.
12. Selected percentiles of the distribution of net worth for the past
four surveys are provided in the appendix.
A9
Saving
Because saving out of current income is an important
determinant offamily net worth, the SCF asks respondents whether, over the preceding year, the family's
spending was less than, more than, or about equal to
its income. Though only qualitative, the answers are a
useful indicator of whether families are saving. Asking instead for a specific dollar amount would require
much more time from respondents and would likely
lower the rate of response to the survey.
Overall, from 2004 to 2007, the proportion of
families that reported that they had saved in the
preceding year was about unchanged at 56.5 percent,
a bit higher than the level in 1998 but still lower than
the 2001 level. The general pattern of changes across
demographic groups in the recent three-year period is
one of small shifts. The previous survey had shown a
broad pattern of declines.
Estimates of the personal saving rate from the
national income and product accounts (NIPA) show
an annual saving rate of less than 1 percent over the
2004-07 period. However, the SCF and NIPA concepts of saving differ in some important ways. First,
the underlying SCF question asks only whether the
family's spending has been less than, more than, or
about the same as its income over the past year. Thus,
families may be saving, but those that are doing so
may be saving a relatively small amount; those that
are spending more than their incomes may be spending a relatively large amount. Second, the NIPA
measure of saving relies on definitions of income and
consumption that may not be the same as those that
respondents had in mind when answering the survey
questions. For example, the NIPA measure of personal income includes payments employers make to
their employees' defi ned-benefit pension plans but
not the payments made from such plans to families,
whereas the SCF measure includes only the latter.
The SCF measure also includes realized capital gains,
whereas the NIPA measure excludes capital gains of
all forms, realized and unrealized.
A separate question in the survey asks about families' more typical saving habits. In 2007, 6.0 percent
of families reported that their spending usually exceeds their income; 16.1 percent reported that the two
are usually about the same; 35.7 percent reported that
they typically save income "left over" at the end of
the year, income of one family member, or unusual
additional income; and 42.2 percent reported that they
save regularly (data not shown in the tables). The fact
that these figures are not much changed over the last
three surveys suggests that variations in economic
A to
Federal Reserve Bulletin D February 2009
3. Reasons respondents gave as most important for their
families' saving. t1Llributed by lype of reason. 19982007 surveys
Family characteristic
Percent
Type of reason
Education .
For the family .
Buying own home . . . .
Purchases
Retirement ....
Liquidity
3.1.
1998
.. . .. ..
Investments
No particular reason .....
When asked for a reason.
reponed do not sa ve .
Total
2007
11.0
4. 1
4.4
9.7
33.0
29.8
2.0
10.9
5.1
4.2
9.5
32. 1
31.2
1.0
1.3
4.9
100
8.4
5.5
4.2
10.0
33.9
32.0
1.6
1.1
11.6
4.7
5.0
7.7
34.7
30.0
1.5
.7
4.9
100
4.0
100
3.3
100
1.1
NOH: See note to table I and text note 13.
conditions over this period have had little effect on
the longer-run saving plans of families.
The SCF also collects information on families'
most important motivations for saving (table 3). J} In
2007, the most frequently reported motive was retirement related (33 .9 percent of families), and the next
most frequently reported was liquidity related
(32.0 percent of families), a response that is generally
taken to be indicative of saving for precautionary
reasons. t4 At least since 1998, these have been the
dominant reported reasons, but saving for retirement
has increased in importance. The education-related
motive also appears to be important but less so in the
latest survey; in 2007 , 8.4 percent offamilies reported
it as their primary motive, down 3.2 percentage points
from 2004. The importance of saving for purchases
rose 2.3 percentage points in 2007 after falling since
before the 1998 survey in its prevalence as a reported
motive for saving.
The survey asks families to estimate the amount of
savings they need for emergencies and other unexpected contingencjes, a measure of desired savings
for precautjonary purposes.J 5 The desired amount
increases with income, but the amount is a lower
percentage of usual jncome for higher levels of such
income than for lower levels (table 3.1).
NET WORTH
From 2004 to 2007, inflation-adjusted net worth
(wealth)-the difference between families' gross as13. Although families were asked to report their motives for saving
regardless of whether they were currently saving. some familie s
reported only that they do not save. The analYSis here is confined to the
first reason reported by families .
14. Liquidity-related reasons include "emergencies," the possibilities of unemployment and illness. and the need for ready money.
15 . For an extended analys is of precautionary savi ng as measured
in the SCF. see Arthur B. Kennickell and Annamaria Lusardi (2004).
"Disentangling the Importance of the Precautionary Saving Motive."
NBER Working Paper Series 10888 (Cambridge. Mass.: National
Bureau of Economic Researc h. November) .
----
All families
Median of desired
precautionary saving
(2007 dollars)
Median of ratio
of desired amount
to usual income
(percent)
5,000
9.2
2,000
3,000
5.000
5,000
10,000
20.000
14.0
9.7
9.4
7.6
8. 1
88
Pt:!n;enfile of usual income
0-19 .9
20-39.9
40-59.9
60-79.9 .
80-89.9 .
90-100 ..
.. .. ........ .
sets and their liabilities-rose strongly, both in terms
of the median and the mean (table 4). The median
rose 17.7 percent, and the mean rose 13.0 percent; the
corresponding values for the period from 2001 to
2(){)4 were 1.0 percent and 6.0 percent. Both the
median and the mean have risen consistently over the
period since 1998, but overall the mean has gained
more-54.7 percent, compared with a 31.8 percent
increase in the median.
Movements in the dollar value of families' net
worth are, by definition, a result of changes in
investment, valuation, and patterns of ownership of
financial assets (tables 5, 6, and 7) and nonfinancial
assets (tables 8, 9, and to), as well as decisions about
acquiring or paying down debt (tables II through 18).
A variety of financial decisions underlie these changes.
The box "Shopping for Financial Services" provides
a discussion of the intensity of families' decisionmaking efforts and their sources of financial information.
After the end of 2007, house prices continued to
decline, and equity prices fell sharply. Although the
survey cannot provide direct results about the overall
effects of these and other such changes, it can provide
some indication of the implications for families'
finances. For this purpose, the value of assets invested
directly or indirectly in publicly traded equity, the
value of privately held businesses, and the net value
of nonresidential real estate are assumed to have
fallen at the overall rate of the Wilshire 5000 index
from the time of the interview until October 2008. In
addition, the value of residential properties-both
primary residences and other residential real estateare assumed to have fallen in line with LoanPerformance Home Price Indexes from the time of the
interview until October 2008. 16 Changes are assumed
to have affected all holders proportionately, and families are assumed to have made no changes in their
holdings of these assets or any other assets or liabili16. Values of primary residences are adjusted by the state-level
index. For other residential real estate, the geographic location is not
reported in the SCF; thus, the national-level inde x is used to adjust
values of these properties. The LoanPerformance Home Price Indexes
are not seasonally adjusted.
Changes in U.S. FamiLy Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
4 . Family ne l wonh. by elected
hanlclerislics
or families.
A II
1998--2007 surveys
Thousands of 2007 dollars
I
1998
Fami ly cbaracteristic
Median
91.3
(3.5)
All ramilies
I
Mean
359.7
(11.7)
I
I
2001
Median
101.2
(3.6)
I
Mean
464.4
(7.9)
I
2004
Median
102.2
(4.7)
I
Mean
492.3
(10.6)
I
I
2007
Median
120.3
(5.6)
I
Mean
556.3
(9.2)
Pen;enlile of income
Less than 20
......... . ..
20-39.9 .
40-59.9 . .
60-79.9 .
80-89.9 . .
... ..... ...... .
90-100
7.4
42.2
68.0
143.0
240.0
575 .9
60.8
122.4
161.0
261.7
414 .1
1.970. 1
9.2
43.8
74.5
167.5
307.8
975.0
61.8
134.8
190.3
344.0
534.8
2.647.5
8.2
37 . 1
79.0
175 .7
344. 1
1,015 .0
79.8
133.4
213 .7
374.3
535 .3
2,783.7
8.1
37.9
88.1
204.9
356.2
1.119.0
105.2
134.9
209.9
375 . 1
606 .3
3,306.0
Age of IIeati (years)
Less than 35
35-44 .
45-54 . . . . . . . . . . . . . . . . . .
55-{i4 .
65-74.
75 or more .
11.6
80.8
134.5
162.8
186.5
159.9
81.3
249.9
461.5
677 .6
594.2
395.7
13.7
90.7
155.4
216.8
207.9
181.6
106.1
303.7
568.4
856.0
793.5
548 .6
15.6
76.2
158.9
273.1
208.8
179.1
80.7
328.6
596. 1
926.7
758.8
580.0
11.8
86.6
182.5
253.7
239.4
213.5
106.0
325 .6
661.2
935 .8
1,015 .2
638 .2
36.0
15.5
104.3
119.6
143.9
132.9
120.3
.~04.9
410.5
502.0
27.4
17.5
105.7
131.2
172.8
135.0
153. 1
336.9
504 .9
660.9
36.0
19.3
126.3
134.2
186.9
159.8
152.7
390.9
496.0
727.0
41.0
18.0
140.8
141.1
191.0
232.2
181.3
382.7
594.5
804.5
Etlucati01/ of IIeati
No high school diploma " ..•. , .. ,
High school diploma
., ... ..... .
Some college ... . .. .... . ,
College degree .. . . .. . ...
26.9
68.8
94.0
186.4
100.4
200.9
302 .6
672.4
29.8
67 .9
85.1
249.5
121.7
211.9
335.7
931.2
22.6
75.5
76.1
248.4
149.9
216.2
338.9
935.0
33.2
80.3
84.7
280.8
142.9
251.6
365.9
1.097.8
Race or elhnicil), of respondent
White non-Hispanic .. .. ,
Nonwhite or Hispanic
121.9
21.2
429.5
128.0
143 .0
21.0
571.2
137.4
154.5
27 .2
617.0
168.2
170.4
27.8
692.2
228 .5
Cllrrelll work S/atus (411ead
Working for someone else
Self.employed .. .. .
Retired ..... .. .. ...........
Other not working ....... . .
67.2
316.3
143.9
4.5
213 .9
1, 176.5
391.6
94.2
76.1
412.0
135.2
10.4
263.9
1.474 .7
531.1
211.1
73.8
368.6
153.6
13.0
294.9
1,563. 1
515. 1
178.2
93.2
388.7
161.3
5.7
350. 1
1.%1.3
543. 1
/24. 1
ClIrrenl occlIpation of head
Managerial or professional .
Technical. sales, or services . .
Other occupation .... . ..... .
Retired or other not working . '
168.5
51.9
63.7
104.3
688.2
245 .7
161.0
341.6
231.1
54 .7
561
112.9
898.3
233.4
159.2
478.5
216.2
49.4
62.0
122. 1
947.2
270.2
162.0
462.8
245.8
73.5
64.3
128.8
1,116.4
310.4
191.7
477.6
120.1
102.3
78.0
78.0
385.7
316.8
340.0
416.3
109.1
124.4
86.3
102.6
530.6
399.0
440.0
516.6
177.6
126.3
70. 1
104. 1
625 .0
479.0
3822
575 .1
159.4
107.5
%.0
156.2
652.7
467.5
499.3
662.7
92.3
87 .9
389.8
184.3
102.7
93.6
500.6
238.7
114.5
65. 1
554 . 1
193.2
132.4
77.2
621.2
241.4
168.2
5.4
514 .7
55.3
201.8
5.6
655.5
64.4
202.6
4.4
686.3
59.4
234.2
5. 1
778.2
70.6
.6
41.6
153.4
392.8
1.141.2
-2.4
45 .7
163.7
409.3
2.464.6
47.8
184.7
503.8
1.524.7
51.8
195.4
527.9
3,233.2
1.9
47.9
187.4
556.6
1,570.6
-1.6
51.7
203.6
578 .5
3,420J
1.2
54.2
219.8
571.4
1,890.7
-2.3
57 .9
227.0
586.1
3.975.7
.
.
'
......... .
Family structure
Single with child(ren) . .... .
Singk, no child, age less than 55 .
Single. no clUld, age 55 or more
Couple with child(ren) .
Couple. no child
...
Region
Northeast
Midwest ......... ...... ..
SOU~I
West
....... ..... ... ..... ... .. ...
. .. .. ..... ...
" ...
Urba1/icirl'
Metropol;'tan statisti cal area (MSA) .
Non-MSA .. ..... ........
HOllsillg sWills
Owner . .
Renter or other .....
Perrentile of net W0I1h
Less than 25
25-49.9
50-74.9
75-89.9 .
90-100
.... ... .. ......
NOTE: See note to table I .
t Less than 0.05 ($50).
1.3
A 12
Federal Reserve Bulletin 0 February 2009
Shopping for Financial Services
As a normal part of their financial lives, families must
make a variety of decisions to select particular investments for any savings they may have, as well as to select
the forms and terms of credit they may use. To the extent
that families devote more or less attention to such activities or that they are better or worse informed. the wealth
of otherwise comparable families may differ substantially
over time.
The Survey of Consumer Finances (SCF) contains a
self-assessment of families' intensity of shopping for
borrowing or investing services. In 2007, about 55 percent of families reported that they undertake a moderate
amount of shopping for either of these types of financial
services (table A).I Only about one-fourth of families
intended to elicit a description of behavior in general, the
behavior reported could still be more reflective of the
short-term needs for such services and consequently the
immediate need for shopping. When broken out by
categories of net worth, the patterns are very similar for
aLl families for loan shopping (data not shown in the
tables). For investment shopping, the data show a more
pronounced gradient toward more intensive shopping by
families with higher levels of wealth.
More families turn to friends, family members, or
associates for financial information than to any other
source of information on bOll'owing or investing (table
B). This result suggests that there may be important
feedback elfects in financial outcomes; that is, families
A. Intensity of shopping for bon'owing or investing,
2007
B. Information used for decisions about borrowing or
investing, 2007
Percent
Percent
Type of service
Intensity of shopping
Borrowing
I
Investing
Type of service
Source
Almost none ..
Moderate amount
A great deal
20.6
54.8
24.6
Borrowing
25.4
I
Investing
54 .6
20. 1
33.4
Calling around
18.0
19.7
35.9
17.5
Magazines. nt:wspapers. and
reported shopping a great deal for loan terms, and only
about one-fifth reported shopping a great deal for the best
terms on investments. Even though the survey question is
I . The underlying queslion allows the survey respondent to shade the
intermediate re sponse toward a greater or lesser amount of shopping.
About one-third of the respondents choose to do so, and of Ihose ,
somewhat more than one-half shaded tlleir response toward a grealer
degree of shopping.
ties. Taken together, these assumptions imply large
drops in median and mean net worth since the 2007
survey-17.8 percent and 22.7 percent, respectively.
Relative to the values in the 2004 SCF, adjusted
median net worth is 3.2 percent lower, and the
adjusted mean is 12.7 percent loweLt?
By age group, median and mean net worth show a
"hump" pattern that generally peaks in the 55-to-64
17. Most of the projected decline in the median is a result of the
adjustments to primary residences and publicly traded equity ; if only
the values of primary residences and of directly or indirectly held
equity are adjusted, median net worth as of October 2008 declines
I S.O percent relative to the level observed in the 2007 survey. In
contrast , the corresponding mean of the data under the more limited
adjustment is only 12.0 percent lower than the unadjusted value. or
just more than one-half of the decline implied by the broader set of
adjustments; this result reflects the fact that the value of businesses and
real estare other than primary residences is relatively concentrated
among wealthier families.
olher media , .
Malerial in Ihe mail
[nternel ,.,.
Friends. relatives. associ ales
Bankers. brokers. and olher
sellers of financial services
Lawyers. accoumant s. and other
financial advisors
...
Does nO! borro w or i nveSI
21.5
28 .3
38.4
46.0
42.3
38.6
38.3
19.5
29.3
9.9
9.5
NOTE: Fi gures sum 10 more than 100 because of reponing of multiple
sources.
age group. This pattern reflects both life-cycle saving
behavior and a historical pattern of long-run growth
in inflation-adjusted wages. The median and mean
values of wealth rise in tandem with income , a
relationship reflecting both income earned from assets
and a higher likelihood of saving among higherincome families. Wealth shows strong differentials
across groups defined in terms of family structure,
education, racial or ethnic background , work status,
occupation, housing status, and the urbanicity and
region of residence; these differentials generally mirror those for income, but the wealth differences are
larger.
Net Worth by Demographic CategolY
Analysis by demographic group for the 2004-07
period shows a pattern of gains of varying sizes in
Changes in US Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
who know relatively well-informed people may obtain
better services, Sellers of financial services-bankers,
brokers, and so on-are the second most frequently cited
source of information for borrowing or investing, The
Internet was reported by 38,4 percent of families as a
source for information on borrowing and by 28.3 percent
for information on investing. Although the Internet, in
principle, makes an enormous amount of information
available to a family, interpretation of the information
may still be an important consideration. However, the
proliferation of financial planning tools may mitigate this
concern. When viewed across categories of net worth, the
data show similar patterns of use of sources of information by all groups (data not shown in the tables).
In addition to serving as a source of information, the
Internet can also be a medium for obtaining financial
services. In 2007,49,4 percent of families reported using
the Internet to access at least some type of service at one
of the financial institutions they used (data not shown in
the tables). If accessing information and using services
are combined, the Internet played a part in the financial
life of 59.7 percent of all families (table C). This figure is
up sharply from 46.5 percent in 2004 and 32.5 percent in
200 I. The proportion of such users rises strongly over net
worth groups: Among the least wealthy 25 percent of
families, 50.3 percent made such use of the Internet,
whereas the figure was 75.6 percent for the wealthiest
10 percent (data not shown in the tables). More striking is
the variation over age groups. Among families headed by
a person younger than 35, 71.9 percent reported using the
median and mean net worth for most groups. But a
small number of groups experienced losses, and some
had noticeably different shifts in their median and
mean net worth.
Median net worth rose for all percentile groups of
the distribution of net worth except for families in the
lowest quartile. In that group, the median fell from
$1,900 to $1,200; the mean fell from negative $1,600
in 2004 to negative $2,300 in 2007. For the rest of the
distribution of net worth, the median and mean over
the recent three-year period rose substantially for all
other groups except the 75th-to-90th percentile group,
which had seen relatively large gains over the preceding three years. Gains for the top wealth group were
unbroken back to at least 1998.
Over the recent period, median net worth increased
for aU income groups above the 20th percentile and
especially for families in the fourth quintile, for
AI3
C. Use of the Internet for financial information or
financial services, by age of head, 2007
Percent
Family characteristic
Percentages of families
All families.
59.7
Age of head (ymrs)
Less than 35
35-44 .
45-54 .
55--M ...... . . . . . . . . .
65-74 .
.,' .
75 or more
71.9
70.8
69.1
59.1
40.3
16.5
MEMO
All families. 2004
All families. 2001 • . .
46.5
32.5
Internet for financial information or services. whereas the
figure for families with a head aged 75 or older was only
16.5 percent. If the relatively greater expression of such
behavior by younger families persists as they age. and if
succeeding cohorts follow their example. Internet-based
financial services may become even more important in
the future?
2. For a discussion of the definition of local banking markets. see
Dean F. Amel. Anhur B. Kennickell, and Kevin B. Moore (2008),
"Banking Market Definition: Evidence from the Survey of Consumer
Finances." Finance and Economics Discussion Series 2008-35 (Washington: Board of Governors of the Federal Reserve System. October).
www.federalreserve .govipubsifeds!2008!2008351200835pap.pdf.
which the median rose 16.6 percent; the mean for this
group was little changed. Families in the lowest
income quintile had the largest proportional increase
in the mean-31.8 percent-a rise due, in part. to an
increase in the fraction of the group consisting of
relatively wealthy families with incomes that are
likely to have been temporarily low (data not shown
in the tables). The mean rose for the other income
groups, and it rose most for the highest deci Ie
group-an 18.8 percent gain. Over the preceding
years shown, median net worth had increased for all
groups except the second income quintile; the mean
had risen for all income groups.
The survey shows some substantial movements of
net worth by age group between 2004 and 2007.
Median net worth rose most strongly-19.2 percentfor the 75-or-more age group, which had seen relatively modest change over the previous three-year
A 14
Federal Reserve Bulletin 0 February 2009
period . The less-than-35 age group saw a large decline
in the median-24.4 percent-over the more recent
period; at the same time , median wealth fell 7.1 percent for the 55-to-64 age group. Mean wealth rose
just more than 10 percent for families in the 45-to-54
and 75-or-more age groups, and it increased more
than 30 percent for families in the less-than-35 and
65-to-74 age groups; mean wealth declined, however,
for the 35-to-44 group and was about unchanged for
the 55-to-64 group. Many of the changes observed
contrast in size or direction with the changes in the
preceding three-year period.
By family structure, single families with children
had the largest increases from 2004 to 2007 in both
median and mean net worth-13.9 percent and
45.3 percent, respectively-but these families had the
second-lowest level of net worth (after younger single
families without children). Median net worth increased for all family-structure groups except younger
single families without children, and the mean increased for all except older single families without
children.
From 2004 to 2007, median net worth increased for
all education groups . The change was particularly
large--46.9 percent-for the no-high-school-diploma
group. At the same time, this group was the only one
that did not see a rise in mean net worth; its mean
declined 4.7 percent. The shifts for this group were
the opposite of the pattern in the preceding three-year
period, during which the median fell and the mean
rose.
The data show gains from 2004 to 2007 in median
and mean wealth for both categories of race or
ethnicity. Gains in the median and the mean were
roughly the same for white non-Hispanic families10.3 percent and 12.2 percent, respectively. But for
nonwhite or Hispanic families, the change in the
median-2.2 percent-was far smaller than that in
the mean-35 .9 percent. 18 In the preceding three-year
period, both the median and the mean for nonwhites
or Hispanics had risen more strongly than those for
other families. Despite some continuing signs of
convergence, in 2007 , the median and mean of net
worth for white non-Hispanic families remained
much higher than those for nonwhite or Hispanic
families. In contrast to the whole group of nonwhite
or Hispanic families, the subgroup of African American families saw a 24.1 percent decline in their
18. If the additional information on Hispanic or Latino ethnic
identification available in the SCF is used in the classification of the
2007 results, the median net worth of nonwhites or Hispanics was
$31,000, and the mean was $237,900 ; for other families, the median
was $174, I 00 , and the mean was $701.800. These figures are all
Slightly higher than the corresponding values reported in table 4 .
median net worth from 2004 ($22,400) to 2007
($17 ,000), but their mean net worth rose 9.3 percent,
from $121 ,500 to $132,800; over the 200 1-04 period ,
the median for the group had shown virtually no
change, while the mean had risen 36.4 percent (data
not shown in the tables) .
Among work-status groups, median and mean net
worth rose from 2004 to 2007 for all families except
those headed by persons who were not working for
reasons other than retirement (the other-not-working
group), which showed substantial declines in both
measures. The group had the lowest levels of both
median and mean net worth of all work-status groups.
Although the dollar amounts of the changes in median
and mean net worth for the self-employed group were
far larger than those for the other groups over the
period from 1998 to 2007, the percentage increase in
the median for the self-employed group was below
the rates for all other work-status categories except
the retired group. The percentage increase in the
mean for the self-employed group was just slightly
higher than that for the working-for-someone-else
group.
Median and mean net worth increased for all
occupation groups in the recent three-year period , but
they did so most markedly for families headed by a
worker in a technical, sales, or service occupation or
by a worker in a managerial or professional occupation. Over the period since 1998, the median for
families in the residual other-occupation category
barely rose, and the increase in the mean was the
smallest of any occupation group. All other groups
had greater than a 20 percent increase in their median
and mean net worth over this period.
Between 2004 and 2007, median net worth fell for
families living in the Northeast or the Midwest, while
it rose strongly for those in the South or the West.
Mean net worth for families in the Northeast or the
Midwest also lagged behind that for families in the
other regions . Over the longer period from 1998 to
2007, median and mean net worth moved up most
strongly in the Northeast and the West; these regions
ended the period with quite similar medians and
means . The Midwest and the South also ended the
period with fairly similar values, at levels considerably below those for the Northeast and the West.
By urbanicity of the place of residence, in the
recent three-year period, median net worth increased
by about the same proportion in MSA and non-MSA
areas, but the mean advanced by a much larger
proportion in non-MSA areas. However, over the
longer period since 1998, median and mean wealth
rose more rapidly for MSAs , and in 2007 both the
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
median and mean net worth for families in MSAs
remained substantially above that for families in
non -MSAs.
By housing status, the percentage increases in
median net worth between 2004 and 2007 were very
simil ar for both groups, and the increase in the mean
for non-homeowners (hereafter, renters) was somewhat higher. From 1998 to 2007-a time of rising
house prices, on balance-the increase in median and
mean net worth for homeowners far outstripped that
for renters .
ASSETS
A 15
S. Value of financia l a :Cl ' of all f:lmili~s , di tribu[ed by
type of as el. 1998-2007 surveys
Percent
Type of financial asset
2007
11.4
Transaction accounts . .
Certificates of deposit ..
4.3
Savi ngs bonds ..
.7
- .. .
Bonds
4.3
22.7
Stocks ..... . .... . ............
Pooled investment funds (excluding
money market funds)
12.4
Retirement accounlS
27.6
Cash value life insurance
6.4
8.6
Other managed assets ...
Other ............ " , . .... . . . . . . ..
1.7
Tota[
[00
.. . ............
.... .. ...
11.4
3.1
.7
4.5
21.5
13.2
3.7
.5
5.3
17.6
11.0
4. 1
.4
4.2
17.9
12.1
28.9
5.3
10.5
1.9
14.7
32.0
3.0
8.0
2.1
100
15.9
34.6
3.2
6.5
2.1
100
42.2
35.7
33.9
[00
M EMO
Financial assets as a share
of total assets . .. .. .. . ...
40.7
At 97 .7 percent in 2007, the overall proportion of
families with any asset was barely changed from
2004 (first half of tables 9.A and 9.B, last column).
Overall, this figure has risen 0.9 percentage point
si nce 1998 (data not shown in the tables). Across
demographic groups, the pattern of changes in the
recent three-year period is mostly one of small
increases or decreases. Noticeable exceptions are
declines for the following groups: the lowest quintile
of the income distribution (2.4 percentage points);
single families with children (1.2 percentage points);
younger single families without children (1.7 percentage points); families headed by a person whose work
status was retired (1.6 percentage points) or who was
in the related retired-or-other-not-working category
(1.2 percentage points); families headed by a person
aged 75 or older (1.5 percent); and families living in
the Northeast (3.3 percentage points).'9 For many
groups, the figure remained at or near 100 percent.
From 2004 to 2007, median assets for families
having any assets rose 16.6 percent, from $189,900 to
$221 ,500 (second half of tables 9.A and 9 .B, last
column), and the mean rose 13.1 percent, from
$591,300 to $668 ,500 (memo line). These percentage
changes closely resemble those for overall net worth,
but examination of changes in median assets by
demographic groups reveals differences. Because
changes in ownership were generally small, these
differences must largely represent variations in the
amount of borrowing. Across net worth groups, the
percentage changes in median assets and net worth
were most similar for families in the top quartile of
the distribution of net worth; for all except the lowest
quartile of that distribution, the changes were more
roughly similar; and for the lowest quartile of the
distribution, the percentage decline in assets was
much larger than that for net worth. For white non-
Although the level of financial assets rose from 2004
to 2007, financial assets as a share of total assets fell
1.8 percentage points, to 33.9 percent (table 5, memo
line); this movement continues a decline in this share
from a level in 200 I (42.2 percent) that marked the
high point observed in the survey since at least 1989.
The relative shares of various financial assets also
shifted . Declines in the percentage shares of transaction accounts , bonds, and "other managed assets"
were mostly offset by increases in the shares of
retirement accounts and pooled investment funds. 2o
After declines in the previous two surveys, the share
of assets attributable to publicly traded stocks held
directly by families edged up.
Overall , the rate of ownership of any financial asset
was virtually unchanged over the recent survey
19. The reLired-or-oLher-not-working occupation category encom passes the retired and the other-not-working work-status categories.
20. The definitions of asset categories in table 5 are given later in
lhe article , in the sections of texl devoted to those categories.
NOTE: For this and following tables, see text for definition of asset categories. Also see note to table I.
Hispanic families, median assets rose 9.9 percent,
while median net worth rose 10.3 percent; but for
nonwhites or Hispanics, median assets rose 36.4 percent, and median net worth rose only 2.2 percent. For
homeowners, median assets increased 8.1 percent, but
median net worth increased 15.6 percent; for renters,
median assets barely changed, but median net worth
rose 15.9 percent. Percentage changes in the medians
of assets and net worth were similar across region and
urbanicity of the place of residence . Over the preceding three-year period, median assets had risen 9.8 percent and mean assets had risen 8.3 percent, compared
with corresponding figures for net worth of 1.0 percent and 6.0 percent.
Financial Assets
A 16
Federal Reserve Bulletin 0 February 2009
6. Famil y holdi ngs of financial assel5. by selected
c h aracleri ~l i c.
of fa mil ie. and lype of assel. 2004 and 2007 urveys
A. 2004 Survey of Co nsumer Finances
Transaction
accounls
Family characteristic
Cenificales of
deposit
Pooled
Savings
bonds
Bonds
Stocks
investment
funds
Retirement
accounts
Cash
Other
value life managed
insumnce
assets
Other
Any
financial
asset
Percentage of families holding asset
.. . .. , ..... . . . .
91.3
12.7
17.6
1.8
20.7
15.0
49.7
24.2
7.3
10.0
93.8
Less than 20 . . . . . . .. .... .. ,
20-39.9 . .... ,. " ..... , .... .. ......
40-59.9 . ... . ,
.. . .. . . . . .. . ..
60-79.9 · . . . . . . . . .. · · . 00
80-89.9 · . . . . , . . . .. ...... ,
, ....
90-100
. . . . .. .. ..
.... .. ..
75.5
87.)
95.9
98,4
99.1
100.0
5.0
12.7
11.8
15.0
16.3
21.5
6.2
8.8
15,4
26.5
32.3
29.9
·
•
5.1
8.2
16.4
28. 1
35.9
55.0
3.6
7.6
12.7
18.6
26.2
39. 1
10.1
29.8
53.5
69.7
81.9
88 .5
14.0
19.0
24,4
29.7
29 .6
38.1
3. ,1
4.9
7.9
7.8
12.2
13.0
7.1
9.9
9.3
11.2
11,4
13.4
80.1
91.5
98.5
99. 1
99.8
100.0
Alie of head (years )
... . .. .. .
.. . ...
Less than 35 ..
35-44 ..
.... .... . .. .. .
. ,"
45-54 ....
.... .. .... . . . ..... . .
55-64 . .. . ...... , .. ..... ........
65- 74 .... .... ... .... ..... ....... ....
75 or more ... ... . .... ..... ..
86,4
90.8
91.8
93 .2
93 .9
96.4
5.6
6.7
11.9
18.1
19.9
25.7
15.3
23.3
21.0
15.2
14.9
11.0
1.1.3
8.3
12.3
18. 2
20.6
18.6
16.6
40.2
55.9
57.7
62.9
43.2
29.2
11 .0
20. 1
26.0
32. 1
34.8
34 .0
2.9
3.7
6.2
9.4
12.8
16.7
11.6
10.0
12.1
7.2
8. 1
8. 1
90. 1
93 .6
93.6
95.2
4 .3
3.0
18.5
23.2
29. 1
25.4
18.4
Family slm"lu",
Single widl child(ren) .... . . ...
Single, no child, age less Ulan 55 .
...
Single. no child, age 55 or more
Couple with child(ren) .
Couple, no child ......
87 .2
85 . 1
91.8
93.5
94.0
8.8
5.9
18.8
14.9
13.6
9.4
11.9
9.1
25.1
22.1
2.6
.9
2.7
9.6
12.4
18.0
23.3
26.2
7.4
10.2
16.0
11.7
19.0
34 .1
37.5
32.8
61.4
59.8
19.9
14.0
28.8
24.7
27.7
3.7
2.8
14.0
6.1
7.9
13.7
13.8
7.8
7,4
9.1
9L1
88.9
94.4
96.4
95 .5
Educaliull of head
No high school diploma ... "
High scbool diploma ... ... ... .... _..
Some college ..... .... ........ ....
College degree .. .. . .. . . ... .... . , ... .
72.4
89 . 1
94.3
99.1
5.6
12.9
9,4
17.0
4.2
14.2
19.3
24.9
4 .7
1
,2.4
17.7
35 .3
2.3
9.2
12.6
26. 1
16.2
43.6
47.7
68.9
13.7
23.0
23.8
29.5
3.0
5.4
6.2
10.9
5.2
8.4
14,4
10.9
77.4
92.9
96.6
99.6
Race or elhlli61), of re. polldem
'
White non-Hispanic
... . .
....
Nonwhite or Hispanic
95.5
80.6
15.3
6.0
21.1
8.5
2.5
25 .5
8.0
18.9
5.0
56.1
32.9
26.8
17.4
9.2
2.1
10.2
9.4
97.2
85.0
Cu rrenl wurk .ItalllS of head
Worki ng for someone else
... .. ...
.. .
... , .
Self-employed .
Retired . .. .. .. . . . ... . . . . .
.. ... . .
Other not working . . ...
... ......
92.2
94,4
90,4
76.2
9.8
14.2
20.2
7.9
20.1
18.7
11.4
14.5
.8
4.3
3.5
19.6
31.6
19.0
14.3
13.5
22.1
16.2
10.2
57 . 1
54.6
32.9
24.9
21.8
29 .8
29.7
10.7
5.4
7.6
12.8
•
9.5
15.1
8,4
\I .5
94.5
96. 1
93.6
79.6
Current occupalion of head
Managerial or professional ..... ......
Technical, sales, or services ..... .. ..
Other occupation . .............. ....
Retired or other not working ... .. ...
98 .5
90.1
87 .2
88.2
14.8
8.9
6.4
18.3
25.5
18.5
13.8
11.8
3. 1
.3
3.0
32.9
IS .6
13.0
18.2
24.3
9.7
8. 1
15.3
68.5
48.5
49.7
316
27.5
21.9
18.7
26.8
8.2
4.9
3.3
ILl
13.2
8.6
8.5
8.9
99.5
92.9
90,4
91.4
Region
Northeast . .. , .... -.. ... ..... .... ....
Midwest ... ..... ........ .. .. .. .....
. ... . ...
SOUlIl . . . . . . . . . . . . .
... ....
... .
West .
94 .6
94 .4
86.9
92.6
15.3
14.9
117
9.7
21.5
23.6
12.7
16.1
1.9
1.6
2 .0
1.7
27.8
23.4
15.4
57 .0
57 .3
41.6
48.9
24.6
30..~
24. I
17.5
7.7
2004
18.8
15.2
12.6
IS .6
4.7
6.7
8.6
10.7
9.5
11.0
96.4
96.5
90.7
94.0
U,hulI;c;IY
Metropolit.1O statisical area (MSA)
Non-MSA . ' ... ...... ....
...
91.6
90.0
12.3
14.6
18.4
14.0
2.0
•
22.6
11 .0
16,4
8.S
51.8
39.5
24.6
22.3
7.8
4.8
lOA
7.9
93.9
93.2
Housing status
Owner . ...... ..
RenLer or other .. ..
..... .. ... ...
... .... . . .. . . . ... .
96.0
80.9
15.9
5.6
21.2
9.5
2.6
.2
25.8
9.1
19.2
5.7
60.2
26.2
30. 1
1"-0
9.6
2.0
9.6
10.9
97.5
85.5
Percentile of nel worth
Less than 25
.... .... ... ..
25-49.9 .. ... .... ... .. ... . .. . .
50-74.9 · . . . . . . . . . .... .....
. ...
75-89.9 . .. . . . ..
.. . . . ..
90-100 . .. .
...
.. ...... .....
7S.4
92.0
98 .0
99.7
100.0
2.2
6.5
16.0
24.2
28.8
6.2
13.2
22.7
28.5
28.1
•
3.6
9.3
21.0
39. 1
62.9
2.0
7.2
12.5
32.4
47 .3
14 ..l
43 . 1
61.8
77.6
82.5
7.7
19.3
30. 1
36.7
43 .8
•
2.3
8.8
15.6
21.0
6.9
9.5
10.2
11.2
16,4
79.8
96.1
99.4
100.0
100.0
All families ..
Pen:elllile of income
.
... .
.
.. .
....
.. ...
..... .
. ........
...
.
...... ... ...
*
2.1
2.9
8.9
*
.6
1.8
3.3
*
J
·
.4
.6
4.1
*
•
·
*
*
3.2
12.7
\I .5
96.S
97 .6
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A 17
6. Family holding' of financial a ets, hy selected characteri tics of familit!S and type of asset, 2004 and 2007 surveysCon linued
A. 2004 Survey of CODsumer Finances-continlled
Transaction
Family characteristic
accounls
I
.
certifi-I Savmgs
b d
cates of
deposit
on s
Bonds
Stocks
Pooled
investment
funds
Retirement
accounts
Cash
Other
value life managed
insurance
assets
Other
Any
financial
asset
Median value of holdings for families holding asset (thousands of 2007 dollars)
...... . ........ •
71.4
16.5
44.4
38.7
6.6
49.4
4.4
25.3
,4
.7
.9
1.1
.9
2.2
87.9
38.4
175.7
6.6
8.8
13.2
11.0
16.5
64.5
16.8
27.5
25.3
28.0
36.8
137.3
5.5
11.0
19.0
35.1
76.9
201.4
3.1
4.1
5.5
7.7
11.0
22.0
24.1
54.9
39.5
38,4
54.9
109.8
2.7
2.2
2.7
4.4
5.5
22.0
53
17.0
53.2
119.1
401.2
4.4
11.0
12.1
31.9
22.0
24.2
.5
.5
1.1
2.7
3.3
5.5
11.0
32.9
87.9
43.9
324.0
4.8
11.0
15.9
27.5
46.1
54.9
8.8
17.5
54 .9
82.4
65.9
65.9
12.1
30.6
61.0
91.2
87.9
32.9
3.3
5.5
8.8
11.0
8.8
5.5
5.5
20.1
47.2
71.4
65.9
54.9
1.1
3.8
5.5
7.7
11.0
24.2
5.7
20.9
42,4
85.7
39.6
42.6
1.4
1.6
3.3
5.3
6.7
11.0
11.0
20.0
11.0
22.0
.4
1.1
2.2
.9
1.1
32.9
68.1
109.8
87.9
6.6
8.8
30.4
6.7
22.0
23.1
16.5
68.6
24.2
54.9
15.4
15,4
40.6
39.0
58,4
2.2
5.5
3.5
5.5
1
,1.0
6.6
32.9
71.4
32.9
49.4
3.3
2.2
11.0
5.5
6.6
5.5
6.0
27.0
32.4
48.3
,.
1.2
2.8
2.9
10.1
16.5
19.2
11.0
20.9
.5
.7
.9
1.1
22.0
168.6
87.9
8.2
8.2
13.2
22.0
7.9
27.3
43.9
58.2
13.7
22.5
23.1
70.6
3.5
5.5
5.9
11.0
16.5
54.9
31.9
54.9
2.2
3.3
4.4
7.7
2.4
13.2
17.6
85.9
Race or el/micil), of respondent
White non-Hispanic . . . . . . . . . . . . . . . .
Nonwhite or Hispanic
5.5
1.6
17.6
13.2
1.1
.7
87.9
19.8
5.8
49.4
19.8
45.0
17.6
7.7
5.5
49.4
43.9
5.5
2.7
39.5
5.5
3.5
11.0
4.6
2.2
11.0
22.0
27.5
8.8
.8
2.1
3.3
2.2
27.5
142.8
98.8
11.0
27.5
49,4
5.5
27.5
65.9
82.4
17.5
32.9
65.9
51.6
34.0
5.9
11.5
5.5
9.2
54.9
46.1
49.4
3.3
6.6
11.0
3.3
22.5
58.4
29.1
5.5
C"/'TY!nt occupation of head
Managerial or professional
Technical. sales. or services.
Other occupation .........
Retired or other not working
8.9
2.6
2.7
3.9
16.5
13.2
6.4
24.2
1.1
.9
.5
2.3
54.9
38.4
87.9
22.0
8.8
5.5
38.4
44,4
27.3
22.0
72.2
65.9
23.8
22.0
46.1
11.0
5.5
5.5
5.5
49.4
65.9
39.5
49.4
6.6
3.3
2.2
7.7
73.2
13.4
12.5
21.4
Region
Northeast
Midwest
South .
West.
6.6
4.5
3.3
3.7
19.8
11.4
15.4
24.2
1.6
.9
1.1
.7
164.7
71.4
43.9
109.8
16.5
13.2
17.6
19.8
54.9
49.4
49.4
28.6
57.9
41.7
29.7
32.9
6.6
7.7
5.5
6.6
54.9
46.1
49.4
49.4
4,4
4.4
4.1
5.5
47.4
33.9
13.4
25.3
Urbollicity
Metropol,tan statistical area (MSA) .
Non-MSA ..
4.6
2.4
16.5
16.5
1.1
1.1
87.9
•
18.7
8.8
54.9
27.5
43.9
22.0
6.9
5.5
49.4
35.5
5.3
2.2
30.3
10.3
Housing x/a/us
Owner. ........
Renter or other
6.6
1.2
22.0
7.7
1.1
.8
71.4
142.8
22.0
4.9
54.9
11.0
50.5
12.1
7.7
3.3
49.4
46.1
6.6
2.2
52.6
3.3
.6
2.2
6.4
17.4
47.2
2.2
6.4
11.4
34.0
50.5
.3
.5
1.1
2.2
2.7
27.5
122.0
2.1
3.8
8.8
22.0
120.8
2.2
8.1
17.6
54.9
175.7
3.2
12.9
36.8
105.1
289.9
.9
4.4
5.5
11.0
22.0
10.3
24.1
54.9
148.3
.8
2.2
5.5
7.7
43.9
1.1
10.9
51.8
223.0
800,4
29.8
60.2
6.3
600.8
176.1
202.0
133.2
25.3
227.4
43.4
220.4
4.1
16.5
1.1
.7
1.6
3.3
7.1
12.1
30.8
11.0
15,4
11.0
19.8
22.0
36.2
Age of head (yea,.,)
Less than 35
35-44 .
45-54
55-64 ..
65-74 "
75 or more ........ . . . .
2.0
3.3
5.3
7.4
6.0
7.1
Family structure
Sing"; with child(ren) ...
Single. no child. age less than 55
Single. no child. age 55 or more
Couple with child(ren) .
Couple. no child ..
AU families ....
Percentile of income
Less than 20
20-39.9 .
40-59.9 .
60-79.9 ..
80-89.9 ..
90-100
......... .... .. ...
Edllcation of head
No high school diploma
High school diploma
Some college.
College degree
.
Current work
SIll/US
of head
Working for someone e lse ........ . . .
Self.employed ... .............. . . . . . .
Retired.
.................. . . .
Other not wor~ing ..
,
•
1.5
.... .... .....
Pen:entile of nel wonh
Less than 25 . . . . . . . . . . . . . . .
25-49.9 .
50-74.9 ............ ... ..
75-89.9 .. '
90-100
MEMO
Mean value of holdings for
families holding asset
NOTE: See note to table J.
* Ten or fewer observations.
.
A 18
Federal Reserve Bulletin 0 February 2009
6. Fnmily holdings of fi nancial assets, by selected characleri 'lics of families [lIJd type of asset, 2004 and 2007 survey ' Contillued
B. 2007 Survey of Consumer Finances
Trans-
action
Family characteristic
accounts
Certifi·
cates of
deposit
Pooled
Savings
bonds
Bonds
Stocks
investment
funds
Retire·
mcnt
accounts
Cash
Other
value life managed
insurance
assets
Other
Any
financial
asset
Percentage of families holding asset
92.t
16.1
14.9
PeR'ell/ill! of income
Less than 20
20--39.9
40--59.9
60--79.9 .... ... ... ...... ...
80--89.9
90--100
74 .9
90. 1
%.4
99.3
100.0
100.0
9.4
12.7
15.4
19.3
19.9
27.7
Age of head (years )
Less than 35
35-44 .
45-54 .
55--& ..... . .. ... ..
65-74.
75 or more .... . ... . . . . ....
87.3
91.2
9,J,7
96 .4
94 .6
95 .3
Family structure
Single with child(ren) . .
Single, no child. age less than 55 .
Single. no child, age 55 or more
Couple with child(ren)
Couple, no child.
1.6
17.9
11.4
52.6
23.0
5.8
9.3
93.9
3.6
8.5
15.2
20.9
26.2
26. 1
1.4
1.8
8.9
5.5
7.8
14.0
23.2
30.5
47.5
3.4
4.6
7. 1
14.6
18.9
35.5
10.7
35.6
55 .2
73.3
86.7
89.6
12.8
16.4
2 1.6
29.4
30.6
38.9
2.7
4.7
5.3
5.7
7.6
13.6
6.6
8.8
10.2
8.4
9.8
15.3
79. 1
9 3. 2
97.2
99.7
100.0
100.0
6.7
9.0
14.3
20.5
24.2
37.0
13.7
16.8
19.0
16.2
10.3
7.9
13.7
17.0
18.6
21..l
19. 1
20.2
5.3
.7
1.1
2.1
4.2
3.5
11.6
12.6
14.3
14.6
13.2
41.6
57.5
64.7
60.9
51.7
30.0
11.4
17.5
22.3
35.2
34.4
27.6
2.2
5.1
7.7
13.2
14.0
10.0
9.6
10.5
9.2
9.4
5.3
89.2
93. 1
93 .3
97.8
96.1
97.4
84 .8
84 .3
94 .3
95 .5
94 .8
9.6
9.6
23 .3
15.1
17.6
10.1
9.9
9.9
22.8
17.1
2.1
1.2
2.2
8.4
14.7
13. 1
20.2
21.5
9.0
7.7
10.4
13.6
12.9
36. 1
42.8
36.2
62.5
61.8
24.8
11.4
23. 1
27.5
26.3
1.6
10.8
5.3
6.3
13.2
11.1
7.6
7.5
9.0
88 .2
86.9
96.3
96.2
96. 1
Edllcatioll of head
No high school diploma . . . . . . . . . .
High school diploma
... ..........
Some college .....
Co liege de gree ...
75 .7
90.9
93.9
98.7
9.5
14.1
14. 1
21.6
11.5
16.4
2 1.6
.6
1.2
3.3
3.9
9.3
17.4
31.5
2.2
5.8
8.9
21.4
21.6
43.2
52.5
73.3
12.6
22.6
23.4
27. 1
L7
4.2
6.6
8.5
7. 1
8.2
9.8
10.9
79.7
93.3
95.5
98.9
Race or elhnicilY of respolldent
White non-Hispanic
Nonwhite or Hispanic
95 .5
83.9
19.4
8.2
17.8
7.8
2. 1
.4
21.4
9.4
13.7
5.8
58.2
39. 1
25.3
17.6
7.3
2.3
9.7
8.3
96.8
86.7
CII rrent work statuS of head
Working for someOne else
Self·employed . . . ... . ......... . . ... . .
Retired .... . . . . . . . . . . . . . . . .
Other not working . . . . . . . . . . . . .
92 .6
96.9
91.6
78.6
13.2
15.0
25.7
5.6
17.0
15.9
10.2
10.7
.9
4.2
2.3
17.8
24.3
16.4
12.8
10.4
21.4
11.3
2.4
62. 1
55.3
34.2
20.3
32.1
27 .3
14.5
3.7
6.9
11.2
9.2
i4.8
7.0
10.6
94. 1
98.0
93 .7
81.4
18.2
11.5
9.2
22.5
21.1
15.0
13.1
10.3
3.1
.4
i9.7
8.8
5.4
9.9
51.0
32.4
24.9
21.3
19.0
25.3
6.7
4.0
2.0
28.7
14.9
9.9
15.8
74 . 1
Retired or other not working ..
98.3
91.9
87 .9
89.5
9.8
11.1
9. 1
9.6
7.6
98 .7
94 .0
90.2
91.8
Region
Northeast
Midwest
South . . .
West.
91.3
93 .6
91.3
92.7
18.1
16.8
15.1
15.5
18.9
16.0
12.0
15.0
2.0
1.2
1.7
1.6
21.4
17.9
15.4
19.2
15.5
10.6
9.7
11.5
53.3
57.8
48.8
52.9
23.5
26.6
23.3
18.3
6.4
6.7
5.2
5.5
5.4
9.2
8.6
13.9
92.5
95.4
93.5
93.9
Urballicit),
Metropolitan slatisticai area ( MSA)
Non-MSA . . ... . .. . . . ......... .
92.8
88.7
16.2
15.9
i5. 1
13.8
l.8
.8
19.4
10.9
12. i
7.7
54 .8
42.0
22.2
26.7
5.9
5.5
9.5
8.6
94.3
91.8
Housing status
Owner .... .. . .
Renter or other . .
97.3
80.8
20.0
7.7
18.2
7.5
2.2
.4
22.4
8. 1
15.0
3.5
63.3
29.2
28.9
10. 1
7.5
2. 1
9.4
9. 1
98.4
84 .0
76.4
93 .6
98 .6
iOO.O
100.0
2.5
9.9
19.3
32.6
33.0
4.7
12.3
17.5
25.9
23.3
11.8
4.3
10.2
17.3
31.6
52.3
3.6
10.5
22.5
42.5
19. 1
48.1
62.9
77.4
84.6
7.8
19.7
28.5
32. 1
41.9
1.9
6.2
11.2
20.3
7.4
8.8
8.8
9.4
16.6
79.6
96.4
99.5
100.0
100.0
All families .
...... . . . .. .
.
3.4
•
22.6
Cllrrent occupation of head
Managerial or professional .
Technical. sales, or services .
Other occupation
Percentile of IIet worth
..... ......
Less than 25
25-49.9 .
. ... .. . ...........
50--74.9 .
75-89.9 .... .. .. ..... ...... .. ... .
90--100 ........ . . . . . . . . . . . . . . .
.
54.5
I I
Changes in U.S. Family Fiiwnces from 2004 to 2007: Evidence from the Survey of Consumer Finances
A 19
6. Pamily holding of financial assets, by 'elected characteristics of families and type of a ct. 2004 and 2007 urveysContinued
B. 2007 Survey of Consumer Finances-(;ontinued
Trans·
action
accounts
Family characteristic
I
I
Certifi·
cates of
deposit
Savings
bonds
Bonds
Stocks
Pooled
invest·
ment
funds
Other
Retire·
Cash
ment
value life managed
accounts insurance assets
Other
Any
financial
asset
Median value of holdings for families holding asset (thousands of 2007 dollars)
All families
,
.
.. ,. ,.
. .. .. .. .
17.0
56.0
45.0
8.0
70.0
6.0
28.8
3.8
10.0
5.5
14,0
15,0
75.0
30.0
30.0
37.5
35.0
46.0
180,0
6.5
12.0
23.9
48,0
85.0
200.0
2.5
5,0
5,2
10,0
9.0
28.1
100.0
86.0
59.0
52.0
30.0
90,0
1.5
3.0
4.0
10.0
10.0
45 ,0
1.7
7,0
18,6
58.3
129.9
404.5
100.0
3,0
15,0
18.5
24.0
38.0
40.0
18.0
22.5
50.0
112.0
86.0
75.0
10,0
36.0
67.0
98.0
77.0
35.0
2.8
8.3
10.0
10,0
10.0
5.0
24.0
45.0
59.0
70.0
100.0
1.5
8.0
6.0
20.0
10.0
15.0
6,8
25 ,8
54 ,0
72.4
68. 1
41.5
1.0
1.5
3,0
,8
1.0
50.0
530.0
80.0
13.0
3.8
25.0
15.0
24.0
46,0
18.0
77.0
45 ,0
60,0
30,0
20.0
45.0
52.0
55 , I
5.0
5.2
5,0
9,0
10,0
50.0
100.0
30.0
52.0
5.5
3.0
3.6
10.0
10.0
10.3
8.9
24.4
36.3
46. 1
14.0
16.0
18.0
25.0
1.0
1.0
1.0
l.l
46.5
50.0
100.0
2.7
10.0
6.0
25 ,0
64 .0
30,0
25.0
75 .0
15.0
28.5
32.0
75,0
2.5
5,2
8.0
13,0
30.0
80.0
52.0
75 .0
1.5
5.0
4.0
10.0
3.0
14.2
20,0
95.7
5, I
2.0
20.0
10.0
1.0
1.0
95.9
23 .1
19,0
8,0
64.0
30.0
52.7
25.4
9.0
5.0
70.0
30.0
10,0
3,0
44.3
9.0
3.8
9.9
4.0
1.0
10.0
25.0
30.0
15.0
1.0
1.0
2.5
2.0
46.8
150.0
79.5
10.5
60.0
28.7
6.3
42.0
80.0
78 ,2
50.0
40,0
91.0
48.0
20,8
7,5
24,0
5,5
2,2
27.2
80.0
100.0
•
5,0
16,0
10.0
3.0
28 ,5
54,1
29.7
3.7
8.8
3.0
2.5
3.3
15.0
15.0
10.0
30.0
1.0
1.0
.7
2.0
80.0
123.2
•
95.9
20,0
12.0
4.0
25.0
75 .0
40,0
18.0
78.2
72.0
30,0
24.3
45.0
13,0
9.0
5.0
5,0
59.0
10,0
20.0
100.0
10.0
5.0
5.0
5.5
77.0
17,6
13.8
2.1.7
5.1
3.8
3,5
4,3
20,0
12.0
20.0
23 ,0
1.0
1.0
1.2
1.0
114.7
49.3
100.0
60.0
17.9
14.0
17,9
18.0
50.0
37.5
70.0
58.8
57.5
36.0
40.0
45,6
9.0
7.0
8.0
10.0
73.0
67.0
80.0
60.0
10.0
6.0
4.0
6.0
43 .8
31.0
20.8
29.1
4.5
2.5
20.0
10.0
1.0
1.2
100.0
50,0
19.0
11.0
60.0
34,0
48.0
31.3
9.0
5.0
70.0
45 ,0
8.0
2.4
32.6
15,8
6.2
1.2
20.0
10.0
1.0
.7
100.0
15,0
20.0
5.5
60.0
40,0
57,0
10.0
10.0
2,0
70,0
54,0
10,0
1.8
54.3
3.8
.7
2.0
6.1
15.5
46.5
2.0
7.0
15.0
25.0
50.0
.5
,7
I.2
2.0
3.5
150,0
l.l
3.0
6.0
20.0
125.0
9.0
25,0
50,0
264.0
3.2
15,0
48.6
117,0
314,0
1.2
3,0
6.5
15.0
30.0
13 ,8
50,0
80.0
180.0
1.2
3.0
10,0
20.0
50.0
1.4
13,2
59.6
215.0
773.0
26.4
55,6
6.6
57403
221.1
309.7
145,8
31.3
248.8
50.3
235.8
4.0
20.0
1.0
.8
1,6
2.7
6.0
12.9
36.7
18.0
18,0
17 .0
11.0
20.0
42 .0
.5
1.0
.7
1.0
2,0
2,5
2.4
3.4
5.0
5.2
7.7
6.1
5.0
5.0
15.0
23.0
23 .2
30.0
.7
1.0
1.0
1.9
1.0
20.0
2.4
2.0
2.5
5.0
6.0
7,5
5,5
28.0
10,0
20,0
1.2
2.5
2.8
10,0
Percentile uf income
Less than 20 " . , ... ,
.. ..
... ... ........ ..
20-39.9 , , . , '
.., ..
40-59.9 ..... . . . . . . . . . . ..
60-79,9 .. .. .... .... ....
.... . .. . .
80-89.9 ,. ..... " ..... .. ... . .... .
. ... .. . . . .... .
90-100
• • • · • • • 1 •• •
.
80.0
·
•
•
19.0
81.0
250.0
Age of head (years)
Less than 35
35-44 .. ,
45-54 . ..
5~4 ...
65-74 . ,
75 or more .
, • • • • • • • • • • • • • • • • • • •• • 0.11
Family slruClllre
Single with child(ren) ... . .
Single. no child. age less than 55 ..
Single, no child. age 55 or more
Couple with child(ren)
Couple. no child .
9,7
200.0
90.8
50.0
*
Education of head
No high school diploma
High school diploma
Some college , . ,
College degree
R(lce or elhnicil), of respondelll
White non·Hispanic . .. ........... . ,.
, .......... .
Nonwhite or Hispanic
.
Current work
SWluS
of "elid
Working ror someone else
Selr-employed .. ' ..
Retired .
Other not worki ng
•
Cutrrml occupatio" of head
Managerial or prolessional ..
Technical , sales. or services
Other occupation . ....... . ...
Retired or other not working ..
Region
Northeast
Midwest
South
West
.. ..... .... ..... ..... ....
- ... . .... . . ..... .......
.... . ... . ...
. . . .. ... . . .
.
Urbanicitl'
Metropolitan statistical area (MSA) . ,.
Non·MSA . ..
Housing slalll,'
\
Owner ,
Remer or other
Percentile of net wonh
Less than 25
25-49.9 .
50-74.9 ,. ,
75-89.9 ... .
90-100
.... ... ....
MEMO
Mean value or holdings for
ramilies holding asset
NOTE: See note to table I.
• Ten or fewer observations.
A20
Federal Reserve Bulletin D February 2009
period, at 93 .9 percent (first half of tables 6.A and
6.B , last column). However, the recent data show
changes for some demographic groups. By income
percentile groups , ownership fell for the first and third
quintiles and rose or stayed the same for other income
groups; by age, an increase appeared only for the
55-to-64 age group; by family structure, ownership
increased for childless couples and childless single
families headed by a person older than age 55 but
declined for other single families; and by work status,
ownership rose substantially for families headed by a
person who was self-employed or neither working
nor retired. Ownership increased for nonwhite or
Hispanic families and decreased for white nonHispanic families . The share of homeowners with
financial assets rose, but the ownership rate fell for
renters .
In contrast to the drop in the overall ratio of
financial assets to total assets over the recent period,
the median holding of financial assets for families
having such assets rose 13.8 percent (second half of
tables 6.A and 6.B, last column), while the mean rose
7.0 percent (memo line). The recent change in the
median did not completely offset the decrease over
the previous three-year period. The more detailed
picture is one of increases in the medians over the
recent period for most demographic groups , including
substantial increases for the lowest two income quintiles and all age groups except the 55-to-64 and
75-or-more categories. Median holdings increased
most markedly for single families with children and
younger childless single families; for families in the
65-to-75 age group; for families living in the South or
outside of MSAs; and for nonwhite or Hispanic
families. Mean holdings of those with financial assets
generally rose; among the scattered declines , the
largest was a 52.0 percent drop for families in the
other-not-working work-status group (means by
groups are not shown in the tables).
Tran action Accounts and Certificates of D po, it
In 2007, 92.1 percent of fami lies had some type of
transaction account-a category comprising checking, savings, and money market deposit accounts;
money market mutual funds; and call or cash accounts
at brokerages. The increase of 0.8 percentage point in
ownership since 2004 resumed the upward trend seen
in earlier surveys after the ownership rate had remained essentially unchanged over the previous
three-year period . Families that did not have any type
of transaction account in 2007 were disproportionately likely to be in the bottom income quintile group,
to be headed by a person younger than 35, to be
nonwhite or Hispanic, to be headed by a person who
was neither working nor retired, to be renters , or to
have net worth in the bottom quartile. See box
"Decisions about Checking Accounts" for a discussion of the reasons families do or do not have a
checking account. Over the 2004-07 period, transaction account ownership rose noticeably-by 3 to
4 percentage points-for families in South, nonwhite
or Hispanic families, and families headed by a person
who did not graduate from high school or who was
aged 55 to 64.
The slight overall expansion in ownership of transaction accounts in the recent three-year period is
reflected in the small changes in the types of transaction accounts held by families. Ownership of checking and savings accounts inched up, while ownership
of money market and call accounts slightly declined
(table 6. 1).
6.1.
All families
Type of transaction account
Checking .
Savings.
Money market
Call ..
2007
(percent)
I
Change. 2004--{)7
(percentage points)
89.7
.3
47.2
.1
20.9
-.2
2. 1
-4
The savings account category includes a relatively
small number of tax-preferred accounts such as medicalor health savings accounts and Coverdell or 529
education accounts. 2 1 For families with a savings
account, ownership of any of these types of taxpreferred accounts increased , from 2.5 percent in
2004 to 3.8 percent in 2007. In both of these survey
years, 529 plans accounted for about 80 percent of the
number of tax-preferred savings accounts.
Median holdings in transaction accounts for those
who had such accounts fell 2.4 percent from 2004 to
2007, while the mean fell 1 1.4 percent. Across demographic groups, the patterns of changes in the median
are mainly a mixture of substantial increases and
decreases. Median balances rose for the lowest and
highest income groups and the lowest net worth
quartile and fell or was unchanged for the middle
income groups and all the other wealth groups; across
age groups, the median increased substantially for the
less-than-35 and the 65-to-74 age groups and fell or
rose slightly for other families. By family structure,
median balances increased sharply for single families
with children and rose for childless single families
headed by a person aged less than 55, but they fell for
other families. Across work-status groups, median
21. Coverdell savings accounts, formerly known as education
individual retiremenl accounts, and 529 saving plans are tax-deferred
plans that parents or others may use to save for educational expenses.
Changes in
u.s.
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
Decisions about Checking Accounts
Between 2004 and 2007. the proportion of families with
any type of transaction account edged up slightly (table 6
in the main text). while the share without a checking
account fell 0.3 percentage point, from 10.6 percent to
10.3 percent (data not shown in the tables). The decline in
the fraction of families without a checking account follows
a longer trend ; in 1989, the share was 18.7 percent. I
Among families without a checking account in 2007,
52.7 percent had held such an account in the past,
63 .2 percent had incomes in the lowest quintile of that
distribution. 56.3 percent were headed by a person
younger than 45. and 58.3 percent were nonwhite or
Hispanic. The SCF asked all families that did not have a
checking account to give a reason for not having an
account (table A). The most commonly reported reasonA. Distribution of reasons cited by respondents for
their families' not having a checking account, by
reason, 1998- 2007 surveys
tables), the general pattern of responses is similar to that
for all families without a checking account, but some
differences are evident. For families that once had a
checking account, the proportion reporting that they did
not like banks, found service charges too high, or had
credit problems all rose from 2004. These increases were
offset by decreases in the proportion reporting that they
did not write enough checks, could not manage or bal.ance
a checking account, or did not have enough money for an
account to be worthwhile.
The SCF asked all families with a checking account to
give the most important reason they chose the financial
institution for their main checking account (table B) . In
B. Distribution of reasons cited by respondents as the
most important reason for choosing institution for
their main checking account, 1998-2007 surveys
Percent
Re,lson
Percent
Reason
Do not write enough checks to
make it wonhwhile
Minimum balance is too high .
Do not like dealing witll banks
Service charges are too high .
Cannot manage or balance a
checking account ..........
No bank has convenient hours
or 10c.1ti on . . . . . . . . . . . . . . . . . ....
Do not have enough money ... . . ..
Credit problems .
Do not need or want account
Other ..
Total ..
1998
I 200 I I 2004 I 2007
28.4
8.6
IS.5
11.0
28.5
6.5
22.6
10.2
27 .9
5.6
22.6
11 .6
18.7
7.6
25 .2
12.3
7.2
6.6
6.S
3.9
1.2
12.9
2.7
6.3
3. 1
.4
14.0
3.6
5.1
2.3
l.l
14.4
2.4
5 .2
2.4
.8
10.4
6.6
S.9
5.6
100
100
100
100
1998
Location of their offices . .. . . . . .
43 .6
Had the lowest fees/minimum
balance requirement .
18.4
Able to obtain many services
at one place .
16.0
Recommended: friend/family
has account there . .. .. ....
3.6
Personal relationship: they
know me: family member
works there .
3.9
Connection through work
or school
1.4
Always done business there:
banked there a long time:
.. . .
2.7
other business there
OO'ered safety and absence
of risk .. . . .
. . ..
2.1
Other convenience: payroll
deduction/direct deposit
I.2
7.1
Other ... . . . . . . . . .
Total .
. .. . . 100
.
I 200 I I 2004 I 2007
42.8
45.4
45 .9
16.6
16.3
13.7
16.4
15.3
16.2
4.7
3.9
4.2
4.0
35
4.2
2.0
3.5
3.3
2.4
2.9
3.0
2.2
1.9
2.9
U
7.5
1.2
6.1
1.0
6.1
given by 25 .2 percent of such families-was that the
family did not like dealing with banks. Another 18.7 percent did not write enough checks to make account
ownership worthwhile; this reason had been the most
frequently reported one in each of the earlier years
shown. The proportion reporting they did not have enough
money to make an account worthwhile also declined
notably-from 14.4 percent in 2004 to 10.4 percent in
2007. Another 12.3 percent of families said that service
charges were too high. The SCF showed a sizable increase
in the fraction of families reporting credit problems as a
reason-from 2.4 percent in 2004 to 6.6 percent in 2007:
the fraction of families that cited they did not need or
want an account as a reason also increased substantially,
from 5.2 percent in 2004 to 8.9 percent in 2007.
When attention is further restricted to families that
once had a checking account (data not shown in the
2007, 45.9 percent of families chose the institution for
their main checking account for reasons related to the
location of the offices of the institution. 2 Another 16.2 percent placed the most importance on the ability to obtain
many services at one place, and 13.7 percent singled out
the importance of obtaining the lowest fees or minimum
balance requirements. Absence of risk was of primary
importance for only a relatively small fraction of families .
Over the 2004-07 period, the most noticeable changes in
these responses were a decrease in the fraction of families
citing reasons related to the lowest fees or minimum
balance requirements and the increase in the fraction
Citing reasons related to the safety and absence of risk
oll"ered by the institution.
I. For the definition of "transaction account," see the main text. For a
more extensive discussion of the ways that families obtain checking and
credit services, see Jeanne M. Hogarth. Christoslav E. Anguelov, and
linkook Lee (2005), "Who Has a Bank Account') Exploring Changes over
Time, 1989-2001 ," }ollmal of Family & Econumic {""lies. vol . 26
(I ). pp. 7-30.
2. For a discussion of the definilion of local banking markels. see
Dean FAme!. Anhur B. Kennickell. and Kevin B. Moore (2008),
"Banking Market Definition: Evidence from rhe Survey of Consumer
Finances." Finance and Economics Discussion Series 2008-35 (Wash·
ington: Board of Governors of the Federal Reserve System. October),
www.federalreservc.gov/pubs/fedS/200SI200S351200835pap.pdf.
100
100
100
A21
A22
Federal Reserve Bulletin 0 February 2009
balances fell for all groups except the working-forsomeone-else category. Holdings increased for households headed by a person in a technical, sales, or
service occupation but decreased for the remaining
three occupation groups. Median balances increased
strongly for nonwhite or Hispanic families and fell
somewhat for other families. By region , median
holdings declined substantially for families in the
Northeast and Midwest.
Certificates of deposit (CDs)-interest-bearing deposits with a set term-are traditionally viewed as a
low-risk saving vehicle, and they are often used by
persons who desire a safe haven from the volatility of
financial markets. Over the 2004-07 period, the
attractiveness of CDs increased as the interest rates
on them rose. The resulting increase of 3.4 percentage
points in ownership was the largest increase observed
in the SCF since 1989. Over the recent period ,
ownership increased among almost all demographic
groups. Increases in ownership were particularly
strong for the top income group, the oldest age group,
retired families, and the next-to-highest net worth
group. The overall median value of holdings of CDs
increased 21.2 percent over the three-year period,
while the mean value decreased 7.6 percent. Consideration of changes in the median across demographic
groups reveals substantial increases for the first and
third income quintiles, the some-college education
group, the other-not-working group, and the other
occupation group. The overall decline in the mean
suggests that balances on most new accounts tended
to be moderate.
Saving Bonds and Other Bonds
Savings bonds are owned disproportionately by families in the highest 40 percent of the income distribution and by families in the top half of the distribution
of net worth . Over the 2004-07 period, the ownership
of savings bonds declined 2.7 percentage points, to
14.9 percent overall, and it fell for virtually all
demographic groups. Median holdings fell 9. 1 percent, but the mean rose 4.8 percent.
Other bond types tend to be very narrowly held,
and the ownership rate fell to 1.6 percent in 2007, a
drop of 0.2 percentage point from 2004. 22 Although
the ownership rate for such bonds fell only slightly,
changes in the types of bonds held by families were
somewhat larger and were driven mainly by a decline
22. "Other bonds" as reported in the survey are held directly and
include corporate and mortgage-backed bonds ; federal , state, and local
government bonds; and foreign bonds . In this article, financ ial assets
held indirectly are those held in retirement accounts or in other
managed assets.
in the fraction of families owning bonds of multiple
types. The proportion of families that owned government bills and bonds, mortgage-backed bonds , and
corporate or foreign bonds fell in the recent period,
while ownership of tax-exempt bonds was unchanged
(table 6.2).
6.2.
Type of bond
Government .......... . . .
Tax exempt ......... . . . . . . . .
Mongage backed .
Corporate or foreign .
2007
(percent)
All families
Change, 2004--07
(percentage points)
I
.3
- .1
t
-. 1
.4
-.4
.4
1.0
+ Less than 0.05 percent.
Ownership of any type of bond is concentrated
among the highest tiers of the income and wealth
distributions, and these groups saw little change in
ownership from 2004 to 2007. The median value of
bonds for families that had them rose 12.0 percent,
while the mean fell 4.4 percent.
Publicly Traded Stock
The direct ownership of publicly traded stocks is
more widespread than the direct ownership of bonds,
but, as with bonds, it is also concentrated among
high-income and high-wealth families. The share of
families with any such stock holdings declined 2.8 percentage points from 2004 to 2007, to 17.9 percent,
thereby continuing a decline observed over the previous three-year period . Across demographic groups,
the recent decline was most marked for the highest
decile of the income distribution, families headed by
a person who was aged 55 to 74 or who was
self-employed, families in the Northeast or the Midwest, and fami lies in the top quartile of the net worth
distribution .
The major stock price indexes increased about
30 percent over the 2004-07 period; at the same time,
the median amount of directly held stock for families
with such assets rose 3.0 percent, and the mean
climbed 25.6 percent. The median value declined for
many demographic groups but rose substantially for
the two family-structure groups with children and for
the self-employed. The mean amount of directly held
stock increased across most demographic groups
(data not shown in the tables).
The great majority of families with directly held
stock owned stock in only a small number of companies . Over the three-year period, the share of families
owning stock in only one company increased
(table 6.3).
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A23
6.4.
6.3.
Number of
directly held stocks
Families with directly held stock.s
Change, 2004-07
2007
(percent)
(percentage points)
I
2 to 9.
10 or more . . . ....... .. . .
I
36.4
47.6
16.0
1.8
-.1
-\.7
For 36.1 percent of stockowners in 2007, at least
one of the companies in which they owned stock was
one that employed, or had employed, the family head
or that person's spouse or partner. Ownership of stock
in a foreign company was less common; only 15.8 percent of stockholders had this type of stock (data not
shown in the tables). The 2004 data show a similar
pattern.
Poled Lnvestment Funds
Pooled investment funds are among the least commonly held of the specific financial assets shown in
table 6, 23 As was the case for directly held bonds and
stocks from 2004 to 2007, direct ownership of pooled
investment funds fell-a decline of 3.6 percentage
points, to 11.4 percent of families in 2007. Ownership
of pooled investment funds declined for almost every
demographic group over the three-year period. Both
the overall change and the changes for demographic
groups continue the pattern observed in the previous
three-year period.
The survey also collects information on the different types of pooled investment funds owned by
families. Ownership shifted over the recent period to
stock funds from most other types of funds; the
residual "other" category, which consists almost
entirely of hedge funds and exchange-traded funds ,
decreased slightly (table 6.4).
Among families owning pooled investment funds,
the value of holdings has continued an increase seen
over the preceding decade; in the recent three-year
period, the median holdi ng rose 26.1 percent, and the
mean rose 53.3 percent. Median and mean values
increased across almost every demographic group,
evidence that the decrease in ownership was concentrated among families with small account balances
(data not shown in the tables).
23 . In this article, pooled investment funds exclude money market
mutual funds and indirectly held mutual funds and include all other
types of directly held pooled investment funds, such as traditional
open-end and closed-end mutual funds, real estate investment trusts ,
and hedge funds .
Type of pooled
investment fund
Stock.
Tax· free bond .
Government bond ..
Other bond.
Combination .
Other ..
2007
(percent)
10.2
2.1
1.2
1.0
1.4
.5
All families
Change, 2004-07
(percentage points)
I
3.2
- .8
.1
- .5
-1.3
- .2
Reliremenl Accounts
Ownership of tax-deferred retirement assets such as
personally established indi vidual retirement accounts
(IRAs) or job-based 401(k) accounts tends to increase
with families' income and net worth.24 For several
reasons, ownership is also more likely among families headed by a person less than 65 years of age than
among the older groups. First, even though retirement
accounts have been in existence for more than 25
years, they may not have become common until
relati vely late in the careers of many persons in the
older groups. Second, beginning in the year that a
/2,
person reaches age 59 1 funds held by that person in
retirement accounts may be withdrawn without penalty, and some in the two oldest age groups may have
already done so. Third, families may have used funds
from retirement accounts accumulated from previous
employment to purchase an annuity at retirement;
annuities are treated in the SCF as a separate type of
managed asset.
From 2004 to 2007, the fraction of fami I ies wi th
retirement accounts rose 2.9 percentage points, to
52.6 percent; the increase offset most of the 3.0 percentage point decrease over the preceding three years.
In the recent period, the fraction of families that had
some type of account plan associated with a current
or past job or that held an IRA or Keogh account
24. Tax-deferred retirement accounts consist of IRAs, Keogh
accounts, and certain employer·sponsored accounts . Employer·
sponsored accounts consist of 401(k), 403(b), and thrift savings
accounts from current or past jobs; other current job plans from which
loans or withdrawals can be made; and accounts from past jobs from
which the family expects to receive the account balance in the future .
This definition of employer-sponsored plans is intended to confine the
analysis to accounts that are portable across jobs and for which
families will ultimately have the option to withdraw the balance.
IRAs and Keoghs may be invested in virtually any asset. including
stocks, bonds, pooled investment funds, options, 'and real estate. In
principle , employer-sponsored plans may be invested in a similarly
broad way, but , in practice, a person's choices for investment are
sometimes limited to a narrower set of assets .
A24
Federal Reserve Bulletin D February 2009
increased, and the fraction that had at least one
account of each type rose as well (table 6.5) .
6.5 .
All families
Type of retirement acco unt
Account plan from current
or past job .
Individual retirement account
or Keogh.
2007
(percent)
Change, 2004-07
I (percentage points)
38.0
2.0
30.6
1.6
14.3
1.8
M EMO
Both types .
Over the 2004-07 period, ownership increased for
nearly all groups. Substantial increases were reported
for families in the 45-to-54 and 65-to-74 age groups,
nonwhite or Hispanic families, families living in the
South, and families in the technical, sales, or services
occupation group.
In a continuation of the trend over the preceding
decade, holdings in retirement accounts increased
markedly in the 2004-07 period; for families having
retirement accounts, the median rose 16.3 percent,
and the mean rose 9.5 percent. Gains also appeared in
the median holdings of most demographic groups
over the recent period; some of the largest increases
were for families in the middle of the income and
wealth distributions, families in the high-schooldiploma and some-college education groups, single
families with children, nonwhite or Hispanic families,
the self-employed work-status group, families in the
South and West, and families residing in nOD-MSA
areas.
Although tax-deferred retirement assets are clearly
an important element in retirement planning, families
may hold a variety of other assets that are intended, at
least in part, to finance retirement. Such other assets
might also be used for contingencies as necessary.
Similarly, a need for liquidity might drive a family to
liquidate or borrow against a tax-deferred retirement
asset, even if it will be assessed a penalty for doing
so.
Two common and often particularly important
types of retirement plans are not included in the assets
described in this section: Social Security (the federally funded Old-Age and Survivors' Insurance program, or OASI) and employer-sponsored definedbenefit plans. OASI is well described elsewhere, and
it covers the great majority of the population. 25 The
retirement income provided by defined-benefit plans
25. For a detailed description of OASI, see Social Security Admin istration, "Online Social Security Handbook, " Publication 65-008,
www.ssa.gov/OP_Home/handbook/ssa-hbk.htm.
is typically based on workers' salaries and years of
work with an employer, a group of employers, or a
union. Unfortunately, future income streams from
OASI and defined-benefit plans cannot be translated
directly into a current value because valuation depends critically on assumptions about future events
and conditions-work decisions, earnings, inflation
rates, discount rates, mortality, and so on-and no
widely agreed-upon standards exist for making these
assumptions. 26
However, the SCF does contain substantial information for family heads and their spouse or partner
regarding any defined-benefit plans or other types of
plans with some kind of account feature to which they
have rights from a current or past job. 27 In 2007,
57.7 percent of families had rights to some type of
plan other than OASI through the current or past
work of either the family head or that person's spouse
or partner, a level nearly the same as in 2004. For this
group of families, the fraction with a standard definedbenefit plan with an annuity payout scheme declined
over the recent period, while the fraction with a plan
with at least some account feature and the fraction
that had both types of plans increased (table 6.6).
6.6.
Families with any pension plan
Type of pension plan
Defined benefit
Account plan .
2007
(percent)
Change, 2004-07
(percentage points)
55 .8
658
- 1.6
21.6
1.8
3.3
M EMO
Both types .
In many pension plans with account features, contributions may be made by the employer, the worker,
or both. In some cases, these contributions represent a
substantial amount of saving, though workers may
offset this saving by reducing their saving in other
forms. An employer's contributions also represent
additional income for the worker. In 2007, 87.1 percent of families with an account plan on a current job
26. For one possible calculation of net worth that includes the
annuity value of payments from defined-benefit pensions and OAS!,
see Arthur B. Kennickell and Annika E. Sun den (1997), " Pensions,
Social Security, and the Distribution of Wealth ," Finance and Economics Discussion Series 1997-55 (Washington : Board of Governors of
the Federal Reserve System, October), www.federalreserve .gov/ pubs/
feds! 1997/index.html.
27. The definition of account plan used here differs slightly from
that used in computing the survey wealth measure, which includes
account balances only if the family has the ability to make withdrawals
from, or borrow against, the account. Here the only criterion used in
classification is whether any account balance exists. For example, a
defined-benefit plan with a portable cash option, which would allow
the covered worker to receive a lump sum in lieu of regular payments
in retirement, would be treated as an account plan here.
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
of either the family head or that person's spouse or
partner had an employer that made contributions to
the plan, a decline of 1.6 percentage points from
2004. In 2007, 91.4 percent of families with such
plans made contributions themselves, an increase of
2.1 percentage points from 2004. The median annual
contribution by employers who contributed to such
accounts was $2,200 in 2007, and the median contribution by families that contributed was $2,500; both
amounts fell slightly from 2004 levels (data not
shown in the tables).
The eligibility of working heads of families to
participate in any type of job-related pension rose
from 54.8 percent in 2004 to 55.9 percent in 2007; it
had declined 2.4 percentage points over the preceding
three years (data not shown in the tables). Participation by eligible workers is usually voluntary. In 2007,
83.8 percent of family heads who were eligible to
participate elected to do so, down slightly from
84.1 percent in 2004. 28 The choice to participate
appears to be related strongly to income. In 2007, the
fraction of eligible family heads declining to participate fell as income rose, and this general pattern was
not substantially altered from 2004 (table 6.7) .
6.7.
Percentile of income
Families headed by a perso n who
was eligible for a work-related
retirement plan on a current job and
who declined to panicipate
2007
(percent)
Less than 20
20-39.9 .
40-59.9
60-79.9 . .
80-89.9 . .. . . ... ..
90-100
.
54.3
28.1
18.5
10.5
10.9
6.5
I (percentage points)
Change, 2004-07
3.7
-1.6
3
-1.5
2.0
1.5
Ca h Value Life lnSllraJlCe
Cash value life insurance combines an investment
vehicle with insurance coverage in the form of a
death benefit. 29 Some cash value life insurance policies offer a high degree of choice in the way the
28. An analysis of the March Current Population Survey (CPS)
with a definition of family head that is closest to that in this article
shows an opposite trend in pension eligibility for employed family
heads , but that trend is at a similar level as in the SCE The CPS
eligibility estimate for family heads with a job in the past year was
57.8 percent in 2004 and 53.9 percent in 2007 . Differences in the
definition of the relevant employment may explain some of the
difference in the levels in the two surveys. Unlike the SCF, the CPS
shows a small increase in the uptake rate for such eligible workersfrom 83.0 percent in 2004 to 83.3 percent in 2007 .
29 . The survey measures the value of such policies according to
their current cash value, not the ir death benefit. The cash value is
included as an asset in this article only when the cash value at the time
of the interview was nonzero.
A25
policy payments are invested. Investment returns on
such policies are typically shielded from taxation
until the money is withdrawn; if the funds remain
untapped until the policyholder dies, the beneficiary
of the policy may receive, tax-free, the death benefit
or the cash value, whichever is greater. In contrast,
term insurance, the other popular type of life insurance, offers only a death benefit. One attraction of
cash value policies for some people is that they
promote regular saving funded through the required
policy premium.
Ownership of cash value life insurance is broadly
spread across demographic groups, with a tendency
toward increasing rates among families with higher
levels of income and net worth and those with older
family heads . Ownership of cash value policies over
the 2004-07 period continued a declining trend,
decreasing 1.2 percentage points, to 23.0 percent of
families in 2007. The decline was shared by most
demographic groups. Over the three-year period,
ownership of any type of life insurance, cash value or
term, also fell slightly-from 65.4 percent in 2004 to
64.9 percent in 2007 (data not shown in the tables).
Of those families with some type of life insurance, the
proportion with term policies was about unchanged,
while the proportion with cash value policies fell;
these changes are similar to trends in the earlier
surveys.
After declining over the previous three-year period,
the median value of cash value life insurance for
fami lies that had any such insurance rose 21 .2 percent
between 2004 and 2007, and the mean rose 23 .7 percent. The median showed increases across most
demographic groups, although it declined considerably for families in the other-not-working work-status
category, renter families, and families in the second
quartile of the wealth distribution.
Other Managed As_ets
Ownership of other managed assets-personal annuities and trusts with an equity interest and managed
investment accounts-is concentrated among families with higher levels of income and wealth and
among families headed by a person who is aged 55 or
older or who is retired. 3o Ownership of these assets
30. Annuities may be those in which the famil y has an equity
interest in the asset or in which the family possesses an entitlement
only to a stream of income . The wealth figures in this article include
only the annuities in which the family has an equity interest. In 2007.
5.5 percent of families reported having any type of annuity. and of
these families. 81.0 percent reported having an equity interest. The
trusts or managed investment accounts included in other managed
assets are those in which families have an equity interest and for which
component parts were not separately reported . Typically. such accounts
A26
Federal Reserve Bulletin 0 February 2009
declined 1.5 percentage points between 2004 and
2007 after a small increase over the previous three
years. Ownership fell in the recent three-year period
for almost every demographic group, with the largest
declines for families in the Midwest and for the
next-to-highest income and net worth groups. Across
all families , the fraction with an annuity declined over
the period, and the fraction with a trust or managed
investment account inched up, while the fraction with
both categories of managed assets was essentially
unchanged (table 6.8).
6.8.
All families
Type of olher managed asse l
Annuily .
Trust or managed inveslment
account
2007
(percenl )
Change . 2004-07
I (percentage poinls)
4.5
-1.4
J.7
.1
M EMO
Both lypeS .
.3
t Less than 0.05 percent .
Between 2004 and 2007, the median value of other
managed assets for families that had such assets
increased 41.7 percent, an increase that offset the
decline in the preceding three-year period. Over the
more recent period , the corresponding mean value
increased 9.4 percent. Median holdings rose for many
demographic groups; noticeable exceptions were families in the top two income deciles and families headed
by a person who was working for someone else or
who was working in a technical , sales, or service job
or a job in the other-occupation category. The rise in
the median value reflects substantial increases in
annuities and modest increases in trusts or managed
investment accounts . For families with an equity
interest in an annuity, the median holding rose
23 .1 percent, to $50,000 in 2007 ; for families with a
tru st or managed investment account as defined in
this article, the median holding rose 9.1 percent, to
$120,000 (data not shown in the tables).
As noted in the discussion of retirement accounts,
some families use settlements from retirement accounts to purchase an annuity. In 2007, 30.4 percent
of families with annuities had done so (data not
shown in the tables). Of these families , 71 .7 percent
had an equity interest in their annuities.
Other Financial Assets
Ownership of other financial assets-a heterogeneous
category including oil and gas leases, futures contracts, royalties, proceeds from lawsuits or estates in
settlement, and loans made to others-fell 0.7 percentage point between 2004 and 2007, to 9.3 percent.
Ownership of such assets tends to be more common
among higher income and wealth groups, younger
age groups, and families headed by a person who is
self-employed. Ownership across demographic groups
generally declined over this period, while the median
holding for those who had such assets increased
36.4 percent, to $6,000.
Holdings may be grouped into four categories:
cash, which includes money owed to families by
other persons; future proceeds, which include amounts
to be received from a lawsuit, estate, or other type of
settlement; business items, which include deferred
compensation, royalties, futures contracts, and deri vatives; and other. The proportion of families holding
various types of other financial assets remained fairly
constant over the three-year period, with cash being
by far the most frequently held component (table 6.9).
6.9.
All famities
Type of other finan cial assel
2007
(percent)
I
Change. 2004-07
(percentage points )
Casb.
Fulure proceeds
8. 1
.9
- .8
.I
Bus iness items .
.5
.I
Other . .
are those in which the owner>hip is complicated or the management is
undertaken by a professional . In 2007 , 84.8 percent of famil ies with
trusts or managed investment accounts had an equity interest in such
an account.
The survey encourages respondents who have trusts or managed
investment accounts that are held in relatively common investments to
report the components. Of the 3.8 percent of families that reported
having any kind of trust or managed investment account in 2007.
47.1 percent of them reported at least one of the component assets
separately. Of families that detailed the components in 2007. 84.8 percent reported some type of financial asset. 19.0 percent reported a
primary residence, 15.3 percent reponed other real estate, 15.3 percent
reported a business, and 2.9 percent reported another type of asset
(data not shown in the tables). The fraction of these families reporting
the primary residence as a trust component in creased 8.0 percentage
points between 2004 and 2007, and the fraction reporting a business
increased 11 .7 percentage points; the fraction reporting other real
estate or another type of asset was linle changed.
;. Less than 0.05 percent.
Some publicly traded companies offer stock options to their employees as a form of compensation.) '
Although stock options, when executed, may represent an appreciable part of a family's net worth, the
survey does not specifically ask for the value of these
optionsY Instead , the survey asks whether the family
31. See Jeffrey L. Schildkraut (2004), " Stock Opti ons: National
Compensation Survey Update" (Washington: Bureau of Labor Statistics. September), www.bl s.gov/opub/cwc/cm20040628ybOlpl.htm .
32. Beca use such opti ons are Iypically not publicly traded or their
e)(ecution is otherwise constrained. their value is uncertain until the
u.s.
Changes in
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A27
7. Di rec t and imiirect fa mil y hold ings of stock. by selecll:d characteri stics of fa miljes. 1998-2007 surveys
Percent except as noted
Family characteristic
Families having stock holdings,
direct or indirect
1998
All families .
.. .
I
2001
I
2004
I
Stock holdings as share of
group's financial assets
Median value among families with holdings I
(thousands of 2007 dollars)
'I
2007
1998
I
2001
I
2004
I
2007
I
1998
I
2001
I
2004
I
-2007
48.9
52.2
50.2
51.1
31.8
40.4
35.7
35.0
54.0
56.1
51.3
53.3
10.0
30.8
50.2
69.3
77.9
90.4
12.9
34.1
52.5
75.7
82.0
89.7
11 .7
29.6
51.7
69.9
83.8
92.7
\3 .6
34.0
49.5
70.5
84.4
9\.0
6.4
12.7
15.3
24.2
57.3
17\.9
8.8
9.1
17.5
33.5
75 .6
289.7
8.2
11 .0
16.5
28.7
60.9
225.2
6.5
8.8
17.7
34.1
62.0
2 19.0
20.4
29.8
38.1
45.8
50.4
62. 5
37.4
35.6
46.8
52.0
57.3
60.5
32.0
30.9
43.4
4\,7
48.8
57.5
39.0
34.3
38.3
52.5
49.3
57.6
40.8
56.7
58.6
55.9
42.7
29.4
49 .0
59.5
59.3
57.4
40.0
35.7
40.8
54.5
56.5
62.8
46.9
34.8
38.6
53.5
60.4
58.9
52. 1
40.1
8.9
25.5
48.4
59.8
71.3
76.4
8.2
32.2
58.5
94.2
175.8
128.7
8.8
22.0
54 .9
78.0
76.9
94.3
7.0
26.0
45.0
78 0
57 .0
41.0
44.9
55 .0
55.7
58.4
51.3
48.7
52.5
57.2
59.1
56.2
55.4
51.8
40.3
53.5
53 .8
55.0
5\.5
39.3
44.3
53.7
53.0
55.0
55 .3
48.1
59.8
27.5
62.4
30.9
60.9
26.4
62.5
26.0
43 .3
9.5
585
8.2
49.4
96
41.2
8.6
55.1
40.5
56.8
46.2
51.9
39.2
53 .8
45.0
Perr:enlile oJ income
Less than 20 . . ...
20-39.9 .. . ... . , ..
40-59.9 .. ... .... , .
60-79.9 ..... ... ....
80-89.9 ......... .. ..
90-100 ..........
Age oJ head (years)
Less than 35 ........
......
35-44 .
45-54 . .... ........
55-64 ....
..... ..
65-74 ..
... .....
75 or more . ...... ..
HOI/sing slaws
Owner .........
Renter or other .
....
NOTE : Indirect holdings are those in pooled investment trusts, retirement accounts, and other managed assets. See also note to table I .
head or that person's spouse or partner had been
given stock options by an employer during the preceding year. In 2007, 8.3 percent of families reported
having received stock options, a decline of 1.0 percentage point below the level in 2004; this decrease
continues a downward trend since the peak of 11.4 percent recorded in the SCF in 2001 (data not shown in
the tables).33
Direct and Indirect Hiding, o f Publ ic ly Traded
Stocks
Families may hold stocks in publicly traded companies directly or indirectly, and information about each
of these forms of ownership is collected separately in
the SCF. When direct and indirect forms are combined, the 2007 data show a resumption of a trend of
increasing stock ownership (table 7). Between 2004
and 2007 , the fraction of families holding any such
stock rose 0.9 percentage point, to 51.1 percent, a
level still below the 2001 peak of 52.2 percent. Much
like ownership of directly held stock, ownership of
direct and indirect equity holdings is more common
among higher-income groups and among families
headed by a person aged 35 to 64. Over the recent
three-year period, ownership increased for all income
groups except the third quintile and top decile. Across
age groups, ownership fell for families headed by a
exercise date ; until then , meaningful valuation would require complex
assumptions about the future behavior of stock prices.
33. Data on the awarding of options have been collected in the SCF
since 1995.
person younger than 45 or aged 55 to 64; ownership
rose substantially for fami lies headed by a person
aged 45 to 54 or older than 65.
At the same time, the overall median value of
direct and indirect stock holdings dropped 2.0 percent. Changes in the median value across demographic groups were mixed, with declines more common for groups that experienced increases in
ownership, an indication that most new owners had
small amounts. As a proportion of financial assets,
holdings rose 2.0 percentage points overall, with
substantial increases for the first and fourth income
quintiles and the oldest age group.
As noted earlier in the discussion on net worth, the
stock markets have undergone sizable declines since
the data collection for the 2007 SCF was completed.
To gauge the potential effect of these changes on the
median amount of equity held by families, the equity
values in the survey were deflated by the ratio of the
average of the Wilshire 5000 index in October 2008
to the value of the index on the day of the interview,
assuming a homogeneous rate of return for all equity
holders and no changes in the portfolios of families
since the time of the survey. Under this scenario, the
median value of equity falls 35.7 percent, from the
2007 value of $35,000 to $22,500 (data not shown in
the tables) .
Among families that held equity, either directly or
indirectly, in 2007, ownership through a tax-deferred
retirement account was most common, followed by
direct holdings of stocks, direct holdings of pooled
investment funds, and managed investment accounts
A28
Federal Reserve Bulletin D February 2009
or an equity interest in a trust or annuity. Over the
2004-07 period, ownership of tax-deferred accounts
rose, while ownership of all other types of equities
fell ; the fraction of equity owners with mUltiple types
also declined (table 7.1).
7. 1.
Type of direct or
indirect equity
Tax-deferred account
Directly held stock ..
Directly held pooled
investment fund .
Managed investment account.
or equity interest in a trust
or annuity
MEMO
Multiple types .
Families with equity
2007
(percent)
Change, 2004-07
(percentage points)
839
35.1
3.3
-6.0
21.1
-7.3
8. 1
-1.3
37.3
-6.7
The distribution of amounts of holdings over these
types of equities shows a different pattern. Of the total
amount of equity, 37.8 percent was held in taxdeferred retirement accounts, 33 .6 percent as directly
held stocks, 22. 1 percent as directly held pooled
investment funds, and 6.5 percent as other managed
assets (data not shown in the tables).
Nonfinancial Assets
By definition, a rise in nonfinancial assets as a share
of total assets must exactly offset the 1.8 percentage
point drop in the share of financial assets from 2004
to 2007, which was discussed earlier in this article
(table 5). The changes in these shares may have been
driven by changes in portfolio choices, portfolio
valuation, or both. The 2001 estimate of the value of
nonfinancial assets as a share of total assets , at
57 .8 percent, appears to be the low point since 1998
(table 8); the 2007 level of 66.1 percent is near the
middle of the range over the past seven surveys
(data not shown in the tables). Over the recent
three-year period, the value of primary residences as a
8. Value of nonfinancial as elS of all familie , di tributcd by
type of assel, 1998-2007 surveys
Percent
Type of nonfinancial asset
Vehicles I .
Primary residence
Other residential propeny .
Equity in nonresidential propeny .
Business equity .
Other ...... . . . . . . . . . . . . . . . . . . . . .
Total . . .. . . ........ .. .. .. .. ...
MEM
O
Nonfinancial assets as a share of
total assets . . ... .... ... .. .... ..
NOTE: See note to table I.
I. For definition , see text note 34.
2007
1998
6.5
47.0
8.5
7.7
28.5
1.7
100
59.3
5.9
46.9
8. 1
8.2
29.3
1.6
100
57.8
5.1
50.3
9.9
7.3
25.9
1.5
100
64.3
4.4
48.1
10.7
5.8
29.7
U
100
66.1
share of nonfinancial assets fell 2.2 percentage points,
to 48.1 percent, still above its share before 2004. The
share of equity in nonresidential property also declined. The largest offsetting increase was in the share
of business equity, which rose 3.8 percentage points
over the period to its highest recorded share of
29.7 percent in 2007.
In 2007, the level of ownership of nonfinancial
assets was 92.0 percent of families, 0.5 percentage
point lower than in 2004 (first half of tables 9.A and
9.B, next-to-Iast column). Across most of the demographic groups shown, the 2007 rate was 85 percent
or more; exceptions were the lowest income and
wealth groups, younger childless single families,
families headed by a person who was neither working
nor retired, renters, families headed by a person
without a high school diploma, and families living in
the Northeast. Over the 2004-07 period, ownership
rose most for the 55 -to-64 age group, families with
children, nonwhite or Hispanic families, and families
living in the South. Substantial declines in ownership
were seen by the oldest age group, the lowest quintile
of the income distribution, families without children,
families headed by a retiree, and families living in the
Northeast.
Over the recent period, the median holding of
nonfinancial assets for families having any such
assets rose 9.3 percent, and the mean increased
16.7 percent. Across demographic groups, substantial
gains in the medians far outnumbered declines . The
largest gains in the median value occurred for the
lowest quinti Ie of the income distribution, and smaller
gains were observed in the top four deciles , with
small declines for the middle groups. Median holdings also climbed substantially among families headed
by a person who was not a high school graduate, the
education group with the lowest ownership of such
assets .
Ve hicles
Vehicles continue to be the most commonly held
nonfinancial asset. 34 From 2004 to 2007, the share of
families that owned some type of vehicle rose 0.7 percentage point, to 87 ,0 percent. Trends in ownership
rates over the recent three years were mixed across
most demographic groups. Across age groups, ownership increased for all groups except the 35-to-44 and
75-or-more age categories. Vehicle ownership de34. The definition of vehicles in this article is a broad one that
includes cars, vans. spon utility vehicles. trucks. motor homes.
recreational vehicles . motorcycles. boats. airplanes. and helicopters.
Of families owning any type of vehicle in 2007 . 99.8 percent had a car.
van. spon utility vehicle. motorcycle, or truck. The remaining types of
vehicJes were held by 15.4 percent of families.
Changes in
u.s.
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
9. Family holding ' of nonfinancial
2007 su rvey
3. selS
A29
and of any ass l., by selected characlerislics of families and lype f as el. 2004 and
A. 2004 Survey of Consumer Finances
Family characteristic
Any asset
Vehicles
Percentage of families holding asset
86.3
69.1
12.5
8.3
II.S
7.8
n.s
97.9
65 .0
85.3
91.6
95.3
95.9
93.1
40.3
56.9
71.6
83.1
91.9
94.7
3.6
6.9
10.0
14.0
19.4
37.2
2.7
3.8
7.6
10.5
12.9
20.8
3.7
6.7
9.5
12.1
15.9
34.7
3.9
4.3
7.6
10.4
8.4
16.7
76.4
92.0
96.7
98.4
99.1
99.3
92.2
97.8
99.8
100.0
99.8
100.0
Age oj head (wars)
Less than 35 ... ......... . ... . ..... ..
35-44 " , ....... .. .....
45-54 ..
. ... .... ... ... ..
55-64 . .. . .
65--74 .. . ..
75 or more .
. ........ .... .. .
82.9
89.4
88.8
88.6
89.1
76.9
41.6
68.3
77.3
79.1
81.3
85.2
5. 1
9.4
16.3
19.5
19.9
9.7
3.3
6.4
11.4
12.8
10.6
7.7
6.9
13.9
15.7
15.8
8.0
5.3
5.5
6.0
9.7
9.2
9.0
8.5
88.6
93.0
94.7
92.6
95.6
92.5
96.5
97.7
98.3
97 .5
99.5
99.6
Family structure
Singh: with child(rcn) .
Single. no child. age less than 55
Single. no child. age 55 or more
Couple with child(ren) ..
Couple. no child ..
80.0
77.3
75 .2
91.3
93.6
60.6
42.0
70.0
75.8
80.1
6.4
7.1
11.4
14.4
15.8
5.0
3.9
6.8
7.7
11.4
4.9
7.0
5.3
12.2
16.3
5.9
6.7
7.9
6.4
8.8
88.4
84.1
88 .2
95.7
97 .4
96.9
95.4
97.8
99. 1
98.9
Educatiotl oj head
No high school diploma . . . .. . . .. .. . .
High school diploma
. . . ... . . "
Some college . .. ...
College degree .
70. 1
87.6
88.2
90.7
56.3
65.8
64.5
79. 1
5.6
8.3
12.2
19.0
4.0
6.1
8.1
11 .9
4.2
10.4
10.7
15.6
1.9
5.3
9.4
11.3
81.9
92.4
93.3
96.5
91.1
98. 1
99.1
99.9
Race or etJmiciry oj respondenT
White non· Hispanic
...
Nonwhite or Hispanic ......
90.3
76. 1
76.1
50.8
14.0
8.9
9.2
5.8
13.6
5.9
9.3
3.8
95.8
84.0
99.3
94.4
Current work staTus oj head
Working for someone else
Self-employed . .
. ..... . . . . ..
Retired . . . . .....
Other not work.ing
89.7
91.2
79.0
66.9
66.5
79.1
75.8
40.0
lOA
25.8
12.8
5.4
6.8
18.7
7.9
•
5.8
58 . 1
3.5
6.9
7.1
12.9
7.1
6.4
93.8
97 .5
89.8
76.3
98.4
99. 1
97.7
89.6
Curr.:nI occupatioll of head
Managerial or professional . .
Technical. sales. or services ..
Other occupation ..... .
Retired or other not work.ing
92.0
85.1
92.1
77.2
78.1
58 .2
66.6
70.3
19.6
8.2
9.0
11.6
11.3
6.9
7.4
7.1
21.2
9.7
10.2
4.0
10.4
7.2
5.9
7.0
97.0
90.9
94.7
87 .7
99.9
97.4
97.8
96.4
80.4
89.4
84 .9
90.6
69.8
73.5
68.9
64 .0
12.6
12.6
10.2
16.3
6.0
8.2
8.8
9.6
11.1
12.6
10.1
13.0
6.4
8.8
7.1
8.9
90.3
94.2
92.1
93.4
97 .9
99.2
97.3
97.7
85 .9
88.3
68.0
74.0
13.J
8.7
8.0
9.8
11.6
11 .0
8.3
5. 1
92 .1
94.6
97.8
98.4
92.3
73.0
100.0
*
15.7
5.4
11.0
2.4
14.7
43
9.2
4.6
100.0
75.9
100.0
93.3
69.8
89 .2
92.0
95.2
93.1
15.2
71.2
93.4
96.2
96.9
4.9
12.7
23.1
45 .6
4.1
8.3
15.1
28.8
5.6
11.2
19.9
40.8
2.9
504
7.8
12.3
18.8
73.7
97.5
99.0
99.8
99.9
91.7
100.0
100.0
100.0
100.0
All families . .
Percentile oj income
Less than 20
20-39.9 . ..
40-59.9 .
60-79.9
80-89.9 ..
90-100
• •• • •• • • • 1 .
~
Region
Northeast . . , ... ...... ... ...
Midwest .. ...... ... ...
South
West . .
~
.
........
Urballici/)'
Metropolitan s(atistieal area (MSA)
Non-MSA ....
... .. ......... . .
HOllsing sta/Wi
Owner.
Renter or other
.. ...... .. .. ..... ...
PercenTile oj net won"
Less than 25
...... ..........
25-49.9 . . ... ...... ..... . .
50-74.9 ... . ..
75--89.9 ....• . ..
90-100
. . . . .. . . . , .
.
A30
Federal Reserve Bulletin 0 February 2009
9. Family holdings of nonfi nancial as
e lS
and of any asset. by selected characteristics of families and Iype of as '01. 2004 and
2007 surveys- Continued
A. 2004 Survey of Consumer Finances-continued
Family characteristic
Vehicles
Primary
I
r«!sidence
.-
1
Other
residential
prop<:rty
InonresidentialII
Equity in
property
Business
equity
I
Other
I nonfinancial I
Any
Any asset
asset
Median value of holdings for families holding asset (thousands of 2007 dollars)
... .... . . , .... . .. .
15.6
175.7
109.8
65.9
109.8
16.5
162.3
189.9
Percentile of income
Less than 20
20-39,9 .
.
40-59,9 .,
60-79,9 .......... ... .
80-89,9 ........... .. .. ......... ... ..
90-100 ..
5,0
8,5
14.4
21.8
28,3
36,2
76.9
109,8
148,3
192.2
247.1
494,2
36,2
71.4
60.4
109,8
107,6
286,9
12. 1
32.9
39,5
47,2
65,9
207,6
32,9
32,9
68,6
164.7
109,8
384.4
4.9
7,7
11 ,0
11 ,0
19,2
54,9
24,6
78,0
145.3
216,5
309,5
715,2
18,7
85,9
169.7
3 17,6
503.6
1,271.5
Age oj head (years)
Less than 35
35-44,
45-54 ..
55-{j4 , ' ....... . ...
65- 74 ..
75 or more ., .. .... ...... .. ...
12.4
17,2
20,6
20.5
/3,6
9.2
148,3
175,7
186,7
219,7
164,7
137.3
90,6
87 ,9
98,8
148 ..~
87,9
1647
60.4
46.3
47,2
82.4
85,7
94,3
54,9
109,8
158,2
209,7
109,g
88,2
5.5
11.0
22,0
27,5
32 ,9
12,1
35.5
166,2
202 ,6
248,6
177,0
150,6
4.1.0
190.4
258,0
385,7
256,1
203.4
Single with child(ren) " '
Single, no child, age less tllan 55
Single, no child, age 55 or more
Couple with child(ren)
Couple, no chi Id ,
8,7
9.4
7,2
20,9
21.6
131.8
137.3
130,9
175,7
214,2
27.5
87,9
93,4
98,8
126,3
1
'5,5
61.5
90, 1
71.7
68.9
55,9
63,9
115.3
109,8
154,6
11 ,0
/I ,0
II ,0
22.0
22,0
98,9
43.9
117,5
195.4
224 ,6
95 ,9
47.5
154,2
250.4
314,2
Education oj head
No high school diploma ...... . . . . ...
High school diploma
Some college. ,
.......... .
College degree
8,2
/3 ,6
14,5
20,7
82.4
137,3
169,1
263.6
94.5
76,9
87,9
159.3
17,6
27.5
101.0
87.9
60.4
88.5
164,7
164,7
5,5
11,0
11,0
22,0
59,9
119,9
150.9
264,9
54 ,8
146,5
165,3
392,1
Race or e,"nidly oj I'I!sponJem
White non-Hispanic
Nonwhite or Hispanic ....
17,3
10,7
181.2
142 ,8
115,3
87,9
72.5
148.3
73.2
18,1
11.0
181.0
70.4
246.6
65.4
Current work statuS oj hem f
Working for someone else
Self-employed
Retired, , ..... ........... .
Other not working .. '
....... ....
16,3
24 ,1
ILl
11.8
175,7
272.4
142.8
142,8
96,6
155.4
109,8
94.5
43,9
137,3
65,9
•
54,9
19L1
UI.8
27.5
11.0
32,9
27.5
22.0
155,8
368, 3
144,7
65,9
177.0
514,3
181.9
33,3
Managerial or professional '"
Technical. saJes. or services ...
Other occupation .
Retired or other not working
21.2
14,0
16,0
11.1
263 ,2
164,7
142,8
142.8
131.8
liS ,)
92,3
103,2
98,6
65.9
24,2
65,9
175,7
82.4
82.4
109.8
19,2
11.0
11.0
27,5
266,2
121.9
126.6
139,6
383 ,9
125,6
145.9
1629
Regio"
Northeast
Midwest
South
West "
17,2
15.3
15.1
15,6
274.6
159.3
142,8
247 ,1
115,3
109.8
98,8
120.8
6,';,9
64 ,5
38.4
137 ,3
109,8
148,3
94.9
164,7
16,5
16,5
16.5
16,5
228, 1
165,0
13104
191.6
297,1
214,3
145.2
218.7
Urbanicit)'
Metropolitan statistical area (MSA) . '
NOIl-MSA ,
15,8
14,3
197,7
98,8
120,8
74, 1
76,9
27 .5
118. I
86,5
16,5
II ,0
178.4
104,0
218, 3
122.2
Housing status
Owner,. ,
Renter or other ,
19,2
7,9
175,7
109,8
87.9
68,1
61.5
134,8
54,9
19,2
8,8
221.4
9,2
3 18,4
13.4
Percentile of net worth
Less than 25
25-49,9 "
50-74,9
75-89.9 .'
90-100 ............
6,1
130
19. 1
24,8
33,6
71.4
93.4
175,0
274.6
494 ,2
28,
71.4
109,8
356,9
16,3
27,5
8Ll
274,6
19,2
60.4
164,7
579,3
3.3
6,6
11 ,0
27,5
87 ,9
8,1
79,5
206,5
3%.2
996,9
8.4
92.8
282.5
659.2
1.727,1
MEMO
Mean value of holdings for
families holding asset ..... .... ,.
22. 1
271.1
293 ,6
327.4
840,7
73,1
402.3
591.3
All families ., '
....... .....
... ... ... ... .
Famil~' srrlt cl!lr(~
32,9
Curren' occupation oj heaJ
.. .. .. ... .. .....
NOTE: See nOte to table 8 .
• Ten or fewer observations ,
I
Changes in
u.s.
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A31
9. Family holdings of nonfinancial assets and 0 any asset, by selecled characlerist ics of fami lies and lype of asset, 2004 and
2007 surveys-ColLlinlled
B. 2007 Survey of Consumer Finances
Family characteristic
Vehicles
I
Primary
residence
I
Other
residential
propeny
I
InonresidentiruII
Equity in
propeny
Business
equity
I
Other
I nonfinancial I
Any
Any asset
asset
Percentage of families holding asset
All families .
87.0
68.6
13.7
8.1
12.0
7.2
92.0
97.7
Perc:emiie of income
Less than 20
. .... . . . . . . .
2G--39.9 .
. .... ... .. ... .. .
4G--59.9 . . . . . . . . . . .
6G--79.9 . ..
... ...... ..
8G--89.9 . ... .... .... .. .... ... ... ...
9G--100 ' "
............
64.4
85 .9
94.3
95.4
95.6
94.8
41.4
55.2
69.3
83.9
92 .6
94.3
5.4
6.5
9.9
15A
21.0
42.2
2.5
3.9
7.4
9.4
13.6
21.0
3.0
4.5
9.2
15.9
17.0
375
3.9
5.1
7.4
7.2
9.0
14. 1
73.4
91.2
97.2
98.5
99.6
99.7
89.8
98.9
100.0
100.0
100.0
100.0
85A
40.7
66. 1
77.3
81.0
85.5
3.2
7.5
9.5
11.5
12.3
6.8
6.8
16.0
15.2
16.3
10.1
3.8
5.9
no
5.6
12.0
15.7
20.9
18.9
13.4
88.2
91.3
95 .0
95 .6
94.5
87.3
97. 1
96.9
97.6
99.1
98.4
98. 1
53.4
42.6
68. 1
78.3
79.2
8.9
6.2
11.8
14.8
18.0
5.6
2.9
7.3
8.4
10.8
5.6
7.5
3.3
15.6
16.6
7.4
89.5
82.5
85.1
96.9
973
95 .7
93 .7
97 .7
98.8
99.4
52.8
68.9
62.3
2.6
7.3
65
II.S
5.3
8.7
10.7
18.2
2.2
5.1
7.0
11.0
80.9
92.2
91.0
96.6
91.7
97.7
98.5
99.6
AKe of head (years)
Less than 35
35-44. . ....... . .... .
45-54 . . .
55-·64 . . .
65--74 .. ... .. .. ... ..... ..... ... .. ....
75 or more
... ....... .. .. ...
875
903
92.2
90.6
71.5
5.5
8.7
8.5
9. 1
5.8
Family structure
Single with child(ren) ......
Single, no child. age less than 55
Single. no child, age 55 or more
Couple with child(ren) ..
Couple, no child .
73.9
94.0
94.6
Education of head
No high school diploma
High school diploma
Some college
College degree
73.7
87.5
86 .7
91.9
71.8
5.8
10.0
13.2
20.6
RIlCe or etllllicit), of respondent
White non-Hispanic
Nonwhite or HisPlUlic
89.6
80.9
75.6
51.9
15 ..'
10.0
9.0
5.9
13.9
7.4
8.4
4.3
94.6
85.8
98.9
94.9
Current work S/(IIIIS of head
Working for SOmeone else
Self-employed.
Retired .. .. . .. .
Other not working ......
91.3
90.6
78.6
693
67 .2
82.4
72.9
33.3
11.9
26.5
14.6
3.8
7.0
17.3
7.7
4.7
6.3
68.4
3.6
3.6
7. 1
11.0
5.4
8.5
94.4
97.6
87 .2
74.8
98 .6
99.7
96.1
90.0
93 .1
78.2
61.5
66.3
66.7
20.7
10.2
9.6
12.9
10.8
7.3
6.7
7.2
no
92.6
77.1
9.2
13.6
3.6
9.9
7.7
4 .9
5.9
97 .2
91.6
95.2
85.2
99.8
97.8
98.5
95.2
75.4
89.5
89.2
90.5
66. 1
71.3
70.2
65.4
13.3
13.7
11.3
18. 3
5.6
8.4
S.8
8.7
7.8
13. 1
IIA
15.3
5 ..~
6.4
7.2
9.3
84.2
93.4
93.8
94.1
94.6
98.4
98.5
98.4
86.2
90.9
68. 1
71.1
14.2
11.7
7.6
10.7
12.3
10.6
7.6
5. 1
91.5
94.3
97.7
97 .9
Owocr . . .. . .. . . . . . . . ..... . .
Renter or other . . . . . . . . . . . . . .
93.8
72.3
100.0
•
17.5
5.6
10.8
2.1
15,4
4.5
8.0
5.3
100.0
74.5
100.0
92.8
Percentile of nel worth
.. ....... ...
Less than 25
25-49.9 ..
5G--74.9
.. ,
,
75-89.9
.. , .•....... ,
9G--100 .. .... ... .... ...... .... ..... .
69.5
91.2
933
94 .5
93 .6
13.8
72.1
92 .8
95.3
96.9
1.2
7.1
11.9
26.2
47.7
1.3
3.7
7.7
16.4
27.3
6.2
11.6
17.9
45.1
2.4
6.5
7.8
7.5
IS.5
71.6
97.7
99.5
99.0
99.6
90.9
100.0
100.0
100.0
100.0
80.5
no
"I
.. .
Currelll occupalion oj head
Managerial or professional .
Technical, sales, or services
Other occupation ......
Retired or other not working .
87A
5.8
7.0
5.7
8.9
RegiolJ
Northeast
Midwest
South
West ..... . ..
... , .
.. ...
,
Urbanicill'
Metropolitan statistical area (MSA) ..
Non-MSA ...... .
Huusing
SlUllIl"
.
.......... ..
A32
Federal Reserve Bulletin D February 2009
9. Family holding ' of nonfinancial assets and of any a. el. by selecled characleriSlic;; of families and lype of
2007 survcys-Conlillued
J
el. 2004 and
B. 2007 Survey of Consumer Finances---conllntled
Family characteristic
Vehicles
Any asset
Median value of holdings for families holding asset (tllOusands of 2007 dollars)
All families ..
15.5
200.0
146.0
75.0
100.5
14.0
177.4
221.5
Percentile of income
Less than 20
20-39.9 ..
40-59.9
60-79.9
80-89.9
90-100
.......... . . . . . . . . . . . .
5.6
9.2
14.6
20.4
25.4
33.9
100.0
120.0
150.0
215.0
300.0
500.0
60.0
57.5
100.0
120.0
175.0
324.0
65.0
60.0
40.0
71.0
72.0
175.0
100.0
25.0
53.7
81.0
100.0
500.0
3.0
6.0
10.0
15.0
20.0
75.0
40.0
77.2
139.0
246.3
360.1
799.9
23.5
84.9
183.5
342.8
558.1
1,358.4
Age of head (years)
Less than 35
35-44 .
45-54
55--&1 ..
65-74 ..
.... ....... . . . .
75 or more .. ... . .... . .. . .
13.3
17.4
18.7
17.4
14.6
9.4
175.0
205.0
230.0
210.0
200.0
150.0
85.0
150.0
150.0
157.0
150.0
100.0
50.0
50.0
80.0
90.0
75.0
110.0
59.9
86.0
100.0
116.3
4 15.0
250.0
8.0
10.0
15.0
20.0
20.0
25.0
30.9
182.6
224.9
233.1
212.2
157.1
38.8
222 .3
306.0
347.0
303.3
219.3
Famil\' s/ruclllre
Single with child(ren) ...
Single, no child, age less than 55
Single, no child, age 55 or more
Couple with child(ren)
Couple, no child . ..............
8.3
9.8
7.4
20.8
20.6
165.0
155.0
140.0
225.0
230.0
90.0
120.0
80.0
133.0
165.0
71.0
48.8
75.0
50.0
85.0
100.0
50.0
300.0
81.8
130.0
9.0
9.0
10.0
12.5
20.0
106.9
52.0
133.0
218.0
235.6
116.4
52.6
177.1
292.8
312.1
Educalion of head
No high school diploma
High school diploma .......... . . .. ..
Some college • • • . • • • . • • . • . • . • • 1 • ••
...........
College degree
10.4
13.3
14.6
19.9
122.5
150.0
192.0
280.0
65.0
76.0
100.0
200.0
125.0
50.0
52.8
90.0
66.0
100.0
81.2
125.4
13.2
7.3
13.0
20.0
84.4
137.7
157.3
289.4
64.6
161.8
186.3
435.4
Race or elhniciry of respolldelll
White non-Hispanic .... . .
Nonwhite or Hispanic
17.1
12.0
200.0
180.0
136.5
175.0
75.0
62.7
112.5
60.0
15.0
8.0
203.8
102.0
271.0
89.2
Current work status of head
Working for someone else
Self-employed ...
Retired.
...............
Other not working ..
17.0
22.1
11.4
6.9
200.0
300.0
155.0
160.0
120.0
293.0
100.0
130.5
52.8
152.5
75.0
48.8
50.0
150.0
212.6
103.1
10.0
50.0
13.2
2.5
167.1
455.0
156.0
29.3
2 13.3
543 .9
203.5
28.9
20.2
14.4
16.7
10.4
270.0
200.0
157.9
155.0
200.0
125.0
90.0
100.0
105.0
85.0
37.0
75.0
200.0
40.0
68.6
196.9
20.0
15.0
10.8
12.5
278.9
155.0
135.6
146.7
411.2
187.0
157.6
177.1
Region
Northeast
Midwest
South
West ..
14.5
14.6
15.6
17.1
275.0
155.0
160.0
300.0
190.0
110.0
120.0
210.0
112.0
52.8
71.5
90.0
150.0
112.4
93.8
101.4
20.0
10.0
15.0
14.0
250.0
157.5
145.8
251.6
290.4
204.7
180.9
293.2
Urbaniciry
Metropolitan statistical area (MSA)
Non-MSA ...
15.8
14.5
220.0
115.0
150.0
80.0
82.5
50.0
105.0
100.0
13.5
22.0
194.0
118.6
243.9
149.2
Housing status
Owner.
Renter or other ..
18.4
8.6
200.0
150.0
85.0
80.0
38.0
113.4
50.0
20.0
5.4
253.5
10.1
344.2
13.6
Percentile of ner worrh
Less than 25 ...................
25-49.9 .......
.
50-74.9
75-89.9 . ....... .... ..
90-100 .... .......
6.9
13.1
17.5
22.0
31.1
81.0
100.0
200.0
317.2
550.0
12.0
30.0
60.0
146.0
400.0
25.0
38.4
82.5
266.7
4.0
20.0
67.6
125.0
690.0
1.3
7.5
13.0
30.0
75.0
8.6
95.8
229.1
443.7
1,160.0
8.1
107.8
304.3
687.1
2,104.0
MEMO
Mean value of holdings for
families holding asset ..
22.0
302.4
335.6
309.4
1071.1
80.7
469.5
668.5
.
": [
~,
:1
Currell! occupation of head
Managerial or professional
Te.chnical, sales, or services
Other occupation .... . .
Retired or other not working .
::
...
.... .... .. .
NOTE: See note to tab le 8.
Ten or fewer observations.
*
1
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
creased for families headed by a person who was
retired, self-employed, or otherwise not working; for
single families without children; and for families
living in the Northeast or the West.
The median market value of vehicles for those who
owned at least one vehicle declined 0.6 percent from
2004 to 2007, and the mean declined 0.5 percent. 35
The median value of vehicle holdings fell most
substantially for families in the other-not-working
work-status group, families in the Northeast, and the
55-to-64 age group. Other relatively large declines in
the median included those for the highest three
income and wealth groups. For most other families,
the median rose or held about steady. These trends are
essentially the opposite of those observed between
200 I and 2004, when median values fell for the
lowest two income and wealth groups, the two oldest
and the youngest age groups, nonwhite or Hispanic
families, renters, and families headed by a person
who was retired. However, continuing a trend, the
share of the total value of owned vehicles attributable
to sport utility vehicles rose over the recent period,
from 19.1 percent to 20.9 percent (data not shown in
the tables).
Some families have vehicles that they lease or that
are provided to them by an employer for personal use.
The share of families having a vehicle from any
source rose 0.3 percentage point over the recent
period, to 89.6 percent. The small difference between
this rate and the ownership rate for personally owned
vehicles belies a larger change in the rates of holding
for leased and employer-provided vehicles. The proportion of families with a leased vehicle rose, from
4.0 percent to 5.2 percent, while that of families with
an employer-provided vehicle fell, from 7.7 percent
to 6.8 percent.
Primary Residence and Other Residential
Real Estate
The homeownership rate turned down slightly over
the 2004-07 period, falling 0.5 percentage point, to
68.6 percent. 36 In 2007, grou ps that had an ownershi p
rate less than the overall rate included nonwhite or
35. Survey respondents are asked to provide the year, make, and
model of each of their cars, vans, sport utility vehicles, and trucks.
This information is used to obtain market prices from data collected by
the National Automobile Dealers Association and a variety of other
sources. For other types of vehicles, the respondent is asked lO provide
a best estimate of the current value.
36. This measure of primary residences comprises mobile homes
and their sites, the parts of farms and ranches not used for a farming or
ranching business, condominiums, cooperatives, townhouses, other
single-family homes, and other permanent dwellings. The 2004 and
2007 SCF estimates of homeownership differ only marginally from
those of the CPS for a comparable specification of household; the CPS
shows an identical decline in the homeownership rate.
A33
Hispanic families, families with relatively low income
or wealth, families living in the Northeast or the West,
single families, and families headed by a person who
was neither working nor retired, who was aged less
than 45, or who had less than a high school diploma
or only some college education. Over the three-year
period, homeownership rose most for the lowest
quintile of the income distribution; fami lies headed
by a person aged 65 to 74; families headed by a
person who was self-employed or working in a
technical, sales, or service job; or families headed by
a high school graduate. The largest declines in the
homeownership rate were for single families with
children and families in the 75-or-more age group or
the other-not-working work-status group.
Housing wealth represents a large component of
total family wealth; in 2007, the primary residence
accounted for 31.8 percent of total fami ly assets.
Over the 2004-07 period, this percentage declined
slightly overall. The relative importance of housing in
the total asset portfolio varies substantially over the
income distribution, with housing generally constituting a smaller share of the portfolio with increasing
levels of income (table 9.1).
9.1.
Family characteristic
All families ..
Percentile oj income
Less than 20 .
20-39.9 .
40-59.9 .......... .
60-79.9
80-89.9
90-100
House value as
of all assets
2007
,
(percent)
a percenUlge
of group
Change, 2004--{)7
(percentage points)
31.8
~.S
47.1
51.8
48.4
45.3
44.5
19.8
-1.5
2.2
-1.5
2.5
2.7
-1.1
The median and mean values of the primary residences of homeowners rose from 2004 to 2007;
overall, the median increased 13.8 percent, and the
mean rose 11.5 percent. These percentage gains in the
median and mean translated into large dollar gains:
$24,300 for the median and $31,300 for the mean.
Homeowners in all demographic groups saw gains in
the median, most of them substantial. The only breaks
in the pattern of gains in median values across groups
were a decline of 4.4 percent for families headed by a
person aged 55 to 64 and a decline of 2.7 percent for
homeowners in the Midwest. One of the largest
increases was the 26.1 percent rise in the median
value of primary residences for nonwhite or Hispanic
families; in contrast, the median for other families
rose 10.4 percent. Other sizable increases included
those for families headed by a person without a high
A34
Federal Reserve Bulletin D February 2009
school diploma (48.7 percent) and for families in the
bottom income quintile (30.0 percent).
As discussed earlier, the national housing market
continued to decline after data collection for the
2007 SCF had been completed. Assuming that homeownership did not change and that changes in house
prices occurred uniformly across all homeowners in a
given state, then the state-level purchase-only LoanPerformance Home Price Index can be used to
approximate the effects of declines in house prices
from the time of the interview until October 2008.
Under these assumptions, the median value falls from
$200,000 for 2007 to $181,600, still a gain of 3.4 percent from 2004; the mean falls from $302,400 for
2007 to $265,600 in October 2008, a decline of
2.0 percent from 2004.
In 2007, 13.7 percent of families owned some form
of residential real estate other than a primary residence (second homes, time-shares, one- to fourfamily rental properties, and other types of residential
properties), a level that is up 1.2 percentage points
from the figure in 2004.37 Although the survey does
not ask directly about ownership of second homes,
such homes should largely be captured as residential
properties that are owned 100 percent by the family
and for which no rent was collected; in 2007,6.1 percent of families had at least one such property, up
1.5 percentage points from 2004 (data not shown in
the tables).
Ownership of other residential real estate is much
more common among the highest income and wealth
groups, the age groups between 45 and 74, and
families headed by a self-employed person, a person
working in a managerial or professional occupation,
or a person who was a college graduate. The median
and mean values of other residential real estate
increased proportionately more than the median and
mean values of primary residences over the recent
period; the median rose 33.0 percent, and the mean
rose 14.3 percent. Most of the demographic groups
saw substantial gains in the median. Declines in
median values were observed for several groups,
including the youngest and oldest age groups, families whose head had not attended college, and families headed by a person who was retired.
Nel Equity in Nonresidential Real Estate
The owners hi p of nonresidential real estate fell
slightly, to 8.1 percent of families in 2007. 38 Owner-
37. This measure of residential real estate also includes outstanding
balances on loans that the family may have made to finance the sale of
propenies they previously owned.
ship follows approximately the same relative distribution across demographic groups as does the ownership of other residential real estate. Changes in
ownership during the recent period were mixed across
demographic groups. Ownership increased modestly
in the top two deciles of the income distribution,
while it decreased modestly in most of the lower
portion of the distribution. By educational attainment,
ownership increased only among families headed by
a person with a high school diploma. Overall, the
median value of such property for owners rose
13.8 percent, and the mean fell 5.5 percent. Particularly large gains in the median value were seen for
families in the lowest income group, single-parent
families, and families headed by a person without a
high school diploma-all groups with below-average
ownership rates.
Nel Equity in Privately Held
Bu inesses
The share of families that owned a privately held
business interest edged up 0.5 percentage point during the recent period, to 12.0 percent. 39 The propor38. Nonresidential real estate comprises the following types of
propenies unless they are owned through a business: commercial
propeny, renlal propeny with five or more unils, farm and ranch land,
undeveloped land. and all olher types of nonresidenlial real eSlate.
Mosl often. nonresidential real eSlale propenies are functionally more
like a business than a residenlial property. They may have a number of
owners, Ihey are typically worth a considerable amounl, and Ihey often
carry large mortgages, which appear 10 be paid from Ihe revenues from
the propeny, not Ihe family's olher income. As in Ihe case of privately
owned businesses, the value of Ihe property in Ihis analysis is laken to
be the net value.
39. The forms of business in this category are sole proprietorships,
limiled partnerships, other Iypes of partnerships, subchapter S corporations and olher Iypes of corporations Ihat are not publicly traded,
limiled liability companies, and other types of private businesses. If
the family surveyed lived on a farm or ranch Ihal was used at least in
part for agricultural business, the value of thai part, net of Ihe
corresponding share of associaled debls, is included with other
business assets.
In Ihe survey, self-employmenl stalus and business ownership are
independenlly determined. Among the 12.0 percent of families with a
business in 2007, 70.1 percent had a family head or the spouse or
partner of Ihe head who was self-employed; among the 12.5 percenl of
families in which either the head or Ihe spouse or partner of Ihe head
was self-employed, 67.5 percent owned a business (data not shown in
the tables).
The 2004 and 2007 surveys differ in the ways that business
ownership was determined. In both surveys, respondents were asked
directly aboul business ownership. In the 2004 and earlier surveys, it
had been nOliced al the stage of data ediling that some respondenls had
reponed themselves as self-employed and as having substantial associated business assets bUI had failed to repon ownership of a business,
perhaps as a result of some confusion about the intent of the business
ownership question; where possible, Ihe data were corrected for such
misunderstandings. Beginning with the 2007 survey, a new follow-up
queslion was asked of every person who was reported as being
self-employed but who had not been noted as working for a business
owned by Ihe family. The question asked whether a business with
some value was associated with Ihe self-employmenl. If so, Ihen
several additional questions were asked aboullhe business's value and
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
tion has changed little over the past several surveys.
Ownership of this type of asset tends to increase with
income, wealth, and education and to be the highest
for families headed by a person who is aged 35 to 64,
who is married or living with a partner, or who has at
least some college education. Business ownership is
about three times as prevalent among homeowners as
renters; it is generally lowest in the Northeast and
highest in the West. Over the recent three-year period ,
increases in ownership were largely concentrated in
the highest income and net worth deciles. By region,
ownership declined in the Northeast, while increases
were reported in the South and West. Breaking a
pattern seen in the preceding three years, ownership
also increased substantially among families headed
by a person who was self-employed.
As noted earlier, equity in privately held businesses
makes up a large portion of families ' total nonfinancial assets . This pattern has strengthened over the
recent period. Across the income distribution, the
share of assets attributable to business equity has a
U-shape, with the largest shares at the top and bottom
of the income distribution (table 9.2).
9.2.
Family characteristic
Net equity in business as a
percentage of all assets
2007
(perce nt)
Change. 2004-07
I (percentage points)
All families .
19.6
Percen/ite of incume
Less than 20 .
18.8
4.2
4.2
-5.0
3.2
2{}-39.9 .
40--59.9 .
6{}-79.9 .
9.!
6.8
8{}-89.9 .. .
11.4
9{}-100 ....... .. . ... ... .
28.1
3.0
-1.4
4.7
3.7
The median holding of business equity for those
having any such equity declined 8.5 percent while the
mean increased 27.4 percent. These changes follow a
decline of 6.2 percent in the median and an increase
of 11.4 percent in the mean between the 2001 and
2004 surveys. In 2007 , median values were generally
increasing in income, age, and net worth. Median net
equity in businesses owned by white non-Hispanic
families and homeowners are substantially higher
than for the complementary groups. Over the recent
three-year period, large increases in median net equity
in businesses were observed in the lowest income
quintile, in the oldest two age categories, in single
families headed by a person aged 55 or older, and in
income. and that information was introduced inlO the appropriate
places in the section of the survey covering businesses. It is possible
Ihat the systematic approach in 2007 discovered more private businesses than had previously been detected through editing.
A35
families in the other-not-working work-status group.
Changes in the medians for other categories included
increases and decreases of smaller magnitudes.
The SCF classifies privately owned business interests into those in which the family has an active
management role and those in which it does not. Of
families having any business interests in 2007,
92.0 percent had an active role, and 12.0 percent had
a non-active role; 3.9 percent had interests of both
types (data not shown in the tables). In terms of
assets, actively managed interests accounted for
89. 1 percent of total privately owned business interests. The median number of actively managed businesses was 1. The businesses reported in the survey
were a mixture of very small businesses with moderate values and businesses with substantially greater
values.
The SCF attempts to collect information about
items owned or owed by a family ' s business interests
separately from item s owned or owed directly by the
family . But, in practice, the balance sheet of a business that is actively managed by a family is not
always separate from that of the family itself. Families often use personal assets as collateral or guarantees for loans for the businesses, or they loan personal
funds to their businesses. In 2007, 17.8 percent of
families with actively managed businesses reported
using personal assets as collateral, and 17.5 percent of
families reported lending the business money; both
percentages are down from their 2004 levels of
19.7 percent and 20.2 percent, respectively (data not
shown in the tables).
Families with more than one actively managed
business are asked to report which business is most
important; that business is designated as the primary
one. 40 In 2007, the vast majority of primary businesses operated in an industry other than manufacturing; the most common organizational form of those
businesses was sole proprietorship, and the median
number of employees was 2. However, primary
actively managed businesses with more than two
employees accounted for 80.4 percent of the value of
all such businesses, and the largest shares of value
were attributable to businesses organized as subchapter S corporations or limited liability companies,
each of which accounted for just more than 30 percent. These patterns are also typical of those observed
in the earlier surveys.
40. For families with only one business. that business is, by default .
considered the primary one . In 2007, primary actively managed
businesses accounted for 78 .0 percent of the value of all actively
managed businesses.
A36
Federal Reserve Bulletin D February 2009
10. Family holdings of uIlfeaJized capital gains on selected ass 'Is as a hure or toW I . 'sets, by selected characterisLics of
fami lies, 1998-2007 urvcys
Percenl
1998
Family characleristic
2001
Real I Busi· I Fi~an- I
eslale ness
CIaI
All
2004
Real I Busi- I Fi ~aJ1-1
eSlale ness
clUl
All
2007
Real .1 Busi- I Finan-I
.
eslale
ness
cial
All
Real
estale
1 Busi- 1Filwn- I
ness
clUl
All
All families . . .
U.s
IJ.6
4.3
29.3
14.S
JJ.6
2.3
28.7
\S.7
10.9
1.1
30.7
18.9
14.2
2.6
35.8
Percentile of income
Less Ihan 20 .. .......
20-39.9 .. . .. ... ..
40-59.9 . . .... .... ... . ..
60-79.9 ...... .
80-89.9 .. .... . .. ... .. .
90-100
.. ........ . . . .
27.6
22.5
20.8
16.0
14. 1
9.1
4.9
2.3
5.6
6.3
6.5
17.2
.3
1.3
1.3
2.4
2.8
6.4
32.8
26.1
27.7
24.6
23.4
32.7
26.7
27.0
18.8
17.0
IS .7
11,4
2.0
3.9
3.9
5.2
7.8
16.9
- .1
- .3
.2
1.7
1.8
3.3
28 .6
30.7
22 .9
24.0
25 .3
31.6
29.3
28.3
25.9
23. 1
19.4
14.3
7.7
5.9
3.0
4.0
4.4
16.6
-. 6
36.4
34.5
29.4
27.6
24 .7
32.5
30.5
31.4
24 .7
23. 1
23.8
1.4
.3
.8
1.6
.9
3.9
42.5
13.8
10.6
3.2
5.6
3.8
8.8
20.8
31.1
28.6
33.6
38.5
Alie of head (years)
Less than 35 . . . . . . . . . . .
35-44 ....... ...... .. . .
45-54 .
.....
55-64 .. . ..
, .. ....
65-74 .. ... .. ........ .
75 or more ..... ... . . . .
7.1
9.4
10.8
12.9
18.3
25.5
7,4
11.7
15.7
12.9
9. 1
5.0
.9
3. 1
2.8
6. 1
6.0
S.3
15.3
24.2
29.3
32.0
33.5
35.8
8.1
12.7
12.9
13.8
20.0
21.1
10.7
14.8
12.6
12.5
10.3
5.1
2. 1
.2
2.0
2.0
3.5
5.2
20.8
27.7
27.5
28.3
33.8
31.4
13,4
16.2
16.7
19.0
20.8
26.5
7.5
12.0
13.5
11.8
8.8
5.5
-,4
1.4
1.1
20.4
29.6
2. 1
2.4
30.8
31.8
34.4
12.6
16.2
18.3
17,4
20.6
28,4
14.6
12.3
15.5
15.4
IH
11.0
1.0
,4
2. 1
3. 2
4.0
4.0
28.2
28.9
36.0
36.0
38.4
43.S
... 65 .5
10.7
26.3
71.0
67.2
11.6
27.6
72.1
68.8
11.1
25. 1
73.0
69.0
11.5
21.7
72.4
....
.
....
.3
.5
.5
.8
1.6
"
31.3
.U.O
MEMo
Percent of famili es with
any such gains ..
Median for Ihose wilh
any such gains .. ..
Mean for Ihose with
any such gains ...
NOTE :
See nOle
10
37.8
39.5
4.6
39.5
45 .1
59.6
.6
46.8
61.0
49.4
.7
59.3
71.0
50.0
3.5
75 .0
86.2
453 .7
67.8
172.9
116.6
530.4
43.9
210.4
157.6
567.6
24.3
243 .1
179.2
80~ . 1
79.3
322.9
lable I.
t Less than 0.05 ($50).
Other Nonfinancial Assets
In 2007, ownership of the remaInIng nonfinancial
assets (tangible items including artwork, jewelry,
precious metals, antiques, hobby equipment, and collectibles) was not very widespread and decreased
marginally compared with the level in the previous
survey period, to 7.2 percent. Among other nonfinancial assets, the most commonly held items are antiques and other collectibles, which were held by only
3.6 percent of families. The composition of other
nonfinancial assets changed little from 2004
(table 9.3).
9.3 .
Type of olher
nonfinancial assel
Gold, silver, or jewelry . '
Antiques, collectibles .
An objecls .
Other .
All famili es
2007
(percent)
1
Change, 2004-{)7
(percentage points)
2.1
3.6
1.8
- .2
.9
-3
t
-.2
t Less than 0.05 percent.
Groups most likely to hold other nonfinancial
assets generally include families in the top two deciles
of the income distribution, families headed by a
college graduate, homeowners, and families in the top
two quartiles of the net worth distribution. Minor
changes in holdings were evident across all the
demographic groups. For families having such assets,
the median value fell 15.2 percent over the recent
period, and the mean rose 16.7 percent. Across
income groups, median holdings rose for families in
the top three groups and declined for families in the
second and third quintiles.
Unrealized Capital Gains
Changes in the values of assets such as stock, real
estate, and businesses are a key determinant of
changes in families' net worth . Unrealized gains are
increases in the value of assets that are yet to be sold .
To obtain information on this part of net worth, the
survey asks about changes in value from the time of
purchase for certain key assets- publicly traded
stocks, pooled investment funds, the primary residence, other real estate, and the current tax basis of
businesses.4l Among families with any unrealized
capital gain , the median value of that gain moved up
26.5 percent over the 2004-07 period, and the mean
moved up 32.8 percent (table LO). These unrealized
capital gains are a very important part of family
assets; in 2007, they represented 35.8 percent of total
family assets, a fraction larger than that observed in
any other SCF since 1989. Unrealized capital gains
41. The survey does not collect information on capital gains o n
every asset for which such gains are poss ible . Most important , it does
not collect such information for retirement accounts .
Changes in
u.s.
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
11. Amount 01 deht of all familie . disLribu ted by type of
debt 1998- 2007 surveys
A37
12. Leverage ratio of group by selected family
eharaeteri sties. 1998- 2CXl7 surveys
Percent
Percent
Type of debt
Secured by residential property
Primary residence .. . . . . . ...
Other . .... ...... .. .
Lines of credit not secured
by residential property
Installment loans . .
Credit card balances
Other .... . . ........
Total . . . . . . . . . . . . . . . . . . ....
.
Family characteristic
1998
71.4
7.5
75 .2
6.2
75 .2
8.5
74.7
10. 1
.3
.5
12 .3
.7
11 .0
3.0
1.6
100
.4
10.2
3. 5
1.1
100
13. 1
3.9
3.7
100
3.4
2.3
100
NOTE: See note to table I.
tend to increase with age as a fraction of total family
assets. The fraction of total family assets attributable
to unrealized capital gains decreases and then increases across income groups. In 2007 , this fraction
was lowest for families in the third income quintile.
The largest component of unrealized capital gains in
all years of the SCF shown was real estate; the
next-most-important components were gains in businesses and financial assets. In 2007, total unrealized
capital gains in real estate represented 18.9 percent of
total family assets. In general, the relative importance
of unrealized capital gains in real estate decreases
with family income and increases with the age of the
family head.
14.2
The composition of household debt shifted between
2004 and 2007 . Debt secured by the primary residence remained the largest component of overall
household debt, but its share fell back 0.5 percentage
point between the most recent surveys (table J 1).42
This decline was more than offset by a 1.6 percentage point increase in the fraction of debt secured by
residential property other than the primary residence.
The share of outstanding credit card balances increased 0.5 percentage point over the three-year
period, while the fraction of nonmortgage installment
debt declined 0.8 percentage point, in line with a
longer-term trend evident since at least the 1998
survey.
The overall value of families' liabilities increased
between 2004 and 2007 at a rate just short of the
corresponding rate for families' assets . Accordingly,
the ratio of the sum of the debt of all families to the
sum of their assets-the leverage ratio--was little
changed, ticking down O. J percentage point, to
14.9 percent. The leverage ratio for the subset of
42. The SCF measure of liabilities excludes debt owed by businesses owned by the family and debt owed on nonresidential real
estate.
12.1
1S.0
14.9
12.7
14.4
20.6
23. 1
20.1
8.9
13.5
14.5
19.2
18.0
18. 1
7.4
15. 1
19.4
23.2
2 1.7
22.8
9.2
13.5
18.5
24.3
25.3
23.4
8.4
36.6
25. 1
15.7
9.0
4 .7
2.2
)3.5
22.6
13.5
7.2
4 .2
1.8
46.4
26.0
17.3
9,3
5.2
4.0
44.3
28 .2
16.3
10.3
6.5
2.2
13.5
15.6
17.9
12.9
13.4
16. 1
15. 1
104
14.0
19.4
19.5
13.3
18.2
20.5
19. 1
12.5
13.3
23.5
11.0
23.4
13.5
27 .2
12.9
27 . 1
13.2
14. 1
13.5
16.2
10.2
13.0
11.4
13.8
12.8
14.4
15.2
17. 1
12.7
14.4
144
17.4
14.2
15. 1
12.0
13.2
14.8
17.8
14.7
17.3
14. 1
16.4
12.0
14.2
14.9
16.7
14.7
17.9
112.3
51.0
27.1
16. 1
5.9
99.8
47 .9
26.2
14.4
4.8
107.4
54.2
33.3
16.3
6.4
108.6
56.5
31.7
17.6
6. 1
Percentile of infOme
... ........ ..... ..
Less than 20
20-39.9 .. .
40-59.9 . . .......... .. ....
60-79.9 .. .. . .. .... ... . .. .
80-89.9 .. ....
90-100 .. .
............ .
.
Aile of head (yelln)
Less than 35
.... ... ... ... ... .
35-44 ......
45-54 .. . .. ........ . .
. . .........
55--64 ..... ... ... ..... ...... ...... ..
65-74 ....
75 or more .
Edllwtiull of head
No high school diploma
High school diploma
Some college.
College degree ..
Race or
et/micit)'
of resporuJe1lI
White non-Hispanic .
Nonwhite or Hispanic
Region
Northeast ....... ....... ..
Midwest
South
.............
West .... ..... .. ....... ... .
.
Urbanici/)'
Metropolitan statistical area (MSA) .
Non-MSA . .
Housing
LiABILITIES
2007
1998
All families
sta llls
Owner _.... ..
Renter or other
Pell:enrile oJ IWt won"
Less than 25
25-49.9 .
.. ..... ....
50-74.9 .
.......... .. . ... . . . .... .
75-89.9 .... . ......
90-100 . . . . . . . . . .
. ... ... ..........
families that had any debt declined somewhat more,
from 19.9 percent in 2004 to 19.4 percent in 2007
(data not shown in the tables).
The overall leverage ratio differs considerably
across types of family groups. It rises and then falls
across income groups. By comparison, the ratio
declines with age, a result consistent with the expected life-cycle patterns of asset and debt accumulation. These general patterns in the leverage ratios
among groups hold across survey years, but the
variation among income groups was slightly more
pronounced in 2007 than in 2004 (table J2).
Holdings of Debt
The share of families with any type of debt increased
0.6 percentage poi nt, to 77 .0 percent over the 2004-07
period (first half of tables 13.A and 13.B, last column), and has risen a total of 2.9 percentage points
A38
Federal Reserve Bullelin 0 February 2009
13. Family holdings
or debt. by
elected characteristic, of families and lype of debl. 2004 and 2007 surveys
A. 2004 Survey of Consumer Finances
Secured by residential propeny
Fami Iy characteristic
Primary
residence
I
Other
Installment
loans
Credit card
balances
Lines of
credit not
secured by
reside.ntial
propeny
Other
Any debt
Percentage of families holdi ng debt
. . .. . , ..... ....
All fan.ilies ..
47.9
4.0
46.0
46.2
1.6
7.6
76.4
Percentile of inwmt!
Less than 20
... ... ..... ....
20-39.9 .
40-59.9 ..
60-79.9 . .. ... .......... , .. .. .... , ...
80-89.9 ....... . . .. . .
90-100
15.9
29.6
51.6
65.8
76.8
76.2
1.5
2.6
4. 1
7.6
1.).4
26.9
39.8
52.5
57.9
60.0
45.7
28.8
42. 9
55. I
56.1
57.6
38.5
1.5
1.8
1.8
2.6
2.5
4.6
5.8
8.0
8.3
12.2
10.6
52.6
69.8
84 .0
86.6
91.9
86.3
Age of head (yellrs)
Less than 35
35-44 .
45-54 ... .
. ..... ... ... .. .... ..
55--64 .
65-74 .
75 or more . .
. ............ .. .....
37.7
62.8
64.6
51.0
32. 1
18.7
2. 1
4.0
6.3
5.9
3.2
1.5
59.4
55.7
50.2
42.8
27.5
13.9
47.5
58.8
54.0
42.1
31.9
23.5
6.2
IJ.3
9.4
8.4
4.0
2.5
79.8
88.6
88.4
76.3
58.8
40.3
Famify strtlClIIre
Single with child(ren) .
Single, no child. age less than 55 .
Single. no child, age 55 or more
Couple with child(ren) .
Couple, no child.
48 . 1
34.1
22 . 1
64. 1
57.9
1.5
3.2
2.5
5.2
5.0
41.9
46,4
20.5
61.2
50.6
48.7
47.9
27.9
58.5
47.5
2.2
1.9
6 .7
7.7
5.0
8.1
8.4
79.6
77.6
47 .7
87 .8
81.6
Edl/wtion of head
No high school diploma
High school diploma
Some college.
College degree . . . ... .
24.8
42.2
48.7
61.3
2.2
4.7
6.7
28.0
44.3
55.3
49.9
29.5
48.2
54.4
47.0
1.8
1.8
1.7
5.7
5.9
10.3
8.5
53.4
73.2
84 .2
84 .3
Race or ethnicit)' of responde'"
White non-Hispanic
Nonwhite or Hispanic
5 1.9
37.4
4.4
3.0
47.0
43.2
46.0
46.7
1.7
1.1
7.8
7.3
78.0
72.5
Current work SllIllIS of head
Working for someone else
Self-employed .
Retired . . ....... .. . . , . . .. ,.
Other not working .. .
56. 1
59.5
24 .6
30.3
4.1
10.2
1.2
55.7
43.5
22.8
45.6
54.9
44.3
25.9
41.0
1.9
3.0
98
5.8
3.9
86. 1
81.5
50.7
70.4
Current occupation of head
Managerial or professional ...
Technical. sales, or services
Other occupation . . . .. .
Retired or other not working.
67 .7
45.7
53.4
25.5
7.8
3.4
3.2
J.3
52.4
52.5
56.6
26.3
50.8
5-1.2
55.2
28.2
1.8
2.4
2. I
10.2
7.5
9.6
3.6
89.3
81.5
84.0
53.7
Region
Nonheast
.... .. .. .......... .... ...
Midwest
South .... . .. . .
West.
47.4
51.9
45.2
48.7
3.5
4. 1
3.2
5.8
42.4
49.9
44.2
47.9
46.6
44.7
46.0
47.5
1.1
1.6
1.6
1.8
7.8
86
6.5
8.4
76.3
75.4
75 .0
79.9
Urbwlicil),
Metropolitan statistical area (MSA) ..
Non-MSA .
49.0
42.5
4.4
2.0
45.4
48.6
46.9
42.8
1.6
1.6
7.9
6.4
76.8
74 .7
69.4
5. 1
1.7
46.6
44 .6
48.8
40.4
1.3
2. 1
7.7
7.3
82.3
63.4
1.4
4 .5
5.7
16.6
47.5
52.4
49. 1
40.2
27.2
40.3
57.9
52.8
40.5
23.4
1.3
1.7
1.9
J.3
1.4
6.2
9.4
7.0
7. 1
9. 1
64.9
83 .8
83.2
74.6
72.7
~
HOllsing status
Owner . .
Reuter or other
. ,
.... ......
...
. ... ... ..... .. ......
Percentile of IIet worth
Less than 25
25-49.9 .
50-74 .9
75-89.9 . ... .. .... ........ .... ...
90-100
12.4
52.8
66. 1
61.6
58.4
2.2
1.5
2.9
.7
.4
1.6
:f!
"
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
13. Family holding of deht. by elected chamctllristics
0
familie. and type of debt . 2004 and 2007 surveys-
A39
olltilwed
A. 2004 Survey of Consumer Finances-conrinued
Secured by residential properly
Family characteristic
Primary
residence
I
Other
Installment
loans
Credit card
balances
Lines of
credit not
secured by
residential
property
Other
Any debt
Median value of holdings for families holding debt (thousands of 2007 dollars)
All families .
104.3
95.6
12.7
2.4
3.3
4.4
60.7
Pelt'en/ile of in come
Less than 20
20-39.9
40-59.9 ...
60-79.9 . . .
80-89.9 ..
90-100 ..
40.6
59.3
84.8
106.5
146.1
203.2
35.7
72.5
68 . 1
85 .7
174.6
6. 1
8.8
11.8
15.2
16.6
19.8
1.1
2.0
2.4
3.3
3.0
4.4
.3
1.1
7.7
15.4
43.9
2.2
2.9
2.5
3.8
5.5
10.4
7.7
17.6
48.8
102.6
149.4
229.5
117.5
120.8
106.5
91.2
56.0
34.0
68.6
82 .4
95.6
119.5
109.8
42.8
13. 1
13.2
13. 1
14.2
9. 1
7.4
1.6
2.7
3.2
2.4
2.4
1.1
1.1
2. 1
7.7
15.4
4.4
3.3
4.4
4.4
6 .0
5.5
2.2
36.9
95.8
91.4
52.7
27.5
16.9
71.4
97 .7
52 .7
104.3
119.7
71.4
72.5
87 .9
153.8
104.3
9.3
9.8
8.8
14.6
15.0
2.4
2. 1
2.0
3.3
2.3
*
4.4
9.9
2.2
.\.3
2.2
4.9
5.5
44.0
23.4
18.1
97.0
93.4
48.3
76.9
94 .5
137.3
51.6
82.4
115.3
7.7
9.9
13.0
16.9
1.3
2.1
2.4
3.0
1.6
3.3
4.4
*
4.4
3.3
3.7
5.5
13.2
34.0
49.4
117.7
107.6
91.2
95.6
72.5
1.1.7
10.5
2.7
1.7
4.4
.4
4.4
3.3
76.3
33.5
109.8
131.6
46.1
85.7
91.2
109.8
86.8
13.2
16.9
8.0
8.2
2.5
3.0
1.6
2.7
4.4
2.4
3.8
7.7
3.3
78.9
102.6
16.9
23 .1
141.7
97.7
90.8
54.9
101.0
115.3
85.7
106.5
16.5
12.2
11..1
8.2
3.3
2.2
2.5
1.6
8.8
1.6
1.6
•
5.5
3.3
3.3
4.4
127.3
47 .6
56.4
17.7
122.5
94.5
86.8
140.7
109.8
87.9
91.2
95.6
13.0
12. 1
12..1
14. 1
2.7
2.2
2.2
2.7
.4
3.3
8.8
4.4
5.5
4.4
4.4
3.3
60. 1
75.4
44 ..1
85.2
115.3
54.9
96.6
69.2
13.2
10.9
2.4
2.2
2.4
22.0
4 .4
4 .4
75.8
28.9
104.3
•
98.8
91.2
14.2
9.6
2.7
1.6
8.8
.5
4 .4
3.3
105.2
8.6
25-49.9 . .
50-74.9 . .
75-89.9 . . . ..... . . . . .. .
90-100 ..
, ..... ..
78.0
82.4
106.5
126.3
204.4
28.9
51.6
108.7
162.5
11.5
10.2
14.6
14.2
19.2
1.9
2.2
2.7
3.3
3.3
.3
1.1
8.8
24.2
54.9
4.4
2.2
4 .4
5.5
22.0
12.5
48.6
98 .9
121.6
209.5
MEMO
Mean value of holdi ngs for
families holding asset
L36.2
183.1
20.7
5.6
40.2
18.7
113.5
Age uf hetld (years)
Less than 35
35-44 .
45-54 . .. . ..
..... ... ...... .. ....
55-{;4 .
65-74 ....... .. . . . .. . .. . ... ... . . .. . . .
75 or more .
Family SITllClUre
Single with child(ren) .... . .. .. . .
Single. no child, age less than 55 .
Single . no child. age 55 or more
Couple wilh child(ren) .
. ... . ..... .
Couple, no child ...
Educarion of head
.
No high school diploma . . . . . . . . . . . .
High school diploma
..... .... .. .
Some college.
College degree
1.1
•
Rae:" 01' ",/lIIiei,), of responde,,'
White non· Hispanic
Nonwhite or Hispanic
Curre'" wurk s"Jlus uf head
Working for someone else
Self-employed .
Retired ......... . ... . . . . ... . . . . . . . . .
Other not working ...
CUTrI!III OCCIlplllion of head
Managerial or professional ..
Technical. sales. or servi ces
Other occupation . ....
Retired or other not working .
Region
Northeast ... ... . . . ..
Midwest
South ....
West ..... ... .. ... . . . .. ... . .. . ... . .
UrbllnidlJ
Metropolitan statistical area (MSA)
Non·MSA
.. . .... . . ..
Housing Slillus
Owner .. .
.. . , .... ..... .... .... .
Renter or other . . . . ... . . .. . . .. ... . .
Perr:enlile of nel wonh
Less than 25 . ,.--
.....
NOTE: See nOle to table II .
• Ten Or fewer observations .
.
A40
Federal Reserve Bulletin 0 February 2009
L . Fam ily holdings of debt. by selected characteri
lies
of families and type of debt. 2004-2007 'urveys--ComiIlLled
B. 2007 Survey of Consumer Finances
Secured by residential property
Family characteristi c
Primary
residence
I
Other
lnstallment
loans
Credit card
balances
Lines of
credit not
secured by
residential
property
Other
Any debt
6.8
77.0
3.9
6.8
6.4
8.7
9.6
7.0
51.7
70.2
83.8
90.9
89.6
87 .6
5.9
7.5
9.8
8.7
4.4
1.3
83.5
86.2
86.8
81.8
65.5
31.4
81.6
76.1
49.0
1.9
1.7
11.1
7.4
4.1
6.5
7.0
Percenlage of families holding debt
. . . .. .. . . . . ..
48.7
5.5
46.9
46.1
Percentile of income
Less than 20
20-39.9 ... . . . . . . . . . . . . . .
40-59.9
60-79.9 ..
80-89.9 ..
...... ........ ..
90-100
14.9
29.5
50.5
69.7
80.8
76.4
1.1
1.9
2.6
6.8
8. 5
21.9
27.8
42.3
54.0
59.2
57.4
45.0
25.7
39.4
54 .9
62. 1
55 .8
40.6
Age of head (years)
Less than 35 ...
... . . .... . . .. . .
35-44
45-54 .
. . . . . .. ... ...
55-64 .
.. .... ..... . ...... ........
65-74 ... ..... ... ... ..
75 or more .
37.3
59.5
65.5
55.3
42 .9
13.9
3.3
6.5
8.0
7.8
5.0
.6
65.2
56.2
51.9
44.6
26. 1
7.0
48.5
51.7
53.6
49.9
37.0
18.8
Famih .wructure
Single with child(ren) ...
Single. no child. age less than 55
Single. no child. age 55 or more
Couple with child(ren)
Couple, no child.
. . . . . .. . . . . . .
.
38.0
35.6
23.2
67.0
59.1
3.5
3.0
1.8
6.9
7.7
48.3
46.7
19.4
63.9
5 1.4
45.6
43.5
30.5
55.7
49.8
Education of head
No high school diploma .... . . . . . . . . .
High school diploma ....... .. . ... . . .
Some college .
College degree ....
. .. .. ... . .. ..
26.0
45.0
46.9
61.6
1.9
3.2
6.4
8.7
33.3
46.0
54.3
49.1
26.9
46.8
51.0
50.2
1.4
2.2
I.7
53
6.4
9.3
6.5
55.5
75.1
80.8
85.1
Race or ethnidry of respondent
White non-Hispanic
..........
Nonwhite or Hispanic
.
52. 1
40.4
5.8
4 .8
46.1
48.9
45. 1
48.4
1.6
2.0
6.7
7.0
76.8
77.7
Cllrrellt work status of helld
Working for someone else . . . . . . . . . .
Self-employed ..
Retired ....
...............
Other nOl working .
.
56.7
64.8
27.0
25.4
5.4
15.1
2 .6
•
57.5
43.9
23 .6
42.8
53 .7
48 .9
28.2
36.8
1.9
3.6
.8
•
8.7
4.7
3.2
7.5
86.2
86.8
52.3
69.7
Current occupation of head
ManageriaJ or professional . . .
Technical. sales. or services
O~ler occupation
Retired or other not working .
67.6
49.7
53.6
26.7
10.0
4.5
5.1
2.5
56.2
52.2
57.8
26.6
52.7
53.2
53.2
29.6
1.8
2. 7
2. 1
.7
7.0
7.9
9.7
3.9
90.9
81.8
84.9
55.0
Region
Northeast
Midwest
South
West .
48.4
51.0
46.6
49 .9
4 .9
5.2
4 .6
8.1
40.7
47 .9
48.5
48.4
44.3
45.5
43.4
52.4
1.9
1.7
2.7
5.6
7.0
6 .9
75
73.3
78.3
75.3
81.6
49.7
43.5
6 .1
2.9
46.0
51.2
46.3
44.8
1.8
1.6
6.6
8.0
77.4
75.0
Housing status
Owner ...... ...
Renter or other .
70.9
•
6.9
2.6
46. 1
48 .6
50.1
37.3
1.3
2.8
6.8
6.9
82.4
65.4
PeTt.'enri/e of net worth
Less than 25 .. , .
25-49.9 . . .. " . , .......
50-74 .9 . .. .. ... ... ,
75-89.9 . .. ... ........
90-100 . , .. ...... ... .. .. ... ........
1l.0
56.1
64.3
63.9
62.1
3.2
4.8
8.5
21.8
54 .2
52. 1
46.1
39.8
28.2
41.0
52.9
51.7
44.1
30.3
2.6
1.3
1.6
6.7
8.2
68.9
82.4
80.3
76.9
75.9
All families .
.
••• 1 • • • • • • •••• • • • •
... ........ ...... ....... ...
.... ....... ...
. .. .. . ... . . .. . .
Urb(lllicin'
Metropolitan statistical area (MSA) .
Non-MSA . . .
1.7
1.8
•
•
2. 1
2. 1
2. 1
2.2
1.9
1. 2
1.5
*
2.0
*
J.5
7.4
3.8
1.5
6.7
90.4
82.5
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A41
13. Family holdings of debt. by elected characteristics of families and type of debt, 2004-2007 surveYfr--Coflfillued
B. 2007 Survey of Consumer Finances-comililled
Secured by residential property
In>~tallme nt
Family characteristic
Primary
residence
I
Olher
loans
Credit card
balances
Lines of
credit not
secured by
residential
property
Other
Any debt
Median value of holdings for families holding debt (thousands of 2007 dollars)
. ... ..... .. ..
3.8
5.0
67.3
*
3.0
4.0
4.0
5.3
5.0
7.5
9.0
18.0
545
111.3
182.2
235.0
4.5
5.0
4.5
6.0
5.0
4.5
36.2
106.2
95.9
60.3
40.1
13.0
3.5
5. 1
7.0
4.5
3.8
6.0
5.0
27 .9
31.0
15.9
103.0
102.7
1.5
2.3
2.9
4.0
1.4
3.8
6.0
4.0
4.5
5.0
6.0
19.5
40.0
54.4
124.3
13.4
12.0
3.3
2.0
5.0
.8
5.0
5.0
76.4
43 .9
89.0
151.6
100.0
13.5
15.5
8.6
10.7
3.0
4.3
1.5
1.8
2.9
5.0
6.4
5.0
10.0
4.5
8.0
82.1
122.7
20.0
21.9
148.0
100.9
94.0
53 .0
130.0
105.0
60.0
100.0
16.3
12.2
12.0
9.7
4.5
3.0
2. 5
1.5
9.0
3.5
4.0
6.4
7.0
4.0
4.8
5.0
137.6
65.8
64.1
20.0
107.0
93.9
99.0
150.8
95 .0
82.5
80.0
160.0
12. 1
tl.O
13.2
14.2
3.0
3.0
2.8
3.0
5.0
3.2
3.8
6.5
5.0
4.5
6.0
66.6
61.2
60.9
95 .5
118.2
60.7
101.0
70.0
13.3
11.7
3.0
2.0
3.5
6.0
5.0
5.0
78. 1
29.8
107.0
All families .
100.0
80.0
14.2
10.3
J6
1.3
7.5
1.0
5.0
4.9
111.1
9.2
107.0
100.0
13.0
3.0
Percenlile oj income
. . . .. . . .. .
Less than 20
20-39.9
40-59.9
60-79.9 .
80-89.9 .. . , ... ....... ... .. ..... ... ..
90-100 .... ............. . . . . ..
40.0
51.0
88.7
11 5. 0
164.0
201.0
70.0
42.0
68.9
83 .0
125.0
147.5
6.5
9.8
12.8
16.3
17.3
18.3
1.0
1.8
2.4
4.0
5.5
7.5
Alie oj head (years )
Less than 35
.. . .. .. . .. .
35-44
.. .... .... . . . ..
45--54 . . ..... . .
55--64 .
65--74 .
75 or more ..
135.3
128.0
110.0
85 .0
69.0
40.0
78.0
1001.6
82.0
130.0
125.0
50.0
15.0
13.5
12.9
10.9
10.3
8.0
1.8
3.5
3.6
3.6
3.0
.8
Family strllctu re
Single with child(ren) ......... . ..
Single. no child. age less than 55 .
Single, no child. age 55 or more
Couple with child(ren) .
Couple. no child . .... . . . . .... . ... . . . .
97.0
93.9
50.0
119.0
119.0
92.5
80.0
135.0
114.8
100.0
10.0
10.0
6.0
13.0
15.8
2.0
1.5
2.3
4.1
3.5
Edllcutioll oj head
No high school diploma ..... ........
High school diploma ... . . .... . ..
Some college .. .
College degree
50.0
84.0
97 .0
142.7
53.3
82.0
80.0
125.0
8.8
10.2
12. 1
17.4
Race or elhnicity oj re£pondenl
White non-Hispanic
Nonwhite or Hispanic ........... . . . .
106.0
11 3.0
90.8
114.8
CllrTl!nl work stalllS olhead
Working for someone else ..... ......
Self-employed .
. ......... . . . . . . .. ..
Retired ....
Other not working .
117.0
135.0
47 .1
90.0
Cllrrent occllpation oj head
Managerial or professional . . . .. . . ... .
Technical , sales. or services.
Other occupation ................ . . . .
Retired or other not working
Region
Northeasl
Midwest
South .
West .
.
.. .. .. , ..... ... ...... .. ... .
.... ..... .... .... ...... ....
.... .... ..... ...
Urballidrr
Metropol,tan stati stical area (MSA) .
Non-MSA .. . . . ..
HOllsin g StatllS
Owner .
Renter or other . .
1.3
5. 1
•
17.3
1.0
4.6
6.0
10.0
30.0
.4
Percenlile oj net worth
Less than 25
25-49.9
.. . ... .. ....
50-74.9 ...... .. ... ..... ..... ... .... ..
75--89.9 . .
...... . . . . . .
90-100 ..... ... ... .
107.0
85.0
104.0
130.0
180.0
74 .0
72.0
94.0
160.0
11.4
13.0
14.0
12.0
17. 1
1.5
2.8
3.5
4.0
4.5
1.0
2.0
4.2
10.3
43.0
5.0
3.9
5.0
5.0
15.0
11.9
64.2
97.5
127.0
203 .0
MEMO
Mean value of holdings for
familie s holding asset
149.0
177.3
21.0
7.3
24.8
15 .5
126.0
.. .
NOTE : See note to table II
• Ten or fewer observations .
A42
Federal Reserve Bulletin D February 2009
since the 1998 survey (data not shown in the tables).
In general, borrowing is less prevalent among childless single families headed by a person aged 55 or
older and families headed by a person who is retired
or is 75 or older. Families in the lowest income,
wealth , and education groups-which tend to have
fewer economic resources-are also less likely to
have any debt. Across income groups , borrowing
peaks among families above the median. In contrast,
by net worth group, debt ownership peaks among
families below the median, in the second quartile.
Families in the highest three income groups , couples
with children, and families headed by a person
employed in a managerial or professional position
have comparatively high rates of debt ownership.
Debt ownership did not rise uniformly across
households between 2004 and 2007 . The fraction of
families with any debt fell for at least one group
within most of the sets of demographic categories
shown in table 13. By age group , debt ownership rOse
5.5 percentage points for households in the 55-to-64
age group and 6.7 percentage points for those in the
65-to-74 age group, but it fell 8.9 percentage points
for families in the oldest age category. Similarly,
changes within income and wealth groups ranged
from declines of 2 to 3 percentage points to gains of
4 percentage points or more. The percentage of
families with debt increased just more than 5 percentage points for nonwhite or Hispanic families as well
as for those headed by a self-employed person,
whereas the fraction rose more modestly or declined
among families in the complementary categories .
The overall median and mean values of outstanding debt for families that had any such debt rose about
11 percent from 2004 to 2007, a slower rate of
increase than in the previous three-year period, when
the median and mean both rose nearly 34 percent.
Median debt tends to rise with income, education, and
wealth; the median by age peaks among households
headed by a person aged 35 to 44. The median
amount of outstanding debt is also higher for couples,
homeowners, and families headed by a person who
was self-employed or who was working in a managerial or professional position. Over the recent threeyear period, the median amount of outstanding debt
rose for most demographic subgroups. The largest
increases in the median amount of debt were for
families headed by a person who lacked a high school
diploma (47 .7 percent) and families headed by a
person aged 65 to 74 (45.8 percent); other relatively
large increases in the median included those for
families Ii vi ng in the South and for families headed
by a person who worked in a technical, sales, or
service job. The median decreased by the greatest
proportion for families in the 75-or-more age group,
single fami lies with children, and families living in
the Midwest.
M rtgages and Other Borrowing on the Primary
Re idence
The share of families with debt secured by a primary
residence (hereafter, home-secured debt) continued to
trend up, from 47.9 percent in 2004 to 48.7 percent in
2007. 43 The increase was driven by the rise in the
fraction of homeowners with a mortgage, which rose
1.5 percentage points, to 70.9 percent in 2007.
Families with higher levels of income, education,
and wealth are generally more likely to have mortgage debt, as are couples and families headed by a
person who is employed in a managerial or professional job or who is self-employed . Across age
groups, the rate of borrowing peaks among families in
a middle age group and declines sharply among older
age groups , a pattern also seen in earlier years.44
White non-Hispanic families are more likely to have
home-secured debt than are nonwhite or Hispanic
families. 45 Between 2004 and 2007, the prevalence of
home-secured debt tended to increase for families
with higher levels of income or wealth, and it also
rose for families headed by a person who was selfemployed or employed in a technical, sales, or service
occupation and for families headed by a person who
was aged 55 to 74; the proportion of families with
home-secured debt declined most for single-parent
families, the oldest age group, and families in the
other-not-working category. The measure shifted comparatively little for other demographic groups.
Overall , the median amount of home-secured debt
rose 2.6 percent from 2004 to 2007, and the mean
rose 9.4 percent; the median had increased 27.4 per43, Home-secured debt consists of first-lien and junior-lien mortgages and home equity lines of credit secured by the primary
residence, For purposes of this article, first- and junior-lien mortgages
consist only of closed -end loans-that is, loans typically with a
one-time extension of credit, a set frequency of repayments, and a
required repayment size that may be fixed or vary over time in
accordance with a pre-specified agreement or with changes in a given
market interest rate, As a type of open-ended credit , home equity lines
typically allow credit extensions at the borrower's discretion subject to
a prearranged limit and allow repayment s at th e borrower' s discretion
subject to a prearranged minimum size and frequency,
44 , Of the families that owned a home, the fraction of homeowners
with mortgage debt was highest among families in the youngest age
group in 2007 , For homeowners in the 2004 s urvey, ownership of
home-secured debt peaked among families headed by a person aged 35
to 44 ,
45 , This pattern reverses , however, when only homeowners are
considered; for example, in 2007 , 68 ,9 percent of white non-Hispanic
homeowners had a mortgage, compared with 77 ,7 percent of nonwhite
or Hispanic homeowners,
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A43
14. Type of home-secured debt held by homeowners, 1998-2()()7 surveys
Percent
Homeowners with home-secured debt
Type of home·secured debt
1998
Junior·lien mortgage .. .
For home purchase .... . .. . .. . _
Other purpos~ . . . . . . . . . . . .
. . . .. ..... .
Home equity line of credit . . . . . . .. . .. ... ,.
Currently borrowing ,
I
2001
I
2004
I
2007
62 .2
36.8
I
62.6
35.8
65 .2
28.2
66. 1
30.4
9.8
15.6
First·lien mortgage . . .. .. . . . . .. . .. .. . .• . .
For home purchase .... . . . . .. . .. . .. .•.
Refinanced
Extracted equity ... .. . .
No extracted equity .
9.7
17,1
12.9
24.0
14.3
21.5
9.4
1.0
8.5
8.5
1.3
7.2
6.1
1.5
4.7
8.5
2.1
6.4
10.6
6.7
11.2
7.1
17.8
12.4
18.4
12.4
n.a. Not available (relevant data not collected).
cent over the preceding three years, and the mean had
increased 26.9 percent. Changes in the median amount
of home-secured debt were mixed across groups. The
median fell more than to percent for families in the
second-lowest income group, families in the top net
worth group, and families living in the Northeast. The
largest increases in the median value of home-secured
debt were for single-parent families and families in
the bottom net worth quartile. Both of these groups,
but particularly the former, experienced declines in
the prevalence of home-secured debt, which suggests
that the proportion of smaller home-secured debts
among these families fell over the recent period.
Other increases in the median were concentrated
among the youngest and oldest age groups and among
nonwhite or Hispanic families.
The rising values of primary residences over the
200~7 period outpaced the increases in homesecured debt and, thus, raised the typical amount of
home equity held by families with home-secured
debt. Median home equity among that group rose
from $76,900 to $91,000 over the period, an 18.3 percent increase (data not shown in the tables).46 Among
those with such debt, the median ratio of homesecured debt to the value of the primary residence fell
2.7 percentage points, to 53.3 percent in 2007; the
drop extended a trend in this measure since 1998,
when the median ratio was 58.8 percent. Over the
recent three-year period, an SCF-based estimate of
the aggregate ratio of home-secured debt to home
values for all homeowners held steady at 34.9 percent. Nonetheless, at the time of the 2007 SCF
interview, 1.0 percent of homeowners had homesecured debt greater than the reported value of their
primary residence.
As discussed earlier, home values generally declined after the data collection for the 2007 SCF was
completed. Assuming that all else, including home-
ownership, stayed constant from the time of the
interview until October 2008, the LoanPerformance
Home Price Index can be used to approximate the
effect of house price declines on home equity. This
assumption, together with the house price adjustment,
implies that as of October 2008, median home equity
for those with mortgage debt was $71,600 (6.9 percent lower than the 2004 value) , and the median ratio
of home-secured debt to house values for families
with mortgage debt was 58.5 percent. Under this
scenario, the aggregate ratio of home-secured debt to
house values for homeowners was 39.8 percent in
October 2008.47
Mortgage interest rates rose slightly, on net, over
the 200~7 period, but they remained low relative to
prevailing rates in the 1990s. Comparatively low
interest rates, appreciation in house values , changes
in mortgage-lending practices, and the deductibility
of interest payments on mortgage debt may have
provided an incentive for families to borrow against
the equity in their home. Such borrowing against
home equity may take the form of refinancing an
existing first-lien mortgage for more than the outstanding balance, obtaining a junior-lien mortgage, or
accessing a home equity line of credit. The survey
provides detailed information on all these options for
home equity borrowing. The share of homeowners
that had a first lien increased 0.9 percentage point, to
66.1 percent in 2007 (table 14). The fraction of
homeowners with junior-lien mortgage debt climbed
more substantially-2.4 percentage points-to 8.5 percent in 2007. The proportion of homeowners that had
a home equity line of credit increased 0.6 percentage
46. Among all homeowners in 2007 , median home equity was
$105,000; in 2004, it had been $94.500.
47. This scenario implies that the adjusted median home equity
among all homeowners was $90,200 in October 2008.
A44
Federal Reserve Bulletin D February 2009
point, to 18.4 percent in 2007, but the share of
homeowners with an outstanding balance held steady
at 12.4 percent; the median amount borrowed against
such lines likewise changed little and inched down
from $24,200 in 2004 to $24,000 in 2007 (data not
shown in the tables).48 Overall , the share of total
home-secured debt that was attributable to outstanding balances on home equity lines of credit fell across
the 2004 and 2007 surveys (table 14.1).
14.1.
Share of total home-secured debt
Type of home-secured debt
2007
(percent)
First tien .
Junior lien .
Home equity line of credit.
9t.4
4.0
4.6
I
Change, 2004-07
(percentage points)
.6
1.0
-1.6
In 2007, an increased share of the stock of first
liens consisted of either loans for home purchase or
loans that had been refinanced and on which the
borrower had extracted additional equity at the time
of the most recent refinancing (table 14). Among
borrowers in the 2007 survey who extracted equity as
a part of their most recent refinancing, the median
amount extracted was $28,900, compared with
$22,000 in 2004 (data not shown in the tables). The
prevalence of both types of junior liens rose over the
recent three-year period. In the 2007 survey, the most
commOn use of extracted equity was for home
improvement, which accounted for 39.8 percent of
outstanding balances attributable to equity extraction
on a first lien, a junior lien, or a home equity line of
credit.
Families headed by a self-employed person were
more likely than families overall to have a home
equity line of credit-20.4 percent of self-employed
families, compared with 12.6 percent overall in
2007-and to be borrowing against such a line-ll.O
percent of self-employed families, compared with
8.5 percent for all families in 2007 (data not shown in
the tables). These differences reflect, in part, the
relatively higher rates of homeownership among
families headed by a self-employed person.
Amid rising house prices between 2004 and 2007,
much discussion focused on how families have managed to finance the purchase of a home. One important determinant of the size of the regular payment
that families must make to service their mortgages is
48. Of all families, 45.4 percent had a first-lien mongage in 2007
(45.0 percent in 2004), 5.8 percent had a junior-lien Illongage
(4.2 percent in 2004), 12.6 percent had a home equity line of credit
(12.3 percent in 2004), and 8.5 percent had a home equity line of credit
with an outstanding balance (8.6 percent in 2004).
the length of time over which the loan must be repaid.
Between 2004 and 2007, the share of fi xed-term
first-lien mortgages with a term of at least 30 years
rose, and the share with a term of 15 years or less
declined (table 14.2).
14.2.
First-lien mortgage with a fixed term
MOrlgage contract length
15 years or shoner .
16-29 years .
30 years or longer .
2007
(percent)
25.6
9.4
65 . 1
I (percentage points)
Change . 2004-07
-7 .3
- .3
7.6
Another factor that may affect a borrower's ability
to service a loan is the extent to which the payment
may change over the life of the loan. Recent declines
in house prices and changes in benchmark interest
rates have brought particular attention to mortgages
with payments that may vary over the life of the loan,
including mortgages that do not require the borrower
to pay back the entire principal over the contract
period of the loan; in such cases, a "balloon payment" of the remaining principal remains at the end
of the loan term. From 2004, the fraction of first-lien
mortgages on the primary residence that had a potentially variable rate fell 0.8 percentage point, to
14.2 percent in 2007 (data not shown in the tables);
over the same period , the share of first-lien mortgages
with a balloon payment increased 0.5 percentage
point, to 4.6 percent. The level of interest rates is
another key determinant of the size of the regular
payment that a borrower must make to repay a loan.
Between 2004 and 2007, the median interest rate on
the stock of outstanding first-lien mortgages on primary residences rose 0.10 percentage point, to
6.00 percent, and the mean interest rate rose 0.13 percentage point, to 6.32 percent.
Bon·owing on Other Res idential Real E tat
The overall prevalence of debt owed on residential
real estate other than a fami ly ' s pri mary residence
increased 1.5 percentage points between 2004 and
2007, the largest increase in prevalence of any of the
types of debt considered in table 13. The increase
reflected not only the rise in the share of families with
other residential real estate (discussed earlier) but
also a higher rate of borrowing against such properties among families that owned them. In 2004,
32.0 percent of families with other residential real
estate owed money On a loan collateralized by the
property, and in 2007 this proportion had risen to
40.3 percent. Borrowing on other residential real
estate is more common among households with
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
higher levels of income, education, or wealth; couples,
as well as families headed by a person who was
self-employed or who was employed in a managerial
or professional position, are also relatively likely to
have such debt. These same groups generally experienced the largest increases in the use of such debt.
The median amount of debt on other residential
real estate for families having such debt moved up
4.6 percent in 2007, but the mean amount fell 3.2 percent. These changes are modest compared with the
sharp rises between 2001 and 2004 in the median and
mean amounts, each of which more than doubled.
Changes over the recent three-year period in the
median and mean amounts exhibited a mixed pattern
of increases and decreases for subgroups of families;
shifts in the medians and means for subgroups were
generally in the same direction.
In ta lLm nl Borrowing
Installment borrowing is about as common as homesecured borrowing. 49 In 2007 , 46.9 percent of families had installment debt, an increase of 0 .9 percentage point over the level for 2004. Although the use of
installment borrowing has increased in each of the
past three surveys, the overall rate of use is comparable with the levels seen in the four surveys from
1989 to 1995. The use of installment borrowing is
broadly distributed across demographic groups, with
notably lower use by families in the lowest income
group, those in the highest wealth group, childless
single families headed by a person aged 55 or older,
families headed by a retired person, and families
headed by a person aged 65 or older. By comparison,
the median amount of outstanding installment debt
varies more clearly across many groups: That amount
tends to rise with income, education, and occupational status, and it falls with age . The median amount
of installment debt is fairly comparable for families
with net worth below the 90th percentile and is
sharply higher for families in the top net worth group.
Installment borrowing is used for a wide variety of
purposes. In 2007, 51.7 percent of such borrowing
was related to the purchase of a vehicle, and 33.2 percent of outstanding installment debt was owed for
educational purposes. In general, balances on vehicle
loans account for a disproportionate share of installment debt for those families headed by a person with
at most a high school degree ; vehicle debt constitutes
a relatively low proportion of total installment debt
49. The term "installment borrowing" in this article describes
closed-end consumer loans-that is. loans that typically have fixed
payments and a fixed term . Examples are automobile loans, student
loans, and loans for furniture, appliances, and other durable goods.
A45
for younger families and families in the lowest wealth
category shown (table 15); the shares of installment
debt attributable to education loans decline with age
and wealth, and-as might be expected-the share
rises sharply with education.50
From 2004 to 2007, the median amount owed on
installment loans rose 2.4 percent, and the mean rose
1.4 percent. Changes in the median within demographic categories include both increases and decreases. The largest gains occurred among families in
the second net worth quartile and families headed by
a person who was retired or otherwise not working,
while the sharpest declines occurred among families
headed by a person aged 55 to 64 and chil.dless single
families headed by a person aged 55 or older.
Credit Card Balance and Othe r Lines of Credit
As with installment borrowing, the carrying of credit
card balances is widespread but considerably less
common among the highest and lowest income groups,
the highest wealth group, and families headed by a
person who is aged 65 or older or who is retired .51
The proportion of families carrying a balance, 46.1 percent in 2007, was barely changed from 2004. Underlying this stability in the share of all families carrying
a balance were larger shifts for many demographic
groups, with increases and decreases of 3 percentage
points or more for many of the groups.
Overall, the median balance for those carrying a
balance rose 25.0 percent, to $3,000; the mean rose
30.4 percent, to $7,300. These increases followed
slower changes over the preceding three years, when
the median increased 9.1 percent and the mean
climbed 16.7 percent (data not shown in the tables).
Over the recent period, the median balance rose
strongly for most demographic groups, particularly
for higher-income families, childless couples, and
families headed by a person who was aged 55 to 64 or
who was self-employed. However, the median balance fell roughly 30 percent for the oldest age group,
younger childless single families, and families headed
50. For an expanded version of table 13, including the categories of
installment loans given in table 15, see www.federa/reserve. gov/pubs/
ossloss2l2007/scf2007home.html.
51 . In thi s article, credit card balances consist of balances on
bank-type cards (such as Visa, Master{:ard , and Discover as well as
Optima and other American Express cards that routinely allow carrying a balance), store cards or charge accounts, gasoline company
cards, so-ca lled travel and entertainment cards (such as American
Express cards that do not routinely allow carrying a balance and
Diners Club), other credit cards, and revolving store accounts that are
not tied to a credit card. Balances exclude purchases made after the
most recent bill was paid.
A46
Federal Reserve Bulletin 0 February 2009
15. Value of installment debt distributed by type of installment debt by selected charn tcristics of fam ilie. with in lallment
debt. 2004 and 2007 urvey
Percent
2007
Family characteristic
Education
All families ... . .......
,
.. .. ... .
Other
Education
Vehicle
Other
55.5
18.5
33.2
51.7
15. 1
.H .9
lOA
28.9
14.0
15. 1
18.2
24 .2
47.0
29.9
33.6
32.7
38.3
25.5
24.4
43.9
54.7
59.4
56.2
50.9
28 .6
26.3
11.7
7.9
5.6
23.6
45.9
61.3
63.3
68.5
72.0
19.5
11.5
12.2
13.0
15.7
27.4
53.1
24.3
27.2
21.7
41.2
57.8
53 .5
53.8
73.2
88.0
5.6
17.8
19.4
24.5
19.0
8. 1
12.6
26.7
33.4
70.0
70.7
61.8
45 .3
21.9
16.7
11.5
21.3
12.8
15.0
23.6
48.1
71.5
69.6
53.0
40.2
15.8
15,4
23.5
11.7
25.9
26.6
56.3
52.7
178
20.7
32.1
36.2
52.1
50.6
15.9
13.2
45.2
27.2
21.5
19.0
3.8
33.0
67.8
67.1
72.5
43.4
21.8
5.0
11.2
8. 5
52.7
47.9
30.3
30.2
25.7
16.7
32.5
60.9
60.4
66.0
47.6
19.6
8.8
9.4
S.3
35 .7
26.0
Percl!lIIih; of income
Less than 20
20-39.9
40-59.9 ... .... .... .... ...... ...... .
60-79.9
80-89.9
90-100 ..... ....... .... ... .. .... ... .
55.8
30.6
29 .2
23.8
17.3
19.0
405
56.7
61.1
64.6
56.9
Age of head (years)
Less than 35
35-44 .
45-54 ...
55~
.
.............. .
65-74.
75 or more .
''' 1
.. .
... ...... ... ...... .
42.6
26.4
23.6
15.8
*
Edllcatioll of hmd
No high school diploma
High school diploma
Some college .. ...
College degree ... . .......
Race or ethnicity of responde",
White non-Hispanic . . . . . . . . . . .
Nonwhite or Hispanic
Percentile of lIet worth
Less than 25 . . . . . . . . . . . .
25-49.9
50-74.9 ........... .. .
75-89.9
... ... ..... ...
90-100
...... .....
NOTE: See nOle to table I.
• Ten or fewer observations.
by a person who was neither working nor retired;
median balances declined more modestly for selected
other groups.
Many families with credit cards do not carry a
balance. 52 Of the 73.0 percent of families with credit
cards in 2007, only 60.3 percent had a balance at the
time of the interview; in 2004, 74.9 percent had cards,
and 58.0 percent of these families had an outstanding
balance on them (data not shown in the tables). The
proportion of cardholders who had bank-type cards
increased over this three-year period, as did the
proportion with miscellaneous other credit cards,
while the share of cardholders having gasoline or
travel and entertainment card types declined considerably (table 15.1). These declines probably reflect, at
least in part, a rise during the period in the issuance of
bank-type cards under the brand names of stores and
52. The remaining disc ussion of credit cards excludes revolving
store accounts that are not tied to a c redit card. In 2007. 5.4 percent
(5 .9 percent in 2004) of families had such an account . the median
outstanding balance for families that had a balance was $700 ($790 in
2004), and the total of such balances accounted for 4.4 percent
(4.3 percent in 2004) of the total of balances on credit cards and such
store accounts (data not shown in the tables) .
15 .1.
Families wilh credil cards
Type of credit card
2007
(percent)
Change. 2004-07
(percentage points)
Bank
Store
Gasoline.
Travel and enlenainment .
Mi scellaneous .
96.1
56.7
ll.9
7.4
3.7
.7
- 1.7
-5.4
-2.6
I I
gasoline companies and in the issuance of new types
of American Express cards that routinely allow carrying a balance.
Bank-type cards are the most widely held type of
card and thus hold particular importance. Indeed,
balances on such cards accounted for 87.1 percent of
outstanding credit card balances in 2007, up from
84.9 percent in 2004 (data not shown in the tables).
The proportion of holders of bank-type cards who had
a balance went up 2.1 percentage points, to 58.3 percent; the proportion of holders of bank-type cards
who reported that they usually pay their balances in
full retreated a bit, from 55 .7 percent in 2004 to
55.3 percent in 2007. Over the recent three-year
period, the median outstanding charges for the month
preceding the interview on all bank-type cards held
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
A47
Rates of use of other debt were noticeably lower
for families in the bottom income group as well as for
families headed by a person who is 75 years of age or
older or who is retired and for families in the next-tohighest net worth group. The highest rate of other
debt ownership was for single families with children.
The prevalence of such debt fell for families with
higher levels of income, education, or net worth; the
rate of use rose for the age groups between 45 and 74
and for all occupation categories except the
managerial-or-professional group.
The median amount owed by families with this
type of debt rose 13.6 percent, to $5,000, between
2004 and 2007; over the same period, the mean fell
17.1 percent. In 2007, 36.6 percent of the total
amount of this type of debt was attri butable to margin
loans (50.4 percent in 2004), 21.3 percent to loans
against a pension from a current job of the family
head or that person's spouse or partner (21.2 percent
in 2004), 12.1 percent to loans against cash val ue life
insurance policies (9.8 percent in 2004), and the
remaining 30.0 percent to miscellaneous loans
(18.7 percent in 2004) (data not shown in the tables).
In 2007, the SCF collected information for the first
time on whether a family member had taken out a
loan in the past year that was supposed to be repaid in
full out of that person's next paycheck. 55 Overall,
2.4 percent of families reported having taken out a
so-called payday loan. The fraction of families that
had taken out a payday loan declined with age, falling
from 4.9 percent of families headed by a person
younger than age 35 to essentially 0 percent for
families headed by a person aged 65 or older (data not
shown in the tables). Across income groups, the share
of families that reported such a loan was between
3.5 percent and 4.0 percent for the bottom three
quintiles, but families in the top two quintiles reported
virtually no use of this type of short-term loan.
Similarly, 5.8 percent of families in the bottom net
worth quartile reported having taken out a payday
loan , while 3.7 percent of families in the second
quartile and virtually no families with net worth
above the median reported having done so.
The data indicate that families tend to take out
payday loans to finance immediate expenses. The
most common reason given for choosing a payday
loan for families that had taken out such a loan was
"emergencies" and similar urgent needs or a lack of
other options (35.9 percent).56 Roughly equal shares
of families cited convenience in obtaining the loan
(21.0 percent) or the need to pay for living expenses,
including food, gas, vehicle expenses, medical payments, utility costs, or rent (20.6 percent). A smaller
fraction, 10.8 percent, of these fami lies reported a
need to pay other bills and loans. The remaining
53. In this article, borrowing on lines of credit excludes borrowing
on credit cards.
54. The "other debt" category comprises loans on cash value life
insurance policies, loans against pension accounts, borrowing on
margin accounts, and a miscellaneous category largely comprising
personal loans not explicitly categorized elsewhere.
55. The family mayor may not have had such a loan outstanding at
the time of the interview.
56. This disc ussion considers the primary reasons given by families
when asked why they chose this type of loan . Families could provide
up to two reasons, but 92.0 percent of those who had taken out a
payday loan in the past year provided only one .
by the family fell from $280 in 2004 to $250 in 2007.
For families having any bank-type cards, the median
number of such cards remained at 2; the median
credit limit on all such cards rose 21.4 percent, to
$18,000, and the median interest rate on the card with
the largest balance (or on the newest card, if no
outstanding balances existed) rose 1.0 percentage
point, to 12.5 percent.
Only 3.8 percent of families had an established line
of credit other than a home equity line in 2007 (data
not shown in the tables).53 Even fewer families1.7 percent-had a balance on such a line, an increase
of 0.1 percentage point since 2004 and only 0.2 percentage point since 2001. The median amount outstanding on these lines climbed 15.2 percent between
the most recent surveys, while the mean fell 38.3 percent.
Borrowing on other lines of credit was more common among households headed by a person who was
self-employed, a pattern that is apparent in earlier
SCF surveys; a similar pattern also holds when the
analysis considers all available lines, not just those
against which families carried a balance.
Other Debt
From 2004 to 2007, the proportion of families that
owed money on other types of debts decreased
0.8 percentage point, to 6.8 percent. 54 The ownership
of each underlying type of such debt also declined
(table 15.2).
15.2.
All families
Type of other debt
Cash value life insurance
loans.
Pension account loans .
Margin account loans.
Other miscellaneous loans . .
200?
(percent)
.9
3.4
.5
2.4
I
Change . 2~?
(percentage points)
--D.?
--D. I
t
- .3
t Less than 0.05 percent.
A48
Federal Reserve Bulletin 0 February 2009
12.6 percent of families with a payday loan in the past
year cited other needs, including "Christmas" or the
need to "help family."
The SCF provides information on the reasons that
families borrow money (table 16). One subtle problem with the use of these data is that, even though
money is borrowed for a particular purpose, it may be
employed to offset some other use of funds. For
example, a family may have sufficient funds to purchase a home without using a mortgage but may
instead choose to finance the purchase to free existing
funds for another purpose. Thus, trends in the data
can only suggest the underlying use of funds by
families .
Although the survey information on use is substantial, it is not exhaustive, Most important, in the case
of credit cards, it was deemed impractical to ask
about the purposes of borrowing, which might well be
heterogeneous for individual families. For the analysis here, all credit card debt is included in the
category "goods and services," The surveys before
2004 lack information on the use of funds borrowed
through a first-lien mortgage; therefore, for purposes
of this calculation, all funds owed on a first-lien
mortgage on a primary residence are assumed to have
been used for the purchase of the home, even when
the homeowner had refinanced the mortgage and
extracted equity for another purpose.
The great majority of family debt is attributable to
the purchase of a primary residence; however, from
2004 to 2007, the share of debt for this purpose
declined 0.7 percentage point after a similar decline
in the 2004 survey. Looking more broadly at debt for
residential real estate, the drop in debt for home
purchase was more than offset by both an increase in
balances owed on residential real estate other than the
primary residence-the second-largest share of debtand a slight rise in balances owed for improvements
16. Amounl of debl of all families. di lributed by purpose
of debt. 1998- 2007 surveys
Perce III
Primary residence
Purchase .... ... . . .. .. __ .
Improvement . . . . .
. ..
Other residential property . . . . .. .
Investments excludi ng real estate .
Vehicles. .. . .. . . . .. __ . .. __ .. .
Goods and services .
Education . . .
Other ..... ____ ..
Total . . .. . . . .... . . .
NOTE: See note to table 8.
Percent
Type of institution
Reasons for Borrowing
Purpose of de bt
17. Amount or dehl of all ramilic , di tributed by type of
lending institution , 1998-2007 surveys
2007
1998
67.9
2. 1
7.8
3.3
7.6
63
3.5
1.5
100
70.9
2.0
6.5
2.8
~8
~8
3. 1
1.1
100
70.2
1.9
9.5
2.2
67
60
3.0
.6
100
69.5
2.3
10.8
1.6
~5
62
3.6
.5
100
Commercial bank . . .. . . ...
Thrift institution I ...
Credit union
Finance or loan company -- .
Brokerage ....
Mortgage or real estate lender .
Individual lender
Other nonfinancial . . . . . . . . . . . . .
Government . . . .. . __ .. .. . ....... .
Credit card issuer . .... .... ... ...
Pension . . .. .. . ... ..
Other ... . . . ..... , ... .. ....
Total
1998
32.8
9.7
4.3
4.1
3.8
35.6
3.3
1.3
.6
3.9
.4
.3
100
2007
34.1
6. 1
5.5
4.3
3.1
38.0
2.0
1.4
1.1
3.7
.3
.5
100
35.1
7.3
3.6
4.1
2.5
39.4
1.7
2.0
.7
3.0
.3
.2
100
37.3
4.2
4.2
3.4
1.6
41.6
1.4
2.0
.4
3.6
.2
.2
100
NOTE : See note to table I.
I. Savings and 10em association or savings bank.
on the primary residence. In 2007, the fraction of debt
owed for goods and services exceeded the share of
borrowing for vehicles for the first time in any SCF
survey since 1989, largely because of a decline in the
share for vehicles between 2004 and 2007. The
majority of the debt in the goods and services category, 56.5 percent, was outstanding balances on
credit cardsY
Choice of Lenders
The survey provides information on the types of
lenders to which families owe money at the time of
the interview (table 17). Over the past decade, regulatory changes and other shifts have contributed to
consolidation of financial institutions; at the same
time, consumers have witnessed a continuing proliferation of similarly named subsidiaries of large financial institutions , which may offer a variety of possibly
overlapping financial services. As a result, fami lies in
the SCF appear to have had difficulty in accurately
classifying the institutional type of lender holding
their loans . A parent company may, for example, offer
installment loans through both a subsidiary commercial bank and a subsidiary finance company with
similar names. Thus, the proportions shown in the
table are only indicative, and small differences across
categories or years should be interpreted with particular caution.
The share of total debt reportedly owed to thrift
institutions (savings and loan associations and sav57. The surveys beginning with 2004 con13in information on the
use of funds ob13ined from refinancing a first-lie n mortgage. If this
information for 2007 is used to class ify o uts tanding debt by purposes ,
the shares of debt were, for home purchase , 65.6 percent; for home
improveme nts, 3.9 percent ; for other residential real e S13te, 11.1 percent; fo r investments other tha n real estate, 1.9 percent ; for vehicles,
5.7 percent ; for goods and services, 7.7 percent ; for education,
3.6 percent: and for other unclassified purposes, 0.5 percent.
Changes in U.s. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
ings banks) fell 3.1 percentage points between 2004
and 2007 . The estimated shares held by finance and
loan companies or brokerages declined 0.7 and 0.9 percentage point, respectively. The largest increases over
the period were the reported rise of 2.2 percentage
points in the shares of debt owed to a commercial
bank and to mortgage or real estate lenders, followed
by gains of 0.6 percentage point for both credit unions
and credit card issuers.
In some cases, loans may have been held at the
time of the interviews by institutions other than the
ones that originally made the loans. This fact might
likewise make determining the type of financial institution that holds such debt more difficult. Resale of
loans is particularly important for mortgage debt.
According to the 2007 survey, 39.5 percent of the
first-lien mortgages on primary residences were held
by lenders other than the ones that made the original
loans, a figure 2.0 percentage points lower than in
2004. 58 In dollar-weighted terms, the results are similar; mortgages with non-originating lenders accounted
for 40.3 percent of the outstanding balances on
first-lien mortgages for primary residences in 2007
and 43.3 percent in 2004 (data not shown in the
tables).
Credit Market Experiences
The SCF also collects some information on families'
recent credit market experiences. Specifically, the
survey asks whether the family had applied for any
type of credit in the past five years and , if so, whether
any application was either turned down or granted for
a lesser amount than the amount initially requested.
Families that gave such responses were asked the
reason given for the decision. The survey also asks
whether, at any time in the past five years, the family
ever considered applying for credit but then decided
not to apply because of a belief that the application
would be rejected . Such families were asked the
reason they believed they would have been turned
down.
In 2007, 66.3 percent of families had applied for
credit at some point in the preceding five years
(68.7 percent in 2004). Of these families, 29.7 percent
had at least once been either turned down for credit or
approved for less credit than they had applied for in
the past five years (30.4 percent in 2004). Of all
58. Mortgages and other loans may also be serviced by a n institution other than the current lender, and some respondents may mistakenly report their loan as having been sold even though it is simply
being serviced by an institution other than the current lender. Because
a loan can also be so ld without changing the servicer, some borrowers
may mistakenly report that their loan has not been sold .
A49
families, 15.3 percent had considered applying but
subsequently did not do so because they thought the
application would be denied (15.8 percent in 2004).
The most common reasons reported for either having
been denied credit or having not applied for credit
were reasons related to the borrower's credit characteristics, such as the lack of a credit history, previous
performance on a loan or account from another
institution, and the amount of debt held by the
borrower (table 17.1).59
17.1.
Reason IUmed down
or did not appl y
Personal characteri stics .
Credit characteristi cs
Financial characteristics
Miscellaneous, inc luding
no reason given .
Families who applied
for credit and were
turned down or
received less credit
than the amount
requested (percent)
Families who did
not apply for credit
because they ex pected
to be turned down
(percent)
1.8
3.9
59.9
29.4
67.7
22.9
8.8
5.5
Debt Burden
The ability of individual families to service their
loans is a function of two factors: the level of their
loan payments and the income and assets they have
available to meet those payments. In planning their
borrowing, families make assumptions about their
future ability to repay their loans. Problems may
occur when events turn out to be contrary to those
assumptions . If such misjudgments are sufficiently
large and prevalent, a broad pattern of default,
restraint in spending, and financial distress in the
wider economy might ensue.
The Federal Reserve staff has constructed an
aggregate-level debt service ratio, defined as an estimate of total scheduled loan payments (interest plus
minimum repayments of principal) for all households, divided by disposable personal income. From
the third quarter of 2004 to the same period in 2007 ,
the aggregate-level measure stepped up 0.74 percentage point, to 14.39 percent. 60
59. Personal characteristics include responses related to family
background or size, marital status, sex, or age ; credit characteristics
include responses related to the need to have a checking or savings
account, lack of a credit history, credit reports from a credit rating
agency or from other institutions, or the level of outstanding debt and
insuffic ient credit references ; financial characteristics include responses related to previous difficulty gening credit. more " strict"
lending requirements of the institution , an error in processing the
application, or credit problems of an ex-spo use.
60. Data on tltis measure, the "debt service ratio," and a description
of the series are available at www.federa lreserve .gov/releases/
housedebtldefaull.htm . See Karen Dynan, Kathleen Johnson, and
A50
Federal Reserve Bulletin 0 February 2009
18. Ralio of debt payments to fami ly income (aggregate and median). shEm: of debtor families with ralio grentcr than 40
percent. and share of ueblOrs with any payment 60 day or more past due, 1998-2007 survey
Percent
Aggregate
Family characteristic
I 998
Debtors with rdtio greater
than 40 percent
Median for debtors
I 200 I I 2004 I 2007
1998
I 2001 I 2004 I 2007
1998
I 2001 I 2004 I 2007
Debtors with any payment
past due 60 days or more
1998
I 200 I I 2004 I 2007
All families . . .. . . . .. . . ..
14.9
12.9
14.4
14.5
17.9
16.7
18.0
18.6
13.6
11.8
12.2
14.7
8.1
7.0
8.9
7.1
Pen'emile of income
Less than 20 ...... .. ...
... . .
20-39.9 . .
40-59.9 .... , . , . . . . . .
60-79 .9 ... ...... .... .. .
80-89.9 . . ..... .. ... ....
90-100
18.8
16.6
18.7
19.1
16.8
10.3
16.1
15.8
17.1
16.8
17.0
8.1
18.2
16.6
19.4
18.5
17.3
9.3
17 .6
17.2
19.8
21.7
19.7
8.4
18.6
17.5
19.4
19.5
17.8
13.7
19.2
16.7
17.6
18. 1
17.2
11.2
19.7
17.4
19. 5
20.6
18. 1
12.7
19.0
17.0
20.3
21.9
19.3
12.5
29.8
18.3
15.9
9.8
3.5
2.8
29 .3
16.6
12.3
6.5
3.5
2.0
26.8
18.5
13.7
7. 1
2.4
1.8
26.9
19.5
14.5
12.7
8.1
3.8
13.0
12.4
10.0
5.9
3.9
1.6
13.4
11.7
7.9
4.0
2.6
U
15.9
13.8
10.4
7. 1
2.3
.3
15. 1
11.5
8.3
4.1
2.1
.2
Age of head (years)
Less than 35
35-44 ...... .... " " " ..
45-54 ...... ..
55--04 . . .... ... , .......
65-74 .
.. . , '
75 or more ..
17.2
17.7
16.4
13.4
8.8
4.1
17.2
15.1
12.8
10.9
9.2
3.9
17.8
18.2
15.3
11.5
8.7
7.1
19.7
18.5
14.9
12.5
9.6
4.4
16.9
20.0
17.9
17.6
13.2
8.1
17.7
17.8
17.4
14.3
16.0
8.0
18.0
20.6
18.4
15.7
15.6
12.8
17.5
20.3
19,J
17.5
17.9
13.0
12.9
12.5
12.8
14.0
18. 1
21.4
12.0
10.1
11.6
12.3
14.7
14.6
12.8
12.5
13. 1
10 2
11.6
10.7
15. 1
12.7
16.0
14.5
15.6
13.9
11.1
8.4
7.4
7.5
3.1
1.1
11 .9
5.9
6.2
7.1
1.5
.8
13.7
11.7
7.6
4 .2
3.4
3.9
9.4
8.6
7 .3
4.9
4.4
1.0
Percentile of net worth
Less than 25
25-49.9 .. ..... . . . . ... .
50-74.9 . ........ . . ..
75--89.9
90-100 .... . .. .. , .
15.0
20.1
18. 3
14.8
10.2
13.4
18.1
16.7
15.4
7.4
13.0
19.5
20.6
15.1
8.5
15.0
22.4
20.3
17.0
8.0
13.6
20.2
20.2
17.8
14. 1
11.5
20. 1
18.3
16.9
11.2
13.0
21.2
21.4
17.8
12.6
12.1
23.4
21.5
18.2
12.6
13. 1
15.9
13.0
12.3
12.2
11.6
14.2
11 .2
10.6
8.5
10.5
15.8
12.8
9.6
7.6
10.4
19.3
15.9
13.0
11.1
16.3
9 .8
5.5
1.0
.2.4
17.7
7. 1
3.6
.7
.3
22.9
11.0
3.2
1.1
.1
16.8
7.7
4.2
1.2
.7
16.3
8.2
13.9
15.6
7.2
15.6
7.9
21.2
8.5
20.0
8.3
21.5
8.1
22.8
8.2
16.5
6.5
14.7
4.2
14.9
4.3
18.0
5.4
6.1
12.9
4.3
14.0
5.6
18.6
4 .8
13.5
.
... .... ...
..
••••
6
•
• • • • • • 6 .. .
Huusing slDtus
Owner ..
Renter or other . .
"
'
6
'
7.4
NOTE: The aggregate measure is the ralio of total debt payments to towl income for all families. The median is the median of the distributi on of ralios
calculated for individual families with debt. Also see note 10 table I .
The survey data for individual families may be
used to construct a similar estimate of debt burden for
families overall as well as for various demographic
groups (table 18).61 The SCF-based estimate is the
ratio of total debt payments for all families to total
Karen Pence (2003). "Recent Changes to a Measure of U.S. Household Debt Service." Federal Reserve Bulle/ill. vol. 89 (October),
pp. 4l7-26.
61. The survey measure of payments relative to income may differ
from the aggregate-level measure for several reasons. First, the debt
payments included in each measure are different. The aggregate -level
measure includes only debts originated by depositories, finance companies, and other financial institutions. whereas the survey includes. in
principle , debts fro m all sources.
Second, the aggregate-level measure uses an estimate of disposable
personal income from the national income and product accounls for
the period concurrent with the estimated payments as the denominator
of the ratio. whereas the survey measure uses total before-tax income
reported by survey families for the preceding year; the differences in
these two income measures are complex.
Third, the payments in the aggregate-level measure are estimated
using a formula that entails complex assumptions about minimum
payments and the distribution of loan terms at any given time ; the
survey measure of payments is directly asked of the survey respondents but may also include payments of taxes and insurance on real
estate loans.
Fourth, because the survey measures of payments and income are
based on the responses of a sample of respondents. they may be
affected both by sampling en-or and by various types of response
en-ors . As mentioned earlier in this article, the survey income measure
tracks the most comparable measure of income in the Census Bureau' s
Cun'ent Population Survey.
family income of all families. 62 From 2004 to 2007,
the SCF-based estimate rose, albeit by less than the
aggregate-level measure, increasing 0.1 percentage
point, to 14.5 percent. In the previous three-year
period, the SCF measure had increased at a faster
pace than the aggregate-level measure; between 200 I
and 2004, the aggregate estimate of the debt-burden
ratio rose 1.4 percentage points, and the SCF-based
measure increased 1.5 percentage points. If total
payments and incomes are computed from the survey
data using only families with debt payments, the
results for the recent period show a slightly larger
increase, from 17.7 percent in 2004 to 18.0 percent in
2007; if the ratio is computed using only families
with home-secured debt, the data show a rise from
20.2 percent in 2004 to 20.5 percent in 2007 (data not
shown in the tables) . The SCF-based estimate of the
aggregate debt-burden ratio increased for most demographic groups over the recent three-year period.
62. The definition of debt payments in the SCF does not include
payments on leases or rental payment s. The survey collects informati on on vehicle lease payments and rent on primary residences . and,
thus. in principle a broader measure of debt payments could be
constructed, one that would be similar to the " financial obligations
ratio" estimated by the Federal Reserve staff.
Changes in
u.s.
Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
The ability to look at the distribution of payments
relative to income at the level of families potentially
offers insights that are not available from any of the
aggregate-level figures. In particular, the survey allows a detailed look at the spectrum of payments
relative to income across all families with debts. Over
the recent period, the median of the ratios for individual families that had any debt rose 0.6 percentage
point, to 18.6 percent in 2007, a gain that extends a
series of increases in this measure since 1989 that
were interrupted only by a decline between 1998 and
200 I. The median ratio of debt payments to income
also rose at least slightly in the recent period for most
demographic groups shown; the median fell for families with wealth in the lowest quartile, for families
with income in the two lowest quintiles or the highest
decile, and for families headed by a person younger
than 45. 63
A limitation of the median ratio is that it may not
be indicative of distress because it reflects the situation of only a typical family. Unless errors of judgment by both families and lenders are pervasive, one
would not expect to see signs of financial distress at
the median. Thus, a more compelling indicator of
distress is the proportion of families with unusually
large total payments relative to their incomes. From
2004 to 2007, the proportion of debtors with payments exceeding 40 percent of their incomes rose
2.5 percentage points, to 14.7 percent; in the preceding three years, the proportion had increased 0.4 percentage point. The increase was shared by all demographic groups except families in the bottom net
worth group, for which the share edged back 0.1 percentage point, to 10.4 percent; in contrast, this fraction increased between 3.0 and 3.S percentage points
for each of the other net worth groups. Compared
with the increases for lower income groups, the share
of families with income between the 60th and 90th
percentiles who had a relatively high ratio of debt
payment to income rose especially sharply.64
Fluctuations in a family's income away from its
usual level can have substantial effect on the family's
payment-to-income ratio. If the ratio is defined in
terms of families' reported usual incomes, the fraction of families with a ratio exceeding 40 percent falls
to 13.6 percent. This 1.1 percentage point difference
reflects two facts: (I) 2.5 percent of families with debt
63. The median of the ratio for families with home-secured debt in
2007 was 25 .1 percent, up from 24.2 percent in 200 I (data not shown
in the tables).
64. Of families with home-secured debt, the proportion that had
total payments of more than 40 percent of their income was 20.1 percent in 2007, a level 3.0 percentage points higher than that in 2004
(data not shown in the tables).
ASl
had relatively high payment-to-income ratios based
on the previous year's income but would not have if
income had been at its usual level, and (2) 1.4 percent
of families with debt had debt payments less than or
equal to 40 percent of last year's income but would
have had a ratio above 40 percent if income had been
at its usual level. Families may draw on assets as well
as income to meet debt payments. For all families
with debt, 57 .7 percent had transaction account balances equal to at least three months of debt payments.
For families with payment-to-income ratios above
40 percent, however, this share falls to 25.9 percent.
Other commonly used indicators of debt-repayment
problems are aggregate delinquency rates-that is,
the percentage of delinquent accounts or the percentage of total balances on which payments are late.
Both account-based and dollar-weighted aggregate
measures indicate that delinquencies on mortgages
rose, on net, from the third quarter of 2004 to the third
quarter of 2007, but they began to rise more sharply
thereafter. Over the 2004--07 period, the percentage
of delinquent automobile loans declined, while a
corresponding dollar-weighted measure rose; the fraction of delinquent loans leveled off in 2008, while the
dollar-weighted measure continued to rise. On net, a
dollar-weighted delinquency measure for other c1osedend loans was unchanged from the third quarter of
2004 to the third quarter of 2007, while the percentage of delinquent loans rose; over the following year,
both measures rose. Delinquency measures for credit
cards also differed by whether the measure was based
on dollar volume or delinquent accounts, but all
pointed to comparatively small changes between the
third quarter of 2004 and the third quarter of 2007;
over the following four quarters, all of these measures
showed clear increases. 65
A related measure is collected in the SCF. Families
that have any debt at the time of their interview are
asked whether they have been behind in any of their
loan payments in the preceding year. This measure
differs conceptually from the aggregate delinquency
rates in that the survey counts multiple occasions of
late payments as one, counts families instead of
balances or accounts, and includes all types of loans;
because it counts individual families, not their balances, it is closer in spirit to aggregate measures
based on the numbers of delinquent accounts than to
those based on the amounts of delinquent balances.
The survey shows a decrease from 8.9 percent in
2004 to 7.1 percent in 2007 in the proportion of
65. The most commonly used such measures are from the Consolidated Reports of Condition and Jncome (Call Report), the American
Bankers Association , and Moody's Investors Service.
A52
Federal Reserve Bulletin 0 February 2009
debtors who were 60 or more days late with their
payments on any of their loans in the preceding year.
This measure feJl for families in each of the income
groups but particularly for families in the middle
60 percent of the income distribution; the percentage
declined for families with net worth below the
median, and it rose for families with higher levels of
net worth.66 The share of families with debt who were
at least 60 days late on a payment during the preceding year rose for families headed by a person aged 55
to 74 and fell for both homeowners and , more substantially, renters. For families with a payment-toincome ratio of 40 percent or more, 13.9 percent
missed a debt payment by 60 days or more; by
comparison, 6.0 percent of debtor families with lower
ratios had fallen behind in debt repayment.
SUMMARY
Data from the 2004 and 2007 SCF show that median
income barely changed, while mean income rose
substantially, an indication that income gains were
much greater for families in the uppermost part of the
distribution. Although overall both median and mean
net worth increased strongly over this period-l7.7
percent and 13.0 percent, respectively-these measures declined for families at the bottom of the wealth
distribution. The preceding three years had seen only
small changes in median and mean income and in
median net worth but a sizable gain in mean net
worth.
Although the median and mean of families' holdings of financial assets increased overall from 2004 to
2007, financial assets declined as a share of total
assets, continuing an earl ier trend. The offsetting
expansion in the share of nonfinancial assets was
most strongly driven by greater holdings of private
business equity and, to a lesser degree, of residential
real estate other than a primary residence. The homeownership rate, which had risen noticeably between
the 2001 and 2004 surveys, turned down slightly.
Unrealized capital gains were an important part of the
increase in assets; in 2007, 35.8 percent of total assets
was attributable to unrealized capital gains, and those
gains were most concentrated in holdings of real
estate and private business equity. In 2004, unrealized
gains accounted for 30.7 percent of assets.
Debt and assets rose in about equal proportions
over the recent three-year period. Thus, overall
indebtedness as a share of assets was little changed.
66. For families with home-secured debt, the result is very similar
to that for homeowners overall. The proportion with payments late 60
days or more in 2007 was 4.8 percent afler rising to an estimated
5.7 percent in 2004 (data not shown in the tables).
Home-secured debt fell slightly as a share of total
family debt, but in 2007 it remained by far the largest
component of family debt. The share of borrowing for
residential real estate other than the primary residence
increased appreciably. The percentage of families
using credit cards for borrowing changed only slightly
over the period , but the median balance on their
accounts rose 25.0 percent, and the mean rose 30.4 percent.
Despite a moderate rise in typical consumer loan
interest rates from 2004 to 2007, the median ratio of
loan payments to family income for debtors, a common indicator of debt burden, at 18.6 percent, barely
rose over the period; in the previous three years, this
measure had risen more steeply. But data from the
recent three-year period show an increase of 2.5 percentage points in the proportion of debtors with loan
payments exceeding 40 percent of their income, a
level traditionally considered to be high; the share of
families with payment ratios this high was 14.7 percent in 2007.
APPENDIX:
SURVEY PROCEDURES AND STATISTICAL
MEASURE
Detailed documentation of the SCF methodology is
available elsewhere. 67 The 2007 data used here are
deri ved from the final internal version of the survey
information. Data from this survey, suitably altered to
protect the privacy of respondents, along with additional tabulations of data from the surveys beginning
with 1989, are expected to be available in February
2009 on the Federal Reserve's website at www.
federa Ireserve. gov fpu bsfossfoss2f2007 fsc f2007 data.
htm!. Links to the data used in this article for earlier
periods are available on that site. Results reported in
this article for earlier surveys may differ from the
results reported in earlier articles because of additional statistical processing, correction of data errors,
revisions to the survey weights, conceptual changes
in the definitions of variables used in the articles, and
adjustments for inflation.
As a part of the general reconciliations required for
this article, the survey data were compared with many
external estimates, a few of which are mentioned in
67. See Arthur B. Kennickell (2000), "Wealth Measurement in the
Survey of Consumer Finances: Methodology and Directions for Future
Research" (Washington : Board of Governors of the Federal Reserve
System , May) ; Arthur B. Kennickell (2001), " Modeling Wealth with
Multiple Observations of Income : Redesign of the Sample for the
2001 Survey of Consumer Finances" (Washington : Board of Governors of the Federal Reserve System , October), www,federalreserve.gov/
pubs/oss/oss2lmethod .html ; and references cited in the se papers.
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
the text. Generally, the survey estimates correspond
fairly well to external estimates. One particularly
important comparison is between the SCF and the
Federal Reserve's flow of funds accounts for the
hou sehold sector. This comparison suggests that when
the definitions of the variables in the two sources can
be adjusted to a common conceptual basis, the estimates of totals in the two systems tend to be close.
The data series in the SCF and in the flow of funds
accounts usually show very similar growth rates.68 In
general , the data from the SCF can be compared with
those of other surveys only in terms of the medians
because of the special design of the SCF sample.
person or couple (whether married or living together
as partners) and all other persons in the household
who are financially interdependent with that economically dominant person or couple.
This report also designates a head of the PEV, not
to convey ajudgment about how an individual family
is structured but as a means of organizing the data
consistently. If a couple is economically dominant in
the PEV, the head is the male in a mixed-sex couple
or the older person in a same-sex couple. If a single
person is economically dominant, that person is designated as the family head in this report.
Percentiles of the Distributions of Income
and Nee Worth
Adjustment for Inflation
I
A53
In thi s article, all dollar amounts from the SCF are
adjusted to 2007 dollars using the "current methods"
version of the consumer price index (CPI) for all
urban consumers. In an ongoing effort to improve
accuracy, the Bureau of Labor Statistics has introduced several revisions to its CPI methodology. The
current-methods index attempts to extend these
changes to earlier years to obtain a series as consistent as possible with current practices in the official
CPI.69 To adjust assets and liabilities to 2007 dollars
and to adjust family income for the preceding calen dar year to 2007, the figures given in table A. I were
applied .
Throughout this article, references are made to vari ous percentile groups of the distributions of income
or net worth. For a given characteristic, a percentile
can be used to define a family's rank relative to other
families. For example, the 10th percentile of the
distribution of income is the amount of income
received by a family for whom just less than 10 percent of families have lower income and 90 percent
have higher income. The percentiles of the distribu tions of income and net worth used to define the
income and net worth groups in the tables in the
article are given in table A.2.
A .2.
A .!,
Survey year
Survey year
1998.
200 1 .
2004 ..
2007 . .
Adjustme nt factor
for assets and de bts in
the survey year
Adjustme nt factor for
income in the cale ndar year
I before the surve y year
1.2732
1.1696
1.0983
1.29 10
\.2024
1.1280
1.0284
10000
Definition of "Family" in the SCF
The definition of "family" used throughout this
article differs from that typically used in other government studies. In the SCF, a household unit is divided
into a "primary economic unit" (PEV)-the familyand everyone else in the household . The PEV is
intended to be the economically dominant single
I
68. For details on how these comparisons are structured and the
results of co mparisons for earlier surveys, see Rochelle L. Antoniewicz
(2000), " A Comparison of the Household Sector from the Flow of
Funds Accounts and the Survey of Consumer Finances " (Washington :
Board of Governors of the Federal Reserve System, October),
www.federalreserve .gov/pubs/oss/oss2lmethod .html .
69. For technical information about the construction of this index.
see Kenneth J. Stewart and Stephen B. Reed ( 1999), "Consumer Price
Index Research Series Using Current Methods, 1978-1998," MonthLy
Labor Review, vol. 122 (June). pp. 29- 38.
Item
1998
Percentile of income
20 .
40 .
60 . . . . , , , . . . , . . . . . .
80 . .... .. . . . . , ..
.
90.
PercentiLe of
25 .
50 ..
75 .
90 ..
/le i
I
2001
I
2004
I
2007
17,700
33,600
54,200
86.900
119,600
19,700
36, 100
60, 100
96,200
139,000
20,800
37,200
58,900
98, 100
142, 100
20,600
36.500
59 ,600
98,200
140,900
12,700
9 1,300
265,900
628.300
14 ,900
101 ,200
335,800
865,700
14,600
102.200
360.700
91 3,300
14. 100
120.300
372.000
90S ,200
wo rth
The groups that are created when a distribution is
divided at every 10th percentile are commonly referred to as deciles. Similarly, when a distribution is
di vided at every 20th (25th) percentile, the groups are
known as quinti1es (quartiles). Families in the first
income decile, for example, are those with income
below the 10th percentile.
Racial and Ethnic Identification
In this article, the race and ethnicity of a fam ily in the
SCF are classified according to the self-identification
of that family ' s original respondent to the SCF inter-
A54
Federal Reserve Bulletin D February 2009
view. The questions underlying the method of classification used in the survey were changed in both 1998
and 2004. Starting in 1998, SCF respondents were
allowed to report more than one racial identi fication;
in surveys before then, only one response was recorded. For maximum comparability with earlier
data, respondents reporting multiple racial identifications were asked to report their strongest racial identification first.
Beginning with the 2004 survey, the question on
racial identification is preceded by a question on
whether respondents consider themselves to be Hispanic or Latino in culture or origin; previously, such
ethnic identification was captured only to the extent
that it was reported as a response to the question on
racial identification. The sequence of these two questions in the 2004 SCF is similar to that in the CPS.
When families in the March 2004 CPS are classified
in the way most compatible with the SCF, the proportion of Hispanic families is 10.5 percent; the 2004 SCF
estimate is 11.2 percent. Differences in these proportions are attributable to sampling error and possibly to
differences in the wording and context of the questions.
For greater comparability with the earlier SCF
data, the data reported in this article ignore the
information on ethnic identification available in 2007,
but respondents reporting multiple racial identifications in the surveys starting with 1998 are classified
as "nonwhite or Hispanic." In the 2007 SCF, 5.4 percent of respondents reported more than one racial
identification, up from 2.3 percent in 2004 and
1.5 percent in 2001. Of those who responded affirmatively to the question on Hispanic or Latino identification in 2007 , 82.8 percent also reported "Hispanic
or Latino" as one of their racial identifications, and
74.5 percent reported it as their primary racial identification. Because the question on Hispanic or Latino
ethnicity precedes the one on racial identification in
the 2004 and 2007 surveys, the answer to the second
of these two questions may have been influenced by
the answer to the first. 70
The Sampling TechniqlteJ
The survey is expected to provide a core set of data on
family income, assets , and liabilities. The major
70. For a review of the effects of various approaches to measuring
race and ethnicity, see Clyde Tucker, Ruth McKay, Brian Kojetin ,
Roderick Harrison , Manuel de la Puente, Linda Stinson, and Ed
Robinson (1996) , "Testing Methods of Collecting Racial and Ethnic
Information: Results of the Current Population Survey Supplement on
Race and Ethnicity," BLS Statistical Notes 40, CPS Publications
(Washington: Bureau of Labor Statistics, June), www.bls .census.gov/
cps/racethnlI995/stat40rp.htm.
aspects of the sample design that address this requirement have been constant since 1989, The SCF combines two techniques for random sampling, First, a
standard multistage area-probability sample (a geographically based random sample) is selected to
provide good coverage of characteristics, such as
homeownership, that are broadly distributed in the
population.
Second, a supplemental sample is selected to disproportionately include wealthy families, which hold
a relatively large share of such thinly held assets as
noncorporate businesses and tax-exempt bonds, Called
the "list sample," this group is drawn from a list of
statistical records derived from tax returns, These
records are used under strict rules governing confidentiality, the rights of potential respondents to refuse
participation in the survey, and the types of information that can be made available. Persons listed by
Forbes magazine as being among the wealthiest 400
people in the United States are excluded from sampling.
Of the 4,422 interviews completed for the 2007 SCF,
2,915 were from the area-probability sample, and
1,507 were from the list sample; for 2004, 3,007 were
from the area-probability sample, and 1,515 were
from the list sample. The number of families represented in the surveys considered in this article is
given by table A .3 .
A.3.
Year
1998 .
2001
2004 .
2007 .
Number of families represenled (millions)
102.6
106.5
112. 1
1161
The Interviews
The survey questionnaire has changed in only minor
ways since 1989, except in a small number of
instances in which the structure was altered to accommodate changes in financial behaviors, in types of
financial arrangements available to families, and in
regulations covering data collection. In these cases
and in all eartier ones, every effort has been made to
ensure the maximum degree of comparability of the
data over time. Except where noted in the article, the
data are highly comparable over time.
The generosity of families in giving their time for
interviews has been crucial to the SCF. In the
2007 SCF, the median interview length was about 80
minutes. However, in some particularly complicated
cases, the amount of time needed was substantially
more than two hours. The role of the interviewers in
Changes in U.S. Family Finances from 2004 to 2007: Evidence from the Survey of Consumer Finances
this effort is also critical. Without their dedication and
perseverance, the survey would not be possible.
The SCF interviews were conducted largely between the months of May and December in each
survey year by NORC, a social science and survey
research organization at the University of Chicago.
The majority of interviews were obtained in person,
although interviewers were allowed to conduct telephone interviews if that was more convenient for the
respondent. Each interviewer used a program running
on a laptop computer to administer the survey and
collect the data.
The use of computer-assisted personal interviewing has the great advantage of enforcing systematic
collection of data across all cases. The computer
program developed to collect the data for the SCF
was tailored to allow the collection of partial information in the form of ranges whenever a respondent
either did not know or did not want to reveal an exact
dollar figure.
The response rate in the area-probability sample is
more than double that in the list sample. In both 2004
and 2007, about 70 percent of households selected for
the area-probability sample actually completed interviews. The overall response rate in the list sample
was about 30 percent; in the part of the list sample
likely containing the wealthiest families, the response
rate was only about 10 percent.
Weighting
To provide a measure of the frequency with which
families similar to the sample families could be
expected to be found in the popUlation of all families,
an analysis weight is computed for each case, accounting both for the systematic properties of the sample
design and for differential patterns of nonresponse.
The SCF response rates are low by the standards of
some other major government surveys, and analysis
of the data confirms that the tendency to refuse
participation is highly correlated with net worth.
However, unlike other surveys, which also almost
certainly have differential nonresponse by wealthy
households, the SCF has the means to adjust for such
nonresponse. A major part of SCF research is devoted
to the evaluation of nonresponse and adjustments for
nonresponse in the analysis weights of the survey,?l
71. The weights used in this al1icie are adjusted for differential
rates of nonresponse across a number of groups. See Arthur B.
Kennickell (1999), "Revisions to the SCF Weighting Methodology:
Accounting for RaceiEthnicity and Homeownership" (Washington:
A55
Sources of Error
Errors may be introduced into survey results at many
stages. Sampling error-the variability expected in
estimates based on a sample instead of a census-is a
particularly important source of error. Such error can
be reduced either by increasing the size of a sample
or, as is done in the SCF, by designing the sample to
reduce important sources of variability. Sampling
error can be estimated, and for this article we use
replication methods to do so.
Replication methods draw samples, called replicates, from the set of actual respondents in a way that
incorporates the important dimensions of the original
sample design. In the SCF, weights were computed
for all the cases in each of the replicates. 72 For each
statistic for which standard errors are reported in this
article, the weighted statistic is estimated using the
replicate samples, and a measure of the variability of
these estimates is combined with a measure of the
variability due to imputation for missing data to yield
the standard error.
Other errors include those that interviewers may
introduce by failing to follow the survey protocol or
misunderstanding a respondent's answers. SCF interviewers are given lengthy, project-specific training to
minimize such problems. Respondents may introduce
error by interpreting a question in a sense different
from that intended by the survey. For the SCF,
extensive pretesting of questions and thorough review
of the data tend to reduce this source of error.
Nonresponse--either complete nonresponse to the
surveyor nonresponse to selected items within the
survey-may be another important source of error.
As noted in more detail above, the SCF uses weighting to adjust for differential nonresponse to the
survey. To address missing information on individual questions within the interview, the SCF uses
statistical methods to impute missing data; the technique makes multiple estimates of missing data to
allow for an estimate of the uncertainty attributable
to this type of nonresponse.
0
Board of Governors of the Federal Reserve System, January),
www.federalreserve.gov/pubs/ossloss2/method.html.
72. See Al1hur B. Kennickell (2000), "Revisions to the Variance
Estimation Procedure for the SCF" (Washington: Board of Governors
of the Federal Reserve System, October), www.federalreserve.gov/
pubs/oss/oss2/method.html.
A56
Federal Reserve Bulletin 0 February 2009
ERRATA
In the analysis of the SCF reported in the article,
privately held businesses do not include businesses
that were reported to have a net value of zero; this fact
was not made clear in the definition given in footnote
39. In 2007, 12.0 percent of families had a privately
held business with a value different from zero; the
median and mean values for families having such
businesses were $100,500 and $1,071,100, respectively. If businesses with a value of zero are included
in the business definition in 2007, ownership rises to
13.6 percent of families, and the median and mean
values fall to $92,200 and $946,300, respectively.
A57
June 2009
Profits and Balance Sheet Developments
at U.S. Commercial Bal1ks in 2008
Morten L. Bech and Tara Rice, of the Board's Division of Monetary Affairs, prepared this article. Thomas C. Allard and Mary E. Muething assisted in
developing the database underlying much of the
analysis. lin ide Avellaneda and Robert Kurtzman
provided research assistance.
I.
Bank prol'ilab il ily. 1985--2008
I~rce n(
Percent
18
1.8
Return on equity
----
16
14
1.6
1.4
12
The continued fallout from the ongOIng financial
turmoil and the economic downturn weighed heavily
on the performance of the U.S. commercial banking
industry in 2008.' As house prices continued to
decline, the performance of mortgage-related assets
deteriorated further, and, with the onset of recession,
credit problems spread to other asset classes and to a
wider range of financial institutions. Delinquent loans
(those whose payments are 30 days or more past due)
on banks' books continued to mount in all major loan
categories, particularly among residential mortgages
and construction and land development loans related
to residential projects. Sizable losses and write-
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 : FFfEC 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 Bill/erin , vol. 84
(June), p. 408. Size categories, based on assets at the start of each
quarter, are as follow s: the to largest banks, large banks (those ranked
II through 100), medium-sized banks (those ranked 101 through
1,000), and small banks (those ranked 1,001 and higher) . At the start of
the fourth quarter of 2008, the approximate asset sizes of the banks in
those groups were as foll ows: the 10 largest banks, more than
$171 billion; large banks, $8.3 billion to $163 billion; medium -sized
banks, $528 million to $8. 2 billion; and small banks, less than
$528 million .
I . It is worth emphas izing that the analysis in this article is based on
the Call Reports for co mmercial banks. For a commercial bank that is
a subsidiary of a bank ho lding company or a financi a l holding
company, the Calf Report does not include the assets, liabilities,
income, or expenses of the other subsidiaries of the larger organization. Thus, the profits of the commercial banks that are subsidiaries of
a larger banking organization may differ substantially from the profits
of the consolidated institution .
L2
to
1.0
8
.8
6
.6
4
.4
2
.2
+
+
0
o
II I I I I I I I I I I , I I I I I I I I I I I I I ,
1987
1990
1993
1996
I 999 2002 2005 2008
The data are annual.
SOURC E: Here and in subsequent figures and tables except as noted,
Federal Fimlncial Institutions Examination Council. ConS
Olidated Repons of
Condition and Income (Call Repon).
NOTE:
downs deepened concerns about the condition of
some very large financial institutions, including some
of their large commercial bank subsidiaries. When the
financial strains intensified in the second half of 2008,
the ensuing turmoil in global credit markets contributed to a steep decline in economic activity late in the
year. At the same time, interest rate spreads on a wide
range of private debt instruments widened further,
and the functioning of many credit markets was, at
times, significantly impaired. Credit default swap
(CDS) premiums for banking organizations, which
reflect investors ' assessments of the likelihood of a
default, shot Up. 2 The stock prices of bank holding
companies (BHCs) fell steeply for the year, underperforming the overall market by a wide margin.
Against this backdrop, the net income of the commercial banking industry contracted substantially in
2008, and the industry return on equity for the full
year fell to less than 1 percent (figure 1). Industry
2. A CDS is a contract bel ween two parties, whereby one party (the
guarantor) pro vides protection against the de fault of an underlying
asset to an investor seeking such protection (the beneficiary). The CDS
premium is the annual fixed fee the bu yer of protection pays to the
seller of protection over the term of the contract, expressed as a
percentage of the dollar amount of protection purchased.
AS8
Federal Reserve Bulletin 0 June 2009
profits were particularly hard hit in the fourth quarter,
when banks in all size groups experienced losses. The
primary drivers of the profitability slump were sizable
provisions for loan losses in response to further
deterioration in asset quality, goodwill impairment
losses , heavy write-downs on securities holdings, and
a sharp drop in trading revenue . For the year as a
whole, losses were especially acute at some of the
largest commercial banks.
The ongoing financial turmoil resulted in a steady
stream of acquisitions and reorganizations in 2008, as
financial institutions failed or required government
assistance amid growing losses on mortgage-related
and other assets . In March, a liquidity crisis at The
Bear Steams Companies, Inc., a major investment
bank, led to its acquisition (with government assistance) by JPMorgan Chase & Co. In July, Countrywide Financial Corporation, a thrift institution and the
largest U .S. mortgage originator, was acquired by
Bank of America Corporation. In addition, the failure
that month of IndyMac Bank, FS.B. , a large thrift
institution, raised further concerns about the profitability and asset quality of financial institutions. The
failure also raised depositors' concerns about the
safety of deposits held by banks.
In early September, the Treasury Department and
the Federal Housing Finance Agency announced that
the housing-related government-sponsored enterprises (GSEs), Fannie Mae and Freddie Mac , had
been placed into conservatorship. The GSEs' equity
prices dropped conSiderably in response, and , as a
result, many smaller banks that held sizable amounts
of the preferred stock of the two GSEs had to
recognize substantial losses in the third quarter. Amid
plummeting investor confidence, and after posting
sizable losses, several large nonbank financial institutions came under extreme pressure: Lehman Brothers
Holdings filed for bankruptcy on September 15 , 2008;
during the same tumultuous period , Bank of America
announced its intention to acquire Merrill Lynch &
Co., Inc.; the Federal Reserve, with the full support of
the Treasury, agreed to provide liquidity support to
American International Group, Inc., or AIG ; and the
Federal Reserve approved the applications by Goldman Sachs Group, Inc., and Morgan Stanley to
become BHCs. ) Upon its collapse on September 25 ,
2008, Washington Mutual Bank, a large thrift institution, became the largest failure ever of a financial
institution in the United States; its stakeholders
3. See Ben S. Bernanke (2009) . " American International Group."
statement before the Committee on Financial Services. U.S. House of
Representatives. Washington. March 24. www.federalreserve .gov/
newsevents/testimonylbernanke20090324a.htm .
absorbed significant losses. 4 Soon after, Wachovia
Corporation, the fourth-largest commercial bank at
the time, experienced acute funding pressures and
agreed to merge with Wells Fargo & Company. In
addition , a number of smaller banks, many located in
states that had experienced the largest house price
fluctuations in recent years (most notably California,
Florida, Georgia, and Nevada), failed in 2008. At
year-end, the total number of banking institution
failures reached 25, the highest since 1993. The list of
problem banks compiled by the Federal Deposit
Insurance Corporation (FDIC) reached 252 banking
institutions, with combined assets of $159 billion.
Through mid-April of 2009, an additional 25 banking
institutions had fai led .
In mid-September, in large part because of losses
on Lehman Brothers' debt, the net asset value of a
prominent money market mutual fund fell below $1
per share-a development known as "breaking the
buck" -a rare event that had not occurred in many
years. Investors responded with massive withdrawals
from prime money market mutual funds , which hold
substantial amounts of commercial paper. These outflows severely undermined the stability of short-term
funding markets, upon which many large corporations rely heavily to meet their short-term borrowing
needs. As a result, many financial and nonfinancial
firms turned to their backup lines of credit at commercial banks for funding .
In response to the pressures on financial institutions and the associated uncertainty about their financial condition, banks and investors pulled back from
risk-taking even further last fall, and conditions across
most financial markets deteriorated sharply. With
banks reluctant to lend to one another, the cost of
borrowing in the interbank market-as exemplified
by the London interbank offered rate , or Libor, a
reference rate for a wide variety of contracts, including floating-rate mortgages-increased appreciably
(figure 2). Securitization markets, with the exception
of those for government-supported mortgages , essentially shut down, boosting the unanticipated demand
for funds from commercial banks.
In an attempt to restore liquidity and stability to the
U.S. financial system in general and the banking
system in particular, public authorities took a number
4. The Federal Deposit Insurance Corporation was able to resolve
the failure without any loss to the insurance fund when most assets and
liabilities were bought by JPMorgan Chase. See Federal Deposit
Insurance Corporation (2008), " JPMorgan Chase Acquires Banking
Operations of Washington Mutual ." press release. Septe mber 25,
www.fdic .gov/news/news/pressI2008/prQ8085 .html .
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
preads of 3-month Libor oVt!r 01. rale 2002---09
2.
Da'\is
poinL~
-
400
-
350
-
300
-
250
-
200
-
150
-- 100
SO
+
o
I
I
I
2002
I
I
2003
2004
I
2005
I
I
2006
2007
I
2008
I
2009
NOTE: The data are daily and extend through April 16, 2009. For the
London interbank offered rate (Ubor), quotes are as of 6 a.m.; for the
overnight index swap (OIS) rate , quotes are as of the close of business of the
previous trading day. An OIS is an interest rate swap with the !loating rate
tied to an index of daily overnight rates, such as the effective federal funds
rate. At maturity, two parties exchange, On the basis of the agreed notional
amount, the difference between interest accrued at the fixed mte and interest
accrued through geometric averaging of the fioating, or index, rate.
SOURCE: For Libor, British Bankers ' Association ; for the OIS rate, Prebon .
of unprecedented actions during 2008. 5 To address
elevated pressures in a number of funding markets,
the Federal Reserve augmented many of its existing
lending facilities. As demand for dollar funding rose
further over the course of 2008, the Federal Reserve
expanded and extended the term of both the Term
Auction Facility (TAF), under which term funds are
auctioned off to depository institutions against the
wide variety of collateral that can be used to secure
loans at the discount window, and the temporary
reciprocal currency arrangements (swap lines) with
the European Central Bank and the Swiss National
Bank. In the fall of 2008, the formal quantity limits
on these lines, as well as the swap lines that had been
set up with the Bank of Japan and the Bank of
England, were eliminated, and the Federal Reserve
introduced new liquidity swap lines with 10 other
central banks. At year-end 2008, $450 billion and
$553 billion were outstanding under the TAF and the
swap lines, respectively. Moreover, in several cases,
the Federal Reserve Board granted exemptions from
restrictions under section 23A of the Federal Reserve
Act in an effort to allow banks greater scope to
provide liquidity to their nonbank affiliates.
5. The appendix to the Federal Reserve's February 2009 Mone/ary Policy Report to the Congress contains a description of the
Federal Reserve initiatives to address the financial strains. See Board
of Governors of the Federal Reserve System (2009), "Appendix:
Federal Reserve Initiatives to Address Financial Strains," in Monetary Policy Report 10 the Congress (Washington: Board of Governors, February 24), www.federalreserve.gov/monetarypolicy/lilesl
20090224_mprfullreport.pdf.
A59
In addition, the Federal Reserve established several
temporary lending facilities over the course of the
year. In March 2008, to address increasing liquidity
pressures in funding markets, the Federal Reserve
established the Term Securities Lending Facility
(TSLF). Under the TSLF, the Federal Reserve lends
Treasury securities to primary dealers, and the lending is secured by a pledge of other securities. After
the demise of Bear Steams, the Federal Reserve
created the Primary Dealer Credit Facility to improve
the ability of primary dealers to provide financing to
participants in securitization markets. In addition, the
Federal Reserve lowered the spread between the
primary credit rate at the discount window and the
intended target for the effective federal funds rate to
25 basis points and temporarily allowed primary
credit loans for terms of up to 90 days.
In September, the Treasury and the Federal Reserve
took several steps to ease investor concerns about the
money market mutual fund industry and support the
functioning of the commercial paper market. The
Treasury introduced an insurance program for money
market mutual fund investors, and the Federal Reserve announced the creation of the Asset-Backed
Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) to extend nonrecourse loans
to banks to finance their purchases of high-quality
asset-backed commercial paper from money market
mutual funds. The following month, the Commercial
Paper Funding Facility was created to provide a
liquidity backstop to U.S. issuers of commercial
paper. 6 Most Federal Reserve facilities have been
extended through October 30, 2009. 7
In October, the Congress passed the Emergency
Economic Stabilization Act (EESA), a move that,
among other things, created the $700 billion Troubled
Asset Relief Program (TARP). The TARP was intended to reduce the strains in financial markets
created by the substantial amount of illiquid structured securi ties and mortgages sti II held by hanks.
The EESA also raised basic deposit insurance coverage to $250,000 on a temporary basis. In addition, the
FDIC announced the Temporary Liquidity Guarantee
Program (TLGP), under which it provides guarantees
of non interest-bearing transaction deposits and se-
6. The Money Market Investor Funding Facility (MMIFF) was also
created in October 2008. Under the MMIFF, the Federal Reserve will
provide senior secured funding to a series of special purpose vehicles
to facilitate an industry-supported private-sector initiative to finance
the purchase of eligible assets from eligible investors. As of year-end
2008, the facility had not been used .
7. The Term Asset-Backed Securities Loan Facility has been authorized through December 31, 2009. Other Federal Reserve liquidity
facilities, such as the TAP, do not have a fixed expiration date.
A60
Federal Reserve Bulletin 0 June 2009
lected newly issued senior unsecured obligations of
participating banks.8 Shortly thereafter, the Treasury
established the voluntary Capital Purchase Program
(CPP), under which it has used TARP funds to inject
about $200 billion of capital into U.S. banking organizations. In November, the U.S . government entered
into an agreement with Citigroup, Inc., which provided the company-in exchange for preferred
stock-with protection against the possibility of
unusually large losses on an asset pool of loans and
securities backed by residential and commercial real
estate and other such assets. The Treasury provided
another $20 billion of TARP capital to Citigroup as
part of the same transaction .
Economic activity, the growth of which had slowed
noticeably, on average, over the first three quarters of
the year, contracted significantly in the final quarter
of 2008, with nearly all major sectors of the economy
registering steep declines in activity. At the same
time, inflation pressures diminished appreciably as
the margin of resource slack in the economy widened
and commodity prices dropped considerably. In view
of the implications of the substantial reduction in
credit availability and the continuing deterioration in
the economic outlook, the Federal Open Market
Committee (FOMC) reduced the target federal funds
rate from 4Y4 percent at the end of 2007 to a range of
o to 1 percent by the end of 2008 (figure 3).
/4
Moreover, at its December 2008 meeting, the FOMC
indicated that economic conditions were likely to
warrant exceptionally low levels of the federal funds
rate for some time.
With monetary policy easing, the economy slowing, and inflation pressures abating, most interest
rates moved lower over 2008 . Money market rates
generally followed the federal funds rate lower,
though widened risk spreads in the Eurodollar and
commercial paper markets muted the decline somewhat. Yields on Treasury coupon securities declined
substantially, particularly late in the year, pressed
lower, in part, by speculation that the Federal Reserve
might begin purchasing large quantities of longermaturity Treasury securities . Interest rates on
adjustable- and fixed-rate mortgages , while volatile,
moved mostly sideways for the better part of 2008.
However, rates on 30-year fixed-rate conforming
8. The FDIC's establishment of the TLGP was preceded by a
dete rmination of systemic risk by the Secretary of the Treasury (after
consultation with the President) foll owing receipt of the written
recommendation of the FDIC Board, along with a similar written
recommendation of the Board of Governors of Ihe Federal Reserve
System. See Federal Deposit Insurance Corporation (2009), "Temporary Liquidity Guarantee Program," resource for bank officers and
directors, www.fdic.gov/regulations/resources/tlgplindex.html.
:1 . Selectcd intcrest rates, 2002-09
Pl!rccllt
- -----------------------
6
5
4
2
Target federal funds rate
+
o
22
20
18
16
14
12
10
8
--- ~~~-- -......-~
6
3Q-year
--- fi xed-ra te mortgages
I I
I
2002
---
I
t
2003
2004
2005
I
2006
I
2007
I I
\
2008
4
2009
NOTE: The data are monthl y and e xtend through March 2009. On
December 16 , 2008, the Federal Open Market Com mittee established a target
range for the fed eral funds rate of 0 to '", percent. The bl ack rectangle
represents thi s ran ge.
SOU RCE: For Treasury securities, mortgages, and Moody's corporate
bond s, Federal Reserve Board, Statistical Re lease H. 15 , "Selected Interest
Rates" (www.federalreserve.goy/releaseslhI5) ; for federal funds. Federal
Reserve Board (www.federalreserve.gov/fomc/fundsrate.htm) ; for high-yield
corporale bond s. Merrill Lynch Master II index.
mortgages fell about 100 basis points, on net, after the
November 25 , 2008, announcement of the Federal
Reserve's program to purchase mortgage-backed
securities (MBS) backed by the housing-related GSEs
and Ginnie Mae. However, the spread between the
rates for nonconforming jumbo fixed-rate loans and
those for conforming mortgages widened further. As
conditions in financial markets deteriorated in September and October, credit spreads on investmentgrade and high-yield corporate bonds, measured relative to yields on comparable-maturity Treasury
securities. surged from already elevated levels.
The combination of financial turmoil and the downturn in economic activity exerted pressure on both
sides of banks' balance sheets as institutions became
more cautious in the extension of credit, saw losses
deplete capital, and relied less on market sources of
funding . In addition, the asset, liability, and capital
positions of banks were materially affected by the
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
4 . Number or b ank~ , and share of ru sets allhc largest
banks, 1990-200
Thousands
Number
14
12
10
8
____ -
I
I
I
t
I
I
I
I
I
I
I
I
6
I
Percenl
----------------------------------Share of assets
-
100 largest
80
_ _-----~
10 largest
100
_ _-
60
40
20
I
I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 t996 1998 2000 2002 2004 2006 2008
I
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.
policy actions taken by public authorities in response
to the rapidly evolving financial and economic landscape. Total bank assets expanded about 10 percent in
2008, owing, in part, to the absorption of assets from
nonbank financial firms; after taking into account a
few of the largest structure events that occurred
during the year, the expansion of total bank assets was
only about 6 percent (see box "Adjustments to the
Balance Sheet Data for Structure Activity"). The
value of loans on the books of banks was essentially
flat last year after accounting for major structure
events. Residential real estate loans contracted, and
other major loan categories, including commercial
and industrial (C&I) loans, consumer loans, and
commercial real estate (CRE) loans, grew modestly.
The number of new commercial banks chartered in
2008 edged down. Merger activity also slowed last
year but still outpaced bank formation. As a result, the
number of banks declined further, to about 7,100 at
the end of 2008 from about 7,300 at the end of 2007
(figure 4, top panel). The share of assets held by the
10 largest banks increased 1 percentage point over the
year, to 54 percent at the end of 2008, and the share of
assets held by the top 100 banks rose about 1.5 percentage points, to 82 percent, over the same period
(figure 4, bottom panel).
The financial turmoil resulted in the conversion of
several large financial companies to BHCs, with at
least one subsidiary assuming a commercial bank
charter, in part to gain access to more-stable insured
deposits. Nonetheless, the formation of new BHCs
A61
slowed in 2008 to the lowest rate in the past two
decades. Mergers among BHCs, however, rose for the
fourth consecutive year, exceeding the rate at which
new BHCs were formed. The number of BHCs thus
fell to about 5,000 in 2008 (for multi tiered BHCs,
only the top-tier organization is counted in these
figures). The number of financial holding companies
declined slightly.9
BAlANCE SHEET D EVELOPMENT.
Balance sheet developments in 2008 continued to be
influenced importantly by the turbulence in the financial markets, which intensified markedly after the
bankruptcy of Lehman Brothers in mid-September.
Moreover, banks were increasingly affected by the
fallout from the slowdown in economic activity that
began at the end of 2007 and accelerated late in 2008.
In addition, as noted earlier, bank balance sheets were
materially affected by the policy actions taken by
public authorities in response to the financial and
economic challenges. Using funds from the TARP,
the Treasury established the CPP, under which the
U.S. government bought preferred shares from a large
number of eligible banking organizations . The Federal Reserve's expansion of its liquidity faci lities for
banks, as well as the FDIC's introduction of the
TLGP, improved the industry'S access to funding.
The increase in deposit insurance coverage to
$250,000 and the full guarantee of noninterestbearing deposits supported strong growth in core
deposits in the latter part of the year. Depositoty
institutions' holdings of reserve balances increased
substantially over the last few months of the year, and
the Federal Reserve began to remunerate reserve
balances.
Total loans on banks' books increased about 2 percent in 2008 (table 1). However, the growth was due
mainly to the substantial structure events that took
place during the year, and loans were essentially flat
last year after removing the effects of these events.
Residential mortgages experienced an outright decline, and growth in several other major loan categories was subdued. In contrast, loans drawn on home
equity lines of credit expanded at a solid pace. The
sluggish pace of lending reflected a confluence of
9. Statistics on financial holding companies include both domestic
BHCs that have elected to become financial holding companies and
foreign banking organizations operating in the United States as
financial holding companies and subject to Ihe Bank Holding Company Act. For more information, see Board of Governors of the
Federal Reserve System (2003), Report to the COIIWess (Ill Finullciu/
Holding Compallies IInder the Gramm-Leach-Bliley Act (Washington :
Board of Governors, November), www.federalreserve.gov/pubs/
reports_other.htm .
A62
Federal Reserve Bulletin 0 June 2009
Adjustments to the Balance Sheet Data for Structure Activity
One consequence of the turmoil in financial markets in
2008 was a steady stream of acquisitions and reorgani zations by major financial institutions. Such structure activity may or may not ati'ect the aggregated commercial
bank balance sheet data discussed in the main text of this
article. In general , consolidation activity that involves
only commercia'! banks would not impact aggregate
industry assets. [n contrast, consolidation of nonbank
assets onto the books of commercial banks would increase
the assets. as described in this article, of the commercial
banking sector.
Several high-profile structure events involving some of
the largest bank holding companies occurred in 2008. I
For example, in March, JPMorgan Chase & Co. acquired
The Bear Stearns Companies, Inc., but as of year-end
2008, that consolidation occurred only at the holding
company level and therefore did not directly affect the
commercial bank aggregates reported in this anicle. 2 But
in September. JPMorgan Chase acquired the banking
operations of Washington Mutual Bank, a thrift institution, causing banking industry assets and liabilities to
jump.
I. In publishing its H.8 statistical release, .. Assets and Liabilities of
Commercial Banks in the United States," each week. the Federal Reserve
describes nonbank structure activity that affects bank assets by $5.0 billion
or more. For a list of such activity dating 10 December 16, 2005. see the
"Notes on the Data " link on the release ' s webpage (www.
federalreserve .gov/releaseslhSIhSnOles.htm ). In addition. information aboul
structure activity involving any banking organization is available in the
Federal FinaJlciallnstilulions Examination Council's central repository of
data, the National Informatio n Center (www.ffiec.gov/nicpubwcb/nicweb/
nicho me.aspx).
2. Bank of America Corporation announced ils intention to purchase
Merrill Ly nch & Co .. Inc .. in Seplember, but the acquisition did not
become elfeclive until January 1. 2009.
both supply and demand factors. Throughout the year,
banks reported in the Federal Reserve's Senior Loan
Officer Opinion Survey on Bank Lending Practices
(SLOOS) that they had continued to tighten credit
standards and terms on loans in all major categories .
Indeed, the fractions of banks tightening lending
standards neared or surpassed historical highs for all
major loan categories. Moreover, banks reportedly
reduced or canceled lines of credit to both businesses
and households, and unused commitments to fund
loans contracted, particularly in the fourth quarter. At
the same time, considerable fractions of banks reported a broad reduction in demand for loans, especially late in the year.
The expansion of the Federal Reserve's balance
sheet resulting from the expansion and establishment
In general, the eti'ects of such bank-nonbank structure
activity on bank balance sheet data do not reHect net asset
creation or elimination. To better capture balance sheet
growth in recent quarters that stems from continuing
operations, the data shown in table A have been adjusted to
remove the eti'ects on the series that have resulted from
recent sizable structure events. Speci fically, the growth
rates of selected balance sheet components given i'n the
table have been adjusted to remove the estimated effects of
the following five major structure events that involved bank
and nonbank organizations: 3
• Goldman Sachs Group, Inc., reorganized some of its
subsidiaries and consolidated a portion of its assets in a
commercial bank subsidiary on November 29, 2008,
boosting industry assets by about $125 billion.
• JPMorgan Chase acquired nearly all of Washington
Mutual Bank 's assets and liabilities on September 26,
2008, boosting industry assets by about $270 billion.
• Wachovia Corporation acquired some assets and liabilities of World Savings Bank, FS .B., on October 12, 2007,
boosting industry assets by about $80 billion.
3. TIle structure-adjusted growth rates shown in Ihe lable were ge nerall y
based on Ihe diilerence belween the end-o f-period reponed data and the
beginning-of-period dala adjusted for the structure event. To adjust for
Citibank. N.A. , in 2006 :04. Wachovia Corporation in 2007 :Q4, and lPMorgan Chase in 2008:Q 3. the beginning-of-period values were determined by
adding the value of Ihe asselS of the acquired thrifl(s ) 10 the reponed data for
the previous quaner. To adjust for Countrywide 's chaner conversion in
2007 :Q I. the beginning-of-period value was determined by subtracting
Countrywide ' s assets from Ihe reponed data for the previous quaner.
Because of the complexilY of the Goldman Sachs reorganizatio n and the
lack of regulatory dal1l for Ihe quaner before the firm's conversion 10 a bank
ho lding company, all commercial bank assets of Goldman Sac hs were
subtracted from the data for both 2008:Q3 and 2008:Q4 .
of various liquidity and credit facilities by the Federal
Reserve was consistent with a substantial increase in
the excess reserve balances held by banks in the
second half of 2008 . Indeed , roughly 75 percent of
the structure-adjusted growth in banks ' balance sheets
last year was accounted for by the surge in their
reserve balances.
On the liability side of the balance sheet, core
deposits expanded as a share of bank funding for the
first time in years. In contrast, managed liabilities,
which had been an important source of funds in the
latter part of 2007, when assets unexpectedly came
onto banks ' balance sheets , grew only moderately last
year. For example, banks' borrowing from the Federal Home Loan Bank (FHLB) system grew just
3 percent, on net, after adjusting for a money center
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
A63
unadjusted growth rates shown in table I of the main text.
The adjustments are particularly important for the second
half of 2008. Notably, after accounting for JPMorgan
Chase's acquisition of Washington Mutual Bank, the
growth of residential real estate loans in the third quarter
was markedly lower, more clearly reflecting the contraction
in most residential real estate markets over that period.
Overall , the adjusted data on growth in total loans show
that, after abstracting for major structure events, bank
lending stepped down noticeably over the second half of
2008, along with the pace of econo mic activity.
• Countrywide Bank converted to a thrift charter on
March 12, 2007, reducing industry assets by about
$90 billion.
• Citibank, N.A., consolidated two related federal savings banks onto its books on October I, 2006, boosting
industry assets by about $200 billion.
These events resulted in the net addition of more than
$580 billion of nonbank assets to commercial banks '
balance sheets over the nine quarters ending in the fourth
quarter of 2008. As a consequence, the adjusted growth
rates shown in the table are generally lower than the
A. Structure-adjusted change in selected balance sheet items, all U.S. banks, 2006--08
Percent, annual rate
Balance sheet
2006
category
Q4
Assets .. ... ..... .. . .. . . .. ..... .
Loans and leases (gross) . ....
Commercial and industrial .
I
I
I
2007
QI
I
Q2
I
Q3
I
Q4
I
I
2008
QI
I
Q2
I
Q3
I
Q4
I
2007
I
2008
One- to four-family residential . .
Commercial real estate loans 1 . ..
Other loans and leases .
Securities .
. ..
Mortgage-backed securities .
Liabilities ... . . . . . ... . . . .. . .. . .. . .
Capital account ..... . ... ......
7.31
7.55
10.06
18.11
4.70
11.%
7. 15
8.08
7.36
7.06
9.48
5.43
4.38
11.04
- 7.64
8.04
6. 14
2.30
11.81
7.83
5.28
6 .69
11.01
12.8 1
16.73
15.25
10.37
9.76
11 .82
1.87
- 2.58
11 .85
.1 69
14.76
14.20
30.83
19.69
3.63
9.22
11.%
4.66
-7.58
14.24
19.40
9.67
8.36
17.26
18.08
-5.62
9.49
12.77
2.76
5.36
9.97
7.06
11.43
2.35
8.85
- 2.22
-3.93
5.05
5.90
7. 14
19.25
12.14
5. 19
- 2.45
.86
1.41
7.74
-8.60
5.32
5.84
-3 .76
15. 52
- 2.63
- .90
11.12
1.23
7.34
6.00
- 7.52
4.62
11.41
8.54
-13.10
13.08
-4 .89
4.05
-Q.OO
-4 .57
.77
- 3.73
.80
-11.62
-16.83
15.49
5.22
-Q.85
10.60
10.29
20.29
11.67
4. 12
8.93
10.05
5.36
.71
10.73
9.49
6. 13
- .40
3.26
3.09
- 5.82
4.00
2.82
-1.35
9.39
7.08
-1.88
MEMO
Unused loan commitments " ." . , '
Federal Home Loan Bank advances .
9.55
1.53
11 .67
22.09
10.04
10.09
13.79
92.30
1.1 9
.38
-3 .02
15.53
-4. 36
8.02
- 12.55
52 .85
-33 .98
-56.15
9.46
33 .27
-12.99
3. 13
. ..
Consumer _. . ..
NOTE: Data are from period-end to period-end and are as of April 16,
2009, for commercial banks and as of February 23, 2009, for thrift
institutions. For the definition of structure-adjusted change, see the box text:
for an explanation of lhe adjustment calculation, see note 3 of the box text.
I. Measured as the sum of construction and land development loans
secured by real estate: real eslate loans secured by nonfarm nonresidential
properties or by multifamily residential properties: nnd 1o.1ns to finance
bank's assumption of the advances of a large failed
thrift 10 As judged by regu latory standards, a large
majority of banks remained well capitalized at yearend 2008, partly reflecting sizable common equity
transfers from their parent bank holding companies in
10. The FHLBs were established in 1932 as GSEs chartered to
provide a low-cost source of funds, primarily for mortgage lending.
They are cooperatively owned by their member financial institutions, a
group that originally was limited to savings and loan associations,
savings banks, and insurance companies. Commercial banks were first
able to join FHLBs in 1989, and since then FHLB advances have
become a significant source of funding for them, particularly for
medium-sized and small banks. The FHLBs are cooperatives, and the
purchase of stock is required in order to borrow.
commercial real estate, construction. and land development activities not
secured by real estate.
SOURCE: Federal Financial Institutions Exrunination Council, Consolidated Reports of Condition and Income (Call Report) for commercial banks:
Office of Thrift Supervision. Thrift Financial Reports for thrifts; staff
calculations.
the fourth quarter, as the holding companies downstreamed capital received under the CPP II
Loans to Businesses
C&I loans expanded around 3.5 percent during 2008the lowest rate since 2003 and well below the 20 percent increase recorded in 2007. The growth in C&I
loans was not materially affected by the signi ficant
structure activity during the year. According to the
SLOOS, the deceleration in such loans can be explained, in part, by bu sinesses' reduced demand to
II. The reported regulatory capital ratios are consistent with a
"well capitalized" designation under prompt corrective action standards enacted with the Federal Deposit Insurance Corporation Improvement Ac t of 1991 .
A64
Federal Reserve Bulletin 0 June 2009
I. Change in balance sht.: 't item . all U.S. banks. 1999- 2008
Percent
I
1999
hem
2000
2001
2002
2003
2004
2005
2006
2007
2008
I
!
Assets .... . . .. . ..
... ... ... , .... , , .....
5.44
5.87
8.10
7.88
12.22
12.36
9.70
16.06
6.28
-1.48
7. 17
2.37
5.11
6.68
-1.89
8.76
8.66
9.24
8.54
10.74
11.02
9.28
13.31
-1.62
8.04
7.01
7.98
6.36
2.85
-32.72
5.11
3.96
1.82
...{,.73
7.94
8.02
5.70
10.95
3.97
4.16
-2.02
13. 15
7.22
8.88
-40.27
7.19
7.53
5.90
-7.41
14.44
14.85
19.86
8.81
-7.41
6.55
1.83
20.90
...{,.93
-8.37
2.64
3.75
13.39
37. 16
10.30
9.45
. .. .. ..
5.58
Liabilities .
. , .. - ... .. .
Core deposits .
.23
.. . " ..
Tnmsaclion deposits ...... . .. . ...... .. . . . . . -8.97
Savings deposits (including MMDAs) . . ... . .
6.68
- .76
Small time deposits . . . . . . . . . . . . .... .. - ....
Managed liabilities I ...
....
. .... .. . . .
15.54
Large time deposits.
....
14. 19
Deposits booked in foreign offices .
14.60
5.07
Subordinated notcs and debentures.
1.56
Gross federal funds purchased and RPs ... ..
Other managed liabilities.
35.27
Revaluation losses held in trading accouQls . ... -13.20
Other .........
..........
-1.26
Interest-earning assets .. . . . , ...... . . . ... . . . .
.. ....
Loans and leases (net) ... .... .... ..
Commercial and industrial
....
Real eSlate . .... . , .
... .
... .. . .
Booked in domestic offices
One- to four-family residential ...
Other real estale
... .. .
Booked in foreign offices .' ... . .. .. .
..... .
Consumer .. . . .. , .
Other loans and leases .... .. .... ... ...
Loan loss reserves and unearned income .
Securities ... . .
.... ... .... .
...
Investment account ..
..... . . ... .... . . . . . .
U.S. Treasury . ...... .. .. .. . ..... . ..
U.S. government agency and
corporal ion obligations ....... . ..
. . .. ,.,
Other.
...
Trading account
. .. . .
.. .
."
Other
Noninterest-earning assets
... , .. .... .. " . .
.... . . . . . .. . .
5.73
16.20
\3 .53
41.92
7.18
7.27
6.51
-4.56
9.75
9.66
10.01
9.19
15.74
9.31
8.31
-2.68
9.44
8.70
14.14
10.78
" .29
11.21
4.35
15.41
15.09
15.75
14.20
35.59
10. 16
3.57
-4. 19
10.58
6. 15
-15.87
7.73
7.97
10.39
12.53
13.80
13.93
11.95
16.61
7.19
2.30
-.18
-5.75
2.40
1.19
-17.59
12.36
12.45
11.97
11.81
14.94
15.05
15.11
14.96
8.79
6.19
3. 17
1.63
11.53
6 .94
-19.30
10.81
10. 11
10.57
20.27
7.04
6.77
5.53
8.39
22.76
11 .67
13.01
27.97
4.54
-4.42
- 26.93
10.24
8.59
2.23
3.49
4.49
4.76
3.08
6.89
-9.31
4.22
"'{'.26
75.00
.60
10.08
7.96
12,212
10,389
6,617
1.408
3,797
3.735
2.056
1,678
63
988
581
158
2.208
1,719
12.84
12.18
- 3.72
13.09
12.74
18.09
2.72
36.12
-2.93
5.11
9.68
5.98
14.()1
6.76
6.64
9.46
3.02
36.81
14.25
7.61
-1.83
10.12
7.96
5.81
6.19
4.71
13.78
31.32
19.31
11.79
- 12. 15
10.75
35.98
22 .35
15.42
14.81
3.57
-22.78
73.68
20.75
1.025
662
489
1.565
1.823
8.59
7.53
- 1.31
12.51
7.20
8.79
19.37
7.84
13.98
6.49
1.80
7.47
20.61
4.45
10.55
10.20
20.68
-7.23
-2.73
-3 .65
-10.96
9.56
5.72
- .28
- 17.06
14.90
7. 13
7.58
-5. 12
18.46
-4 .92
5.34
5.05
4.49
-.59
12.75
.97
33.44
5.23
7.24
7.29
2.82
13.71
...{,.79
6.96
1.42
12.63
5.08
- 8.70
22.00
14.03
5.28
9.56
8.25
3.20
11.72
1.58
12.06
21.86
16.84
10.49
8.40
1.37
-12.61
17.19
7.74
6.40
-1.18
6.93
12.88
12.24
22.88
6.32
11.41
15.62
6.15
- 17.86
-1.60
12. 10
5.84
-4.28
5.53
16.97
19.45
15.94
29.67
22 .60
9.47
18.89
6.89
22.33
10.79
5.49
-1.22
3.34
18.03
16.57
1.90
25.86
16.83
7.06
28.44
42.66
3.21
11.28
14.47
20.51
10.03
23.29
6.49
4 .75
2.46
4.60
5.76
14.38
88.60
-8.45
11.063
5.405
838
3.295
1.272
4.845
1,072
1.539
182
786
1.265
388
425
3.89
10.65
12.29
7.84
6.61
23 .14
7.59
14.69
10.94
1.15
1.149
15.42
-3.34
n.a.
12. 16
3.29
13. 10
29.05
n.a.
6.82
15.54
17.21
8.99
10. 12
3.71
13.93
13.45
3.73
16.87
2.06
10.00
14.91
10.22
29.80
9.20
-1.24
30.62
6.77
11.37
15.60
1.684
1.069
526
.....
Capital account
... ........ .... .... .. ............
MEMO
Commercia.! real eSlate loans2
Mortgage-backed securities
..
..... .. .. .. ..
.. . . . . ..
Federal Home Loan Bank advances
..
MEMO
Dec.
I 2008
' (billions
I
of
dollars)
n.a.
NOTE : Dala are from year-end to year·end and are as of April 16. 2009.
I . 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.
finance inventory accumulation and fixed investment.
The financing gap-the difference between capital
expenditures and internally generated funds-at nonfinancial corporations declined in the second half of
2008 (figure 5). Moreover, the slowdown in the pace
of merger and acquisition activity contributed to a
substantial drop in net equity retirement over the
course of 2008, which also reportedly played a role in
the decreased demand for C&I loans, as repurchases
of equity are frequently financed with bank loans, at
least initially.
C&I loan growth differed markedly by bank-size
grou p last year. At the top 100 banks, C&I loans
expanded only a little more than 2 percent, while C&I
loans at banks outside the top 100 grew about 10 per-
-.03
.12
2. Measured as the sum of construction and land developmem loans secured
by real estale; real estate loans secured by nonfarm nonresidential propenies or
by muhifamily residential properties; and loans to finance commercial real eslate. construction, and land development activities nOt secured by real eSlate.
n.a. Not available .
MMDA Money market deposit account.
RP Repurchase agreement.
cent. The slower growth in C&I lending at larger
banks was attributable not only to the domestic
factors mentioned earlier but also to international
ones, In particular, the restructuring of foreign operations by one large bank contributed to an 11 percent
drop in C&I loans booked to non-U.S. addressees,
For the industry as a whole, C&I loans expanded
over the first three quarters of the year and then
contracted in the fourth quarter. Early in the year,
strains in the syndicated loan market likely forced
banks to hold loans on their balance sheets that had
been intended for sale to market investors. After the
severe financial market disruptions in the fall, some
nonfinancial companies drew heavily on committed
lines of credit with banks, which caused the growth of
u.s.
Profits and Balance Sheet Developments at
7_
5. Financing gap and net equity r~tir~mt:n l at nonfarm
nonfinancial corp rations, 1990--2008
Commercial Banks in 2008
A65
hanges In demand and supply conditions at 'elected
banks for commercial and industrial loan to large and
middle-market tlrms , 1990--2008
Billions of dollars
----------------------------------
Percent
1,000
N e t percentage of banks reporting stro nger demand I
SOO
60
40
600
20
+
o
400
200
20
+
o
200
I
I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1995 2000 2002 2004 2006 2008
40
60
so
I
I
Non:: The data are four-quaner moving averages. The financing gap is the
differe nce between capital expendi tures and inte rnally generated funds . Net
equity retirement consists of fund s used to re purchase equity less fund s ra ised
in equity markets .
SOURCE: Federal Reserve Board , S ta tistical Release Z.I , " Flow of Funds
Accounts o f the Un ited States." table F. I02 (www.federalreserve.gov/
releaseslz I).
I
"
I
I I I
I
I
I I I I
I II
I
N e t percentage of banks reporting tighter standards 2
IlJO
80
60
40
C&I loans to spike in September and October (figure 6). In fact, according to a special question on the
October 2008 SLOOS, nearly 45 percent of banks, on
net, reported an increase in the dollar amount of C&I
loans drawn under preexisting commitments over the
previous three months . Nevertheless, despite the
unanticipated demand at times over the year, SLOOS
respondents indicated weaker demand for C&I loans,
on net, throughout 2008 , especially in the fourth
quarter (figure 7, top panel).
Each quarter last year, considerable numbers of
banks indicated in the SLOOS that they had further
6. Commercial and industrial loans al domestically
charte red commercial banks_ 2007-08
20
+
o
20
40
I I I I I I I I I I I I I I I I I I I _
LLJ
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NOTE : The data are drawn from a survey generally conducted four times
per year; the last observation is from the Ja nuary 2009 survey , which covers
2008:Q4 . Net percentage is the percentage of banks reponing an increase in
dema nd Or a tightening of standards less , in each case. the percentage
reponing the opposite. The definiti on for firm size suggested for, and
generally used by, survey respondents is that large and middle-market firm s
have a nnual sales o f $50 million or more .
I. Series begins wi th the November 199 1 surve y.
2. Series begins with the May 1990 survey.
SOURCE: Federal Reserve Board , Se nio r Loan O ftic er Opinion Survey on
Ba nk Lending Practices (www.federalreserve .govlboarddocslsnloansurve y) .
Billions of do ll ars
1.300
1,200
1, 100
1,000
900
I
I
2007
2008
NOTE : The data are weekly and seaso nally adjusted .
SOURCE: Federal Reserve Board , Statistical Release H.8, "Assets and
Liabilities of Commerc ial Banks in the United States" (www .federalreserve.
go v/ releaseslhS).
tightened their credit policies for C&I loans (figure 7,
bottom panel). Significant majorities reported tightening credit standards; at the same time, many banks
reported that they had increased spreads of C&I loan
rates over their cost of funds, were charging higher
premiums on riskier loans, and had increased the
costs of credit lines to nonfinancial firms . In addition ,
substantial fractions of SLOOS respondents indicated
having tightened nonprice terms on C&I loans, which
involved, for example, reducing the maximum size,
shortening the maturity, and strengthening the covenants associated with loans or credit lines. By late in
the year, nearly all of the respondent banks were
reporting that the move to a more stringent lending
posture importantly reflected a less favorable or a
more uncertain economic outlook, and large fractions
Federal Reserve Bulletin 0 June 2009
A66
8.
9.
Change in commercial rea l estate loans. by major
components. 1990-200
_ __
_ _ _ _ _ __
_
Change in unused hank loan comm itments
businesses and households. 1990-200
_ _ _ _ _ _ _~
Pcrccm
10
Percent. annual rate
Commercial real estate,
construction, and
land development loans
40
60
30
40
20
20
+
o
to
+
o
20
to
40
20
60
30
I
I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NOTE:
The data are annual and adjusted for major structure events .
of banks pointed to their reduced tolerance for risk .
Large fractions also noted concerns about the capital
position of their own bank as a reason for tightening
standards and terms on C&I loans.
The Federal Reserve's quarterly Survey of Terms
of Business Lending also showed a tightening of
terms for C&I loans last year. The spread of C&I loan
rates over Eurodollar and swap yields of comparable
maturity increased for all loan sizes and all bank-size
groups surveyed last year. The survey results also
indicated a greater reluctance to lend to new customers , as the share of loans originated under previous
commitment increased to the top of its historical
range. In addition, spreads on loans not made under
commitment, which generally reflect the most recent
loan pricing, increased sharply late in the year.
CRE loans grew about 7 percent last year, down a
couple of percentage points from 2007 and the slowest rate since 2004. After adjusting for the major
structure events, CRE loans grew just 4 percent for
the year, with the rate of expansion tailing off to near
zero in the fourth quarter. Loans secured by nonfarm
nonresidential properties, which account for about
60 percent of all CRE loans, expanded about 10 percent in 2008 (figure 8). Growth in this CRE component was supported by a 15 percent expansion in
loans backed by owner-occupied property, which
often function as C&I loans with real estate collateral
pledged. 12 Construction and land development loans,
12. Beginning last year, banks report the amount of loans secured
by nonfarm nonresidential properties that are backed by owner·
occupied property. Such loans account for about one-half of all loans
secured by nonfarm nonresidential properties . These loans often
function as C&I loans with real estate collateral pledaed because
unlike other CRE loans secured by nonfarm nonresidential propertie;
that are underwritten based on the rental or lease income fro m the
80
I I I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
The data. which are quarterly, begin in 1990:Q2 and are not
seasonally adjusted. The total consists of unused commitments relating to
credit card hnes ; revolvIOg, open-end lines secured by one· to four-family
resldenlJal pro pertieS; commercial real estate, construction. and land
development loans: securities underwriting; and "other."
NOTE :
which account for about one-third of all CRE loans,
contracted 5 percent in 2008, with the decline accelerating over the course of the year. Commercial
construction loans associated with one- to four-family
residential projects dropped particularly sharply in
the second half of 2008, Banks ' unused commitments
to fund construction of both commercial and residential properties fell about 30 percent for the year as a
whole (figure 9). The growth of CRE loans has been
slowing since 2006, a trend reflecting both moderation in demand and reduction in supply. Loan demand
was damped last year by a further deterioration in
market fundamentals, including falling rents, rising
vacancies, and a rapid decline in CRE prices (figure 10, top panel). On the supply side, significant net
fractions of respondents reported having tightened
CRE lending standards over the past year (figure 10,
bottom panel). In addition, in response to special
questions on CRE lending in the January 2009
SLOOS, significant net fractions of banks reported
having tightened all queried loan policies in 2008 . By
year-end , CRE loans constituted 13 percent of the
assets of all commercial banks. The share of CRE
loans relative to all loans at medium-sized and small
banks declined marginally but stayed quite high last
year (figure II).
In the second half of 2008, issuance of commercial
mortgage-backed securities (CMBS) essentially
ceased (figure 12). In a response to a special question,
some SLOOS respondents indicated that the shutproperties , loans secured by owner-occupied properties are underwritten based on the future business revenues of the property ' s owner.
Profits and Balance Sheet Developments at US. Commercial Banks in 2008
10.
A67
12 . Gross i suancc ,\' selected mortgage- and a 'et-ba ked
securities. 2003-08
Change. in demand and supply condition at
selected banks for commercial real estate loans.
1996-2008
Billions or dollars. annual rale
Percent
Non-agency RMBS
CMBS
Consumer ABS
•
•
Net percentage of banks reporting stronger demand
60
1,800
1,500
40
20
+
1.200
o
900
20
600
40
300
60
I
Net percentage of banks reporting tighter standards
I
-
100
80
60
Non:: The data are monthly. Non-agency RMBS are residential
mongage-backed securities issued by institutions other than Fannie Mae,
Freddie Mac, and Ginnie Mae ; CMBS are commercial mongage-backed
securities; and consumer ABS (asset-backed securities) are securities backed
by credit card loans. nonrevolving consumer loans , and auto loans.
SOUHCE: For RMBS and ABS , Imide MBS & ABS and Merrill Lynch; for
CMBS, Commercial Mongage Alen .
40
20
+
o
extended or refinanced maturing CRE loans that
borrowers were unable to refinance in the CMBS
market.
20
40
I
I
I
I
1998
1996
I
I
I
2000
I
2002
I
I
2004
I
I
2006
2008
NOTE: See figure 7, general nOle and source note.
down of that market had led to an increased volume
of CRE loans on their books in the latter part of the
year. With the CMBS market impaired, banks reportedly faced Jess competition for higher-quality, longerterm CRE debt, and, in other cases, banks likely
Loans to Households
The continuing deterioration in housing market activity and the outright declines in home prices substantially affected bank lending to households last year
(figure 13). Overall , the value of loans backed by oneto four-family residential properties held by commer13.
Change in pric" of exi. ling single-fami ly homes,
1990-200
Commercial rea l estate loans a a share or al l loan .
by bank size. 1990-2008
II .
20
LP price index
15
Percenl
10
5
+
50
o
40
-
5
10
30
Medium-sized
and small banks
15
20
I I
I
I
I
I I I I I I I I I I I I I I I I
I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
10
10 largest banks
I
I
I
I
I
I
I
I
I
I
I I I
I I I I I I I I
I
1990 t 992 1994 1996 1998 2000 2002 2004 2006 2008
NOTE: The data are quanerly. For the definition of bank size, see the
general note on the first page of the main text.
Na n:: The data are quanerly and extend through 2008:Q4: changes are
from one year earlier. The LP price index includes purchase transactions
only. For 1990, the FHFA index (formerly calculated by the Office of Federal
Housing Enterprise Oversight) includes appraisals associated with mongage
refinaneings ; beginning in 1991. it includes purchase transactions only.
SOURCE: For LP, LoanPerformance, a division of First American
CoreLogic ; for FHFA , Federal Housing Finance Agency .
A68
Federal Reserve Bulletin 0 June 2009
14.
Level of refinancings of re idenlial morlgage$,
1990-2009
January 26. 1991l
=I
100
80
60
40
20
+
o
I
I
I I I I I I I II I I I I I I I I I I j
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
I
NOTE: The dala. which are weekly and ex lend Ihrough April 17.2009. are
four-week moving averages. Residenlial mongages include bOlh firsl and
second liens secu red by one- 10 four-family residenlial propenies.
SOURCE: Mongage Bankers Associalion .
cial banks grew just 3 percent. However, after adjusting for major structure events, residential real estate
loans held by banks, which had grown every year
since at least the 1980s, posted an outright decline of
about 6 percent for the year. More broadly, according
to data from the Federal Reserve's Z.I statistical
release ("Flow of Funds Accounts of the United
States"), household mortgage debt from all sources
declined last year for the first time since data were
recorded in the Aow of funds beginning in 1945 .
Survey evidence indicates that the decline in resi dential real estate lending last year stemmed from
both tighter credit standards and weaker demand.
Substantial fractions of SLOOS respondents reported
tighter credit standards on such loans throughout
2008. Not surprisingly, the tightening of credit standards tended to be more pronounced for nontraditional and subprime mortgage products than for prime
mortgage products . Indeed , only a few banks reported
that they had originated subprime loans during the
year. The fraction of banks reporting tighter credit
standards on prime mortgages spiked to a record high
of 75 percent in the July 2008 survey, and the
fractions that so reported remained high in the October 2008 and January 2009 surveys. In addition,
SLOOS respondents indicated further weakening in
demand for residential mortgages each quarter last
year, though to a lesser extent in the final quarter of
the year. Refinancing activity picked up at the end of
last year as households-specifically, those that were
not constrained by deteriorating credit scores or
increasing loan-to-value ratios-took advantage of
the decline in mortgage rates late in the year (figure 14).
In contrast, loans drawn under revolving home
equity lines of credit grew a solid 10 percent in
2008-the largest increase since 2004----even after
adjusting for major structure events that took place
last year. As househo lds' access to other types of
credit became tighter and "cas h out" refinancing in
many instances was no longer feasible, households
probably drew on existing lines of credit. Moreover,
because these loans usually carry variable interest
rates, declining interest rates over the year likely
spurred demand. On the supply si de, banks sought to
limit their exposure to home equity lines by canceling , suspending, or reducing such lines of credit,
likely because of borrower financial difficulties and
falling house prices that eliminated part or all of the
collateral used to secure the 10ans.13 In fact, unused
commitments secured by residential housing dropped
an unprecedented 10 percent last year after adjusting
for major structure events.
Amid deteriorating credit quality, waning demand
for consumer durables, and disruptions in the securitization markets , consumer loans on banks' books
expanded modestly in 2008. Credit card loans, which
at year-end accounted for about 40 percent of the
value of consumer loans on banks' books, increased
5 percent, whereas other consumer loans grew less
than 2 percent, down from 13 percent in 2007 (all
adjusted for major structure events). According to the
SLOOS, banks further tightened standards on consumer loans each quarter las t year (figure 15, top
panel). Particularly in the second half of the year,
banks cut unused commitments for credit cards significantly as the unemployment rate climbed and
disruptions in funding markets intensified. In addition, sizable net fractions of banks responding to the
SLOOS reported having lowered credit limits on
existing credit card accounts to both prime and nonprime borrowers, citing the less favorable economic
outlook, reduced tolerance for risk, and declines in
customer credit scores as important reasons for their
moves. Moreover, banks generally reported weak
demand for consumer loans . The net fraction of banks
reporting an increased willingness to make consumer
13. In June 2008. the FDIC issued supervisory guidance reminding
institutions that although reducing or suspending home equity lines of
cred it may be an approp riate way to manage credit ri sk . cenain lega l
requirements, in place to protect the borrowe rs, had to be followed .
Specifically, the FDIC urged the insti tution s to work with borrowers to
minimize hardships that may result from reductions or suspensi ons of
credit lines. More information is in Federal Deposit Insurance Corporation (2008), "Consumer Protection and Risk Management Considerations When Reducing or Suspending Home Equity Lines of Credit
and Suggested Best Practices for Working with Borrowers," financial
institution letter, June 26. www.fdic .gov/news/news/financiaI12008/
fi108058a.html.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
15.
Changes in supp ly conditions at selected banks fo r
con umer lending and for con umer insl IImenlloans.
16.
A69
Bank holdings of securities as a proportion or tOlal
bank asselS, 1990-2008
1996-2008
Percent
Percent
Net percentage of banks reporting tighter
standards for consumer lending
-
26
so
24
60
40
22
20
20
+
o
20
I
I
IS
I
! I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006 200S
NOTe: The data are quanerly .
Net percentage of banks reporting increased
willingness to make consumer installment loans
-
40
20
+
o
20
40
60
I
I
I
1996
I
I
1998
I
2000
I
2002
I
2004
I
I
2006
2008
NOTE: See figure 7, general note and source note.
installment loans in the October 2008 survey fell to
its lowest level since at least 1990; banks continued to
report decreased willingness to make such loans, on
net, in the January 2009 survey (figure 15, bottom
panel). The broad pullback in consumer credit also
likely reflected, in part, difficulties in the market for
asset-backed securities (ABS), which had typically
funded a considerable fraction of consumer credit. In
the second half of 2008, ABS issuance virtually
ceased.
Reserve Balances
In response to widespread financial market strains
that emerged in August 2007, the Federal Reserve
established several new facilities to provide liquidity
to banks and other financial institutions and made
several important modifications to its existing facilities and operations. Before September 2008, the
aggregate supply of reserve balances was not materially affected by the liquidity facilities, as any increases in reserve balances from the payouts of loans
were Jargely offset (sterilized) by redemptions or
outright sales of Treasury securities held by the
Federal Reserve. But after the bankruptcy of Lehman
Brothers , the magnitude of liquidity added to the
system through various facilities and special interventions exceeded the Federal Reserve' s ability to sterilize increases in reserves with draining operations.
However, in December, the FOMe lowered its target
/
for the federal funds rate to a range of 0 to 1 4 percent.
This low target was consistent with a very high level
of banking system reserves. All told, reserve balances
due from Federal Reserve Banks increased from
about $20 billion at the beginning of 2008 to around
$520 billion at year-end. 14
Securities
Overall holdings of securities by banks were almost
flat last year, growing a mere 0.6 percent, the slowest
rate in more than a decade. Securities holdings were
only marginally affected by the major structure events
described earlier. As a proportion of total assets,
banks' holdings of securities declined to 18 percent at
the end of 2008 (figure 16). However, the aggregate
numbers conceal developments in the underlying
investment and trading accounts. Holdings of securities in banks' investment accounts grew 10 percent
last year, whereas the value of the holdings of securities in their trading accounts declined 23 percent, as
holdings booked in foreign accounts were roughly
halved.
14. Total reserve balances, which include balances of thrift institutions and foreign banks, grew from $33 billion at the beginning of
2008 to $856 billion at year-end (see the Federal Reserve Board ' s
H.4.1 statistical release, "Factors Affecting Reserve Balances of
Depository Institutions and Condition Statement of Federal Reserve
Banks," www.federalreserve .gov/releaseslh41; Wednesday levels).
A70 Federal Reserve Bulletin D June 2009
Widespread deterioration in financial market conditions caused the value of banks' securities holdings
to decline throughout 2008. The difference between
the reported fair value measurements and book values
of available-for-sale securities in investment accounts
widened significantly. The largest revaluation losses
were incurred in non-agency MBS and domestic ABS
portfolios, and the largest banks were more adversely
affected than other bank-size groups. The 10 largest
banks held roughly 45 percent of the available-forsale securities in investment accounts at the beginning of the year but accounted for two-thirds of the
revaluation losses for the year.
In the third quarter of 2008, held-to-maturity securities in investment accounts surged as banks purchased a large amount of high-quality asset-backed
commercial paper from money market mutual funds
with funding provided by the Federal Reserve's
AMLF. On the year, held-to-maturity securities in
investment accounts rose more than 60 percent but
still accounted for only a very small fraction of
banks ' total securities holdings at year-end.
Other Loans and Leases
Other loans and leases decreased 8 percent during
2008, the largest drop in more than a decade . The
decline in this volatile loan category occurred despite
a spike during the financial turmoil in September and
October, when unplanned overdrafts by a wide range
of customers, including some money market mutual
fund complexes, increased markedly and many nonbank financial firms drew down their lines of credit to
ensure access to funds. The overall drop in other
loans and leases likely reflected a confluence of
factors related to the general economic slowdown and
continuing distress in the financial markets . Loans to
other banks dropped 18 percent at an annual rate,
probably reflecting, in part, concerns about the solvency of some institutions and lower demand as a
result of the expansion of the Federal Reserve 's
liquidity facilities. Loans for purchasing or carrying
securities also fell with the deterioration in financial
market conditions. Leases, which are made primarily
to businesses for financing equipment or to households for financing automobiles, declined significantly as well , along with the step-down in capital
investment and automobile sales. In contrast, bank
lending to state and local governments grew robustly
in 2008, perhaps because higher costs of bond issuances and dislocations in municipal bond markets,
including markets for auction rate securities and
variable-rate demand obligations, strained municipal
governments' ability to borrow in capital markets.
17.
Selected domestic li abil ities a t bank a a proportion
lheir IOlal domestic liabilili e . 1990-2008
or
Percent
-----------------------------------
40
30
20
10
+
o
I
I I I I I I I ! 1 ! ! 1 1 I , I ! I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
I
NOTF.: The data are quanerly. Sav in gs de posits include mo ney marke t
deposit accounts.
Liabilities
Bank liabilities increased 11 percent in 2008, outpacing the growth in assets by 1 percentage point.
Adjusting for major structure events, the annual
growth in liabilities was 7 percent. Core deposits
grew 11 percent (adjusted) and, for the first time since
2003, increased as a share of bank funding . IS At
year-end, they composed 49 percent of bank liabilities, compared with 47 percent at the end of 2007
(figure 17). Core deposits are traditionally a more
important source of funding for smaller institutions
than for larger ones. However, in 2008, the growth
rate of core deposits at the largest 100 banks outpaced
the rate at institutions outside that bank-size category.
All components of core deposits grew during 2008.
The majority of the expansion occurred over the
second half of the year and was due to a range of
factors, including a substantial easing of monetary
policy, the continuing and intensifying financial turmoil, increasing economic uncertainty, and regulatory
changes. Falli ng market interest rates reduced the
opportunity cost of holding deposits, thereby spurring
their growth. Moreover, turbulence in financial markets and economic uncertainty tend to generate
demand for liquid and safe assets. In particular, the
turmoil created by the bankruptcy of Lehman Brothers and the resulting outflows from the money market
mutual fund sector contributed to strong demand for
bank deposits in the fall (figure 18). To help maintain
consumers' confidence in the banking system, the
Emergency Economic Stabilization Act temporarily
increased basic FDIC insurance coverage from
15. Core deposits consist of savings deposit s, small-denomination
time deposits, and transaction deposits .
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
18.
et flows into money market mutual fund s
and deposits at commercial bank, 2008
Billions of dollars
200
150
100
50
+
o
50
100
A71
attractive rates to their members. As a result, FlH.,B
advances extended to banks grew (after adjusting for
the resolution of Washington Mutual Bank, under
which lPMorgan Chase assumed the failing financial
institution's advances) an average of 25 percent at an
annual rate during the first three quarters of 2008,
only to reverse most of the increase in the fourth
quarter. All told, such advances ended the year up
3 percent (adjusted). The slowdown late in the year
likely reflected, in part, the introduction of the TLGP,
which provided an FDIC guarantee for some newly
issued senior debt of banking organizations.
150
200
Capital
I ~I__~~_-L~__~~__~~~L-~I__~,__~~I
L
I
F
M
A
MAS
0
N
D
NOTE: The data are aggregated from weekly to biweekly frequency.
SOURCE: For money market mutual funds , iMoneyNet; for deposits ,
Federal Reserve Board, Statistical Release H.S , "Assets and Liabilities of
Commercial Banks in the United States" (www.federalreserve.gov/
releasesIhS).
$100,000 to $250,000 per depositor in October 2008.
In addition, in mid-October, the FDIC announced that
the TLGP would provide an unlimited guarantee of
deposits held in noninterest-bearing transaction accounts at participating depository institutions.
In line with these developments, savings deposits
expanded in the first and fourth quarters of 2008, the
periods in which the bulk of the 400 basis point
easing in monetary policy occurred. Small time
deposits grew briskly over the second half of 2008.
After declining for three consecutive years, transaction deposits increased one-fifth in 2008. The growth
was particularly strong in the fourth quarter-64 percent at an annual rate-likely driven by the TLGP.
Managed liabilities grew 6.5 percent over the year,
the lowest rate in half a decade. With the growth of
core deposits outstripping that of assets, banks were
able to reduce their reliance on generally more expensive and less stable sources of funds. Moreover,
access to and usage of the Federal Reserve's discount
window and TAF further reduced the banks' need for
market-sensitive funding options. In contrast to their
experience over the two previous years, banks did not
rely on deposits booked in foreign offices to fund
asset growth for the year as a whole.
After the financial crisis began in the summer of
2007, the Flll.-B system became an increasingly
important source of funding for banks because the
FHLBs were able to lend against mortgages accumulated on banks' balance sheets. Heightened uncertainty led investors to put a higher premium on the
perceived implicit government guarantee of Flll.-B
debt, which, in turn, allowed the FHLBs to offer
Equity capital at commercial banks rose 1.2 percent
in 2008, the second-lowest rate since the 1980s and
just one-ninth of the growth rate of assets in 2008.
Adjusted for major structure events, the industry'S
equity capital contracted 2 percent. Nonetheless, both
the tier 1 and tier 2 risk-based capital ratios for the
industry as a whole rose noticeably in the fourth
quarter of 2008 . 16 At year-end, commercial banks
maintained a total risk-based capital ratio of 12.8 percent, compared with 12.5 percent at the end of the
third quarter. This increase was more than accounted
for by $66 billion of capital transferred during the
fourth quarter from parent bank holding companies
(the largest such transfer reported over the past 25
years), much of which was presumably TARP money
(figure 19). Without those capital injections, and
holding risk-weighted assets constant, the total riskbased capital ratio at year-end would have declined to
12.0 percent. Alternatively, some banks may have
chosen to reduce their risk-weighted assets in order to
maintain a higher year-end capital ratio.
Although risk-based capital measures ticked up,
the considerable pressures that remain on banks'
balance sheets may affect their future capital positions. Banks recorded $26 billion in net unrealized
losses on available-for-sale securities in 2008. If
16. Tier I 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 I 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 mulliplying Ihe 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 I 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.
Federal Reserve Bulletin 0 June 2009
A72
It) .
apilallransfers to commercial banks from
parent bank holding l:ompanie', 199{}-2008
BilJions of dollars
70
60
50
40
30
20
10
+
o
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Nm'E: The data are quanerly .
banks decide to sell the securities, then the remaining
unrealized losses on the securities currently recorded
in other comprehensive income would be moved to
net income and subtracted from retained earnings,
which would reduce regulatory capital. The industry
leverage ratio showed a modest decline last yearP
The dichotomy between the increase in the risk-based
capital ratios and the decrease in the leverage ratio
reflected a substantial accumulation of cash assetsparticularly reserve balances-which have a risk
weight of zero. At the BHC level, regulatory capital
ratios improved during 2008, supported importantly
by substantial private capital investments in a few
companies during the first half of the year and by the
significant CPP investments by the Treasury toward
the end of the year.
Derivatives
In 2008, the notional principal amount of derivatives
contracts held by banks rose $35 tri I Iion, or 21 percent, to more than $200 trillion (table 2). However,
this surge importantly reflected the reorganization of
a prominent derivatives dealer, which substantially
increased the amount of derivatives booked at one of
its commercial bank subsidiaries. If the effects of the
reorganization are removed, the notional amount grew
only 3 percent last year. In either case, the growth in
the notional principal amount of derivatives contracts
stemmed almost entirely from interest rate deriva17. 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
lier I capital.
tives, which at year-end accounted for 82 percent of
all contracts held at banks. The notional principal
amounts for all other types of derivatives contracts
were little changed or even fell.
As dealers, banks often enter into offsetting positions, a strategy that significantly boosts the notional
value of their derivatives contracts. The fair market
value of derivatives contracts held by banks reflects
the contracts' replacement cost and is far smaller than
the notional principal amount. The fair market value
of contracts with a positive value in 2008 was about
$7 .0 trillion, whereas for contracts with a negative
value, it was roughly $6.9 trillion.
An 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. Those swaps
are the most common type of derivative used by
banks and account for about three-fourths of the
notional value of banks' derivatives contracts, though
most of the swaps are held for trading and marketmaking purposes rather than for hedging. The notional value of interest rate swaps increased 27 percent in 2008, but the increase was only 6 percent after
adjusting to remove the effect of the dealer's reorganization. Other types of interest rate derivatives contracts employed by banks include futures, forwards,
and options. The notional value of these other interest
rate deri vati ves contracts also grew 6 percent (adjusted).
One of the fastest growing components of banks'
derivatives portfolios in recent years has been credit
derivatives, which, prior to last year, had grown an
average of 71 percent per year since 2000. Without
adjusting to remove the impact of the dealer's reorganization mentioned earlier, the notional principal
amount of credit derivatives held by banks grew in
2008 but only by 0.2 percent. Subtracting the yearend holdings of the reorganized dealer implies that
the notional amount of credit derivatives held by
banks dropped 9 percent over the year. Credit derivatives include total return swaps and credit options, but
credit default swaps account for 98 percent of the
notional value of credit derivatives held by banks .
Banks are beneficiaries of protection when they buy
credit derivatives contracts and providers 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 in notional value, and contracts in
which they were guarantors totaled $7.8 trillion (fig-
Profits and Balance Sheet Developments at U. S. Commercial Banks in 2008
A 73
hange in notional valut! and fair value of derivative ', all U... hanks. 2003--08
2.
Percenl
MEMO
Interest rate derivatives
Notional amount . .... . ... ...
Fair value
Positive . . . . .. .. . . . .. . ..
Negative ... . . . . . . . . . . . ..
2005
2006
23 .69
15.38
29.75
25.68
2106
201.070
.36
100
.....
2004
26.54
Total derivatives
NOlional amount . .
. . ,., .Fair value
Posilive .... .. , . .. . ... ... ....
Negative
. .. , ... ...
2007
2008
Dec. 2008
(billions of
dollars )
2003
Hem
13.71
13.75
-6.46
- 5.78
-4.50
-4.27
6S. 18
65.77
250.20
249.27
7. 100
6,908
27.62
Other deri vati ves I
Notional amount .. ..
. ."
Fair value
....... .
Positive .
Negative . .... .. . . .. .
.. .
5, 120
4.989
2 103
7.69
29.27
36.69
2.03
17.523
14.86
12.74
-35.84
-37 .36
22.86
21.39
43 .59
43.40
149.12
163.80
645
661
134.52
139.07
130.46
148.09
137.87
157.53
54.93
67.69
44.03
75 .87
73.94
77.79
.21
-. 12
.54
15.897
7.811
8.086
69.9 2
74.56
38.37
5 1.28
2.64
66.36
8143
- 5.62
827.98
83.50
505.51
2.79
92.96
201.40
-159
90.26
3.98
187.44
295.25
- 38.79
11 87.4 1
301.20
1086.95
- 18.95
28 1.97
41.97
312.45
260.8 1
303.42
6.54
1.048
44
1.004
1,126
1,078
48
32.66
29.43
75 . 17
13.4 4
-9.31
3.254
3. 16
-5 .25
.
164.397
290.51
286.47
3.77
... .
.
26 .98
56. 19
58. 19
68.3 1
378 .09
-68.87
19.85
-63. 13
295.74
Credit derivatives
.. .
Notional amount .
Guarantor ..
'" .
Beneficiary . . . . . . . . . . . . . .
Fair value
Guarantor ..... .... ... .. .
Posilive ... .. ..... .. ...
Negative .. ........ .... ...
Beneficiary .... . ... ..... ...
Positive . . .. .. .. .... ...
Negative . .... ... . .. . . ...
20.54
-14.55
-15.06
55. 98
6182
5113
.
27. 11
- 5. 52
-5 . 15
41.81
38.81
Exchange rate derivalives
Notional amount .
. . . . ...
Fair value
Positive . . . . . . . . . . , . ' "
Negative.
. . . . . . .. ... ....
1192
n.14
12.94
IS.81
.. .
22.07
- 5.95
- 5.07
8.55
19.73
58.51
74.29
18.99
24.15
4 1.22
15.66
33.70
39.27
213
206
NOTE : Data are from year-end to year-e nd and are as of April 16. 2009.
I. Other derivatives consist of equ ity and commodity derivatives and othe r contrac ts .
ure 20). At year-end 2008, credit derivatives accounted for 8 percent of the notional principal value
of all derivatives contracts held by banks.
Banks also use deriv atives related to foreign exchange, equities, and commodities. Collectively, those
20.
Notional amounts of' credil derivatives for wh ich
banks were beneficiurie~ or guarantors. 2000-08
Trilli ons of (jollars
9.0
8.0
7 .0
6.0
5.0
4 .0
3.0
2.0
instruments account for 10 percent of the notional
value of the derivatives contracts held by banks. As
with other derivatives, the pricing and volume of
foreign-exchange-related contracts were affected by
the financial turmoil. Increased market volatility
raised the cost of hedging foreign exchange positions,
and counterparty concerns reduced liquidity in some
foreign exchange markets . The semiannual survey of
North American foreign exchange volume conducted
by the Foreign Exchange Committee, or FXC, showed
year-over-year declines in trading volumes for several
categories of foreign -exchange-related derivatives in
2008. 18 These declines were the first recorded since
the survey began in 2004. Banks ' notional holdings of
foreign-exchange-related derivatives grew 2 percent
in 2008, but, after adju sting for the derivatives dealer' s reorganization , they dropped almost 8 percent.
Banks' holdings of equity and commodity derivatives
1.0
+
o
I I
I
2000 2001
I
I
I
I
I
2002 2003 2004 2005 2006 2007 2008
NOTE: The dala are quanerl y.
18 . The FXC is an indust.ry group and includes representatives of
major financial inst itutions engaged in foreign exchange trading in the
United States. It is sponsored by the Federal Reserve Bank of
New York and maintains a website at www.newyorkfed.orglFXC.
A74
Federal Reserve Bulletin 0 June 2009
fell 13 percent and 2 percent, respectively, in 2008,
and these two categories were materially unaffected
by the structure change.
The reorganization of the large derivatives dealer
also affected the industry-wide concentration of derivatives contracts. As reported in previous versions
of this article, the share of industry contracts (in terms
of notional value) at the 10 largest banks (in terms of
assets) had for years been more than 97 percent, a
concentration ratio that reflected the role that some of
the largest banks playas dealers in the derivatives
markets. However, at the end of 2008, that share
declined to 84 percent, as the bank created by the
reorganization was only the 11th-largest bank. Still,
banks' derivatives holdings remained highly concentrated last year: For each individual category of
derivatives contracts discussed earlier, the 10 banks
with the largest holdings accounted for more than
99 percent of the notional principal value of contracts
held by all banks.
21.
Distribution or return on a sels al(;ommcrcial banks ,
by percentage of tOLaI indu try-wide assets, 1985-2008
I~ rcell(agc
- •
of lola I industry -wide as.~ L\j
50
1985- 2007 average
2008
40
30
20
10
50
2007
•
2008
- -- 40
30
TRENDS IN PROFITABILITY
Total annual net income of the commercial banking
industry declined sharply in 2008; it was down 92 percent from the 2007 level. The primary drivers of the
contraction were sizable provisions for loan losses in
response to further deterioration in asset quality,
heavy write-downs of securities holdings, goodwill
impairment charges, and a marked drop in trading
revenue. Return on equity for the full year fell to less
than 1 percent, down from 9.5 percent in 2007.
Banks' annual return on assets (ROA) also dropped
considerably, to 0.07 percent last year, its lowest level
since 1991 . The decrease in profitability was most
pronounced in the fourth quarter; indeed, commercial
banks posted an aggregate loss in that period .
Until the second half of 2007, the profitability of
commercial banks had been relatively high and consistent for some time. The distribution of ROA among
commercial banks between 1985 and 2007 is centered
between 1 and 1.5 percent, with negative returns
accounting for less than 7 percent of industry-wide
assets (figure 21, top panel). The leftward shift in the
distribution of ROA in 2008 shows the widespread
nature of the deterioration in profitability last year.
Bank profitability in 2008 eroded significantly even
when compared with 2007, when strains on banks and
their profitability had already emerged (figure 21,
bottom panel). The fraction of banks that incurred
annual losses in 2008 doubled from 2007 to about
20 percent, and these institutions accounted for about
35 percent of industry assets, the highest share since
1987.
20
10
-2.5 -2.0 -1.5 - 1.0 -0.5 0.0 0.5
1.0 1.5 2.0 2.5
Return on assets (percent)
NOTE: Total industry-wide assets are deflated by a gross domestic product
price deflator.
A drop in noninterest income for the year-the
second consecutive annual decline--contributed importantly to lower bank profitability in 2008. Noninterest income was about 1.8 percent of average total
assets last year, the lowest share since 1990. Trading
activities resulted in an aggregate net loss to banks in
2008 of $2 .3 billion, the first annual loss reported in
that business line in at least 25 years. The loss was
driven by a $13.9 billion realized loss from credit
exposures in the trading account in 2008, threefourths of which was incurred by the top 10 banks. 19
In addition, banks took other losses owing to substantial asset markdowns in 2008. Realized losseswhich affect the income statement directly-reached
their highest levels ever in the third quarter, in part
because of large third-quarter losses on GSE preferred stock held by many, especially smaller, banks.
Profits in 2008 were also hit by a dramatic increase
in loan loss provisions as credit quality worsened
19. In this contex.i. credit exposures are defined as cash debt
instruments (such as debt securities) and credit derivatives contracts
(such as credit default swaps) .
Profits and Balance Sheet Developments at
u.s.
A75
Commercial Banks in 2008
2:1 . Premjum on credit default swaps on subordinated deht
at selected banking in~Lilulions . 200 1-09
22.
January 2001
= Ill()
Da'\is points.
160
------------------------------------
140
280
120
240
100
200
80
1
.60
60
120
40
80
20
I I
I
I
2001
2002
2003
2004
2005
2006
40
+
I
2007
2008
o
2009
NOTE: The data are monthly and eXiend Ihrough March 2009.
SOURCE: Standard & Poor's and Dow Jones.
appreciably for all major loan categories. The delinquency rate for all loans and leases held by banks
increased to about 4.6 percent in the fourth quarter.
The delinquency rate on residential real estate loans
climbed to 6.3 percent, its highest rate in more than
15 years, while the delinquency rate on CRE loans
rose to 5.4 percent. The increase in CRE loan delinquencies primarily reflected soaring delinquencies on
construction and land development loans. Especially
late in the year, banks also experienced a noticeable
increase in delinquency rates on C&I and consumer
loans, particularly credit card loans. The total chargeoff rate, which had started to climb in 2007, rose to
nearly 2 percent of all loans and leases in the fourth
quarter, increasing at a faster rate last year than the
delinquency rate. The charge-off rate for CRE loans
increased more than fivefold in the fourth quarter
from the year-earlier quarter to just more than 2 percent, and that for C&I loans more than doubled to
1.4 percent.
With steep declines in profitability, dividends paid
in 2008 were about one-half of the amount paid to
shareholders in 2007. Even so, di vidends exceeded
earnings for the year. Investors remained concerned
about the further erosion in profits driven by deteriorating asset quality and continued uncertainties about
banks' exposures to structured finance products. As a
result, the Dow Jones stock price index for banks fell
considerably in 2008, significantly underperforming
the S&P 500 index (figure 22). Reflecting the increase
in the perceived riskiness of banks, CDS premiums
on banking institutions' subordinated debt moved
noticeably higher, on net, in 2008 (figure 23).
I I
I
200 1 2002 2003 2004 2005 2006 2007 2008
I
2009
NOTE: The data are weekly and eXlend through April 15 , 2009. Median
spread of all available quotes.
SOURCE: M arkit.
Interest Income and Expense
In response to the Federal Reserve's easing of monetary policy, the rates that banks earned on their assets
and paid on their liabilities declined markedly over
the year, generally following the rates on market
instruments. Banks earned an average of 5.7 percent
on their assets in 2008, down from 6.8 percent in
2007, and paid an average of 2.5 percent on their
liabilities, compared with 3.8 percent in 2007. Because the aggregate rate paid on banks' liabilities
dropped slightly more than the aggregate interest
earned on banks' assets, the industry-wide net interest
margin edged up to 3.43 percent in 2008, compared
with 3.37 percent in 2007 (figure 24, top panel) . This
increase was concentrated at larger banks, as small
and medium-sized banks experienced declines in
their net interest margins (figure 24, bottom panel).
Core deposits are an attractive source of funding
for banks because they tend to be fairly stable, as well
as relatively inexpensive, compared with managed
liabilities. The average effective interest rate that
banks paid on core deposits dropped from 2.8 percent
in 2007 to 1.9 percent in 2008. Taken together, banks
lowered the rates paid on the components of core
deposits fairly uniformly: Banks paid an average of
3.8 percent on small time deposits, 1.3 percent on
savings deposits (including money market deposit
accounts), and l.2 percent on other checkable deposits, with each rate almost 1 full percentage point less
than in 2007. Nonetheless, funds flowed into these
A76
Federal Reserve Bulletin 0 June 2009
24.
el interest margin,
by ize of bank. 1990-2008
-------------------------------------
Percent
All banks
4.50
4.25
4.00
3.75
3.50
3.25
I
I
I
1
I
I
1
I
5.00
4.50
4.00
3.50
3.00
I
I
1
1
I I I I I I I I I I I I I I 1 I I
I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
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 generat note on the first page of the main tex!.
deposit accounts, as investors, seeking the safety and
liquidity of FDIC-guaranteed accounts, withdrew
investments from money market mutual funds, longerterm mutual funds, equity markets, and hedge funds.
In addition, a small number of banks increased their
core deposit rates to attract funds, evidently to obtain
stable funding during the crisis period.
The rates paid on banks' managed liabilities, which
generally exceed those on other funding instruments,
dropped 1.7 percentage points in 2008 to 3. 1 percent
on average. 20 However, although the rate fell substantially, its spread over market yields on short-term
Treasury securities was considerably higher at the end
of 2008 than in 2007. 2J That relatively high spread,
which reflected the especially sharp decline in Trea20. Managed liabilities consist 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. Managed liabilities are generally funds over which
the bank has significant discretion to increase or decrease in response
to changing funding needs created by deposit outflows or new loan
demand.
21 . For example, the difference between the average rate paid on
banks' managed liabilities and the average yield on three-month
sury bill yields in response to the pronounced flight to
quality, suggests that managed liabilities were a relatively more expensive source of funds for banks last
year than in 2007.
The average interest rate earned on banks' assets in
2008 fell more than I percentage point, to 5.7 percent.
The decline was due mostly to lower rates earned on
loans and leases, which dropped 1.15 percentage
points on average. However, the effective rate of
return on loans was significantly lower as a result of
the deterioration in asset quality. Net of loss provisions, the rate earned on loans and leases was a bit
Jess than 4 percent, a historical low. The average
interest rate earned on loans to both businesses and
households declined last year. After holding steady in
2007, the average interest rate earned on business
loans tumbled over the course of 2008. The Survey of
Terms of Business Lending, which measures the
interest rate on new C&I loan originations at a broad
sample of banks, indicates that interest rates on new
C&I loans fell 3 percentage points over the year
(between the November 2007 and November 2008
surveys).22 Despite this decline, spreads on C&I loans
widened over the year as banks adjusted their pricing
in response to the deterioration in the economic
outlook and other factors. The weighted-average
spread of C&I loan rates over Eurodollar and swap
yields of comparable maturity increased about 30 basis points in 2008, a development consistent with the
indication by large fractions of SLOOS respondents
that they had increased the spread on C&I loans to
both large and middle-market firms and to small firms
over the course of 2008 (figure 25).
The average interest rate earned on consumer loans
decreased to 9.5 percent in 2008 from 10.2 percent in
2007, while the average effective interest rate on real
estate loans decreased about 1 percentage point during 2008, to 6 . 1 percent. Partly as a result of the
dislocations in both the asset-backed and mortgagebacked securities markets, the spreads on credit cards,
auto loans , and residential mortgages widened in
2008. The widening of spreads curbed the decline in
household borrowing rates relative to the decline in
market interest rates. The rate earned on real estate
loans was also supported by the longer average
maturity of such loans and the relatively high percentage of these loans with fixed interest rates . Moreover,
because of reduced credit availability and increasing
Treasury bills was 2.4 percentage points in the fourth quarter of 2008,
while that spread was just 1.3 percentage points in the year-earlier
quarter.
22. The effective (compounded) annual interest rates are calculated
from the stated rates and other terms of the loans and weighted by the
loan amounts.
Profits and Balance Sheet Developments at
25 .
26.
Net pcrcenlage or selected domestic bank reporting
increa ed spreads of rates over cost of funds. by type
of loan, 1990--2008
u.s.
A 77
Commercial Banks in 2008
Noninlercsl inc me as a proportion of lOlai asseLS,
1990-2008
Percent
Percenl
100
3.0
80
2.5
60
40
2.0
20
+
o
1.5
20
40
1.0
60
80
I I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 L996 1998 2000 2002 2004 2006 2008
I I I 1 I I I I I I I , I I 1 I I I , I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NOTE: The data are quanerly.
NOTE: See figure 7, general note and source note.
loan-to-value ratios , along with elevated interest rates
on nonconforming mortgages , refinancing was not
viable for many households .
Noninterest Income and Expense
Total noninterest income declined for the second
consecuti ve year, to its lowest level since J990 (figure 26). Total noninterest expense rose in the fourth
quarter of 2008 because of the sizable goodwill
impairment losses that some large banks recorded in
that quarter (figure 27, top panel).23 Aside from the
goodwill impairment charges, however, noninterest
expense was flat at 2.9 percent of assets at year-end
2008 . The cost of premises and fixed assets, which
account for 12 percent of noninterest expense, fell
modestly relative to average total assets in 2008, as
did salaries and benefits (figure 27, bottom panel).
Other indications that commercial banks were able to
make progress in moderating personnel costs were a
slight decline in the number of full-time-equivalent
employees in 2008 and a growth rate for salaries and
compensation per employee that was the second
lowest in at least the past 25 years . Finally, other
noninterest expense, which accounts for about 38 percent of noninterest expense, moved down slightly last
year. This category includes a wide range of items
that are not reported separately, including expenses
23. Banks incur goodwill impairment losses when the market value
of their business segments (or reporting units) drops below the fair
value recorded by the company. Companies must test for impairment
of goodwill annually or when events occur that would likely reduce
the fair value of a reporting unit (business segment) below the carrying
value . Assets are wriuen down when considered overvalued compared
with the market value-that is, the amount that a potential (or actual)
acquirer would be willing to pay (or had paid) for the assets.
for advertising and marketing, data processing, and
consulting and advising .
Noninterest income dropped about 5 percent over
the year, primarily as a result of a steep decline in
trading revenue (figure 28, top panel). Banks reported
nearly $14 billion in losses on the trading of credit
exposures last year, which likely reflected substantial
write-downs of some mortgage-related structured
products as well as losses on collateralized debt
obligations, credit derivatives, and syndicated leveraged loans. Moreover, an unprecedented number of
credit events occurred in the CDS market in the
second half of 2008, including events involving Lehman Brothers and the GSES.24 These events resulted
in the termination of a large number of credit derivatives contracts, and guarantors suffered large losses
on many of them . Aggregate losses also resulted from
equity security and index trading. Revenue from
interest-rate-related trading was down from 2007 but
remained positive. Revenue from commodity-related
trading and foreign-exchange-related trading in creased somewhat in 2008, perhaps, in part, because
the increased volatility in both of these markets
boosted trading volume, allowing banks to earn more
fee income. Deposit fees, which accounted for 20 percent of the total noninterest income of large banks and
26 percent of that of small banks, were relatively
24. Twelve credit events occurred in 2008. Under definitions
established by the International Swaps and Derivatives Association,
Inc., a credit event is a bankruptcy, obligation acceleration . obligation
default , failure to pay, repudiation/moratorium, or restructuring. The
senlement of outstanding CDS contracts proceeded smoothly. For a
review of the management of the CDS credit events, see Federal
Reserve Bank of New York (2009), "Senior Supervisors Group Issues
Report on Management of Recent Credit Ddault Swap Credit
Events," press rdease , March 9, www.newyorkfed .org/newsevents/
newslbanking/2009/ma090309.html.
Federal Reserve Bulletin 0 June 2009
A78
27 ,
Nonimere t cxpcn c and goodwill impairmenllos cs,
noninlereS! expense. as n
and selected com ponents
proportion of total assets. 2002-D8
or
28. SelecteJ components of nonintcresl income unci of
other noninterc t income as a proportion or ltlwl
assets,2002-D8
Percent
Percent
Noninterest expense and goodwill impairment losses
Selected components of noninterest income
2,0
4
NoniolereSI expense less goodwill impainnent losses
1.6
Other
1.2
,8
2
Deposil fees
Goodwill imp.;nnen! losses
.-l
+
o
.4
-~/\
_
I
V, _
Fiduciary income
Tmding income
I
I
I
+
o
.4
Selected components of noninterest expense
Selected componel1ts of other noninterest income
2,0
L2
Salaries and benefils
1.5
"Olher"
.8
Nel servicing and secnrilization income
1.0
.4
Premises and fixed asselS
~nl banking income
.5
Amortization and goodwill impairment losses
o
+
Income from insurance aClivilies
o
I
I I
I
2002
2003
2004
2005
2006
2007
2008
+
.4
Nel gains (losses) on lhe sale of assets
I I
I I
2002
2003
2004
2005
2006
2007
2008
NOT~ :
The dala are qu arterl y, For Ihe definilion of good will impairment
losses, see lexI nOle 23 ; for the definilion of other noninleresl expense , see
Ihe main lext.
stable over the year. Likewise, income from fiduciary
acti vities held up fairly well amid the financial crisis.
Other noninterest income, which accounts for about
65 percent of total noninterest income, moved down
last year. Other noninterest income includes net servicing and securitization income , investment banking
income, income from insurance activities, net gains
(losses) on the sale of assets, and an "other" category
(figure 28, bottom panel). The largest components of
the "other" category in 2008 were bank card and
credit card interchange fees, earnings on the cash
surrender value of bank-owned life insurance programs, and fees from automated teller machines .25
25, Earnings on the cash surrender value of bank-owned life
insurance (BOll) programs are available to a bank when it cashes in
(or "surrenders") the insurance policy or receives the proceeds of a
death benefit upon the death of an insured employee, BOll generally
may be used only in an amount appropriate to fund a bank's exposure
arising from employee compensation or benefits programs and is not
to be used to fund other normal operating expenses or for speculation,
More information is available in Board of Governors of the Federal
Reserve System, Division of Banking Supervision and Regulation
(2004), "Interagency Statement on the Purchase and Risk Manage-
NOTE: The data are quarterly. For definilions of other noninteresl income
and ils "olher" component see Ihe main lext. Nel gains (losses) on th e sa le of
asselS consisl of Ihe sale of loan s and leases, olher real eSlale owned. and
olher asselS (excluding securilies),
Loan Peiforman e and Los!} Pro visioning
Credit quality declined across all major loan categories in 2008, and the overall delinquency rate at
commercial banks (consisting of loans whose payments are 30 days or more past due) rose to 4.6 percent at year-end, its highest level since late 1992. The
aggregate charge-off rate also moved up , to 1.9 percent of total loans, and the charge-off rate at the top
100 banks exceeded 2 percent. The most significant
deterioration occurred in banks ' residential and commercial real estate loan portfolios , where delinquencies and charge-offs rose to their highest levels in
more than a decade (figure 29). Delinquencies and
charge-offs on consumer loans also moved higher
during 2008. The credit quality of C&I loans, which
appeared fairly robust early in 2008, deteriorated later
ment of Life Insurance," Supervision and Regulation Letter SR 04- I 9
(December 7), www.federalreserve,gov/boarddocs/srlellersI2004/
sr0419.htm ,
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
29. Delinquency and charge-off rates for loans
businesses, by type of loan, 1990-2008
30.
[0
A79
Interest-payment ralio for nonfinancial corporations,
1990-2008
Percent
Pcr(!l!nt
15
20
Delinquencies
18
12
16
Commercial reul estate
9
14
6
12
3
10
+
o
I I I I I I I I
I
I
I
I
8
1 I I I
I I I I I I I I I I I I I I I I I I
Imlmlml~lm2000~22004 2006~8
Nel charge-offs
3.0
2.5
NOTE: The data are quanerly . The interest-payment ratio is calculated as
interesl payments as a percentage of cash flow .
SOURCe: National income and product accounts and Federal Reserve
Board.
2.0
1.5
1.0
.5
+
o
I I I I I I I I I I I I I I I I I I I 1 I
I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
NOTE: The data are quanerly and seasonally adjusted; the dala for
commercial real eSlate begin in 1991. Delinquent loans are loans Ihal are nOI
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 Ihe annualized amount of charge-offs over the period, nel of
recoveries, divided by the average leve l of outstanding loans ove r the period.
For the computation of these rates, commercial re.11 estate loans exclude loans
not secured by real estate (see table I, note 2). C&I is commercial and
industrial.
Charge-off rates for C&I loans more than doubled
year over year for banks of all sizes. Both charge-offs
and delinquencies climbed in the latter part of 2008 as
nearly all major sectors of the economy registered
steep declines in activity and the profitability of
nonfinancial firms plummeted. Reflecting these adverse developments, the interest-payment ratio for
nonfinancial firms, calculated as interest payments as
a percentage of cash flow, moved up a bit in the
second half of the year. Although this ratio remained
in the bottom part of its historical range, the recent
increase suggests that credit strains are likely to
intensify over coming quarters (figure 30).
Commercial Real
in the year. The significant rise in nonperforming
loans and the potential for even greater losses given
the generally weaker economic outlook led banks to
substantially boost their loss provisions in 2008.
Nevertheless , some measures of reserve adequacy
remained very low by historical standards.
C&I Loans
The delinquency rate on C&I loans, which had been
near the lower end of its historical range over the past
several years, rose in 2008 to 2.6 percent by year-end.
The increase was concentrated among the larger
banks, where delinquencies jumped from about
1.2 percent at the end of 2007 to about 2.5 percent at
the end of 2008. The deterioration at smaller banks
was also noticeable, with the delinquency rate increasing about 70 basis points, to about 2.8 percent.
tate Loans
The rate of delinquency on CRE loans doubled in
each of the past two years, mainly because of deterioration in the credit quality of construction and land
development loans, particularly those linked to residential projects (figure 31). Reflecting the ongoing
problems in the housing sector, the delinquency rate
on construction and land development loans that
financed residential development jumped sixfold, to
17.3 percent, from the beginning of 2007 to year-end
2008, while the charge-off rate rose from near zero to
7.4 percent over the same time period. Those increases occurred despite a tightening of credit standards on CRE loans that began in the second half of
2006. Moreover, the share of construction and land
development loans in total CRE loans declined from
34 percent in 2007 to 32 percent by the end of 2008.
In part because of an increase in vacancy rates , the
A80
31.
Federal Reserve Bulletin D June 2009
Delinquency and charge-orr rates for construction
and Innd development loans, by type ()f loan, 2007-08
Percent
_
Delinquencies
~_ .
Indicawrs or household financial ' tre. s, 1991-2008
----------------------------------
Percent
Financial obligations ratio
IS
o Resident iaJ
20.0
16
Other
19.0
14
12
18.0
10
17.0
S
6
16.0
4
2
I
I
Per (O
O,oon persons
Net charge-offs
_
-
6.0
-
-
7.0
-
Household bankruptcy filings
8.0
5.0
1.000
900
-
600
500
4.0
-
800
700
3.0
400
300
200
100
I I
Non,: For definitions of delinquencies and net charge-offs, see the nOte for
figure 29.
delinquency rate on multifamily properties rose from
1.9 percent at the end of 2007 to 3.2 percent at the end
of last year. Amid a sharp deterioration in the economic fundamentals for commercial buildings, the
delinquency rates on loans secured by existing nonresidential structures significantly increased in 2008
from 1.5 percent to 2.5 percent.
Loans LO Househo lds
Financial conditions in the household sector deteriorated further, on balance, in 2008, reflecting significant job losses, lower equity and housing wealth, and
depressed consumer sentiment. Against this backdrop, consumer credit growth weakened considerably
over the year. Partly as a result of lower interest rates
on consumer loans, the household financial obligations ratio, an estimate of debt payments and recurring obligations as a percentage of disposable income,
edged down to 19 percent from its recent high of
19.4 percent (figure 32, top panel). In such adverse
economic circumstances, delinquencies and foreclosures on residential mortgages climbed further, and
I
1994
I
I
1996
1998
2000
2002
2004
I I
I
I
2006
200S
NOT": The data are quarterly. 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 mongage debt , consumer debt, auto leases, rent,
homeowner's insurance . and propeny taxes. The series shown for bankruptcy
filings begins in 1995 :QI and is seasonally adjusted.
SOURCE: For
financ ial obligations ratio. Federal Reserve Board
(www.federalreserve.gov/releases/housedebl); for bankruptcy filings , slaff
ca lculations based on data from Lundquist Consulting.
the credit quality of credit card and other consumer
loans declined appreciably. Although household bankruptcy filings remained low relative to the levels seen
before the 2005 changes in bankruptcy laws, the
bankruptcy rate moved up in 2008 (figure 32, bottom
panel).
Residential Real state Loan
The credit quality of residential mortgages continued
to worsen sharply in 2008, with the subprime mortgage deterioration that began in 2007 spreading to
stronger credits. Default rates on alt-A mortgages rose
as house prices dropped further. The weakening in the
economy affected the credit quality of the full range
of mortgage products, and, throughout 2008, credit
rating agencies downgraded residential mortgagebacked securities backed by prime, alt-A, and
subprime mortgages. In addition, mortgage securitiza-
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
:n. Rate of serious del inquency on residential mortgages,
by lype of mortgage and type of interest rate. 2000-09
A81
34. D linquency and charge-off rate. [or residential real
e tale loans at commercial banks, hy lype of I n,
1991- 2008
Percent
-----------------------------------
Pcrc~ m
40
Delinquencies
8
35
-
30
Subprime. va riable rate
7
25
20
5
15
Subprime. lixed mte
6
4
10
Prime. variable rate
-
5
+
======-
I
Prime. fixed mte
I
I
I
I
I
I
I
I
I
I
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
_/'~ - ~~
,-~o~
2
o
-
I
I I I 1 1
NOTE: The data are monthly and extend through January 2009. Seriously
delinquent loans are 90 days o r more past due or in forec losure. The prime
mongage data are representative of all residential mongages. not just those
held by commercial banks. The subprime mongage data cover only
securitized loans.
SOURCE: For prime mongages. McDash Analylics; for subprime
mongages. LoanPerformance. a di vision of First American CoreLogic.
tions other than those backed by the housing-related
GSEs and Ginnie Mae essentially ceased last year.
Regarding the supply of mortgage credit, large fractions of commercial banks reported in the SLOOS
that they had tightened credit standards on a broad
range of residential mortgage products, a move that
further impaired the ability of borrowers to refinance
existing mortgages. Reflecti ng 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 subprime
borrowers (figure 33). All told, the delinquency rate
on variable-rate subprime mortgages jumped to more
than 35 percent by the end of 2008 .
At commercial banks, delinquencies on residential
real estate loans reached 6.3 percent at the end of
2008, their highest rate on record (figure 34). Net
charge-offs on these loans increased to 1.6 percent at
an annual rate in the fourth quarter of 2008, also a
record high. The deterioration in the credit quality o f
residential mortgages on banks ' books was widespread last year; delinquency and charge-off rates
rose across all types of mortgage products and all
bank sizes.
Delinquency rates on closed-end one- to fourfamily mortgage loans held by banks rose to 7.9 percent on first-lien mortgages and 5.1 percent on juniorlien mortgages in the fourth quarter. Delinquency
rates on revolving home equity lines of credit also
rose substantially, to 3.2 percent. In general, junior
liens and home equity lines of credit are offered to
higher-quality borrowers , as suggested by the lower
3
I
I
I
Net charge-offs
2.0
1.6
.8
.4
+
o
I I
I 1 I I I I I I 1 I I I I I
1996 1998 2000 2002 2004 2006 2008
I
NOTE: The data are quanerly and seasonally adjusted. For definitio ns of
delinquencies and net charge-offs. see the nOle for fi gure 29 .
delinquency rates on those products than on first-hen
mortgages . However, in the event of a default, a bank
that holds a loan secured by a junior lien on a one- to
four-family residential property is repaid only after
the first-lien mortgage has been fully repaid . In the
case of foreclosure, the holder of a junior-lien mortgage may not be repaid at all, especially if the
property has lost a significant portion of its value.
Indeed, while the charge-off rates on all types of
residential mortgages increased considerably last
year, the charge-off rate on closed-end junior liens
(3.9 percent) was about four times higher than that on
closed-end first liens (1.1 percent). However, although
the charge-off rate was much higher for closed-end
junior liens, the volume of such loans was just
15 percent of the total aggregate volume of first liens
at the end of 2008. Charge-off rates on revolving
home equity lines of credit more than doubled last
year, increasing from 0.7 percent at year-end 2007 to
1.9 percent at year-end 2008.
The credit quality of residential mortgages worsened the most at the 100 largest banks in 2008. For
closed-end mortgages, the delinquency rate increased
Federal Reserve Bulletin 0 June 2009
A82
about 4.8 percentage points at the largest banks, to
8.5 percent, but it also moved up more than 1 percentage point at smaller banks, to about 3.7 percent. Last
year's rise in charge-off rates was also somewhat
greater at larger banks than at smaller banks.
C on, u mer Loan
Se lIfitiz d Loans
The weakening in the credit quality of consumer
loans no doubt reflected the slower pace of economic
growth, the rise in the unemployment rate, and slower
growth in households' income. Moreover, financial
pressures on households were intensified by the
inability of some borrowers to lower their interest
payments and to obtain cash by refinancing mortgages. The delinquency rate on credit card loans held
by banks rose moderately over most of 2008, but it
jumped noticeably in the fourth quarter to 5 .6 percent
(figure 35). The charge-off rate on such loans increased more steadily over the year, rising from
4.1 percent at the end of 2007 to 6.3 percent at the end
15.
Delinquency <md charge-off rates for loan '
hOll 'cholds, by type of loan. t 990-2008
10
Percclll
Delinquencies
-
6
4
Other consumer
-
3
2
-
I I I I I I II
_
of 2008. 26 The delinquency rate on other (non-creditcard) consumer loans also rose somewhat, to 3.3 percent at year-end . Charge-off rates on those loans
climbed from about 1.7 percent in 2007 to 2.7 percent
in 2008, a considerable increase that brought the rate
to its highest \eve I in at least the past 25 years.
I I
I
I
1
Net charge-offs
8
-
7
6
5
The credit quality of loans that were sold and securitized weakened in 2008, though not, in most cases, to
the same extent as loans that were held on banks '
balance sheetsY The majority of loans securitized by
banks in this manner are residential mortgages on
one- to four-family homes (63 percent). At year-end
2008, the volume of securitized one- to four-family
residential real estate loans stood at about one-third of
the volume of such loans held on banks' balance
sheets. The delinquency rate on securitized one- to
four-family residential mortgages was about 8 percent in the fourth quarter of 2008, up significantly
from 2007. Charge-off rates on these mortgages
increased modestly but stayed well below the rates on
residential loans on banks' books.
The delinquency rate on securitized credit card
loans-which make up roughly one-fourth of the
loans securitized by banks and are about equal in
dollar value to the credit card loans that banks hold on
their balance sheets-moved up, from about 4 percent
in 2007 to 5.3 percent in 2008. Charge-off rates on
those loans increased significantly last year, from
4.8 percent at year-end 2007 to 7.2 percent at yearend 2008.
Delinquency rates on the small amount of banksecuritized auto loans, which make up less than
1 percent of total securitized loans, remained relatively stable in 2008 after a modest run-up in 2007,
whereas charge-off rates doubled. Delinquency and
charge-off rates on the small amount of securitized
C&I loans (also less than I percent of total securitized
loans) rose last year.
Outstanding securitizations of other types of loans
and leases, a category that includes CRE loans and
accounts for about 11 percent of all loans securitized
4
3
Other consumer
+
o
I I I I I I I I I I I I I I I I I I I I I I
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
The data are quarterly and seasonally adjusted; data for delinquencies begin in 199 I. For definitions of delinquencies and net
charge-offs, see the note for figure 29.
NOTE :
26. For a discussion of the change in bankruptcy law that was
implemented in 2005 and it s effect on credit card loans, see the 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.
27 . Loans that banks so ld and securitized with servicing rights
reta ined or with recourse or other se ller-provided enhancements are
hereafter referred to, for simplicity, as "securitized" loans. 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).
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
by banks, amounted to about $200 billion . These
securitizations equal roughly 45 percent of the total
volume of these types of loans held on banks' books.
The delinquency rate on such securitizations rose
modestly over the year to about 0.8 percent, though
the charge-off rate was about zero.
37.
Reserve. for I an and Jease 10
se~.
A83
1990-2008
Percenl
----------------------------As a percentage of total loans and leases
3.0
2.5
2.0
1.5
Lo s Provisi ning
1.0
The continued erosion of credit quality spurred banks
to step up appreciably the annual rate of loan loss
provisioning in 2008 to almost 1.5 percent of total
assets. As a proportion of total assets, loss provisioning in 2008 surpassed the highs reached during the
late 1980s and early 1990s (figure 36). Loss provisioning consumed more than 30 percent of total
revenue in 2008.
Provisioning increased considerably at banks of all
sizes. At the top 100 banks, provisioning reached an
annual rate of 1.9 percent of average assets in the
fourth quarter, compared with 0.9 percent at the end
of 2007. Provisioning at banks outside the top 100
rose to 1.3 percent of assets at the end of 2008, more
than double the rate at the end of 2007 .
For the second consecutive year, the rate of loss
provisioning significantly outpaced that of chargeoffs, implying an increase in reserves as a percentage
of total loans and leases (figure 37, top panel).
However, net charge-offs rose appreciably as well,
leading to declines in some measures of reserve
adequacy. At the average charge-off rate for all of
2008 and without additional loss provisions. current
reserves are sufficient to cover only about 1.6 years of
charge-offs, a record low level (figure 37, middle
panel). The ratio of charge-offs to delinquent loans.
an estimate of recent loss rates on nonperforming
36. Provisions for loan and lea e 10 se as a
proportion of total assets, 1985-2008
PCft:Cnl
----------------------------------
1.5
1.0
.5
+
o
I
I I I I I I I I I I I I I I II I I
1988
1992
1996
2000
NOTE: The data are annual.
I
I I I I I I
2004
2008
I
I
I
I
I
I
I
,
I
1 I
I
I
As a percentage of net charge-offs
500
400
300
200
100
I
I
I
I
I
I
I
1 I
1 1 I
I
I
I
I
I
As a percentage of delinquent loans
100
80
60
40
I
I I I I I I I I I I I I I I 1 I I I I 1 I
1990 1992 1994 19% 1998 2000 2002 2004 2006 2008
NOTE: The data are as of year·end. For definitions of delinquencies and net
charge-offs. see the note for figure 29.
assets, reached nearly 11 percent in the fourth quarter,
the highest level in the past two decades. Yet reserves
are sufficient to cover only about 47 percent of
delinquent loans (figure 37, bottom panel).
INTERNATlONAL OPERATIONS OF U.S.
COMMERCIAL BANK
The share of U.S. bank assets booked in foreign
offices declined from 14 percent at year-end 2007 to
about 12 percent at year-end 2008 . Assets booked in
foreign offices remained highly concentrated among
the largest banks. On the whole, commercial banks
lost money on their international operations in 2008.
Net income abroad was significantly adversely affected by restructuring acti vity at one large bank,
which consolidated some of its foreign operations
into its domestic operations. Other reported losses at
banks' foreign offices were attributable to securities
write-downs and higher loan loss provisions.
Loan loss provisions in banks' foreign offices
increased about 67 percent from the level of a year
earlier, a substantially smaller increase than was
posted at domestic offices. While interest income
declined 20 percent in 2008, interest expense dropped
A84
Federal Reserve Bulletin 0 June 2009
:1. Exposu re of
.S . banks to se lected economics at year-end relative
10
lier I capita l. 1997-200
Percent
Asia
Year
All
1997 . .. . . . ... .. . .
1998 ... . . ... ... -..
,.
1999. .. . ,
2000 .
2001 . .... ..... ... ..
2002 .. . . .. . . . . . .. .. .
2003 .
... . . . . .
2004 .. .. ..... .. .....
2005 ....... .. . .
2006 .. .. .... .
2007 ........ .... .. ..
2008 .. . . . . . , . . . . . .
.. ..
.. ..
.
.
I
China
I
India
I
Korea
I Latin America and the Caribbean I Eastern I
Europe
I
All
n.a.
n.a.
n.a.
n.a.
n.a.
28.2
26.1
24.0
22.4
21.9
22 .8
32. 2
30.7
34 .7
44.6
30.8
1.0
.8
.8
.9
.9
1.3
1.4
2.4
4.1
4.5
3.4
2.2
2.4
2.6
2.5
2.7
3.9
4.2
4 .9
6.1
9.8
6.1
7.1
6.6
6.4
5.8
5.8
5.5
15.0
12.9
13.6
14.4
10.7
42.9
39.0
37 .9
54. 1
38.9
32.8
31.8
31.8
.108
35.6
25.5
87 . 1
69. 1
67.9
68.0
67 .2
69.5
79.9
125.8
134.8
190.5
249.8
217.4
3.5
2.3
2.0
2.2
2.7
2.7
4.4
5.3
10.4
22.7
25.5
24.3
5. 1
5.4
6.2
7.5
7.7
8.7
13.6
16.3
21.6
33 .6
54.9
43. 1
25.3
17.3
17.2
18. 1
17.5
18,4
19.2
58.7
567
74 .8
80.8
75.3
101.7
105.0
101.6
107.3
162.4
123.5
115.2
124.4
1.19.7
168.9
199.3
179.7
I
Mexico
n.a.
9.9
9.5
9. 1
26.0
20.8
'18.0
16.6
17.4
16.8
17.2
12.9
I
Brazil
G-IO and
.
Switzerland'
I
Idevelo d
Non-G-IO
countries,
I
Towl
n.a.
n.a.
11 .3
10.5
11.2
13.0
8.4
6.8
6.5
6.9
5.7
8.2
5.0
3. 5
2.9
4.4
4.3
5.5
5.4
6. 1
5.9
6.5
9 .0
5.4
182.5
164.2
174.6
164.8
172.1
182.0
198.2
165.2
174.7
219.3
166.3
37 . 1
32.5
32 .8
28.4
29.8
35.0
37 .2
31.6
38.5
48.3
35.3
n.a.
294.3
264.6
273.7
274.0
259.8
278.1
305.4
265.3
285 . 1
356.6
263.3
33.4
27.6
27.3
31.6
39.0
26.6
23.7
25.5
30.4
31.5
46.2
35.6
11.9
8.5
7.4
12.3
12.9
17.5
19. 1
23. 8
25.7
35 .5
50.2
37.9
354.9
446.3
427 .8
494.6
495.1
546.5
638.5
775.7
724 .8
959.1
1.229.0
1.172.9
88.7
90.8
84.7
93 .0
85.4
94.7
122.7
145.5
1386
211 .2
270.5
248.6
719.6
689.5
775.3
823.0
824.7
975.4
1.195.4
1, 163.5
1,565.2
1.998_
8
1.856.5
n.a.
n.a.
MEMO
Total exposure
(billions of dollars )
1997 .. . . ..... . ....
1998 . ... . . . . .. .. ...
1999 . . . . . . ... , .... ..
2000 . ... . .. . . .. .. .
2001 .. ... . . . . ..- .. ..
.,
2002 .. .. . .. .. .
2003 ..... .. ....... .
2004 ..... ..... ..
2005 . .. .... .....
2006 . .. ....... ..... .
2007 .. ... . . .. . . .
2008 ............. ...
..
18.8
24. 1
24.8
25 .7
78.0
66.2
63.0
65 .2
76. 1
92.5
96.1
90.7
644,3
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
capiwl , see text note 16.
The 2008 data cover 68 banks with a towl of $705 . 1 billion in tier I capilal.
I. The G- IO (Group of Ten) countries are Belgium, Canada, France. German y, Iwly, Japan . Luxembourg, the Netherlands, Sweden, and the United
Kingdom .
2. The non-G-I 0 deve loped countries include Australia, Austria. De nmark ,
Finland, Greece . Iceland , Israel, New Zealand , Norway. Ponugal. South Africa,
Spai n, and Turkey.
n.a. Not available .
SOURCE : Federal Financial Institutions Examination Counc il , Stati stical Release E.16, "Country Exposure Lending Survey" (www.fliec. govIE16.htm).
more than twice that amount. The resulting rise in net
interest income boosted net income at foreign offices.
Trading revenue, which accounts for about one-third
of noninterest income, rose about 85 percent in 2008,
but other noninterest income and income from investment banking activities , which account for most of
the rest of noninterest income, were both down
moderately at foreign offices.
Banks' total exposures to foreign economies
through lending and derivatives activities dropped
about 7 percent in 2008 after two years of sizable
growth.28 While banks reduced their exposures to
both advanced foreign economies and emerging market economies, the most pronounced declines in U.S.
banks' cross-border lending and derivatives
activity-in dollar terms-occurred in the advanced
foreign economies. 29 In relative terms, however, U.S.
banks' exposures to some emerging market economies declined the most. The regions of Eastern
Europe, Asia, and Latin America showed declines in
dollar exposures of 25 percent, 13 percent, and 10 percent, respectively (table 3).
Overall, the decline in U.S. banks' exposures to
foreign economies was likely attributable to the sharp
decline in foreign economic activity and the attendant
reduction in credit demand. In addition , exposures
were likely reduced as banks pulled back from lending to foreign accounts in an effort to boost capital
ratios and limit their credit and market risk. Indeed,
total exposures from lending to foreign residents
(excluding derivatives activity) fell about 17 percent
in 2008. 30
28. These exposures declined more significantly relative to tier I
capital because the reponing institution s' tier I capital increased from
$560 billion in 2007 to $705 billion in 2008.
29. The advanced foreign economies are those of Au stralia, Austria, Belgium, Canada, Denmark , Finland, France, Germany, Greece ,
Iceland, Ireland, Israel , Italy, Japan, Luxembourg, the Netherlands ,
New Zealand, Norway, Ponugal, South Africa, Spain, Sweden, Swilzerland , Turkey, the United Kingdom, and " other non-G-IO developed
countries ...
DEVELOPMENTS IN EARLY 2009
U.S. economic activity continued to contract in the
first quarter of 2009.31 The deterioration in labor
30. Exposures to foreign residents arising from derivatives activities with foreign counterparties actually doubled in 2008, most likely
because of greater volatility in financial market s, especially late in !.he
year.
31 . This section reflects information available through mid-April.
Profits and Balance Sheet Developments at
u.s.
Commercial Banks in 2008
A8S
market conditions accelerated in the first few months
of the year, with steep job losses across virtually all
sectors . In the first quarter, consumer spending showed
some tentative signs of stabilization around the low
level at which it ended 2008. Available data suggest
that the outstanding amount of consumer credit was
flat over the first two months of the year. Although
housing market activity rebounded a little in February
and March, for the quarter as a whole, single-family
starts declined to a post-World War II low of about
350,000 units at an annual rate. Delinquencies on
residential real estate loans rose further in the first
part of the year, but foreclosures on residential properties were about flat, in part because of the temporary moratoriums by the housing-related GSEs and
major banks on such foreclosures. Nonresidential
construction also weakened further in the first quarter.
The April 2009 SLOOS indicated that banks continued to tighten standards and terms on all major types
of loans to businesses and households during the first
quarter and that demand continued to weaken for
nearly all types of loans.
Against this backdrop, financial markets and institutions generally remained under pressure through the
first part of 2009. Early in the year, investors continued to be very reluctant to bear risk, and broad equity
price indexes declined steeply in January and February while corporate bond spreads remained very high.
However, sentiment in financial markets appears to
have improved noticeably since then, partly reflecting
positive investor guidance on first-quarter earnings at
some major banks as well as investors' positive
reception of the actions announced by the FOMC
after its March meeting. Equity prices rose, on balance, in March while high-yield corporate bond
spreads narrowed. Nonetheless, for the first quarter as
a whole, bank stock prices declined considerably, on
net, with the S&P bank stock index down about
40 percent. Premiums on credit default swaps for
commercial banking firms also rose in the first quarter
of 2009, on net, and the largest institutions experienced the greatest widening.
Reflecting the ongoing financial strains and the
deterioration in the economic outlook, the Federal
Reserve and the Treasury took a number of further
actions during the first quarter to provide additional
support to financial markets and institutions and
contribute to a resumption of economic growth. The
Federal Reserve began purchasing agency MBS during January.J2 In addition, at the conclusion of its
March FOMC meeting, the Committee announced
that the Federal Reserve would increase its long-term
asset purchases, indicating that it would buy an
additional $750 billion of MBS (up to a total of
$1.25 trillion) and an additional $100 billion of
agency debt (up to a total of $200 billion) this year to
provide greater support to mortgage and housing
markets. The Committee also announced that it would
purchase up to $300 billion in longer-term Treasury
securities over the period ending September 2009 to
help improve conditions in private credit markets.
Long-term Treasury yields, which had risen earlier in
the year as market participants anticipated a greater
supply of Treasury securities resulting from federal
budget deficits, declined on the FOMC's announcement, and fixed-rate mortgage rates for high-quality
borrowers dropped below 5 percent. Mortgage rates
declined to their lowest levels since at least the 1970s,
when these data were first collected.
In January 2009, the U.S. government, as part of its
commitment to support financial market stability,
entered into an agreement with Bank of America. In
exchange for preferred stock, the government provided Bank of America with protection against the
possibility of unusually large losses on certain pools
of on-balance-sheet securities backed by residential
and commercial real estate loans and by other assets.
Moreover, the government invested an additional
$20 billion from the TARP in the bank.
In February, the Treasury, FDIC, Office of the
Comptroller of the Currency, Office of Thrift Supervision, and Federal Reserve initiated a Capital Assistance Program to ensure appropriate capitalization of
the banks. Under the program, the bank supervisory
agencies assessed the capital needs of 19 major U.S.
banking institutions with year-end 2008 assets exceeding $100 billion under a baseline and a more challenging economic scenario. Should that evaluation indicate that an additional capital buffer is warranted, an
institution will have an opportunity to turn first to
private markets to raise capital. If the firm is unable to
raise sufficient private capital, the temporary capital
buffer will be made available from the government.
The Public-Pri vate Investment Program, introduced
by the Treasury in March, with the participation of the
FDIC and the Federal Reserve, will establish publicprivate investment funds to purchase legacy assets.
Capital for the funds will be provided jointly by
private investors and the Treasury. In addition, the
government will provide the funds with leverage
(through Federal Reserve lending or FDIC guarantees) that currently cannot be raised from market
32. The program was first announced in November 2008; more
information on the MBS purchases is in Federal Reserve Bank of
New York (2009), "Agency Mortgage-Backed Securities Purchase
Program," www.newyorkfed.org/markets/mbs.
A86
Federal Reserve Bulletin 0 June 2009
sources, allowing the funds to increase their purchases of legacy assets.
In March, the Federal Reserve initiated operations
of the Term Asset-Backed Securities Loan Facility
(TALF), originally announced in November 2008.
The TALF is designed to catalyze the securitization
markets by providing financing to investors to support their purchases of certain AAA-rated assetbacked securities. The market for ABS had been
virtually shuttered since the worsening of the financial crisis in October 2008. The program initially
accepted ABS backed by student loans, auto loans,
credit card loans, and loans guaranteed by the Small
Business Administration, but various types of ABS
backed by loans to businesses were added in April ,
and several other asset types were being evaluated for
acceptance, including commercial mortgage-backed
securi ties and non-agency residential mortgagebacked securities. Under the TALF, the Federal
Reserve lends an amount equal to the market value of
the ABS less a "haircut," and the loan is secured at all
times by the ABS. The Treasury-under the TARPprovides further credit protection to the Federal
Reserve in connection with the TALF.
According to the Federal Reserve's weekly data,
domestic commercial bank credit contracted in the
first quarter of 2009. C&I loans ran off as demand
waned and as banks reported widespread paydowns
of outstanding loans. A temporary buildup of residential real estate loans on banks' books was unwound in
March, as banks reportedly sold large amounts of
such loans to the housing-related GSEs. Revolving
home equity loans continued to grow despite further
tightening of lending standards and terms reported by
banks. Consumer loans increased slightly as a result
of significant purchases of loans from nonbanks,
likely owing, in part, to banks' better access to
funding while the market for credit card and auto
securitizations was impaired.
According to the April SLOOS, banks continued to
tighten standards and terms over the first quarter of
2009 on all major categories of loans to both businesses and households. Although the net percentage
of banks that reported having done so declined in
some cases relative to the January survey, these
percentages remained in the high end of their historical ranges for all loan categories . Respondents also
indicated that demand for all types of loans continued
to weaken, with the notable exception of prime
residential mortgages. This result coincided with a
slight upturn in applications for mortgages to purchase homes and a substantial rise in applications for
refinancing. Assuming the economy progresses according to consensus forecasts, a significant majority
of banks reported that delinquencies and charge-offs
on existing loans to businesses and households were
likely to deteriorate further over the remainder of this
year.
[n early April, the Financial Accounting Standards
Board issued guidance related to fair value measurements and other-than-temporary impairments (OTTl).
The new fair value guidance reduces the emphasis to
be placed on the "last transaction price" in valuing
assets when markets are not acti ve and transactions
are likely to be forced or distressed . The new guidance may result in higher fair value estimates if
current fair values inappropriately rely on distressed
transaction prices. The new OTIl guidance will
require impairment write-downs through earnings
only for the credit-related portion of a debt security's
fair value impairment when two criteria are met:
(I) The institution does not have the intent to sell the
debt security, and (2) it is unlikely that the institution
will be required to sell the debt security before a
forecasted recovery of its cost basis. This guidance
may result in reductions in impairments, thus improving institutions' earnings. 33
By the middle of April, about one-half of banking
organizations had reported their earnings for the first
quarter of 2009. While earnings per share (EPS)
results were better than expected at some (especially
large) banking organizations, about one-third of the
firms reported losses, and about two-thirds fell short
of analysts' expectations. Banks cited continued
declines in house prices as well as the weakening
economic environment and its impact on commercial
loan portfolios as the primary reasons for the losses.
Their earnings results, coupled with analysts' estimates available through mid-April , indicated that
banking firms will earn in the first quarter of 2009, on
average, about one-fourth of their EPS in the same
quarter last year and just slightly more per share than
in the fourth quarter of 2008.
0
33. Mo(e information on the guidance, which consists of Statement of Financial Accounting Standards (FAS) 157-e, FAS liS-a,
FAS 124-a, and guidance from the Emerging Issues Task Force,
EITF 99-20-b, is in Financial Accounting Standards Board (2009),
" Summary of Board Decisions," April 2, www.fasb.org/actionJ
sbd040209.s html.
Appendix tables start on p. A87
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
A. I. Portfoli o composiLion, inlere l rale , and income anti e:v.pen e,
A87
.S. hanks , 19 ~9-2008
A.. AII banks
Item
1999
I
2000
I
2001
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Balance sheet items as a perce ntage of average net consolidated assets
Interest-earning assets I . . . . . . . . . ... .. .. .......
Loans and lea.~es (net) . ..... ...... ...... ...
Commercial and industrial .. ..... . ... .
U.S. addressees .. . . . .. ..... .... - . . ...
Foreign addressees . . ...... .. . . . . . . . .
... .. .... .. .. . .
Consnmer
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 nonrcsioontial .
. . . . . ..
In foreign offices . . .. ... ........ . . . . . ..
To depository institutions and
acceptances of other banks ...
Foreign governmeors . . . . . . . . . . . . . .. .. . . .
.... ....
Agricultural production ..
. ....
Other loans ..
Lease-financing receivables .. .. .. .. .. . .. .
LESS: Unearned income on loans .. . . .. . .
LESS: Loss reserves 2 . ..... .... .. . . . ... . ..
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 mongage-backed securities
Other .
.....
. .......
Equity ....... .......
. . .. . .
Trading account . .............. . . . ... ... -.
Gross federal funds sold and reverse RPs ..
Balances at depositories I .
... - .....
Nonintercst-earning assets I ... .. .. . ...
Revaluation gains held in trading accounts . ..
Other
......
.. .. . ..... .. ....... .
...
.
.
•
.
•
•
•
•
•
•
•
j
•
.
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 accoullls
..
Other .. ..........
Capital account .. . ... . . • . . . . . .. .. .... . .
.... ..
MEMO
Commercial real estate loans' ....... . . .. . ... . .
Other real estate owned'
.......... .. . ... . . .
Mongage-backed securities ....
... .. . .... .. . .
Federal Home Loan Bank advances . . .. .. .... . ..
Balances at the Federal Reserve I .... .. . ... .. . .
Interest-earning .
...
.... .......
Nonintercst-earning ...... ...... . . .. ... ....
Interest-earning balances at depositories
other than the Federal Reserve ... ... . . ...
Average net consolidated assets
(billions of dollars) ....
. .. .... . . .
..
87 .03
59.34
17.07
14A3
2.64
9.71
3.51
6.20
25 .44
24.87
2. 18
.56
14. 10
1.76
12.34
.88
7.IS
.57
1.96
.16
83
2.75
2.51
-.06
-1.04
20AO
18.33
17 . 7.~
2. 14
87.13
60.48
17.16
14.67
A6
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
4.06
5.06
32.40
31.84
3.90
.S4
18.26
4.95
13.31
1.08
8.06
.56
86.86
58.26
IIA2
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
33.37
32.76
5.05
.53
18.31
4.49
13.82
1.04
7.84
.60
85.30
56.73
12.08
10.12
1.96
8.33
3.68
4.65
31.95
31.35
4.72
.52
17.29
4.60
12.70
1.10
7.72
.61
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
- 1.04
21.90
18.97
18.72
.90
2.11
.08
.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
.oJ
.52
2.48
1.23
-.02
- .70
20.77
15.41
15.23
.32
1.19
.02
.49
2.64
1.08
- .02
-1.03
19.29
14. 13
13.95
.24
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
11.14
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
2.46
13.92
2.70
11.22
12.37
7.13
2.01
3.22
IAI
IAI
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
2.14
13.18
1.82
11.36
10.65
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
8.11
5.47
1.24
lAO
1.20
2.13
2.28
. 18
5.16
6.03
3.25
14.70
2.83
11.87
91.25
47.07
10.36
8.00
2.36
24.53
12.18
90.96
49. 18
9.73
7.26
2,47
90.57
48.56
9.10
6.58
2.52
31.19
9.33
8.27
.~4 . 61
2.21
4.54
90.85
48 .98
10.06
7.67
2.39
28.13
10.80
35.05
8. 30
9.42
lAO
7.77
8.16
2.09
4.73
8.09
9.38
1.33
7.75
8.06
2.30
4.87
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
5AI
2.04
29.49
8.62
38.29
10.07
11.18
lAO
7.53
8. 11
I.SI
4A7
89.78
43.89
6,43
4.66
1.77
28.21
9.26
39.85
9.13
12.81
1.55
7.06
9.31
1.59
4.44
90.07
42.71
6. 16
4.S3
1.63
27.04
9.50
41.08
9.13
13.09
1.51
6.98
10.38
2.27
4.01
86.08
56.88
12. 18
.so
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
1.87
.12
.78
2.58
2.63
- .05
- 1.02
20.02
17.59
16.93
1.66
1.83
.10
.75
2.34
2.58
- .04
-1.04
19.53
16.82
16.48
.85
10.31
4.75
1.92
3.63
1.52
.95
2A9
9.38
3.52
5.87
27 .04
26.49
2.51
.56
14.96
1.96
13.00
.99
7.48
.54
10.85
5.24
2. 15
3.46
1.62
.88
2.24
.61
2.06
4 .61
2.68
12.97
2. 57
10AI
.66
2.43
4.12
2.52
12.87
2.28
10.58
91.52
48.60
12.58
9.78
2.81
91.58
46.52
11 .07
8.61
2,46
2A8
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
.97
7.56
IOA8
1.70
9.06
3.55
5.51
29.91
29.45
2.99
.54
16.96
3.40
I3 .S7
1.05
7.91
.~0. 12
6A3
1.58
2.65
1.34
1.89
2.37
.16
4.43
5.30
1.98
13. 14
1.64
11.51
22047
22A3
13.55
36.59
7.89
10.96
1.36
7.97
8.40
2.52
J81
13.01
38 .83
8.77
11.43
1.37
7.83
9.44
2.29
3.94
8A8
8.42
8.75
9.15
9.04
9.43
10.09
10. 16
10.22
9.93
10.87
.06
8.27
n.a.
.52
n.a.
.52
11.58
.05
7.63
12.09
.05
8.17
2.89
.40
12.47
.06
10.39
3.19
.40
12.78
.06
10.56
3.07
.35
n.a .
.40
040
.35
14.47
.07
9.31
3.66
.20
n.a.
.20
14.10
.13
8.84
4.44
n.a.
13.52
.04
10.33
3.04
.29
n.a.
.29
14.35
.05
9.89
3.07
.24
.42
12.57
.06
9.69
3.17
.38
n.a.
.38
2.68
2.52
2.90
2.52
2.46
2.76
2. 14
1.98
2.30
2.69
5.439
5.907
6 ..134
6.6.'5
7.249
7.879
8.592
9,427
10.W6
II ,S78
n.a .
042
n.3.
37A2
8.89
10.66
1.43
7.95
8A9
n.a.
n.a.
.24
3.44
3.00
.44
A88
Federal Reserve Bulletin 0 June 2009
A.!, Portfol io composition. inIcrcst rates, and income and expen ' C,
,Sobank . 1999-2008-Cominued
A. All banks-Conriflud
hem
1999
I
2000
I
2001
I
2002
I
200~
I
2004
I
2005
I
2006
I
2007
I
2008
Effective interest rale (percent)6
Rates eurnt!d
Interest-earning assets.
Taxable equivalent
...
,
....... ..... ......
......
7.73
7.78
8.50
7.99
6.30
6.48
6.28
.
8.20
8.26
9.00
8.33
6.47
6.65
6.45
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
5.47
3.96
4.10
4.00
5.08
5.12
5.91
5.47
3.86
3.99
3.96
5.70
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
5.72
5.75
6.39
3.91
4.87
4.95
4.93
n.a .
n.a.
n.a .
.. . .. .... . . ....
Net of loss provisions . . .. . . .. ... ... ... . .. ... .. .. ... .
Securities .. .. . . ... . .
Taxable equivalenl .. . . . . . ......... . . . . .
Investment accounl . . . . . .. . .. . . .... . ... ...
Loans and 'Ieases, gross .
5.76
6.45
5.60
6.01
3.86
4 .01
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 .31
5. 10
4.71
5.29
5.02
4.70
5.07
5.13
4.23
5.21
4.58
4 .67
2.53
3.23
3.93
3.61
3.94
3.54
1.96
2. 19
5.04
5.43
3.83
5.91
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
4.58
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 .97
5.46
2.53
2.26
2.47
2.21
1.16
1.26
3.48
3.82
2.39
4 .05
U.S. Treasury securities and U.S .
government agency obligations
.... ... .
(excluding MBS) .
Mongage-backed securities .
. . ...... ..
Olher .. .... . .
. ... .......... .
Trading account ....
. ... . . . . . . . . . . . .
Gross federal funds sold and reverse RPs . .
Imerest-bearing balanc~s al depositories I
6.48
4.78
5.95
n.a.
n.a .
n.a.
6.63
5.56
6.48
Rales paid
Interesl-bearing liabilities . . . . . . ...
.....
Inleresl-bearing deposils
.. +. ... .. . ...
In foreign offices.
.... ........ ....
In domeslic offices .... .... .. . . .. ..
Omer checkable deposilS . ....... . . ..
Savings deposils (including MMDAs) . ...
... . . . . . .. .. .. ..
Large ti me deposits
Other ti me deposits
Gross federal funds purchased and RPs .
Olher imerest-bearing liabilities
.... ......
4.31
3.88
4.91
3.64
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
Income and expense as a percentage of average nel consolidared assels
... ...
Gross interest income ...... . . .
Taxable equivalent .. . .. .... ... ..... .... ....
Loans .. ......... ... ..... .... . . . . . . . . . . . . ...
Securilies
Gross federal funds sold and reverse RPs . . ..
Other
... . . .. . . . . . . . . . . . . . . . . .
6.75
6.80
5. 13
1.15
.23
.24
7. 18
7.22
5.53
1.15
.23
.27
6.38
6.42
4.92
1.00
.20
.27
5.27
5.31
4.06
.89
.09
.22
4.54
4.58
3.55
.74
.07
.18
4.43
4.46
3.42
.74
.07
.20
4.97
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
4.89
4.91
3.68
.70
.15
.36
Gross interest expense ...
...
Deposits
.....
Gross federal funds purChased and RPs .. .. ..
Odler ..... . .. .......... ..
.. . . . .
3.22
2.21
.39
.63
3.76
2.56
2.98
2.09
.45
.31
.58
1.30
.86
. 10
.33
1.25
.81
.11
.75
1.79
1.23
.15
.41
.33
1.89
1.23
.22
.44
2.79
184
.36
.59
2.99
2.05
.36
.58
1.96
1.34
. 17
.45
...... .. .. ........... .... ,
Nel interest income
Taxable equivalenl ... . .. . . . ..... .. ..
3.52
3.57
3.41
3.46
-'.40
3.44
3.48
3.52
3.24
3.28
3.17
3.21
3.07
3. 11
3.05
309
2.95
2.98
2.93
2.95
.39
.50
2.59
.40
.38
.21
.08
.08
.04
n.a.
1.61
.68
.68
2.54
.45
.32
.16
.08
.07
.01
.30
2.40
.42
.32
. 13
.03
.07
1.60
n.a.
1.53
.30
2.35
.39
.31
. 17
.05
.07
.04
n.a.
1.48
2.36
38
.30
.20
.05
.08
.07
n.a.
1.48
.55
2.10
.38
.32
.05
.04
.07
.03
- .09
1.36
1.47
1.57
.45
2.54
.44
.31
. 16
.07
.07
.02
n.a.
1.63
.27
2.66
.40
.38
.19
.07
.09
.03
n.a .
1.70
Noninterest expense .
..... .
....... ..
Salaries. wages, and employee bcnefils .. .....
Occupancy . ...... ... .... ..... ........ .. . ..
Other ... . . . ........ . . .
... .... . ... ...
3.77
1.59
.48
1.71
3.66
1.51
.45
"'10
3.57
1.49
.44
1.64
3.47
1.51
.44
1.51
3.36
1.50
.43
1.43
3.34
1.46
.42
1.46
3. 19
1.44
.41
1.34
3.13
1.44
.39
1.30
3.09
1.39
.37
1.33
.....
1.11
1.07
1m
.93
.82
.94
.84
.76
.99
1.28
•
-.04
.07
. 10
.08
.04
•
- .01
- .01
-.14
2.03
.72
1.81
.63
1.96
.65
•
2.05
.67
.01
1.97
.64
1.93
.62
•
2.00
.65
.03
1.41
•
1.77
.59
- .01
- .02
.04
.02
.05
1.31
.96
.35
1.18
.89
.29
1.17
.87
.31
1.32
1.01
.30
1.39
1.07
.31
1.33
.76
.58
1.31
.75
.56
1.39
.87
.51
.97
.82
.15
.07
.37
- .31
15.43
13.97
13.41
1438
15.34
14. 14
12.99
13.64
9.45
.69
.....
Loss provisions . .... . . . . . . . . .. . . . . .. . ... .. . .. .
7
Noninterest income .. . .. .. ........ ... . .. ...
Service charges on deposils .. .
Fiduciary activities ... .
.. ....
.. .. ...
....
Trading revenue .. .
....
InlereSI rate exposures .. . ... . ..
Foreign exchange mle exposures .. .. ...
Other commodity and equity cxposur~s .
Credit exposures ....... ..... . ...
Other . . . . ... ... ..... .....
...... . .....
.. .
Net noninlere'l expense ..... . . ...
....
Gains on investment account securities.
...
..... . ..
Income before taxes and extraordinary items ..
. .. . . . .... . .. . . . .
Taxes .... ... .
EXlraordlllary lIems . nel of Income taxes . . . . .
Net income . .
Cash dividends declared
Relained income ..
MEMO: Return on equity . ... ........... .. .... ..
I
•
2.54
.42
.35
.20
.09
.07
.03
n.a.
NOTE: Data are as of April 16,2009.
I. Effective October I, 2008, the Federal Reserve began paying interest on
depository institutions' required and excess reserve balances. Beginning with
the 2008:Q4 Call Report, balances due from Federal Reserve Banks are now
reported under " lnteresl-earning assets" rather than "Noninleresr-earning assets ."
2. Includes allocated transfer risk reserve.
3. Measured as the sum of large time deposits in domestic offices, deposits
booked in foreign offices , subordinated noles and debenrures, federal funds
purchased and securities sold under repurchase agreemenrs, Federal Home
Loan Bank advances, and olher borrowed money.
4 . Measured as the sum of construction and land developmenl loans secured
by real esate; real eslllie loans secured by nonfarm nonresidential properties or
n.a.
.03
•
.43
1.80
.37
.28
-.02
.01
.10
.
-.12
1.16
3.07
1.27
.35
1.45
by muliifamily residemial properties; and loans 10 finance commercial real estale. construction, and land development aClivities nOI secured by real eSlate .
5. Other real eSlale owned is a componenl of olher noninteres l-earning
asselS.
6. When possible , based on th e average of quarterly balance sheel dala reported on schedule RC-K of Ihe quarlerly Call Report .
7. Includes provisions for allocated lIansfer risk .
• In absoJule value, less Ihan 0.005 percenl.
n.a. NOI available .
MMDA Money markel deposil accounl.
RP Repurchase agreemenl.
MBS Mortgage-backed securities.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
A.I . Portfolio composition. interesl rale . and income and ex pen e,
A89
.S. banks. 1999- 2008
B. Ten larges! banks by asseLS
1999
hem
I
2000
I
2001
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Balance sheet items as a percemage 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 . . . . . . . . . . . . . . . .
. . . . . ..
Multifrunily residential . ....... ... ....
Nonfarm nonresidemial . ' .. ..... , .... .
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' .. ........... ... .. . ...
Securities ...
.,., ....
Investment account . ... .• . . . . . . . , ...
.
...
.,
Debt
.. .........
......
U.S. Treasury
U.S. government ag~ncy and
corporation obligaLions ... ..
Government-backed mongage pools.
Collateralized mongage Obligations
Other.
......
State and local government
Private mongage-backed securities ..
. . .......
. .....
Other .....
Equity ... ..
........
Tradi ng account ..... . . . ......... ... .....
Gross federal funds sold and reverse RPs .... .
......
Balances at depositories' .'
Noninterest-earning assets I .. . . . ..
Revaluation gains held in trading accounLS .
Other .
' ... . ... ... . . ... , .
.
....
.....
...
....
.. .
..... .. . ... ..
Liabilities
Core deposits ...... . ... . .. . . ... ... , .. ...
Transaction depoSiLS .
..... .. .. ....
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
•
•
•
•
••
••
0- •
..
Capital account .
.
. . . .. . . . . . . .. .... .. ... .. , ..
MEMO
.. .
Commercial real estate loans 4
.. ...
' .....
. ..
Other real estate owned' .. . . . ..... . . .. . . .
.. .. . ..... . . ..
Mongage-backed securities.
F~deral Home Loan Bank advances .... ... ...
Balances at the Federal Reserve' ...... .. .. ... ..
Interest-earning . . .
.. . . . ..
Noninterest-earning .
... .. - ..... . ... ......
Int~rest-earning balances at depositories
other than the Federal Reserve . ...
Average net consolidated assets
..
(billions of dollars) ..
...
••
••
•
0- • •
1,34
81.74
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
53.61
16.16
11.69
4.47
7.82
2.90
4.92
20.78
19.70
1.42
.12
13.51
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
85.03
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
83.09
50.66
11.85
8.45
.140
8.43
3.54
4.89
25.26
24.29
1.86
.09
18.40
5.59
12.80
.69
3.25
.97
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
.86
3.15
. 12
.20
2.81
1.78
- 04
-.65
23..07
15.58
15.44
.56
2.97
.07
.20
2.88
1.60
-.02
- .56
13.05
15. 12
14.97
.43
1.71
.05
.17
3.08
1.22
-.02
-.60
21.97
12.81
12.66
.24
1.67
.02
. 15
3.21
1.06
-.02
-.98
21.02
12.44
12.32
. 16
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
1.10
3.40
.20
5.91
5.79
2. 18
18.61
5.79
12.83
9.92
8.64
.70
.58
.57
.96
3.52
. 16
6.96
6.37
2.93
16.46
4.45
12.01
9.69
8.65
54
.50
.58
1.18
3.43
.14
7.79
6.96
2.28
16.04
3.50
12.54
9.48
8.64
.53
.32
.64
1.09
3.33
. 15
7.94
7.60
1.99
15.32
3.07
12.25
8.02
7.53
.33
. 16
.65
1.45
2.30
.1,6
9. 16
7.47
2.38
14.97
3.03
11.93
6.90
6.48
.33
.09
.55
2.06
2.66
.12
8.57
8.13
3.28
16.91
4.77
12.14
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
-'.83
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
2.79
6. 12
91.34
34.49
4.73
3.91
.81
24.59
5.18
47 .69
6.72
20. 16
2.09
8. 18
10.54
3.77
5.39
7.72
7.64
7.86
8.48
8.06
8.36
9. 19
8.90
9.18
8.66
5.69
.06
6.40
5.87
.04
6.32
n.a.
.20
n.a.
.20
6.68
.04
6.68
.82
.27
6.92
.03
8.82
.82
.23
5.99
.03
10.30
.79
.25
n.a.
6.33
.02
10.36
.63
.21
n.a .
.21
6.73
n.a.
6.31
.03
9.60
.84
.23
n.a.
.23
6.64
.05
9.31
2.33
.15
Ita.
.15
6.37
.09
8.87
2.79
3.92
3.61
.32
81.49
53 .37
19.20
13.14
6.06
5.94
1.36
4.58
16.96
15.55
.90
.10
10.77
1.54
9.22
.43
3.35
1.41
82.23
55.22
19.87
13.95
5.92
5.43
1J4
4.09
19.82
18.48
.98
.11
13.37
1.61
11.76
.60
n.n .
.26
n.a.
.26
3A2
.27
.23
Il.a.
.25
.m
10.25
.75
.17
n.a.
.17
3. 14
3.01
3.69
2.28
2.18
2.93
2.28
1.99
2.38
2.69
1.935
2,234
2.527
2.785
3,148
3.654
4,232
4.759
5.469
6.241
A90
Federal Reserve Bulletin D June 2009
Al. Portfo li o compo ilion. interest rate. and in orne anLi expense, U.S. banks, 1999- 200
ollfillued
B. Ten largesl banks by assels-Continued
Item
1999
I
2000
I
2001
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Effective imerest rale (percent)6
Rml!J earned
lnterest-earning assets. , ..... . ... .. .. ..... ..
Taxable equivalent ........ . . , .... .. . . ...
LoWIS 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 I
.. .. . ....
•
•
••
0
•
•
•
.
Rales paid
Interest-bearing liabilities. " .... ... ...... .. ... .
Interest-bearing deposits ... ...... .... ... ....
In foreign offices .
. . . . . . . . . . . . . .. . In domestic offices
Other checkable deposits ..... . .. .. .. .
Savings deposits (including MMDAs) ..
.....
Large time deposits
Other time deposits
...
Gross federal funds purchased and RPs .. . ....
Other interest-bearing liabilities . " ..... .. . .
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
6AO
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
5.44
5.45
6. 14
3.23
4.91
4.94
5.14
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
3.02
5.34
4.77
4.56
2.59
3.46
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
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
2.47
2.08
2.52
1.85
1.13
1.10
3.35
3.46
2.54
4.32
n.a.
n.a.
n.a.
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
4.52
3.82
4.99
3.04
1.44
2. /1
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
.97
.71
2.14
2.61
1.59
3.83
Income and expense as a percentage of average net consolidated assets
. _, - . ..... .. .
Gross interest income . . .
Taxable equi valent ... , .. ... . .. ....
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 provisions 1 .. .. . .... . . ... .. . ... ....
. .. . ... ...
Noninterest income
.. . . . .
Service charges on deposits
Fiduciary activities ..... . . . .. , .... ... ....... .
Trading revenue .... , . . ....... . .. . .. . . . ... .. ,
.... .
[nterest rate exposures . . . .. ......
Foreign exchange rate exposures .. .
Other commodilY and equity exposures .
Credit exposures .. . . . . . . . . . . . . . . ,
.. .
Othel ... ... .... ..
. .....
Noninterest expense .
...
Salaries. wages, and employee benefits
Occupancy . . . . .. ......... .
Other . . . . . . . .. . - . . ... . . . . .
Net nonintcrest expense ....... . . . ........ . . ....
Gains on investment account securities.
...
Income before taxes and extraordinary items
Taxes .. ...... . . . . . . . ..... .... . . .. ...
Extraordinary it~ms . net of income taxes ...
Net income ... .. ... . . . . . . . . - . . . . ..
Cash dividends declared .. . . . . , . . . . . ..... .
Retained income .. . . . ..... ... , . . . . ... ....
MEMO: Return on equity .. ... ....... . .....
....
.
.
6.01
6.03
4.35
.85
.30
.51
3.16
1.97
.40
.79
2.84
2.86
6.39
6.41
4.74
.88
.25
.51
3.60
2.33
.49
.78
2.78
2.80
.26
2.55
.37
.31
.46
.17
.19
.09
n.a.
1.41
3.45
1.57
.50
1.38
.90
.03
1.71
.66
.38
2.54
.40
.27
.48
.20
.18
.11
n.a.
1.39
3.31
1.46
.47
1.39
.77
-.03
1.60
.60
1.05
.79
.26
1.00
.86
.13
13.58
13.04
•
5.55
5.57
4.13
.72
.25
.44
2.69
1.74
.35
.59
2.87
2.89
.59
2.26
.44
.29
.43
.20
.14
.08
4.77
4.79
3.57
.73
.12
.35
1.65
1.05
. IS
.41
3.12
3.14
4.05
4.07
.\.04
.63
.10
.2S
1.19
.74
.13
..13
2.86
2.88
3.94
3.%
2.86
.69
.10
.30
1.20
.74
.13
.33
2.74
2.76
4.47
4.48
3. 19
.72
.IS
.38
1.89
1.17
.27
.45
2.58
2.59
5.46
5.48
3.91
.80
.31
45
2.88
1.72
.47
.69
2.58
2.60
5.61
5.63
3.98
.69
.38
.56
3.00
I.S7
.46
.68
2.61
2.63
4.52
4.53
3. 15
.65
.20
.51
1.88
1.17
.21
.50
2.63
2.65
.73
2.31
.48
.25
.32
.15
.14
.03
. 16
2.21
.45
.24
.23
.07
. 12
.04
n.a.
1.10
3.13
1.38
.45
1.30
.87
.08
1.48
.49
- .01
1.26
3. 16
1.4/
1.28
.85
. 13
1.67
.56
1.28
3.11
1.34
.43
1.33
.91
.20
2.17
.42
.27
.31
.11
.12
.07
n.a.
1.38
2.99
1.38
.43
1.19
.62
.22
2.35
.41
.23
.37
.09
. 14
. 13
n.il.
.35
2.32
.46
.26
.30
.12
. 14
.04
n.a.
1.30
3.02
1.39
.45
1.18
70
.11
1.92
.63
.07
1.74
.56
.60
1.95
.40
.20
.05
.08
.09
.06
- .18
1.31
2.80
1.32
.37
1.12
.85
.02
1.52
1.66
.40
.21
- .01
.03
.14
-.01
-.17
1.07
2.71
1.20
.35
1.17
1.05
-.05
1.75
.57
.99
.66
.32
12.55
1.11
1.05
.06
13.14
1.29
.99
.30
16.06
1.18
.65
.53
14.07
1.18
.59
.59
12.86
•
NOTE: Data are as of April 16,2009.
I. Effective October I, 2008, the Federal Reserve began paying interest on
depository institutions ' required and excess reserve balances. Beginning with
the 2008:Q4 Call Report, balances due from Federal Reserve Banks are now
reported under "Inlerest-earning assets" r'drher than "Noninteresl-eaming assets,"
2. Includes allocated transfer risk reserve.
3. Measured as the sum of large time deposils in domestic offices, deposits
booked in forei gn offices, subordinated notes and debentures, federal funds
purchased and securities sold under repurchase agreements. Federal Home
Loan Bank advances, and other borrowed money.
4. Measured as the sum of construction and land development lowls secured
by real estate; real estrue loans secured by nonfarm nonresidential properties or
.4{,
•
•
n,a.
•
•
•
n.a.
1.35
2.89
1.39
.40
1.09
.54
- .01
1.82
.59
.02
1.25
.64
.62
14.08
118
.33
•
.85
.60
.25
9.23
*
-.07
.09
.16
.28
-.11
1.89
by multi family residential properties: and loans to finance commercial real eslate . construction, and land development activities not secured by real estate.
5. Other real estate owned is a com pone", of other noninterest-earning
assets.
6. When possible. based on the average of quarterly balance sheet data reponed on schedule RC-K of the quarterly Call Repon .
7. Includes provisions for allocated transfer risk .
" In absolute value . less Ihan 0.005 percent.
n.a . Not available.
MMDA Money market deposit account.
RP Repurchase agreemenl.
MBS Mongage· backed securities.
Profits and Balance Sheet Developments at U.S. Commercial Banks in 2008
A.!, P rtfolio compo 'ilion, inlere l rale , and inco me and ex pense,
c.
A91
.S. banks , 1999-2008
Banks ranked II through 100 by asselS
hem
1999
I
2000
I
200 I
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Balance sheet items as a percentage of average net consolidated assets
Interest~earning assets 1
7.41
20
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
33.35
5.95
.21
17.80
4.01
13.79
1.27
8.13
. 18
85.34
60.04
12.80
12.46
.34
10.61
5.67
4.94
32.50
32.19
5.62
.26
16.57
3.90
12.67
1.22
8.52
.31
1.21
.02
.23
1.59
2.15
-.02
- 1.10
21.16
20.09
19.88
.95
.54
.01
. 19
1.87
2 ..~0
- .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
.94
.03
.23
2.56
1.51
-.01
-1.12
16.87
14.99
14.84
.3 1
12.99
6.08
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
7.72
3.76
2.43
1.54
1.03
3.23
2.54
. 14
1.89
4.27
4. 16
14.66
.91
13.75
7.05
1.53
9.71
12.79
.52
3.54
89.87
46.55
7.06
5.65
1.41
31.75
7.74
39.29
8.76
7.21
88.86
48.18
6.64
5.35
1.29
9.51
39A8
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
88.40
47.44
5.15
3.90
1.25
32.99
9.30
37.02
10.20
8.52
1.39
1.31
lAO
88.17
46.35
5.13
3.89
1.24
31.51
9.71
37.82
9.76
7.80
1.31
8.95
12.97
.40
3.64
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
6.79
10.10
.47
3.48
12.23
.85
3. 15
8.43
8.85
9.21
9.35
10.13
11 .14
11 .92
11 .60
11.83
11 .00
.03
9.34
12.06
.03
8.52
12.06
.04
n . 3,
n.a.
4.07
.36
n.n.
12.10
.06
11 .93
4.75
.37
12.85
.05
11 .81
4.65
.28
15.05
.05
11.27
5.54
..18
15.95
.06
11.01
5.35
.19
0.8 .
0.8.
",3 .
o.a.
16.01
.10
9.42
6.45
3.89
3.18
.37
.28
13.93
.04
11.81
5.19
.21
n.a.
.21
. 18
.22
14.51
2.49
12.02
1.11
7.28
.09
88.09
62.14
15.84
15.36
.48
IUO
7.05
6.15
27.29
27.21
3.31
.23
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
.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
-.03
- 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
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
... . . . . . . ... . . . , •. ..
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 .................
. . . ..... ..
91.66
48.33
12. 12
10.52
1.60
23.89
12.3t
39.85
8.17
8.20
91.57
46 .28
9.93
8.61
90.79
47.07
7.49
6.32
1.17
9.78
11.99
.58
2.9 1
2402
12 ..\3
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
Capital account . .. . . .. . . . .. . ... . .. .. . . . ... .. .. .
8.34
. •• ,
" . , . . . . . ...
"
' "
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' . . . . . . . . . . . .
.. .. .
. ..... .
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 mongage-backed securities . . ..
Other . . .. . . . . ....... .. .
.. . . ... ..... . .
Equity .
Trading account . . . ..
Gross federal funds sold and reverse RPs . ....
Balances at depositories I
Noninterest-earning assets I . . . ,
... .... . .. . .
Revaluation gains held in trading accounts .
Other ..... . .... . .. . . .
. ....... .
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
1.71
JOO
1.32
9.72
.97
2.13
3.53
.34
1.13
4.71
3.33
11.66
.47
11 .19
30.07
3.72
3.19
.95
2.14
2.85
.21
1.07
4.20
3.26
11 .90
.60
11.30
1.34
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
33.33
8.20
37.04
10.10
6.02
.n3
2.68
2.65
1.16
4.60
2.67
.12
1.90
3.41
2.72
12.99
.48
12.51
6.72
MEMO
Commercial real estate loalls~ ..... ••. . . . . . . .. .
Other real estate owned' .......... . ...... .. .. .
Mongage-backed securities . ... . ... .. . . ....... ..
Federal Home Loan Bank advances .
Balances at the Federal Reserve I . . . . . . . . . . • •.
Interest-earning ... . .. . . . .. .
Noninterest-earning . ... ..... .
Interest-earning balances at depositories
other than the Federal Reserve . . ... _.. .. .
Average net consolidated assets
(billions of dollars) .
.64
n.a.
.64
n.a.
.43
.36
12.24
.05
10.93
4.85
.37
n.a.
.37
.19
.72
3.06
2.71
2.88
3.33
3.26
3.29
2.24
2.22
2.72
3.43
1,879
2.031
2. 130
2, 124
2.287
2.376
2,403
2,579
2,798
3,177
.43
9.63
A92
Federal Reserve Bulletin 0 June 2009
A. !. Portfol io compo -ilion. inlerest rates, and income and cxpcn. c. U.S. banks. J999- 2008-Col7tillued
C. Banks ranked II through 100 by assets-Conlinued
Item
1999
I
2000
I
2001
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Effective interest rate (percent)"
Rates earned
Interest-earning assets . .. .. ...
.. .. . ... ..
..
Taxable equivalent ..... .. . .
Loans and leases, gross .. .. . . . . . . . . . . . .. ....
Net of loss provisions ..... . . .. . ."
Securities ... . . . . . . . . . . . . . . . . . . . . . . ......
Taxable equivalent .... .. ......
.. .. . .... ..
.
..
....
.
Investment account .... . , .. .... ... ........
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
6.04
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 .91
7.45
6.64
5.25
5.37
5. 18
5.86
5.88
6.44
3.76
4.85
4.93
4.74
n.a.
n.a .
n.a.
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 .95
4 .24
4 .85
5.23
5.28
5.94
5.16
4.84
3.92
5.02
4.42
5.72
2.47
2.97
2.22
1.96
1.70
1.99
.94
1.08
3.37
3.68
1.73
3.65
1.61
135
1.23
1.36
.64
.66
2.70
2.95
1.20
3.04
1.56
1.29
1.42
1.27
.72
.65
2.49
2.58
1.37
2.77
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
4.45
4.09
4.46
4 .90
3.72
3.33
4 .01
3.22
2.60
2.44
4.46
4.74
4 .71
5.25
2.40
2.16
2.21
2.15
1.33
1.36
3. 14
3.87
2.07
3.66
U.S. Treasury securities and U.S.
government agC!ncy obligatjons
(excluding MBS) . .
. , .. .. ...
Mortgage-backed securities.
... ..
.. . .
Other .... .. ........
. ............. , .
Trading account.
Gross federal funds sold and reverse RPs .
Interest.bearing balances at depOSitories I ... . .
n.a.
n,a .
5.62
5. 13
4.82
6.25
6.06
5.49
5.83
6.60
5. 13
4 .83
3.86
4.38
R(I1es paid
Interest-bearing liabilities.
......... . ... . .....
Interest-bearing deposits .. . . .
..... .. .
In foreign offices . .. . . . ..... . . .. . . . ... . ..
In domestic offices
...
Other chec kabl~ deposits ... ... , .... . ...
Savings deposits (including MMDAs) ...
.... . ...
Large ti me deposits .
Other time deposits , . , .......
Gross federal funds purchased and RPs . . ... ..
Other interest-bearing liabilities . .. ....... . .
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..12
2.30
5. 1I
5.42
3.86
5.29
.....
n.a.
Income and expense as a percentage of average net consolidated assets
.. ...
. .. ... ....
Gross interest iocome ...... . ...
Taxable equivalent
...... . .. . ..... ..
Loans ....... .. ...... ... ......... ......
..
Securities
..... . .....
Gross federal funds sold and reverse RPs . . " .
....... , . ...... ,.
Other
7.03
7.07
5.60
1.11
.18
.14
7.54
7.57
6.05
1.09
.22
.18
6.70
6.73
5.28
1.06
. 15
.2 1
5.31
5.34
4.15
.90
.08
.18
4.67
4.70
3.72
.75
4 .63
4 .65
3.71
.04
.15
Gross interest expense , .. ,
.,.,',.
Deposits
... . , . " . .. .......
Gross federal funds purchased and RPs .
Other ....
...
".,"
3.29
2.04
.51
.74
3.96
2.41
.56
.99
3. 14
2.01
.38
.75
1.77
1.09
. 17
.51
Net interest income
..... . . . . .. .
... ..
Taxable equivalent
3.75
3.78
3.58
3.61
3.56
3.59
3.54
3.57
.68
3. 18
.42
.52
.07
.02
.04
.9 1
3.35
.42
.42
.08
.04
.03
.80
3.30
.42
.42
.08
.04
.04
.. ..
.
. . ....
... .. ... .. ..
,
..... .. ... .. ....
.55
Noninterest income
... .... . .. .
Service charges on deposits ... .. .. .... .. ....
Fiduciary activities
..... ... .. ,
..... .. ..
Trading revenue .... .... ... . .. . .
, . ...
Interest rate exposures . .....
Foreign exchange rate exposures .
Other commodity and equity exposures . .
Credit exposures .... ..... , . . , ........ ..
Other
....
3.38
.42
.48
.08
.02
.05
2.40
.... .
Noninterest expense ..
Salaries, wages, and employee benefits .... . .
Occupancy .
.. .. .. . . . . . . . . .
. ..
Other .... , .. ...... . . . , . , . . . . . . . . .
4.15
1.54
.46
2.16
Loss provisions'
....
....
"
n.a.
.03
.15
5.28
5.31
4.27
.77
.06
.18
6.08
6.11
4 .85
.87
. 13
.23
5.99
6.02
4 .60
.93
.17
.29
5.02
5.04
3.95
.71
. 10
.26
1.30
.77
.12
.41
1.26
.74
. 13
.40
1.94
1.18
.23
.53
2.78
1.84
.30
.63
2.96
2.04
.32
.59
3.37
3.40
3.36
3.39
3.34
B7
3.30
3.33
3.03
3.06
1.90
1.28
.14
.48
3.12
3. 14
.67
.55
3.09
AO
.42
.07
- .01
.05
.03
n.a.
2.20
3.55
1.45
.39
1.70
.52
2.81
.37
.35
.06
- .01
.04
.02
n.a.
2.03
.41
2.9t
.35
.41
.07
.02
.05
.55
2.73
.33
.54
.09
2.09
1.77
-.10
1.66
.\..\6
1.37
.37
1.62
3.34
1.34
.33
1.68
345
1.32
.34
1.79
3.54
1.22
.32
2.00
2.18
o.a.
2.43
n.a.
2.37
3.29
.42
..17
.09
.04
.04
.01
n.a.
2AI
4 .00
1.44
.43
2.14
3.95
1.47
.42
2.07
3.73
1.49
.40
1.84
3.64
1.47
.41
1.76
•
*
Il .a.
•
.73
•
n.a.
"
.08
"
.01
1.69
2.35
,,\2
.41
-.04
-.02
.08
•
...
.77
.82
.60
.43
.35
.45
.55
.43
.72
Gains on investment account securities ..... .....
-.01
-.05
.09
.10
.03
-.05
1:19
-.29
2.42
.87
2JJ2
.70
2. 14
.74
2.41
.82
2.39
.82
"
-.03
Income before \HXeS and extraordinary items
Taxes ............. . . , . , . , . . .
. ...
Extraordinary items, net of income taxes ....
06
2.42
.82
•
2.27
.77
.01
2.4.\
.83
.07
1.71
.59
- .05
- .05
.12
-.01
1.55
1.17
.38
1.32
.94
.38
1.39
.96
.43
1.59
.99
.60
1.59
1.05
.54
1.57
.95
.62
1.50
1.00
.50
1.67
1.37
.30
1.06
1.26
-.20
-.18
A3
- .62
18.59
1.'1 .72
15.74
17.24
17.03
15.54
13.48
14.05
9.16
- 1.55
Net noninterest expense . .. . . . . . .. ........
.
,
Net income . ... ... .. ....... , .. .. .. ... .....
Cash dividends declared ... ..
. ...
Retained income , . , . .... .. .. ..... .. ... .... , .
.. ...
MEMO: Return on equity
.. ... ...
•
•
•
NOTE: Data are as of Apri I 16, 2009.
I. Effective October I, 2008, the Federal Reserve began paying interest on
depository inslitutj ons' required and excess reserve balances. Beginning with
the 2008:Q4 Call Report, balances due from Federal Reserve Banks are nOw
reported under " Interest-eaming assets" rather Ihan "Noninlerest-earning asse ts ."
2. InCludes allocated transfer ri sk reserve .
3. Measured as the sum of large time deposits in domestic offices. de posits
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.
4. Measured as the sum of construction and land development loans secured
by real estate; real es tate loans secured by nonfam, nonresidential properties o r
•
•
by multifamily residential properties; and loans to finance commercial real esune, construction. and land developme nt activities not secured by real estate.
5. Other real estate owned is a component of other noninterest-earning
assets .
6. When possible. based on the average of quarterl), balance sheet data reponed on schedule RC-K of the quarterly Call Repon .
7. Includes provisions for allocated tran sfer risk.
* In absolute value. less U13n 0.005 percent .
n.a. Not available .
MMDA Money market deposit account.
RP Repurchase agreement.
M BS Mongage-backed securities .
Profits and Balance Sheet Developments at
u.s.
Commercial Banks in 2008
A93
A. 1. Portfolio composition, interesl rates , and income and expense, U. . banks, 1999- 2008
D. Banks ranked 101 through 1,000 by assets
Irem
1999
I
2000
I
200 1
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
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 . . . .. .........
,.
Multifamily residential .. ... . .
,.
Nonfarm nonresidential ... ,"
In foreign offices
' ... . .
To depository institutions and
acceptances of other banks .... ... .. ...
Foreign governmenls . . " .. .. ., .. .. .
Agricultnral production .
. . .. .. . ,
, .....
Other loans .... ......... , .. ,
Lease-financing receivables , .. .. , ... ,
LESS: Unearned income on loans.
.. . ...
Lr.ss: Loss reserves' .
.... .. ..... ..
. . .. . ..
... . ..
Securities . . . .. ....
Investment account . ..... . . . .... .... .. .. ...
.. . .. . . . ...
Debt
....
U.S. Treasury
U.S. governmeOl agency and
corporation obligations . . . . . . . . . . .
Government·backed mongage pools.
Collateralized mortgage obligations
Other .. . . . . . ..... ...
State and local government
. ... .. .
Private mongage-backed securities . . .
. .. . ..... . . . . .... .... . .
Other . .
Equity . ..
... . . . . . . . . . . . . . . . . .. . .. ...
Trading account ..... .. ...... ..... . . .......
Gross federal funds sold and reverse RPs .....
Balances at depositories I .
.. ...
... ..
Non.inleresl-earning assctli I .. .
. .. . ....
Revaluation gains held in trading accounts
Other ........
... .. ... . .... .
91.68
61.48
12.66
12.34
.32
10.77
3.37
7.40
35.89
35.87
148
.58
18.26
1.99
16.26
1.44
12.12
.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
38.92
38.89
5.40
.73
15.39
2.51
12.88
1.83
15.55
.03
91.34
61.32
11.50
11.20
.31
6.80
1.82
4.98
40.95
40.90
5.89
.80
15.71
2.92
12.79
2.00
16.51
.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
.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
22.28
1.32
.37
.02
.86
1.18
.75
-.06
-1.10
23.86
23.80
23.30
1.22
.37
.02
.83
1.25
.67
- .06
- 1.02
24.36
24.23
23.79
1.00
.25
.01
.82
1.32
.75
- .06
-.98
23.59
23.54
13.18
1.02
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
15.56
6 .22
3.04
6.30
2.91
.99
2.19
.79
.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
6.55
3.69
5.60
2.89
.99
2.34
.50
.06
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
1.81
8.66
16.70
6.80
3.41
6.49
2.92
1.08
1.46
.36
.05
2.95
1.69
8.44
8.66
8.44
8.68
Liabilities
.... ... ..... ....... ... ... ..... .
Core deposits
·1···· .. .... ... ...
... .
Transaction deposits .. .. . ... .....
Demand deposits . . ..... . .. . .
.......
Other checkable deposits .
Savings deposils (including MMDAs) .
Small time deposits . . .....
Managed liabilities' . .
... ..
.. ...
Large ti me 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 . .. . .......
... .... . ... . ..
90.90
62.48
13.93
10. 19
3.74
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
89.93
61.26
11.37
8.05
3.32
3B4
17 .55
26.57
12.17
.88
.34
5.27
7.90
.01
2.08
89.68
61.30
11.50
7.96
3.54
34.00
15.80
26.40
11.92
.64
.35
5.35
8. 13
89. 18
60.39
11.77
8. 12
3.64
34.42
14.21
26.98
12. 12
.65
.35
5.52
8.34
89. 10
59.03
11.15
7 .87
3.28
33 .75
14. 13
28.38
13.64
.57
.27
5.54
8.35
2.13
90.32
60.33
11.48
8.23
3.25
29.40
19.46
27.75
12.60
1.24
.31
5.77
7.84
.01
2.23
1.98
1.81
. .. ... ... ....... ... . . .. .
9. 10
9.05
9.68
10.07
10.32
17.27
.08
11.27
19.32
.07
10.25
n.a.
n.a,
21.03
.08
10.29
5.27
.54
n.a.
.54
23.05
. 10
11.24
5.71
.52
n.a.
.
....
... .
.
.. .. .
"
.... .
"0 '
.... ..
....
"
... .
'
.
.. ..
Capit.11 account .
MEMO
.... ...
....
Commercial real estate loans·
.. ... .. .
Other real estate owned' .. ..... .. . .. . . . . .
Mongage·backed securities .. .
... . .. . .. .. ..
Federal Home Loan Bank advances .. ., ...... .. .
Balances at the Federal Reserve I . . . .. . ' . ..... ..
.. .... ..... ....
Interest·earning ..
. ..
Noninrerest·earning .... ......... .. ... ..... . . .
Intcrest-earning balances at depositories
other than the Federal Reserve .. . ... ... .. .
Average net consolidated assets
(billions of dollars) ........ ... ...
... ....
.55
n.a.
.55
1.68
974
.30
6.30
8. 15
•
.57
n.a.
.57
1.60
986
.52
91.32
65 . 15
11.78
11.48
.30
5.42
1.24
4 . 18
45.86
45.78
8.86
.99
15.17
3.60
11.57
2 ..n
18.39
.08
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
91.28
70.52
12.58
12.31
.27
5.15
1.76
3.39
50.78
50.78
13.04
1.22
14. 16
3. 19
10.97
2.41
19.95
.
. 14
.27
.,
.81
1.36
.75
-.06
-.90
21.57
21.50
21.21
.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
.90
1.37
.65
- .06
-1.12
16.96
16.80
16.27
.36
15.05
5.73
3. 16
6. 16
2.78
1.17
1.37
.29
.08
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
8.72
.04
8.67
11 .32
5.24
2.42
3.66
2.73
.86
1.00
.53
. 17
2.01
1.78
8.72
.06
8.66
88.87
59.68
8.43
5.94
2.49
32.89
18.36
27.51
14.42
.57
1.69
89.01
58.04
9.82
6.99
2.83
32.82
15.41
29.32
15.21
.52
.24
5.40
7.94
.01
1.64
5.33
6.97
.01
1.66
89.23
58.91
7.74
5.32
2.42
31.04
2013
28.74
14. 15
.72
.21
5.26
8.39
.02
1.57
10.82
10.90
10.99
11.13
10.77
24 .62
. 11
11.59
6.29
.59
27.28
. 10
11.29
6.46
.55
29 .84
.08
10.06
6.42
.47
32.22
n.a.
n.a.
n .a .
D.a.
.55
.47
34 .52
.11
8.18
5.53
.29
n.a.
.29
35 .86
.28
8.52
7.04
1.45
J.J4
.31
•
•
.59
'"
•
. 13
•
2 . 8.~
1.76
8.68
*
.
.14
91.28
68.85
12.07
11.80
.27
5.35
1.88
3.46
49.50
49.41
12.85
1.16
14.08
3.01
11 .07
2.33
18.99
.09
:+;
.08
8.72
6.11
.36
.36
•
.22
1.68
1.89
1.81
1.69
1.76
1.67
1.57
1.55
1.002
1.022
1.072
1,080
1,152
1,249
1.267
1.278
I
A94
Federal Reserve Bulletin 0 June 2009
A .1. Portfoli o composition . inter
D. Banks ranked 101 through
SI rilleS,
and income and expense,
.S. barrks.1999- 2008- Colllillued
t,ooo by assets- Conlinued
hem
1~9
I
2000
I
2001
I
2~
I
2003
I
2~
I
2005
I
2~
I
2007
I
2008
Effective interest rate (percent)"
Rates earned
Interesl-earning assets ....... . . • . .. .. .. . . ... . . ..
Taxable equivalent ......... .. .. . .
Loans and leases. gross .
Net of loss provisions.
Securities .,..
. ......... ........ . ... . . .
Taxable equivalent
Investment account ...
U.S. Treasury securities and U.S.
7.83
7.92
8.74
8.25
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
5.95
6.42
6.50
7 .3 1
6 .55
4.95
5.21
4.93
5.59
5.67
6.56
6.01
3.81
4.06
3.82
5.46
5.53
6.25
5.87
3.79
4.04
3.78
n.a.
n.a.
n.a.
7.18
4.98
5.07
n.a.
5.85
6.33
4.54
5.38
4.51
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
2.45
2.28
2.14
2.28
1.06
1.17
3.32
1.80
1.61
1,43
1.61
.74
.75
2.58
3.77
2.86
1.83
4.22
1.29
3.57
1.65
1.44
1.43
1.44
.72
.74
2.33
2.51
lAS
3.37
6.12
6 . 19
6.90
6 .64
4.03
4.28
4.02
7.01
7.08
7.79
7.54
4.53
4.80
4 .53
7 .31
7.38
8.02
7.44
4.86
5.14
4.85
6.24
6.30
6 .72
5.09
4.76
5.01
4.76
4 . 19
4.64
4.81
4.92
4 .94
4.58
4 .74
4.96
4.8 1
5.25
4.87
4.56
4.45
5.09
4.42
4 .44
2.12
2.21
3.78
3.59
2.72
govemment agency obligations
(excluding MBS) .......... ..
securities
~Iortgage-backed
Other
Trading account . ..
Gross federal funds sold and reverse RPs
[nterest-bearing balances at depositories I
Il.a.
n.3.
5.40
9 .30
6.15
5 .76
6.60
3.91
3.93
4.79
3.97
3.81
4.27
3.'17
4.23
4.'12
6.59
3.31
3.29
Rules paid
Interest-be.'U"ing liabilities
Interest-bearing deposils
In foreign offices ..
In domestic offices ..
Other checlmble deposits
Savings deposits (including MMDAs) ..
Large time deposits
Other time deposits ............ ... . .... .
Gross federal funds purchased and RPs ..
Other interest-bearing liabilities
4.09
3.84
5.07
3.82
I.~
2.65
5.17
5.11
4.82
5.47
4.46
6.13
4.43
2.27
3.07
6 .00
5.74
5.95
6.46
.'\.81
1.81
2.22
5.27
5.51
3.82
5.32
2.36
2.09
3.05
2.08
Ll8
1.27
3.21
3.10
2.94
4.02
3.38
3.11
4 .50
3.10
1.74
2.06
4.41
4.19
4.52
4.75
4.63
3.58
1.89
2.38
4.90
4.83
4.49
5.04
2.79
2.29
2.73
1.17
1.39
3.91
4.03
2.30
3.66
Income and expense as a percentage of average net consolidated assets
4 .~
Gross interest income
Taxable equivalent
Loans.
Securities
.. ....... .. .
Gross federal funds sold and reverse RPs .
Other
7.19
7.27
5.47
1.51
.17
.04
7.79
7.86
5 .96
1.58
.21
.04
7 . 16
7.23
5.59
1.33
. 16
.08
5.84
5.91
4.56
1.15
.07
.06
5.07
5. 15
4 .07
.91
.05
.05
5.06
4.01
.88
.05
.05
Gross inlerest expense . . .... .
............. ..
Deposits
Gross federal funds purchased and RPs .
Other
3.20
2.44
.34
.42
3.79
287
.38
.54
3.14
2.48
.22
.44
1.92
1.49
.09
.34
1.41
1.04
.07
.30
1.29
.92
.08
.29
Net interest iucome
Taxable equivalent
3.99
4.00
4.07
4.02
4.1 0
3.92
3.67
3. 74
3.70
3.73
4.07
3.77
3.79
.39
2.31
.38
.38
.02
.01
.52
.65
.54
.40
.30
2.35
.36
.44
.01
.01
2.37
2.36
AI
.35
2.30
,41
2.26
.24
2.02
.36
.34
.37
.01
.0 1
7
Loss provisions
Noninteresl income ............... ,.
Service charges on deposils
Fiduciary activities
Trading revenue ........... . ..
Interest rate exposures .
.39
.40
3.~
.01
.01
-.01
.39
5.57
5.64
4.55
.86
.09
.07
6.40
6.46
5.29
.89
.14
.09
5.58
.88
.12
.09
1.84
2.67
2.04
.24
.39
3.00
2,41
.24
.36
2.24
1.81
. 12
.3 1
3.67
3.47
3.52
1.34
. 16
.34
.35
.01
.01
3.73
3.79
.23
1.98
.35
.30
.01
6.67
6.74
3.73
.47
1.88
.36
.31
.01
5 .71
5.76
4 .80
.80
.04
.06
1.22
1.50
.36
.31
-.01
Foreign exchange rate exposures ..
Other commOdity and equity exposures ..
Credit exposures
............. .
Other
Noninterest expense ... .
Salaries. wages. and employee benefits
Occupancy ..
Other.... . . . ........... .
- .0 1
n.a.
1.53
n.3.
n.a.
1.58
n.a.
1.60
n.n.
1.54
n.a.
n.3.
n.3.
1.55
1,49
1.30
1.32
1.20
.83
3.70
3.84
1.59
.47
1.78
3.88
1.61
.46
1.81
3.72
1.64
3.59
3.26
1.64
.43
1.53
3.37
1.61
.41
1.36
3.35
1.59
1.63
3.54
1.64
.43
1.48
3.38
1.46
.39
1.53
1.56
.47
1.68
AS
1.57
.40
.40
1.35
1.28
Net noninterest expense
1.39
1.48
1.52
1.35
1.29
1.29
1.35
1.36
1.38
1.88
Gains on investment account securities.
-.01
- .04
.05
.04
.05
.02
-.01
-.01
-.01
- .21
Income before taxes lUld extraordinary items
Taxes ........ . .. . .
Extraordinary items, net of income taxes . .
2.19
1.96
.67
1.90
.66
.0 1
2.07
.67
2.02
.66
.0 3
2.13
.68
2.13
.68
2.12
.69
1.81
.57
. 15
. 14
Net income ...
Cash dividends d~c1ared
Retained income
1.46
1.06
1.29
1.39
Ll9
.20
1.64
-.25
1.45
.78
.68
1.45
.87
.58
1.43
.37
1.25
1.33
-.08
1.39
.40
.54
1.23
.91
.32
.01
.57
-.56
16. 10
14.2 1
12.93
13.83
13.46
13.42
13.33
13.03
11.08
.07
Memo: Return on equity
.74
.01
.92
NOTE: Data are as of April 16,2009.
I. Effective October I , 2008. the Federal Resen'e began paying interest on
depository institutions' required and excess reserve balances. Beginning with
the 2008:Q4 Call Report. balances due from Federal Reserve Banks are now
reported under "Interesl-earning assets" rather than "Noninterest-earning assels."
2. Includes allocated transfer risk reserve.
3. Measured as the sum of large time deposits in domesti c offices, deposils
booked in foreign offices, subordinaled notes and debentures. federal funds
purchased and securities sold under repurchase agreements. Federal Home
Loan Bank advances. and other borrowed money.
4. Measured as the sum of construction and land development loans secured
by real estate; real estale loans secured by nonfarm nonresidential properties or
.89
by multifamily residential properties: and loans to finance commercial real estate. conslruction. and land developmenl activities not secured by real estate.
5. Other real estate owned is a component of other noninleresl-earning
assel.s.
6 . When possible . based on the average of quarterly balance sheel data reported on schedule RC-K of the quarterly Call Report .
7 . Includes provisions for allocated transfer risk .
* In absolule value, less Ihan 0.005 percent .
n.a. Not available .
MMDA Money market deposit account.
RP Repurchase agreement.
MBS Mortgage-backed securities.
Profits and Balance Sheet Developments at
u.s.
Commercial Banks in 2008
A95
A. I Ponf lio compo ilion, interest rate, and in orne llnd expen. e. U.S. banks. 1999-2008
E. Banks nO! ranked among the 1,000 largest by assets
Item
1999
I
2000
I
200 I
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Balance s heet items as a percentage of average net consolidated assets
Interest.earning assets I ... .. . . . . . . . .. . . . . .. ... ..
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 ...........
Multiiamily residential .
. . . .. .
Nonfarm nonresidential ....... . .. . . . .
In foreign offices
..... .... . .
To depository institutions and
acceptances of other banks ... . .... . . . .
Foreign governmems ..
. . .. . . . .
Agricultural production . ..... . .. . . .
. ............ .
Other loans .
Lease-financing receiv:obles ... . . ... . .
LESS: Unearned income on loans .... . . . ... .
LF.ss: Loss reserves ' .. . ..... .... ..... .
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 mongage-backed securities
Other ........................ ..
Equity..
...... .
92.55
59.76
10.64
10.55
.08
8.16
.69
7.47
36.84
36.83
3.28
2.95
17 .66
1.17
16.49
.98
11 .96
•
.14
.01
4.06
.67
.26
-.15
-.87
26.91
26.88
26.34
3.34
92.52
62.31
11 .09
11 .02
.07
7.98
.59
7.39
39.29
39.29
3.70
3.06
18.43
1.28
17.15
1.04
13 .06
•
.12
.01
3.85
.69
.27
- . 11
- .88
25.40
25.38
24 .82
2.12
92.30
62.67
11.10
11.02
.IJ7
7.42
.59
6.83
40.30
40.30
4.23
3.04
18.24
1.37
16.87
1.06
13.71
•
92.27
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
92.16
62.32
10.42
10.37
.05
6.16
.51
5.64
42.30
42.30
4.99
3.13
17.08
1.79
15.29
1.28
15.82
•
92.34
63.80
10.29
10.25
.04
5.45
.40
5.05
44.75
44.74
6.01
3.22
17.17
2.11
15.06
1.41
16.94
•
92.15
67.82
10.35
10.30
.04
4.07
.35
.1.72
50.09
50.09
9.63
3.48
16.63
2.11
14.52
1.61
18.73
*
.
.06
.06
.25
- .06
- .89
23.34
23.34
23.07
.81
3.21
.70
.24
- .05
- .87
2 1.92
21.91
21.70
.71
3.22
.70
.26
- .05
- .87
20.54
20.52
20.35
.61
3.26
.70
.27
-.04
- .87
19.65
19.58
19.41
.47
3.24
.73
.26
-.04
-.93
19.20
19.16
18.97
.33
15.64
4.23
1.71
9.70
4.49
.22
.65
.20
.02
3.24
1.69
7.71
14.73
3.62
1.50
4.30
.24
.48
. 17
.02
3.53
1.64
7.64
14.01
3.55
1.55
8.92
4.20
.29
.43
.17
.07
3.92
1.54
7.61
13.44
4.80
1.76
6.88
4.24
.47
.49
.09
3. 76
.67
.27
3.64
.65
.31
-.07
HO
3.26
.66
.26
- .06
-.92
23.47
23.43
23.12
.68
- .88
22.80
22.79
22.49
1.33
23.34
23 .33
23.05
1.04
16.07
4.54
2.30
9.23
4.56
.26
1.12
.27
.01
4.26
1.95
7.73
16.23
.21
1.05
.31
.04
4.27
2.11
7.84
16.57
4.76
1.96
9.85
4.67
.19
.83
.26
.01
3.33
1.86
7.66
.90
•
92.39
67.29
10.25
10.21
.04
4.36
.37
3.99
49.28
49.28
10.01
3.38
16.31
2.01
14.30
1.50
18.W
.05
.10
- .90
•
92.36
66.65
10.17
10. 12
.04
4.63
.37
4.25
48.54
48 .53
9.10
3.26
16.69
2.06
14.63
1.47
18.01
.05
.12
-.09
92.29
65.43
10.21
10. 15
.05
4.97
.36
4.61
46.97
46.97
7.46
3.25
17.12
2.20
14.93
1,48
17.66
16.89
3.95
2.00
10.93
4.96
.26
.89
.53
.Q3
4. 17
1.71
7.45
16.95
3.47
1.70
11 .78
4.64
.23
.56
.02
3.22
1.59
7.48
15.27
3.78
1.94
9.56
4.51
.27
1.11
.30
.01
5.0 1
1.82
7.70
7.45
7.48
7.70
7.73
7.84
7.66
7.71
7.64
*
7.61
7.85
Liabilities
.. . . .. .. .. .. .. . ... ...... ..
Core deposits
. ............. .. .. ..
Transaction deposits . . ... . .... .. . .. .... .
Demand deposits
. . . . . . . . . ... .
Other checkable deposits .......... .
Savings deposits (including MMDAs) .
Small time deposits .... . ... .
Managed liabilities) ... ... ......... . .. .
L.'Ifge time deposits . . .......... . .
. .. . .
Deposits booked in foreign offices ... .
Subordinated nOles and debentures .. .
Gross lederal funds purchased and RPs ... . .
Other managed liabilities ... ....
. .. .
Revaluation losses held in trading accounts .
................. .....
.. .
Other
89.75
72.74
23 .87
12.80
11.07
19.77
29. 10
89.88
70.87
23.20
12.64
10.57
19.19
16.09
18.08
12.51
.05
.02
2.06
3.44
89.73
70.04
22 .66
12.24
10.42
21.32
26.05
18.79
13.21
.07
.04
1.51
3.96
89.58
69.96
23. 18
12.58
10.60
22.43
24.36
18.78
13.07
.06
.03
1.52
4.09
89.55
69.24
23.36
12.77
10.59
23.24
22.64
19.57
13.15
.07
.04
1.76
4.54
89.49
67.68
22.72
12.77
9.95
22.98
21.98
21.04
14.53
06
.03
1.74
4.68
89.35
65.74
2081
11.97
8.84
22.66
22.28
22.76
16.49
.06
.03
1.82
4.36
88.95
65.12
18.66
10.73
7.93
22.68
23.78
22.92
16.91
.05
.03
1.82
4.11
89.12
64.27
17.75
10.06
7.68
22.56
23.97
24.02
11.52
.08
.0 1
1.79
2.69
89.59
69.92
22.35
12. 16
10. 19
19.38
28.20
18.67
13.55
.06
.02
1.55
3A9
.92
.93
1.00
.90
.84
.74
.77
.84
.91
.82
Capital account .... . ............ .. _"
10.25
10.12
lOA I
10.27
10.42
10.45
10.51
10.65
11.05
10.88
16.33
.11
6.22
17.91
.11
5.39
20.67
n.a.
22.23
.15
7.25
3.87
.87
24.50
. 14
6.91
4.32
.78
26.77
.13
6.16
4.46
.70
28.8 1
.12
5.36
4.14
.57
29.88
n.a.
19.15
. 12
5.99
3.34
.76
30.34
.35
7.03
5.20
1.26
n.a.
11 .3.
n.a.
n.U.
n.n.
n.n.
n.a.
Trading account. . ............ .
Gross federal funds sold and reverse RPs .
Balances at depositories I . . . . . . . . .
. ... .
Nonintcre~t-eaming assets I ,.
Revaluation gains held in trading accounts .
.. .....
Other .... ...
MEMO
Commercial real estate loans4 . . . . . . . . . ... .
Other real estate owned'
....
. ........ .
Mongage-backed securities ....... . ....... .. . .. .
. ..
Federal Home Loan Bank advances.
Balances at the Federal Reserve I . . . . . . . . ••• ...
Interest-earning .
. . . . . . .. . ...... . .
Nonjnterest-earning . . . . . . .. . . . . . . . . . . . . . .
..
Interest·earning balances at depositories
other than the Federal Reserve ............ .
Average net consolidated assets
(billions of dollars).. " .... " .... .. " ....
•
.93
n.a.
.88
•
28.48
.93
n.a.
•
•
•
•
.14
7.10
3.71
.79
4.84
2.20
9.19
4.73
9.61
. 16
5.39
193
.45
. 19
.04
3.29
1.84
7.85
16.64
.06
.03
1.87
5.41
.82
.93
.93
.76
.79
.87
.78
.70
.57
.45
,45
1.71
1.59
1.82
1.95
2.11
1.86
1.69
1.64
1.54
1.71
652
655
675
704
742
768
805
840
862
882
A96
Federal Reserve Bulletin 0 June 2009
A. 1. Pon rolio ·onlposition. interest rates, and income and expense, .S. banks. 1999-2008- Conlil/lled
E. Banks not ranked among the 1.000 largest by assets-Continued
Item
1999
I
2000
I
200 I
I
2002
I
2003
I
2004
I
2005
I
2006
I
2007
I
2008
Effective interest 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 .. ....
. ... ........... .. .
Trading account. . ......... ........ .... . . .
Gross federal funds sold and reverse RPs
Interest·bearing balances at depositories I .
Rates paid
Interest·bearing liabilities.
Interest·bearing deposits
In foreign offices ...
In domestic offices
Other checkable deposits . . . .......... .
Savings deposits (including MMDAs) .
Large time deposits
Other time deposits
Gross federal funds purchased and RPs .
Other interest·bearing liabilities . ....
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
8.03
9.01
8.60
5.86
6.27
5.86
6.79
6.90
7.83
7.39
5.03
5.43
5.02
5.94
6.05
7.08
6.72
3.87
4.26
3.87
5.73
5.84
6.72
6.45
3.74
4.1I
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
7.35
8.13
7.8 1
4.68
5.06
4.68
6.34
6.42
7.03
6.18
4.70
5.05
4.70
n.a.
n.a.
n.a.
3.60
4.96
5.65
n.a.
n.a.
n.a.
4.01
6.24
6.38
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
.1.38
3.90
4. 18
18.95
1.J2
2.02
3.53
4.17
4.16
7.52
3.21
3.21
4.12
4.59
4.25
7.50
4.95
4.64
4.69
4.96
4.33
4.74
5.05
5.06
4.62
5.08
4.28
4.34
2.17
3.03
4.32
4.21
4.12
4.21
2.28
3.20
5.2 1
5.24
4.73
8.25
4.84
4.67
4.43
4.31
3.97
4.31
1.97
2.81
5.52
5.60
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
2.79
2.96
1.31
5.., I
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
3.42
3.28
4.27
3.28
1.45
2.34
4.37
4.12
4.37
5.70
3.91
3.8 1
4.66
3.80
1.62
2.67
4.90
4.79
4.46
5.81
3.06
2.99
2.28
2.99
1.11
1.65
6.73
6.82
5.53
.37
.38
5.87
5.95
4.83
.90
.07
.07
2.33
2.08
.04
.2 1
3.54
3.62
.64
1.19
.36
.32
.58
., .53
1.84
.44
1.25
2.19
.50
3.50
1.76
.44
1.30
2.32
7.92
5. U
4.67
2.47
3.56
5.89
5.70
5.69
9.13
3.92
8.08
4.03
4.06
2.35
4.50
Income and expense as a percentage of average net consolidated assets
Gross interest income
7.48
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 provisions' . . . . . .
....... . .... .
Noninterest income
Service charges on deposits .... . .. . .. .. ... . ..
Fiduciary activities
Trading revenue . ,
Interest rate exposures ...
7.60
5.61
1.58
.22
.06
3.26
3.02
.08
.15
4.22
4.34
.31
1.44
.42
.26
7.83
7.95
5.99
1.57
7.33
7.44
5.73
.21
.20
.08
3.33
3.07
.06
.20
4.00
4.10
.33
6.31
6.41
5.01
1.1-6
.07
.06
2.22
1.98
.03
.21
4.08
419
.35
1.30
1.39
.44
.25
.45
n.a.
n.a.
n.n.
.67
3.57
1.78
.47
1. 3 1
2.26
-.01
1.61
.45
.61
3.54
1.79
047
1.28
2.24
.04
1.46
.39
1.17
.79
.38
11.52
1.07
.43
.67
3.57
1.82
.46
1.28
2.18
.05
1.60
AI
- .01
1.18
.68
.50
10.28
11.49
1.32
.05
3.64
3.30
.12
.21
4.20
4.31
.32
1.31
.43
.20
.
.27
5.46
5.56
4.47
.89
.05
.06
1.60
1.41
.02
.17
3.86
3.96
.29
1.47
.43
.28
5.32
5.41
4.35
.87
.05
.05
1.41
1.22
n.a.
.76
3.55
1.82
n.a.
n,o.
.64
.61
.57
3.52
1.81
.45
1.26
2.14
.01
1.55
.37
3.48
1.79
JA9
1.82
.44
1.24
1.60
.38
2.18
-.01
1.55
.36
1.18
1.21
.67
.54
11.54
1.19
.65
.53
11.14
•
.02
.17
3.91
4.00
.23
1.38
.43
.31
5.78
5.87
4.76
.85
.11
.06
1.82
1.58
.05
.19
3.96
4.05
6.49
6.58
5.35
.2 1
1.33
.20
J.31
.38
.36
.40
.33
•
.88
.92
.18
.08
2.56
2.27
.08
.20
.08
2.95
2.67
.08
.20
3.79
3.87
.28
.21
3.94
4.03
•
1.33
•
Foreign exchange rate exposures ..
Other commOdity and equity exposures.
Credit exposures
Other .
Noninterest expense .
Salaries, wages, and employee benefits
Occupancy .....
Other ..
Net nonimerest expense
Gains on investment account securities.
Income before taxes and extraordinary items
Taxes ..
Extraordinary items. net of income laxes
Net income .... .. ....
Cash dividends declared ..
Retained income ....... ... .. .
MEMO: Return on equity
n.a.
.75
3.73
1.82
.49
1.42
2.29
1.62
.47
1.15
.70
.46
11.26
.64
NOTE : Data are as of April 16, 2009.
I. Effective October I, 2008, the Federal Reserve began paying interest on
depository institutions ' required and excess reserve balances. Beginning with
the 2008:Q4 Call Repon, balances due from Federal Reserve Banks are now
reponed under " (meresl ~eaming assets" rawer than " Noninreresl-earning assets."
2. Includes allocated transfer risk reserve.
3. 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.
4. Measured as the sum of construction and land development loalls secured
by real estate: real eslate loans secured by nonfarm nonresidential properties or
.45
1.28
2.09
.04
1.53
.38
1.14
.67
047
10.97
64
.54
11.25
.44
1.25
2.15
n.a.
-. 09
1.31
.29
1.01
67
.35
9.18
.48
.10
.38
.56
- .18
3.53
by multifamily residential propenies; and loans to finance commercial real es·
tate. construction, and land development activities not secured by real estate.
5. Other real estate owned is a component of other noninterest·earning
asse ts.
6. When possible, based on the average of quarterly balance sheet data reo
poned on schedule RC· K of the quanerly Call Repon .
7. Includes provisions for allocated transfer risk .
* 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 2008
A.2. Repon of illcome, al l U.S. bank
A97
1999- 2008
Millions of dollars
lIem
1999
Gross interest income .. ....... . . . . ..
2008
367.123
369.758
279,217
62,415
~
Loss provisions.
..... . .
Service charges on deposits.
Fiduciary activities ...
Trading revenue ............... . .
Other.
Noninterest income.
~
....
Noninterest expense
Salaries, wages, and employee benefits .
Occupancy.
Other.
Net noninterest expense ..
Gains on investment account securities
1nco me before taxes .
Taxes.
Extraordinary items, net of income taxes
Net income.
Cash dividends declared .
Retained income
NOTE: Data are as of April 16,2009.
348,667
351.651
269.408
58,577
426.600
429.556
328.088
65,864
551,039
554,295
421.879
78,913
616.995
620,456
464.879
82,710
566,000
568.685
426.181
81,548
\3,546
15,829
12,647
17,006
6.221
14,672
5,015
13.189
5.142
15,538
11.045
21,602
21,288
28,959
28.682
40.723
16,853
41.418
222.161
151,147
188,746
\32.311
\18,741
81,701
94.123
62,400
98.541
63,639
162.501
105.922
263,372
173,878
3100412
212,783
227,066
154,812
26,860
44.155
19,583
36,852
9,920
27,122
7,590
24.133
8,842
26.058
19.161
37,418
33,775
55,720
37,715
59,914
19,755
52,499
201.684
204,318
215.505
218.191
230,862
233,610
235.095
237,877
250,126
253,110
264.099
267.055
287.667
290.923
306.583
310.044
338.934
341.619
21.220
..
Net interest income . . . . . . . . . .
Taxable equivalent ...... . . . . .
329.218
332,000
257.697
53,316
191,726
194.361
Gross interest expense . . . . . . . . . . . . . . .
Deposits ..
Gross federal funds purchased and
repurchase agreements .
Other .........................
349,603
352.351
269,397
59,3 \I
21.210
34,215
repurchase agreements .
Other.
404,251
406,937
3 \I ,539
63,061
175,397
119,969
LOilllS
Securities .
Gross federal funds sold and reverse
423.845
426,479
326,804
67.666
12,337
13.157
Taxable equivalent ........ . . .
29.386
43,084
45,206
32.742
23.894
25.579
25,386
56.746
170,019
144.800
21.591
20.519
10,437
92.256
153.101
23.720
22,202
12.235
94,945
160.902
26,872
21.988
12.382
99,658
168.236
29,629
21.404
10,794
106.410
183.792
31.692
22,453
\1,605
118.042
188.999
33,454
25.088
10.303
120,154
201.768
33.830
26.381
14.375
127.180
222,887
36.194
28.312
19, 170
139.213
218,554
39.187
32,962
5.289
141 , 115
207,880
42.540
32,907
-2.336
134.767
205.207
86,396
25,945
92.867
216,375
89,016
26.762
100,598
225.979
94,196
27,939
103.846
230.128
100,447
29,311
100,368
243.214
108.446
31,314
103,453
263,304
115,254
33,253
114.797
274,136
124.038
35.051
115.048
294,890
135.868
36,393
122,629
321,406
144.700
38.531
138,177
355,910
147,595
40,909
167,406
60,407
63,274
65.077
61.892
59.422
74,305
72.368
72.003
102,852
148,030
246
-2,280
4.630
6.411
5,633
3.393
-220
-1.320
-649
-16,186
110.345
39,315
169
106.741
37,249
-31
111,971
37,284
-324
130.176
42,816
...{j8
148,563
48.498
427
155.322
50,264
59
165.933
53,568
241
188.960
60,956
2.647
146.335
44.230
- 1,672
4.698
2,199
5.388
71,199
69,461
74,363
87,291
100,494
105,115
112,604
130,652
100,433
7,887
52.280
18.919
52.547
16.915
54,844
19,519
67,230
20,062
77 ,757
22.738
59.523
45,591
64,624
47,981
82,310
48.340
85,265
15,168
43.253
-35.367
A99
July 2009
u.s. Households' Access to and Use of
Electronic Banking, 1989-2007
Catherine J. Bell and Jeanne M. Hogarth, of the
Board's Division of Consumer and Community Affairs, and Eric Robbins, of the Federal Reserve Bank
of Kansas City, prepared this article.
Consumers are increasingly embracing electronic
technology as a means of making payments and
managing their personal finances. Data from the 2007
Federal Reserve Payments Study show a continuing
shift away from paper-based transactions, such as
payments by cash and check, and toward electronic
transactions, in particular, automated deposits and
payments and payments by debit card. I The number
of debit card payments, for example, increased from
15.6 billion to 25.3 billion between 2003 and 2006,
and the dollar value of debit card payments increased
as well (see box "How Would You Like to Pay for
That? "). (Payments by credit card, as a proportion of
all payments, remained constant over the period.)
Managing their financial matters electronically
offers consumers many potential benefits: they can,
for example, arrange for timely payments at virtually
any time of the day or night and can avoid overdrafts
by reviewing their account balances throughout the
month. Yet concern remains that some technologies
are not available to consumers at all income levels.2
There is also concern that data breaches in recent
I. Federal Reserve System (2007), " The 2007 Federal Reserve
Payments Study: Noncash Payment Trends in the United States:
2003-2006," www.frbservices.orglfiles/communicationslpdflresearch/
2007 _payments_study.pdf. Also see Geoffrey R. Gerdes (2008),
"Recent Payment Trends in the United States," Federal Reserve
Bulletin, vol. 94 (October), pp.7S-106, www.federalreserve.gov/pubs/
bulletinl2008/pdflpayments08.pdf; Geoffrey R. Gerdes, Jack K. Walton II , May X. Liu, and Darrel W. Parke (200S), "Trends in the Use of
Payment Instruments in the United States," Federal Reserve Bulletin,
vol. 91 (Spring), pp. 180-20 I, www.federalreserve.gov/pubs/bulletinl
200S/springOS_paymen!.pdf; and Visa USA Research Services (2006).
"VISA Payment Panel Study: 2006 Payment Trends Study."
2. Eun-Ju Lee and Jinkook Lee (2000), "Haven't Adopted Electronic Financial Services Yet? The Acceptance and Diffusion of
Electronic Banking Technologies, " Financial Counseling and Planning, vol. I I (I). pp. 49-60; Jeanne M. Hogarth, Jane M. Kolodinsky,
and Tatiana Gabor (2006), "Consumer Payment Choices: Paper,
Plastic-<lr Electrons')" Consumer Iltlerests Annual (Proceedings of
the 2006 annual conference of the American Council on Consumer
Interests), vol. S2, pp. 127-40. www.consumerinterests.orglfilesl
publiclHogarth_ConsumerPaymentChoicesPaperPlasticorElectrons.pdf.
years have reduced consumers' willingness to use
some technologies.3
This article examines changes over time in consumers' access to, adoption of, and attitudes toward
various forms of electronic banking (e-banking),
including the use of automated teller machines
(ATMs), debit cards, direct deposit, preauthorized
payments, phone banking, online banking, smart
cards, and prepaid cards. The article also updates data
on electronic banking reported earlier and looks at
several emerging technologies. 4 The analyses are
based on data from two sources: the Federal Reserve's triennial Survey of Consumer Finances (SCF)
(surveys for 1989 through 2007) and questions included by the Federal Reserve in the University of
Michigan Survey Research Center's Surveys of Consumers (surveys in 1999, 2003, and 2006). The two
surveys are described in appendix A. Unless stated
otherwise, all analyses were restricted to households
that reported having an account with a bank, thrift
institution, or credit union.
ACCES lBlL/TY OF BANKING SERVICES
As the financial services industry has evolved, consumer access to financial services has increased, both
in the number of brick-and-mortar bank branches and
in the availability of e-banking services, such as
ATMs and online banking. Despite a decline of
almost 50 percent in the number of banks between
3. In a survey by the Princeton Research Group on behalf of
Consumer Reports Web Watch, respondents reported having altered
their use of credit cards because they were concerned about identity
theft; see Consumer Reports Web Watch (2005), "Leap of Faith:
Using the Internet Despite the Dangers" (October 26), www.
consumerwebwatch.orglpdfslprinceton.pdf. Security concerns have
also been cited as a barrier to consumer adoption of mobile banking;
see Niina Mallat (2007). "Ex.ploring Consu mer Adoption of Mobile
Payments: A Qualitative Study," l oumal of Strategic Information
Systems. vol. 16 (December), pp. 413-32.
4. Earlier data were reported in Christoslav E. Anguelov. Marianne
A. Hilgert. and Jeanne M. Hogarth (2004) . ·'U.S. Consumers and
Electronic Banking, 1995-2003," Federal Reserve Bulletill. vol. 90
(Winter), pp. 1-18, www.federalreserve.gov/pubs/bulletin/2004/
winter04_ca.pdf. See that article for a comprehensive glossary of
e-banking terms and a discussion of e -banking services.
AIOO
Federal Reserve Bulletin 0 July 2009
How Would You Like to Pay for That?
As new payment technologies have developed , consumers have changed the way they pay for the goods and
services they buy. Although the number and volume of
consumers' cash transactions cannot be measured accurately, indirect evidence suggests that cash transactions
have declined. I It is certain that the use of checks as a
form of payment has declined substantially (table A). The
decline between 2003 and 2006 was accompanied by an
increase in the use of debit cards and the number of ACH
payments (for example, preauthonzed payments).
Several studies have looked at consumers' choices of
form of payment under differing circumstances. One
study found that French consumers make high-value
I. Geoffrey R. Gerdes (200S). "Recent Payment Trends in the United
States," Federal Reserve Bulletill . vol. 94 (October). pp.75-106.
IVww.federalrescrve.gov/pubslbulietin/200S/pdt1payments08.pdf; Paul W.
Bauer and Daniel Littman (2007), .,Are Consumers Cashing Out?"
Federal Reserve Bank of Cleveland Economic Commentary (October).
www.clevelandfed.org/research/commentaryn007/100107.cfm.
payments by check, mid-value payments by cash or bank
debit card, and low-value payments by cash? Another
study found that the nature of the transaction, the transaction value, the environment at the point of sale, the bill's
frequency, and the variability of the transaction value
affect consumers' decisions about which form of payment
3
to use. Similarly. the 2006 Visa Payment Panel Study
showed that in 2005. U.S. consumers were more likely to
use a credit card than another form of payment to pay for
a meal at a high-priced restaurant. were likely to use cash
or credit card to pay for a meal at a mid-priced restaurant,
2. David BOUltie and Abel Francois (2006), "Cash. Check or Bank
Card? The Effects of Transaction Characteristics on Ihe Use of Payment
Instruments." University of Paris Working Paper, www.bos.frb.org/
economic/cprg/conferences/payments2006/papers/Bounie.pdf.
3. Fumiko Hayashi and Elizabeth Klee (2003), "Technology Adoption
and Consumer Payments: Evidence from Survey Data." Review (4 Network EcUlWlllics, vol. 2 (June). pp. 175- 90.
A. Distribution of payments, by payment method, 2003 and 2006
Percent
2006
2003
Payment method
Number of
transactions
Dollar value
60.9
45 .S
54.9
2.5
.9
35.7
23. 3
19.2
10.7
2.S
Dollar value
... . . . ... . .. . . . .. .
Checks.
Cards . . .... ..
.... .... ... .. . ..
Credi t cards . .. .... . . .... . . .
Debit cards ... .. .... ... ... ..
ACH ...... . ..
. . . . . . ..
Electronic benefit transfers . .
NOTE:
I
Change, 2003 to 2006
•
I
Components may not sum to 100 percent because of rounding .
.05 percent.
1980 and 2007 due to industry consolidation, the
number of bank branches has climbed steadily, at a
compound annual rate of growth of 2.7 percent. 5
Growth in the number of ATMs has been even more
rapid, with a compound annual growth rate of 12.2 percent (figure 1). In particular, the growth of offpremises ATMs (ATMs not located within a bank
branch) has allowed consumers greater access to their
accounts.
Dollar value
transactions
I
Number of
lTansactions
12.7
-9.S
-28 .6
40.9
23.3
27.1
15.7
12.0
44.4
14.6
41.1
46 .7
•
t.2
1.3
1.0
* In absolute value, less than
Number of
.0
20.0
. .. Not applicable.
SOU RC'E: Gerdes. "Recent Payment Trends in the United States."
1. Number of bank branches and ATM . in the
nited U
ltcs, 1980-2007
Tbousanda of
lbouoon<b
ofATMs
bulk branches
soo
100
400
300
..... -.......---_
Bank bnwches
".-.
60
...
200 . - . . . . . -
40
20
100
S. One possible explanation for bank branch growth in an increasingly electronic world relates to the benefit of branch networks.
Research by the Federal Deposit Insurance Corporation shows that
banks with larger branch networks have greater deposit growth and
higher returns on inveslment. See Gary Seale (2004), "Branching
Continues to Thrive as the U.S. Banking System Consolidates," FYI:
An Update on Emerging Issues in Banking (October 20), www.fdic.gov/
bankJanalyLicalJfyil20041 I 02004fyi .html.
1986
1989
1992
t99S
1998
2001
2004
2007
SOURCE: Summary of Deposits and American Bankers Association. The
Summary of Deposits (SOD) is an annual survey conducted by the Federal
Deposit Insurance Corporation (FDIC) of branch office deposils as of June 30 for
all FDIC-insured commercial banks, FDJC-supefl'ised savings banks, and
insured branches of all foreign banks. Current and h.iSlOrical SOD data can be
accessed through the FDIC's website. at www2.fdic.gov/sod.
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
AlOl
tions (table C) . For Internet transactions. a small proportion of consumers use third-party payment systems (PayPal, for example), perhaps reflecting concerns about fraud
and data security. Although these transactions are settled
within the banking system, many third-party services
operate outside the regulated banking industry.
and were likely to use cash at a quick-service restaurant
(table B).4
Data from the 2006 Michigan Surveys of Consumers
also reveal the tendencies of U.S. consumers to use
different forms of payment for different types of transac4. Visa USA Research Services. "Visa Payment Panel Study."
B. Distribution of consumer payments at various locations, by payment method, 200S
Percent
Payment method
Payment location
Cash
Gas stations ...... . ..... .. .
Grocery stores ..
Department slOres ..
Discount stores . . .
Hotels .
...
High-priced restaurants ..
Mid·priced restaurants ..
Quick·service restaurants.
I
Check
I.
Credit card
(general purpose)
,I o~~;~~~~~~~) I
Credit card
Debit card
8
I
26
30
I
33
3
3
4
35
16
18
13
17
25
33
26
9
2
73
20
36
3
59
2
3
36
12
20
21
9
66
NOTE : Components may not sum to 100 percent because of rounding.
3
17
37
5
I
2
0
Other
I
10
12
23
17
2
SOURCE: Visa USA Research Services. "VISA Payment Panel Study."
C. Method of payment, by transaction type, 2006
Percent
Payment method
Transaction type
Cash
In store (under $25) ..
In store (ovcr $25).
Internet. .
43
16
n.a.
I
Check
8
16
I
NOTE: Components may not sum to 100 percent because of rounding.
I. For example, Pay Pal.
Growth in the number of bank branches and ATMs
narrows the distance between consumers and their
financial services providers. In the 1989 Survey of
Consumer Finances, 36 percent of respondents reported living or working within one mile of the
nearest branch or ATM of their primary financial
institution ; by 2007, the proportion had grown to
41 percent (and 86 percent lived or worked within
five miles) (table 1).
Consumers' Banking Tendencies
The ubiquity of bank branches means that most
consumers have convenient access to traditional
banking channels, such as brick-and-mortar branches
and ATMs. And the use of direct deposit and preauthorized payments, together with the availability of
financial services via telephone and computer, means
I
Credit card
18
35
7-1
I
Debit card
31
33
20
I
Prep.1id card
I
Third pany'
n.u.
0
0
0
n.a.
7
n.a. Not available.
SOURCE: Michigan Surveys of Consumers.
that consumers can initiate most transactions 24 hours
a day, from remote locations.
As the adoption of e-banking grows, one might
expect brick-and-mortar branches to lose importance.
However, surveys continue to show that the majority
I . Di lance of home or workplace from clo
e~l
branch or
ATM . 1989 and 2007
Percent of respondents
Year
1989 .....
2007.. . ..
Less than
I mile
36.3
40.8'
More than
10 miles
47.8
45.4
9.3
7.7
6.2
4.6
Non: Percentages do nOI sum 10 100 percent because table does not include
respondents who reported " mail" or "telephone" as the distance from the closest branch.
i. Includes 37.6 percent reponing " within I mile" and 3.2 percent reporting
"the Internel"; Ihe Internct was not mentioned in 1989.
SOURCE : Survey of Consumer Finances.
AI02
Federal Reserve Bulletin 0 July 2009
2. Main way of doing husiness with primary linancial institution , by demograph ic characteristic, 2006
Percent
Demogrnphic characteristic
In person
Online
ATM
Phone
Direct deposit
.... . .. .....
A II responden ts . .
Respondents using online banking . .
53.6
30.9
20.8
44.5
17. 1
19.1
3.5
3.2
1.1
1.1
Household income (by income percemile)'
20% or less ..
21%-40% . . ....... . .. . .. .. ..
41'70-QO% . . ....... . .. . .
61%-80'70 . .. ... ...... .... ..... ....... .... ,
81 '70-100% . . .
68.6
61.5
55..1
42.7
36.6
3. 1
12.9
16.2
31.8
41.6
17.0
15.7
18.3
19.1
16A
4.6
4.8
3.5
4.0
1.5
.0
2.5
Alie of respondent (yean)
Younger than 35 . .
35-44.
45-54 ..
5~ . . .
..
65 and older..
.... ... .. ... .... ,
37.0
44.4
51.3
67.5
70.0
33.8
32.2
19.9
12.8
4.5
22.7
17.9
19.8
12.8
11.9
3.3
4.7
2.4
1.7
4.9
2.5
.4
1.3
1.4
.0
Eduwtion of respondellt
No ,high school diploma .. ... ......... ........
High school diploma.
Some college . ..
Bachelor's degree .. . .. . . ... . . . .. .
Postgraduate education .
80.4
62.0
56.9
45.9
39.2
2.8
12.2
15.1
28.0
36.4
4.7
16.9
20.3
17.3
17.3
2.3
2.9
2.8
4.8
3.2
.0
.7
1.6
1.3
1.1
Raceielhnicity of respmuielll
White .
. . . . .. . . . . . ..
. . . . . . . , .. .....
Black ...
.... ...... ..
Hispanic
Othei' .
54.3
52.4
47 .9
51.0
21.2
15.7
22 . 1
27.5
16.1
21.8
22.1
14.8
3.6
4.4
2.3
2.7
1.1
1.0
1.9
.0
49.1
58.6
63.4
26.8
14.0
15.6
20.9
17.1
3.2
5.1
1.6
1.0
.9
1.6
54.0
52.0
21.5
18.2
16.2
20.7
3.2
4.6
1.1
1.3
52.5
54 .6
22.5
19.4
16.4
17.8
3.0
3.9
1.0
48.5
56.7
52.1
55.4
25.3
18.6
18.3
21.1
19.8
15.9
22.4
13.5
3.6
3.4
3.7
1.5
2.2
.0
3.3
.7
,...
~
1.3
1.5
.4
Marital status of r(!~,;pOndenl
Married .
Single female .
Si.ngle male .
...........
f1ol1U!ownership ,fill/US
Own home.
Do not own home .. .
Gender of resp(}fIlJ~nt
Male . .
Female . . .
.. .. . . . . . . .
Region
West ...
....... ....... , ... .... .. .
Midwest ..
Northeast ........ .. .
South
. .. ...
I
NOTE: Percentages do not sum 10 100 because of nonresponse.
I. Income percentiles are based on Ihe income of all responding households.
Thus, of respondents in the lowesl 20 percent of the income dislribulion.
68.6 percenl reported doing business wilh their primary financial in stilUtion
mainly in person and 3. 1 percelll reported doing business mainly online.
of consumers still conduct their bank business mainly
in person (table 2). In the 2006 Michigan Surveys of
Consumers, 54 percent of respondents said that
in-person interaction was their main way of doing
business with their primary financial institution. In
contrast, 21 percent reported conducting bank business mainly online, and 17 percent reported conducting transactions mainly using ATMs. These results
differ from those of the Survey of Consumer Finances, which asks about the "main ways of conducting business" with their financial institution, thus
allowing for multiple responses. In the 2004 SCF,
77 percent of respondents said they did their banking
in person, 64 percent reported using ATMs, and
50 percent reported using the maiL 6
lOA
1.1
2. Includes Asian, Pacific Islander. and Native Ameri can.
SOURCE: Michigan Surveys of Consumers.
Looking at just those respondents who bank online
presents a far different picture. For example, a much
smaller proportion of online bankers--only 31 percent-reported in-person interaction as their main
way of doing business with their primary financial
institution. A larger proportion-45 percentreported online banking as their main means of
conducting business.
Differences in practices also exist among demographic groups. For example, consumers in the top
6. Lorella 1. Mester (2006), " Changes in the Use of Electronic
Means of Payment : 1995-2004," Federal Reserve Bank of Philadelphia Business Review (2nd quarter), pp. 26- 30, www.
phi lade Iphiafed .org/research-and -data/pub Iicationslbus iness- rev iew /
2006/q2Ibr_q2-2006-4_changes-electronic-means .pdf.
u.s. Households ' Access to and Use of Electronic Banking,
A 103
1989-2007
3. Consumer access to Internet and use of Internet for online banking. by dcm graphic characleri tic. 2006
Percent
Internet access at home
Demographic characteristic
Have access
Distribution by type
of connection
Dial. up
I
High·speed
All respondents . .. . . .. . .... .. .
Respo ndents using o nline banking .
72.3
95. 1
27 . 1
18.7
72.9
81.3
HOllselw ld income ( by income percentile)'
20% or less . . . . . . .. . ....... .. . . . .... .
21 %-40% .... .. . . ..
. . .. . . .... .
41 %-4>% .
. . .. . .. . .. . .•.......
61 %--80 % . . .... . . . . • .. . . . . ... . . .. .
8 1%- 100% .... . ... .
36.6
61.1
76.7
88 .8
96. 3
41.0
59.0
55 .2
67 .5
22.9
10.7
77.1
79.2
86.9
79. 1
25 .5
20.1
74 .5
79 .9
Age of responde/ll (years)
Younger than 35 . . . . . ..
. ... _. .
35-44 .... .. ... . . ..... . .. . .. . ... .
. ...•.... . .. • .. . . ... . .
45-54 ..
55-64 .. .... . . ... . . .. . . . ...... . .. .
. .. .
65 and older . . ..
Edllcation of respondent
No high school diplo ma. . . . . . . . ....... . .
High school di ploma. .
. . ... .
Some co llege . .. . .. .. . ... . .. . . . . . .
Bachelor s degree .. ....... . . .
Postgraduate educatio n . . . . .
Race/crlmicity of respondent
White ... .. ..........
. ........ .
Blac k .
. . . ......... .. .. ... .
Hispanic ....... . ... .. . . .. • .. . . ....... . .
.. ....
Other> ..... . ..... . . . .
Marital statlls of respolldent
Married .... . . .... .
. . .. .. ... .
..
......
Single female ... . .
Single male .
. . . . . .... . . .
Homeowllership
44.8
32.5
73. 1
22. 5
33.8
45.9
42.5
2 1.8
60.7
71.0
84.6
89.7
57.5
40.9
30.2
21. 2
16.2
Internet
access
at work:
Have access
89.3
Distribution of online bankers by
location most frequentl y used to
access their financia l institutio n
Ho me
52.2
75 .5
17.2
4 1.0
54 .2
7 3.5
77.4
I
Work
I Both equall y
...
78.2
14.4
7.4
89. 1
72.3
80.2
8 1.4
74.6
10.9
16.9
15.7
.0
10.7
4.2
4.4
11. 2
73.3
8 1.6
2 1.1
12.6
14.4
8.6
95.0
5.0
14.3
14.2
66.2
57 .5
67.S
73.2
66.5
46.3
9.8
42.6
59 .2
69.8
78.8
11.6
32.4
51. 2
66.8
50.0
83.5
.0
10.5
76.4
13.6
50.0
60
10. 1
78.3
83.8
74.1
77.3
13. 1
20 .8
8.6
2.0
72.7
71.3
81.1
52.5
56.0
78.3
46.8
77.3
52.3
73.9
13.9
27.8
.0
23 . 1
7.8
70. 1
89.7
10.3
3.1
13.0
12.5
20.9
8,4
4.6
5.6
77.5
80.0
75 .0
75. 1
27.3
55. 7
28.7
59.6
79.4
18.9
22.7
8 1. 6
54.9
63. 9
27.0
730
72.4
57.8
27 .6
39.2
78.6
82.9
27.0
73.0
51.1
73.5
76.5
28 .6
19.0
71.4
8 1.0
53.2
55.4
47.9
80.0
70.2
76.0
69.2
25.2
28 .9
74 .8
71.1
58.8
46.5
78.0
70.6
73.4
69.6
23.2
76.8
67 .4
53.0
32.6
22.2
28.8
83.0
75 .7
75 .4
78. 2
5.6
7.4
10.6
9.9
.0
2. 1
staills
Own home ... . . . ... . . .
Do not ow n home. . . . .
Gender (i f respondem
Male . ... . .. . . ... . .... . .. ... .. .
Female ...... .
. .... . .
Region
Wes\.
.. .. . . . . ... . . .
. •. .... .• ..
Midwest . . .. . .
Northeast. . ..... . . . .. . . . . . . . . ..... . . . . . .
South . ..... . . .. . . . .
NOTE : Some percentages do not sum to 100 because of round ing Or
nonresponse.
I. Income percenti les are based on the income of all responding house holds.
Th us, of respondents in the lowest 20 percent of the inco me distributio n,
36.6 percent reponed hav ing In ternet access at home and, of lhat group. 41 .0
percent reponed having a di al· up co nnection.
fifth in term s of income tended to report using online
banking as their main way of doing business with
their primary fin anci al institution (42 percent), whereas
consumers with less income reported in-person banking as their main way of conducting bank business
(perhaps in part becau se of a lack of access to the
Internet). Compared with those over the age of 45 ,
larger proportions of respondents under 45 reported
using online banking or ATMs as their main way of
doing business with thei r primary fin ancial institution. Education level appears to be associated with
online banking as well : larger proportions of respon-
77.8
71. 2
47. 1
54.9
53.7
14.0
6. 1
16. 1
13.7
79.2
11 .3
77.3
17.3
9.6
5.4
11.7
5.3
18.6
5.8
17.7
6.9
10.4
11 .3
2. Includes Asian, Pacific Islander, and Nati ve American .
. No t applicable .
SOU RCE: Mic hi gan Surveys of Consume rs.
dents wi th a bachelor's degree or postgraduate education reported online banking as their main way of
banking.
Extent of Consumer Access to the Internet
Nearly three-fourths of respondents to the 2006
Michigan Surveys of Consumers reported having
Internet access at home (72 percent), and about half
reported having access at work (52 percent). Most
consumers with home access had a high -speed connection (73 percent) (table 3). For onl ine bankers, the
A I 04
Federal Reserve Bulletin D July 2009
majority (78 percent) reported that they do their
online banking most often from home.
Several demographic factors-including age, education , race and ethnicity, and income-seem to be
associated with Internet access. The same groups less
likely to cite online banking as their primary means of
conducting bank business were also less likely to
have Internet access at home . For example, respondents older than 65 were less likely to have Internet
access at home and less likely to have a high-speed
Internet connection . Similarly, only 22 percent of
respondents without a high school diploma reported
having Internet access at home, and only 12 percent
reported having access at work. In addition , black and
Hispanic respondents were less likely than white and
"other" (predominantly Asian, Pacific Islander, and
Nati ve American) respondents to have Internet access
at home-although those who had home access were
just as likely as white and "other" respondents to
have a high-speed connection . In a multivariate modeling of Internet access, black respondents were the
only group statistically less likely to have access,
either at work or at home (data not shown).
Between 2000 and 2006, access to computers and
the Internet became more widespread across all
income groups .? However, data from the 2006 Michigan Surveys of Consumers indicate that differences
among households in different income groups remain .
About 50 percent of low- and moderate-income
households (those in the first and second income
quintiles, the lower 40 percent of the income distribution) had Internet access at home, compared with
nearly 90 percent of middle- and higher-income
households (those in the upper 60 percent of the
income distribution) ; similarly, about 30 percent in
the lower income group reported having Internet
access at work, compared with nearly 70 percent in
the upper income group.8
Even for those with Internet access at home, the
type of access varies by income, with higher proportions of lower income households accessing their
home Internet service provider via a slower dial-up
7. U.S. Census (200 I), "Home Computers and Internet Use in the
United States : August 2000 " (September), www.cen sus.gov/prod/
200Ipubslp23-207.pdf; U.S. Census (2005) , "Computer and Internet
Use in the United States: 2003" (October), www.census.gov/prod/
2005pubslp23-208.pdf; 2008 Statistical Abstract of the United
States, "Internet Access and Usage and Online Service Usage:
2006" (table 1127). www.census. gov/compendialstatabn008/tables/
08s I I 27.pdf.
8. Here and elsewhere in this article , "low income" refers to
households in the first income quintile (lowest 20 percent of the
income distribution), " moderate income" refers to those in the second
quintile, "middle income " refe rs to those in the third quintile , and
" highe r income" generally refers to those in the upper two quintiles.
connection rather than a high-speed connection. This
finding has implications for the use of online banking,
as consumers may find online banking via a dial-up
connection cumbersome and may believe that highspeed connections are more secure. As discussed
later, consumers' perceptions of the convenience and
security of e-banking products affect their willingness
to adopt these products.
TRENDS IN CONSUMER ADOPTION
OF E -BANKING
Consumer adoption of some mature e-banking technologies seems to have reached saturation. For example, the proportion of households reporting that
they use direct deposit for income or benefits payments was at 80 percent in 2007 (table 4). ATM use
remained fairly stable, at 67 percent and 69 percent in
2003 and 2006, respectively (though a higher proportion reported using ATM card s in 2007).
Adoption of other, newer e-banking technologies
has been growing. In particular, the use of debit cards
has increased in recent years-although some consider debit cards a " mature" technology, given their
widespread use .9 (Debit cards have been around long
enough and have been used in a sufficient number of
transactions that a few problems are being recognized, among them account overdrafts; see box
" Account Debits and Overdrafts.") Only 20 percent
of respondents to the 1995 Survey of Consumer
Finances had used a debit card; by 2007, the percentage had more than tripled, to 71 percent. The increase
may have been due to several factors. In the mid1990s, banks began to issue debit cards imprinted
with the Visa or MasterCard logo, leading to acceptance by more merchants. lo Also, the addition of
national credit card networks enabled consumers to
complete transactions with only a signature anywhere
a merchant accepted the card-in contrast to the
requirement, when debit cards were introduced, that
they use a personal identification number (PIN).
Wider merchant acceptance and the elimination in
many instances of the PIN requirement resulted in a
significant increase in debit transactions in general,
9. Julia S. Cheney (2007), "An Update on Trends in the Debit Card
Market," Payment Cards Center Discussion Paper 07-07 (Philade lphia : Federal Reserve Bank of Philade lphia, June), www .
phil adelphiafed.orglpay ment-cards-center/publicat io ns/discuss ionpapers/20071D2007 June U pdateDebitCard MarketTrends. pdf.
10. Stan Sienkiewicz (2002), " The Evolution of EFT Networks
from ATMs to New On-Line Debit Payment Products," Payment
Cards Center Discussion Paper 02-04 (Philadelphia: Federal Reserve
Bank of Philade lphia, April ), www.philadelphi a fed .org/pcc/papers/
2002IEFTNetworks_042002.pdf.
u.s.
4. Proponion of
Households' Access to and Use of Electronic Banking, 1989-2007
A105
.,. household Ihal u 'e various eleclrOni banking technologies. selected years
Percent
Michigan Surveys of Co nsumers
Survey of Consumer Finances
Technology
1995
Direct deposit .
ATM card.
Debit card .....
Preauthorized payment ..
53
Auto mated phone system.
Online banking .
Smart card .
Prepaid card ..
n.a.
35
20
25
4
I
n.a.
I
1998
67
55
37
40
26
7
2
n.a.
I
2001
I
2004
I
2007
I Change,
1995 to
1999
2007
73
58
50
44
76
66
63
51
80
76
71
49
50
116
254
95
23
21
3
n.a.
21
35
n.a.
25
53
n.a.
1,228
Il.a.
n.a.
...
I
2003
65
59
n.a.
31
I
2006
70
67
54
46
46
51
12
73
Change,
1999 to
2006
77
69
62
57
44
32
6
7.l
I
40
10
n.a.
n.a.
19
16
. ..
84
16
411
NOTE: The numbers in this table differ from those in Mester, "Changes in
the Use of Electronic Means of Payment: 1995-2004," in that Mester's data in·
clude all households whereas the data in this table include only those households that have bank accounts, consistent with Anguelov, Hilgert, and Hogarth,
" U.S . Consumers and Electronic Banking." In addition , for those households
with ATM cards. this table includes only those households that use the product ,
whereas Mester (see note b to her table " Percent of U.S. Households Ihat Use
Each Instrument: 1995, 1998, 2001, and 2004") indicates that she included any
household that reported owning an ATM card.
Calculations may not yie ld change shown because of rounding.
n.a . Not available .
. . . Not applicable.
SOURCE : Survey of Consumer Finances and Michigan Surveys of
Consumers.
and in signature debit transactions (as opposed to PIN
debit transactions) in particular.
The data indicate that consumers may be using
some technologies as substitutes (using one or the
other) and other technologies as complements (using
both). For example, there is some evidence that
consumers are using debit cards as substitutes for
checks and cash and that those who are not using
debit cards for transactions are using credit cards. I I
(The decision about which form of payment to use
may be driven in part by the size and circumstances
of the transaction; see box "How Would You Like to
Pay for That?") Similarly, consumers may use either
online or phone banking, rather than both. Or they
may use preauthorized payments and phone or online
banking as complementary means of paying bills.
In 2006, more than half of consumers reported
using preauthorized payments, up from about onefourth in the mid-1990s. Preauthorized payments
allow consumers to have many types of bills paid
automatically from their bank account-rent or mortgage, car payments, utility bills, or gym memberships, for example. Paying in this way helps consumers avoid late fees and maintain a sound credit record.
While preauthorized payments can reduce consumers' costs in terms of their time and effort, they can
also increase their "switching" costs, for example,
the time it takes to change to a new financial institution, or the expense of stopping payment should the
consumer wish to terminate his or her relationship
with a current recipient of a preauthorized payment.
Online banking has clearly been the fastest growing e-banking technology over the past decade: fewer
than 5 percent of consumers were banking online in
1995, compared with 53 percent in 2007. While most
online bankers use the service to monitor their
accounts or transfer funds, a significant proportion in
2006 were using online banking to pay bills (table 5).
In 2003, only 32 percent of households reported
banking online, and 55 percent of those online bankers were paying bills online; by 2006, of the 51 per-
I I. Ron Borzekowski, Elizabeth K. Kiser, and Shaista Ahmed
(2006), "Consumers' Use of Debit Cards: Paltems, Preferences, and
Price Response," Finance and Economics Discussion Series 2006-16
(Washington: Board of Governors of the Federal Reserve System,
April), www.federalreserve.gov/pubs/fedsl2oo61200616/200616pap.
pdf; Elizabeth Klee (2006), "Families' Use of Payment Instruments
during a Decade of Change in the U.S. Payment System," Finance and
Economics Discussion Series 2006-0 I (WaShington: Board of
Governors of the Federal Reserve System, February), www.
federalreserve .gov /pubs/fedsI2006120060 1120060 I pap.pdf; Fumi ko
Hayashi and Elizabeth Klee (2003). "Technology Adoption and
Consumer Payments: Evidence from Survey Data," Review of Network Economics, vol. 2 (June), pp 175-90; Elizabeth KIee, " How
People Pay: Evidence from Grocery Store Data" (2008), Journal of
Monetary Economics , vol. 55 (April), pp. 526--41; Marques Benton,
Krista Blair, Marianne Crowe, and Scon Schuh (2007), "The Boston
Fed Study of Consumer Behavior and Payment Choice : A Survey of
Federal Reserve System Employees," Public Policy Discussion Papers
No. 07-1 (Boston: Federal Reserve Bank of Boston, February),
www.bos.frb.org/economiclppdp/2007/ppdp0701 .pdf.
5. Proportion of online bankers using various onli ne
banking service ', 2003 and 2006
Percent
Service
Monitor accounts
..
Transfer funds between accounts
Pay bills ........ ..
Open new accounts.
Apply for loans . . .
2003
2006
95.4
63 .9
97.7
70.1
76.0
14.8
54.7
".a.
n.a.
11.1
32
51
MEMO
Proportion of respondents banking online ..
n.a. Not available.
SOUHCE: Michigan Surveys of Consumers.
AI06
Federal Reserve Bulletin 0 July 2009
Account Debits and Overdrafts
A 2007 study by PULSE EFf Association and Dove
Consulting found that an increasing proportion of debit
card programs authorize purchases "even when there are
insufficient funds in the underlying demand deposit
account at the time of the transaction, in essence allowing
cardholders to overdraw their accounts.'" In these cases,
consumers may face an overdraft fee from their bank.
Financial institutions contend that consumers may be
willing to pay overdraft fees rather than have their
transactions denied. while consumer advocates contend
that consumers should be gi ven the choice of canceling or
continuing their transactions.
In December 2008, the Federal Reserve Board issued
final rules that amend the Board ' s Regulation DD (Truth
in Savings) to address depository institutions' disclosure
practices related to overdrafts. The new rules take effect
January I, 20 I O.
• Disclosure of aggregate overdraft fees . All institutions
must disclose on their periodic statements the aggregate dollar amounts charged for overdrafts and returned items, both for the statement period and for the
year to date. (Previously, only institutions that promote
or advertise the payment of overdrafts were required 10
disclose aggregate amounts.)
• Disclosure of balance information. Institutions that
provide account balance information through an automated system must provide a balance that does not
include additiona l funds that may be made available to
cover overdrafts.
At the same time the Board issued these final rules, it
also issued proposed rules for overdraft services. The
proposed rules. which would amend the Board's RegulaI. The PULSE EFT Associalion and Dove Consulling slUdy is
described in Julia S. Cheney (2007). "An Updale on Trends in the Debit
Card Markel." Paymenl Cards CeDler Discussion Paper 07-07 (Philadelphia: Federal Reserve Bank of Philadelphia. June). www.
philadelphiafed.org/payrnenl-cards-cenler/publicalionsldiscussion-papers/
2007tD2007JuneUpdateDebitCardMarketTrends.pdf.
cent of households banking online, 76 percent were
paying bills online.
Compared with online bill paying, other online
banking services, such as opening new accounts , are
used much less frequently (appendix table B. l). In
2006, only about 15 percent of online bankers used
online banking to open a new account, and only
II percent used online banking to apply for a loan.
Because not all banks offer a full range of services
online, some of these numbers may reflect the supply
of, as well as the demand for, e-banking services.
tion E (Electronic Fund Transfers). provide certain consumer protections related to the assessment of overdraft
fees.
• Consumer choice regarding overdraft services. The
proposal solicits comment on two approaches to giving
consumers a choice regarding the payment of ATM and
one-time debit card overdrafts by their financial institution.
-
-
Opt-out. Under one approach. an institution would
be prohibited from imposing an overdraft fee
unless (I) the consumer is given an initial notice
and a reasonable opportunity to opt out of the
institution' s overdraft service and (2) the consumer
does not opt out.
Opt-in. Under the other approach, an institution
would be prohibited from imposing an overdraft
fee unless the consumer affirmatively consents
("opts in") to the institution ' s overdraft service.
• Debit holds. The proposed rules would prohibit institutions from imposing an overdraft fee when the account
is overdrawn because of a hold on funds in the
consumer's account that exceeds the actual transaction
amount. For example, when a consumer uses a debit
card to pay for gasoline, the initial authorization may
p~ ace a hold for $50; the consumer may want to
purchase only $20 worth of gas, but if he or she has
only $40 in the account, the $50 hold may overdraw
the account. The proposed rule is limited to debit card
transactions in which the actual transaction amount
generally can be determined within a short time after
the transaction is authorized (for example, transactions
at gas stations and restaurants).
For details and to track the progress of these proposals,
visit www.federaJreserve.gov/newsevents/press/bcreg/
2008 J218a.htm. The comment period for these proposals
closed on March 30. 2009.
Nearly three out of four respondents to the 2003
and 2006 Michigan Surveys of Consumers reported
using some type of prepaid, or stored -value, card .
Some of these cards may be closed-system, or singlevendor, cards (for example, gift cards from a particular store); others may be general-purpose cards that
carry a Visa, MasterCard, or American Express logo.
Some cards are designed for a single use, while others
are reloadabJe; for example, some employers issue
reloadable payroll cards to employees who do not
have their pay deposited directly into a bank
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
account. 12 Between 2004 and 2007, the number of
transactions made via prepaid cards grew from 2.4 bil lion to 4.3 billion; the dollar volume grew in approximately the same proportion, from $64 billion to
$113 billion. While the majority of these prepaid card
transactions were made by closed-system cards, the
share made by general-purpose cards grew from
20 percent to 28 percent over the period. 13 Consumer
and community educators have advocated the use of
these cards as a way to transition unbanked and
underbanked households to the mainstream banking
system. However, many of these cards are not associated with a bank account.
Users of E-Banking
In addition to the benefits of using e-banking products
and services noted earlier, studies suggest that consumers who monitor their bank accounts electronically identify fraudulent transactions earlier than consumers who rely on paper statements. 14 If this is the
case, then it is important to identify barriers to the
adoption of e-banking technologies so that consumers
can be encouraged to use these products for their own
benefit.
Consumers' access to bank accounts and their use
of e-banking products is correlated with demographic
factors such as age, income, race and ethnicity, and
education. IS Given that the number of e-banking
12. James C. McGrath (2007), "General-Use Prepaid Cards: The
Path to Gaining Mainstream Acceptance," Payment Cards Center
Discussion Paper 07-03 (Philadelphia: Federal Reserve Bank of
Philadelphia, March), www.philadel phiafed.orgJpcc/papers/2007 /
D2007MarchGeneraIUsePrepaidCards.pdf; Julia S. Cheney and
Sherrie L.w. Rhine (2006), "Prepaid Cards: An impOllant Innovation in Financial Services," Payment Cards Center Discussion Paper 06-07 (Philadelphia: Federal Reserve Bank of
Philadel phia, July), www.philadelphiafed .orgJpcc/papersI2006/
D2006JulyPrepaidCardsACClcover.pdf; Julia S. Cheney (2007), "Payments, Credit, and Savings : The E){perience for LMI Households, "
Summary of Payment Cards Center conference (Philadelphia: Federal
Reserve Bank of Philadelphia) , www.philadelphiafed.org/pcc/
conferencesl2007/C2007MayE){perienceforLMI .pdf.
13. Aite Group (2007) , "Prepaid Cards: The State of Ihe Industry, " Report 200707231 (July), www.aitegroup .com/reports/
20070723J.php; and ATM & Debit News and Prepaid Trends,
New York: Source Media , September 27, 2007. Gerdes ("Recent
Payment Trends in the United States") estimates that appro){imately
3.3 billion prepaid card payments, with a dollar volume of appro){imately $49.6 billion, were made in 2006.
j 4. Mary T. Monahan (2007), " Identify Fraud Is Dropping, Continued Vigilance Necessary," Javelin Strategy and Research 2007 identilY Fraud Survey Repon (February) .
15. Lee and Lee, "Haven ' t Adopted Electronic Financial Services
Yet?"; Eun Ju Lee, Jinkook Lee, and David Eastwood (2003) , " A
Two-Step Estimation of Consumer Adoption of Technology-Based
Service Innovations," Journal of Consumer Affairs, vol. 37 (December), pp. 256-82; Jane M. Kolodinsky, Jeanne M. Hogarth, and
Marianne A. Hilgen (2004), " The Adoption of Electronic Banking
Technologies by U.S . Consumers," International JournaL of Bank
A 107
products used by consumers has increased, it may be
instructive to look at how various demographic
groups-some of which may be underrepresented
among electronic bankers-have fared,
I[)come and -Banking
Data from the Michigan Surveys of Consumers confirm that higher income households are more likely
than those in other income groups to have a bank
account and to use each of the electronic banking
services covered in the surveys (table 6). However,
low- and moderate-income households appear to be
catching up: by 2006, 80 percent of low-income
households and 94 percent of moderate-income households reported having a bank account. And while each
income group has shown growth in the adoption of
e-banking technologies, the growth has been especially noticeable among low- and moderate-income
consumers. For example, the proportion of .Iow- and
moderate-income households using preauthorized payments more than dou bled between 1999 and 2006.
And low-income consumers reported an even larger
increase in online banking, with the proportion rising
tenfold , from 3 percent to 30 percent, between 1999
and 2006. Despite significant growth in the percentage of low-income consumers banking online, the
difference between the lowest and highest income
groups in the percentages banking online appears to
have widened over time, from 19 percentage points in
1999 to 26 percentage points in 2003 to 40 percentage
points in 2006. Finally, the proportion of low-income
consumers banking by phone more than doubled from
1999 to 2006, perhaps an indication that phone
banking is a substitute for online banking among
lower-income households.
Does their increased use of online banking, phone
banking, and preauthorized payments mean that lowand moderate-income consumers are better off? While
this question cannot be answered definitively, it is
possible that these consumers are better able to
monitor their account activity and balances with these
e-banking technologies. Interestingly, when attitudes
and other demographic characteristics were controlled for in the 2006 data, income was not a
significant determinant of whether a household banked
online, banked by phone, or used preauthorized payment (data not shown).
Marketing, vol. 22 (4), pp. 238-59; Borzekowski, Kiser. and Ahmed.
"Consumers' Use of Debit Cards"; Michal Polasik and Tomasz Piotr
Wisniewski (2008), "Empirical Analysis of Internet Banking Adoption in Poland" (June 22), paper presented at the 21st Australasian Finance and Banking Conference, papers.ssrn.com/soI3/
papers.cfm?abstracUd= I j 16760.
A 108
Federal Reserve Bulletin 0 July 2009
6. U c of e-banking products and 'e rvices by consumers who have a bank :lccount. hy demograph ic chardctcrislic.
selected years
Percenl
-
Have a bank accounl
Demographic characlerislic
ATM card
1999
I
2003
I
2006
1999
I
2003
I
2006
ProducI or service
I
I
I
Debil card
1999
I
2003
I
2006
I
DirecI deposit
1999
I
2003
I
2006
....
89
86
92
60
67
69
n.a.
54
62
66
70
77
Household income (by iJicome percentile) I
20% or less ... .. .
...
210/0-40%.
.. ... . ........ .. . .
" .
41%-60%" .... . .... . . . . . . , , . , . ... .. .
61%--80% . .. .. .. .. . . . .. ... " . . . . . . . . .
....
81'70--100% . .
67
89
93
98
97
67
82
34
47
60
68
82
57
71
72
68
72
58
66
63
79
83
n.a .
92
98
80
94
97
98
97
49
58
60
53
55
50
65
61
71
69
63
70
60
65
72
59
69
68
80
73
71
74
79
84
81
Age of respondent (years)
Younger than 35 . ... " . . ...... . . , . .... ..
.,"
35-44 "
···· · .wo . ···· ·· ·
45-54 ..
... • • . •• 1 .. . ..... . , ...
55--64 " ... "."" .... . .. . . . . .. . . . . .
65 and older .... . . .. ..
. , ...... .......
87
87
91
87
91
81
88
90
91
83
88
95
95
91
92
79
74
58
52
19
84
77
62
58
45
89
80
76
57
41
79
64
43
39
30
86
76
64
52
32
58
67
60
57
89
60
70
66
76
83
73
75
89
67
88
93
70
88
97
95
99
23
45
70
67
85
55
60
70
72
71
49
57
73
77
75
42
51
61
58
49
44
53
72
65
97
44
81
88
95
97
63
61
62
64
72
73
47
63
71
75
78
62
70
79
83
83
Race/ethn;c;r)' of respondent
While . .
..
Black . ... ... . ......... . .. .
Hispanic .. .. ... ... ...... .. ..........
Olher> ...
. .... . . ... . .. .. . . .
92
75
71
87
90
66
69
86
95
80
81
90
58
61
79
71
64
80
90
67
68
75
76
63
50
68
86
67
61
70
68
63
65
71
63
74
70
71
60
86
78
83
66
74
Mar;/(f! s/(ftus of ''f,pv1l<Iem
Married . . .... ...
Single female . .. .. ....
Single male .... . . ....... ... . .
94
83
83
90
79
85
94
88
91
64
51
60
69
64
67
71
64
68
57
50
53
64
59
59
66
70
59
75
67
55
78
80
69
93
80
91
74
95
84
56
69
63
78
67
77
50
67
59
73
70
57
72
64
78
75
... .
.. ...... .
91
87
87
85
93
92
62
58
68
67
71
67
54
55
63
61
63
69
69
71
75
79
Reg;on
WeSI ... . .... . .... ..... . . . . . . . . . . . . .
Midwesl .. ... . , ...
..... .. . .. ... ..
Northeasl ..... . . ,
. . ...... .
. . . ..
South .. . ...
91
89
89
83
84
94
93
96
89
70
90
89
86
73
58
67
70
75
64
76
64
65
47
44
58
67
58
61
62
69
62
60
70
66
71
67
74
80
74
74
80
All respondents . .
""
".
.
.
.......
.. ...
....
EJllcat;on of respondent
No high school diploma ..
High school diploma ..
Some college . . . . . . ... ..
Bachelor' s degree .. '
POSlgradnale educalion . .
.... .....
... ....
.... .... ..
Humeowflership sWIllS
...., .. .
...
.. . .
...
.
Own home .
.. . .. . . . .
Do not own home . . . . . . . . . . . . . . . . .
.
Gender of ''fsponJelll
....
Male . ""
Female . ...
..... .. ..
......
....
~
92
..
92
I. I nco me percentiles are based on the income of all respondi ng households.
Thus , of respondents in Ihe lowesl 20 percem of lhe income dislribulion .
67 percenl had a bank account in 1999 and 2003 and 80 percenl had a bank
account in 2006.
Age and E-B anki ng
Younger consumers (under age 35) are slightly less
likely to have a bank account than consumers more
typically in the workforce. However, among consumers with a bank account, the use of ATMs, debit cards,
and online banking decreases consistently as age
increases: younger households are much more likely
than older households to use these services. The
service that is the exception is direct deposit, the use
of which generally increases with age. When considering changes over time, however, growth rates for
adoption among older consumers (those 65 and
above) have surpassed rates for other age groups. For
example, the proportion of older consumers using
SO
60
60
n.a.
n.a.
n.a.
n.a .
n.a.
n.a.
n.n.
n.a .
n.a .
n.a.
n.a .
n.a .
n,a.
n.a.
n.a .
n.a .
n.a .
n.3 .
n.a.
n.a.
o.a .
n.a.
n.a.
n.a .
n.a.
n.a.
n.n.
n.a .
n.a.
71
78
2. Includes Asian, Pacific Islander. and Native American.
n.a. Not available.
SOURCE: Michigan Survey s of Consumers.
ATMs and preauthorized payment doubled from 1999
to 2006, the proportion using phone banking tripled,
and the proportion using online banking increased
tenfold.
Ed ucation and E- Banking
Consumers who have no post-secondary education
are less likely than their more-educated counterparts
to have a bank account. And among less-educated
consumers who have a bank account, smaller proportions use e-banking services. The most widely used
service among those with no post-secondary education is direct deposit, followed by prepaid cards and
ATMs.
u.s.
Households' Access to and Use of Electronic Banking, /989-2007
A109
6. - ol1lil1!1ed
Percen!
Product or service
2006
1999
79
78
59
70
76
76
79
81
84
73
71
51
87
78
73
74
52
n.n.
57
68
49
63
n.a.
n.a.
73
77
77
n.3.
82
n.3.
74
70
79
68
74
61
60
n.a.
n.a.
77
n.3.
63
76
70
60
10
16
n.a.
n.n.
74
71
81
68
14
9
n.a.
66
69
n.n.
79
75
8
n.3.
n.n.
74
74
71
74
74
69
79
69
9
12
10
15
J3
8
6
7
6
I
21
8
3
4
5
9
7
3
8
14
14
14
6
5
4
16
12
7
12
12
6
5
S
13
7
15
n.3.
6
7
53
49
n.a.
n.3.
5
7
57
53
48
48
n,a.
6
7
3
7
46
10.7
31.9
51.1
23
21
27
39
42
35
39
47
53
55
46
50
59
58
69
22
30
45
45
58
22
47
45
50
53
50
43
40
53
48
3
6
9
II
22
17
27
32
38
43
30
38
50
64
70
25
40
37
27
26
47
51
44
41
44
62
62
55
53
52
45
60
43
35
53
52
48
42
18
50
47
50
45
36
16
13
9
9
2
48
36
31
26
9
67
65
53
43
20
19
26
30
37
38
30
38
51
51
47
31
50
54
60
73
13
36
42
55
48
33
44
49
48
44
3
6
12
15
17
II
29
39
56
62
18
37
41
37
10
35
53
59
64
n.n.
n.n.
n.a.
31
27
38
39
45
49
49
61
56
53
65
43
51
51
54
48
37
50
34
25
31
22
36
49
53
39
51
47
n.a.
n.a.
73
40
37
44
54
35
27
25
51
42
33
57
52
49
45
37
30
49
36
38
46
50
36
22
33
56
42
45
n.n.
40
13
7
II
n.a.
n.n.
36
21
48
40
58
52
38
46
44
44
46
52
9
15
32
31
51
49
31
31
47
46
54
59
37
43
45
43
45
48
12
10
35
29
31
36
23
31
46
45
44
48
59
54
53
60
51
31
38
42
47
37
46
47
54
41
47
45
15
7
8
12
34
28
26
36
About one in ten of the least-educated consumers
(those without a high school diploma) bank online. In
2006, 22 percent of respondents in this group had
access to the Internet at home, and about 12 percent
had access at work (table 3), hindering their ability to
access and become familiar with online banking
products. Thus, while an increasing percentage of
less-educated consumers are using e-banking, their
adoption of these services pales in comparison with
consumers in other education groups. When controlling for attitudes and other demographic characteristics, education is a significant factor for the use of all
e-banking technologies except phone banking.
With a few notable exceptions, between 1999 and
2006, the use of e-banking grew among most educational groups. It is interesting that respondents with
the most education were less likely to report using
59
74
4
6
5
8
7
44
II
8
n,n.
n.a.
40
II
73
12
57
II
73
6
46
II
n.3.
n.3.
31
n,n.
n.a.
n,a.
o.a,
n.a.
lI,a .
n.a.
n.il.
n.a.
n.a.
n.a.
n,n.
n.a.
n.a.
n.a.
n.a.
n.iI.
II
12
7
II
12
14
n.a.
n.a.
n.il.
n.3.
n.a.
n.a.
n.il.
n.il.
n.a .
n.a.
n.il.
n.n.
n.n.
"-a.
n.n.
77
n
79
75
n
ATMs in 2006 than in 1999 but were more likely to
report using debit cards; it may be that these consumers were substituting debit card transactions for ATM
transactions. Similarly, consumers with more education appear to have switched from phone banking to
online banking over time, as might be expected, as
access to the Internet is also greater for those with
more education .
Race, Ethn icity, and E-Banki noCompared with white consumers, lower proportions
of black and Hispanic consumers report having a
bank account. Over time, however, the proportions of
banked black and Hispanic consumers have increased,
by 5 percentage points for black households and
10 percentage points for Hispanic households from
AII0
Federal Reserve Bulletin 0 July 2009
7. Proportion of consumers using c-banking technologies. by type of user. selected years
Percenl
Limiled users
Minimal users
Technology
1999
1
2003
1
2006
ATM card .. . . .. . .. .. .......
..
Debit card . . . . . , . . . . . . . . . .
Direct deposit .
. .. .. ... ..
Auto bill payment . ....
68
n.a.
31
57
22
7
63
35
43
38
51
12
Phone banking .. . . .. .. .....
Online banking . . . . . .. . , ... ,.
Prepaid card . . . . . . . ... .. ...
18
5
n.a.
34
13
97
II
8
25
37
29
22
.
.. .
~
All respondenls .. . . .. . . ,.
...
NOTE: Components may nol sum
n.a. Not avail able.
10
100 perce III because of rouoding.
1999 to 2006. Among those with a bank account.
black consumers appear more likely to use debit cards
than their white counterparts but are less likely to
bank online.
Adoption of electronic banking products and services generally seems to have increased over time for
all the racial and ethnic categories surveyed. A notable
exception is the use of phone banking and preauthorized payments: a substantially smaller proportion of
"other" consumers (predominantly Asians. Pacific
Islanders, and Native Americans) reported banking by
phone in 2006 compared with previous surveys, and a
substantially larger proportion of this group reported
using preauthorized payments.
Cornbinatiotls oj E-Bcmking Services
Used hy Consumers
As e-banking has become more popular, consumers
have adopted various combinations of e-banking
products and services. Cluster analysis makes it possible to look at those combinations and the characteristics of the users. In general, consumers can be
sorted into several groups : early adopters and heavy
users, who try everything; minimal users, who use
very few, if any, e-banking services; and one or more
limited-user groups "in the middle," who adopt different combinations of products and services. 16
Minimal users seem to make use of direct deposit
and ATM and debit services (debit cards and preauthorized payments), but little else (table 7). Limited
users may add phone banking to these more basic
services. Heavy users are just that-they make use of
most e-banking services. While it is the case that
about one out of five consumers did not make much
use of electronic banking services in 2006, over time
16. Hogarth. Kolodinsky. and Gabor. " Cons umer Payment Choices:
Paper. Plastic---or Electrons?"
1999
I
2003
1
Early adoplers and heavy users
2006
57
60
n.a.
44
62
17
28
51
83
68
o.a.
17
II
18
48
26
100
40
58
7
1999
I
2003
2006
34
93
98
87
80
71
95
95
86
67
90
57
50
...a.
67
57
92
59
73
83
26
15
45
51
38
32
76
I
lI.a.
SOURCE : Michigan Surveys of Consumers.
more than half of consumers have come to be classified as heavy users.
Consumer Attitude toward
Emerging Payment Technologies
The 2006 Michigan Surveys of Consumers asked
about the use of emerging payment products, such as
contactless cards and wireless payment devices . Contactless payment cards, which operate by transmitting
a radio signal to a payment terminal or a handheld
device (instead of by being swiped at a terminal),
were not available in the United States until recently. 17 In fact, only 6 .3 percent of survey respondents with a bank account reported having received a
contact less payment card from their bank or credit
card company (data not shown). Some consumers
have been exposed to contact less payments through
the use of electronic pass devices at toll booths and
electronic tokens at gas pumps. The main selling
points of contactless payment cards are greater speed
and convenience: such payments may make for faster
transactions, allowing consumers to maintain control
over the card rather than hand it to a merchant.
Among all respondents, more than half (52 percent) said they would or might use contactless payment cards in the future (table 8). Among online
bankers (recall that they make up about 51 percent of
the full sample), nearly two-thirds (65 percent) said
they would or might use this means of payment.
17. The Smart Card Alliance. an industry association of payment
system participants. estimates that 21 million contactless cards had
been issued in the United States by April 2007 . See Smart Card
Alliance (2007). "Proximity Mobile Payments: Leveraging NFC and
the Contactless Financial Payments Infrastructure," Smart Card Alliance Contact less Payments Council white paper (September),
www.smaI1c ardalliance .orglpages/publications-proximity-mobi lepayments .
u.s.
Households' Access to and Use of Electronic Banking, /989-2007
Alll
8. Con umers' expectations regarding the use of emerging payment technologies in the rUlure , 2006
Percent
Respondents who bank online
All respondents
Expectation
Yes
Use contacltess payments in fUlure . . . . . . . .. . . . . . . .
Use wireless paymenls in fUlure .. ..
I
37.8
16.3
NOTE: ComponenlS may not sum to 100 because of rounding.
The future success of contactless payments may be
tied to the same demographic characteristics that
appear to influence adoption of other electronic banking products. Income, age, education, and race and
ethnicity, for example, appear to be associated with
the adoption of electronic banking products. Similarly, consumers with higher income and more education, and younger households, were more likely to
indicate a willingness to use contactless payment
products in the future (see appendix table B.2).
Wireless payment devices were described in the
survey as cellular phones and PDAs that can be
equipped with a computer chip that allows users to
charge items to their phone bill using the device
instead of to a credit or debit card. Applications are
also being developed, in a partnership between banks
and telecommunications companies, that will debit
users' bank account or bill their credit card account
rather than charge their phone bi II.
Compared with contactless payments, the potential
success of other types of wireless payment devices is
much less clear. The majority of respondents to the
2006 Michigan Surveys of Consumers (77 percent)
said they were unlikely to use wireless payments in
the future, and consumers who reported banking
online were only slightly more likely to say they
would likely adopt wireless payment technology.
What accounts for this difference between consumers' willingness to use contactless and wireless payments? Some researchers suggest that consumers do
not necessarily see a need for wireless products. IS
Moreover, as is the case with contactless cards,
familiarity with these products is directly related to
their availability, and the infrastructure enabling merchant acceptance of contactless and wireless cards is
still developing in the United States. To date, wireless
payments systems have been deployed in parts of
Europe and Asia but still face significant technological and infrastructural barriers in the United States.
Mobile banking and payments, via such devices as
mobile (or "cell") phones and PDAs, have gained
attention in recent years (see box "Mobile Banking
18. Dan Schau (2007), US Mobile Banking: Beyond the Buzz
(Boslon: Celent).
Maybe
t4 .7
7.2
I
No
Yes
47.5
76.5
I
51.6
24.0
Maybe
13.8
7.7
I
No
34.6
68.2
SOU RCE: Michigan Surveys of Consumers.
and Payments"). Access to mobile technology is now
widespread in the United States; an estimated 80 percent of the population have access to mobile phones,
and some industry analysts predict that mobile phone
use in the United States will approach 100 percent in
a few years. 19 As of early 2009, all the major financial
institutions in the United States offer mobile banking
services that provide account access via mobile
phones and PDAs, and many smaller banks are
adding technologies to provide mobile banking services. 20 These services generally allow consumers to
transfer funds between accounts, schedule online
payments, and conduct other online banking transactions using their mobile device, but most do not allow
consumers to use their mobile device to make payments at the point of sale. Third-party providers are
beginning to offer mobile payment options using
short message service (SMS) technology, and niche
markets, such as the Metropolitan Transit Authority in
New York City, are using near-field communication
(NFC) chip technology to enable payments. 21
Before mobile payments can become more widespread and accepted by both merchants and consumers, financial institutions, mobile carriers, mobile
hardware producers, and other stakeholders must
cooperate to develop standards that will allow interoperability among mobile devices and bank technology networks. Although adoption has already
occurred in Asia and Europe, most industry insiders
believe it will take several years, perhaps until
2012, for mobile payments to become widespread in
the United States. 22 However, the recent rapid adop19. Joseph Salesky (2007), "Mobile-Phone Banking : Coming to a
Bank Near You ," U.S. Banker (July) , www.americanbanker.coml
usb_article.html?id=20070626A2K9LH3P.
20. Marianne Crowe (2008), Emerging Paymellts-The Changing
Landscape, Presentation to Maine Association of Community Banks
and New Hampshire Communily Bankers Association (Boston: Federal Reserve Bank of Boston, April), www.bos.frb.org/economic/eprg/
presentations/2008/crowe04151708.pdf.
21. Nasreen Quibria (2008), The Contactless Wave : A Case Study
ill Trallsit Paymeflls, Emerging Payments Industry Briefing (Boston :
Federal Reserve Bank of Boston, June), www.bos.frb.org/economic/
e prg/paperslbrie fi ngsltrans it. pd f.
22 . According to the 2007 Mobile Financial Services Study. 51 percent of survey respondents believe mobile payments will be a reality in
five to ten years, while 20 percent expect it to take more than ten years .
A 112
Federal Reserve Bulletin 0 July 2009
Mobile Banking and Payments
In Zagreb, Croatia. consumers can board the local streetcar and pay their fare via their mobile phone. In Kuala
Lumpur, Malaysia, consumers can use their mobile phone
to pay for parking and restaurant meals. In Stockholm,
Sweden, consumers can buy a cup of coffee using their
mobile phone.
Technologies using mobile (or "cell ") phones, PDAs,
and other wireless handheld devices are also making an
appearance in the U.S. financial services market, initially
as mobile banking. The recent implementation of programs at major U.S. financial institutions, coupled with
the emergence of pilot programs at many regional and
local banks, indicates that mobile banking is about to
become a widely accepted banking medium. Industry
experts believe that the evolution in mobile technology,
together with consumer demand for more-convenient
access to their banks' products and services, especially
among younger generations. will create a viable market
for mobile banking.
Mobile banking is a logical extension of online banking and thus may be a comfortable next step for online
bankers. But extending the use of mobile devices beyond
banking transactions to point-of-sale and person-toperson fund transfers may require innovations in merchant, telecommunication, and financial services infrastructure as well as consumer willingness to try new
payment technologies.
Technology behind Mobile Banking
and Payments
Cunently, mobile banking and transactions rely on one of
several basic technologies:
• web access protocol (WAP)-a technology generally
used for mobile banking; has the familiar look and feel
of online banking
• downloadable application-a technology that allows
users to download the platform needed for a transaction; look and feel of platforms similar to online
banking
• short message service (SMS)-a technology that leverages text messaging to monitor account balances and
authorize and track payments; widely considered to be
the fastest growing and most popular platform at
present
• near-field communication (NFC) chip-a computer
chip similar to those found in contactless payment
cards. In 2006, New York's Metropolitan Transit
Authority (MTA) implemented a pilot program for
using contact less cards to pay fares and. a few months
into the trial. added NFC-enabled mobile phone payments as an alternative to card payments. The early
response was positive, with the MTA reporting that
customer acceptance was good, there were no consumer complaints about MTA charges, no instances in
which the MTA had to return funds to a consumer, and
no fraud . I
Companies adopting mobile payment technology now
indude nontraditional banking institutions and thirdparty payment providers such as PayPal, Obopay, and
Amazon. The industry is also looking at GPS technology
in mobile phones to allow customers to locate financial
products and services (such as ATMs) and to identify
targeted promotions when they are within a reasonable
distance of products and services that might be of interest
to them.
The "electronic waHet" (stored, encrypted credit card
or bank account information that can be used to make
electronic payments without entering the information for
each transaction), which was developed for online transactions, is also being adapted for mobile devices and
dubbed the "m-wallet." The m-wallet will include downloadable applications to enable customers to manage
routine financial transactions, including both debit and
I. Nasreen Quibria (2008). The Contactless ~/ "e: A Case 5111dy in
hans;t Payments. Emerging Paymenls Industry Briefing (Boston: Federal
Reserve Bank of Boston , June), www.bos.frb .org/economi c/eprglpapersJ
briefings/transit.pdf.
tion of smartphone technology may serve to expedite the process (a smartphone is a mobile phone
with advanced features, often with PC-like functionality).
Insights provided by the Diffusion of Innovation
model and the Technology Acceptance Model (described in the next section) suggest that consumers'
familiarity with mobile devices, along with additional
experience with text messaging technology (SMS),
contactless payment cards, and wireless Internet, will
speed the adoption of a variety of mobile banking
technologies. Online banking and contactless payments may be the building blocks for further
adoption. 23
See Edgar, Dunn & Company (2007), 2007 Mobile Financial Services
SlUdy: Key Findings Reporl (San Francisco: Edgar, Dunn & Company,
February).
23. Julia S. Cheney (2008), " An Examination of Mobile Banking
and Mobile Payments: Building Adoption as Experience Goods?"
Payment Cards Center Discussion Paper 08-06 (Philadelphia: Federal
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
credit transactions, and conduct routine banking functions. One vendor promotes an m-wallet product that
includes bill payment, prepaid airtime replenishment,
prepaid shopping cards, money orders, money transfers,
coupons, person-to-person transactions, gift/loyalty cards,
ticketing. and point-of-sale transactions.2 The evolution
and adoption of "smart phone" technology ha,provided a
solid platform for developing, launching. and marketing
applications for those functions .
Anticipated Adoption
A 113
an increase in the amount of control they had over their
finances.4
Businesses providing these services may be able to
capture the unmet demand for banking products and
services among the unbanked and underbanked-groups
that, according to the Center for Financial Services
Innovations (CFSI), account for nearly 40 percent of U.S.
households. CFSI believes that widespread use of alternative service providers (such as payday lenders and check
cashers) and the fact that approximately 65 percent of
Americans own a mobile phone are indications of potential demand. ~
Market reports indicate that despite earlier failures in
introducing mobile banking products and services. demand may finally be sufficient to support mobile commerce. One report predicts that 30 percent of onLine
banking households will use mobile banking by the end
of 20 I o? In a survey described in the report, 50 percent
of the Generation Y cohort (defined as persons age
18-25) indicated that they considered the availability of
mobile banking a "very important" or "somewhal important" factor when choosing a financial institution; 84
percent of this group (the early adopters of mobile
banking technology) said they already use their mobile
phone for functions other than making calls.
The features of mobile commerce that are attractive to
consumers are similar to those of online banking. namely.
convenience and ease of use. In addition, mobile commerce enables consumers to access their accounts from
almost anywhere at almost any time. Immediate access to
account balances and overdraft alerts have the potential to
enable consumers to exercise responsible control over
their finances . In a recent consumer trial of mobile
banking products, 75 percent of participants thought that
mobile banking allowed them to make better-informed
spending decisions, and more than 50 percent reported
Among the factors hindering adoption of mobile banking
and commerce is the lack of infrastructure that can
optimize the functionality of these products . Key challenges to service providers lie in providing ease of use
and interoperability-features crucial to widespread adoption. The current generation of mobile products and
services appears to be functioning efficiently without set
standards for interoperability. SMS technology is leading
the way. However, the next generation, which is expected
to rely on a combination of SMS technology and downloadable applications (in many cases relying heavily on
the adoption of smart phone technology), has greater
infrastructure requirements. Service providers also face
the challenge of persuading potential customers that their
products and services are safe and secure. The data on
online banking analyzed for this article indicate that a
perception of safety is an important consideration in
adoption. Consumer concerns include customer authentication (verification that the user is in fact the authori zed
user), the interception of private data, and the loss of
sensitive information if the mobile device is lost or stolen.
2. Motorola. Inc. (2008). "Motorola M-Wallet Sotution: New Transaction Options for Subscribers. New Revenue Opportunities for
You" (brochure). www.motorola.com/staticfiles/Business/_Documcnts/
slatic%20files/M-WallecBRO_06083hv2.pdf.
3. Dan Schatt (2007), US Mobile Banking: Beyond the Bu'-Z (Boston :
Celent).
4. Michael Lindsey (2008). " Mobile Banking Case SlUdy: Lessons
Learned from a Pilot Rollout," NACHA Tele.eminar: Case Sludies from
Bank Mobile Implementations.
5. Caroline Boyd and Kat)' Jacob (2007). Mobile FillUlzeial Services
and the Underbanked: Opportllnities alld Challenges Jor Mbwzkill g alld
Mpayments (Chicago: Cenler for Financial Services Innovation, April).
www.cfsinnovati on.com/documentlmbanking.pdf.
Barriers to Adoption: Infrastructure and Security
In addition to issues of access, availability, and
familiarity, there are concerns about the security and
privacy of financial information related to contactless
card, wireless, and mobile transactions_ These concerns may be the greatest impediments to the success
of mobile banking, wireless, and contactless payments . A 2007 report noted that 82 percent of surveyed banks thought resolving security issues was
"important or very important to resolve for successful mobile banking."24
Reserve Bank of Philadelphia, June). www.philadelphiafed.org/pcc/
papers120081D2008MobileBanking.pdf.
24. Aile Group (2007), " Mobile Banking Security: The Black
Cloud Attached to the Silver Lining," Report 200710241 (October),
www.ailegroup.com/reportsl200710241 .php.
A 114
Federal Reserve Bulletin 0 July 2009
9, Consu mers' perceptions of e-banking, selected years
Mean of responses I
Percent who agree or strongly agree
Perception
1999
Conveniellce
Electronic banking is convenient. .. . . .
. ..
There are enough advantages of electronic banking for me to
. .......... .. .. .
consider using it. . . .
Electronic banking helps me to beller manage my personal finances.
It bothers me to use a machine for banking transactions when
I could talk with a person instead .. . .... ..... ... . .. .. .
Electronic banking products will reduce the need for having
traditional bank accounts in Ihe future . .... .
Familiarity ami east! of use
Electronic banking is the wave of Ihe fulure ..
Electronic banki ng services are used by llIallY people . . . .. .. . .
I have the opportunity to try various electronic banking services ..
I have seen how others use electronic banking ..
I need to familiarize myself with electronic banking technology.. .
Electronic b<ulking is difficult to use. . . . . . . . .. . . ... .. '
My use of electronic banking keeps me from switching to other
fin ancial service providers..
Secnrily and privacy
When I use eleclronic banking, my money is as safe as when I use
other banking services.
. . . . . . . . . . . . . .. " ..
Mistakes are more likely 10 occur with electronic b'mking thall with.
regular banking ..
. . . . . . . . . .. . . ... . . .. .. . ,.
Mislakes with electronic banking are more difficult to get corrected
than with regular banking. . .
. . ... .
I feel comfortable providing my personal information tllrough .
. . . .. . .... ... .... . .
electronic banking syslems. . . . .
I worry aboul the privacy of my information when using elecu'onic
banking systems. . . .
....
. ..
I worry that electronic banking systems are not secure enough 10
protect my personal financial information..
I worry thai electronic banking systems arc nol secure enough and
. .... . ... .. .
I could lose my money.. . . . . . . . .
Electronic banking increases the likelihood that I will become a
victim of identity thefl. . ..
. . . . . .. .....
.. ... .... ...... .
I. On a scale of I
5 "strongly agree ."
10
5, wit h l being "strongly di sagree," 3 "neut ral," and
CHANGES IN CONSUMER A IT/TUDES TOWARD
E- BANKING OVER TiME
Two theories have emerged to explain why and how
consumers adopt new technologies. Both are relevant
to an evolving payment system: the Diffusion of
Innovation model and the Technology Acceptance
Model (TAM),25 Both models incorporate, among
other characteristics of new technologies, the idea of
relative advantage, which prompts consumers both to
try out and to adopt the technology. In the Dj ffu sion
of Innovation model , relative advantage is characterized as the degree to which consumers perceive a new
product or service as different from, and better than ,
its substitutes. The counterpart to relative advantage
in the TAM is perceived usefulness. In the case of
electronic payments, convenience and savings of ti me
and money have been cited as relative advantages,
and pri vacy concerns as a relative disadvantage,
Empirical research on the diffusion of technologies
25. Everett M. Rogers (1962), The Diffusion of Inn ovatio/l
(New York : Free Press); Frederick D. Davis ( 1989), "Perceived
Usefulness, Perce ived Ease of Use, and User Acceptance of Information Technology," MIS Quarterly, vol. 13 , pp. 319-40.
I
2003
I
2006
1999
76
46
37
53
81
58
48
46
I
2003
3.8
3. 1
3.0
3.2
3.3
3.1
3.4
4.0
3.4
3.3
2.9
n.a.
n.a.
3.4
1I.a.
n.a.
3.8
3.7
3. 1
3.0
3.5
2.6
4.0
39
3.6
3.5
3.3
2.5
3.9
3.9
3.5
3.4
3.4
72
2. 3
70
49
41
63
21
82
83
70
64
53
17
n.a.
n,a.
2.8
n.a.
n.a.
3.2
3.0
3.4
49
41
n.u.
3.3
2.9
3.3
2.9
3.5
3.2
3.0
n.a.
55
36
49
41
63
52
40
l1.a.
n,a.
n.a.
n.a.
33
2.7
n.n.
!l.a.
3.9
2.9
3.2
2.9
50
35
n.a.
n.a.
3.3
3.1
3.5
n.a.
I
2006
80
56
50
42
53
74
80
64
57
57
1
5
28
54
31
45
40
n.a.
52
46
60
n.a. NOI available .
SOU R Mich.igan Surveys of Consumers .
CE:
based on the TAM and its extensions has found
consistently positive relationships between usefulness, and to a lesser extent ease of use, and the
adoption of a variety of technologies, including computer software and e-mail,26
Convenience
Overall, research indicates that the more observable,
compatible, simple, and useful a technology is and
the more advantages it offers, the more likely consumers are to adopt it. Consumers continue to recognize
the convenience of electronic banking services
(table 9).27 As measured by the 1999, 2003, and 2006
Michigan Surveys of Consumers , growing proportions of consumers report that e-banking helps them
better manage their personal finances , and smaller
proportions report being bothered by not interacting
26. Hoganh, KoJodinsky, and Gabor, " Con sumer Payment Choices:
Paper. Pl asti c-{)r Electrons?"
27. [n a 2007 study by the Federal Re serve Bank o f Boston , both
users and nonusers recognized the con venience of e-banking services
(Be nton, Blair, Crowe, and Schuh, " The Boston Fed Siudy of Con sumer Behavior and Payment Choice" ).
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
with people in their banking transactions. A new
question in the 2006 survey asked about the need for
traditional bank accounts; more than half of respondents (53 percent) said that e-banking products will
reduce the need.
Familiarity and Ease of Use
Consumers' perceptions regarding familiarity and
ease of use of e-banking technology, as reported in
the 2006 Michigan Surveys of Consumers, reveal an
interesting dichotomy (table 9). On the one hand, the
majority reported that e-banking is widely used
(80 percent) and that they have seen how others use it
(57 percent). On the other hand, nearly three out of
five (57 percent) felt that they need to become more
familiar with e-banking services. Clearly there is a
need for bankers and community educators to find out
which aspects of e-banking are unfamiliar to consumers and to craft outreach and education opportunities
to address information gaps.
E-banking can be perceived as a set of services that
engenders loyalty in a customer base. Once consumers have signed up for direct deposit, online banking,
or preauthorized payment, they may perceive the
transition costs involved in switching banks-in
terms of both time and mental energy-as quite high.
However, only about one-fourth (28 percent) of survey respondents felt that their use of electronic banking keeps them from switching to another financial
services provider. The message to financial institutions is c1ear-even e-bankers feel empowered to
vote with their feet.
Security and Privacy
Consumers also report disparate perceptions with
respect to security and privacy. Over time, the proportions of consumers expressing concern about mistakes connected with e-banking and about difficulty
in resolving errors have declined . In addition, more
than half the respondents to the 2006 Michigan
Surveys of Consumers (54 percent) reported feeling
that e-banking was "as safe as when I use other
banking services." However, more than half (52 percent) were concerned that e-banking systems were
not secure enough to protect their personal financial
information, and three out of five (60 percent) agreed
or strongly agreed that e-banking would increase the
likelihood of their becoming a victim of identity theft
(table 9).
These results are consistent with related findings
from other studies. For example, between 2005 and
2007 consumers ' concerns about online security
A115
decreased and the percentage of consumers paying
their bills online increased, yet data on Internet
transactions by payment type show that the proportion of credit card payments declined over the same
period. 28 One interpretation is that the decline in
Internet credit card transactions reflects consumers '
concerns about security. Analysis of the adoption of
Internet banking in Poland found a relationship
between the decision to open an online account and
the perceived level of security of Internet transactions: a 1 percentage point decrease in perceived
security was associated with a drop of almost 29 percent in the probability of opening an online account. 29
A 2007 study by the Boston Federal Reserve Bank
also found that the main barriers to using online bill
payment were concerns about privacy and identity
theft. 30
Increasingly, consumers are targeted with computer viruses, spam, and phishing e-mail messages
that attempt to steal their personal information. Data
security requires providing security for data at rest
(data residing on computers within organizations),
data in transit (data moving over networks), and data
"on travel" (data on laptops or other portable devices).3l Reports of data breaches involving consumers' names, account numbers, and other information
have received attention from state and federal lawmakers. In mid-2003, California became the first state
to require businesses to notify consumers of data
breaches that result in the loss of their personal
information. 32 Since then, all but six states have
enacted laws requiring notification of data breaches.33
Before these notification laws took effect, news
reports of breaches were infrequent; after 2003 , public announcements became much more frequent
(figure 2).34
28. Crowe, Emerging Payments-The Changing Landscape.
29. Polasik and Wisniewski, " Empirical Analysis of Internet Banking Adoption in Poland."
30. Benton , Blair, Crowe, and Schuh, " The Boston Fed Stud y of
Consumer Behavior and Payment Choice."
31. Bruce Summers, cited in James C. McGrath and Ann Kjos
(2006), "Information Security, Data Breaches, and Protecting Card holder Information: Facing Up to the Challenges," Summary of
Payment Cards Center and Electronic Funds Transfer Association
conference. September 2006 (Philadelphia: Federal Reserve Bank
of Phila del phi a), www.philadelphiafed .org/pcc/conferences/2007/
C2006SeptlnfoSecuritySummary.pdf.
32. California implemented the law in 2003. See the California
civil code, section 1798.80-1798.84.
33. National Conference of State Legi slatures, "State Security
Breach Notification Laws ," December 16, 2008, www.ncsl.org/
programs/liS/cip/priv/breachlaws. htm .
34 . Several very large data breaches (not included in figure 2) came
to light as a result of the notification laws, including the 1055 of
40 million records by MasterCard reported in 2005; 26.5 million
records by the Veterans Admini stration reported in 2006; and more
A116 Federal Reserve Bulletin 0 July 2009
2.
10. Proba bil ity of being a heavy user of e-banking
technologies. by con umcr anitude toward u, peets
of e-banking, 2001
umber of con, umer data records reported losl
per month. 2000-20{)7
Thouuods of m:onIs
4,500
4,000
Aspect
3,500
3,000
I
2.500
2,000
I I
I,SOO
1.000
2000
soo
.A.. ,
\
200t
2002
2003
2004
200S
2006
2007
NOTE: Excludes data losses exceeding 4 million records, including a loss of 40
million records reported in 2005 by MasterCard ; a loss of 26.5 million records
reported in 2006 by the Veterans Administration ; and a loss of more than 94
million records exposed in a data breach 8tthe TJMaxx parem company reported
in 2007.
SOURCE : Rita Tehan (2007 ). "Data Security Breaches: Context and Index
Summaries ," Congressional Research Service Report RL33199 (May 7).
www.fas.orglsgp/crs/misC/RL33199.pdf.
Some observers claim that a very small percentage
of data breaches actually result in fraud. 35 Nevertheless, notification may make consumers better off,
because they are better able to protect themselves
against fraudulent use of their personal financial
information. In some instances, consumers whose
data have been breached are provided with credit
monitoring services, whereby one of the credit reporting agencies alerts them whenever their credit file is
accessed. Consumers may also be able to place a
fraud alert on their credit file or freeze their credit file
altogether, preventing anyone but themselves from
using their personal financial information to obtain
credit. (See box "Reducing the Risks from Identity
Theft. ")
Despite indications that the number of identity
theft incidents is declining, the media continue to pay
significant attention to data losses-possibly increasing consumer concern about security and privacy.36
Studies by the Congressional Research Service estimate total data losses between 2000 and 2007 to have
been 100 million records, not including losses exceeding 4 million records or incidents in which the
number of losses is unknown (figure 2). The Privacy
than 94 million records by TJX, parent company of TJMaxx and
Marshalls, reported in 2007.
35. A Javelin Strategy and Research study s howed that fewer than
I percent of lost data records result in fraudulent activities (Mary T.
Monahan (2006), "Data Breaches and Identity Fraud: Mi sunderstanding Could Fail Consumers and Burden Businesses" (August» .
36. The number of identity theft victims declined from an estimated
8.9 million adults in 2005 to an estimated 8.4 million adults in 2006
(Javelin Strategy and Research, 2007 Identity Fraud Survey Report
(February 2007), as cited on the Privacy Rights Clearinghouse website, www.privacyrights.orglar/idtheftsurveys.htm#Jav2007).
Highly
positive
Security and privacy.
.80
Convenience .. .
.84
Familiarity and ease of use.
.77
I
Attitude
Middle of
the road
.70
.57
.56
-T
I
Highly
negative
.45
.35
.26
SOURCE: Hogarth, Kolodinsky. and Gabor, "Consumer Payment Choices:
Paper. Plastic-or Electrons')" (based on 2003 Michigan Surveys of Consumers data).
Rights Clearinghouse identified incidents occurring
between January 2005 and April 2009 that resulted in
more than 253 million lost or stolen records Y
In 2003, three out of five consumers (63 percent)
reported being worried about the privacy of their
consumer information when banking electronically,
and in 2006 about the same proportion (60 percent)
felt that e-banking would increase the likelihood of
their becoming an identity theft victim (table 9). The
large number of data losses-whether or not they
result in fraud-may be contributing to consumers'
concerns. Looking to the future, some research suggests that improvements to hardware and to software
authentication techniques could be effective in reducing identity theft, augmenting the current practice of
reJying on fixed passwords, which most banks use for
their online services.
The Importance of Attitudes
When other key variables-such as income, age,
education, marital status, race and ethnicity, gender,
and region-are held constant, attitudes become
important predictors of consumers' adoption of
e-banking technologies. It appears , for example, that
increasing consumer confidence in the security and
privacy of various technologies could bring about a
large increase in their use: in the 2003 Michigan
Surveys of Consumers, respondents with highly positive perceptions of e-banking's security and privacy
had an 80 percent probability of using a full range of
the technologies, compared with a 45 percent probability for those with highly negative perceptions
(table 10). To improve consumer attitudes, financial
institutions may want to consider ways of providing
evidence of the security and privacy of their electronic payment services, although changing consumers' perceptions may be a challenge when phishing
and identity theft continue to be in the news.
37. Privacy Rights Clearinghouse , "A Chronology of Data
Breaches," updated April 9. 2009, www.privacyrights.org/ar/
ChronDataBreaches.htm.
u.s.
Households' Access to and Use of Electronic Banking, J989-2007
A 117
Reducing the Risks from Identity Theft
Technology offers some help to consumers in reducing
the consequences of identity theft. For example, electronic banking technologies allow them to monitor their
account activity, thereby helping them identify fraudulent
activities sooner than they otherwise might. The financial
industry also benefits from technological innovations, for
example, modeling techniques that monitor account activity and identify anomalies associated with potentially
fraudulent transactions.
Consumer liability in the event of identity theft (as well
as credit card theft) is limited both by state and federal
regulations that protect consumers and by industry rules.
Credit card users in particular are protected by the Truth
in Lending Act and the Federal Reserve Board's Regulation Z, which limit their liability for unauthorized transactions to $50. In addition, the Electronic Fund Transfer
Act and the Board's Regulation E specify liability limits
for unauthorized electronic transactions and set forth
procedures for recouping funds stolen from consumers'
bank accounts. The limits are $50 if the consumer notifies
the bank within 2 days of learning of the loss or theft of a
debit card and up to $500 if the consumer notifies the
bank after 2 days but within 60 days after the bank sends
a statement containing an unauthorized transfer or transaction. Consumers who do not report an unauthorized
transfer appearing on a statement within 60 days after the
statement is sent risk unlimited loss on their account plus
the maximum amount of their overdraft line of credil, if
any. Some debit and credit card issuers guarantee that a
consumer will not be held responsible for fraudulent
charges incurred with the consumer's card or account
information.
Consumers who are victims of identity theft should
take the following steps, as laid out on the Federal Trade
Commission's website:
I. COlllactthe credit reporting companies, place a fraud
alert on your credit reports, and review your credit
reports.
• Equifax. 1-800-525-6285; www.equifax.com; P.O.
Box 740241, Atlanta, GA 30374-0241
Similarly, changing consumer attitudes about the
convenience of e-banking technologies could bolster
their use. In the 2003 survey, consumers with highly
positive perceptions of the convenience of e-banking
were more than twice as likely as those with negative
perceptions to adopt a wider range of e-banking
services. Both financial institutions and communitybased educators can help consumers identify ways in
which payment technologies can make bill paying
• Experian. \-888-EXPERIAN (1-888-397-3742);
www.experian.com; P.O. Box 9532. Allen, TX
75013
• TransUnion. 1-800-680-7289; www.transunion.
com; Fraud Victim Assistance Division, P.O. Box
6790, Fullerton, CA 92834-6790
2. Close the accounts that you know, or believe, have
been tampered with or opened fraudulently.
3. File a complaint with the Federal Trade Commission .
Use the FTC's online complaint form (www.
ftccomplaintassistant.gov/); or call the FTC's Identity
Theft Hotline, toll-free, at 1-877-ID-THEFT (1-877438-4338); TTY: 1-866-653-4261; or write to the
Identity Theft Clearinghouse, Federal Trade Commission. 600 Pennsylvania Avenue NW, Washington.
DC 20580.
4. File a report with your local police or the police in the
community where the identity theft took place. If the
police are reluctant to take your report, ask to file a
"miscellaneous incident" report, or try another authority, such as your state police. You can also check with
your state attorney general ' s office to find out if state
law requires the police to take reports for identity
theft. Check the Blue Pages of your telephone directory for the phone number, or check www.naag .org
for a list of state attorneys general.
The FTC encourages consumers to take the following
precautions to guard against identity theft:
• Deter identity thieves by safeguarding your information, including your social security number and account numbers.
• Detect suspicious activity by routinely monitoring
your financial accounts. billing statements, and credit
reports.
• Defend against identity theft as soon as you suspect it
by taking the four steps listed above.
For more information, visit www.ftc .gov/bcp/edu/
microsites/idtheftl and www.bos.frb.org/consumer/
identityfindex.htm.
more convenient. For example, they might point out
that using preauthorized payments ensures that bills
are paid on time, thus eliminating late fees .
Increasing familiarity and ease of use may offer the
greatest potential for increasing adoption of e-banking
technologies. The data reviewed in this article indicate that hel ping people access and become more
familiar with these technologies and demonstrating
their ease of use could lead to as much as a 51 per-
AI18
Federal Reserve Bulletin 0 July 2009
Policy Challenges and Opportunities
Policy makers face several challenges in the e-banking
market, including providing data security and consumer
protection and regulating the involved entities.
Federal. state, and local laws set the basic parameters
for data security; industry best practices and individual
firms' policies also require certain data security safeguards. However, as new products and services evolve ,
laws, regulations, and policies often struggle to keep up
with the evolving risks. Also, the once-clear de finition of
who is a financial services provider has become blurred as
nonbank providers such as telecommunications firms and
other third parties have moved into the market and are
now providing payment serv, ces and financial transfers.
i
Multiple regulators and regulations may be involved in a
single transaction.
Related to the blurring of regulatory lines are the
matters of consumer protection and avenues of recourse.
Although it is possible for consumers to receive disclosures via a handheld device-a PDA or mobile phonequestions remain. Is the screen large enough for consum-
centage point increase (from 26 percent to 77 percent)
in the probability of adopting more of these technologies.
EXPANSION OF E-BANKINC
Expansion of e-banking is a matter of both supply and
demand. On the supply side, merchant acceptance
seems to be key to expanding from magnetic stripe
technologies to radio-frequency, smart-card, and other
chip-based technologies . Fee structures and payment
streams for issuers , merchants, and consumers are
also important.)8 On the demand side, consumer
access-a payment infrastructure that provides
e-banking services and broad consumer ability to
bank electronically-and positive consumer attitudes
are essential to wider adoption of e-banking.
Expanding access through improved infrastructure
does not have to rely on extreme technological solutions . A first step may be to continue to reduce the
persistent digital divide between upper- and lowerincome households. One approach is to increase
access to high-speed Internet connections. Another is
to expand the availability of phone banking, both
through improved and expanded automated systems
38. Margaret Canen, Dan Littman, Scott Schuh, and Joanna Stavins
(2007), "Consumer Behavior and Payment Choice : 2006 Conference
Summary," Public Policy Di sc ussion Paper 07-4 (Boston : Federal
Reserve Bank of Boston), www.bos .frb .orgleconomic/ppdp/2007/
ppdp0704.pdf
ers to see the required disclosures "clearly and conspicuously"? Can financial services providers group the required information together on a small screen so that
consumers can take in the meaning? What is a consumer's recourse if a mobile transaction goes awry? Does the
consumer contact the mobile provider or the financial
institution, or both?
The entry of nonbank providers into the financial
services market presents another set of challenges. Some
legislation. such as the Truth in Lending Act, makes it
clear that the law and associated regulations cover nonbank entities. But coverage under other laws and regulations is less clear. Some have argued that the regulatory
environment needs to be updated to reflect new and
emerging technologies and relationships. I
I. Gail Hillebrand (2008). "Before the Grand Reth inking: Five Things
to Do Today with Payments Law and Ten Principles to Guide New
Payments Products and New Payme nts Law." Chicago-Kelll Lnw Re"iew_
vol. 83 (2). pp. 769-81 I.
that can act as substitutes for online banking and
through improved web access protocols for mobile
phone banking. These are natural extensions of current trends; financial institutions may want to do even
more to provide and promote alternative ways of
banking.
However, expanding e-banking may not be a case
of "if you build it , they will come." While the
proportion of heavy use rs of e-banking has increased
over time , more than one out of five survey respondents in 2006 (22 percent) were classified as minimal
users, making use of only direct deposit and ATM or
debit cards. The data suggest that attitudes may play
an important role in expanding adoption. Consumers
need to perceive that e-banking is safe and that their
information is secure. Both financial institutions and
policymakers have a role in ensuring a safe data
environment for e-banking (see box "Policy Challenges and Opportunities"). Beyond safety, consumers need to perceive that e-banking is convenient and
easy to use . As policymakers and financial institutions
continue to address the issues of access and attitudes,
consumers can fully realize the potential of e-banking
to help them manage their payments and increase
their financial security.
APPENDIX A:
OURCES OF DATA
The data on which this article is based come from two
nationally representative surveys-the triennial Sur-
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
AIl9
vey of Consumer Finances and the monthly Michigan
Surveys of Consumers. Although the surveys have
different sampling schemes and differ in some other
ways, the data from the two are sufficiently comparable to give a general picture of consumer use and
perceptions of electronic banking technologies. Data
from the two surveys were not combined for analysis;
rather, a separate analysis was carried out on each
data set, and the results in some discussions were
viewed together to extend the period of analysis and
thus get a better idea about trends.
In general, the terms households, consumers,families, and respondents are used interchangeably in
discussions of the data and elsewhere in the article.
To be specific, however, data from the Survey of
Consumer Finances are for what was referred to as
the primary economic unit, defined as an economically dominant single individual or couple (married
or living as partners) in a household and all other
individuals in the household who are financially
dependent on that individual or couple. For example,
in the case of a household composed of a married
couple who own their home, a minor child, a dependent adult child, and a financially independent parent
of one of the members of the couple, the primary
economic unit would be the couple and the two
children. Data from the Michigan Surveys of Con sumers are for families, defined as any group of
persons living together who are related by marriage,
blood, or adoption or any individual living alone or
with a person or persons to whom the individual is
not related.
Interviewers used a program running on laptop computers to administer the survey and collect the data .
Respondents were encouraged to consult their records
as necessary during the interviews.
To gather information that is both representative of
the U.S . population and reliable for those assets
concentrated in affluent households, the SCF employs
a dual-frame sample design consisting of a standard,
geographically based random sample and an oversample of aftluent households . Weights are used to
combine data from the two samples so that the data
from the sample families represent the population of
all families. 40 A total of 4,299 households (representing 99 .0 million families) were interviewed for the
1995 survey; 4,309 households (representing
102.6 million families) for the 1998 survey; 4,449
households (representing 106.5 million families) for
the 2001 survey; 4,522 households (representing
112.1 million families) for the 2004 survey ; and
4,422 households (representing 116.1 million families) for the 2007 survey. Missing data-missing
because of lack of response to individual interview
questions, for example-are imputed by making multiple estimates of the missing data to allow for an
estimate of uncertainty.
The analysis was restricted to those households
that reported having an account with a bank, thrift
institution, or credit union . For the 1995 survey, this
group constituted 87.6 percent of households ; for the
1998 survey, 90.5 percent; for the 200 I survey,
90.9 percent; for the 2004 survey, 91.3 percent; and
for the 2007 survey, 92. I percent.
Survey of Consumer Firumces
Univer 'ily of Michigan
Survey oj Consumers
The Survey of Consumer Finances (SCF) is a triennial survey of U.S. families (defined as primary
economic units, as described above) sponsored by the
Federal Reserve, in cooperation with the Statistics of
Income Division of the Internal Revenue Service, and
conducted by NORC, a national organization for
research at the University of Chicago. 39 The survey
provides detailed information on U.S. families' balance sheets, use of financial services, demographics ,
and labor force participation. The great majority of
interviews were conducted in person, although interviewers were allowed to conduct telephone interviews if that was more convenient for the respondent.
39. See Arthur B. Kennickell (2000). "Wealth Measurement in the
Survey of Consumer Finances: Methodology and Directions for Future
Research" (paper prepared for the annual meetings of the American
Association for Public Opinion Research. Portland, Oregon, May
2000) (www.federalreserve.gov/pubs/ossloss2/papers/meas urement.
pdf and references cited therein).
The Surveys of Consumers, initiated in the late 1940s
by the Survey Research Center at the University of
Michigan , measure changes in consumer attitudes
and expectations with regard to consumer finance
decisions. 4 1 Each monthly survey of about 500 households includes a set of core questions. For the October
and November 1999, June and July 2003 , and November and December 2006 surveys, the Federal Reserve
Board commissioned additional questions concerning
households ' use and perceptions of electronic bank-
40. See Arthur B. Kennickell (1999). "Revisions to the SCF
Weighting Methodology : Accounting for RacelEthnicity and Homeownership" (Board of Governors of the Federal Reserve System , January), www.federalreserve .gov/pubs/oss/oss2/papers/weight.
revision.pdf.
41 . For more information on sample design , questionnaire development, and interviewing protocols, refer to the Surveys of Consumers
website. at www.sca.isr.umich.edu/main.php.
A120
Federal Reserve Bulletin D July 2009
ing technologies. Some of these additional questions
were based on questions in the Survey of Consumer
Finances to allow for comparison of responses to the
two surveys.
Interviews were conducted by telephone , with telephone numbers drawn from a cluster sample of
residential numbers. The sample was chosen to be
broadly representati ve of the four main regions of the
country-Northeast, Midwest, South, and West-in
proportion to their populations. Alaska and Hawaii
were not included. For each telephone number drawn ,
an adult in the family (as previously defined) was
randomly selected as the respondent. The surveys
yielded data from 1,000 respondents in 1999 (October
and November surveys combined), 1,002 respondents
in 2003 (June and July surveys combined) , and 1,002
respondents in 2006 (November and December surveys combined). The collected data were weighted to
be representative of the population as a whole,
thereby correcting for differences among families in
the probability of their being selected as survey
respondents. All survey data in the tables are based on
weighted observations.
As with the Survey of Consumer Finances, the
analysis was restricted to those households that reported having an account with a bank, thrift institution , or credit union . For the 1999 survey, this group
constituted 89 percent of households; for the 2003
survey, 86 percent; and for the 2006 survey,
92 percent.
D
u.s.
Households' Access to and Use of Electronic Banking, 1989-2007
Al21
R. I , Proportion of con lim r ' who bank on line and reasons for hanking online, by demographic characteri st ic. selected years
Percelll
Reason for banking online
Bank online
1999
... . . .....
accounts
Apply for
loans
2006
2006
2006
Open new
Pay bills
Demographic characteristic
..
I
2003
I
2006
2003
I
10.7
31.9
51.1
54.7
76.0
14.6
11.1
2.6
6.4
9.2
10.6
21.8
16.8
26.7
31.9
38.4
43 .4
30.4
38.4
49 .7
64.2
70.1
38.1
50.9
55.2
55.4
58.9
71.5
69.1
79.7
75.6
79.7
4.6
9.9
13.0
15.6
20.2
6.2
8.3
18.7
11 .0
9. 1
Aile of responde", Crean)
...... .... .. .....
Younger than 35 . ..
. .. ... .. , . . ... . .
35-44 .....
45--54 ..
..... .. . , .. . . .. .
55--64 . . . . . . . . . . . ...
. . . .. .. . . ....
65 and older..
....... ...
16.1
13.4
9.2
8.7
2.0
47.6
36.4
30.6
25.7
8.5
67.3
65.2
52.7
43 .2
20.3
51.4
59.2
59.1
46.3
54.0
80.0
81.1
70.1
70.9
68.9
16.9
16.9
12.7
9.4
16.0
12.6
14.2
9.7
10.2
.0
Educatiun l~r respondent
No high school diploma. .... ... . , ... ... .. .
High school diploma. . ...... . .. . ...... .. . .. .
.... ...... .. ..
Some college .
Bachelor's degree . ...... . ... ... .. ...
Postgraduate education .
....
3.0
5.9
11.9
14.7
17.0
47 .6
36.4
30.6
25 .7
8.5
10.4
35.3
53.5
58.6
63.6
66.6
52.4
50.9
56.7
56.8
100.0
67.2
71.9
78.2
82.9
.0
6.6
13.2
17.6
18.8
.0
5.2
15.8
9.1
14.0
Racelethnidf), of f'I!. pondent
'
White ..
.......... . . . . . . . . . , . , . .
, .... .... , ' , . , ..... . ..
Blac·k .
. .. .. .
Hispanic . ' ... . . .. .
Other' . . .
, . .. ... .. .. .... , .. . .
.. .
10.5
8.5
10.6
24 .6
11.1
18.2
:l7.4
41.0
52.7
38.8
51.3
47.0
50.6
81.6
57.9
73.3
74.4
80.4
81.9
90.0
13.9
18.6
16.4
28.8
12.6
8.3
2.6
2.9
All respondents . . ...
'
.
-"
HOllsehold income (by income percentile)'
20% or less .
.... ........... . ..
21 %-40%. ...... .. , ....
41 %-{j()% . ..... . . . ... ..... , .. . . ... " .. ...
61%-80% .. .... . .. . .. ..
.. . ... .
81 %- 100% . ...
... .... . .. ..
...
..
.. .
~
.
.. .. ..
.. ...
.
~
2. Includes Asian , Pacific Islander, and Native American .
Sou Rn : Michigan Surveys of Consumers.
I. Income percentiles are based on the income of all responding households.
Thus, of respondents in the lowest 20 percent of the income disuibution,
2.6 percent banked online in 1999 and 30.4 percent banked online in 2006.
8.2. Proportion of onsumers who would lise conwcLless or wireless paymcn ' in Ihe fUllIre.
by uemographic characterisl ic, 2006
Percent
Contactless payments
Demographic characteristic
All respondents .........
.
. .. . ,
Have
used
I
I
All respondents
Yes
IMaybe I
No
19.4
37.8
14.7
2.6
11.1
14.8
25 .9
39.7
30.2
27.6
35.7
46. 1
55.5
22.7
28 .5
20.3
I
Wireless payments
Online bankers
All respondents
I
Online bankers
I Even IUnlikely I Likely I Even IUnlikely
I Maybe I
No
Likely
13.8
34.6
16.3
7.2
76.5
24.0
7.7
68.2
59.7
43.4
42.5
48.9
63. 1
7.6
10.4
19.5
14.9
9.6
32.8
46 .2
38.0
36.2
27.3
13.8
16.8
12.0
16.8
23.8
6.8
5.5
5.2
7.5
10.5
79.4
77.7
82.9
75 .7
65.7
18.6
30.2
19.9
18.8
28.5
1.6
8.3
7.2
8.0
9.6
79.8
61.6
73.0
73 .3
62.0
39.8
38.2
44 .2
45 .5
68 .7
56.5
57.0
44.4
50.2
37.0
5.7
14. 1
16.1
20.3
24.1
37.8
28 .9
39.5
29.5
38 .9
27.6
24.0
13.1
10.6
6.3
10.4
7.9
9.3
6.0
2.5
62. 1
68. 1
77.6
83.4
91.1
32.4
30.9
18.9
8.0
10.9
6.3
7.4
11 . 1
8.0
4.2
61.4
61.8
70.1
83.9
84.9
Yes
47.5
51.6
12.5
13.8
16.3
15.1
13.3
57.3
58.7
48.0
38.8
31.2
9.7
17.2
15.2
17.3
14.5
I
Hf}lueho/d income (by income,' percemiie)J
20% or less ... .... . ,. ,." ...... . . ..
...... .
.......
21%-40%. ....
41 '1r-{)0% . ... ··· · ·f · ... .. . .. . . .... ..
61%-80% ..
..... ...... . .
· ,, 1 ',
., ..
81 %-100%.
.... . .... .
...
Age of respondent (yew:»
Younger than 35 . ........ . ., .. ... " ..
35-44 .......... .. ............ . .. ....
45- 54 ..
, ...... , . . . . . . . . . . . ..... .
55-{)4 .....
......... . . . . . . . . . . .
65 and older . . .. , . , . , . , . , ... .. , . ...
10.0
50.5
44.6
40.6
37.3
16.8
Education of respondent
No high school diploma. .. .. ... , . . ..
High school diploma .. ....
Some college .. .. .... ....
.. . .. ..
....
Bachelor's degree ... . , ..
...
Postgraduate education . ... ,.
2.8
10.4
13.2
28.0
33.3
8.2
27 .2
35.5
47.2
53.2
21.2
10.1
17.7
15.6
13.7
70.7
62.8
46.9
37.2
33.1
50.0
43J
43.8
54.2
63.7
.0
9.2
19.1
14.2
10.2
50.0
47.5
37.2
31.6
26.1
8.8
18.3
11.9
18.3
18.9
5.6
4.9
6.0
7.2
13.2
85 .7
76.8
82. 1
74.5
67.9
.0
35.4
15.4
24.8
25.4
.0
1.2
5.5
8.5
14.2
100.0
63.5
79.1
66.7
60.4
Race/ethnicif)' of respondent
White .
. , ... ' . ........ ... ..
Black . ..... . '
., .. , ' .. .. .. ... .
Hispanic . .... ... ..... . . .. .. .. ... ... . .....
Other2 .. ..
. . . .. . ...
' ....
19.7
12.3
19.5
29.4
38. 1
37.8
39.4
32.4
14.5
7.6
27.7
12.6
47 .3
54.7
32.9
55.0
52.4
43.2
68.0
5.4
13.6
9.9
17.5
16.2
34.0
46.9
14.4
784
14.5
23.5
23.5
24. 1
7.1
4.6
7.2
14.5
78.4
72.0
693
61.4
22.9
22.7
28.3
37.5
7.4
11.3
4.4
17.2
69.8
66.0
67 .3
45.3
.
.
.. .. ...
15.3
NOTE: Components may not sum to 100 percent because of rounding.
t. Income percentiles are based on the income of all responding households.
Thus, of respondents in the lowest 20 percent of the income disuibution,
2.6 percent had used a contact less payment device in 2006 and 30.2 percent
said they would use contact less payments in the future .
2. Includes Asian , Pacific Islander. and Native American.
SOURCE: Michigan Surveys of Consumers.
AI2S
August 2009
Industrial Production and Capacity
Utilization: The 2009 Annual Revision
Anne Hall, of the Board's Division of Research and
Statistics, prepared this article. Deepti Iyer provided
research assistance.
On March 27, 2009, 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 2009, most of the
changes were for the period beginning in 2004.1 The
overall contour of total IP is little changed by the
revision. Industrial output rose steadily at an average
annual rate of 2.3 percent from 2004 through 2007,
then fell sharply in 2008 at a rate of negative 6.7 percent (table 1). Measured from fourth quarter to fourth
quarter, the increase in total IP in 2007 is now
reported to have been 0.3 percentage point Jess, and
the decrease in total IP in 2008 is now reported to
have been 0.6 percentage point more, than earlier
estimates.2
The revision shows that the rates of capacity
utilization for total industry in the fourth quarters of
2007 and 2008 were both about V percentage point
2
lower than previously estimated. Utilization in 2007
was 80.4 percent, about V2 percentage point below its
long-run (1972 through 2008) average, and , in 2008,
it was 74.2 percent, 6.7 percentage points below its
long-run average. The operating rate for manufacturing was revised down 0.6 percentage point in 2007
and 0.8 percentage point in 2008; for the fourth
NOTE: Charles Gilbert directed the 2009 revision and , with Kimberly Bayard, David Byrne, Norman Morin , and Daniel Vine , prepared
the revised estimates of industrial production. Norman Morin and
Daniel Vine prepared the revised estimates of capacity and capacity
utilization .
I . When necessary to maintain consistency with any revisions to
the data for 1972 and subsequent years. the levels of the production
and capacity index.es 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 this article were published in Board of
Governors of the Federal Reserve System (2009), Statistical Release
G . 17, " Industrial Production and Capacity Utilization" (July 15),
www.federalreserve.gov/releases/gI7/releases_2009.htm . Data re ferred to in this article as " previous" appeared in the G .17 release
issued on March 16, 2009. That release was the last G . 17 published
before the annual revision was issued on March 27 .
quarter of 2008, the factory operating rate stood at
70.9 percent, 8Y4 percentage points below its longrun average.3 The utili zation rate for mines was
/2
revised down about 1 percentage point in 2006 but
was little revised in other years; at the end of 2008, it
stood at 89.6 percent, about 2 percentage points
above its long-run average. The operating rate for
utilities was revised down 0.7 percentage point in
both 2006 and 2007 ; in 2008, it was revised down
0.6 percentage point, to 83 .6 percent, and was 3.2 percentage points below its long-run average.
Compared with the previous estimates, total industrial capacity is now reported to have risen 0.4 percentage point less in 2008 and is expected to fall
0.6 percentage point more in 2009. The smaller
increase in 2008 reflected a substantial downward
revision to capacity in the high-technology manufacturing industries ; the capacity indexes for mining, for
utilities, and for manufacturing outside of the hightechnology industries are all now reported to have
been higher in 2008 than stated previously. The larger
decrease in total industrial capacity in 2009 reflects
downward revisions to the indexes for both durable
and nondurable manufacturing and for mining; the
capacity indexes for other manufacturing (logging
and publishing) and utilities were little changed from
their previous estimates.
Although comprehensive benchmark production
data for manufacturing for 2007 are not yet available,
the updated measures of production incorporate several newly available sources of data. Estimates of
manufacturing (NAICS) production were updated
with data from selected 2007 Current Industrial
Reports (CIRs) from the U.S . Census Bureau. Estimates of other manufacturing (logging and publishing) were updated with annual data on logging for
2007 from the U.S. Forest Service and with annual
data on the publishing industry from the Census
Bureau's Service Annual Survey. The index for min3. Manufacturing consists of those industries in the North American Industry Classification System, or NAICS, definition of manufacturing plus those industries- logging and newspaper, periodical, book ,
and directory publishing-that traditionally have been considered to
be manufacturing.
A 126
Federal Reserve Bulletin 0 August 2009
I. Rcvi ed rates of change in industrial production and capacit)'. revised rates
between revised and previously reported rate . 2004-08
Revised rale
(percenl)
MEMO:
2007
Item
proporo on
or capacit)' utilization. and the difference
2~81
2004
1
Dillerence belwee n rales
(revised minus previous, percentage points)
2005 1 2006 1 2007 1 2008
2004-0 8 1 2004 1 2005 1 2006 1 2007 1 2008
avg.
Prodllction
Total inde • . ..... .. .... ,
.. ...
Manufacturing.
hcludin~ s.;lecled high-tech
JOdustnes ... ..... .. . . ... ..
Selected high-tech industries ..
100.0
78.6
.5
.3
3.0
3.6
2.6
3.8
1.8
1.2
1.8
1.9
--6.7
-8.7
- .2
- .2
- .1
- .1
.0
.1
.1
.1
-.3
-.4
-.6
- .8
74.4
4.2
2 1.4
-.4
11.1
1.1
3.2
8.6
.6
2.5
22.6
-1.6
.4
13. 1
4.2
.9
18.2
1.6
-8.9
--6.9
6
-.1
-3.1
.1
-. 1
- .7
.0
.1
.2
.0
.3
-4.2
.3
- .2
-4.1
.1
--6.4
.2
.... .. . ... 100.0
..... . .. . 80.9
1.1
1.2
- .1
-.1
.8
1.3
1.5
1.4
2.0
2.2
1.1
1.3
- .1
- .1
- .3
-.:\
.0
- .1
.2
.1
.2
.3
- .4
76.2
4.7
19.1
.7
9.7
1.0
-.2
1.7
.4
.6
11.9
.0
1.1
5.7
1.9
1.0
22.9
1.2
1.0
6.3
1.4
.1
- 3.9
.1
.0
-3.8
-.4
.0
- 1.2
A
.3
.3
-4.7
.8
1.5
-.3
.2
- 11.2
.0
100.0
80.9
78.9
77.0
79.0
80A
79.2
80.6
79.0
80.4
78.7
74.2
70.9
-.3
77.3
-.3
- .1
- .1
.0
.0
-. 1
.0
-.5
- .6
- .7
- .8
76.2
4.7
19.1
77.1
76. 1
86.8
77.8
70.7
86.8
79.3
77.4
8504
78 .8
82.8
87.3
78.7
79.6
87.7
71.0
69.8
86.9
1.3
-.2
-.2
1.1
.1
-.2
2.2
- .2
-.2
2.9
- .6
- .5
- .9
- .3
-1.0
1.5
- .2
Mining and uti1ities .
- .4
Capacity
Total inde • ... . .. . . . ..
Manufacturin g . . .
-. 5
Exdudin~
sc;lected high-tech
JOduslnes . . . .. ........ . . . .
Selected high-Iech industries ..
Mining and utilities ... ... .
Capacity utilizatioll
Tolal index .....
.. " . . . . . . . . . .
, ...
Manufacturing . ... .
Exdudin:; s~ lected high-Iech
mdustnes .. , . _. . . .........
Selected high-Iech industries . . ..
Mining and utilities . .
.. ...... ..
-A
NOTE : For produclion and ca pacily, the revised rates of change are fro m the
founh quaner of Ihe pre vious year 10 Ihe fourth quaner of Ihe year indicated;
Ihe differences belween revised and previously reponed productio n are also
calculated from Q4-lo-Q4 rates.
Capacity utilization rales are for the founh quaner of the year indicaled ; differences belween revised and previously reponed capacilY ulilizalion are also
calculated from Q4 rates.
I. Manufac turing excluding semiconduclors and re lated electronic components, compulers an d peripheral equipment. and communicalions equipment.
ing was updated with new annual data on mineral
extraction for 2006 and 2007 from the U,S . Geological Survey (USGS). The weights that allocate individual production indexes into multiple market groups
were previously derived from the benchmark inputoutput accounts for 1997 from the Bureau of Economic Analysis (BEA); with this revision , these
weights were updated using data from the benchmark
input-output accounts for 2002.4 Updated price deflators from the BEA were used in the construction of
the revised production estimates. FinaJJy, 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 results of both
the 2007 Census of Manufactures and the 2008
Annual Survey of Manufactures (both from the Census Bureau) should be available for the 2010 revision
to the IP indexes.
Results from the Census Bureau's Quarterly Survey of Plant Capacity for the fourth quarters of 2007
and 2008 were used to update the capacity indexes
and capacity utilization rates, In addition , the revisions to the capacity indexes and capacity utilization
rates incorporate the revised production indexes and
newly available data on industrial capacity from the
USGS, the Energy Information Administration of the
U.S. Department of Energy (DOE), and other organizations.
4. The updated weights are based on the original release of the
benchmark input-output accounts from September 2007, not on the
revised version of Ihe accounts released in January 200S.
RESULTS OF THE REVISION
As revised, total IP for the fourth quarter of 2008 was
104.4 percent of output in 2002, and capacity stood at
140.7 percent of output in 2002. Both indexes are
lower than reported previously. The capacity utilization rate for total industry in the fourth quarter of
2008 was 74.2 percent, 0,7 percentage point below
what was stated earlier. Detailed results of the revision can be found in the appendix tables ,5
5. Table A.I shows Ihe revised data for total IP, and table A.2 shows
Ihe revised data for capacity and capacity utili zation for total industry.
Tables A .J and A.4 show the revised rates of change (fourth quarter to
fourth quarter) of IP for markel groups, industry groups, special
aggregates, and selected detail for the years 2004 through 200S. Table
A .S shows the revised rales of change of annual IP indexes for market
and industry groups for the years 2004 through 200S. Tables A.6 and
A.7 show the revi sed figures for capacity and capac ity utilization.
Table A.S show s the annual proponions of market groups and industry
groups in total IP. Tables A .3, A.4, A .5, and A.6 also show the
difference between the revi sed and previous rates of change . Table A .7
shows the difference between the revi sed and previou s rates of
capacity utilization for the final quarter of the year. Table A .9 shows
Industrial Production and Capacity Utilization: The 2009 Annual Revision
1.
lndustrial produc6on, capacity, and capacity utilization : Total industry, January 199
PmdllCtiCD
A 127
June 2009
Ratio scale, 2002 output ~ 100
and capacity
-Revised
- Previous
Pcn:cnt
84
140
82
80
130
Capacity
78
120
76
74
110
72
70
100
68
I
I
1999
I
I
I
200 I
I
I
2003
I
2005
I
I
2007
1
I
I
I
2009
NoTE: Here and in the following figures, the shaded areas are periods of
business recession as defmed by the National Bureau of Economic
Research (NBER). The last shaded area begins with the peak as defined by
the NBER and ends at the trough of a three-month moving average of
manufacturing !P.
Industrial Production
The overall contour of IP in this revision is similar to
that reported previously (figure 1). The total index
rose modestly each year from 2004 through 2007 and
then dropped in 2008. Relative to the previous estimates, total IP increased 0.3 percentage point less in
2007 and fell 0.6 percentage point more in 2008.
Revisions to the changes in other recent years were
smaller. The change in total IP was revised down
0.1 percentage point in 2004 and was revised up
0.1 percentage point in 2006; it was not revised
noticeably in 2005.
Market Groups
Although the aggregate index for IP was little revised
before 2007, revisions to the indexes for some market
groups were significant. These revisions largely resulted from the incorporation of the 2002 benchmark
input-output accounts from the BEA, which, as discussed further in the section on technical aspects of
the revision, updated the weights used to allocate
individual production indexes to multiple market
groups .
The production index for final products and nonindustrial supplies follows an output path similar to that
for total IP; moderate gains in 2004 through 2007
were followed by a drop in 2008 (figure 2 and table
A.3) . Compared with the previous estimates, the
the annual production and price indexes for selected categories of
communications equipment, and table A.IO shows the quarterly
production and price indexes for some of the same categories of
communications equipment. Table A.II shows the quarterly price
indexes for selected categories of semiconductors.
I
I
1999
I
2001
I
I
2003
I
2005
2007
I
I
2009
Data labeled "revised" correspond to the data in the Federal Reserve's
Statistical Release G.17, "Industrial Production and Capacity Utilization,"
published on July 15,2009. Data labeled "previous" are those published
before the March 27, 2009, annual revision.
index for final products and nonindustrial suppJies is
now reported to have advanced 0.5 percentage point
less in 2007 and to have decreased 0.4 percentage
point more in 2008. Overall changes to the rates of
increase in other years were minimal; the change in
the index was revised down 0.1 percentage point in
2004 and was essentially unrevised in 2005 and 2006.
The change in the output of consumer goods was
revised down 1 percentage point in 2007; revisions to
other years were small. The output of durable consumer goods declined in 2004 and 2006, rose slightly
in 2005 and 2007 , and dropped sharply in 2008. The
rates of change are now higher than earlier estimates
suggested in 2004 and in 2006 through 2008, and they
are a touch lower in 2005 than previously reported.
Among durable consumer goods, the most significant
revisions were in the index for home electronics,
which now is estimated to have increased less rapidly
in 2005 and 2006, to have increased more rapidly in
2004 and 2007, and to have posted an advance instead
of a decline in 2008. Elsewhere within durable consumer goods, the index for miscellaneous durable
consumer goods is now estimated to have increased
less rapidly in 2005, and to have decreased less
rapidly in 2006, than previously reported . Revisions
to the indexes for the other major categories of
durable consumer goods were smaller.
The index for consumer nondurables shows moderate gains in output in 2004 through 2006, but, with
this revision, it now posts a decline instead of an
advance in 2007. The index also drops slightly in
2008. Revisions in recent years besides 2007 were
small. Among consumer nondurables, the changes in
the index for clothing were revised down for 2004
AI28
Federal Reserve Bulletin 0 August 2009
2. Industrial production: Market groups, January I989- June 2009
Ratio "",Ie, 2002 - 100
Ralio scale, 2002 = 100
Equipmcru
155
110
135
100
115
95
90
75
80
-
I
I I I I II
U
I
55
70
J I I
1
I I I
1
I.
I
I
Ind""lrial malflrial.
NOIIinduslrialllUpplies
115
110
100
100
85
90
70
80
-
I I I I I I I
1991
1994
I I I I I I I I I I I
1997
2000
2003
2006
1
I
-
55
70
I
2009
through 2006 and revised up for 2007 and 2008. The
index for chemical products, which was previously
flat in 2007 and declined slightly in 2008, now moves
down significantly in both years . The index for paper
products was revised up for 2005 and 2006, revised
down for 2004 and 2007, and stood below its previous level for the fourth quarter of 2008. The index for
consumer energy products was revised up in 2008 and
posted moderate increases, on net, over the past few
years.
The production of business equipment increased
solidly from 2004 through 2006, rose slightly in
2007 , and then fell in 2008. Relative to previous
estimates, the rates of change in the index were
noticeably lower in 2005 and 2007; the revisions to
the data for other recent years were smaller. For
transit equipment, output rose substantially, on net,
from 2004 through 2006 and decreased in 2007; the
index plummeted in 2008, partly because of weakness
in the motor vehicle industry and partly because of a
strike at a major aircraft producer in the second half
of the year. Although the rates of change in the index
for transit equipment were revised down in 2004,
2005, and 2008 and were revised up in 2007, the level
of output at the end of 2008 was nearly the same as
I
I I
I I I I J I I I I
1991
I
1994
1997
2000
2003
J
I I 1 I
2006
2009
reported previously. The production of information
processing equipment is now estimated to have
expanded less rapidly over the past few years than
reported earlier, and the production of industrial and
other equipment in 2007 and 2008 appears slightly
weaker. The production of defense and space equipment is now higher than estimated previously in 2005
through 2008.
After posting gains in 2004 and 2005, the output of
construction supplies decreased moderately in 2006
and 2007 and then dropped sharply in 2008. The
revisions to this index were relatively small, and its
level in the fourth quarter of 2008 is nearly the same
as reported earlier. The production of business supplies rose modestly from 2004 through 2007 and then
slumped in 2008; the rates of change are higher than
reported earlier for 2005 through 2007 but are lower
for 2004 and 2008.
The production of materials expanded over the
years 2004 through 2007 , then fell markedly in 2008;
the rates of change for this index are little revised
before 2008, but the drop in 2008 is larger than
estimated previously. The indexes for durable and
nondurable materials both fell more than 10 percent
in 2008 after having increased moderately, on net,
Industrial Production and Capacity Utilization: The 2009 Annual Revision
3. fndustrial production: Manufacturing, and manufacturing
excluding selected high-technology industries,
January 1989-June 2009
Ratio scale, 2002 = 100
Level
115
105
95
85
75
65
liang< from year earlier
Pcrcc:nt
Manufacturing
10
5
+
o
5
10
15
i
l
l
l
l lll
1991
1994
l llll '
1997
2000
"
2003
1
1 1 11
2006
2009
NoTE: For definition of manufacturing, see text note 3.
The selected high-technology industries are semieonductors and related
electronic components (NAlCS 334412-9), computers and peripheral
equipment (NAlCS 3341), and communications equipment (NAlCS 3342).
from 2004 through 2007. The production of durable
materials is now estimated to have risen more slowly
in 2006 and 2007 and to have fallen more quickly in
2008. These revisions were due in large part to
revisions to the index for equipment parts. For nondurable materials, the output gains in 2006 and 2007 are
now higher than stated earlier, largely because the
declines in textile materials in those years are now not
as steep as previously reported and the increases in
chemical materials in the same years were revised up.
The index for energy materials edged up in 2008 after
having increased moderately in the previous two
years, and it is little changed by the revision.
Production by Indu try Group
Manufacturing production expanded each year from
2004 through 2007 and then slumped in 2008 (figure 3 and table A.3). The output of manufacturing
advanced less in 2007, and contracted more in 2008,
than reported earlier. With this revision, the month of
A 129
the peak in manufacturing production moved from
July 2007 to December 2007.
For durable goods industries as a whole, output
rose in each year from 2004 through 2007 and fell
sharply in 2008. Revisions to the index for durable
goods industries for the past few years were small on
net. Among durable goods industries, most major
categories followed contours similar to that of the
durable goods aggregate, with net increases from
2004 through 2007 followed by sharp drops in 2008.
Notable exceptions were wood products, nonmetallic
mineral products, motor vehicles and parts, and furniture and related products; the indexes for these categories started trending down before 2008.
The revisions to the changes in the output of most
major categories of durable goods before 2007 were
slight; exceptions include computer and electronic
products, in which the gain in output in 2006 is now
stated to have been significantly lower, and aerospace
and miscellaneous transportation equipment, in which
the gain in output in 2006 is now stated to have been
somewhat higher. For 2007, the output indexes were
revised down noticeably for wood products, nonmetallic mineral products, computer and electronic products, and furniture and related products but were
revised up for miscellaneous manufacturing. For
2008, relative to previous estimates, higher output
indexes are reported for electrical equipment, appliances, and components and for furniture and related
products, but the production indexes for wood products, primary metals, machinery, computer and electronic products, and motor vehicles and parts were
revised down moderately.
Production in nondurable manufacturing industries
followed a contour similar to that of durable manufacturing, with advances in every year from 2004
through 2007 followed by a decline in 2008. Neither
the overall advance in the earlier years nor the decline
last year was as great as the swings in durable
manufacturing. The output index for the nondurable
goods sector in most recent years was little revised,
on net, compared with previous estimates. The current revision reports noticeably higher rates of change
in 2007 in textile and product mills, apparel and
leather, and petroleum and coal products but a noticeably lower rate of change in chemicals. For 2008,
output is now reported to have fallen markedly faster
for textile and product mills, apparel and leather,
printing and support activities, chemicals, and plastics and rubber products compared with previous
estimates.
The revised output index for other manufacturing
(logging and publishing) fell each year from 2005
A I30 Federal Reserve Bu lletin 0 August 2009
4.
Industrial production: Selected high-technology
industries, January I998- June 2009
Ratio scale, 2002 = 100
..
i
360
280
220
170
through 2007 but contracted significantly in 2008.
The expansion in production from 2004 through 2007
was considerably Jess than stated earlier, and the
slight decline previously estimated for 2008 has been
revised down to a significant decrease.
Capacit)
120
90
70
50
35
I I
I
t 999
I
I.
II
200 I
I
2003
I
I
I
2005
2007
I
I
I
I
2009
NOTE: For the NAICS categories of these industries, see the note to
figure 3.
through 2008, with a particularly sharp drop in 2008.
Output in these industries is now estimated to have
decreased substantially less in 2006 than reported
earlier, but revisions to the rates for other years were
smaller.
The index for mining rose moderately in the past
two years after a jump in 2006; the increase in 2006
was revised up relative to previous estimates, but the
index is otherwise similar to what was previously
reported. For utilities, the revised output estimates are
also, in general, very similar to those reported earlier.
The estimates for selected high-technology
industries-computers and peripheral equipment,
communications equipment, and semiconductors and
related electronic components-were revised significantly over the 2004-08 period (figure 4 and table
A.4). On net, output in the high-tech sector is still
reported to have posted gains in recent years, with
robust increases from 2004 through 2007 followed by
a contraction in 2008. However, the increases in 2006
and 2007 are now shown to have been slower, and the
decrease in 2008 is now shown to have been steeper,
than reported earlier.
Among the major high-tech components, production of computers and peripheral equipment rose
solidly in each of the years from 2004 through 2007
and then fell in 2008; the rates of change were revised
up in each of the past few years except 2005. The
output of communications equipment expanded in
each of the past few years, but the rates of increase in
most years are markedly lower than estimated previously. Most notably, the increase of 20.6 percent that
was reported earlier for 2007 has been revised down
to 6.6 percent based on shipments data from the CIR
for telecommunications. Production of semiconductors and related components rose solidly from 2004
Total industrial capacity is estimated to have risen at
an average annual rate of 1.4 percent in 2005 through
2008 (table A.6). The average annual rate is the same
as previous estimates, but the rates of change in 2006
and 2007 are slightly higher, and the rate of change in
2008 is somewhat lower, than stated previously. In
2009, total industrial capacity is now expected to
decline nearly 1 percentage point; this decline is
larger than estimated previously.
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
1.6 percent from 2005 through 2008, about 0.1 percentage point less than estimated earlier. In 2009,
manufacturing capacity is now expected to contract
1.2 percent.
Within manufacturing, the capacity of durable
goods manufacturers expanded moderately in each
year from 2005 through 2008 and is expected to
contract somewhat in 2009. The increase in 2008 was
tempered considerably by the recent revision. The
capacity of nondurable goods manufacturers followed
a similar contour to that of durable goods manufacturers, but the increases from 2005 through 2008 were
smalJer, and the decline in 2009 steeper. Nondurable
goods manufacturing capacity is expected to decrease
more in 2009 than in previous estimates; rates of
change in capacity for most major nondurable industry groups were marked down. Capacity for the
logging and publishing industries rose, on net, from
2005 through 2008 but is expected to fall in 2009; the
rates of change are higher as a result of the revision.
Aggregate capacity for the selected hightechnology industries advanced substantially in each
year from 2005 through 2008 and is expected to
expand appreciably in 2009. Relative to previous
reports, capacity in these industries rose less quickly
in 2005, 2006, and especially 2008, but it increased
somewhat more rapidly in 2007 . It is expected to rise
faster in 2009 than previously estimated. Excluding
high-technology industries, manufacturing capacity
expanded slightly from 2005 through 2008 but is
expected to decline in 2009. The current estimates are
similar to previous reports except for 2009, during
Industrial Production and Capacity Utilization: The 2009 Annual Revision
which the contraction in capacity is now anticipated
to be greater than stated previously.
Capacity at mines is estimated to have fallen in
2005 and to have expanded from 2006 through 2008;
it is expected to recede somewhat in 2009. The gains
in 2006 and 2008 are now reported to have been
larger than previously published, but the increase in
2007 has been revised down , and capacity at mines is
now expected to contract rather than expand in 2009.
Capacity at electric and gas utilities has risen each
year since 2004. The current estimates show larger
gains in 2005 and 2006 than reported earlier; revisions to other recent years were negligible.
By stage of processing, capacity in the crude stage
is now reported to have risen more in 2006 and 2008
than previously shown but is now expected to fall in
2009. The rates of change for capacity in the primary
and semifinished stages were revised down for 2008
and 2009; revisions to earl ier years were slight.
Relati ve to previous estimates, increases to the index
for finished goods processors were revised up in 2007
and 2008, but capacity is expected to fall more in
2009 than stated previously.
Capacity Utilization
From 2005 through 2007, the capacity utilization rate
for total industry stood a little below its long-run
average of 80.9 percent, but in 2008 it fell to 74.2 percent, a level 6.7 percentage points below its long-run
average (table A.7). The utilization rate for total
industry was revised down about 1 2 percentage point
/
in 2007 and 0.7 percentage point in 2008; revisions
for earlier years were smaller.
Similarly, manufacturing capacity utilization, on
balance, spent most of 2005 through 2007 at a little
below its long-run average of 79.6 percent. The
utilization rate in manufacturing tumbled during
2008, reaching 70.9 percent in the fourth quarter of
2008, 83/4 percentage points below its long-run average. Relative to earlier reports, the factory operating
rate was revised down in 2007 and 2008 but was little
changed in earlier years . Within durable goods, utilization rates for many industries were near their
long-run averages from 2005 through 2007 and then
dropped well below average in 2008; among the
exceptions were motor vehicles and parts, nonmetallic mineral products, and wood products, in which the
utilization rate was significantly below average in
2006 and 2007 and then fell even further in 2008. In
the fourth quarter of 2008, three durable goods industries (nonmetallic mineral products, primary metals,
and furniture and related products) had uti lization
rates between 10 and 20 percentage points below
A 131
their long-run averages, and two durable goods industries (wood products and motor vehicles and parts)
had utilization rates more than 20 percentage points
below their long-run averages.
Among durable goods industries, nonmetallic minerai products had the largest downward revisions to
utilization over the 2005-08 period; other industries
with large downward revisions to their capacity utilization rates were wood products and motor vehicles
and parts. The durable goods industries that reported
the largest nel upward revisions since 2005 were
machinery, aerospace and miscellaneous transportation equipment, and furniture and related products.
Utilization rates for many nondurable goods industries were somewhat below their long-run averages in
2005 through 2007 and then fell further in 2008, but
the declines in 2008 were not as great, on average, as
the declines in the utilization rates for durable goods
industries . In the fourth quarter of 2008, four nondurable goods industries (textile and product mills,
paper, printing and support activities, and plastics and
rubber products) had utilization rates between 10 and
20 percentage points below their long-run averages .
The nondurable goods industries with the largest
downward revisions to utilization rates over the
2005-08 period were food, beverage, and tobacco
products; petroleum and coal products ; and plastics
and rubber products. Apparel and leather had the most
noticeable upward revisions to its utilization rate over
this period; other nondurable goods industries with
large upward revisions were textile and product mills
and printing and support activities.
Capacity utilization in the other manufacturing
category (logging and publishing) was revised down
in 2005 and revised up from 2006 through 2008. It
stood more than 10 percentage points below its
long-run average in the fourth quarter of 2008 .
Capacity utilization in mining was generally above
its long-run average from 2006 through 2008 and, in
the fourth quarter of 2008, stood at 89.6 percent,
about 2 percentage points higher than its long-run
average. Relative to earlier estimates, the utilization
rate for mining was a little lower in 2006 and 2008
but was little changed in 2005 and 2007. At electric
and gas utilities , capacity utilization rates were revised down for 2005 through 2008, and capacity
uti lization in the fourth quarter of 2008 is now
estimated to have been more than 3 percentage points
below its long-run average.
The operating rates for the selected hightechnology industries were above their long-run averages in the fourth quarters of 2006 and 2007 but fell
to more than 8 percentage points below their long-run
A 132
Federal Reserve Bulletin 0 August 2009
5. Capacity utilization: elected .high-technology industries,
and manufacturing excluding selected high-technology
industrie , January I 989- June 2009
6. Capacity utilization: Selected high-technology industries,
January J996-June 2009
Ratio scale, percent
_ _ ~_
_
_
_ _ __ __
_
-
Manufacturing
Revised
-
_ __ _. - _
Percenl
Previous
110
95
high-technology
industries
~
90
85
excluding selected
70
75
-
50
65
55
I
I I l I I 1 1 1 1 1 1 1 I 1 1 1 1 1 1
1991
1994
1997
2000
2003
2006
r
1 I
2009
I
I.
I
Conummicauans <quipmcru
NOTE: The high-technology industries are identified in the nOle to
figure 3.
110
90
averages in 2008 (figures 5 and 6 and table A.7).
Relative to earlier estimates, capacity utilization is
now reported to have been higher in 2005, 2006, and
2008 but lower in 2007. The operating rate for the
computers and peripheral equipment industry is now
shown to have been higher than previously reported
in each of the past few years, particularly 2008, but,
in the fourth quarter of 2008, stood about 4 percentage points below its long-run average. The utilization
rate for communications equipment was more than
8 percentage points below its long-run average in
2005 and rose to more than 6 percentage points above
its long-run average in 2006 before dropping in 2007
and 2008; at the end of 2008, the rate was 1.7 percentage points below its long-run average. Capacity utilization for communications equipment is now higher
than previously reported in 2005 and 2006 but lower
in 2007 and 2008. Capacity utilization in the semiconductor and related electronic components industry is
now lower than earlier estimates in every year after
2005. The operating rate in this industry was above or
near its long-run average from 2005 through 2007 but
stood more than 16 percentage points below its
long-run average in the fourth quarter of 2008.
TECHNICAL ASPECTS OF THE REVISION
Comprehensive benchmark data for manufacturing
production in 2007 were not available for this revision. After incorporating the limited information that
was available, the benchmark production indexes for
manufacturing-defined for each six-digit NAICS
industry as nominal gross output divided by a price
index-were little changed before 2007. The principal changes resulted from small revisions to price
70
-
50
SemiconduCIOl1 find rclaU:d c.lcclronic componcd15
110
90
70
-
I
I
I
1997
1999
I
I
200 I
2003
I
2005
2007
I
50
1
2009
indexes from the Bureau of Economic Analysis and
from improved estimates of price indexes for communications equipment output constructed by the Federal Reserve (discussed later in the article). In addition, the benchmark production indexes for other
manufacturing (logging and publishing) were advanced through 2007 and updated for 2006 based on
data from the Forest Service and the Census Bureau.
The IP indexes in recent years incorporated information from selected CIRs for 2007 from the Census
Bureau, the revised benchmark input-output accounts
for 2002 from the BEA, the Quarterly Survey of Plant
Capacity from the Census Bureau for 2007 and 2008,
and other annual industry reports. The indexes also
Industrial Production and Capacity Utilization : The 2009 Annual Revision
incorporated revised monthly and quarterly source
data on production, shipments, inventories, and
production-worker hours.
As mentioned earlier, the benchmark production
indexes for most industries incorporate updated price
indexes from the industry output program of the
BEA. However, the price indexes for pharmaceuticals
(NAICS 325412), for semiconductors (NAICS
334413), and for most components of communications equipment (NAICS 3342) are constructed by the
Federal Reserve from alternative sources. This article
provides annual and quarterly price indexes for the
relevant components of communications equipment,
along with quarterly semiconductor price indexes
(tables A.9, A.l 0, and A.ll).
Changes to the Methodology for Adjusting
for Temporary Help Supply Employees
A 133
Plant Capacity (ASPC) and on each industry ' s cyclical patterns. With this revision, the allocation of THS
employment among industries within manufacturing
was updated based on data from the ASPC for 2002
through 2005. 7
In addition, this revision updates the method for
estimating each industry's monthly baseline share of
temporary help employment use in manufacturing.
Previously, this share was held constant for each
industry at the level estimated according to the
method just described. With this revision, the share is
allowed to evolve based on the industry's share of
total manufacturing employment. THS employment
is multiplied by assumptions on hours worked and on
the productivity of a THS worker relative to a permanent worker to estimate the effective hours contributed by THS workers for each three-digit manufacturing industry. The THS hours are added to the reported
production-worker hours for each industry to produce
an adjusted production-worker hour series. The percentage adjustment for each three-digit industry'S
hours is then applied to the hours series for each of its
component industries.
The compilation of the initial IP estimate for a given
month relies heavily on the hours worked by production workers in the manufacturing sector when the
availability of the other IP source data is limited . The
hours data are adjusted to account for the labor input
of temporary help supply (THS) employees who
work in the manufacturing sector; this adjustment is
necessary because these workers are on the payrolls
of companies that are c1assi fied in the service sector
of the economy by the Bureau of Labor Statistics.
These adjusted detailed hours series are used in
maki ng (1) estimates for those IP series based on
labor input for the period for which benchmark output
indexes are not yet available and (2) preliminary
estimates of those IP series based on physical product
data for which the current source data are not yet
available.
The procedure for implementing this adjustment is
as follows. An estimate is made of the component of
THS employment that is allocated to manufacturing.
This estimate begins with a baseline figure projected
from the Current Population Survey but varies based
on the cyclical movements of the manufacturing
sector and the rest of the economy-THS employment has a cyclical pattern similar to that of manufacturing. 6
The THS employment in manufacturing is then
allocated among the NAICS three-digit industries
based on each industry's use of THS workers as
reported in the Census Bureau 's Annual Survey of
Industrial production in the United States was severely affected by hurricanes in both 2005 (Hurricanes Katrina and Rita) and 2008 (Hurricanes Gustav
and Ike). Industries with a large presence in the Gulf
Coast region include oil and natural gas extraction,
petroleum refining, petrochemical manufacturing, and
plastic resin manufacturing. These industries were
mostly shut down during the storms, and storm
damage sometimes delayed their return to operation.
In addition, some other industries in the afflicted areas
also shut down factories. The data on which the IP
indexes are based for many of these industries are not
available on a timely basis; initial estimates for them
were made from other sources. The estimation of
crude oil extraction and petroleum refining output
was relatively straightforward with the availability of
weekly data from the Department of Energy. Timely
output data on natural gas extraction were less available, but reports by the Minerals Management Service of the U.S. Department of the Interior on shut-in
capacity provided a good first estimate until data on
output became available from the DOE. Weekly data
6 . See Marcello Estevao and Saul Lach (1999), " Measuring Tem·
porary Labor Outsourcing in U.S. Manufacturing," Finance and
Economics Discussion Series 1999-57 (Washington : Board of Gover·
nors of the Federal Reserve System, October), www,federalreserve.gov/
pubS/feds/ I 999/index .html.
7 . For several years . the ASPC collected information about the
share of production workers that consisted of temporary workers ; this
information is not collected in the Qual1erly Survey of Plant Capacity,
which replaced the ASPC in 2007.
Estimating the EJt'ect of Hurricanes on
Production
A 134
Federal Reserve Bulletin 0 August 2009
on railcar loadings of chemicals from the Association
of American Railroads and information on shut-in
capacity of petrochemical plants from Chemical Market Associates, Inc., and PetroChem Wire were used
to inform the IPestimates for petrochemical manufacturing; reports from the National Petrochemical and
Refiners Association on quarterly petrochemical output became available later and improved the estimates. Anecdotal information from contacts in the
plastic resin industry on output was used until monthly
data on production from the American Chemistry
Council became available. The effect of the storms on
other industries was estimated based on data on the
regional distribution of industrial activity from the
County Business Patterns report of the Census Bureau .
Estimation 0/ Capacit)' in the Light MOlOr
Vehicle Industry
Capacity for light duty motor vehicles (NAICS
33611) is expected to contract significantly in 2009.
The estimate for motor vehicle assembly capacity for
a year is constructed from estimates of the peak
historical assembly-line speed over the previous 10
years and the number of hours that can be worked at
each plant in the United States. Annual line speed
data and the number of shifts at individual plants are
reported in Ward's Automotive Yearbooks. An annual
capacity count for a plant is calculated by multiplying
the peak line speed by the hours per year that the plant
could run. New plants are added to capacity when
they start production, and plants are removed from
capacity when they are permanently shuttered. An
adjustment is made to reflect manufacturers' plans to
open or close assembly plants only when the dates
have been confirmed and specific plants have been
named. Plant-level data are aggregated using price
weights for the different models of light vehicles, and
if a plant produces multiple models on one assembly
line, capacity is split among models based on estimated production levels for the models at the plant.
Changes to Individual Production Series
With this revision, the monthly production indicators
for some series have changed .
Carpet and Rug Mills
The index for carpet and rug mills (NArCS 3141 I) is
based on quarterly data on unit shipments from the
Carpet and Rug Institute with a model-based inven-
tory adjustment. 8 Formerly, it was based on monthly
data from the same source. A cubic spline is used to
interpolate monthly values from the quarterly figures,
a method similar to that used for the other series for
which only quarterly physical product data are availableY
High-Technology Good
Communicarion eqllipmem
Price indexes for two product classes of communications equipment were revised to incorporate additional detail. The price index for enterprise and home
voice equipment (part ofNAICS 33421) was updated .
A price index for telephones and answering machines,
one of the two product categories in this industry, was
previously calculated using average selling prices for
two types of phones (corded and cordless) but is now
a matched-model index constructed using detailed
data, beginning in 1997, from the Consumer Electronics Association on transmission frequency, number of
lines, and presence of other features such as caller
identification, speakerphone, and integrated answering machine. The price index for wireless system
equipment (part of NAICS 33422), which covers
mobile phone infrastructure, was improved by folding in additional detail on base-station radio transmission capacity using data from the De II' Oro Group, a
market research firm. The resulting mobile infrastructure price index fell 4 percentage points faster per
year, on average, from 2000 to 2008.
Updated price indexes for the six product groups in
communications equipment, introduced in the 2008
revision, are included in this article (table A.9).
CO
Tllpurers
With this revision , a change to the method for estimating the domestic shipments share of domestic absorption in electronic computer manufacturing (NArCS
334111) was introduced. The six product-based indexes for computer manufacturing are derived from
quarterly data on nominal domestic absorption from
IDC, an industry research group. For each product, an
estimate of the domestic shipments share of domestic
8. Factory production is calculated as shipments plu s the change in
factory inventories. When only shipments are available. a model-based
inventory adjustment is applied . See Charles Gilbert and Kimberly
Bayard (2005) , " Industrial Production and Capacity Utilization: The
2004 Annual Re vision." Federal Reserve Bulletin. vol. 9J (winter).
pp. 9-25. www.federalreserve .gov/pubslbulletin/2005/0Sindex .htm.
9. See Ri chard D. Raddock (1993). " Industrial Production , Capacity, and Capacity Utilization since 1987." Federal Reserve Bulletill.
vol. 79 (June). pp . S 9~OS .
Industrial Production and Capacity Utilization: The 2009 Annual Revision
absorption-derived from the Census Bureau's CIR
for computers and peripheral equipment-is used to
convert the IDC domestic absorption data to a domestic shipments concept. 10
The domestic shipments share for each of the six
indexes was constructed by di viding the relevant
annual measure of domestic product shipments from
the CIR by the corresponding measure of annual
domestic absorption from IDe. Each of these shares
is converted to a quarterly frequency and projected
forward for more-recent quarters when the CIR data
are not yet available. Prior to the current revision,
projections of the individual domestic shipments
shares were based on monthly data on foreign trade in
computers from the Census Bureau. Specifically,
domestic absorption forthe industry (NAICS 334111)
was adjusted by net exports to obtain domestic shipments; the change in the ratio of domestic shipments
to domestic absorption was applied to the shipments
share for each of the six product indexes. With the
current revision, the foreign trade data are no longer
used. Instead, the CIR-based individual domestic
shipments shares are extended out with a modelbased trend for quarters when the annual CIR data are
not yet available. Examination of all relevant data
sources suggests that the shares derived from modelbased trends lead to more-accurate measures of
domestic production than the shares derived from
trade data.
Semiconductors
Beginning with the 2008 revision, detailed price data
on MOS (metal-oxide semiconductor) memory products (part of NAICS 334413) from iSuppli, an industry research group, have been used to construct
quarterly indicator quality-adjusted price indexes for
three categories-DRAM (dynamic random access
memory), Hash memory, and other memory. These
prices are included in this article (table A.ll).
Civilian Aircraft
A 135
is estimated by combining data on aircraft deli veries
with an assumption about the time required to build a
plane and the intensity of activity during that period .
Previously, the production index for aircraft was
based on a 10-month build period, during which
43 percent of production was assumed to have
occurred in the three months immediately before the
delivery and 57 percent was assumed to have occurred in the seven preceding months. Based on
discussions with contacts in the aircraft industry, the
new indexes assume a shorter build period. Specifically, they now assume that commercial aircraft take
either two or three months to build. The new assumptions were applied to the entire history of aircraft
models that are still in production ; the data for models
that are no longer in production were left unrevised.
Change to Individual Capacity Series
lectri ity Generation
The capacity index for electric power generation,
transmission , and distribution (NAICS 2211) is now
based on generation capability data from the DOE;
previously it was based on electricity generation
capacity data from the North American Electric Reli ability Corporation (NERC). The change was made
because the DOE data are compiled using a more
consistent definition over time. However, because the
DOE data are published with a lag, the capacity
projection for the most recent year or two is estimated
by extending the DOE generation capability series by
the rate of change shown for the NERC electricity
generation capacity data.
Nonferrous M lals (except Aluminum)
The capacity index for nonferrous metal (except
aluminum) production and processing (NAICS 3314)
is now based on copper smelting, copper refining, and
zinc smelting data from the U.S. Geological Survey.
Formerly the capacity index was based on the USGS
data on just copper smelting and copper refining.
With this revision , a change to the methods used for
the calculation of the index of industrial production
for civilian aircraft (part of NAICS 336411) was
introduced. Production in the civi lian aircraft industry
Natural Gas Extra tion
10, Prior to 2006, the CIR for computers and peripheral equipment
was released annually. Beginning in 2006, the Census Bureau began to
issue quarterly reports along with annual summaries, For the construction of the domestic shipments share for 2006 onward, the Federal
Reserve used only the annual summaries, not the quarterly reports,
However, the Federal Reserve carefully follows the quarterly CIR
releases and expects to use them more fully in a few years, when a
longer history will be available,
The DOE no longer publishes physical capacity estimates for natural gas extraction (part of NAICS
211111). Capacity estimates for recent years are
based on trend-through-peak estimates of capacity
using the IP index and output projections from the
Short-Term Energy Outlook (STEO) and Annual
Energy Outlook (AEO) reports of the DOE.
A 136
Federal Reserve Bulletin 0 August 2009
Trend-through-Peak Estimate'
As with recent years for natural gas extraction, the
trend-through-peak method of estimating capacity is
also used for those industries in mining and utilities
for which no physical capacity sources are availableseven individual series accounting for about 5 percent
of capacity. With this revision , the trend-throughpeak method used to estimate capacity indexes for oil
extraction (part of NAICS 2UIII), natural gas liquid
extraction (NAICS 211112), and natural gas sales and
transmission (NAICS 2212) is based on production
indexes that are extended using output projections
from the STEO and AEO reports.
The basic method in estimating trend-through-peak
capacities for these industries is to construct baseline
estimates of capacity by connecting peaks in production, with these peaks representing 100 percent utilization. In practice, the procedure involves a fair
degree of judgment and deviates from a strict trendthrough-peak approach in a variety of ways. First and
most important, if a peak in production was reached
several years ago and production has not subsequently approached that previous maximum, published capacity levels generally will, after a time,
trend downward. That is, they will tend to follow
recent IP. Second , the capacity levels corresponding
to peaks in production for different series have yielded
a variety of peak uti lization rates historically.
Weights for Aggregation
The aggregation method for the IP index is a version
of the Fisher ideal index formula." In the IP index ,
series that measure the output of an indi vidual industry are combined using weights derived from their
proportion in the total value-added output of all
industries. '2 The weights for manufacturing industries are derived from value-added measures from the
Census of Manufactures and the Annual Survey of
II. A Fisher ideal index estimates the change in aggregate output
between two periods as the geometric average of two aggregate output
indexes-{)ne that weights the component output indexes based on
prices from the earlier period and one that uses prices from the later
period . An aggregate IP index is the cumulative product of Fisher
indexes computed for each period , with concurrent prices (derived as
unit value added) applied to the component output indexes for every
period.
12. For detailed discussions of the aggregation method, see Carol
Corrado, Charles Gilbert, and Richard Raddock (1997), " Industrial
Production and Capacity Utilization: Historical Revision and Recent
Developments," Federal Reserve Blllletin , vol. 83 (February), pp. 6792, www.federalreserve.gov/pubslbulletin/1997/97bulletin .htm#feb;
and Carol Corrado (2001), "Industrial Production and Capacity Utilization: The 2000 Annual Revision, " Federal Reserve Bullerin , vol. 86
(March), pp. 132-48, www.federalreserve .gov/pubs/bulietin/200J/
01 index .htm .
Manufactures. 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 data on producer prices for the period after
2006. Table A.8 shows the annual value-added proportions in the IP index from 200 I through 2008.
The outputs of most industries are inputs to multiple markets . Although data that directly split the
output of an industry by its purchaser are sometimes
available, most industry output measures do not provide that detail. With the 2002 annual revision,
weights that allocate individual IP indexes into multiple market groups were derived from the Standard
Make and Use Tables (at the detailed level) from the
1997 benchmark input-output accounts of the BEA.'3
With this revision, the weights for 2002 were updated
using estimates from the same tables from the 2002
input-output accounts; years subsequent to 2002 were
assumed to have weights identical to those for 2002.
The weights for the period up through 1997 are still
computed from the 1997 accounts, and the weights
between 1997 and 2002 are linear combinations of
the 1997 and 2002 weights .
Revised Monthly Data
This revision incorporates product data that became
available or were revised after the regular six-month
reporting window for monthly IP was closed. These
data were released with too great a lag to be included
with monthly IP estimates but were available for
inclusion in the annual revision .
Revised Seasonal Factors
Seasonal factors for all series were reestimated using
data that extend into 2008 or 2009. Factors for
production-worker hours-which adjust for timing,
holiday, and monthly seasonal patterns-were updated with data through February 2009. The updated
factors for the physical product series, which include
adjustments for holiday and workday patterns , used
data through 2008. Seasonal factors for unit motor
vehicle assemblies have been updated, and projections through September 2009 are on the Federal
Reserve Board's website at www.federalreserve.gov/
releases/g 17/mvsf.htm.
0
13 . See Carol Corrado (2003), " Industrial Production and Capacity
Utilization : The 2002 Historical and Annual Revi sion, " Federal
Reserve Bllllerin , vol. 89 (April), pp. 15 1-76, www.federalreserve.gov/
pubslbu Ileti n/2003/03index .htm .
Industrial Production and Capacity Utilization: The 2009 Annual Revision
A 137
A. 1. Revised dala for ind u, trial prod ucli o n fo r lOlai industry. 11)79-200'>
Seasonally adjusted data except as noted
I
Year
Jan.
Feb.
1
I
Mar. j Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Quaner
Dec.
I
I
2
I
3
I
4
Annual
avgl
Industrial prOduction (percent change)
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 . . ..... .
2009 ....
....
.... ......
... ...
.....
......
....
... .
- .7
A
- .6
-1.9
1.9
2.0
- .3
.5
- .3
.0
.2
- .5
-.5
- .6
.5
A
.3
- .7
.1
.5
.5
.0
- .7
.5
.7
.3
.4
.0
- .5
-. 1
-2.2
.6
.1
- .5
2.0
- .6
.5
.5
-.7
1.3
.4
- .4
.9
- .6
.8
.3
.0
.0
1.7
1.2
.0
.4
.4
- .6
.0
.3
.5
.6
.0
.8
- .3
-. 8
.3
-.3
.5
- .7
.8
.5
.1
- .6
.1
.2
.3
.5
- .5
.8
.0
1.1
.2
- .2
.8
.1
.2
.4
-.3
.8
- .1
- .6
- .1
.2
- .2
- .4
-\.7
- 1.1
-2.0
- .6
- .9
1.2
.6
- .2
.1
.6
.5
.0
-. 1
2
.7
.3
.5
.0
.8
.0
.4
.2
.6
- .3
.3
- .8
.5
.0
.4
.4
-.6
- .7
.8
-2.5
.7
-.7
.7
.5
.1
.1
.7
- .1
- .7
.2
1.0
.4
- .4
.6
.2
.6
.7
.7
.7
.2
-.7
.5
.0
.7
.3
- .1
.1
- .3
-1.2
.0
- 1.2
.5
-.4
.5
.4
.1
-.3
.5
.2
.0
.3
1.0
.0
.2
.7
.3
.9
.5
- .6
-. 2
.1
- .6
.9
.1
-.9
.4
.4
.0
-. 2
- .2
- .7
.7
- .4
1.5
.3
- .6
.6
.6
.2
-.9
- .1
.0
.8
.4
.2
- .4
- .1
.5
- .4
.6
- .2
-.4
-.3
.4
.7
-. 1
.2
.3
-. 1
-.7
.4
.0
- .9
1.1
.0
.4
- .1
.7
.5
.9
.2
.1
- .5
.0
.5
1.4
.6
1.4
2. 1
.5
-. 2
-.4
.1
- .1
.2
.2
.2
.1
- 1.1
.1
1.6
- .6
-.4
1.5
-. 1
.5
.2
J
- .3
- .3
.2
.9
.2
.4
.2
.4
.6
.9
-3
-3
.5
-.3
.1
.6
.0
-1.7
- .3
.4
-4 .0
.6
1.3
- .7
- .8
.8
- .1
-A
.5
1.5
.5
- .1
- .7
- .2
.7
.7
.9
- .2
.0
.7
.7
1.4
- .4
- .6
- .3
.1
.9
1.1
- .1
-.5
1.3
- .1
1.7
-1.1
-3
.3
.4
.3
.5
.5
.2
.3
-1.2
-. 1
.4
.4
.6
.3
.8
.9
-. 1
.6
.0
-.5
.4
.9
.2
1.1
- .2
.6
- 1.3
.1
.6
-1.1
- .7
.5
.1
1.0
.9
.5
.4
.6
- .7
- .4
.0
.5
1.1
.4
.6
.4
.3
.8
- .4
.0
- .5
- .1
.7
.6
.8
.3
- 2.3
1.7
- .6
1.7 -15.8
.9
1.0
- 7.7
- 5.1
4.9
9.2
12.4
6.3
1.0
.4
-2.4
2.3
7.0
5.5
3.6
3.6
- 1.7
1.6
3.1
2.8
- 7.4
2.6
-.5
7.2
3.6
.9
5.2
7.5
5.1
1.2
2.9
8.1
7.9
6.4
4.4
3.2
4.'1
3.7
4.8
4.9
-5 .7
- 5J
2.5
5.9
2. 9
- 3.0
2.8
1.8
5.7
1.7
3.6
2.2
1.8
2.4
.2
-4 .6
-19. 1 -11 .6
578
57 .3
55 .8
52.4
58.1
61.1
62.0
62.9
67.4
69.4
69.4
68.6
69.1
71.8
74.3
79.4
57.9
58.0
56.9
55 .3
53.4
59.6
61.2
61.8
63.3
67.7
69.4
69.5
67 .8
69.3
72.3
74.9
79.7
82.0
87.5
94.2
97.8
102.9
102.2
98.7
101.3
102.9
106.7
109.0
110.5
112.0
99.0
-.4
-1.'1
--{i.3
4.3
--{i.0
14.4
2.8
-.7
1.6
7.3
2.1
-2.4
1.2
5.5
2.9
2.1
5.1
3.9
5.4
9.6
2.9
4.1
-.3
-5.7
2.1
2.6
1.9
-.7
2.0
2.1
- 9.0
1.5
16.4
-8.5
- 7.1
10.8
.4
2.4
4.7
10.2
2.9
1.8
--{i. I
.9
4.0
6.0
8.1
3.4
5.6
10.4
S.I
8. 1
-1. 2
-5 .0
-.4
4. 1
5.7
4.0
-.6
.8
- 13.0
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
1.3
2.5
3.3
2.3
1.5
-2.2
57.6
54.7
57.7
53.7
56.4
60.9
61.1
61.7
65.5
68.6
68.7
70.2
69.2
71.0
72.9
77.2
80.7
84 .7
90.9
95.6
99.7
104.0
99.3
100.6
101.2
10.U
107.0
110.1
111.7
108. 1
57.8
56.8
56.4
52.7
57.9
61.0
61.5
62.4
67 .1
69. 1
69.0
69 .2
69.3
71.7
73 .9
78.7
81.4
85.8
93.2
96.8
101 .7
103.7
98.1
100.6
102. 2
105.3
108.0
110.0
112.0
104.4
57 .7
56.3
57.0
54 .1
55.6
60.5
61J
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.'1
99.5
103.7
100.1
100.0
101.3
103.8
107.2
109.7
111 .3
108.8
Industrial production (2002= I 00)
...
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 . .
2009 .. ....
... ... ..
.
57.6
58.0
57 .0
54.7
53.4
59.3
60.9
62.3
62.7
67.5
69.6
69.0
68.2
68.7
72.2
74.6
79.7
81.1
86.5
94.1
97.5
102.4
102.7
98.4
10l.l
102.7
106.3
108.9
109.9
112.3
100.1
57.9
58.1
56.7
55 .8
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
82.4
87.6
94 .2
97 .9
102.9
102.1
98.4
101.4
103.3
107.0
108.9
110.8
112.0
99.4
58.1
57 .9
57. 1
55.4
53 .6
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 .3
88.3
94.2
98.1
103.3
101.8
99.2
IOU
102.7
106.9
109. 1
110.6
111 .6
97.7
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
94.6
98.3
103.9
101.5
99.5
100.5
103.1
106.8
109.5
111.1
111 .0
96.9
57.9
55.3
57 .1
54.5
54.6
60.6
61.2
61.6
64.4
68.2
68.9
70.0
68.3
70.6
72.3
76.2
79.9
83.5
88.9
95.3
99.0
104.1
100.8
100.0
100.5
103.9
107.1
109.4
111.1
110.7
95.8
57 .9
54.6
57.4
54.3
54.9
60.8
61.3
61.4
64 .7
68 .4
69.0
70.2
68.9
70.6
72.5
76.7
80. 1
84.2
89.3
94.8
98.8
104.3
100. 1
100.9
100.6
103.0
107.5
109.9
111 .2
110.4
95.4
57.8
54.3
57.8
54.1
55.7
60.9
60.9
61.7
65 .1
68 .5
68.3
70.1
68.9
71.2
72.8
76.9
79.9
84.2
89.8
94.4
99.5
104.0
99.7
100.6
101.0
103.7
107.5
110.1
111 .5
110.4
NOTE : Mo nthly percent c hange fi gures show the change from the pre vious
month ; quarterly figures sho w the change from the previous quarter at a co mpound annual rate of change . Production and capacity indexes are expressed as
pe rcentages of output in 2002.
57.4
5-1.5
57.8
53.6
56.4
61.0
61.1
61.6
65 .6
68.8
69.0
70.2
69.0
70.8
72.8
77.3
80.9
84.7
91.0
96.3
100.0
103.8
99.3
100.6
100.9
103.9
107.7
110.3
111.6
109.2
57.5
55.3
57.4
53 .4
57.2
60.9
61.4
61.8
65 .8
68.6
68.8
70.4
69 .6
71.0
73 .1
77.4
~J.3
85.1
91.9
96.1
99.7
104.3
99 .0
100.7
101.5
103.9
105.8
110.0
112.0
104.8
57 .8
56.1
57.0
53.0
57.7
60.8
61.1
62.0
66.8
69.0
68 .7
69 .9
69.5
71.5
73.6
78.1
81.1
85 .2
92.5
96 .7
101.0
103.9
98.4
100.'1
101.6
104.8
107.0
109.8
lilA
106.2
57.8
57.0
56.4
52.8
57 .9
61.1
613
62. 3
67 . 1
69.1
68.9
69.0
69.'1
71.8
73.9
78.6
81.3
85 .9
93 .3
96.6
101.6
103.9
97.9
100.9
102.5
105.1
108.2
109.6
112.1
104.8
~1.7
86.4
93.7
97.0
102.4
103.5
97.9
100.4
102.'1
105.8
108.9
110.5
112.4
102.4
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
100.8
100.1
100.5
103.3
107.2
109.6
IIl.1
110.7
96.0
Estimates from Febmary 2009 through June 2009 are subject to further revision in the upcoming mo nthly releases.
I. Annual a verage s of industrial producti on are calculated from not seasonally adjusted indexes.
. . . Not avai lable as of Jul y 15. 2009.
Federal Reserve Bulletin 0 August 2009
A138
A .2. Revised data for Cap<lC ily and capacity ul ilization for LOlal indu 'try. 1979- 2009
Seasonally adjusted data
Year
Jan.
I
Quaner
Feb.
Mar.
Apr.
May
June
July
Aug.
Sept.
Oct.
Nov.
Dec.
I
'I
I
2
I
I
3
4
Annual
avg.
Capacity (pen::ent of 2002 output)
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 .. . . . . . . .
2009 ... .. .. . ...
..
~
,
.
...
••
•
•
•
0
.
.
""0'
67.1
68.9
70.7
72.7
74.0
74.5
76.3
78 .2
79.3
80.9
81.7
83.7
85.5
86.8
88.8
90.4
93.9
98. 1
103.8
111.2
118.8
124.5
129.6
133.5
134.0
133.5
133.3
134.7
136.9
139.6
140.7
67.3
69,1
70.9
72.9
74.0
74.5
76.5
78.3
79,5
81.0
81.8
83.8
85 ,6
87,0
89.0
90.6
94.2
98.6
104.3
112.0
119.3
124.9
129.9
133.7
133.9
133.5
133.4
134.9
137.1
139.8
140.7
67.4
69.2
71.0
73.0
74 .0
74 ,7
76.7
78.4
79.6
81.1
82.0
84.0
85.7
87 .1
89.1
90.9
94.5
99.0
104.9
112.7
119.8
125.4
130.3
133.9
133.8
133.4
133.4
135 ,0
137.3
139.9
140.6
67 .6
69 ,3
71.2
73 .2
74.1
74.8
76.9
78.5
79.8
81.1
82 . 1
84.2
85 .8
87.3
89.2
91.1
94.8
99.5
105.4
II3A
120.3
125.8
130.7
134.0
133.8
133.4
133.5
135.2
137.6
140.1
140.5
67.8
69.5
71.4
73.3
74.1
74.9
77.1
78.5
79.9
8 1.2
82.3
84.3
85.9
87.5
89.3
91.4
95 .1
99.9
106.0
114.1
120.7
126.2
131.1
134.1
133.7
133.4
133.6
135.4
137.8
140.2
140.4
67 ,9
69.6
71.5
73.4
74.1
75.1
77.2
78.6
80.1
81.2
82.4
84.5
86.0
87.7
89.4
91.7
95.5
100.4
106.6
114.7
121.2
126.7
131.4
134.2
133.6
133.4
133.7
135.5
138.0
140.4
140.2
68.1
69.8
71.7
73.5
74 ,1
75 .2
77.4
78.7
80.2
81.2
82.6
84.6
86.1
87.9
89.5
92.0
95.8
100.9
107.2
115.4
121.7
127.1
131.8
134.2
133.6
133.3
133.8
135.7
138.3
140.5
68.2
69.9
71.9
736
74.2
75.4
77.6
78.8
80.4
81.3
82.8
84 ,8
86.2
88.0
89.6
92.3
96.2
lOLA
107.8
116.0
122.1
127.5
132.1
134.2
133.6
133.3
134.0
135.9
138.5
140.6
68.4
70.1
72.1
73.7
74.2
75.6
77.7
78.9
80.5
81.4
82.9
84.9
86.3
88 .2
89,7
92 ,6
96.5
101.8
108.5
116.6
122.6
127.9
132.4
134.2
133.5
133.3
1~4.1
136, I
138.7
140.7
68.5
70.2
72.2
73.8
74.2
75.7
77.8
79.0
80.6
81.4
83 ,1
85 ,1
86.5
88.4
89.9
92.9
96.9
102.3
109.1
117.1
IHI
128.3
132.7
134.2
133.5
13.3.3
134.3
136.3
139.0
140.7
68.6
70.4
72.4
73 .9
74.3
75.9
78.0
79.1
80.7
81.5
83.3
85.2
86.6
88.5
90.1
93.2
97 .3
102.8
109.8
117.7
123.5
128.7
133.0
134. 1
133.5
133.3
134.4
136.5
139.2
140.7
68.8
70.5
72.6
73.9
74.4
76.1
78.1
79.2
80.8
81.6
83 .5
85.3
86.7
88.7
90.2
93.5
97.7
103.3
110.5
118.2
124.0
129.2
133.3
134.1
133.5
133.3
134.6
136.7
139.4
140.7
.. .
67.3
69.1
70.9
72.9
74.0
74.6
76.5
78.3
79.5
81.0
81.8
83.8
85.6
87.0
89.0
90.6
94.2
98.6
104.3
112.0
119.3
124.9
129.9
133.7
133.9
133.5
133.4
134.9
137.1
139.8
140.7
67.8
69.5
71.4
73.3
74.1
74.9
77.1
78.5
79.9
81.2
82.3
84.3
85.9
87.5
89.3
91.4
95 .1
99.9
106.0
114.1
120.7
126.2
131. I
134.1
133.7
133.4
133.6
135.4
137.8
140.2
140.4
68.2
69.9
71.9
73.6
74 .2
75 .4
77.6
78.8
80.4
81.3
82.8
84.8
86.2
88.0
89.6
92.3
% .2
lOLA
107.8
116.0
122.1
127.5
132. 1
134.2
133.6
133.3
134.0
135.9
138.5
140.6
.
68,6
70.4
72.4
13.9
74.3
75.9
78.0
79. 1
80,7
815
83.3
85 .2
86.6
88.5
90.1
93.2
97.3
102.8
109.8
117.7
123.5
128.7
133.0
134.1
133.5
133.3
134.4
136.5
139.2
140.7
. ..
68.0
69.7
71.6
73.4
74.1
75.2
77.3
78.7
80. 1
81.2
82.5
84.5
86.1
87.8
89.5
91.9
95.7
100.7
107.0
114.9
121A
126.9
131.5
134.0
133.7
133.4
133.8
135.7
138. 1
140.3
84.0
81.3
76.9
70.9
78.2
80.3
79.4
79.4
83.4
85.0
83 .1
80.3
79.8
80.9
82.3
84.9
83.6
83 .7
84.7
82.0
82.6
80. 1
73.5
74.9
76.7
79.4
80.9
80.9
80.6
72.7
86.0
84.0
80.3
75.9
72.1
80.0
79.9
79.0
79.6
83 .6
84.8
83.0
79.3
79.6
81.3
82 .6
84 ,6
83. 1
83.8
84.1
82.0
82.4
78.7
73.8
75.6
77. I
80.0
80.8
80.6
80.1
70.4
85.3
80.0
80.0
74.4
73 .6
80.8
79.5
78.3
80,5
84,2
84.0
83.1
79.5
80.6
81.2
83.4
84.0
83.6
83 .8
83.2
81.8
82.5
76.9
74.7
75.2
77.5
80.2
81.0
80.6
78.9
68.4
84.4
78.2
80.2
72.9
76.1
80.8
78.8
78.3
81.5
84.4
83.0
82.9
80.2
80,6
81.3
83.6
83 .9
83.5
84.3
82.4
81.6
81.6
75 .2
75.0
75.7
77.9
79.9
81.1
80.7
76.9
84.2
80.7
77.9
71.4
77.9
80.3
78.9
78.9
83.1
84.8
82.9
81.2
80.1
81.0
82.1
84.4
83.6
83.5
84 .8
82.2
82.3
80.6
73.7
75.0
76,5
79.0
80.4
80.6
80.4
74.2
85.0
80,7
79.6
73 .7
74 .9
80.5
79.3
78.6
81.2
84.3
83 ,7
82.5
79.8
80.4
81.5
83.5
84.0
83.4
84.2
83.0
81.9
81.7
76. 1
74.6
75 .8
77.9
80. 1
80.9
80.6
77.6
.,
Capacity utilization (percent)
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 · . . . . . . . ...
2009 .... .. ... . ...
...
.
......
.....
..
.
85.8
84.2
80.7
75 .2
72.2
79.7
79.9
79.6
79.0
83.4
85. I
82.5
79.9
79.1
81.2
82.5
84.9
82.6
83.3
84.6
82.1
82.3
79.3
73.7
75.5
77.0
79.7
80.9
80.3
80.5
71.1
86.1
84 .1
80.1
76.5
71.8
80.0
80.0
79.0
79.9
83.6
84.6
83. I
79.2
79.6
81.4
82.3
84.6
83.6
83.9
84. 1
82. 1
82.4
78.6
73.6
75.8
77.4
80.2
80.8
80.8
80.2
70.6
86.1
83.7
803
75.8
72.3
80.2
79,9
78.4
79.9
83.8
84 .7
83.3
78.7
80.1
81.3
83 .0
84.4
83 .1
84.2
83.6
81.9
82.4
78 ,1
74.1
75 .7
76.9
80.1
80.8
80.6
79.8
69 .5
NOTE: See the general note to table A.I.
85.0
81.9
79.7
75.0
73.2
80.6
79.6
78,3
80.2
84.2
84.6
83 .0
78.8
80.5
81.4
83.2
84.1
83.4
83 .8
83.5
81.7
82 .6
77.7
74.2
75.1
77.3
80.0
81.0
80.7
79.2
69.0
85 .5
79.7
80.0
74.4
73.7
80.8
79.5
78.4
80.6
84.1
83.8
83 .0
79.5
80,6
81.0
83 .4
84.0
83.5
83.9
83.6
82.0
82,5
76.9
74.5
75.2
77.9
80.2
80.8
80.7
78.9
68.2
85.3
78.5
80.2
73.9
74. 1
81.0
79.3
78 ,1
80.8
84.2
83.7
83. I
80.1
80.5
81.1
83 .7
83.9
83.9
83.8
82.6
81.5
82 .3
76.2
75.2
75.3
77.2
80A
81.1
80.6
78.7
68.0
84.9
77.8
80.6
73 .6
75 .2
81.0
78.7
78.4
81.2
84,3
82.8
82.8
80.0
81.0
81.3
83.6
83.3
83.4
83.8
81.8
81.8
81.8
75.7
74.9
75.6
77.7
80.3
81.1
80.7
78.6
84. 1
77.9
80.4
72.8
76.0
80.9
78.8
78.2
81.6
84.7
83.3
82.9
80.0
80.4
81.2
83.7
84.2
83.5
84.4
83. 1
81.9
81.4
75.2
75.0
75.6
77.9
80.4
81.2
80.6
77.6
84.1
79 ,0
79.7
72.5
77 .1
80.6
79.0
78.3
81.7
84.3
83.0
82 .9
80,6
80,5
8 1.4
83.6
84.2
83.6
84.7
82.4
81.3
81.5
74.7
75.0
76.0
77.9
78.9
80.8
80.7
74.5
84.4
79.8
79.0
71.8
77.7
80.3
78.5
78.6
82.8
84.7
82.7
82.2
80.4
80.9
8\..9
84.1
83 .7
83,2
84.7
82.6
82. 1
80.9
74 .1
74.9
76. 1
78.7
79.7
80.6
80.2
75.4
...
84.1
81.0
77 .9
71.5
77.9
80.4
78 .7
78.8
83. 1
84.8
82.8
81.0
80.2
81.1
82.1
84.3
83.6
83.5
85.0
82.1
82.2
80.7
73.6
75.2
76,8
78 .8
80.5
80.3
80.5
74.4
. .. Not available as of July 15, 2009.
Industrial Production and Capacity Utilization: The 2009 Annual Revision
A 139
.". Rates of change in inuustrial produc tion, by market and i ndustry group '. 2004-{)8 1
Difference belween rales of change:
revised minus previous (percentage points)
Revised rale of change (percent)
NAICS
code'
Item
2004
1
2005
1
2006
1
2007
1
2008
2004
1
2005
3.0
2_6
1.8
1.8
..... 7
- .1
.0
2.5
4.4
1.1
.8
-5 .8
-. 1
.0
1.5
Total industry ........ .
2.5
1.2
-1.5
7.8
1.5
4.4
2.9
3.4
4.0
-5.8
4.2
-.4
1.7
9.2
\5.0
12. 1
5.6
8.0
7 ..1
3.0
.1
- 3.2
-5.2
8.8
- 5.6
-. 7
1.2
1.6
.2
1.1
3.2
15,3
-5.1
-1.0
-.1
- .1
.2
-.4
4.9
.1
- .2
.5
-3.2
.0
.6
- .1
-1.2
- .3
- .3
.2
-.5
-4.2
-17.2
-22.4
1.6
-20.4
-10.9
- .4
- 1.8
-1.2
-6.7
-4.2
-1.8
-4. 1
1
2006
1
2007
1
2008
-.3
-.6
.0
- .5
-.4
-. 1
- 1.0
- .2
.1
MARKET GROUPS
Final products and nonindustrial supplies .... .. .
Consumer goods ............ .. . ...... .. . .
Durable . . . ...... ..
Automotive producls .. . . .
.... ... .
Home electronics
Appliances. furniture , carpeting
Miscellaneous goods
... . . .. .
Nondurable
. .. .. .. ... . ...... .. . ..
Non·energy . . ........ .. . . ... .. , . ... .
Foods and tobacco ." .... . .. , .. .
.....
.. .. .. .... . ... .
Clolhing
Chemical products ..... . . ... .. ... .
Paper products
........ .. .. .
Energy
. .... . ...... .
Business equipment .. . . ..... ... . .. .. , ... .
Transit ... .. .
Information processing _. . .. . . .. , . .. . .
Industrial and other
Defense and space equipment ... .• • . . .. .
Constrllction supplies
Business supplies .
Materials ...... . . . .. . .. . . ....... . .. ... .
- .5
-3 .2
7.4
1.6
2.5
2.3
1.9
2.3
- 13.9
3.5
.9
4.0
5.3
6.2
7.0
4.0
1.7
2.0
2.9
3.7
5.4
5.8
.0
10.3
5.0
4.8
Non-energy . . . , . . .. . . ,......... . . . . . .. , ..
Durable ... ....... . . .. ... ............. .
Consumer pariS . . . . .. ..... . .... . .
Equipment pans ......
.. .. . . .
Other ..
.. ....... . _........... ..
Nondurable ... .. ..... .. ..... . . ..... ..
Textile . ....... . ...... .. .. . . . .. . .
Paper
......... . .. . ... . .. ... .. .
............... .
Chemical
.. .......... .. ... ..
Energy ..... ..
.4
2.6
5.9
.6
12.7
10
-2.6
- .8
.5
3.8
9.6
-1.0
-7.3
-4. 1
- .5
.0
-4.8
5.8
.1
-. 1
7.4
9.2
10.8
4.8
-1.9
-3 .3
.4
2.7
1.4
.4
-5 .7
6.9
- 1.8
3.1
-11.5
1.8
6.9
5.5
- .9
1.1
- 2.2
1.9
J6
2.3
-1.4
-8.4
-29.0
2.0
- 7.4
- .5
6.6
1.1
5.7
- 1.0
1.3
3.2
- 11.6
.0
-4. 1
-.4
-1.3
.0
.1
- 1.0
.7
.3
.1
- 3.7
1.2
.5
.0
-1.1
- .9
-1.4
- 2.6
- .4
1.1
.3
-.2
.0
- 6.9
-,3
.3
.0
.0
.1
.1
.5
10.3
3.2
1.8
-6.9
- 1.4
4 ..1
2.5
- 7.9
-12.0
-12.0
-20.3
-6.5
-12.9
- 12.0
- 1.1.7
- 10.8
-15.8
.2
-8.7
-8.7
- 11.1
-20.7
- 10.3
- 26.8
-7.0
- 10.6
-2.6
- .2
.0
.0
.2
.0
.0
-.5
35
4.7
-2.2
-.3
.0
- .8
.0
.5
.1
.0
1.0
.0
.1
1.4
.1
-.4
.0
.2
- 1.5
.0
.7
2
.3
.2
-.4
-2.7
1.2
.9
.5
- 1.3
-1.8
- .4
.0
3.4
.5
2.0
-.4
-.5
- .3
- 5.1
-1.9
2.6
.1
-3
.1
-1.9
.4
.7
1.4
-4 .2
- 2.9
.0
- .6
2.0
-2.3
-.6
.5
.2
- .2
- .2
- .2
.4
.8
-1.5
-.2
.2
.1
-1.4
2.0
- .7
.2
.7
.6
.7
-.4
.2
- .8
.2
.1
-.7
.1
-2.4
.1
1.5
-. 1
.0
-.7
-.9
-1.4
-1.9
-. 5
-3.9
-.2
-2.1
.1
2.5
-. 1
- .9
-.5
.7
.1
2.3
- .2
-1.1
.2
- .3
.3
-.4
-.4
-.6
- .7
-.8
- .8
- .8
-. 1
.0
I
- 2.0
.2
-. 1
.1
-2.7
.3
-1.2
-3.0
.7
.2
2. 1
..1
1.3
INDUSTRY GROU PS
Manufacturing'~
..... ... .. . , ... . . •.. _..
Manufacturing (NAICS) . . . . . . . . ...
Durable manufacturing .. . ........ •. . ...
Wood products ....... ... . . ..
..
Nonmetallic mineral products . . ........ .
Primary metal
.. .... .
Fabricated metal products ........ .
. ..... . .... .. .... .
Machinery . . ...
Computer and electronic products .... . .
Electrical equipment, appliances,
and components .... . . ............... .
MOlor vehicles and pans .. ... .
Aerospace and miscellaneous
transportation equipmenl ... . ..... ... .
Furniture and related producls . . . , , . . . .
Miscellaneous
......
. ...... .
Nondurable 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 . .. . . . . . .. .
Other manufacturing (non-NAICS)
Mining
... . ..
. , . .. . ...... . ..... .
Utilities... . ......... ..... .... . •. ..... .... . . .
Electric . ..... ... .. ...... ....... .......... .
Naruml gas ..... .. . ....... . ..... . . .... .
331
332
333
3]4
3.6
3.7
3.8
1.4
4.4
8.3
1.8
5.2
9.7
335
3361-3
2.4
-1.8
1.7
3364-9
337
339
2.9
3.4
1.8
3.5
.7
1.3
.5
-3
31-33
321
327
311 ,2
313.4
315.6
322
323
324
325
326
11 33, 5111
21
2211.2
2211
2212
6. 1
8.3
15.3
2.8
9.3
-.4
-6.2
3.3
- 1.9
-2.9
-23.3
.1
- .4
-. 1
10.9
5.6
-1.7
11.1
-2.6
- .5
.0
.0
1.1
- .1
- .9
3.5
2.9
- 12.7
-17.8
- 2.3
-.6
1.6
6.4
.1
- .2
.8
1.3
.8
1.9
- 7 .3
-6.3
.0
.1
-.1
- .1
.2
.1
.0
.1
- .2
.3
.4
.2
.4
.0
- .2
- .3
- 2.1
- 1.5
.3
.7
4.5
-1.8
.0
.0
.0
.1
.0
.0
.1
3.3
.3
3.1
3.5
1.6
-. 1
.2
.0
3.3
-8.9
2.9
2.5
10.5
6.6
.9
1.4
- 1.4
- .5
-3
-.9
-4.9
2.0
3.5
-4.8
8.7
- .6
-1.1
1.4
I. Rates of change are caiculated as the percent change in Ihe seasonally adjusted index from the fourth quaner of the previous year to the fourth quaner
of the year specified in the column heading .
2. North American Industry Classification Syslem.
3. Manufacruring comprises North American Industry Classification Syslem
(NAICS) manufacruring industries (sector 31 -33) plus Ihe logging industry and
the newspaper, periodical , book, and directory publishing industries. Logging
.1
- .1
- .7
1.3
1.4
.2
- 11.4
-.4
.5
2.4
2.3
5.1
- 3. 0
-1.2
1.8
2.4
-1.2
.1
.0
.0
1.2
-13 .0
-3.6
-4.2
.1
1.2
- .1
- .1
1.9
2.0
3.2
-7.5
-1.2
4.3
3.3
-1.0
11 .0
3.8
4.0
7 .0
11.8
5.5
4.2
.6
-3.7
- 1.2
2.5
-.8
-1.6
-13.8
- 8.2
-10.9
-9.6
.5
-9.8
-11.9
.1
.0
.1
o
-8.8
-.7
.8
.3
- .8
.0
.0
.1
5.9
- .1
.1
.1
.4
-.1
.0
.1
.5
.0
.1
- .2
- .5
.3
-.3
- 2.9
-2.9
.1
- .3
-.4
1.8
.4
- .5
.1
-. 2
.7
.5
.1
.1
-. 1
.8
1.3
.1
-. 2
.7
-.7
.1
-.5
.6
-3
- .8
.0
-1.2
- .7
.1
-1.3
.0
-1.3
-1.3
.0
.1
.1
.2
.2
-.4
-.2
.1
.3
and publiShing are classified el sewhere in NAtCS (under ag'riculrure and information, respectively), but hislorically they were considered to be manufacluring industries and were included in the industri al seclor under the Standard Industrial Classification (SIC) system. In December 2002, the Federal Reserve
reclassified all its industrial oulPUI dala from the SIC system 10 NAICS.
... Not applicable .
A140
Federal Reserve Bulletin 0 August 2009
AA. Rates of change in ind ustrial production. specia l aggregates and selected det:li l. 2004-08 1
NAICS
code'
Item
I 2005 I 2006 I 2007 I 2008
2004
I 2005 I 2006 I 2007 I 2008
2.6
1.8
1.8
...{).7
-.1
.0
.1
-.3
-.6
1.3
4 .0
4.5
8.4
2.3
-1.7
-1.8
2.1
1.9
1.9
- .7
5.7
1.2
1.3
.4
11 .9
-2.6
-4.7
3.9
- .1
1.2
14.9
2.6
6.8
3.6
.5
6.9
-4.4
2.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.2
.1
.0
.1
.0
.4
-.1
.0
-. 1
.1
.4
-.4
.2
.2
.5
.0
-.3
.5
3341
3342
3.4
8.6
3.5
2.6
4.0
22.6
25.3
8.9
1.2
13. 1
22.1
12.4
1.7
18.2
24.2
66
-9.4
-6.9
-11.9
10.4
- .1
-.7
1.8
1.9
.0
.2
-3.6
-4.8
.1
-4.2
4.2
-8 .2
-.4
-4. 1
7.4
-14.0
- .7
-6.4
2.2
1.7
334412-9
13.8
28.4
9.8
22.3
- 15.0
- 3.5
4.3
- 5.7
- 3.7
-14.7
3.0
- 1.8
2.7
.1
-1.4
-.6
30
3.2
6.6
7.4
2.7
.4
-6.2
-7.6
-4.3
.9
- 9.5
-23.3
- 30.3
- 14.8
-8.5
-4.2
-.1
- .4
-.7
-.2
.0
..~
- .1
- .4
-.5
-. 3
.3
.5
.3
- .1
- .3
-. 6
.0
.4
-.2
.4
.3
1.1
.7
.4
-. 1
.2
.1
.5
.9
.0
.0
.1
-.7
-.2
- .6
1.4
.7
-1.9
- 1.9
.3
.9
-1.1
2.3
- 1.0
.4
2.4
2.7
3.2
3. 1
1.6
2.5
4.8
1.2
.4
-.4
1.1
.9
1.4
-11.7
- .1
- .1
- .1
.0
.1
.1
3.4
4.1
4.9
Energy
Consu mer products
Commercial products
Oil and gas well drilling
Convened fuel
Primary materials.
2.8
4.0
8. 1
2.3
1.8
2.5
2.0
2. 1
4.0
- 9.3
- .1
-.1
-. 1
213111
Non-energy
Selected high-technology industries
Computers and peripheral equipment
Communicalions equipment .
Semiconductors and related
electronic components ..
Excluding selected high-technology
indust ries ..
Motor vehicles and parts
Motor vehicles .
Motor vehicle parts
Excluding motor vehicles and parts
Consumer goods ...
Business equipment .
Construction supplies
Business supplies
Materials . ... .
Measures exdudinR selected hiRh-technology
industries
Total industry .... .. . . .
Manufacturing 3
2004
3.0
..... . .. . .... . ... .
Total industry
~
Difference bel ween rates of change:
re vised minus previous (percentage points)
Revised mte of change (percent)
I
.
Durable ..
3361-3
3361
3363
-3.4
-1.0
35
2.1
5.1
1.9
1.9
5.3
1.7
.8
6.2
- 3.4
-8.8
-11 .8
-9.8
-11.2
-<"J.7
-8.9
- .2
.8
- .8
- .3
-.3
- .1
- 1.4
-.4
-. 1
.0
-.5
.9
.5
.6
- .3
.3
3
.1
- .1
- .2
-. 2
-.3
.0
.0
.0
.1
.1
-.4
-.4
-.5
-.6
- .8
- .8
- .8
- .9
- .5
-.4
.0
MeaJ'lfes excluding motor vehicles alld parIs
Total industry ... .
Manufacturing'
Durable ..
-5.9
-7.8
Measures exc/udinll selected hill h-tec!moIOIlY
industries and Ilw/Or vehicles and parts
Total industry .......
Manufacturing' .
Measllres of non-energy materia!',· illPlIfS
Finished processors
Primary aud semi finished processors
3. 1
3.7
1.7
2.7
1.7
1.0
1. 2
1.1
-5.8
- 7.8
.0
.0
.0
.0
.3
3
-.2
- .2
-.3
5.6
5.3
6.2
-. 2
1.7
1.3
4.0
3.2
-11.1
- 12.5
-4
.4
.7
- .3
-1. 1
1.0
-1.2
.9
-2.2
-.8
Stage-oj-process groups
Crude
Primary and semi finished
Finished .
2.6
3.5
2.5
-6.5
3. 5
5.2
7.6
- .8
3.3
1.2
2.5
1.1
-4.6
-8.0
.0
-.2
.1
.0
.2
- .2
.3
-. 5
-. 1
- .6
- 1.0
- .1
.... . . . . .. . . .
I. Rates of change are calculated as the percent change in the seasonally adjusted index from the fo urth quarter of the previo us year 10 the founh quarter
of th e year specified in Ule column heading.
- 5.8
2. North American Industry Classification System.
3. See table A.3, nOle 3.
Not applicable.
.2
-.1
-.4
-.4
Industrial Production and Capacity Utilization: The 2009 Annual Revision
A 141
A.5. Ralt:S of change for annual indu. trial production Indexes. 2004-08 1
Difference between rates of change:
revised minus previous (percentage points)
Revi sed rate of change (percent)
Item
2004
. ... ... .....
Total industry .
I
2005
I
2006
I
2007
2.5
3.3
2.3
1.2
2.7
.5
1.2
3.4
7.0
10.6
4.5
3.3
2.4
4.0
- 1.2
2005
I
2006
I
2007
I
2004
.0
.0
.1
- .2
- .5
-2.7
- 9.9
-.5
- 1.1
2.5
..{).3
-2.9
-1.9
- 3.7
1.8
- .1
.3
- 2
.1
- 1.0
.1
-. 1
.1
.2
.0
- .1
.0
-. 1
- .7
.7
-1.2
-. 5
- .2
- .5
- .3
.0
.0
-. 1
.1
.1
.0
.1
.3
.1
- 1.0
1.2
.0
.6
.1
.2
.0
- .7
.0
.6
.7
.1
.0
.2
.1
1.0
-. 1
-.7
- .5
-.8
.2
-3.2
- 3.1
- 3. 3
-2 .9
-5.7
2.1
.3
1.0
.4
5.3
- 1.8
.4
- 1.0
.9
9.4
- 2. 1
2.3
1.2
2.4
2.7
J.7
I
2008
-2.2
1.5
1.4
I
2008
.0
.0
.1
.0
.0
.0
.0
-.1
.0
.0
.0
-1.0
.0
0
.1
-. 1
- .2
.0
3.3
.2
.0
-.3
- .3
- .6
.0
.1
- .6
- .6
- .7
- .5
.1
.3
- .2
MARK ET GROUPS
Consumer goods .
.... ..... ....
Durable
Nondurable
Business equipment . . .. .. ... . "
Defense and space equipment
Construction supplies
Business supplies - ..... .. Materials ...
Non·energy
... . . ... . . ' .
Energy .
.... ....
..
IND U
2.3
2. 1
3.1
4.5
- .4
1.1
2.7
3.7
- 1.9
1.3
2.0
2. 1
1.8
'RY GRO UPS
ManufaClurin~? . _
.. . . ... . .
Manufacturing (NAICS)
Durable manufacturi ng
Nondurable manufacturing . ..
Other manufacturing (non-NAICS)
Mining . ..
Utilities
3.0
3.1
4.1
1.9
.8
- .6
1.4
4.0
4.2
5.5
2.8
2.5
2.7
4.4
- .3
1.4
1.5
2. 1
1.0
- 1.0
3.3
-.6
.8
-1.3
2.1
-1.3
.6
3.4
I. The rates of change are calculated from annual averages of seasonally ad·
justed industri al production indexes rat her U,an between the fourth quarter of
one year and the fourth quarter of the ne xt.
.5
.1
2. See table A.3, note 3.
A.6. Rale of change in capacity. by industry groups. 2005-09 1
Difference between rates of change:
revised minus previous (percentage points)
Revised rate of change (percent)
Item
2005
Total industry
Manufacturing 2 , ..... ,
Manufacturing (NAICS)
Durable manufacturing
Nondurable manufacturing .
Other manufacturing (non-NAICS)
Mining
Utilities
Selected high· technology industries
Manufacruring except selected
high· technology industries' .
Srage·of-proc ess groups
....... .. . . ,
Crude ..
Primary and semifinished
Finished . .
I
2006
I
2007
I
2008
I
2009
2005
I
2006
I
2007
I
2008
I
2009
.8
1.5
2.0
1.1
- .9
.0
.2
.2
-.4
-.6
1.3
2.2
2.3
3.7
1.0
.6
1.4
1.3
22.9
1.3
1.5
11.9
1.4
1.4
2.0
.8
1.1
2.3
1.3
5.7
2.3
6.3
-1.2
- 1.2
-.6
- 1.7
- .9
- .7
1.8
8.4
- .1
- .1
-.2
.1
.0
.0
8
-1.2
.1
.1
- .4
.5
.0
1.0
5
-4.7
.3
.3
.4
.2
.0
-.4
.0
1.5
-.5
-. 5
-1.0
.1
.7
.4
.1
- 11 .2
- .6
- .6
- .2
- 1.0
.1
-1.5
.1
.6
1.1
1.0
1.0
- 1.6
.0
.1
.3
.2
- .7
- .9
1.0
1.9
1.5
1.3
1.8
1.4
2.0
2.4
1.2
.8
2.2
- 1.2
-1.0
-.6
-. 1
.2
- .3
.6
.1
.1
.0
- .1
.7
.7
-1.1
.4
- 1.4
- .5
-.5
1.4
2.4
.5
- .2
-1.1
I. Rates of change are calculated as the percent change in the seasonall y adjusted iodex from the fourth quarter of the previous year to the fourth quarter
of the year specified in the column heading.
1.3
2.0
.8
.9
1.1
2. See lable A.3, no Ie 3.
1.2
Al42
Federal Reserve Bulletin 0 August 2009
A. 7. Capacit utili zation rates, by indu try groups. 2005-08
NAICS
code'
Item
Revised rate
(percent of capacity. seasonally adjusted)
2008 avg. 1 2005 :Q4
Total industry ... . .
...
.... .... . . . . .... . . .
Manufacturing2 ....
. .. .. . . ... .
Manufacturing (NAICS) .... .. ... ..
Durable manufacturing ....
Wood products
..... ..
Nonmetallic mineral products ... .. .
Pri mary meta I .. . .. , ......
Fabricated metal products
...
Mach.inery . . . . . . . . .. . . .. . ......
Computer and electronic products .
Electrical equip .• appliances.
....
and components.
Motor vehicles and parts
Aerospace and miscellaneous
transportation equipment. . . . . . . . . .
Furniture and related products
Miscellaneous
. .....
Nondurdble manufacturing ..
Food, beverage, and tobacco products .
Textile and product mills
Apparel and leather
Paper
... . . . .
Printing and suppon
, ... Petroleum and coal products .
. .. . . , .
Chemical ..
Plastics and rubber products .
Other manufacturing (non·NAICS) .. . . " .
Mining .
... .
Utilities
Selected high· technology industries
.... .
Computers and peripheral equipment .....
Communications equipment
Semiconductors and related electronic
. ...
components .. .
80.4
80.6
80.4
74.2
.0
-.1
-.5
-.7
79.2
78.9
77.9
89.2
78.1
83.3
78.7
78.6
77.0
68.6
70.5
84 .1
SO.5
79.8
75.4
70.9
70.9
67. 1
54.8
63.0
61.4
74.1
70.3
69.4
.0
.0
.0
-.7
-5.3
-.6
-.4
1.3
.6
.0
- .1
.0
-.7
-{).3
79.8
75.3
79.0
78.8
77.3
75.2
72.6
80.4
79.5
81.8
78.4
- .4
2.4
.4
-.6
-.6
-.8
-1.5
-7.5
.3
- .8
2.6
-2.5
-.8
- .9
-.7
-1.5
-5 .9
-1.5
-.7
1.5
-.6
335
3361·3
83 .2
76.7
83.1
76.4
82.2
70.3
82.8
70.2
78.4
53.6
-. 1
-1.9
.2
- 2.0
- .6
- 2. 1
.7
-2 .2
3364·9
337
339
73.2
79.8
77.0
80.1
80.3
78.5
75 ,2
84.4
78.3
88.4
75.7
85.2
84. 1
854
85.3
77.4
74.3
67.5
77.3
79.0
76.3
80.6
79.4
73.1
76.8
84 .2
79.7
88.8
79.0
81.9
82.2
90.8
83.7
82.8
79.5
82.3
84.2
77.6
74.4
80.5
79.7
71.3
77.7
82.6
78.4
87.1
78.5
84 .1
80.2
89.8
85.2
79.6
81.6
77.3
72.0
65.1
69.4
74.8
77.1
64.7
72.2
74.4
72.7
85.7
70.0
72.7
3.2
.8
.2
.1
-.5
-1.2
5.7
.4
.6
1.1
.2
- .7
4.5
1.5
- .2
- .2
-.9
.6
4.9
-. 1
1.1
-. 1
- .1
- ,4
3.9
1.0
72.5
89.6
83 .6
69.8
74.1
74.3
- 1.2
- .1
- .4
1.5
-.5
- .7
2.2
.0
5.7
2.9
2.0
8.9
- .5
-1.4
2.5
4.7
.0
1.9
- 1.7
- .5
-.5
1.1
- .1
- .7
-.9
3.0
-3.6
2.9
2.1
-2.4
-1.2
- 1.9
2.6
2.4
.5
3.5
- 3.7
-1.3
-1.5
3341
3342
73 .2
78.4
76 .5
81.5
81.5
81.6
79.5
87 .6
83.4
86.1
78.2
83 .6
84 .2
87 .6
86.8
78 .2
78 .1
76.2
334412·9
80.6
84.6
84.9
80.0
64 .5
.4
-.]
- 1.3
-.9
. ..
.. .
81.0
79.7
80.5
79.3
80.5
78.8
80.5
78.7
74.4
71.0
-. 2
-.2
-. 3
-.2
- .5
-.5
-.8
-1.0
86.6
82.0
77.7
83 . I
82.6
76.6
88.7
80.7
77.6
88 .3
80.7
77.2
83.8
73.4
71.0
-. 2
-. 7
.7
- .4
-.7
.6
- .8
-. 6
-1.7
-.6
- .7
311.2
313.4
315.6
322
323
324
325
326
1133.5111
21
2211,2
Measures excluditif.: selected
high·technology industries
Total industry .. ..... .
... . . .. . .. ..
Manufacturing2 . . .
.... .. ...
"
80.9
321
327
331
332
333
334
...
SlOge·of-process groups
2005:Q412006:Q4 1 2007 :Q41~008:Q4
79.6
79.4
77.8
79.2
77.7
80.5
77.S
78.6
78.3
31 ·33
"0'
Crude
. . .. ....
Primary and semifinished ...
Finished . , .. ,
.. .
I2006:Q4 I2007:Q4 I2008:Q4
Difference between rates of change:
revised minus previous
(percentage points)
. . .. . . . . . .
.. . .. . . ..
I. North American Industry Classification System.
2. See table A.3, note 3.
.'
.
77.6
Not applicable ,
-.4
-.4
-.4
.5
- .2
-.6
1.5
13.7
- 5.3
Industrial Production and Capacity Utilization: The 2009 Annual Revision
A143
A .8. Annual prop )rtion in industrial production, by market groups and induslry groups. 2000-08
NAICS
code'
Item
.
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
57 .5
28.4
7.9
3.7
.4
1.4
2.4
20.5
16.8
9.2
1.2
4.0
2.0
3.7
. . .. . . . . . -
Total industry .
2008
58.9
31.0
8.9
4.7
.4
1.4
2.4
22 . 1
18.2
9.6
.8
5.2
2.1
3.9
58 .2
31.0
8.7
4.6
.4
1.3
2.3
22.2
18.0
9.6
.7
5.2
2.0
4 .2
57 .0
30.2
8.0
4.0
.4
1.3
2.3
22.2
17.3
9.3
.6
5.1
1.9
4.9
56.9
29.8
7.4
3.6
56.2
29.2
6.8
3.2
2.2
22.4
16.7
8.9
.5
5.0
1.8
5.7
56.8
29.3
7. 1
3.3
.4
1. 2
2.2
22 .2
16.4
8.7
.4
5. 1
1.7
5.8
1.1
2.1
22.4
16.2
8.8
.4
4.8
1.7
6.2
57 .0
29.5
6.3
2.9
.3
1.0
2.1
23.2
17. 1
9.4
.4
5. 1
J.7
6. 1
10.2
1.8
3.2
5.2
1.6
4.9
10.8
9.6
1.6
3.0
5.0
1.6
9.4
1.6
3.0
4.9
1.5
9.3
1.6
2.8
4.8
1.6
9.6
1.8
2.9
5.0
1.5
9.3
1.6
2.8
4.9
1.5
9.5
1.5
2.9
5.0
1.7
4.8
10.6
43.0
29.7
18.2
3.6
6.3
8.3
11.4
.7
2.4
5.1
13.3
4.9
10.6
43 . 1
29.3
17.8
3.3
6.2
8.3
11.5
.7
2.3
5.3
13.8
5.0
10.5
4.9
10.7
43 .2
29.3
17.7
3.2
6.0
8.5
11.6
.6
2 __1
5.5
13.8
4.9
10.5
43 .8
29.2
17.2
2.9
5.8
8.4
12.0
.5
2.3
5.9
14.6
43.0
29.0
16.8
2.7
5.9
8.2
12.2
.5
2.3
5.9
14.0
MARKET GROUPS
.... ..... ..
11.6
1.9
4. 1
5.5
1.4
59.0
30.0
8. 1
4.0
.4
1.4
2.3
21.8
18.0
9.8
1.1
4.6
2.1
3.8
11.2
2.0
3.9
5.3
1.6
Construction supplies
Business supplies
... . . .... . . .. ..
Materials
Non-energy
... .... ........ .
..... .... .. .... ...
Durable . .
Consumer parts
Equipment parts
Other
....... . . . .
Nondurable "
Textile
... ...... ..... ,
Paper
Chemical ...
Energy . . . . . . . . . . . . . . .
4.6
11.0
42.5
31.9
20.6
4 .1
8.0
8.4
IU
.9
2.9
4.3
10.6
4.8
11.0
41.0
30.3
19.2
3.8
7.2
8.2
11.1
.8
2.8
4.1
10.7
41.1
30. 1
18.7
4.0
6.5
8. 1
11.4
.8
2.8
4.4
11.0
4.9
10.8
41.8
29.6
18.3
3.8
6.4
8. 1
11.3
.7
2.5
4.5
12.2
321
327
331
332
334
334
84.0
79.2
45.3
1.4
2.2
2.5
6.0
5.9
10.5
83.5
78.6
44.0
1.4
2.2
2.3
5.8
5.5
9.3
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
80.5
76.2
40.7
1.6
2.2
2.7
5.3
4.9
7.8
79.5
75.5
39.7
1.5
2.3
2.6
5.3
4.9
7.4
79.3
75.4
39.6
1.4
2.3
2.8
5.5
5.0
7.2
78 .6
74.8
38.4
1.2
2.2
2.7
5.6
4.9
6.7
79.0
75.3
38. 1
1.0
2.2
2.5
5.9
4.9
6.9
335
3361-3
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
2.0
4 .5
3364-9
337
339
3.2
1.7
2.9
3.7
1.7
3. I
3.5
1.8
3.3
3.3
1.7
3.3
3. 1
1.6
3. 1
3.2
1.6
3. 1
3.2
1.5
3. 1
3.4
1.4
3. 1
33.9
10.6
1.4
34.6
11.3
1.3
1.2
3. 1
2.6
1.7
9.7
3.7
4.8
7. 1
9.4
8.0
1.4
35 .3
I 1.3
1.4
1.0
3.1
2.4
1.8
10.7
3.8
4.7
7.2
9.6
8.2
1.4
35.2
11.4
J.3
.9
2.9
2.2
2.1
10.8
3.6
4.5
8.5
9.8
8.2
1.6
35.5
10.9
1.2
.7
2.7
2.1
3.2
11.2
3.4
35.8
10.6
1.2
.6
2.6
2.0
4.2
11.3
3.3
4.1
10.7
9.8
8.0
1.8
35.7
10.4
I.J
.6
2.6
1.9
4.5
11.4
3.2
4.0
36.5
10.7
.9
.6
2.5
1.9
5.0
IJ.7
3. 1
3.8
11.7
9.7
8.0
1.7
3.5
1.3
3..1
37.2
11.5
9
.6
2.6
1.8
4.7
12.1
3. I
Final products and nonindustrial supplies
Consumer goods .
Durable .
AUlOmOlive products ..
. . . . . . . . .. .
Home electronics ... . .
~pli ances . fumirure . carpeting
isce lI,neous 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
.4
1.3
.3
INl>usrRY GROUPS
Manufacturing 2 ,
... . . . . . . . .
Manufacturing (NAICS)
Durable manufacturing
Wood products
Nonmetallic mineral products . . ....
. . . . . . . . . . . .. .
Primary metal
Fabricated metal products
Machinery .. .. . ..............
Computer and e lectronic products .
EleCtrical equipment. appliances.
and components .
Motor vehicles and parts
Aerospace and miscellaneous
lranSpOrlalion equipment. .. .
Furniture and related products
Miscellaneous
Nondurable manufacturing .
Food. beverage. and tobacco producl.l ..
Textile and product mills
Apparel and leather " .
Paper ... . ....... , ... ' . . . . . . . . . . . . . . .
Printing and support
Pelroleum and coal products . .
Chemical
Plaslics and rubber products . ..
Olher manufacturing (non-NAICS)
.
Mining
UtiUties
Electric
Narural gas . .
.... ... ... ...
3 1-33
311.2
3 I 3,4
315,6
322
323
324
325
326
325
21
221 I
221 2
2211
J.3
3. 1
2.6
1.8
9.3
3.7
4.8
7. 1
8.9
7.6
1.4
NOTE : The IP proportion daw are estimates of the industries' relative contributions to the o_erall lP change between the reference year and the following
year. For example, a I percent increase in durable goods manufacturing between 2008 and 2009 would account for a .381 percent increase in tOlal IP.
4.3
9.8
9.7
8.0
1.7
11.0
9.7
8. 1
1.6
I. North American Industry Classification System.
2. Sec table A.3, note 3.
Not applicable .
3.7
10.6
10.4
8.7
1.8
A144
Federal Reserve Bulletin 0 August 2009
.9. Annual production and price indexes for elected communications equipmcnl. \998-2008
Index. 2002=100
Year
Satellites and earth
I Enterpriseand home I Transmission and
Other
vOice
related'
station
I Wireless system I
I
Prices IProduction I Prices 1
Prices IProduction I Prices
IProduction I
Production I Prices IProduction I
Datn networlJng
Production
.,
1998 . ..
1999 .
2000 . ... ....
2001 .. ... . . .
.. . .
2002.
2003 ...... .
2004 . .... . .
2005 .
2006 . . ..
2007 ... ..
2008 ..
I
Prices
234.4
194.4
174.1
133.2
100.0
76.6
59.9
54.3
51.4
50.2
n.a
n.a
n.a
n.a
123.3
100.0
112.9
124.2
160.5
254.1
276.1
282.6
n.a
n.a
n.a
n.a
100.0
86.6
74.0
67 . 1
64 .0
69.3
61.9
170.6
154.3
145.3
123.1
108.8
100.0
91.0
82.4
79.8
77.5
n.a
118.2
155.7
228.7
202.6
100.0
81.0
77.3
62.2
69.8
91.1
91.8
189.3
169.6
n.a
n.a
n.a
n.a
100.0
123 .9
161.8
159.3
148.3
115.5
146.2
149.~
116.5
'100.0
90.5
83. 2
77.4
66.5
61.1
n.a
NOTE: The complete set of annual prices necessary to compute the annual
price indexes for 2008 are not available. The estim ates for the quarterly price
indexes for 2008 (shown in table A. I0) are based on only incomplete data .
164.8
143.7
129.0
114.6
100.0
83 .7
73 .2
71.7
67 .7
62.9
n.a
78.0
70.0
94.6
82.9
100.0
117.2
175.0
188.6
260.2
286.2
365.5
160.9
143.2
129.9
131.1
100.0
90.3
72.4
75.6
69.2
66.1
n.a
83 .6
86.4
111 .5
95 .9
100.0
97.3
89.5
70.6
66.8
66.5
73.2
108.4
106.3
100.4
100.9
100.0
98.6
99.4
100.4
99.8
99.8
n.a
I. Category consist s of transmi ss ion. local loop, and legacy central office
equipment.
n.a. Not avai lable.
A. 10. Quarterly production and price indexes fo r sclected communications equipment, 1998:Q 1- 2008:Q4
Index , 2002= I00
Year and
quarter
-
Data networlU ng
Production
1998:QI
Q2
Q3
Q4
1999:QI
Q2
Q3
.... .. .
.
.
.. .
.
.... ...
...... . .
... . .
n.a
n.a
Prices'
n.a
n.a
n.a
n.n
n.n
n.n
n.a
n.a
n.il
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n,n
n.a
n.a
n.n
n.a
n.a
n.•
n.a
11.a
n.o
n.n
1
04 ·
2003:QI
Q2. . . ..
Q3 .. . .....
04 .... ... .
2004:QI
Q2 .
Q3 .. . .. ...
Q4.
2005 :QI . . . . . . .
Q2 .. .. ...
Q3 ....
04 ·
2006:QI ..
Q2 ...
Q3 ..... ...
04·
2007 :QI . ... . .
Q2 ........
Q3 ... ... I
.. I
2008:QI ... .....
Q2 .. . .. .
Q3 .
04 ... ...
I
n.a
n.a
n.a
n.a
n.a
04 ·
..
Production
n.a
04 , .. .....
04 ·
Prices
Enterprise and haOle voice
n.a
n.a
n.a
2000:QI .. .. ...
Q2 .. . ... . .
Q3 .. .
200I :QI
Q2 ...
Q3 .
04 ..
2002:QI . "
Q2 .
Q3 .. .
I
I
I
n.a
150.9
126.2
109.6
107.3
105.0
99 .3
98.3
97.5
97.7
109.8
119.4
124.4
139.8
118.9
122.8
115.6
128.7
146.9
162.6
203.1
220.4
245.4
269.5
280.3
276.9
271.9
276.6
279.0
287 .5
295.5
279.6
268.1
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
54.0
53.5
52.9
51.9
51.9
50.6
49.5
48.7
49.0
50.0
49.2
47 .9
49.3
48.1
48.6
47.5
n.a
n.a
116.9
102.2
91.4
90.0
91.5
87.0
92.2
75.9
79.1
77.5
70.7
68 .7
65 .5
658
69. 2
67.9
64.3
64 .8
61.7
65.4
69.1
69.7
71.3
66.9
65.3
62.7
64.3
55 .2
NOTE : Quarterly production and pri ce indexes are not available for two cat·
egories of communication equipment shown in t.1ble A.9: "satellites and earth
swtion" and "other."
I. Category consists of transmi ssion , local loop, and legacy central office
equipment.
n.a
n.a
n.a
n.a
n.a
n.•
n.a
n.a
n.a
n.a
n.a
n.n
104.3
100.7
97.9
97.2
97.2
95 .4
90.9
89.4
86.4
86.4
82.6
81.5
81.5
80.5
79.8
79.2
79. 1
77.5
76.8
75 .8
76.7
76.0
73.6
73.1
I
I
Transmission and relaled I
Production
96.9
1\5.2
1,24.8
135.2
123.9
143.5
166.8
187.8
213.0
235 .9
228.2
237.4
250.0
210.6
206.2
144.7
131.8
105.2
88 .1
75 .6
80.9
81.9
79.1
82.0
82.2
80.7
72.4
73.9
69.0
64.7
58.7
56.6
61.2
69. 1
74.2
74.5
84 .6
89.9
93.0
96.9
96. 1
96.7
87.9
86.7
2. Index , 2003= 100.
n.a . Not available.
J
Prices
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
I
J
Wireless system
Production
n.a
n.a
n.a
n.a
n.a
n.a
n.a
n .il
n.a
n.a
n.a
n.a
n.a
n.a
109 . ~
n.H
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
656
65.2
62.5
60.0
57.0
n.a
98 .0
99.7
99.3
103.0
103.3
106.4
131.8
153.6
163.9
160.4
161.2
161.9
158.6
16 .~ . 1
160.3
155.4
159.2
160.5
154.5
119.5
113.0
103.9
115.2
129.6
139.6
158.6
144.5
142.3
I
Prices
n.n
n.a
n,a
n.a
n.n
n.a
n.a
n.a
121.9
122.6
123.7
124.7
124.4
122.4
114.7
110.7
109.2
106.3
93.9
90.9
87.4
83 .8
69 .2
65 .7
65 .8
68 .6
68.5
74 .1
77 .1
74.8
70.2
66.3
64.4
65.2
68.3
71.1
71.0
68.4
58 .0
48 .2
48 .7
48 .3
47.7
46.9
Industrial Production and Capacity Utilization: The 2009 Annual Revision
. 11 . Quarterly pri e i nd exe~ for selected semicunductors.
1998:QI-200R :Q4
Index, 2002=100
1998 :QI . .. ... .
Q2 .
Q3 .
04 .. ..
1999:QI .
Q2 .
Q3 .
Q4 .
2000:QI . '
. ...
Q2 .
Q3 .
Q4 . .
200I:QI
Q2 .
Q3 .
04 ·
2002:QI .
Q2 . .
Q3 .
04 ·
2003:QI
Q2
Q3
Q4
2004 :QI
Q2
Q3
.
.
.. .
. . .. .
.
.
04
2005:QI .
Q2 .
Q3.
Q4
2006:QI
Q2
Q3
Q4
2007 :QI
Q2
Q3
04
..
.
.
Dynamic random
access memory
Flash
memory
Other
memory'
Prices
Year and
quaner
Prices
Prices
956.2
689.7
530.0
572.6
640.0
520.3
493.0
663 .0
516. 1
482.6
513.8
319.6
206. 1
125.6
72.6
59.8
125.2
10l.2
85.4
88 .8
63.9
56.8
67.5
64. 1
62. 1
65.9
62.2
53.4
43 .5
32 .9
367.2
340.0
286.0
280.3
234.5
229.9
285.7
321.3
314.1
327 .9
317.5
300.5
232.8
202.9
164.6
514.6
478.0
439.5
421.9
439.6
471.3
469.9
465 .7
396.6
410.7
409.3
385.9
275 . 1
231.3
188.3
155.5
114.9
103 .8
32.3
29. 1
28 .7
28.9
30.5
33.5
.
.
2008 :QI ... .
Q2
Q3
Q4 .
25.6
15.2
13.6
9. 1
6.9
7.9
6.6
4 .6
136.4
109.7
103.7
96.3
90.5
84 .2
74 . 1
69.3
66.5
61.5
58.4
45.4
35.9
31.8
29.0
26.2
24.3
19.6
16.9
14.6
14.0
10.8
10.8
12.5
10.3
7.3
6.6
4.8
4.0
9~ . 7
86.9
91.7
85.2
79.4
77.3
74.7
69.0
73. 8
68 .8
63 .0
61.3
58 .7
59.5
66.4
63 .7
61.6
59. 1
60.2
59. 1
50.2
42.1
521
50.9
SO.8
46. 1
I. Other memory comprises all lypeS of memory excepl flash memory and
dynamic random access memory; static random access memory is ilS largesl
componen!.
A 145
A147
November 2009
The Financial Crisis and U.S. Cross-Border
Financial Flows
Carol C. Bertaut and Laurie Pounder, of the Board's
Division of International Finance, prepared this
article. James Coonan provided research assistance.
This article examines the effects of the recent financial crisis, which began in August 2007, on U.S.
financial flows . Cross-border financial flows are of
interest for several reasons, including the information
they provide about changes in a country's indebtedness , foreign investor attitudes toward domestic assets, and the current account balance. Cross-border
financial flows are the counterparts to transactions
recorded in the current account, the broadest measure
of a country's transactions with the rest of the world .
When a country runs a deficit in the current
account-as has been the case for the United States
since the early 1990s-this imbalance implies that
foreign investors must, on net, be acquiring the
country's assets. In essence, the United States has
been borrowing from the rest of the world to finance
the excess of imports over exports.' Foreigners'
willingness to continue investing in the United States,
and the nature of those investments, determines the
price that the United States must pay to continue
running current account deficits.
U .S. financial inflows typically occur through foreign purchases of U .S. securities, net lending to U .S.
banks and other firms, and foreign direct investment
in the United States. During the financial c risis,
however, the composition of inflows changed dramatically, and some inRows came from unusual
sources.
In this article, we focus on cross-border Rows in
securities-both foreign purchases of U.S . securities
and U.S. purchases of foreign securities-as well as
on cross-border bank flows to characterize the effect
of the crisis on net inflows. In addition to flows, we
analyze the (related) influence of the crisi s on gross
cross-border securities, banking, and nonbank
1. Alternatively. one could argue that the desire of the rest of the
world to invest in the United States causes an imbalance that drives the
U.S . c urrent account to be in defi c it.
positions. 2 These positions are primary components
of the net international investment position of the
United States, which measures the country ' s international financial indebtedness. We identify three major
channels through which cross-border flows and positions were affected by the crisis:
1. "Right to safety" shifts in portfolio composition
away from riskier securities and toward investments in safe and liquid markets, particularly U.S.
Treasury securities3
2. unusual flows through the banking system resulting from a shortage of dollar liquidity abroad and
the breakdown in interbank markets
3. a pullback from cross-border positions during the
financial crisis, reflecting a general increase in risk
aversion. We find that although both U .S. and
foreign investors did reduce their holdings of
cross-border securities and foreign deposits , the
adjustments in cross-border portfolio holdings
were relatively minor compared with the substantial valuation losses that investors faced. We find
somewhat more evidence of such a pullback in
banks ' own cross-border positions.
These channels, of course, interact in their effects
on financial flows and portfolio positions . Flight-tosafety concerns over foreign exposure can result in
reduced cross-border positions, and risk aversion can
intensify funding pressures .
The first section of the article addresses the flightto-safety flows of private investors out of risky secu rities and toward U.S. Treasury securities, as weB as
the shift by official investors to an even heavier
concentration of their purchases in U.S. Treasury
securities. This section also discusses the unusual
flows resulting from the flight of U.S. investors out of
foreign securities. Before the crisis, financial inflows
from foreign investors were typically partia lly offset
by outflows from U.S. purchases of foreign securities.
During the crisis, these flows reversed .
2 . We discu ss only certain positions of nonbank firms. In particular,
we exclude direct investment positions.
3. For the purposes of this article, "Treasury securities" refers to
U.S. Treasury securities.
A 148
Federal Reserve Bulletin 0 November 2009
The second section of the article describes the
unusual net lending flows from the United States to
Europe-through interbank markets and through liquidity swap lines with the Federal Reserve-in
response to a shortage of dollar liquidity abroad. This
section breaks the crisis into three distinct phases.
During the first phase, covering the first year of the
crisis, the majority of banking offices directed lending
to the home region of the parent bank. The second
phase, the most intense period of the crisis, can be
characterized by a breakdown of interbank markets
and cross-border borrowing of foreign central banks
from the Federal Reserve. Finally, the third phase is
the slow recovery of interbank markets in 2009. The
analysis disaggregates total net lending by nationality
of the parent bank and aggregates individual banklevel data by banks' lending behavior.
While the first two sections discuss ne t flows for
specific sectors of the financial account, the third
section documents declines in gross cross-border
positions and a slowdown in cross-border trading
during the crisis across most instrument types associated with the financial account (including securities ,
interbank lending, borrowing and lending by nonbank
firms, and trade credit). This section shows that the
retreat from securities positions during the crisis has
been minor, but that banking and other positions have
experienced more-significant drops.
The final section concludes, adding a discussion of
other countries ' experiences of flight to safety and
declining cross-border positions during the crisis. The
article also includes two boxes . The first box provides
background on the data collected by the Treasury
International Capital (TIC) reporting system and on
the challenges that the crisis presented to the measurement of financial transactions and cross-border portfolio positions (see box "The Treasury International
Capital Data Reporting System"). For e xample , bankruptcy filings , takeovers, and the transition of some
financial firms to bank holding company status generated changes that made it difficult to assess whether
financial flows were being correctly reported. The
second box, " Difficulties in Assessing Market Values
of Securities during the Financial Turmoil, " discusses
the probl ems inherent in determining the market
values of some cross-border securities positions when
trading becomes extremely thin.
FUGHT-TO-SAFETY
DURING THE CRISt
HIFTS IN PORTFOLIOS
In recent years before the crisis, most of the inflows to
the United States occurred through foreign acquisitions of U.S . securities . These foreign acquisitions ,
I.
For.:ign net purchases of . . securities. by type of
purchaser. and U.S . current account deficit, 2002-09
fi iUi ons of U.S. do llars. annual rdlC
U
Foreign official
Foreign private
U.S. current account
deficit-
•
-
1.600
1.400
1.200
1,000
800
600
400
200
+
o
I
I
I
2002
1
2003
1
2004
I
2005
I
2006
I
2007
I
2008
I
I
2009
NOTE: For stacked bars , a pOSiti ve value indicates net purchases of
securities , and a negati ve value indicates net sales of securities.
• For illustrati ve purposes, the U.S. current account defi cit is shown as a
positive value.
S OURCE: For foreign official and foreign private, and in subsequent fi gures
except as noted, staff estimates from data collected through the Treasury
International Capital reponing system: for U.S. current account defic it. Bureau
of Economic Analysi s.
representing net purchases both by foreign pri vate
investors and by foreign official investors , typically
amounted to more than the current account deficit
(figure I). Forei gn private investors include foreign
banks, non-government-operated investment funds,
and foreign corporations , as well as individual investors. Foreign official investors are primarily foreign
central banks and finance ministries but also include
investment funds operated by central governments
(so-called sovereign wealth funds) . During the crisis,
both types of investors exhibited flight to safety in
their securities portfolios, with the result that total
foreign purchases of U .S. securities fell below the
current account deficit. This section discusses that
fl ight to safety and the unusual flows resulting from
the flight of U.S . investors out of foreign securities,
which made up, in part, for the gap between the
current account deficit and foreign purchases of U.S .
securities.
Increased Purchases of
Securities
u.s.
Treasury
As concerns rose over the risks associated with
various U.S . securities that were structured around
U.S. subprime loans and other forms of real estate
loans and consumer credit during the summer of
2007 , foreign investors began to acquire increasing
amounts of U .S. Treasury securities, with corresponding movements out of other, riskier securities. We
interpret these movements in cross-border portfolios
The Financial Crisis and U.S. Cross-Border Financial Flows
At49
The Treasury International Capital Data Reporting System
The primary data source for U.S. cross-border financial
portfolio Hows and positions is the data collected by the
Treasury International Capital (TIC) reporting system.
The TIC system includes monthly and quarterly data
collected in aggregate by country, broad instrument type,
and type of foreign counterparty, as well as periodic (now
annual) in-depth surveys of cross-border holdings of both
long- and short-term securities. I
vidual security level. the surveys can provide considerable additional information on cross-border securities
holdings, including greater detail on the types of securities held, their maturity structure. and the face and market
values of the individual securities.
Components of the TIC System
The TIC data, including both the monthly and quarterly
data as well as the annual surveys, are the primary source
data for many of the items in the official international
financial transactions accounts compiled by the Bureau of
Economic Analysis (BEA). In our analysis, we use estimates at a monthly frequency. prepared by stalf members
at the Federal Reserve Board, that are similar to those
reported by the BEA . These flows may differ somewhat
from the underlying as-reported TIC data, because the
BEA and the Board's stall adjust reported flows to
reconcile the information obtained from the monthly and
quarterly data with that obtained in the annual surveys
and other data sources. In particular. net purchases of
securities attributed to foreign official investors are larger
in this analysis than in the underlying TIC data because
the TIC 5 data do not identify as foreign official acquisitions those that occur through foreign private intermediaries. Because of these additional acquisitions. when a
new survey of foreign holdings of U.S . securities is
conducted, foreign official holdings of U.S. securities are
often revealed to be larger than would be estimated from
summing official net purchases since the previous survey.
Information on foreign purchases of U.S. long-term securities and on U.S. purchases of foreign long-term securities is collected monthly on the TIC S form. Data are
collected on foreign gross purchases and gross sales by
country for four types of long-term U.S . securities: U.S.
Treasury debt securities, U.S. agency debt securities, U.S.
debt securities issued by all other institutions (primarily
corporate issuers), and U.S. equity. These data distinguish
foreign official purchases of U.S . securities from purchases by other foreigners . The TIC 5 form also reports
U.S . cross-border purchases and sales of foreign longterm debt and equity, again by country. For analytical
purposes, the sales of each type of security are usually
subtracted from gross purchases to measure net transactions.
The TIC B forms collect data on cross-border positions
in the form of deposits, loans, brokerage balances. and
repurchase agreements. Although these data are commonly referred to as the TIC banking data. they also
include positions reported by other depository institutions, by bank and financial holding companies, and by
securities brokers and dealers. The TIC B forms also
collect selected data on cross-border holdings of shortterm securities, such as short-term Treasury bills and
certi ficates, commercial paper. and negotiable certi ficates
of deposit. Like the TIC S data, the TIC B data are
reported by country and by type of foreign counterparty.
Cross-border positions of non banks (including entities
such as exporters and importers, industrial firms, insurance companies, and pension funds) are collected quarterly by country on the TIC C forms. These forms
distinguish between "financial" claims and liabilities
(such as deposits, short-term securities, and loans) and
"commercial" claims and liabilities (such as accounts
receivable or payable arising from import or export
activities).
In addition to the monthly and quarterly data, morecomprehensive data on foreign holdings of U.S. securities
and U.S. holdings of foreign securities are available from
detailed annual surveys of cross-border portfolios. Because the annual survey data are collected at the indil. For further information on thl! TIC systl!m for collecting cross·
border financial data, see Carol C. Benaut. William L. Griever. and Ralph
W. Tryon (2006). "Understanding U.S. Cross· Border Securities Data."
Federal Reserve Bulletin, vol. 92 (May), pp. A59-A 75,
www.federalreserve.gov/pubslbulleli nl2006/cross_bordecsecuri lies.pdf.
Financial Accounts of the Bureau of Economic
Analysis and Adjustments to the TIC Data
Complications from the Financial Crisis in Assessing
Correct TIC Reporting
Aspects of the crisis itself have complicated the measurement of financial transactions and cross-border portfolio
positions. In particular. bankruptcy filings and mergers
and takeovers of major market participants generated
changes in reporter panels as well as some unusual
unwinding of positions that made it difficult to assess
whether financial flows were being correctly reported.
For example, Lehman Brothers Holdings Inc. held large
cross-border positions in repurchase agreements, in which
they lent securities to foreign banks in exchange for a
cash loan . In order to correctly measure financial flows, it
was necessary to determine the resolution of these and
other such positions-that is, whether securities changed
hands as a result of failure to repay, whether positions
were taken over by companies acquiring subsets of
Lehman's business, or whether the positions are still
pending bankruptcy court outcomes.
In addition, changes in reporter classifications resulting
from the creation of several bank holding companies
generated new reporting responsibilities, which in turn
generated inconsistent definitions of data series and further complicated the analysis of financial flows .
Federal Reserve Bulletin 0 November 2009
Al50
2.
TOlal fore ign holdings and foreign oflicial hiding '
of U.S. Treasury securities, 1995-2009
Dillioll,'\ of U.S. dollars
3.500
3.000
2.500
2.000
1.500
1.000
Foreign official
500
I
I
1995
I
I
1997
I
1
1999
I
1
200 I
I
I
2003
I
I
2005
I
I
2007
2009
as reflecting changes in investor risk aversion or
flight-to-safety portfolio motives. These movements
became more pronounced with the intensification of
the crisis in the fall of 2008 but reversed somewhat
with the stabilization of financial markets through the
first half of 2009.
Although foreign investors historically have held a
large share of U.S. Treasury securities, most of these
securities are held by official investors and, in large
part, reflect official reserve holdings. Official holdings
of U.S . Treasury securities grew especially rapidly
between 2002 and mid-2007-more than doubling
from roughly $700 billion to more than $1.6 trillion-as many Asian central banks acquired large
amounts of dollar reserves over this period (figure 2).
U.S. Treasury securities make up a much smaller
share of foreign private portfolios and typically have
accounted for a much smaller fraction of foreign
private investors' purchases of U.S. securities: U.S.
Treasury securities accounted for only about 12 percent of foreign private investors' securities holdings
in 2003 and for less than 10 percent in 2006. Although
foreign private investors made large purchases of
Treasury securities during months of market turbulence (for example, in August 2007 and April 2008),
they did not noticeably shi ft their purchases into such
securities until the intensification of the crisis in the
fall of 2008 (figure 3, solid bars). Foreign private
monthly purchases reached a record $93 billion in
October 2008 and remained sizable through the first
quarter of 2009.
Identifying the foreign counterparties for these
recent large private purchases of Treasury securities
is difficult. The TIC system that collects the underlying data for transactions in long-term securities is
designed to record transactions between U.S. residents and their direct cross-border counterparties, not
the ultimate investors. Thus, if an investor in France
purchases a Treasury security but the transaction is
booked through a London intermediary, the TIC
system will report a sale of U.S. Treasury securities to
the United Kingdom, not France. This example highlights the " financial center bias" in the data: Roughly
one-third of all purchases and sales of U.S. long-term
securities in the TIC system are recorded against the
United Kingdom, with nearly as many recorded collectively against the Caribbean financial centers of
the Bahamas, Bermuda, and the Cayman Islands.
Nonetheless, in both the summer of 2007 and the
fall of 2008, net purchases of Treasury securities by
entities in the Caribbean banking centers, especially
the Cayman Islands, picked up notably. This increase
in Treasury acquisitions is consistent with shifts in the
portfolios of hedge funds and other investment funds
located in these offshore financial centers to safer and
more-liquid investments during periods of pronounced market turmoil. More recently, foreign private investors have reduced their purchases of Treasury securities, and net purchases of such securities
through Caribbean financial centers have reversed to
net sales. These developments may indicate increased
risk tolerance and a diminution of "safe haven"
flows.
Foreign official investors also increased their purchases of Treasury securities, especially in the second
half of 2008, and their acquisitions of these securities
have remained high in 2009 (figure 3, white bars).
Total foreign acquisitions of Treasury securities (official and private purchases combined) amounted to
more than $1 trillion in the two years since summer
2007, raising estimated total foreign holdings to
nearly $3.4 trillion by mid-2009. However, because
the issuance of Treasury securities has been heavy
3.
Foreign nel purcha~es of .S. Treasury e ·urities.
by type of pu!cila cr. 2002-09
Billions tlf U .S. llollars. annual rale
U
•
Foreign official
Foreign private
1.000
800
600
400
200
+
o
I
1
I
2002
2(0)
I
2004
2005
2006
NOTP.: See general nole 10 fi gure I.
2007
I
1
2008
2009
A 151
The Financial Crisis and U.S. Cross-Border Financial Flows
4.
Billions of U.S. dollars
U.S. Treasury securities outstanding
All
6.000
5.000
4.000
3,000
2,000
Treasury bills
I
1,000
I
2006
_
2007
2008
2009
Foreign holdings of U.S. Treasury securities as a
share of such securities outstanding
Pen;cnt
75
70
65
60
foreign official and foreign private acqUIsitIOns of
Treasury securities has been Treasury bills: From
June 2007 through June 2009, total foreign holdings
of Treasury bills increased more than $625 billion, to
more than $850 billion, accounting for about twothirds of the total increase in foreign holdings of
Treasury securities. More than one-half of these
short-term Treasury securities were acquired during
the turbulent market conditions last fall. In part,
increased foreign holdings of short-term Treasury
securities reflect changes to the issuance patterns of
Treasury debt last fall: Newly issued Treasury bills
accounted for much more of the increase in debt
outstanding than has been typical in recent years
(figure 4, top panel). Nonetheless, the share of shortterm Treasury bills held by foreign investors has risen
slightly over the past couple of years , from about
38 percent before the onset of the crisis to about
43 percent as of June 2009 (figure 4, bottom panel).
harply Reduced Purchases of Other Types
of
Securities
u.s.
55
50
45
40
35
I I
2006
2007
2008
2009
NOT!': U.S. Treasury securities outstanding are constructed as marketable
U.S. Treasury debt held by the public , excluding holdings of the Federal
Reserve System Open Market Account.
SOURCE: For U.S . Treasury securities outstanding, staff estimates from
U.S. Treasury, Monthly Statement of the Public Debt of the United States;
and Federal Reserve Board , Statistical Release H.4.1, "Factors Affecting
Reserve Balances." For foreign holdings of U.S . Treasury securit ies, staff
estimates from data collected through the Treasury International Capital
reponing system.
Although foreign private investors had made relatively small purchases of Treasury securities prior to
the turmoil, they had made sizable acquisitions of
other, riskier securities. Indeed, in 2005, 2006, and
the first half of 2007, foreign private investors '
acquisitions of long-term securities other than Treasury securities had accounted for the bulk of financial
inflows. Their purchases, on net, of these other securities dropped to essentially zero in the first half of
2008 and reversed to sizable net sales in the second
half of the year (figure 5). Foreign investors continS.
Foreign privale net purchase of U. . securities other
than .S . Treasury securities. by type of security,
2002-09
over the past two years, these record foreign acquisitions have not resulted in foreign investors acquiring
a disproportionate share of U.S. Treasury securities
outstanding. As of June 2009, foreign investors were
estimated to hold about 58 percent of the marketable
Treasury debt held by the public, a share about
unchanged from June 2006 (figure 4).4
Foreign holdings of Treasury securities typically
have been concentrated in long-term bonds and
notes-that is, securities with an original maturity of
more than one year. However, with the onset of the
financial turmoil, a much larger fraction of both
Billions of U.S. dollars. annual rail:
o Equity
1.500
Long-term corporate debt
[J Short-term corporate and other debt
• U.S. government agency
1.200
900
600
300
+
o
300
4. We constructLOtai marketable Treasury debt held by the public as
the total marketable Treasury debt outstanding and held by the public
as reponed by the Momhly St.a temem of the Public Debt of the United
States. minus Treasury securities held by the Federal Reserve System
in the System Open Market Account.
I
I
I
2002
I
I
2003
2004
I
2005
I
2006
I
I
2007
200S
t
I
2009
NOTE: Shon-term corporate and other debt consists primarily of
commercial paper, negotiable certificates of deposit. and bankers '
acceptances. See also general note to figure I.
AI52
Federal Reserve Bulletin D November 2009
ued to sell U.S. corporate and agency debt securities
in early 2009 but resumed purchasing U.S. equity,
especially in the second quarter.
Much of the falloff in foreign purchases of other
types of securities reflects markedly reduced purchases of U.S. corporate debt securities: After amounting to more than $500 billion of foreign inflows in
2006 and nearly $350 billion in the first six months of
2007, foreign private net purchases of U.S. corporate
debt totaled less than $50 billion from summer 2007
through the end of 2008.
The reduction in U.S . corporate debt issuance since
mid-2007 may have been a factor contributing to the
marked slowdown in foreign net purchases of corporate debt securities over this period and especially in
the fourth quarter of 2008 . Foreign purchases of U.S.
corporate debt partly reflect acquisitions of newly
issued debt, and foreign gross purchases are correlated with U.S. corporate bond issuance (figure 6).
Even as lower corporate issuance reduced foreign
gross purchases of U.S. corporate debt, however,
foreign sales of debt remained high because foreign
gross sales of U.S . corporate debt partly reflect
redemptions of maturing securities. According to the
detailed survey data, roughly 8 percent of corporate
debt held by foreign investors over the past two years
had a remaining maturity of less than one year. With
total foreign holdings of corporate debt amounting to
$2.7 trillion as of June 2007 and to $2.8 trillion as of
a year later, redemptions of maturing debt amount to
about $225 billion in each of those years and are thus
recorded in the TIC system as sales of U.S. corporate
debt by foreign residents . As new issuance of U.S.
corporate debt slowed sharply, especially in the second half of 2008, net sales by foreign investors may
have been explained, in part, by limited acquisitions
of newly issued debt that were insufficient to offset
the maturing bonds in their portfolios. But at the same
time, net sales by foreign investors also indicated
weak foreign demand for such securities, as limited
issuance of U.S . corporate debt largely reflected weak
demand by investors, including foreign investors.
Much of the previous foreign demand for longterm corporate debt appears to have been for corporate asset-backed securities (ABS) , including sizable
acquisitions of corporate mortgage-backed securities.
Although the monthly transactions data over this
period do not distinguish transactions in corporate
ABS from transactions in other corporate debt securities, we can use information from the detailed surveys
of foreign holdings of U.S . securities to learn more
about the types of securities acquired. According to
the survey data, foreign investors ' holdings of corpo-
6.
U.S. issuance, and foreign gro ' s purcha es, of U.
corporaLC debt. 2006-09
Dillion.Ii of U.S. dollars
U.s. issuance
300
250
200
150
100
50
11 ", ,, , ,, , ,,1 ,,,, ,,, , ,, 1,, , , , ,, ,, 1,,, ,, , ,, 1
2006
2007
2008
2009
SOURCE: For U.S. issuance. staff estimates based on data from Ihe
Depository Trusl & Clearing Corporation and Thomson Financial; for foreign
gross purchases, staff estimates from dala collecled lhrough Ihe Trea sury
Internalional Capital repon ing syslem.
rate ABS increased by more than $300 billion between June 2006 and June 2007, accounting for more
than 40 percent of the total increase in holdings of
corporate debt securities. At $902 billion, foreigners '
holdings of corporate ABS accounted for about onethird of their holdings of corporate debt securities by
the end of June 2007. 5
By June 2008, however, foreign investors held only
$760 billion in U.S. corporate ABS, about $150 billion less than they did the year before. In large part,
the notably lower foreign holdings in June 2008
reflect sizable valuation losses on these securities:
Compared with the relative stability in their prices
over the previous 12 months, prices of corporate ABS
fell roughly 13.5 percent by mid-2008 (see box
"Difficulties in Assessing Market Values of Securities
during the Financial Turmoil "). The underlying survey data indicate somewhat lower aggregate holdings
of these securities as well. Nonetheless, foreign investors also appear to have continued buying some U.S.
corporate ABS between the two surveys. Of the
$760 billion in corporate ABS held in June 2008,
about $2 I 5 billion reflects securities that were not
held in 2007, including roughly $105 billion in
securities issued over the 12-month period. In contrast, roughly $280 billion in individual corporate
ABS held in 2007 was no longer held by June 2008.
Foreign investors did not substantially change their
total holdings of short-term U.S. corporate debt
5. The underlying survey data indicate that most of the increase in
the value of total foreign investment in U.S. corporate ASS between
June 2006 and June 2007 appears to have arisen from increased
foreign holdings rather than from valuation changes : The average
effective price increase in these securities during that period was only
about I V2 percent.
A153
The Financial Crisis and U.S. Cross-Border Financial Flows
Difficulties in Assessing Market Values of Securities during the Financial Thrmoil
The Treasury Inlernational Capital surveys of foreign
holdings of U.S. securities and U.S . holdings of foreign
securities collect data both at face value (or, for equity,
number of shares) and at market value as of the survey
date (end of June for foreign holdings of U.S. securities
and end of December for U.S. holdings of foreign securilies). As part of the comprehensive process for reviewing
the survey data, prices assigned to individual securities
are crosschecked across survey respondents and with
commercial data sources to verify the assigned market
values. For securities such as Treasury securities or
commonly traded U.S . equities, determining the correct
price as of the survey dates is fairly straightforward:
Because these securities trade in large, liquid markets,
prices for the securities are readily available and easily
verifiable.
If we want to understand how cross-border portfolios
were affected by valuation gains or losses as the financial
crisis unfolded, however, we need to be able to estimate
such valuation changes for dates other than those of the
surveys. This requirement is especially true for estimating
valuation effects for foreign holdings of U.S . securities,
because the most recent survey collected holdings in June
2008, before the intensification of the crisis in the fall of
2008. Estimating valuation gains or losses for periods
beyond survey dates is a somewhat more complicated
process because the composition of investor portfolios
may change over the period. However, foreign holdings
of most classes of U.S. securities such as U.S . Treasury
securities and equities in aggregate are similar to the
composition of standard price indexes of U.S. Treasury
securities or of equities weighted by market capitalization. Thus, to create estimates of foreign holdings of U.S.
securities for non survey dates, we update the survey
values of holdings with net purchases as recorded in the
monthly transactions data, and we apply aggregate price
indexes to these estimates to adjust for valuation gains or
losses over nonsurvey intervals. Similarly. we can estimate valuation gains or losses on U.S. holdings of foreign
equity and foreign debt by applying foreign equity and
bond price indexes to our holdings of foreign securities. 1
However, market conditions during the financial turmoil made the task of assessing market prices of securities that became very thinly traded extremely difficult,
even on survey dates. This problem was especially true
for corporate asset-backed securities (ABS). for which
the difficulty was compounded by the very large number
of securities involved. ABS typically are issued in different tranches. Each tranche is usually relatively small. and
different risk characteristics may be associated with each
tranche. As a result, many securities that superficially
appear similar because they are issued by the same ABS
issuer on the same date can have very different market
values because of their different risk characteristics, a fact
that makes crosschecking and verifying prices across
reporters and with commercial data sources considerably
more difficult. Furthermore, prices were more difficult to
obtain for some ABS-particularly those in smaller, more
risky tranches-than for others. As market functioning
for ABS became impaired, tracking prices became harder,
especially for these more risky tranches. And although
riskier tranches tend to be smaller, they are numerous and
in aggregate can account for a sizable portion of crossborder positions. For example, the June 2008 survey of
foreign holdings of U.S. securities identified roughly
8,000 individual ABS with face values of more than
$25 million. These 8,000 securities accounted for roughly
three-fourths of the total face value of corporate ABS held
by foreigners. But more than 28,000 individual ABS.
each with a face value of $25 million or less. collectively
accounted for the n:maining one-fourth of corporate ABS
held . A further complication has been that many ABSparticularly those issued in the Cayman Islands and held
by U.S. investors-were privately placed. with little
information on the price of the securities even at issue, let
alone on the price as of the survey date.
ABS price indexes can provide some guidance on how
ABS prices are likely to have moved between surveys,
besides providing a means to estimate more recent valuation gains or losses. Because roughly two-thirds of U.S.
corporate ABS held by foreign investors was floating -rate
debt. using an average of an index of floating-rate ABS.
such as the Barclays Capital U.S. Floating-Rate AssetBacked Securities Index, and an index of fixed-rate ABS.
such as the Barclays Capital U.S. Asset-Backed Securities
Index, is a reasonable guide to estimating current valuation
effects. By this measure, prices for U.S. corporate ABS
were little changed between June 2006 and June 2007 but
fell roughly 13 percent between July 2007 and June 2008;
they had declined a further 18 percent by year-end 2008
(figure A). Although these price declines are sizable, they
may actually understate total foreign losses on U.S.
corporate ABS. as the indexes themselves capture price
changes only for securities that are actively traded.
A. Change in prices ofV.S. corporate asset-backed
securities, by type of security, 2006-09
Fixed rate
100
90
80
Floating rate
t. For more detail on how 10 construct monthly estimates of securities
positions accounting for net transactions and valuation changes, see Carot
C. Bertaut and Ralph w. Tryon (2007). "Monthly Estimates of U.S.
Cross-Border Securities Positions," International Finance Discussion
Papers 910 (Washington: Board of Governors of the Federal Reserve
System. November). www.federa lreserve.gov/pubslifdp/2007/9101
ifdp910.pdf.
l , j " . , , ! , ,1
2006
, I,,!
, 1 1 1 . " 1 ,, . ..
2007
, .11,, 1,,1
2008
-
70
.1 ,, 1
2009
SoURCE: For fIXed rate, staff calculations from Barclays Capitat U.S.
Asset-Backed Se<:urities Index; for floating rate, staff calculations from
B=lays Capital u.s. Asset·Backed Securities Floating-Rate Index.
A 154
Federal Reserve Bulletin 0 November 2009
between June 2007 and June 2008. However, as with
long-term debt, the asset-backed portion of foreign
holdings declined. In mid-2007 , asset-backed commercial paper (ABCP) accounted for nearly 40 percent of foreign holdings of U.S. short-term corporate
debt. By mid-2008, this figure had declined to about
25 percent. Starting in the third quarter of 2008 , as
short-term funding markets ceased normal functioning, foreign investors did decrease their overall positions in short-term U .S. corporate debt. Such positions dropped about 30 percent between June and
December of 2008 and continued falling more gradually in 2009, losing another 10 percent by June 2009.
Foreign private investors also slowed their net
purchases of U.S. government agency debt and equity
in the second half of 2007, turning to net sales of
these securities in 2008. However, the magnitude of
this reversal was considerably less dramatic than the
marked slowdown in net purchases of corporate debt
securities. Although concerns about the financial
viability of Fannie Mae and Freddie Mac gained
particular market attention in the summer of 2008,
foreign private investors had been net sellers of
agency securities since mid-2007 . Foreign private
interest in agency debt does not appear to have been
affected by the move in September 2008 to place
Fannie Mae and Freddie Mac into conservatorship, as
foreign private net sales of agency securities have
continued thus far in 2009, though at a somewhat
slower pace than in the previous few quarters .
Although foreign private purchases of U.S . equity
did show some sizable swings during months of more
pronounced market turmoil, foreign acquisitions , on
net, were not affected to the same degree as were
foreign purchases of corporate debt securities. Foreign purchases of equity remained sizable in the
second half of 2007. And despite the sharp drop in
U.S. equity prices in the fall of 2008, foreign investors made only limited net sales of U.S. stocks,
though, as we discuss in the section "Marked Slowdown in Cross-Border Securities Trading" (p. A162),
gross trading in U.S. equity was sharply curtailed.
More recently, foreign investors have returned to
purchasing U.S. equity.
Portfolio hilts jor Foreign Official Investors
Foreign official investment has typically occurred
through purchases of U .S. Treasury securities, but in
recent years, official investors began to acquire an
increasing amount of U.S . agency securities (figure 7). For the period 2005 through summer 2007,
official purchases of agency securities accounted for
about one-half of all official inflows. During this
7. Foreign officia l nel purchases of
by lype of securi ty. 2002-09
.S. securilies.
lJillions of U.S. dollars. annual rate
o U.S government agency
1.000
U.S. Treasury
All othe r
•
•
800
600
QIQ2
400
200
+
o
200
400
600
800
I
I
I
2002 2003
I
I
2004
I
2005
I
2006
I
2007
I
2008
I
I
2009
NOTE: All other consists of lon g·term corporate debt and equity. See also
general note to figure I.
period, foreign official purchases of agency securities
accounted for more than two-thirds of the net issuance of agency debt.
The composition of foreign official inflows was
little affected by the onset of financial turmoil in
mid-2007 but changed markedly with the intensification of the turmoil in the second half of 2008 . As we
saw with foreign private investors , official investors
made large net purchases of Treasury securities and
net sales of other types of securities beginning in
summer 2008. However, some special factors influenced the timing and extent of the shift in the
composition of official inflows .
Official net purchases of agency securities remained strong in 2007 and through the first half of
2008 but began to weaken as concerns about Fannie
Mae and Freddie Mac began to surface in July 2008.
Beginning in July 2008 , most official investors appeared to allow maturing issues of long-term agency
securities in their portfolios to be redeemed without
making offsetting new purchases, resulting in a small
net decline in their holdings of agency securities.
From October 2008 through the end of that year,
however, some official investors made sizable outright sales of their holdings of agency securities as
they intervened to support their currencies. These
outright sales of agency securities continued through
the end of 2008 and contributed to an unusual net
outflow from official investors for the quarter.
Official investors had also acquired increasing
amounts of other U.S . securities, primarily U.S. corporate stocks and bonds, in 2006 and the first half of
2007. These official inflows largely reflect acquisitions by sovereign wealth funds willing to invest in
somewhat riskier U.S. securities. Although inflows
The Financial Crisis and
into such securities actually picked up in the second
half of 2007 and the first half of 2008, they, too,
reflect aspects of the financial turmoil: Official purchases in late 2007 and early 2008 were boosted by
the well-publicized injections of capital by some
sovereign wealth funds into U.S. financial institutions
as the financial crisis unfolded.
So far in 2009, official inflows have remained
sizable, but they continue to be concentrated in U.S.
Treasury securities.
Flight-to- aJety Shift · in Securities Portfolio.
of u.s. In vestors
U.S. purchases of foreign securities are outflows in
the financial account and thus typically offset some of
the financial inflows recorded through foreign official
and foreign private purchases of U.S. securities. U.S .
investors had acquired increasing amounts of foreign
stocks and bonds from 2004 through the first half of
2007. They continued to acquire foreign securities
through the first half of 2008, though at a reduced
pace, but began to sell foreign securities in the
summer of 2008 (figure 8). These record sales of
foreign securities in the second half of 2008 provided
a financial inflow to the United States, making up, in
part, for the gap between the current account deficit
and foreign purchases of U.S . securities evident in
figure 1.
Increased risk aversion and an interest in reducing
foreign exposure (a form of flight to safety) are likely
motivations for the pullback in U.S . investors' holdings of foreign securities, especially investments in
foreign equity, which are the bulk of U.S. external
securities portfolios. U.S. investors continued to
acquire foreign equity through the first half of 2008
8.
U.. net purcha~e s of foreign securities, by type of
security , 2002-09
Billions of U.S. dllilars. annual mlc
o Equity
•
•
Long-tenn debt
Shon-tenn securities
600
500
400
300
200
Q2
u.s.
Cross-Border Financial Flows
A155
but made fairly sizable net sales of foreign equity in
the second half of 2008 as foreign stock markets
plunged.
U.S. residents' net purchases of foreign bonds
slowed notably in the first half of 2008 and reversed
to large net sales in the second half of that year. As
with foreign purchases of U.S . corporate bonds, the
deterioration in U.S. purchases of foreign bonds may
reflect, in part, weak global debt issuance since the
onset of the turmoil. Another similarity to the foreign
sales of U.S. corporate debt is an apparent reduction
in U.S. demand for foreign-issued ABS. Although the
majority of foreign debt securities owned by U.S.
investors are conventional debt securities issued by
foreign governments and corporations, a sizable portion of the increase in U.S . investors' holdings of
foreign long-term debt between 2005 and the onset of
the crisis came from increased purchases of foreignissued ABS.6 Of the $720 billion in foreign privatesector debt held by U.S . residents at year-end 2005,
about $131 billion, or roughly 18 percent, consisted
of foreign-issued ABS. By the end of 2007, total
holdings of foreign private-sector debt had grown to
$1.2 trillion, and holdings of foreign ABS had more
than doubled, increasing to $330 billion, which
accounted for 27 percent of foreign private-sector
debt held.
By December 2008, U.S . investors' holdings of
foreign private-sector debt had declined to $945 billion, and holdings of foreign ABS had decreased to
$231 billion . As with foreign holdings of U .S.-issued
corporate ABS, much of the decline in the market
value of holdings of foreign ABS between 2007 and
2008 reflects sizable estimated valuation losses on
this debt: Between December 2007 and December
2008, prices of these securities are estimated to have
fallen roughly 25 percent.
U.S . residents' holdings of foreign-issued shortterm debt also grew rapidly in the years before the
crisis, reaching $368 billion by December 2006.
Much of this increase likely reflected increased holdings of foreign ABCP: The share of commercial paper
(ABCP and unsecured) in these holdings increased
from about 15 percent in December 2003 to almost
50 percent in December 2006. This fraction stayed
I~
0
100
200
300
400
I I
I
2002
I
2003
I
2004
I
2005
I
I
2006 2007 2008
NOTE: See general note to figure I.
I
I
2009
6. Much of this foreign-issued ABS was backed, at least in pan, by
U.S. loans; this characteristic of foreign-i ssued ABS was especially
true for U.S. holdings of ABS issued through the Cayman Islands,
which amounted to nearly $200 billion in December 2007. For further
information, see Daniel O. Beltran, Laurie Pounder, and Charles
Thomas (2008), "Foreign Exposure to Asset-Backed Securities of
U.S. Origin," International Finance Discussion Papers 939 (Wa~hing
ton : Board of Governors of the Federal Reserve System, August),
www.federalreserve.gov/pubs/ifdpI2008/939/ifdp939.pdr.
Federal Reserve Bulletin 0 November 2009
A156
fairly constant at about 50 percent over 2007 and
200S, while total holdings of short-term foreign debt
dropped. Overall , from the onset of the crisis in
August 2007 through March 2009, U.S . holdings of
short-term foreign debt declined by about one-third.
With an easing of tensions in financial markets , an
improved environment for foreign bond issuance, and
a recovery in global equity markets so far this year,
U.S. residents have resumed purchases of both foreign stocks and bonds.
I U.
Banking offices in the niled Stales: Bank • ~lwn
gross cross-border claims on foreigner. and the ir own
gross cro s-bordcr liabilities to private foreigners
~
,
2004-09
Billions of U.S. dollar ..
3.500
3.000
2,500
BANKING D EVELOPMENTS
2,000
Banks' cross-border positions (which include some
positions of securities brokers) are quite volatile, and
large net flows for a gi ven month are not unusual.
Over longer periods of time, however, banking usually contributes little to net U.S. financial flows, as
was the case for the period 2004 through early 2007
(figure 9, solid bars). However, since mid-2007,
cross-border banking flows have exhibited unusual
patterns that reflect features of the financial crisis.
Even as the crisis slowed the growth in gross
positions, net changes in positions showed a substantial increase in net lending abroad, or outflows,
between mid-2007 and mid-200S . These outflows
were followed by a large inflow between September
and December 200S as previous net lending was
retracted; finally, renewed sizable outflows from January to June 2009 reflected a resurgence in net lending.
Over the whole period from August 2007 to
9.
.S. cro 's-horder net banking flows for banks' own
accounts, and central bank swap flows and other U.S.
fficial asset flows. 1004-09
•
Net banking !lows for banks' own accounts
600
U.S. ofticial asset !lows
400
200
+
o
200
400
600
I
I
2004
2005
2006
2007
2008
2004
2005
2006
2007
2008
2009
June 2009, new net lending abroad by banks in the
United States cumulated to about $4S0 billion.
This pattern was driven mainly by significant U.S.
dollar liquidity needs of European banks. Through
much of the crisis, banks located in the United States
played a primary role in funding dollar needs abroad.
During the height of the crisis in the fall of 200S,
however, foreign central banks provided dollars,
drawn from their swap lines with the Federal Reserve,
to foreign banks directly. This section will elaborate
on these unusual flows from banking and the official
swap lines (figure 9, white bars).
Background on Cross- Border Banking
Positions
BilliolL,\ of u.s. dollars
o Central bank swap !lows and other
1,500
2009
NOTE: Semiannual values nO! annualized. A positive value indicates a net
financial innow to the United Stale s, and a negative value indicates a net
financi al outflow from the United States.
SOURCE: For net banking !lows for banks' own accounts, Slaff estimates
from data collected through the Treasury Internalional Capital reponing
system ; for central bank swap !lows and other U.S. official asset !lows.
Federal Reserve Board, Stali stical Release H.4 . I, "Factors Affecling Reserve
Balances ."
Gross cross-border positions reported by banks in the
United States are sizable: Gross cross-border claims
and liabilities each represent just more than one-fifth,
respectively, of U.S.-owned assets abroad (claims)
and foreign-owned assets in the United States (liabilities) in the U.S . international investment position. At
the end of 2007, these positions amounted to about
$3.S trillion in gross claims on foreigners and about
$4.2 trillion in gross liabilities to private foreigners.
Most of these positions, about SO percent on each
side, are banks' own claims and liabilities. We report
banks ' own gross positions in recent years (figure 10).
The remaining 20 percent of the positions are banks'
holdings of short-term securities and deposits on
behalf of customers, which are discussed elsewhere in
this article. 7
7 . Cha nges in cu stomers ' s hon-term securities ponfolios are discu ssed earlier in the section " Flight-lo · Safety Shifts in Po t1folios
during the Cri s is" (p. A 148). The decline in customers' banking
The Financial Crisis and U.S. Cross-Border Financial Flows
I I.
Banking orfice 111 the United Stares: Gross crosshorder claims on foreigners and gross cross-border
liabilities to privatc forei gner~ . by nati nal ity f parenl
bank. 2004-08
A 157
12. Banking office in the Unitcd States: Gross ero border claims on foreigners. gr s cross-b rdef
liabilities to private foreigners. and net position for
. .-owned offices and for European-owned office .
2004-09
[lillion> of U.S. doll""
•
•
o
U.S.-owned
Europc:an-owned
All other
J3illions of U.S. doll...
4.000
U.S .-owned offices
3.500
2.000
Net borrowing
1.800
3.000
1.600
2.500
1.400
2.000
1,200
1,500
1.000
1.000
800
500
600
2004
Banks' own cross-border claims consist mainly of
deposits with foreign banks, loans, resale agreements,
and their holdings of foreign certificates of deposit
(CDs) and short-term securities. Banks' own crossborder liabilities consist mainly of deposits by foreigners and repurchase agreements (repos). A substantial fraction-more than two-thirds-of banks' own
cross-border positions are with affiliated banking
offices abroad (that is, intercompany positions).
By definition, banking offices located in the United
States include both U.S.-owned banks and U.S.
offices of foreign-owned banks. Therefore, for foreignowned banks in the United States, affiliated offices
abroad include the parent office. Gross U.S. crossborder positions are roughly split between U.S.owned banks and offices of banks headquartered in
Europe (figure 11). Banking offices with headquarters
elsewhere (primarily Asia, Canada, and Australia)
account for less than 10 percent of gross positions.
For several years before the crisis , U.S.-owned
banks, as a group, were substantial net borrowers
from abroad, which means that their liabilities exceeded their claims (figure 12, top panel, shaded
area) . However, this position was fairly stable, with
little new net borrowing or lending over the 2004 to
2006 period. Offices of foreign-based banks, which
are primarily European, maintained a more neutral
cross-border position in the pre-crisis period: Claims
were nearly equal to liabilities (figure 12, bottom
panel). These positions also created little new net
borrowing or lending before 2007.
positions is discussed in a later section, "Reductions in Foreion
Exposure in Securities. Banking, and Nonbank Positions" (p. A 160).
2005
2006
2007
2008
Billions of
European-owned offices
•
2009
U. ~ .
dollars
1.800
Net borrowing
Net lending
1.600
1,400
1,200
1.000
800
600
I !
2004
2005
2006
2007
2008
2009
Increased Net Lending through Mid-200B
Normally, banks generate little net flows, meaning
little new net borrowing or lending, because banks'
gross cross-border liabilities to foreigners and gross
cross-border claims on foreigners typically grow at
about the same rate. However, between mid-2007 and
mid-2008, a substantial gap opened between the paths
of liabilities and claims (figure 13, top panel). New
net lending, by our definition, occurs when claims
rise relative to liabilities, regardless of the absolute
position of claims and liabilities initially. Figure 13
illustrates new net lending by showing the cumulative
changes in claims and liabilities. At its peak in early
fall of 2008, this gap cumulated to about $430 billion
in new net lending abroad by banks located in the
United States since January 2007, about $390 billion
of which occurred between August 2007 and August
2008. The gap then narrowed dramatically through
the fall of 2008, retracting nearly 80 percent of that
lending, but opened again beginning in January 2009,
A 158
Federal Reserve Bulletin 0 November 2009
13. Banking oftiecs in the nited State ' : Cumulative
change since 2004 in gross ero s-border claims
on foreigner and in gros ' cross-border liabilities lO
private foreigners. ,Uld new net borrowing or lending,
for all oftices and for European-owned oftices.
2004-09
Billion.." of U.S. dollars
All offices
New net borrowing
New net lending
14.
et nows of .S.-owned and European-owned banks
and of banks with owner of other nationaliLie .
Augu t 2007 lhrough August 2008
Dilliolls or u.s. dollars
•
o
European·owned
U.S.-owned
All other
200
100
+
1.800
o
1.600
100
1.400
200
1.200
300
1,000
400
800
500
600
400
200
2004
2005
2006
European-owned offices
New net borrowing
New net lending
2007
2008
2009
Billion .~
oi
.s. doll:1rs
1.000
800
600
400
200
cumulating to about $435 billion in new net lending
between January and June 2009.
European-Owned
NO A positive value indicates a net financial innow to the United
TE:
States, and a negative value indicates a net fin ancial outnow from the Un ited
States.
Banks
The increased net lending abroad between mid-2007
and mid-2008 is mainly attributable to U.S. offices of
European-owned banks lending to their affiliated
offices in Europe. Although U.S. banking offices with
European parents make up less than one-half of U.S .
gross cross-border positions, their increased lending
more than explains the overall pattern for the first
year of the crisis (figure 13, bottom panel). Europeanowned offices in the United States generated an
outflow of more than $450 billion over the first year
of the crisis (figure 14). Furthermore, almost all of
that new lending was to affiliated offices, often the
parent office.
In the several years prior to the crisis, many
European banks directly or indirectly sponsored more
than 100 special purpose vehicles (SPVs), including
structured investment vehicles (SIVs). These vehicles
issued hundreds of billions of dollars of ABS, including ABCP, into the U.S . market. When ABCP markets
froze in the fall of 2007, European banks not only lost
a source of new funding, but also needed to payoff
the commercial paper and medium-term notes maturing throughout late 2007 and early 2008 that could
not be rolled over in the market. 8 Because many of
the assets backing the commercial paper were illiq uid, European banks needed other sources of U.S.
dollars. This need added substantially to the demand
for dollars by European banks at a time when liquidity was at a premium and financial markets, including
foreign exchange markets, were under stress from
many angles.
The notion of a dollar liquidity crunch in Europe is
supported by the fact that net lending to Europe
during the first year of the crisis was widespread
across many banks, whereas banking flows are usually dominated by the few largest banks. The U.S.
offices of 30 banks each lent more than $10 bi Ilion
abroad, on net, between August 2007 and August
2008,9 Of those banks, 22 were European owned, and
all but 4 had sponsored SPVs.
U.S .-Owned Banks
If Europe had such strong demand for dollars, why
were U.S.-owned banks not also lending to Europe?
8. Allhough the ABS were liabilities of the SPVs and not of lhe
banks them selves, most banks chose, as a maner of reputation, to
intervene to support the SPVs they had created.
9. [n this analysis, securities brokerage arms that report separately
(for ex ample, J.P. Morgan Worldwide Securities Services) are counted
as separate banks.
The Financial Crisis and U.S. Cross-Border Financial Flows
15.
Summed nel flow' and gross po itions of U.S .-owned
banks, Aug ust 2007 through August 2008
Billions o f U.S. dollars
-
Summed net nows of individual U.S.-owned banks
identilied as net borrowers, and of indi vidual
U.S.-owned banks identified as net lenders
•
gOO
600
Net borrowers
Net lenders
400
200
+
o
200
Aug. 2007- Aug. 2008
400
L -_ __ _ _ __ __ __ __ _ _ _ _ __ __ _ _ _ _ _ _
J
Billions of U,S. dollars
Gross positions of U.S.-owned banks identified as
net lenders
700
o Net lending
600
500
400
Liabilities
300
I
A
SON
2007
I
•
D
I
J
I
FMAMJJA
200S
NOTE: For summed net nows, a positive value indicates a net financial
innow to the United States, and a negative value indicates a net financial
out now from the United States. The ouUlows from net lenders shown in the
top panel reneet the change in gross positions shown in the bottom panel.
The net position of U.S.-owned banks changed little
during the first year of the crisis, generating a small
net inflow. But this result obscures the many ways
that cross-border flows of U.S.-owned banks responded to the crisis. Some U.S.-owned banks actually did lend abroad-as much as $235 billion during
the first year of the crisis (figure 15, top panel).
However, those amounts were more than offset by
about $270 billion in inflows from other U.S.-owned
institutions that were net borrowers. This latter group
of U.S.-owned banks appears to have borrowed from
foreign affiliates to shore up the liquidity of the parent
bank, similar to the behavior of the European-owned
banks. Presumably their need for liquidity at home
outweighed the profit to be gained from lending
abroad . A majority of the $270 billion in inflows
generated by these U.S.-owned net borrowers was
attributable to securities brokers. These institutions
A 159
did not have access to borrowing from the Federal
Reserve early in the crisis and likely turned to their
own foreign offices instead for needed cash.
The group of U.S.-owned banks that generated
$235 billion in outflows, or net lending, during the
first year of the crisis had both increasing gross
cross-border claims and decreasing gross cross-border
liabilities (figure 15, bottom panel). Looking at each
bank individually suggests that this group encompasses two very different sets of banks in terms of
their situation and behavior during the crisis. One set
had increasing gross claims abroad over the first year
of the crisis and roughly flat gross liabilities. In
particular, these banks increased their gross claims on
unaffiliated foreigners during this period, suggesting
that they were lending to European banks and not just
their own offices abroad. Such banks presumably had
sufficient liquidity at home to enable them to fulfill
some of the dollar demand in Europe.
In contrast, a second set of U.S.-owned banks and
brokers started from a large net borrowing position
(meaning that their liabilities to foreigners were
greater than their claims on foreigners) and then saw
their gross cross-border liabilities plummet nearly
50 percent during the first year of the crisi s, which
also generated outflows. If these institutions were
among those in which the market lost confidence,
such that foreign counterparties were unwilling to
continue lending to them, then these U.S.-owned
banks and brokers would have been forced to payoff
their liabilities to foreigners. This situation is a plausible explanation for the data pattern. Indeed, this set
includes some institutions that eventually required
substantial government rescues or entered bankruptcy. When only net flows are considered, the data
for these two very different sets of U.S. -owned banks
are observationally equivalent. Although only one set
of banks actually lent more abroad, both sets produced net outflows, which are generally referred to as
net lending.
During the first year of the crisis, many of the
depository institutions that lent abroad (or generated
outflows), both U.S .-owned and European-owned
offices, also borrowed from the Federal Reserve's
discount window, which included use of the Term
Auction Facility. But even among those banks, average borrowings from the discount window during that
period equaled at most 10 percent of their net lending
abroad, suggesting that the Federal Reserve was not
the primary source of those funds.
A160
Federal Reserve Bulletin 0 November 2009
Crj is
JTltel1s~fication.:
December,
September to
that borrowing, possibly because more funds were
available at home from the Federal Reserve at the
height of the crisis.
2008
Starting in September 2008, however, the Federal
Reserve began to playa key role in providing dollar
liquidity abroad. In response to the severe dollar
shortage, the Federal Reserve dramatically increased
the availability of dollars to foreign central banks
through liquidity swap facilities. Outstanding amounts
drawn on the swap lines reached $288 billion in
September, $534 billion in October, and a peak of
$554 billion at the end of December 2008. More than
three-fourths of these funds were drawn by central
banks in Europe.
Because of the swap lines , the foreign banks that
had been borrowing heavily from their U.S. offices
were able to obtain dollars directly from their own
central banks. In response, the U.S. offices of many of
those foreign banks were able to decrease their lending position to their parents, receiving a flow of funds
back into the United States between September and
December of 2008. Specifically, European-owned
banks accounted for inflows of about $290 billion
over this period (figure 16).
The cross-border flows of U.S.-owned banks also
showed the severity of the crisis during this period.
U.S.-owned banks that had been lending early in the
crisis stopped lending. Meanwhile, nearly all securities brokers, even those that had been able to borrow
from affiliates earlier in the crisis, generated large
outflows as their borrowings from foreigners collapsed. These events resulted largely from the breakdown in the market for repos, an important source of
funding for many securities brokers. Finally, U.S .owned depository institutions that had been borrowing from their foreign offices abroad also decreased
16.
el nows of U .S.-owned and European-owned
banks and of banks with owners of other nationalities.
eptember 2008 through June 2009
Dill ions of u.s. dollars
•
•
o
European-owned
U.S.-owned
All other
800
600
-
400
-
200
+
o
200
-
400
Jan.-June. 2009
600
NOTE: See nOle 10 figure 14 .
Gradual bnprovement in 2009
As the tone of interbank markets began to improve
slowly during the winter, foreign central banks decreased their drawings on the swap lines with the
Federal Reserve, leaving $310 billion outstanding at
the end of March and just $114 billion at the end of
June. The decline in the swaps is recorded as an
inflow for the United States as the Federal Reserve
decreases its claims on foreign central banks. Pri vate
banking offices in the United States (this time, more
U.S. and Asian banks than European banks) stepped
back in to provide dollar liquidity abroad (figure 16).
Between January and June of 2009, net bank lending
abroad increased almost dollar for dollar with the
decline in the swaps, an indication that the strength of
demand for dollar funding abroad was undiminished
but that banks regained the ability to provide that
funding through interbank markets in the first half of
2009.
Overall, cross-border bank flows reflected the crisis
through the channeling of liquidity "home" to protect
the parent bank, with European banks generating by
far the strongest net flows from U.S. offices in order
to meet extraordinary demand for dollars in Europe.
This channeling of liquidity and the subsequent
breakdown in interbank markets, failure of banking
institutions, and intervention of central banks reflected concerns over risk similar to those we saw in
the cross-border securities flows . These characteristics of the crisis are also apparent in the contraction of
gross banking positions, discussed in the next section.
REDUCTION IN FOREIGN Expo URE fN
SECURITIES, BANKING, AND NONBANK
POSITIONS
As discussed earlier, increased risk aversion during
the crisis led to notable flight-to-safety flows in
securities portfolios, including net sales of foreign
assets by U.S . investors and net sales of riskier U.S.
assets by foreign investors, as well as flows due to
banks channeling liquidity "home." Flows, of course,
represent changes in positions, so these movements
imply a broad reduction in outstanding cross-border
positions-in other words, a retraction of foreign
exposure. Perhaps surprisingly, however, such reductions are significant only in banking and certain other
nonsecuri ties positions.
A 161
The Financial Crisis and U.S. Cross-Border Financial Flows
17 .
Foreign holdings of .S. ecurilies adjusted for
foreign nel acquisitions. ami such holdings 01'0
adju led for valuation changes, by type of security,
2005-09
18.
.S. holdings of foreign securitie adjusted for .
net acquisition . . and such holdings also adjusted for
valuation changes, by rype ofccurity. 2005-09
Billions of U.S. dollars
l3ill ions of U.S. doll""
-
Foreign holdings adjusted for foreign net
acquisitions
16.000
o Equity
o Corponlle debt
•
_
t4.000
U.S. holdings adjusted for U.S. net acquisitions
9.000
o Equity
•
8.000
Debt
7.000
t2.000
U.S. government agency
U.S . Treasury
6.000
10.000
5.000
8.000
4.000
6.000
4.000
3.000
-
2.000
2.000
!I: 1I1I !I!
I
2005
-
2006
2007
2008
Foreign holdings adjusted for foreign net
acquisitions and valuation changes
Billions or u.s. dollars
16.000
.-
2006
2007
U.S. holdings adjusted for U.S. net
acquisitions and valuation changes
2008
1.000
i
i!
I
2009
Billions or u.s. dl,llars
9.000
14.000
o Equity
8,000
•
n Equity
n Corporate debt
•
2005
2009
~
7.000
Debt
12.000
U.S . government agency
U.S. Treasury
6.000
to.OOO
5.000
8.000
4.000
6.000
3.000
4.000
2005
2006
2007
2008
2.000
2.000
1.000
2009
NOTE: Data extend through June 2009.
Limited Effects of Recenl Sales on Overall
Cross-Border Securities Holding.
Although the financial crisis had a marked effect on
the composition of securities flows, the size of crossborder positions is sufficiently large that the pullback
in cross-border securities holdings resulting from the
record cross-border securities sales last fall shows up
more as a slight flattening out of securities holdings
than as an outright reduction in cross-border exposure. Foreign holdings of U.S . corporate equity, corporate debt, and agency securities moved down somewhat in the second half of 2008, but, on net, total
foreign holdings of securities other than Treasury
securities were little changed from their pre-turmoil
levels (figure 17, top panel). And total foreign holdings of Treasury securities rose by a more than
offsetting amount, so that total foreign holdings of
U.S. securities actually continued to rise slightly
through the second half of 2008 and in 2009.
These limited reductions in foreign holdings of
U.S. securities are put into perspective when consid-
NOTE: Data extend through June 2009.
ered in light of the sizable valuation losses foreign
investors have faced on their cross-border securities
portfolios (figure 17, bottom panel). While foreign
net acquisitions of corporate and agency securities
left foreign holdings of these securities about unchanged from summer 2007 through year-end 2008,
adjusting these holdings by incorporating valuation
losses shows a much more pronounced decline .
Cumulative valuation losses on foreign holdings of
these securities from mid-2007 through the end of
2008 were about $1.6 trillion, or roughly 23 percent
of their pre-turmoil value. The recovery in equity
markets and in corporate bond prices in the first half
of 2009, however, reversed about $200 billion of
these losses.
We provide a similar analysi s of the data on U.S .
holdings of foreign stocks and debt securities (figure 18). A slight reduction in U.S . holdings resulting
from U.S . net sales of foreign securities is evident in
the second half of 2008, but this pullback in crossborder positions was just about reversed in the first
half of 2009 (figure 18, top panel). However, U.S.
Al62
Federal Reserve Bulletin 0 November 2009
investors faced considerable valuation losses on their
cross-border holdings, especially their holdings of
foreign equity in 2008 (figure 18, bottom panel). Total
valuation losses are estimated at nearly $2.5 trillion,
or nearly 40 percent of the value as of June 2007.
Most of these losses are valuation losses on foreign
equity, and although foreign equity markets recovered
some in the first half of 2009, we estimate that by
June 2009, foreign portfolios of U.S. investors had
recovered only to about where they were in early
2006.
20.
Cros -border repurcha e agreements. by type of
posiLion, 2004--09
Billions (If U.S. dollars
1.200
1.<XXl
800
600
400
Marked lowdown in Cross-Border Secl/.rities
Trading
Although securities positions were little changed by
cross-border net sales, gross cross-border trading in
U.S. securities was sharply curtailed in the fall of
2008, a further sign of investor caution. In a typical
month, total foreign gross purchases and sales of U.S.
securities greatly exceed net purchases (figure 19).
From 2005 through mid-2007, gross cross-border
trading, especially of equities and Treasury securities,
grew rapidly, and trading remained at high levels
even after the onset of the financial crisis in the
summer of 2007. With the intensification of the crisis
in October 2008, however, gross trading fell back
sharply to the levels last seen in 2005. Trading has
been slow to recover but has picked up a bit in recent
months, at least with respect to Treasury securities.
Drop-Off in Gross Banking Positions
In contrast to the limited pullback in securities positions , the decline in cross-border banking positions
was substantial. Gross positions declined from their
19.
F reign gross purchases and fore ign gross sales of
.. long-term se urilics, and foreign nel purchaslls
of such secUl; ties, 2000--09
Billions or u.s. dollars
3.500
3,000
2.500
2,<XXl
1.500
200
I
I
2004
2005
2006
2007
2008
2009
peaks of early 2008 by about 15 percent for claims
and 30 percent for liabilities (see figure 10).
A major contributor to the decline in banking
positions was the particularly striking drop in repos,
an important form of short-term interbank lending
(figure 20). Cross-border repos are primarily undertaken by securities brokers (included as reporters in
the banking data). The cross-border repo market
flattened out in the first three quarters of the crisis but
came under further stress with the collapse of The
Bear Stearns Companies Inc. in March 2008 as fears
about counterparty risk increased. The decline in
repos accelerated dramatically with the collapse of
Lehman Brothers Holdings Inc. in September 2008 .
From March through December of 2008, cross-border
repo positions shrank 47 percent on the claims side
and 57 percent on the liabilities side. Meanwhile,
other banking positions fell steeply in September and
October of that year as hedge fund liquidations and
concurrent declines in derivatives trading contributed
to a drop in brokerage balances, which are included in
deposits.
Decline ill Nonbank Positions
This section addresses pullbacks in positions , excluding securities and direct investment, of nonbank
entities located in the United States (including individuals). 'o In general, the gross positions of nonbank
entities declined during the crisis as firms and investors brought money home, reducing cross-border
1.<XXl
500
Foreign net purchases
~I'--""\ ~
I
2001
I
I
2003
I
I
200S
I
2007
2009
+
o
JO. Positions of nonbank entities are compiled by the Bureau of
Economic Analysis (BEA), combining data reported on the TIC
system's C form , whi ch collects positions of U.S. nonbank firms with
unaffiliated foreigners, with surveys conducted by the BEA, which
collect positions with affili ated foreigners, plus additional estimates by
BEA staff.
The Financial Crisis arul U.S. Cross-Border Financial Flows
21 . Cross-border loan and bank deposi t positions of
nonbanks, by type of posilion. 2006-09
Billion.'> of U.S. dollars
Liabilities
1.800
t.600
1.400
1.200
-
-
t.ooo
-
800
-
-
600
-
-
400
-
-
QI Q2
-
I I
I
2006
II
II
2008
2007
200
I
2009
llillion....,: of U.S. dollars
Claims
1.800
-
-
1.600
-
1.400
-
-
1.200
-
-
1.000
-
800
-
600
-
-
400
-
QI Q2
-
-
I I
II
2006
II
2007
200
I
2008
2009
NOTE: Liabilities are loan s made 10 U.S. resident firms or individuals by
foreigners, mostly foreign banks; claims are loans 10 foreigners and deposits
in foreign banks made by U.S. resident firm s or individual s.
SOURCE: Data collected through the Treasury International Capital
reporting system, combined with balance of payments data from the Bureau
of Economic Analysis.
investments. This decline was a reversal of the trend
for both U.S.-residents' investments abroad and foreign investments in the United States."
The decrease is evident in the data on the crossborder loan and bank deposit positions of nonbank
firms and individuals (figure 21).t2 Here, liabilities
are loans made to U.S. entities by foreigners, mostly
foreign banks (figure 21, top panel). In the other
direction, claims are loans to foreigners and deposits
in foreign banks made by U.S. entities (figure 21,
bottom panel). 13 Cross-border holdings by nonbanks
II. The decline in foreign holdings of U.S. short·term securities
and the decrease in holdings of foreign commercial paper by U.S.
residents are discussed earlier in the section "Flight·to-Safety Shifts in
Portfolios during the Crisis" (p . A 148).
12. The term loans is used broadly to denote other financial
positions that are not explicitly securities, negotiable CDs, deposits,
direct investment, or commercial (that is, trade).
13. This category includes both positions for which firms use a U.S.
bank as a custodian or servicer of their foreign accounts and positions
that U.S. firms enter into directly with firms or banks abroad . The
A 163
of negotiable CDs are also included in this category.
Liabilities (loans to the United States) fell about
10 percent in 2008 and a little further in early 2009.
Claims (loans to foreigners and deposits in foreign
banks) fell more steeply-almost one-third in 2008.
Cross-border commercial positions also exhibited
declines. These positions are primarily trade payables
and advance receipts (liabilities) and trade receivables and advance payments (claims). The gross level
of commercial positions (not shown) declined about
10 to 20 percent in the second half of 2008 with the
fall in trade and the tightness of trade financing.
Cross-border positions of financial intermediaries
that are neither banks nor securities brokers also fell
dramatically during the crisis.14 However, as with
securities, the financial crisis exacerbated or highlighted difficulties in measuring certain nonbank
financial flows. This circumstance was particularly
true for positions of the many financing vehicles that
were not full-fledged firms in the sense of having
employees or physical headquarters. During the crisis, the Bureau of Economic Analysis discovered that
many SPVs or SIVs located in offshore financial
centers had affiliated vehicles in the United States that
issued securities and loaned the proceeds to the
offshore entities. J 5 Such direct loans are difficult to
survey. The size of the cross-border position resulting
from these loans is estimated by the amount of
securities issued by the vehicles known to have this
structure. When markets for ABCP froze in the fall of
2007, the U.S. vehicles were unable to roll over
short-term debt securities. To payoff maturing securities, the U.S. vehicles had to reclaim the funds they
had loaned to the offshore entities, thereby creating an
inflow of $170 billion in the second half of 2007 and
a significant decline in the level of cross-border
claims. Overall, as markets deleveraged and some
vehicles ceased to exist, cross-border claims fell
nearly 40 percent, and liabilities about 23 percent,
from their peaks in 2007 (figure 22).
positions that use a U.S. bank as a custodian are reported in the TIC
data and are included in the financial account as positions reported by
banks. The positions held directly with foreign counterparties are not
included in the TIC data; in the financial account, these are positions
with unaffiliated foreigners reported by U.S. nonbanking concerns.
14 . Examples of such entities include insurance firms, financial
management firms, and securitization vehicles.
IS . Intercompany positions are generally considered direct invest·
ment, which is not discussed in this article, except for non·equity
positions between financial firms such as banks, securities brokers, and
financing vehicles.
AI64
22 .
Federal Reserve Bulletin 0 November 2009
r ss-border posiliom; of nonbank linanciaJ
intermediaries. by type of p ilion , 2006-09
!Jillions or u.s. dollars
Liabilities
600
500
400
300
200
QI Q2
1,1111.11 IU 11,11
I
2006
2007
2008
'00
2009
lliUions of U.S. dollar.
"
Claims
600
-
500
-
400
-
-
300
-
--
200
-
-
100
-
QI Q2
I I
II
I
2006
2007
I
I
2008
2009
NOTe: The majorily of these claims and liabilities are in the fom1 of
intercompany balances. Such balances represent transacti ons between firms
in a direct investment relationship. but the transactions are excluded from
direct invesunent data when both fim1S are classified in the flOance industry.
and they are excluded from banking data when the firms are neither banks nor
securities brokers.
SOURC(: Bureau of Economic Analysis.
CONCLUSION AND GLOBAL OVERVIEW:
Sl MILA R PORTFOLIO SHI FTS IN OTHER
COUNTRY STA Tl TICS?
U.S. cross-border financial flows indicate pronounced
flight-to-safety swings in the composition of securities purchased during the financial crisis, with foreign
investors, on net, selling U.S . securities other than
U .S. Treasury securities and U .S. investors, on net,
selling foreign securities, especially in the second half
of 2008. We look next to see whether such shifts in
cross-border securities purchases are also evident in
financial flow data for the euro area, the United
Kingdom, and Japan. And although we did not see
much evidence of a pullback in cross-border securities investment relative to the size of cross-border
holdings in the U.S. data, we consider whether data
for these countries indicate a global pullback in
investment in securities other than those of the home
country of the investor.
Similar to the pattern of cross-border investment
for U.S. investors, investors in both the euro area and
the United Kingdom had made sizable and growing
cross-border securities purchases in the years leading
up to the financial turmoil. In both regions, home
investors also reduced their net purchases of "foreign" securities (that is, securities issued outside of
the home country) following the onset of the crisis in
2007 and made large net sales of such securities in the
second half of 2008 (figure 23, top and middle
panels). As financial markets stabilized more recently,
these net sales again reversed to show net purchases,
though the reversal through June 2009 is relatively
small for the euro area . Financial flow data for Japan,
however, do not show a similar pullback from foreign
investment (figure 23 , bottom panel). Instead, Japanese investors acquired increasing amounts of foreign
securities through the first half of 2008, suggesting
that the financial crisis may have affected U.S. and
European investors sooner and to a greater extent
than it did Asian investors. And although global
equity prices fell sharply in the second half of 2008,
Japanese investors increased their purchases of foreign equity, though they did reduce their purchases of
foreign bonds .
We also look at foreign investment in the euro area,
the United Kingdom, and Japan to see if the data for
these countries show patterns similar to that for the
United States-that is, reduced foreign purchases of
riskier securities issued by these countries. The pattern of a flight to safety by foreign investors does
seem to be present in the euro-area data: We see a
marked slowdown in purchases of euro-area equities
by foreign investors during the onset of the crisis in
the second hal f of 2007 and a shift to large sales of
euro-area equity during the intensification of the
crisis in the second half of2008 (figure 24, top panel).
The euro-area data also show reduced foreign purchases of euro-area bonds, especially in the second
half of 2008. Detail underlying this slowdown indicates offsetting purchases of euro-area sovereign
bonds and sales of other, presumably riskier, euroarea debt securities. In contrast, foreign inflows into
money market instruments jumped sizably in the
second half of 2008. These inflows, concentrated in
September and October of 2008, were mostly in the
form of increased foreign purchases of short-term
euro-area government securities, consistent with foreign investor demand for safer or more-liquid investments during the intensification of the financial crisis.
The Japanese data also suggest flight to safety, as they
The Financial Crisis and
23.
ero s-border portfolio investment: Domestic net
acq uisitions of foreign securities for the cum area, the
nit d Kingdom, and Japan . by type of ecurity .
2002-09
u.s.
Cross-Border Financial Flows
24. e ros -border portrolio investment oreign n >t
acquis itions or dome tic securiLic for the euro area,
the United Kingdom. and Japan, by rype of c urity,
2002-09
Billions uf U.S. dollars. annual mlC
Euro area
1,200
o Equity
•
•
Billions of U.S. dollars. annual rate
_ Euro area
1.400
o Equity
1.000
Bonds and notes
Money market
instruments
A 165
•
•
800
1.200
Bonds and notes
Money market
instruments
600
1.000
Q2 _
QI
800
600
400
400
200
+
o
200
+
0
200
200
400
I
2002
I
I
2003
2004
400
600
600
I
I
2005
2006
2007
2008
2009
2002
BiIliOO:i of U.S. dollurs. annual rale
United Kingdom
o Equity
I
2005
I
2006
I
2007
I
2008
2009
))iII inn!'i l)l~ U. S. Jo1 la.1',\, dnnual rale
'
o Equity
600
Bonds and notes
Money market
instruments
2004
United Kingdom
800
•
•
2003
600
II Bonds and notes
•
500
Money market
instruments
400
QI
300
200
+
Q2 _
o
200
I
2002
I
2003
I
2004
I
2005
I
2006
0
1
2007
2008
2009
2002
BiUiool\ of U.S. dollars. annual rate
_ Japan
400
o Equity
•
•
2004
2005
2006
2007
o Equity
350
2009
500
Bonds and notes
Money markel
instrumenls
•
300
2008
Dillion . . of U.S. J ollar,'\, annual TalC
600
_ Japan
Qt
Bonds and notes
Money market instruments
2003
400
300
250
Q2
200
200
100
+
150
o
100
100
50
+
200
o
I
I
I
2002
I
2003
I
I
2004
2005
I
2006
200
100
+
400
I
400
2007
300
I
I
2008
2009
I
I
2001
I
2003
I
2004
2005
I
2006
1
2007
2008
2009
NOTE: See general note to figure I.
SOURCE: Staff estimates from balance of payments accounts as reported by
the European Central Bank. U.K. Office for National Statistics, and Bank of
Japan via Haver Analytics.
NO See genera l nOle 10 fi gure I.
TE:
SOURCE: Staff eSlimates from balance of payments accounts as reported by
the European Cenlral Bank, U.K. Office for National Stalistics, and Bank of
Japan via Haver Analytic s.
show net sales of Japanese equity and large inflows
into liquid money market instruments beginning in
the summer of 2007 and then a switch to net sales of
all types of Japanese securities by foreign investors in
the second half of 2008 (figure 24, bottom panel) .
Evidence of such flight-to-safety flows is less
apparent in the U.K. data, as foreign purchases of
U.K. equity appear to have been Jess influenced by
market swings (figure 24, middle panel). The U.K.
data also indicate continued strong foreign purchases
of long-term U.K. debt securities, even in the second
half of 2008. However, detai I underlying these figures
shows a shift in the composition of foreign purchases
that is similar to the shift evident in the euro-area data:
A 166
25.
Federal Reserve Bulletin 0 November 2009
Cross-border portfolio investmem: Domestic holdings
o f for~ i gn ecurilies adjusted for domestic nel
acquisitions for the curo area. the United Kingdom.
and Japan. and su h holdings also adjusted for
valuation ,hanges. 200- -09
TO '-border portfolio investment Foreign holdings
of doml:stic securities adju ted for foreign net
acquisitions for the euro area. the United Kingdom .
and Japan. and ' uch holdings also adju ted for
valuation changes. 2005-09
26.
Billions of U,S. dollars
Billions of U.S. dullars
Euro area
Euro area
I \'000
8.000
Adjusted for foreign nel acquisilions
and valuation chnnges
Adjusted for domestic net acquisitions
and valuation changes
10,000
7.000
9,000
8,000
6,000
-
7,000
Adjusted for foreign net
acquisitions
5.000
4,000
6,000
S,OOO
I I
I !
2005
2006
2007
2008
200S
2009
Billions of U.S. l.Iollurs
United Kingdom
Adjusted for domestic net acquisitions
and valuation changes
2006
200?
2008
2009
(Jillions or u.s. dollars
United Kingdom
4,500
4,000
Adjusted for foreign net acquisitions
and valuation changes
3.500
4,000
3.500
-
3,000
3.000
Adjusted for domestic net
acquisitions
2005
2006
2007
2008
2,500
2,500
-
2,000
2.000
2005
2009
llillions or u.s. dllll:trs
Japan
2006
200?
2008
2009
Billions of U.S. doll an;
Japan
250
300
Adjusted for domestic net acquisitions
and valuation changes
225
275
Adjusted for foreign nel acquisilions
and valuation changes
250
200
175
225
150
Adjusted for domestic net
acquisitions
200
Adjusted for foreign net
acquisitions
125
175
100
t
2005
2006
200?
2008
2009
i
2005
2006
200?
200S
2009
SOURCE: Staff estimates from international investment positions and
balance of payments accounts as reported by the European Cenlral Bank,
U.K. Office for Nalional Sialislics. and Bank of Japan via Haver Analylics.
SOURCE: Staff estimates from iOlernaiional inveslmenl posilions and
balance of payments accounlS as reponed by Ihe Europe.1O Central Bank,
U.K. Office for National Slalistics, and Bank of Japan via Haver Analyt ics.
Foreign investors' purchases of U.K. government
securities picked up in the second half of 2008, while
their purchases of debt securities issued by financial
institutions fell sharply and remained weak in the first
half of 2009.
But as with the U.S. data, these effects on the
composition of cross-border financial flows in other
industrial countries do not indicate a signi ficant pullback in the overall size of such countries' crossborder securities positions (figure 25) . In the euro
area and the United Kingdom, recent reductions in
holdings of foreign securities arising from sales of
foreign securities (thin lines) are small relative to the
size of holdings and compared with the actual move-
The Financial Crisis and U.S. Cross-Border Financial Flows
ments in investment positions incorporating valuation
changes (thick lines). And the reduction in foreign
holdings of Japanese securities arising from foreign
sales of such securities since mid-2008 also is quite
small, especially relati ve to valuation losses incurred
on these holdings (figure 26).
Similarly, the fall in cross-border banking activity
evident in the U.S. data was mirrored by declines in
banking activity around the globe. The external (that
is, cross-border) claims of all banks located in countries reporting to the Bank for International Settlements fell about 8 percent between March and
December of 2008. 16 Declines early in the year were
concentrated in the United States and the United
Kingdom, but in the fourth quarter, sizable drops
occurred in the euro area, developing countries, and
offshore financial centers as well.
With the improvement in the tone of financial
markets so far in 2009, many of the unusual crossborder financial flows generated by the financial crisis
appear to be reversing. U.S. and foreign data indicate
16. See the figure "Cross-border positions" in Bank for International Settlements (2009), BIS Quarterly Review, " Statistical Annex,"
table lA (Basel. Switzerland: BIS, June). p. A4, www.bis.org/publ/
qtrpdF/cqs0906.pdf.
A167
that investors are making renewed purchases of
riskier foreign securities such as equities and that
purchases are no longer concentrated in safer and
more-liquid short-term government debt securities.
Increased cross-border interbank lending and the concurrent decline in central bank swaps indicate that
banks are again able to provide funding through
interbank markets. However, cross-border data to
date also indicate some longer-lasting effects of the
financial crisis. The slow recovery in interbank repo
positions and still-subdued gross cross-border securities trading suggest continued investor caution. Moreover, many of the institutions directly affected by the
crisis-SPVs and SIVs active in the issuance of
ABS-were located in offshore financial centers, and
the unwinding of their activity and the closure of
some of these entities have had a notable effect on the
size of nonbank cross-border positions. And because
much of the pre-crisis growth in cross-border purchases of corporate debt securities was in the form of
corporate ABS, the disruption in corporate ABS markets and the curtailment of corporate ABS issuance
show through as significantly reduced foreign purchases of corporate debt securities.
0
A169
April 2010
(revises 2009 draft release, includes revised data)
The 2008 HMDA Data: The Mortgage Market
during a Turbulent Year
Robert B. Avery, Neil Bhutta, Kenneth P Brevoort,
Glenn B. Canner, and Christa N. Gibbs, of the
Division of Research and Statistics, prepared this
article. Cheryl R. Cooper and Christine Coyer 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 the disposition of applications
for mortgage credit, the characteristics of the home
mortgages that lenders originate or purchase during a
calendar year, the location of the properties related to
those loans, and personal demographic and other
information about the borrowers.' 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.
The Federal Reserve Board implements the provisions of HMDA through regulation. 2 The Federal
Financial Institutions Examination Council (FFIEC)
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 aggregations of
home-lending activity for each metropolitan statisti-
I. A deSCription of the items reponed under HMDA is provided in
appendix A.
2. HMDA is implemented by Regulation C (12 C.F.R. pI. 203) of
the Federal Reserve Board. 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 Fedeml
Reserve System, the Federal Deposit Insurance Corporation, the
National Credit Union Administmtion, the Office of the Comptroller of
the Currency, the Office of Thrift Supervis ion, and representatives
from state bank supervisory agencies .
cal area (MSA) and for the nation as a whole. 4 The
FFIEC also makes available a consolidated data file
containing virtually all the reported information for
each lending institution. s
The 2008 HMDA data consist of information
reported by about 8,400 home lenders, including all
of the nation's largest mortgage originators. The
loans reported are estimated to represent the majority
of home lending nationwide. Thus, they likely provide a broadly representative picture of home lending
in the United States.
This article presents a number of findings from our
initial review of the 2008 HMDA data. Three of those
findings are noted here. First, the 2008 HMDA data
reflect the ongoing difficulties in the housing and
mortgage markets. Reported loan application and
origination volumes fell sharply from 2007 to 2008
after already falling considerably from 2006 to 2007.
A reduction in lending occurred among all groups of
borrowers regardless of race, ethnicity, or income,
although lending for some groups declined more
sharply than for others.
Second, the Federal Housing Administration's
(FHA) role in the mortgage market expanded considerably during 2008. The increasing use of FHAinsured loans in 2008 appears to be related to a
number of factors, including difficulties faced by
private mortgage insurance (PMI) companies and
their pullback from the marketplace.
Third, the data show a decline in the incidence of
reported higher-priced lending between 2007 and
2008. 6 However, atypical changes in the interest rate
environment, related primarily to widening spreads
4. For the 2008 data, the FFlEC prepared and made available to the
public more than 51,100 MSA-specific HMDA repons on behalf of
reporting institutions. The FFIEC also makes available to the public
reports about private mortgage insurance (PMI) activity. All the
HMDA and PMI reports are available on the FFIEC's repons website
at www.ffiec.gov/repons.htm .
5. The only reponed items not included in the data made available
to the public are the loan application number, the date of application,
and the date on which action was taken on the application. Those items
are withheld to help ensure that the individuals involved in the
application cannot be identified.
6. Loans are reponed as higher priced in HMDA if their annual
percentage interest mte (APR) spread is 3 percentage points or higher
A170
Federal Reserve Bulletin 0 April 2010
between the yields on Treasury secuntles and the
interest rates on prime mortgage loans, resulted in a
large number of loans being reported as higher priced
in 2008 that would not have been so reported a year
earlier. As a result, the decline in the incidence of
reported higher-priced lending actually understates
the true extent of the decline in subprime lending.
Also the distortion led to an increase in the reporting
of higher-priced loans for FHA even though it appears
that FHA pricing was relatively unchanged.
The article proceeds in seven major sections. The
next section briefly describes the economic environment in 2008. The following two sections provide an
overview of the mortgage market along several
dimensions in 2008 and its evolution over time based
on the HMDA data. The fourth section discusses in
detail how changes in the interest rate environment
affected the reporting of higher-priced lending in the
HMDA data and provides estimates of higher-priced
lending that adjusts for these changes. The fifth
section analyzes the surge in government-backed
lending, assessing the importance of higher loan
limits and changes in pricing and coverage by PMI
companies. This section also draws on industry data
to help describe changes in the credit-risk profile of
government-backed loans . The sixth section describes
how the reduction in mortgage lending during 2008
played out across different demographic groups. And
finally, the last section presents analyses that speak to
issues of fair lending.
Di fficulties in the housing and financial markets
advanced into a broad-based economic recession. 8 By
December 2008, the unemployment rate had risen to
7.2 percent from 4.9 percent a year earlier, and the
number of employed individuals fell by nearly 3 million during the year.9 The deterioration in household
income and wealth as well as fears about buying into
a falling market may have weakened demand for
housing and mortgages.
On the supply side, strained lending institutions,
facing the risks posed by falling home prices and a
weakening economy, were apprehensive or unable to
offer loans that did not have some form of government backing. Potential borrowers, especially those
with blemished credit histories and those seeking
"jumbo" mortgages, likely found it more difficult
than in previous years to obtain a mortgage. 10 Those
with adequate credit histories but little money for a
down payment also faced a more challenging situation since PMI companies, which suffered large losses
in 2007 and 2008, tightened their standards and raised
prices. t I Lenders also sharply curtailed the issuance
of second-lien loans used heavily in previous years to
help finance home purchases. Partly in response to
difficulties in the private market, the government
raised the size limits on loans eligible to be purchased
by Fannie Mae or Freddie Mac and insured by the
FHA as well as the guarantee limit for loans backed
by the Department of Veterans Affairs (VA) as part of
the Economic Stimulus Act of 2008 .
2008: A TURBULENT YEA R
MORTGAGE M ARKET TREND FROM THE
HMDA D ATA
The 2008 HMDA data reflect a sharp deterioration in
economic conditions during the year. The housing
market's continued decline was reflected in the Federal Housing Finance Agency's (FHFA) nationwide
home price index, which posted a year-over-year
decline of more than 8 percent by November 2008,
compared with less than 3 percent in January. At the
same time, mortgage-related losses conti nued to
weigh on the confidence of investors and the health of
financial institutions. A number of major financial
institutions either failed, merged under distress, or
received government assistance. The governmentsponsored enterprises (GSEs) Fannie Mae and Freddie Mac were placed into conservatorship by the
FHFA in September'?
for a first lien or 5 percentage points or higher for a junior lien than the
yield on a comparable-maturity Treasury security.
7. To maintain the GSEs ' ability to purchase home mortgages , the
Treasury announced plans to establish a backstop lending facility for
the GSEs, to purchase up to $100 billion of preferred stock in each of
the two firms, and to initiate a program to purchase agency mortgage-
For 2008, 8,388 institutions reported under HMDA:
3,942 commercial banks, 913 savings institutions
backed securit ies. See Board of Governors of the Federal Reserve
Syslem (2009) , Monerary Policy Report 10 the Con gress (Washington:
Board
of Governors .
February),
www.federalreserve.gov/
monetarypolicy/mpc20090224_part I. htm.
8. The National Bureau of Economic Research declared the start of
the recession as December 2007 .
9 . Employment statistics from the Bureau of Labor Statistics ;
based on individuals 16 years or older.
10. Industry sources indicate that the dollar amount of originations
of subprime loans fell 88 percent from 2007 to 2008, to a level of
$23 billion. Jumbo loans are loans that exceed the size limits set for
loans that Fannie Mae and Freddie Mac are permit1ed to purchase
(commonly referred to as conforming loans) . Available data indicate
that the dollar amount of originations of jumbo loans fell 72 percent
from 2007 to 2008. to a level of $97 billion . See In side Mortgage
Finance (2009), The 2009 Mortgage Market StatistiClJI Annual, Vol. J:
The Primary Market (Bethesda, Md .: Inside Mortgage Finance Publications).
J I. See Mortgage Insurance Companies of America (2009), 20092010 Fact Book & Member Directory (Washington : MICA). www.
privatemi .comJnews/factsheets/2009- 20 I O.pdf.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A171
I . Oi tribution of reporters covered by the H me Mortgage Disclosure Act, by type of instilulion, 2006-08
2006
Type
Number
I
Percent
I
I
I
I
2007
I
Number
Percent
2008
I
Number
Percent
Depository inst;tutiolJ
Commercial bank ..
3.900
946
2,036
6,882
Savings institution
Credit union . ...
All .
Mongage (ompall)'
Independent
Affiliated' ..
All . ... ,
All institutions
. . . . . . . . ..
..... ,
.
.. .
~
,
.. . - .. .
1.328
676
2.004
8,886
77.4
3.910
929
2,019
6,858
45.4
10.8
23.4
79.7
3.942
913
2,026
6,881
47.0
10.9
24.2
82.0
14.9
7.6
22.6
1,124
628
1.752
13.1
7.3
20.3
957
550
1,507
11.4
6.6
18.0
43.9
10.6
22.9
8,610
100
8,388
100
100
NOTE: Here and in all subsequent tables, components may nOt sum to totals
because of rounding.
I. Subsidiary of a depository institution or an affiliate of a bank holding
company.
SOURCE: Here and in the subsequent tables and figures except as noted, Federal Financial institutions Examination Council, data reported under the Home
Mongage Di sclosure Act (www.ffiec.govlhmda).
(savings and loans and savings banks), 2,026 credit
unions, and 1,507 mortgage companies (table 1),12
The number of reporting institutions fell nearly 3 percent from 2007, 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
affiliates of bank or savings institution holding companies that reported data,
Reporting lenders submitted information on
14.2 million applications for home loans of all types
in 2008, down 34 percent from 2007 and almost
50 percent from 2006 (table 2). Lenders also reported
information on 2,9 million loans that they had purchased from other institutions and on 276,000 requests for preapprovals of home-purchase loans that
did not result in an application for a loan (preapproval
data not shown in table).
The top panel of figure 1, which shows the monthly
counts of loans, indicates a downward trend in homepurchase lending from 2006 to 2008 . For instance, the
2006 peak month for home-purchase lending (in
June) was more than 400,000 loans, compared with
less than 300,000 loans at the peak month (June) in
2008. The bottom panel of figure 1 indicates that
refinance lending jumped at the beginning of 2008 to
a level in February exceeding any month in 2006 or
I.
Volume f home-purchase and refmance onginaLions and
annual percentage raLe, by month, 2006-08
1110usalKls or loum
Perce mage point..
Home purchase
500
8
4tl()
300
7
200
APR
6
100
I
!
I "
I
,
!
I , , I
"
I
!!
•
,
t
I
, , I
, •
! "
I
,
• !
fbo"",nds ur 16m
I~rcenlagc
mint..
Refrnance
8
400
12. Not all mortgage lenders have to provide HMDA data.
Depositories must have had an office in a metropolitan area and had
assets of more than $37,000,000 at the end of 2007 to report data for
2008. For filing year 2008, 55.7 percent of the commercial banks in
existence on December 31, 2008, filed HMDA data. However, the
filers had 93.0 percent of the total mortgage dollars outstanding on
commercial bank portfolios at that time. For savings institutions,
70.9 percent of existing institutions holding 94. 1 percent of the
mortgage dollars filed. For credit unions, only 25.4 percent of the
institutions filed; however, these institutions held 92.5 percent of the
mortgage dollars outstanding on credit union balance sheets.
Independent mortgage banks needed to meet other criteria related to
their dollar volume of mortgage lending, the share of mortgage lending
of their total lending, and their lending in metropolitan areas to be
eligible for reporting. There is no comprehensive list of independent
mortgage lenders, so it is difficult 10 know the full scope of HMDA
data coverage of such lenders.
300
7
200
6
100
I,I ,'
r "
, "
2006
, '
1 ,1 ", , ."I " t " " "
2007
, 1, 1
2008
NOTE: The data are monthly. Loans are first-lien mongages for site-built
properties and exclude business loans. Annual percentage rate (APR) is the
average monthly rate for a 30-year fixed-rate mortgage from the Primary
Mortgage Market Survey. as reported by the Federal Financiul Institutions
Examination Coune ii , www.ffiec .govlratespreadfnewcalc.aspx .
Al72
Federal Reserve Bulletin D April 2010
2. Home loan llnd reporting acti vity of lending in. ti lu t ion~ covered under the Home Mortgage Disc losure Act, 1990-2008
Number
Applications (millions)
Applications recei ved for home loans on 1-4
family properties, and home loans purchased
from another institution
Year
Home purchase
.. ...
I
Refinance
I improvement
Home
Total'
Loans
purchased
(millions)
Total'
(millions)
5.5
6.6
10.0
'1'3 .6
10.7
1.2
1.4
2.0
1.8
1.5
Reporters
Disclosure
reports'
6.7
7.9
12.0
15.4
12.2
9.332
9.358
9.073
9.650
9.858
24.041
25 .934
28.782
35,976
38.750
I
... .. . .
1990 "
199 1 . . . . . . . . . . . .
1992. . ... ....
..
1993 . .. . ..... . ...
1994 .. .. . .....
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
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 .4 16
57.294
56.966
.
2000 .
.. "
2001 . , ... ........... .
2002 .. .. .. . . . .. . . . . . . .
2003 .. .. ..... .. . .. ... . .
2004 . .. .. . .. . .. . . ... ....
.
8,)
7.7
7.4
8.2
9.8
6.5
14.3
l7.5
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'
8.1 2 1
8.853
52.776
53 ,066
56.506
65,808
72,246
. ... . . . .. .... .. . .
. . .. .. ..... . . . ... . .
. . . . .... . . .. .. .
.
.. . . . . . . . . . .
11 .7
10.9
7.6
5.0
15.9
14.0
11.5
7.7
2.5
2.5
2.2
1.4
30.2
27.5
2 1.4
14. 2
5.9
6.2
4.8
2.9
36.0
33. 7
26.2
17. 1
8.848
8.886
8,610
8.388
78.193
78.638
63 ,055
51.109
.
..
.
.. .
~
~
2005
2006
2007
2008
1.1
NOTE : Except as noted. applications exclude requests for preapproval that
were denied by the lender or were accepted by the lender but not aCled upon
by the borrower. In Uti s arti cle . appli cations are defined as being for a Joan on
a specifi c property; U,ey are thus distinct from requests for preapprovaJ , which
are not related to a specific propeny.
I. App~cati on s for multifa mily homes are included on ly in the total col·
umns: for 2008. U,ese applications numbered 42.792 .
2. A report covers the mortgage lend ing acti vi ty of a lender in a single metropo litan stati stical area in which it had an office during U,e year.
2007 . Refinance lending then fell sharply during the
remainder of 2008. Figure 1 also shows that the
annual percentage interest rate (APR) for a 30-year
fixed-rate prime mortgage fell sharply at the end of
2007 to levels not seen in several years; it continued
to fall in early 2008 and dipped below 6 percent in
January 2008, which may have triggered the jump in
refinance lending.13
business; in others , it is the result of a merger,
acquisition , or consolidation. When a merger, acquisition, or consolidation occurs, all lending by the
institutio ns 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.
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 di scontinued. The tracking report indicates that 15 institutions that reported
HMDA data for 2007 ceased operations during 2008
or at the beginning of 2009 and did not report lending
activity for 2008 . 15 Of the 15 nonreporting institutions, 3 were banking institutions and 12 were independent mortgage companies.
Although it is not possible to know how many
loans these 15 institutions originated in 2008 before
discontinuing operation s, one can gauge their poten-
The Potential Effect of NOl1reporters on
Lending Volume in the 2008 HMDA Data
As part of the HMDA data collection effort, the
Federal Reserve Board tracks each financial institu tion that is expected to report (including all lenders
that reported data for the previous calendar year) and
then contacts those that did not submit a report. 14 In
some cases, nonreporting is due to a cessation of
D. The APRs for prime loans are base d o n data fro m Freddie
Mac' s Primary Mortgage Market Survey and reflect inlerest rates and
discount po ints offered to cons umers during the first three days of eac h
week . For mo re details , see note 29 . Loan co unts in fi g ure I are
aggregated to the mo nthly level using the date of loan origination , as
opposed to an earlier date when the interest rate fo r the loan was
Joc ked. If the HMDA data were aggregated using the " lock " date, the
spike in refinancings would like ly occur closer to the January dip in
the APR .
14. Sometimes contacting a no nreporting lender is impossible
because the firm has ceased operations .
15. The li st of lenders that ceased ope rations and did no t report is
as comprehensi ve as possible at this time . [f additiona l information
becomes a vailable, the list will be updated on the Federal Reserve
Board ' s website . For a list of the institutio ns that ceased ope rations
and did not repo rt , see appendix table A . I, which has been posted
separately as an Excel file.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
tial importance by measuring their lending activity in
2007. 16 In the aggregate, these 15 nonreporting companies accounted for about 5 percent of all conventional first-lien loans for site-built properties in the
2007 HMDA data (data not shown in tables).17 The
tracking reports indicate that the 15 nonreporting
institutions had exited the marketplace by the middle
of 2008, so their effects on the completeness of the
HMDA data are confined to the first half of the year.
Government-Backed Lending
Government-backed loans-those insured by the FHA
and those backed by guarantees from the VA, the
Farm Service Agency, or the Rural Housing Servicerose in 2008 relative to 2007. The rise in FHAinsured lending was particularly large. The number of
reported FHA-insured loans was almost three times
greater in 2008 than in 2007, and the FHA-insured
share of home-purchase and refinance loans rose to
more than 21 percent in 2008 from less than 6 percent
in 2007 (table 3).1 8 Moreover, by December of 2008,
the FHA's share of home-purchase and refinance
lending was about 30 percent (data not shown in
tables).
Lenders typically require borrowers to purchase
mortgage insurance (through the FHA or PMI companies) or a credit guarantee (through the VA, for
example) when the borrower provides a small down
) 6. An estimate of the underreponing of first liens for singlefamily propenies can be made using quarterly financial data filed with
the Office of Thrift Supervision for the two largest institutions ,
Washington Mutua) Bank and IndyMac Bank. These institutions
accounted for 88 percent of the loans made in 2007 by the 15
nonreporting institutions. Assuming the first liens on one- to fourfamily properties originated by these thrifts in 2008 were of the same
average loan amount as those originated in the corresponding quarters
in the 2007 HMDA data, the 2008 HDMA data is underreported
because of these two institutions by about 1.7 percent for the year:
59,000 loans in the first quarter (3.2 percent), 39,500 in the second
(2.2 percent), 2,900 in the third (0.2 percent), and 4,000 in the fourth
(0.3 percent). These values may not be evenly di stributed across loan
purposes. In 2007, Washington Mutual originated refinance loans as a
higher proportion of all of its lending in all quarters than did all
HMDA lenders (a 15 percentage point average difference). IndyMac's
relative shares were similar to those of HMDA lenders overall. Most of
the loans originated by Washington Mutual in 2008 were included in
the HMDA data as purchased loans by JPMorgan Chase Bank and not
as originations.
17. Market shares reported in this article are based on the number
of loans and not the dollar amounts.
18 . Loans are for owner-occupied, one- to four-family properties.
Junior-lien loans and loans for manufactured homes are included
because the HMDA data prior to 2004 do not separately identify these
loans. The FHA share of home-purchase and refinance lending in
2008, excluding junior-lien and manufactured-home loans , was
22.5 percent. For more information about the reporting details, see
Roben B. Avery, Glenn B. Canner, and Robert E. Cook (2005),
" New Information Reponed under HMDA and Its Application in Fair
Lending Enforcement," Federal Resen'e Bulletin, vol. 9) (Summer),
pp.344-94.
A 173
Share of home loans. by lyp of loan . 19 0-_008
Percent
Year
Conventional
All
1990 .
1991
1992
1993
1994
77.4
81.7
87. 1
81.5
81.5
IB. I
13.B
B.B
13.0
12.6
100
100
100
100
100
1995 ..
1996 ..
1997 _..
1998
1999
81.9
82.5
82.7
85.7
848
12.7
12.7
12.9
10.0
11.8
5.5
4 .8
4.4
4.3
3.4
100
100
100
100
100
2000 .
2001
2002 .
2003
2004 .
84.4
87. 1
90. 1
91.3
93.0
12.7
10.3
7.6
6.2
5. 1
2 .8
2.6
2.3
2.5
1.9
100
100
100
100
100
2005
2006
2007
2008
95 .3
95.2
92.5
74.3
3.4
3.5
5.6
21.5
1.3
1.3
1.9
4 .2
100
100
100
100
NOTE: Includes home-purchase and re finance loans for t-4 famil y, Owneroccupied properties.
I. Includes loans guaranteed by the U.S. Depanmelll of Veterans Affairs, the
Farm Service Agency, or the Rural Housing Service.
FHA Federal Housing Administration .
payment. 19 Such credit enhancements protect lenders
against loss if the borrower defaults.
The VA guarantees a percentage of the loan amount
up to a certain limit (but with no cap on the loan size),
while the FHA cannot insure mortgages that are larger
than legislated limits. Historically, these limits have
been set at levels that were sufficiently low that many
homebuyers in areas with high home prices have not
been able to use these programs. Under the Economic
Stimulus Act of 2008, the limits were raised in
high-cost areas. In a later section, " The Surge in FHA
and VA Lending," we will analyze more closely the
contribution of increased limits to the increase in
FHA and VA-backed lending. We will also examine
whether difficulties facing PMI companies contributed to the shift to government-backed lending.
Loan Sales
The HMDA data document the importance of the
secondary market for home loans. Just over 73 percent of the first-lien home loans reported in 2008
were sold during the same year (table 4).20 Notably,
the rise in government-backed lending between 2007
and 2008 described earlier has resulted in a sharp
increase in the proportion of loans sold into pools
19. For more details about PMI, see appendix B, " Private Mortgage Insurance Data."
20 . Loans that are sold in a different calendar year than the year of
origination are recorded as being held in the lender's portfolio in the
HMDA data.
A174
Federal Reserve Bulletin 0 April 2010
4. Dislribulion of loam . old during year of original ion. by lype of
purcha~er.
number of loans, and amount of loans, 2006--08
Percent
2007
2006
Type of purchaser
By number
of loans
Fannie Mae ... ... .. •-- ... . . .
,.
Ginnie Mae . .. .
. ... Freddie Mac .
. ... , ..... ..... ...
Fanner Mac ... ..... ...
Private securitization
....
By amount
of loans
By number
of loans
17.2
2.2
/0.7
.0
9.0
14.3
1.4
8.9
.0
11.0
6.9
15.7
14.5
23.8
100
72.2
I
2008
By amount
of loans
By number
of loans
23.4
.1.5
15.3
.0
3.6
21.2
2.4
13.4
.0
5.0
25.8
.5
27.1
9.5
16.2
0
.6
7.6
15.5
16.2
25.0
100
6.8
10.S
21.4
15.6
100
7.6
10.3
23.4
16.7
100
8.8
9.7
12.3
15.4
100
8.8
9.4
13.5
14.8
100
71.9
69.5
67.0
73 .2
72.0
I
11.4
16.2
.0
I
By amount
of loans
Commercial bank or savings
institution ... .. . . .. . .... ..
Insurance company ........ . .......
Affiliate of institution .... .. , . .. . ..
Other
. . , . . . . . . . . ...
Total .... , .. - . .. .. .
---~
MEMO
Share of all originalions sold
.
NOTE : Includes only first-lien loans.
guaranteed by the Government National Mortgage
Association (Ginnie Mae).
More prominent in the secondary market are Fannie Mae and Freddie Mac. For the most part, the
purchases made by Fannie Mae and Freddie Mac
consist of conventional loans originated to purchase
homes or to refinance existing loans. Fannie Mae and
Freddie Mac are restricted by law to purchase mortgages with origination balances below a specific
amount, known as the conforming loan limit. As with
the FHA loan limits mentioned earlier, the Economic
Stimulus Act of 2008 increased the conforming loan
limits.21
In 2008, sales to Fannie Mae and Freddie Mac
accounted for about 42 percent of the loans reported
as sold, compared with about 28 percent in 2006. At
least in part, this increase in market share reflects the
reduction during this period in the higher-priced share
of loans, which the GSEs typically do not purchase
directly. Higher-priced loans were often sold through
the private securitization process; indeed, loans sold
through this process diminished considerably, from
about 10 percent of sold loans in 2006 to less than
1 percent in 2008.
Credit Unions
A credit union is a cooperative financial institution
formed by a group of people with a common bond,
such as employees of a firrri or members of a religious
organization, university, or governmental entity.22
Members of a credit union pool their funds to extend
credit to their fellow members . In 2008, about 7,700
21. For more on the conforming loan limit, see www.fhfa.gov/
Defaulr.aspx?Page= 185.
22. The notion of a common bond has been expanded some in
recent years, for example, to include individuals from broad geographic areas.
credit unions across the country served upward of
90 million members. The vast majority of credit
unions are small measured by asset size, and many do
little home lending. As such, only about 2,000 credit
unions report under HMDA each year (table I).
Unlike other types of lenders, credit unions have
not experienced a significant reduction in homelending activity over the past couple of years
(table S.A). As a consequence, their share of one- to
four-family, site-built HMDA loans has risen, particularly for junior liens (a 28.2 percent share in 2008).
Their high market share of junior liens can be
explained, in part, by the collapse of the piggyback
market, discussed later in the section "Piggyback
Lending." Piggyback junior-lien home-purchase loans
are issued as part of a purchase package. Less than
5 percent of credit union junior liens have been for
home purchases, so they were not particularly affected
by this collapse.
The credit union data afford a unique opportunity
to benchmark the HMDA data. Unlike other depositories, all credit unions are required to report their
aggregate first- and junior-lien mortgage originations
by number each year as part of their regulatory
filings. Savings and loan institutions that report to the
Office of Thri ft Supervision also report aggregated
information, but in dollar amounts instead of number
of loans (table S.B). These data allow a determination
of the HMDA-filer coverage relative to all credit
union and savings and loan mortgage lending. The
credit union data show that for 2008, almost 90 percent of all credit union mortgage originations were
made by lenders who reported under HMDA. For first
liens, the numbers reported in regulatory filings by
these lenders corresponded relatively closely to the
number reported in HMDA (93 percent of first-lien
loan originations are reported in HMDA, data derived
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A 175
5. Home lending, 2004--08
A. By credit unions, number of loans
MEMO:
Junior liens
First liens
Year
Number
2004 . .. .. .. . - .. . .
2005 ... - ..... .. ..
2006 . ........ ..
2007 . .. . ... " . ,
2008. .. .... .. , ..
Originations in credit union reports of condition and income
Unsecured
HMDA
percent
distribution
Number
HMDA
percent
distribution
Number
357,433
341 ,307
291 .863
31 3.447
359,645
2.7
2.7
2.7
3.7
5.5
166.028
197,070
237,361
205 .231
145,500
9.9
7.6
7.8
12.0
28 .2
21 ,940
20,382
19,053
19.128
18,656
First liens
Closed-end junior liens Number of
HELOCs
Number
Number
HMDA
HMDA
HMDA
originated share of all originated share of all originated
percent
by HMDA
distribution by HMDA such liens by HMDA such liens reporters
reporters
reporters
88.1
740,962
13.7
381,683
87 .2
343.150
372,517
89.9
651 ,507
12.9
88.1
412.253
87.7
11.7
329.108
497 .898
90.8
539,658
12.0
424.611
90.8
461 ,292
336.229
88.7
11.4
451 ,725
386.079
89.8
305 .204
89.6
SOURCE: Credit union reports of condition and income from National Credit
Union Administration.
NOTE: Excludes loans for multifamily properties.
HELOC Home equity line of credit.
5. Home lending . 2004- 08
B. By savings and loan instituti ons, thousands of doll ars
MEMO:
I
First liens
Junior liens
Originations in thrift reports
of condition and income
Unsecured
First liens'
Year
trhousands
dollars
2004 . . . .. .. .. .. . ...
2005 .. . . . . . ..... . .
2006 .. .. ..... ..
2007
... .... .
2008 . . . . . , . . . . . . .
0
581.777 ,825
582.083.085
457 :429,907
486.826.148
313:662:849
HMDA
percent
distribution
housands
dollars
23.4
21.1
18.7
24 .7
22.7
11 ,797 ,538
22,907 ,264
22.984.024
16:573,910
3,973.576
0
HMDA
Thousands
percent
dollars
di stribution
15.4
17.4
13.5
16.8
13.4
48.902
65 .940
135.685
155,330
189.703
0
Closed-end junior liens'
trhousands 0
HMDA
HMDA share
dollars
HMDA share
originated of all such
originated of all such
percent
by HMDA
distribution by HMDA
liens
liens
reporters
reporters
..
98.7
3.6
596.252,410
4.4
. .
648,433,523
98.7
8.2
436,043,072
78 .6
...
9.8
98.9
63,642,622
97.9
562.351.440
11.3
265,559,705
86.1
30,351.849
85.9
trhousands
dollars
0
.
NOTE : Excludes loans for multifamily properties and those ori ginated by institutions that did not report origination data to the Office of Thrift Supervision
for the fu II calendar year.
I. Prior to 2007 , data from the Office of Thri ft Supervision did not differentiate between first and j unior liens. As a result, the column for first liens for
2004-06 inclUdes junior liens.
... Not avai lable .
SOURCE: Thrift re ports of condition and income from the Office of Thrift Supervi Sion .
from table 5.A). However, for closed-end junior liens,
only about 48 percent appear to be reported, which
suggests that many of these loans are junior liens not
reportable under HMDA rules because they are nei ther for home purchase, home improvement, or refinancing of an existing lien.
ity was much steeper for site-built homes than for
manufactured homes . Over this longer period , the
number of loans to buy site-built homes fell 48 percent, and the number to buy manufactured homes fell
25 percent.
The mean loan amount used to purchase manufactured homes in 2008 was $75,000, which was much
smaller than the mean loan amount of $217,000 for
site-built homes. Similarly, the mean income of borrowers purchasing manufactured homes in 2008 was
$48,400, which was much smaller than the mean
income of $93,300 for purchasers of site-built homes
for the same period .
Lending f r Manufactured Homes
Since 2004, the HMDA data have distinguished
between loans secured by site-built properties and
those related to manufactured homes . Manufacturedhome lending differs from lending for site-built properties along a number of dimensions, including typical loan amounts, borrower incomes, and the share of
such loans that are higher priced.
The reported number of manufactured-home loans
fell by about the same proportion as for site-built
homes from 2007 through 2008 (table 6) . However,
when measured from 2005 (a year when mortgage
markets were quite robust), the decline in loan activ-
Lend ing for Noo-Owner-O cli pied Propertie
One factor contributing to the strong performance of
housing markets over the first half of this decade was
the growth in sales of homes to investors or indi viduals purchasing second or vacation homes , which are
collectively referred to here as non-owner-occupied
AI76
o.
Federal Reserve Bul\etinDApril201O
Manufactured and sile-built home Ientling. 2004-08
ManufaclUred homes
Year
2004
2005 .. .. ..
2006 . . . .. .. . . .. .. . .. .
2007.. ..
2008 ...... .. ... .
I
Number
129.150
127,336
131.188
122,834
95.895
I
Site-built homes
Percent
distribution
2.7
2.6
3.0
3.6
3.7
I
Number
Percent
di suibution
97 .3
97.4
97.0
96.4
96.3
4.654,243
4,830.594
4.290,023
3,325,082
2,511.827
MEMO
Bonv wer income
(thousallds of dll//ars) ,
Mean ....
Median .
48.4
42 .0
93.3
69.0
Loan amollllt (thousalld., IIf do//"I'.,')'
Mean ... .
Medi'Ul ... . .
74.6
62 .0
2 16.9
176.0
NOTE: Includes only first-lien , owner-occupied home-purchase loans for t-4
family homes.
properties .23 From 1996 through 2005, the share of
one- to four-family, site-built home purchase loans for
non-owner-occupied properties rose each year, increasing from 6.4 percent to 17.3 percent over the
period (table 7). This share has since faJ len to
13.5 percent in 2008.
Currently, loans for non-owner-occupied properties
are not eligible for the FHA or VA programs. However, the GSEs can purchase non-owner-occupied
property loans that otherwise meet their requirements,
but they typically demand interest rates that are about
3/8 of a percentage point higher than the interest rates
on loans for similar owner-occupied properties. Perhaps reflecting less of an appetite for such loans on
the part of private lenders, the GSE market share of
both home-purchase and refinance non-owneroccupied property lending grew about 10 percentage
points from 2007 to 2008 (33.8 percent to 43.1 percent for home-purchase lending and 28.4 percent to
39.2 percent for refinance lending). Nevertheless,
non-owner-occupied property lending remained a
comparatively small part of overall GSE lending in
2008 (17.9 percent of home-purchase lending and
11 .3 percent of refinance lending; data not shown in
tables).
Piggyback Lending
Since the early 2000s, piggyback loans emerged as an
important segment of the conventional mortgage market, particularly regarding loans to purchase homes.
23. An investment property is a non -owner-occupied dwelling that
is intended to be rented o r resold for a profit. Some non-owneroccupied units-vacation homes and second homes-are for the
primary use of the owners and thus would not be considered invest ment properties. The HMDA data do not, however, disting ui s h
between these two types of non-owner-occupied dwellings.
I. For loans originated ill 2008.
. . Not appli cable.
7. NOIl-owner-occupicd lending a a hare of all first liens
to purchase or refinance one- lO four-fami ly. site-built
home. by number and dollar amOunt of loan. 1990-
2008
Perce nt
Home purchase
Year
Number
1990 ...
1991.
1992 ..
1993 ..
t994
I
Dollar
amount
Refinance
Number
I
Dollar
amount
6.6
5.6
5.2
5. 1
5.7
5.9
4.5
4.0
3.8
4.3
9.0
5.8
4.7
5.1
8.0
8.4
4 .9
4.0
4.3
6.6
6.4
6.4
7.0
7. 1
7.4
5.0
5. 1
5.8
6.0
6.4
7.8
6.7
6 .8
5.2
6.7
6.4
5.8
5.7
4.4
5.9
2000 .. ., ........ ....
200t .... .. ..... ......
2002
2003
2004 ..
8.0
8.6
10.5
11.9
14.9
7.2
7.6
9.2
10.6
13. 1
7.4
5.8
6. 1
6.2
8.3
7.0
5.2
5.3
5.6
7.2
2005 ..
2006 .... ... .... .. ...
2007 ..
2008 ... .
t7.3
16.5
14.9
13.5
15.7
14.8
13.8
12.3
8.8
10.7
11.3
10.0
7.9
9 .9
10.6
9.5
.. .... ....... .
1995
1996 ..
1997 ..
1998
1999
In piggyback lending, borrowers simultaneously receive 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. In many cases , borrowers used piggyback loans
to avoid the need to obtain PMI. 2A Sometimes , piggyback loans were used to keep the size of the first-lien
24 . One adva ntage of pi ggyback loans over those bac ked by PMI
insurance w as that PM! payments made by the borrower did not
qua lify as de duc tible interest under Internal Revenue Se rvice (IRS)
g u idelines . whereas interes t payments on man y piggybac k loans did.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A177
8. Piggyback home-pur hru e lending. 2004-08
I
MEMO
Year
2004 ..
2005
2006 ...
2007
2008
Number
Incidence
530.740
950.965
950.408
356,959
43.017
12.9
21.5
24.3
12.2
2.7
Higher-priced proponion
or piggyback loans
19.1
53.2
44.4
16.0
3.0
I Piggyback proportion or
higher-priced loans
22.5
46.7
42.8
13.9
1.1
NOTE: Conventional first-lien mongages for owner- occupied. 1-4 ramily.
site-built properties.
loan within the Fannie Mae and Freddie Mac conforming loan limits so the borrower could take advantage of the lower interest rates available on conforming loans.
The HMDA data help document the extent of
piggyback lending over time. However, because not
all lenders submit HMDA data, some of the juniorlien loans that are reported may not have the corresponding first-lien Joan 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 open-end loans that do not need
to be reported under HMDA.
The HMDA data for 2005 and 2006 show that
lenders extended about l.2 million junior-lien loans
to help individuals purchase one- to four-family, site
built homes for owner-occupied properties in each of
these years. The number of reported junior-lien loans
contracted sharply in 2007 to about 550,000 such
loans. This contraction continued as the number of
junior-lien loans declined by 83 percent from the
2007 level to only about 92,000 loans in 2008.
A loan-matching process can be undertaken to
determine which reported junior-lien loans in the
HMDA data appear to be associated with the appropriate reported first-lien loans. 25 Our matching algorithm indicates that in 2008, 2.7 percent of the nearly
1.6 million first-lien conventional loans to purchase
one- to four-family, site-built owner-occupied homes
involved a piggyback loan reported by the same
lender, a proportion that was down 77 percent from
2007 (table 8).
The Congress allowed the deductibility of PMl premiums of some
borrowers starting in 2007, which reduced the relative attractiveness
of piggybacks.
25. For the analysis here, a junior-lien loan was identified as a
piggyback loan to a reponed first-lien loan if both loans (I) were
conventional loans involving propeny in the sa me census tract ;
(2) were originated by the same lender with approximately the same
dates of loan application and closing; and (3) had the same owneroccupancy status and identical borrower income, race or ethnicity, and
sex.
THE DISPOSITION OF APPLICATIONS By LOAN
CHARA
TERISTICS
IN 2008
Thus far, our analysis of the HMDA data has focused
primarily on how the mortgage market has evolved
over the past few years. In this section, we examine
the information provided by HMDA about what home
lending looked like in 2008.
Table 9 categorizes every loan application reported
in 2008 into 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
applications, application denials, originated loans,
loans with prices above the reporting thresholds
l
established by HMDA reporting rules for identifying
higher-priced loans, loans covered by the Home
Ownership and Equity Protection Act (HOEPA), and
the mean and median APR spreads for loans reported
as higher priced .26
The 2008 HMDA data include information on
14 million loan applications, about 12 million of
which were acted upon by the lender. The vast
majority of these applications were for first-lien loans
on one- to four-family, site-built homes. Among these
applications, about two-thirds of home-purchase applications and four-fifths of refinance applications
were for conventional loans. These shares of applications for conventional loans are considerably lower
than were observed in earlier years (data not shown in
tables).
26. The type of information provided in tables 9 and lOis identical
to that provided in analyses of earlier years of HMDA data . Comparisons of the numbers in these two tables with earlier years can be made
by consulting the following anicles: Roben B. Avery, Kenneth P.
Brevoon, and Glenn B. Canner (2008), " The 2007 HMDA Data,"
Federal Reserve Bulletin, vol. 94, pp. Al07-AI46; Robel1 B. Avery,
Kenneth P. Brevoon, and Glenn B. Canner (2007), "The 2006 HMDA
Data," Federal Reserve Bulletin, vol. 93, pp. A 73-A 109; Roben B.
Avery, Kenneth P. Brevool1, and Glenn B. Canner (2006). "HigherPriced Home Lending and the 2005 HMDA Data," Federal Reserve
Bulletin, vol. 92, pp. A l23-A 166; and Avery, Canner, and Cook,
"New Information Reponed under HMDA ."
A178
Federal Reserve Bulletin 0 April 2010
9. Disposition of applicalions for home loan', and origination and pricing of loans, by Iype of home and I Y~ of loan, 2008
Applications
Type of home and loan
Number
submitted
Loans originated
Loans with APR spread above the threshold'
Acted upon by lender
Number
Number 1 NU1T!ber . 1 Perc.ent
deJlled
deJlled
Distribution, by percentage points of APR spread
Number
Percent
9 or
3-3.99 1 4-4.99 1 5--{i .99 1 7-8.99 1 more
1-4 FAMtLY
NONBUStNESS REI.ATW'
Owner occ'upied
Site-built
Horne purchase
Conventional
First lien
Junior lien.
Government backed
First lien . .
Junior lien ...
Refinance
Conventional
. .... .
First lien
Junior lien .
Government backed
First lien . . ......
Junior lien ...
2,491.474
146.420
2.166.315
127.818
391.045
22.858
18.1
17.9
1,565,612
90.232
113.767
9.899
7.3
11.0
69.9
16.4
1.369.879
1.301
1.211.975
1.161
209.886
95
17.3
8.2
941 ,575
1.043
89.882
4
9.5
.4
93 .1
5.0
5.227.940
471.860
4.395.340 1.627.99 '1
173.203
419.789
37.0
41.3
2.328. 102 245.118
214.579 31.571
10.5
14.7
47 .7
11.7
93.1
1.7
6.2
.4
.7
J.3
100.0
.6
.0
.1
.0
18.3
20.9
55 .2
12.6
23 .0
.6
21.9
1.189.774
937
944.697
752
387,460
262
41.0
34.8
498.271
372
65 .784
4
13.2
1.1
92.7
6.1
.9
75 .0
.2
25.0
.0
.0
451 .561
421.964
389.513
373.086
187.249
165.662
48.1
44.4
172,328
179.313
53,476
22.670
31.0
12.6
41.6
19.9
21.5
59.0
~5 . 5
21.1
1.5
19.9
21.632
2:928
17.866
2.493
6.770
524
37.9
21.0
9.834
1.602
1.360
1,211
13.8
75.6
81.7
5.8
33.2
2.3
40.7
.2
26.1
384,490
378.389
188.293
49.8
151,475
., .
.'
.
.,
. ..
Manufactured
Conventional . first lien
Home purchase
Refinance . ... ..... .
Other
...... ....
296.213
114.728
137.052
287.601
103.996
121,464
156,475
51.076
45.691
54.4
49.1
37.6
68.147
42.098
65,414
51,354
26.791
16:599
75.4
63.6
25.4
19.6
22.2
52.0
21.6
19.7
10.2
31.2
33.5
22.0
17.3
20.9
11.0
10.3
3.7
4.9
Non-owner occupiecr
Conventional. first lien
Home purchase
Refinance ..... . .
Other ...... .. .......
592.174
593.296
118.535
521 .870
507.391
106.634
104.761
167.245
44. 147
20.1
33.0
41.4
368.595
293.490
55.145
57.323
34.433
8.259
15.6
11 .7
15.0
74.0
68.1
35.3
15.4
16.0
17.1
7.5
12. 1
36.6
1.9
3.1
8.2
1.2
.8
2.9
49,316
46.847
20.828
47 .546
44.599
17.529
2.091
3.095
2.522
4.4
6.9
14.4
44.217
39.935
14.374
2.317
1.865
39.9
43 .2
47.4
29.4
33.6
8.1
19.3
18.6
38.2
5.7
4.2
4.7
5.7
.5
972
5.2
4.7
6.8
13.921
23 .244
5.627
12.625
21.580
5.327
1.913
3.488
800
15.2
16.2
15.0
10.065
17.089
4.355
474
634
125
4.7
3.7
2.9
56.8
53.6
47.2
24.9
24.3
19.2
16.7
20.2
24.8
1.3
8.0
.4
.0
.8
14,193,941 12,227,356 3,944,602
32.3
7,177,262 835,892
11 .6
55.1
14.1
19. 1
8.9
2.8
Home improvement
Conventional
First lien
Junior lien .
Government backed
First lien
Junior lien.
Unsecured
(conventional
or government
backed)
....
10.1
.
..
BUSINESS RELATE[)]
Conventional. first lien
Home purchase
Refinance . .
Other
... ..... .
1.5
MULTtFA~ILy5
Conventional . first lien
Home purchase
Refinance .
Other
.. . . . . . . . . . ..
Total
.....
.. . , . ..
1.9
I. Annual percentage rale (APR) spread is the difference between the APR
on the loan and the yield on a comparable-maturity Treasury security. The
threshold for first-lien 10aJls is a spread 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 Prolection ACI of
1994 (HOEPA). which does not apply 10 home-purchase loans.
3. Business-related applications and loans are those for which the lender
reported that the race. ethnicity, and sex of the applicant or co-applicant are nOi
applicable: all other applications and loans are nonbusiness related .
4. Includes applicalions and loans for which occupancy status was missing.
5. Includes business-relaled and nonbusiness-related applicati ons and loans
for owner-occupied and non-owner-occupied properties.
Not applicable.
Patterns in the denial rates are consistent with
what has been observed in earlier years . Denial rates
on applications for home-purchase loans are generally lower than those observed for either refinance
or home-improvement loans. Denial rates on appli-
cations backed by manufactured housing are generally higher than those backed by sile-built
homes.
Furthermore, requests for a first-lien, conventional,
home-purchase loan backed by a manufactured home
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A 179
Ofllinued
9. Disposition of applicalions for home loans, and origination and pricing of loan . by type of home and type of I an. 200
Loans originated
Loans with APR spread above the threshold I
Type of home and loan
APR spread (percentage points)
I,
I
I
Mean
t-4
Number of HOEPA·covered loans'
Median
F ,\MtLY
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 improvemenl
Conventional
.. ..... . ... ..
First lien
Junior lien . ..... . . , . , . .
Government backed
First lien.
Junior lien
Unsecured
(convenlional or government backed)
Manufactured
Conventional. first lien
Home purchase
Refinance., .
Other . , .
3.9
5.7
3.5
5.5
3.4
5,9
3.2
5.7
4.7
7.2
4.1
6,6
2.686
873
3.4
6.2
3.3
5.8
583
0
5.0
7. 1
4.4
6.4
1,085
854
3.7
7.8
3.3
7.7
8
27
6.0
5.7
4.9
5.5
5.5
3.9
1,650
614
3,9
4.0
5. 1
3.5
36
4.8
128
76
4 .9
4.4
4.6
4.3
4.2
4.2
4
3
4.2
4 ,2
4.6
3,8
3.9
4.1
o
4.6
3.8
8,593
Non-owner occupied"
Conventional. first lien
Home purchase
Refinance. , .
Other.
BUSINESS RELATED'
Conventional. first lien
Home purchase . . , . .
Refinance.
Other ..
MUtTiFAMILY.s
Conventional. first lien
Home purchase . , .
Refinance ..
Other ..
Total, .
is the only one of the 25 product categories for which
the majority of applications are denied.
In addition to the application data provided under
HMDA, about 734.000 requests for preapprovals that
were acted on by the lender were reported under
HMDA (table 10). Almost one-quarter of these requests for preapproval were denied by the lender. Of
the applications acted on by the lender and preceded
by requests for preapproval, more than 88 percent
were approved (data derived from table 10).
The HMDA data also indicate which loans were
covered by HOEPA. Under HOEPA, certain types of
mortgage loans that have rates or fees above speci-
2
fied levels require additional disclosures to consumers and are subject to various restrictions on loan
terms. 27 For 2008, 2,281 lenders reported extending
about 8,600 loans covered by HOEPA (data regarding lenders not shown in tables). In comparison,
27. The requirement to repon HOEPA loans in HMDA 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.FR. pI. 226 ,32{a). The required reponing is not
triggered by the more recently adopted protections for " higher-priced
mongage loans" under Regulation Z, notwithstanding that those
protections were adopted under authOrity given to the Board by
HOEPA. See 73 Fed. Reg. 44522 (July 30, 2008) , The more recent
HOEPA regulations do not lake effect until October I, 2009.
Federal Reserve Bulletin 0 April 2010
A180
10. Home-purchase lending that began with a request for preapproval: Disposition and pricing. by type or home. 2008
Requesls for preapproval
Type of home
Number acted
upon by lender
I
. I
.
Applications preceded by requests for preapproval l
,I
Number submilled I
L
ACled upon by lender
I
Number demed
Percent demed
455.565
24.846
103,025
5,767
22.6
23 .2
275.844
15.11 2
245.481
14.394
33,303
1.820
172,217
81
54.004
30
31.4
37.0
107,065
47
97.422
38
12,46 1
11
21.908
4.955
1.600
1.541
7.3
31.1
20.102
3.173
17. 155
2.926
8.027
417
51.442
2.003
9,970
530
19.4
26 .5
34.662
1.328
30.768
1.009
4,669
284
1.059
268
62
9
5.9
3.4
960
255
842
203
71
24
117
17
6
0
5.1
.0
105
17
91
15
9
3
734,478
J76,544
24.0
458,670
410,344
61,099
Number
Number denied
1-4 FAMILY
NONlJl1SINESS RE1.AT E!'))
Owner occupied
Sile-buill
Conventional .
Firsl lien.
Junior lien
Govemmenl backed
Firsl lien . ... . ....... . • ' .
Junior lien . . . , . . . . . . . . . ,
.
ManufaclUred
Conventional, firsl lien . . . . . . . . .
Other . .
Non-owner occllpiecf
Con ventional, firsl lien
Olher .......
.
.
BUSI NESS RELr\ T E0 3
Conventional, first lien ... .
Other
MUl.TIFAMIL ,,5
Conventional, firsl lien
Olher . , ., ..... ... . ....
TOlal . ..
0lal reported in table 9.
I. These applications are included in the 1
2. See nole I, lab Ie 9.
3. See nOle 3, lable 9.
lenders reported on about 11,500 loans covered by
HOEPA in 2007. In the aggregate, HOEPA-related
lending made up less than 0.2 percent of all the
originations of home-secured refinance mortgages
and home-improvement loans reported for 2008 (data
derived from table 9).28
Relative to previous years, a smaller proportion of
loans were reported as higher priced in 2008, and a
larger proportion of reported higher-priced loans had
an APR less than I percentage point above the
reporting threshold . Furthermore, a substantial fraction of loans in 2008 were likely reported as higher
priced because of atypical changes in the interest rate
environment, rather than because the loans represented relatively high credit risk. We discuss this
issue in detail in the next section and formulate an
adjusted measure of higher-priced loans that is more
consistent over time.
THE 2008 H MDA DATA ON LOAN PRICING
A number of factors can alter the incidence of
reported higher-priced lending without any corresponding changes in subprime lending activity. In
2008, we identify two factors related to the overall
interest rate environment-a steepening of the yield
curve and widening spreads between Treasury rates
28. HOEPA does not apply to home -purchase loans.
le
4. See nO 4. table 9.
5. See nOle 5, table 9.
. . NOI applicable.
and the interes t rates on prime mortgage loans-that
may have led to variation over time in whether a
loan was reported as higher priced in HMDA. Understanding how these changes in the interest rate
environment affected the reported incidence of
higher-priced lending is important when attempting
to draw inferences about how lending to high-risk
borrowers has changed.
In the following sections, we discuss how changes
in the interest rate situation during 2007 and 2008
may have affected the reported incidence of higherpriced lending. We then present the methodology we
use to adjust for changes in the interest rate environment in a manner that provides a clearer picture of
how home lending to high-credit-risk borrowers has
changed. We then discuss what the 2008 HMDA data
indicate about lending to high-risk borrowers.
How the Interest Rate Situation AiJ.'ected the
Reporting of Higher-Pri eel Loans
The reporting rules governing HMDA require lenders
to use the yield on a Treasury security with a comparable term to maturity in determining whether a loan
was required to be reported as higher priced under
HMDA. Because most mortgages prepay well before
the stated term of the loan, lenders typically use
relatively shorter-term interest rates when setting the
price of mortgage loans. For example, lenders often
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A181
10. Home-puIcha 'e lending that began with a requesl f r preapprovul: Dispo' iLion and pri ing. by type of home, 2008-Cominlled
Loan originations whose applications were preceded by requests for preapprovaJ
Loans with APR spread above the threshold'
Type of horne
Number
Percent
I
4-4 .99
3.3
5.4
4.9
,.
.5
100.0
.1
.0
.1
.0
3.4
5.8
3.2
5.8
12.6
86.7
21.4
8. 1
40.6
4.4
19.5
.8
5.9
.0
6.0
3.6
6.0
3.3
8.9
5. 1
82 .2
24. 2
12.4
0
3.8
72.7
1.0
3.0
.6
.0
3.7
5.0
3.4
5.2
53
15
7.3
8.7
50.9
86.7
32. 1
13.3
15.1
.0
1.9
.0
.0
.0
4.2
3.4
3.9
3.2
I
1.4
9. 1
.0
100.0
.0
.0
100.0
.0
.0
.0
.0
I
.0
6.0
3.0
6.0
3.0
23,380
7.4
68.8
10.6
15.1
4.2
1.3
4. 1
3.5
9.8
3.7
94.4
Manufactured
Conventional, first lien . .
Otber ..... . .. ..... .. . .
6.928
2,293
4.592
594
66.3
25 .9
Non-own er occllpied'
Conventional. first lien ..
Other .. ,. - ... ... ...
23.382
646
2.086
33
BUSINF.SS RF.l.ATED'
Conventional. first lien . ..
Other .... .. ..
. .....
73 1
172
71
II
316,200
"
..
..... ....
I
3.5
5.6
7,844
I
Total.
7-8.99
.1
.1
80,369
27
.
I
.4
2.7
3.6
11.6
, . ,
5-6.99
3.4
97 .3
6.881
1.279
..
I
11.4
..
84 .6
190.583
10,987
MULTIFAMIt.Y
'
Conventional. first lien
Other .... ... . .. . ..
APR spread (percentage
points)
Median
Mean spreadl sprelld
9 or more
Distribution, by percentage points of APR spread
Number
3-3.99
1-4 FAMtLY
NONBUSINESS RELATED'
Owner occupied
Site-built
Conventional
First lie n ..
. , ..
Junior Ikn .
Government backed
First lien ... .
...
Junior lien .
'--
..
.
price 30-year fixed-rate mortgages based on the yields
on securities with maturities of fewer than 10 years,
and they typically set interest rates on adjustable-rate
mortgages (ARMs) on the basis of securities with
much shorter terms . Thus, a change in the relationship
between shorter-term and longer-term yields can
affect the reported incidence of higher-priced lending.
For example, if short-term interest rates fall relative
to long-term rates , then the number and proportion of
loans reported as higher priced will fall even if other
factors, such as lenders' underwriting practices or
borrowers' characteristics, are unchanged . For ARMs,
this effect is further exacerbated by the manner in
which APRs are calculated. The interest rates on most
ARM loans, after the initial interest rate reset date ,
are typically set based on interest rates for one-year
securities. As a result, the APRs for ARMs-which
take into account the expected interest rates on a loan,
assuming that the loan does not prepay and that the
index rates used to establish interest rates after the
reset do not change-will be particularly sensitive to
changes in one-year interest rates. Consequently,
higher-priced lending reported for ARMs will fall
when one-year interest rates decline relative to other
rates even if the relationship between long-term and
intermediate-term rates is constant.
The relationship between shorter- and longer-term
interest rates can be seen in the yield curve for
Treasury securities, which displays how the yields on
these securities vary with the term to maturity.
Through the first seven months of 2007, the yield
curve was relatively flat and then began to steepen, so
that the differences between the yield on a 3D-year
Treasury security and the yields on the five-year and
one-year Treasury securities increased (figure 2).
Overall, this steepening continued in 2008; while
2.
pread between interest rates on JO-year and S-year a
well as 30-ycar and I-year Treasury honds, 2006--08
Pcn:cnlage JlO
inl'i
3.0
2.5
2.0
1.5
1.0
.5
+
0
1,1
NOTE: The data are weekly. Prior to mid-February 2006, the 30-year
Treasury bond was not available . and the data are missing.
S OURCE: Federal
Reserve
Board ,
Statistical
Release
H.15,
ww w J ede ra Irese rve .go vlre leaseslh J5/data. htm .
A 182
Federal Reserve Bulletin 0 April 2010
3. HMDA price-reporting lhreshold. interest rales for tixcdand adjus lable-nlle loans, and spreads between the
threshold and uch rates, 2006-08
Pen:cnlagc poinl"i
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
o
1 ,1" ,,,, ,,, ,, 1 ,, , ,' ,
2007
2006
,
,I",,,,
" , , 1 ,1
2008
NOTE: For explanalion of Home Mortgage Disclosure ACI (HMDA)
price-reporting lhreshold, see lex!. The threshold and a nnual percenlaoe rales
00
(APRs) are for conven lional firsl-lien 30-year prime loans.
SOURCE: APRs from lhe Freddie Mac Primary Mortgage Markel Survey:
see nOles 10 figure I.
spreads did narrow during the spring and at the very
end of 2008, they remained consistently above the
spreads observed in 2007. As discussed earlier, this
change would be expected to decrease the incidence
of reported higher-priced lending, particularly for
ARMs, even in the absence of any changes in highrisk lending activity.
In addition to the steepening yield curve, a second
change in the interest rate environment affected the
likelihood that a loan was reported as higher priced in
HMDA in 2008. As a result of the "flight to quality"
and liquidity concerns caused by the financial crisis
late in 2008, the spreads between the yields on
Treasury securities and other securities and loans,
including 30-year fixed-rate loans, widened considerably. At the beginning of 2008, the HMDA reporting
threshold was 7.66 percent, and the APR on a 30-year
fixed-rate prime loan, based on the rates reported by
Freddie Mac's Primary Mortgage Market Survey
(PMMS), was 6.12 percent (figure 3).29 This difference resulted in a gap between the HMDA reporting
threshold and the APR on a prime 30-year fixed-rate
loan of 1.54 percentage points.
29. The weekly Fredd ie Mac Primary Mortgage Market Survey
reports the average contract interest rates and discou nt points for all
loans and the margin for adjustable-rate loans for loans offered to
prime borrowers (those with the lowest credit risk) . The survey
currently reports information for two fixed-rate mortgage products (30
year and 15 year) and two ARM products (one-year adjustable rate and
a five-year adjustable rate) . For more information, see
www.freddiemac.comldlinklhtmUPMMS/di s play/
PMMSOutputYr.jsp.
By the end of 2008, this gap had narrowed to
approximately 0.77 percentage points, as the falling
yields on Treasury securities pulled the HMDA
reporting threshold closer to the prime mortgage rate.
As a result, an increasing share of near-prime loans
would have been reported as higher priced toward the
end of 2008 over what had been reported earlier in the
year. Widening spreads between the interest rates on
Treasury securities and the rates on prime mortgage
loans would be expected to increase the overall
incidence of higher-priced lending, even if the creditrisk profile of borrowers remained unchanged.
These two changes in the interest rate environment
in 2008, therefore, worked in opposite directions. The
expected net effect of these two competing forces can
be discerned from figure 3. The top line in that figure
shows the HMDA reporting threshold in effect from
2006 through 2008. The middle three lines show the
APRs calculated from the interest rates reported in
Freddie Mac's PMMS for the three 30-year loan
products reported in that survey: a fixed-rate loan, a
5-year ARM, and a I-year ARM. As expected, the
steepening of the yield curve had a much larger effect
on the APRs associated with ARMs than on fixed-rate
loans , though rates on alJ three products were generally lower in 2008 than they had been in earlier years.
The change during 2008 in the spreads between the
APRs on these prime loans and the HMDA reporting
threshold (shown by the bottom three lines in figure 3) suggests that the net effect of these changes
depended on whether the loan had a fixed or adjustable rate. For ARMs, the spreads appeared to have
widened substantially in 2008, suggesting that the
incidence of reported higher-priced lending for these
loans should have decreased in 2008 even without
changes in borrower characteristics. For fixed-rate
loans , spreads appear to have narrowed relative to
earlier years. Consequently, the incidence of reported
higher-priced lending for fixed-rate loans should have
increased .
The difference in the net effects of the changes in
the interest rate environment between fixed- and
adjustable-rate loans complicates an analysis of the
HMDA data, because one cannot determine whether a
loan in the HMDA data is a fixed- or adjustable-rate
loan. Using industry data, however, it is possible to
estimate the monthly volume of both loan types. 30
These data show that at the beginning of 2007 , ARMs
30. Source : Lender Processing Services, Inc. (LPS). LPS claims
coverage of ~bout 70 percent of the mortgage market, including all
loans of 9 of the top 10 mortgage servicers (see www.lpsvcs.com).
Their coverage is nonrandom and appears to overrepresent governmentrelated lending and underrepresent jumbo and subpri me lending .
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
Al83
II. Share of mortgage origination, by type and length of loan and by month of clo ing, 2006-08
Percent
30-year
FRM
15-year FRM
Less than
5-year ARM
5-year or
longer ARM
January
February
March
April
May
June
July
August
September
October
November
December
55.9
58.4
58.7
59.7
59.1
59.4
58.4
60.6
63.7
65 .2
69.8
71.6
10.1
10.1
9.0
8. 1
7.3
6.8
6.7
6.9
7.5
7.9
7.8
7.9
16.7
14.6
15.8
16.0
16.7
15.6
17.4
16.5
13.5
12.3
10.5
8.9
17.0
16.5
16.2
17.0
18.2
17.6
15.9
15.3
14.6
11.9
11.6
100
100
100
100
100
100
100
100
100
100
100
100
January
February
March
April
May
June
July
8.4
8.0
7.9
7.4
7.2
4.8
3.7
3.5
3.8
4.5
September
October
November
December
73.8
75.8
77.6
79.0
79.7
79.8
77.3
77.7
83.2
83.4
82.5
82.5
10.4
9.0
9.7
8.9
8.8
9.0
11.1
11.1
6.5
6.1
7.1
6.0
100
100
100
100
100
100
100
100
100
100
100
100
January
February
March
April
May
June
July
August
September
October
November
December
81.9
76. 1
701
71.2
76.7
75.4
76.2
75.7
79.9
84.0
85.3
88.4
4.6
5.1
8.3
5.8
4.5
7.6
8.1
7.8
4.4
1.5
1.3
.6
100
100
100
100
100
100
100
100
100
100
100
100
Year
Month
2006
2007
August
2008
8A
8.1
7.5
7. 1
7.3
7.9
8.8
9.0
10.1
12.6
17.8
19.7
20.7
17.6
15.6
14.2
14.5
14.0
13.4
12.4
lOA
NOTE: Restricted 10 conventi onal first liens for owner-occupied. 1-4 family.
site-built properties.
FRM Fixed-rate mongage.
accounted for about 17.8 percent of the market,
falling to a range of between 5 and 6 percent at the
beginning of 2008 (table 11). During 2008, ARM
activity continued to fa]] (particularly in the latter
portion of the year) to less than 2 percent. Given the
small share of ARMs in the marketplace in 2008, the
majority of distortions in the incidence of reported
higher-priced lending caused by changes in the interest rate environment can be attributed to fixed-rate
lending.
Adju ting for Changes in the Interest Rate
Environment. 2006-08
The changes in the interest rate environment discussed in the previous section can result in loans of a
given level of credit risk being reported as higher
priced in the HMDA data at some points in time but
not others. This variation makes drawing inferences
about changes in high-credit-risk lending based upon
changes in the incidence of reported higher-priced
lending much more complicated. To better isolate the
3.9
2.3
1.6
1.5
1.5
.9
1.0
1.9
2.2
1.2
1.3
1.5
1.9
1.7
1.1
1.0
.6
17.3
Total
ARM Adjustable-rate mongage.
SOURCE: Lender Processi ng Services. Inc.
credit-risk component of pricing so that we have a
definition of a "higher-priced loan" that is more
constant over time and, therefore, more fully reflective of high-ri sk lending activity, we construct an
adjusted measure.
We define the credit-risk component of a loan as
the difference between the APR on that loan and the
APR available to the lowest-risk prime borrowers at
that time. This credit-risk component is assumed to be
constant over time. 3l In other words, we assume that a
nonprime borrower who received a loan with an APR
that was 0.25 percentage points above the APR
available to prime borrowers at that time would
receive a loan that was 0.25 percentage points above
the available rate for prime borrowers at all other
times, regardless of any changes in the interest rate
environment. We then examine the share of loans
over time with credit-risk components above specific
31 . The credit-risk component that we are defining here may
include other ri sk components besides credit risk (for example,
prepayment risk) .
A184
Federal Reserve Bulletin 0 April 2010
thresholds. This approach should provide a more
accurate depiction of how the extent of high-risk
lending has changed that is relatively free of the
distortions introduced in the incidence of reported
higher-priced lending by changes in the interest rate
environment.
In estimating the credit-risk component of loans in
the HMDA data, we use, as the measure of the rate
available to prime borrowers, the APR derived from
the information reported in the Freddie Mac PMMS
for a 30-year fixed-rate loan. 32 As an approximation
of the APR on loans in HMDA, we add the reported
spread (for higher-priced loans) to the appropriate
HMDA reporting threshold for a 30-year loan . We
refer to the resulting estimate of the credit-risk component as the PMMS spread. 33
PMMS spreads can only be calculated for loans
with reported spreads in HMDA. Loans with PMMS
spreads below 0.95 percentage points would not have
been reported as higher priced at any time between
2006 and 2008. We are therefore unable to identify
these loans in the data . Loans with PMMS spreads
between 0.95 and 1.75 percentage points would have
been reported as higher priced at some points during
the three years but not at others, so we can only
identify these loans at some points in time. Only those
loans with a PMMS spread of more than 1.75 percentage points have been consistently identified in the
HMDA data as higher priced. Therefore, we focus on
loans with a PMMS spread greater than 1.75 percentage points in examining how high-risk lending has
changed over time, as this measure should be free of
the distortions introduced by changes in the interest
rate environment and should more accurately reflect
changes in high-risk lending activity over time. We
refer to loans with a PMMS spread in excess of
1.75 percentage points as adjusted higher-priced
loans.
32. By using the APR for the 3D-year fixed-rate mortgage, we are
implicitly treating all loans in the HMDA data as though they were
3D-year fixed rate loans. Because of the small market share for ARMs
and the prevalence of 3D-year loans , we do not expect this simplifying
assumption to have a substantive effect on our analysis of 2008 data.
However, note that the share of loans that were ARMs in 2006 and
early 2007 was much higher than in 2008. As such, one should
exercise caution when comparing incidences of adjusted higher-priced
lending across these periods .
33. Under new rules adopted by the Federal Reserve Board in
2008, the spread between a loan's APR and the APR of comparable
prime PMMS loan will be used to determine whether a loan is reported
as higher priced in HMDA. The new rules take effect for all loans with
application dates on or after October 1, 2009, and for loans regardless
of application date if originated in 20 I O. APRs of first-lien loans with
a PMMS-APR spread of 1.50 percentage points or more must be
reported . For second-lien loans, the reporting threshold is a PMMSAPR spread of 3.50 percentage points.
In cidence of Higher-Priced Lendin.g
As in earlier years , most loans reported in 2008 were
not higher priced as defined under HMDA reporting
rules. Among all the HMDA-reported loans secured
by one- to four-fami Iy properties, 11.6 percent were
higher priced in 2008 , down significantly from the
historic high point of 28.7 percent in 2006 and from
18.3 percent in 2007 (data for 2008 shown in table 3;
data for 2006 and 2007 are not shown in tables). The
incidence of higher-priced lending fell from the 2007
levels for all conventional loan product categories,
with the exception of those related to manufactured
homes.
Looking exclusively at changes in the annual rates
of higher-priced lending can obscure the information
about how the mortgage market is developing over
time. To better illustrate how changes in higher-priced
lending have played out in recent years, we examine
monthly patterns in higher-priced lending activity.
The top line in the upper panel of figure 4 shows the
incidence of reported higher-priced , home-purchase
lending. The monthly data show that the overall
annual decline in the incidence of higher-priced lending between 2007 and 2008 obscures a substantial
rebound in the incidence of reported higher-priced
lending in the second half of 2008. A similar rebound
in the incidence of reported higher-priced lending is
observed for the refinance loans (shown in the bottom
panel of figure 4).
This rebound in the incidence of reported higherpriced lending appears to reflect changes in the
interest rate environment and not changes in actual
high-risk lending activity. Using our methodology to
correct for distortions caused by changes in the
interest rate environment, we see that the share of
adjusted higher-priced loans (shown in figure 4 as
"PMMS + 1.75") continued to decline in 2008 and
remained at historically low levels, even when the
incidence of reported higher-priced lending in HMDA
began to increase. There does appear to have been
something of a rebound in the share of adjusted
higher-priced home-purchase loans at the very end of
2008, though, even after this increase , the incidence
of adjusted higher-priced lending remained below the
levels observed throughout 2007.
The pattern for refinance lending appears somewhat different than that for home-purchase lending.
The incidence of adjusted higher-priced refinance
lending fell at the beginning of 2008 and then
remained relatively flat throughout the rest of the
year. The timing of this decline, and the fact that a
similar decline was not observed for home-purchase
lending, suggests that this may be the result of a
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
4.
Higher-priced 'hare of lending. by annual percentage
rate thre hold. 2006-08
Percentage [li)inl's
Home purchase
25
20
PMMS + 1.75
15
10
PMMS + 3.75
-
5
Pr.:rn:magc point...
Refinance
35
30
A18S
more than 3.75 percentage points ("PMMS + 3.75").
Most of the adjusted higher-priced loans had PMMS
spreads in excess of 2.75 percentage points for most
of 2006. In 2007, this circumstance changed dramatically as the shares of both home-purchase and refinance lending accounted for by these loans fell
precipitously. While starting 2008 from much lower
levels than previous years, the share of loans made up
of these loans that were very higher priced continued
to fall in 2008, though the decline seems to have
slowed somewhat. Nevertheless, loans with PMMS
spreads in excess of 2.75 percentage points now
account for a negligible share of home-purchase
lending and for a very small share of refinance
lending. This suggests that. as in 2007, the decline in
the incidence of adjusted higher-priced lending has
been greater for the highest-risk borrowers.
Higher-Priced Lendin!? by Lender Type
25
20
15
10
NOTE: The data are monthly. Loans are fIrst -lien mongages for site-built
propenies and exclude business loans. Annual percentage rates are for
conventional 3D-year fixed -rate prime mongages.
PMMS Freddie Mac Primary Mongage Market Survey.
HMDA Home Mongage Disclosure Act.
changing mix of borrowers caused by the refinancing
boom in early 2008. This refinancing boom. which
coincided with a sharp decline in the prime mortgage
rate. may have encouraged a large number of highcredit-quality borrowers to refinance their prime
mortgages in order to take advantage of relatively low
mortgage rates. A tendency of high-credit-quality
borrowers to refinance when rates are low and to
refrain when rates are high may explain why the
incidence of adjusted higher-priced refinancing lending exhibits more variation than home-purchase lending. A comparison of the incidence of adjusted higherpriced lending and volume of refinancing suggests
that increases (decreases) in refinancing activity often
occur at the same time as decreases (increases) in the
incidence of adjusted higher-priced lending (figures 3
and 4).
Figure 4 also shows the share of home-purchase
and refinance lending that was composed of loans
with PMMS spreads of more than 2.75 percentage
points (shown in the figure as "PMMS + 2.75") and
Higher-priced lending activity can also differ by type
of lender. Three types of lender are considered here:
depository institutions, subsidiaries or affiliates of
depository institutions, and independent mortgage
companies. In 2006, independent mortgage companies originated almost one-half of all higher-priced
loans and accounted for 31.7 percent of all first-lien
loans (table 12). For that year. depository institutions
accounted for a smaller share of higher-priced lending
(26.8 percent of adjusted higher-priced lending) than
independent mortgage companies.
Since 2006, the share of higher-priced loans originated by independent mortgage companies has fallen
dramatically. Independent mortgage companies accounted for 18.2 percent of reported higher-priced
loans in HMDA in 2008, down from 45.7 percent of
such loans in 2006. When using the adjusted higherpriced loan definition, the decline has been even
steeper (particularly between 2007 and 2008), with
the share of higher-priced loans extended to independent mortgage companies falling to 11 .9 percent.
The share of adjusted higher-priced loans originated by depository institutions has increased substantially from 26.8 percent in 2006 to 61.6 percent in
2008, though the incidence of adjusted higher-priced
lending has also fallen for depository institutions over
this period from 14.7 percent to 5.6 percent. These
numbers suggest that the increased share of adjusted
higher-priced lending of depository institutions reflects the sharp decline in high-risk lending by independent mortgage companies and not an increased
focus on high-risk lending by depository institutions .
Some of the increased share for the depository insti-
Al86
Federal Reserve Bulletin D April 2010
12. DistribuLion of reportl!d higher-priced lending, by lype of lender, and incid 'nce al each Iypt: of lender, 2006-08
Percent except as noted
Adjusted higher-priced loans I
Higher-priced loans
Type of lender
Number
I Distribution I
Incidence
Number
I Distribution I
MEMO:
All loans
I Distribution
Incidence
Number
47.7
26.8
25.6
100
35.3
14.7
23.7
23.5
3,292,281
4,455,331
2.633,237
10.380.849
31.7
42.9
25.4
100
21.7
42.6
35.7
100
15.7
11.2
23.1
14.8
1,685.948
4 .648,082
1.888,347
8.222.377
20.5
56.5
23.0
100
11.9
61.6
26.5
100
3.3
5.6
11.9
6.0
1,319.714
4.044,889
826,848
6,191,451
21.3
65.3
13.4
100
2006
Independent mOl1gage company ... . .
.... ....... . .. . . ..... .
Depository
Alii liate or SUbsidiary of depository . .
Tolal .
1,287,869
802,125
725,953
2,815.947
45.7
28.5
25.8
100
39.1
18.0
27.6
27. 1
1,163,602
653 ,985
624. 179
2.441:766
2007
Independenl mOl1gage company
~tl\'t7!:~o~ s~bs;di.;ry~t' d~p~~ii~~y
Total . . ...... .....
... ...
•.
306.675
660.744
485.287
1,452.706
21.1
45.5
33.4
100
18.2
14.2
25 .7
17.7
264.893
519.662
436,425
1.220.980
2008
Independent mOl1gage company
. . . . . . . ., . .
Depository
Affiliate or subsidiary of depository.
Total ..
.
120,605
401 ,594
138,709
660,908
18.2
60.8
21.0
100
9. 1
9.9
16.8
10.7
43 .894
228,252
98,232
370.378
NOTE: First-lien mOl1gages for site·buill properties: excludes business loans .
For definition of higher· priced lending, see lext.
I. Adjusted higher-priced loans are those with annual percentage rates
(APRs) 1.75 percentage poinls or more above the 30-year fixed-rate APR from
Ihe Freddie Mac Primary MOrlgage Markel Survey.
tutions may reflect acqUlsItlons of previously independent mortgage companies.
of home-purchase loans and one-quarter of refinance
loans were backed by either the FHA or the VA, and
fewer than 15 percent of originations were sold to
unaffiliated institutions or into the private securitization market (however, recall table 4, which indicates
that almost no loans were sold into the private
securitization market in 2008). The two GSEs increased their market share in 2007, but then relinquished much of these gains during 2008.
While the decline of the subprime-based private
securitization market was well under way by 2007,
FHA and VA lending did not surge until 2008. At least
two events in early 2008 may help explain the timing
of this surge. First, as part of the Economic Stimulus
Act passed in February, the Congress authorized an
increase in the loan-size limits applicable for the FHA
and VA programs and GSE purchases. Second, beginning in the early part of 2008, PMI companies started
limiting their issuance of insurance and raising prices
because of rising claims and binding capital restrictions in certain states. As a consequence, Fannie Mae
and Freddie Mac substantially reduced their purchases of loans with loan-to-value ratios (LTV) above
80 percent, which by statute require PMI (or other
credit enhancement), Both GSEs also raised their
credit guarantee fees for such loans at this time as
well. We examine the effects of these events in the
following two sections,
THE SURGE IN FHA AND VA LENDING
Figure 5 illustrates the changing structure of the
mortgage market between 2006 and 2008. It groups
first-lien owner-occupied site-built mortgages for
home purchase and refinance into six distinct categories: (1) loans sold to an affiliate or held in the
portfolio of the originating lender ("Portfolio"),
(2) loans sold into the private securitization market or
to unaffiliated institutions ("Private"), (3) loans sold
to Fannie Mae or Freddie Mac (GSEs), (4) loans
insured by the FHA, (5) loans backed by the VA, and
(6) loans insured by the Farm Service Agency or
Rural Housing Service, The data show that approximately 40 percent of loans in early 2006 were sold
into the private securitization market or to an unaffiliated institution,34 By the end of 2008, nearly one-half
34. Classifying loans by their ultimate disposition is complicated
by HMDA reporting rules. A loan is classified as sold if the sale takes
place within the HMDA reporting year. In other words, a loan
originated in December must be sold within the same month 10 be
classified as sold. Since lenders often hold loans for several months
before selling them, there is an "underreporting" in loan sales in
HMDA for loans originated toward the end of the year. Analysis of Ihe
HMDA data indicates that most loans are sold within three months if
they were sold. To adjust for the underreporting in October-December,
we used an imputation formula based on the allocation of loans
originated in September (and the following January for 2006 and 2007
data) to allocate conventional loans among the first three groups
shown in figure 5. Data in all of the tables presented in this section are
based on this imputation.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
5.
Adjusted share of owner-occupied fir l-lien lendino, by
type of loan . 2006-08
Percentage (Xlinl.\;
Home purchase
50
Private'
40
I,
I "
"
, , , , , "I
"
"
"
""
I "
, ' , , , "
"
I
,I
Pcrcclliagt' pOinL'i
Refinance
50
40
30
20
10
o
1, 1,
,,, , ,, ,,,1, ,,,, , ,,, ,,1,, , ,,,,, ,
2006
2007
, 1,1
2008
NOTE: The data are monthly. Loans are for site-buill propenies and
exclude business loans. For each year, the founh quaner is adjusted for the
government-sponsored entity (GS E), private , and ponfolio loans. See te xt
note 34 for details.
l. Private loans are conventional loans sold to a nongovernment-related or
non-affiliate instirution.
2. Ponfolio loans are conventional loans held by the lender or sold 10 an
affiliate institution .
3. GSE loans are all originations categorized as conventional and sold 10
Fannie Mae, Freddie Mac, Ginnie Mae, or Farmer Mac.
FHA Federal Housing Administration-insured .
VA Depanment of Veterans Affairs-guaranteed.
FSAJRHS Fann Service Agency or Rural Housing Service-guaranteed.
The £.fJect of Higher Loan-Size Limits
New standards released on March 6, 2008, raised
the GSE and FHA loan-size limits up to $729,750 in
certain areas designated by the Department of Housing and Urban Development as "high cost." 35 FHA
loan limits were also raised above their 2007 levels
in many other areas to new levels . Prior to these
changes, the GSEs could not purchase single-family
home loans above $417,000 in most states, while
35. More than one-half of the 2008 loans in the high-cost areas
were in California. One-third of the loans were in the mid-Atlantic
states of New York, New Jersey, Maryland, and Virginia .
Al87
the FHA could not insure single-family home loans
above $271,050 in most areas of the country.36
VA loans do not have a size limit, but they do have
a guarantee limit that is tied to GSE loan limits Y The
VA guarantees the smaller of 25 percent of the loan
amount or 25 percent of the applicable GSE loan
limit. As such, increases to the GSE loan limit raise
the maximum VA guarantee amount.
To understand the potential effect of the higher
limits, we divided loans originated in 2008 into four
categories based on the size of the loan and the
location of the property securing the loan: (I) loans
smaller than the applicable 2007 FHA limit; (2) loans
larger than the applicable 2007 FHA loan limit, but
less than $417,000 and the applicable 2008 FHA
limit; (3 ) loans larger than $417,000 but under the
2008 high-cost area limit common to the FHA, VA,
and GSEs; and (4) all other loans. Changes in the
loan-size limits directly affected the options available
to borrowers for loans in categories 2 and 3 but did
not affect those in categories 1 and 4.
Table 13 displays the share of loans in these four
categories by month , loan purpose, and loan product
type (FHA, VA, GSE, and other).38 Among FHA
loans, there is a noticeable rise in the share of
"newly FHA-eligible" loans (categories 2 and 3) in
the first half of the year when the limits were
increased for both home-purchase and refinance
loans. For 2008 overall, the share of FHA-insured
home-purchase loans in categories 2 and 3 was
9.7 percent, compared with 2.4 percent in 2007. 39
This increase implies that the limit changes lifted
FHA home-purchase lending by 7.4 percent in 2008,
36. The GSE loan limits were higher in Alaska and Hawaii ; the
max imum loan size for the FHA program was as low as $201,160 in
some low -cost areas.
37. VA loans larger than the GSE limits, however, cannot be sold
into Ginnie Mae security pools.
38. The other category includes ponfolio loans, private loans, and
loans insured by the Farm Service Agency or the Rural Housing
Service (a very small pan of the category).
Loan growth during 2008 (panicularly for the first half of the year),
shown in table 13, is likely understated because of the omission of data
from the 15 lenders who failed to repon HMDA data, as discussed
earlier. In December 2007, these lenders accounted for 3.4 percent of
home-purchase loans and 6.0 percent of refinance loans in HMDA ;
however, these loans were not proponionately distributed among the
four loan types examined here. For the same period , these lenders
represented less than 2 percent of FHA loans and 0.0 I percent of VA
loans . Their market share of GSE loans was 3. I percent for homepurchase loans and 5.7 percent for refinance loans; for "other" loans,
their s hare was 4 . 1 percent for home-purc hase loans and 6 .7 percent
for refinance loans.
39. FHA -insured loans in the 2007 HMDA data for amounts that
exceed the s ingle-family loan limit can be attributed to recording
errors in the data or to loans for two-, three-, or four-famil y Sl.ructures,
which have higher loan limits and are not identified separately in the
HMDAdata.
A 188 Federal Reserve Bulletin 0 April 2010
13. Percent f h mc-pufcha e anu refinance loan. , by category or FHA and GS . eligibility. by type of loan and monLh or
origi nation
Percent except as noted
Home purchase
Type of loan
by month
of origination
I
FHA
2008
January . .
February
March.
April . ...
May .. . ...
June . . . . . . .
July.
August.
September ..
October
November .
December .
Total . .
2007
Second half .
Total .
VA
2008
January .. ..
February ...
March . .
April. .. ....
May ... ... .
June .
July . .
August. .
September. .
October . .
November ..
December . .
Total . .
2007
Second half
Total . .... .
GSE2
2008
January . ..
February ..
March .
April. .
May .. ..
June . ...
July ..
..
August . .
Refinance
Newly
Other
FHA
Newly
Market
Number of
GSE and ' eligibility Number of
Market
Growth
FHA
Growth
eligible.
or no
share
FHA
loans
loans
share
no change eligible
eligible ' change'
14. 1
17.6
20.9
25.7
28.5
29. 1
3 1.4
33.7
40.5
35.3
36.5
38.2
29.6
96.0
95.7
94. 1
90.3
88 . 1
87.0
87.1
87 .3
88 .2
87.3
88.0
87 .3
88 .7
3.1
3.4
4.8
7.5
9. 1
9.5
9.4
9.0
8.4
8.6
8.2
8.5
8.1
.2
.2
.3
1.1
1.6
1.8
1.9
1.9
1.8
2. 1
1.9
2. 1
1.6
.. .
9.4
7.8
96..1
96.7
2.7
2.4
6,976
8,747
10.661
11.710
13.651
14.707
14,948
14.071
12.532
13,202
10,307
12.131
143.643
100.0
125.4
152.8
167.9
195.7
210.8
214.3
201.7
179.6
189.2
147.7
173.9
4.5
5.0
5.2
5.3
5.5
5.7
5.9
5.9
5.6
6.4
6.9
7.2
5.7
77.2
76.7
75.8
75 . 1
73.6
72.0
73.0
73 .7
75.2
76.0
77.0
76.2
74.9
56,002
106.710
.. .
...
3.5
3.2
59,029
63 ,165
70.510
68.462
71.840
72,736
67 ,790
61.150
50.053
48,782
34.849
36.962
705.328
100.0
107.0
119.4
116.0
121.7
123.2
114.8
103.6
84.8
82.6
59.0
62.6
38.0
35.8
34.1
31.1
29.0
28.1
26.6
25.4
22.4
23 .8
21.857
31.099
43.193
56.654
70.554
75,493
79,949
80.968
90,597
72.304
54.914
64.245
741 ,827
149,428
257,674
September. . '
October . .
November. .
December . .
Total
2007
539,637
Second half
1,109.069
Total . . ..
100.0
142.3
197.6
259.2
322.8
345.4
365.8
370.4
414.5
330.8
251.2
293 .9
. ..
.7
.7
.7
1.0
1.3
1.6
1.6
1.8
9.9
8.5
10.1
12.4
15.5
17.4
21.4
24.7
26.6
25 .5
28.8
24.9
16.2
93.9
93.8
92.2
85 .7
83 .6
83.4
83 .5
83.7
815
82.6
83.0
80.8
85.4
5.0
5.1
6.5
12.0
13.4
13. 1
12.8
12.6
12.8
13.3
13.2
14.5
11 .5
...
...
7.0
4.6
94.5
94.9
100.0
191.5
179.4
169.0
131.1
97 .7
78.9
66.5
72.6
118.5
73 .9
188.7
1.0
1.2
1.2
1.3
2.0
1.9
2.2
1.6
25,634
35 . 100
38,896
43,173
39.700
37,073
35.697
34.773
37 ,068
46,682
33,774
51 ,327
458 ,897
100.0
136.9
151.7
168.4
154.9
144.6
139.3
135.7
144.6
182.1
131.8
200.2
.2
.2
.8
.7
108.094
164.063
17.4
17.4
18.0
17.9
18.5
19.8
18.8
18.5
17.4
16.2
15.7
15.4
17.7
.6
.6
1.1
1.4
1.3
1.3
1.4
1.4
1.5
1.6
1.8
1.3
4.8
5.3
50
5.7
6.5
7.1
6.9
6 .5
6.0
6.3
5.6
6.7
6. 1
2,625
5,026
4.709
4,437
3,441
2,565
2,071
1,746
1.906
3. 111
1.939
4.953
38,529
75.8
76.2
18.8
18.7
.1
.1
5.3
51
8.129
15.019
19.9
20. 1
20.9
20.8
20.6
20.1
19.2
18.6
17.3
16.3
16.7
17. 1
19.3
.6
28.1
72.1
71.9
70.9
70.6
69,4
68.0
68.3
68.4
70.4
71.0
71.2
70.3
70. 1
2.2
7.4
7.5
7.8
8.0
8.8
9.5
9.2
9.3
8.4
8,4
8.3
8.9
8.5
105.505
177.617
157.348
132.992
86.447
69,358
47,377
37,482
38.002
54.018
31.474
60.730
998.350
32.5
32.6
75.4
77.1
16.7
.3
.3
6.4
6.0
449.999
995,889
23.2
22.0
17.11
1.2
.5
.4
.6
1.2
2.4
3.3
3.7
3.8
4.2
3.9
3.8
assuming that the share of FHA lending in each of
these categories would have remained at its 2007
level in the absence of limit changes (derived from
table). This same assumption would imply that FHA
refinance lending was 8.9 percent higher because of
the limit changes.
In contrast to the patterns for FHA lending, the
proportion of VA loans in the four categories changed
little over the course of the year, suggesting that the
limit increases had little effect on VA lending. GSE
lending showed only a modest boost from the limit
1.7
Newly
Other
Newly
FHA
eligibility
eligible,
FHA PSE ane
or no
FHA
no change eligible
eligible change'
.. .
100.0
168.3
149. 1
126. 1
81.9
65.7
44 .9
35.5
36.0
51.2
29.8
57 .6
.3
.3
.4
.9
1.3
1.4
1.4
1.6
1.6
LI
.9
.8
.9
1.4
1.7
2.2
2.2
2. 1
2.2
2.9
2.7
3.5
2.0
4.3
3.9
.3
.3
1.0
1.0
1.4
1.7
1.7
2.4
1.4
74 .7
70.7
71.7
74.8
77.5
77.4
80.6
82.4
78.5
73.9
73.4
67.5
74.0
17.9
21.8
21.0
18.2
16,4
16.4
14. 1
12.8
14.4
18. 1
16.8
21.6
18,4
.3
.2
.4
.4
.6
,4
.6
.5
.7
.9
1.4
.9
.6
7.2
7.2
6.9
6.7
5.5
5.8
4.7
4.4
6.4
7.2
8.4
10.0
7.0
.5
,4
79.6
80.5
15.3
14.9
.2
.2
4.8
4.4
40.9
43.0
40.9
38.1
33 .9
32.6
28.4
26.6
27.3
29.5
26.8
29.5
35.3
74.3
71.9
74.9
76.3
76.7
74.6
76.9
77.3
76.0
71.4
75. 1
68.2
74.3
18.6
20. 1
18.0
16.9
16.3
15.8
14.3
13.7
14.5
16.6
14.8
19.8
17.4
.2
.2
.2
.2
.5
2.7
2.5
2.2
2.4
3.9
2.6
2.3
1.I
6.9
7.8
6.8
6.5
6.6
6.8
6.4
6.7
7.1
8.2
25.2
26.2
78 .3
79.4
16.1
15.1
.3
.:1
5.3
5. 1
1.3
1.2
1.2
1.2
1.3
1.2
1.2
7.5
9.7
7.2
increases (category 3). Under the same assumption
used above, we estimate that GSE home-purchase
lending would have been 1.9 percent lower and GSE
refinance lending only 0.8 percent lower in 2008 had
the GSE limits not been changed.
In sum, the effect of the limit increases on FHA,
VA, and GSE lending appears to have been modest;
the vast majority of the overall growth in both FHA
and VA lending was in the categories in which there
was no change in the eligibility standards.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A189
13, Percent of home-purchase and refinance loan , hy category or HA and GSE eligibility. hy Iype of Joan and month of
origin alion-Colllirlued
Percent except as nmed
Refinance
Home purchase
Type of loan
by month
of origination
Other'
2008
January ....
February . . .
March ..
April. .. ..
M"y .. . . . ..
June .. .. .
July . . .. ..
August .
.. .
Number
loans
0
Other
Other
Newly
Newly
FHA
Newly
FHA
Newly
Market
GSE and eligibility Number 0 Growth Market eligible, no FHA PSE and eligibility
eligible, no FHA
Growth
FHA
FHA
or no
loans
share
or no
share
eligible
change eligible
change
eligible change l
eligible change'
-
67 ,503
73.628
82,163
83,434
91,289
96,353
91 ,786
84.186
70,329
70.623
50.385
54,709
916,388
September. .
October ..
November . .
December.
Towl. .. . ...
2007
Second half
838.703
Total .. . . .. 1.847,598
Total market
2008
155,365
January .
February . .
176,639
21)6,527
March .
April .. .. ...
220,260
May .
247,334
JUlie .
..
259,289
July ... .
254.473
August.
240,375
September. .
223,511
October ... .
204.911
November. .
150,455
December . . , 168,047
Total .. . .. .. 2507, 186
2007
Second half 1,583,770
Total .. ..... 3,321 ,051
100.0
109.1
121.7
123.6
135.2
142.7
136.0
124.7
104.2
104.6
74 .7
81.1
..
43.4
41.7
39.8
37.9
36.9
37.2
36. 1
35.0
31.5
34.5
33.5
32.6
36.6
67.8
68.4
67.7
68 .2
67 .9
66.4
675
68.1
70.1
70.8
71.5
71.0
68.5
14.3
14.7
14.9
14.5
14.7
15.2
14.5
13.9
13.4
13.3
12.6
12.8
14.2
3.9
3.3
3.3
3.4
3.2
3.3
3.5
3.6
3.4
3.2
3.3
12
3.4
13.9
13.7
14.1
13.9
14.2
15.2
14.5
14.3
13. 1
12.7
12.6
13.0
13.9
124,272
195,520
183,400
168.781
125.791
103.786
81.7 I5
66,685
62, 133
79,514
50.156
88,828
1,330.581
100.0
157.3
147.6
135.8
.. .
...
54.6
56.4
67 .6
67.5
14.3
13.2
5.1
6.3
13. I
13.0
983.519
2,396.004
.. ,
1OJ.2
83.5
65.8
5.l7
50.0
64.0
40A
71.5
...
48.2
47 .3
47.7
48.3
49.3
48.8
49.0
47.4
44.7
43.4
42.7
43.2
47.1
72.5
710
72.4
74.1
75.1
75.3
76.3
78 .1
77.2
74.0
75.9
70.3
73.8
13.9
15.7
13.9
13.2
12.3
11.6
10.6
9.8
10.6
13.2
11.0
15.4
13. 1
2.8
2. 1
2.3
2.0
2.2
2.7
2.7
2.6
2.6
2.9
2.9
2.8
2.4
7.2
10.7
11.2
11.4
10.7
10.4
67.3
68.7
74.4
72.1
12.0
11.4
4.6
6.5
9.1
9.9
1.5
lOA
lOA
9.6
9.6
9.8
10.2
11.5
100.0
113.7
132.9
141.8
159.2
166.9
163.8
154.7
143.9
131.9
96.8
108.2
.. .
100
100
100
100
100
100
100
100
100
100
100
100
100
73.8
74.9
74.8
75 .0
74.4
73.2
74.2
75.0
77.8
77.0
77.8
77.4
75.3
15.0
14.8
15.0
14.9
15.0
15.1
14.4
13.7
12.5
12.5
12.1
12.3
14.0
2.0
1.6
1.6
1.8
2.0
2.5
2.8
2.9
2.7
3.0
2.8
2.8
2.4
9.2
8.8
8.7
8.3
8.5
9.2
8.6
8.4
7.0
7.5
7.2
7.5
8.3
258.036
413.263
384.353
349,383
255.379
212,782
166,860
140.686
139.109
183,325
117,343
205.838
2.826.357
100.0
160.2
149.0
135.4
99.0
82.5
64.7
54.5
53.9
71.0
45 .5
79.8
..
100
100
100
100
100
100
100
100
100
100
100
100
100
75.4
73.3
75.4
76.4
77.0
76.5
78.1
79.3
78.6
75 .4
77.7
72.3
75.8
15.0
16.7
14.9
14.5
13.9
IJ3
12.2
11.6
12.3
14.3
12.7
16.6
145
1.2
1.2
1.5
2.4
2.3
2.2
2.2
2.8
2.3
2.2
1.7
8.1
8.8
8.4
7.9
7.7
7.8
7.4
6.9
6.9
7.5
7.3
8.9
8.0
. ..
100
100
73.1
73.2
14.5
13.7
2.9
3.6
9.5
9.5
1.549,741
3,570,975
..,
100
100
76.8
75.1
12.5
12.0
3.2
46
7.6
8.3
1.I
NOTE: First-lien mongages for owner-occupied, 1-4 family, site-built propenies ; excludes business loans. Government-sponsored entity (GSE) and other
loans have been adjusted for the rounh quaner of 2008 ; for more details, see
text.
I . Includes loans that were not FHA or GSE eligible or were always GSE
eligible.
2. GSE loans include all originations categorized as conventional and sold
10 Fannie Mae, Freddie Mac, Ginnie Mae, or Farmer Mac by the end of the
calendar year.
3. Other loans include loans originated with a Farm Service Agency or Ruraj Housing Service guarantee and conventional loans nOI sold 10 a
government-related institution .
. Not applicable.
Pullback by PM! Companies and Its
Implication for FHA and VA Lending
Both the FHA and VA loan programs offer a form
of credit insurance and, consequently, compete with
the PMI companies. The two government programs
likely increased their market share, at least to some
extent, because the PMI and GSE price increases
pushed the price of conventional higher-LTV loans
above that for the FHA and VA programs for some
With losses mounting in 2007 and 2008, PMI companies started raising prices and limiting coverage in
some areas in the spring of 2008. These changes
likely reduced the ability of the GSEs to purchase
higher-LTV loans (loans with LTVs above 80 percent) because of the statutory requirement that such
loans carry PMI (or a comparable credit enhancement) in order to be eligible for GSE purchase. The
GSEs also raised their own underwriting fees for
relatively high-LTV loans in March 2008 and further
in June. 40
40. PMI annual premiums for loans with LTVs above 80 percent
range from 0.50 percentage points to greater than 1.00 percentage
poin!. On March I, 2008, Fannie Mae and Freddie Mac raised their
one-time delivery fees for 30-year loans with LTVs above 70 percent
to a range of 0.75 to 2.00 percentage points, depending on the
borrower' s credit score. On March 9, 2008, both GSEs added a
0.25 percentage point additional fee for "market conditions. " In June
2008, the GSEs raised their fees again, by an average of 0.50 percen!age points. [n the summer of 2008, many PMI companies announced
further increases in their rates, particularly in markets they defined as
"distressed." In some areas, it became almost impossible to obtain
PM[ for loans with LTVs of greater than 90 percen!.
Al90
Federal Reserve Bulletin 0 April 2010
14. Disposilion of home-purcha'c and refinance application. for private mortgag> insurance, convel1lional 103ns. and
nonconvenlional loans. by month of aClion taken . 2008
Purpose of loan and month
of origination
Home purchase
January . .. . ..
February . - . ... .....
.. .....
March ..
April .. .... . . .. ..
May .
... . ... . ....
June ... .. . .
July .. .... .
August. . . .. .. .... . ... ..
September. .. ... . .
October ..
.. .. ..
November. . .. .... . . . . .. .
December ..
. . ...
...
Refinance
January ... . . . . .... . . ...
February . . . . . . . . . . . . .. .
March . .... . . ,
April. ...
- ,
May . . .... ... .. -, . . .
June .
. . .. . . ..
. ... ..... .
July ..
.
....
...
"
'
AuguS . .
I
.. ... ..... ..
September . .. . ..... . .
October.
.
Nove mber. . . ... . .. . ,.
Dece mber .. .. ' .. " , ..
......
Private mortgage insurance
I loans covered I
Number of
Percent
withdrawn
102.859
89,047
95,190
96.396
86,310
83.544
82,427
71.505
59. 115
69.844
47,634
44.118
73 .644
59.372
61.160
65 .874
56.563
54 .739
53,663
45 ,766
36,044
32.936
26. 140
24.680
3.2
3.9
4.7
4.2
4 .9
3.8
3.7
4.5
7. 1
12.6
7.9
6.3
3.0
4.2
7.1
4.8
5.7
6.4
6.7
6.2
7.3
7.6
7.3
8.4
217.027
217 .777
238 .353
239 .885
241.888
246.414
238,464
213 ,776
183.792
183:889
133;188
138.1 83
124.433
134.085
149.236
147.684
158.238
163,806
154. 109
139.688
115,074
113.280
80.344
86. 176
14.2
13.0
11.9
13.2
12.3
11.8
12.9
12.8
1.1.5
14.3
14.3
14.0
21.2
19.4
18.6
19.7
16.5
16. 1
16.4
16.3
18.0
18.4
19.2.
17.6
53.565
37,895
39 .379
45.036
36.362
27 ,504
17,956
11.779
8.976
7.310
8.841
6,464
7,187
3.3
5.6
5.9
6.5
7.6
5.6
6.8
7.2
9.2
17.7
12.4
11.8
3. 1
3.9
5.4
5.6
6.5
6.7
7.5
6.9
8.8
7.1
7.5
15.9
562.486
721.408
675.958
632.885
481.145
401 ,895
344,968
281.635
266.415
311.590
216,267
332.578
229,794
373 . 119
340.698
301.741
212.236
173. 151
129. 109
104,170
100.132
133,495
81.625
149.506
16.7
15.4
14.0
14.6
15.0
14.9
16.6
16.8
16.7
15.9
18.4
21.2
30.3
31.8
34.2
36.6
37.5
43.0
44.6
45.2
41.0
44.6
34.6
56.450
65.040
56,452
46,880
35,281
31.766
25,533
19.050
30.028
17. 166
16.166
IPercent denied
Number of
applications
I
Conventional
Number of
applications
Number of
loans
I
Percent
withdrawn
IPercent denied
40.6
NOTE : First-lien mongages for owner-occupied. 1-4 family. site-built
properties; excludes business loans.
borrowers. 41 Consistent with this account, figure 5
indicates that the increase in FHA's home-purchase
and refinance market shares accelerated just as GSE
market shares began falling in early 2008 . VA market
shares, however, rose more steadily over time.
To further examine the potential link between PMI
issuance and FHA and VA lending, we take advantage
41. For the first half of 2008 , the FHA charged a flat delivel)' fee of
1.50 percentage points and an annual premium of 0.50 percentage
points to insure 30-year mortgages. On July 14, 2008, the FHA
implemented a ri sk-based insurance system with upfront fees for
30-year mortgages ranging from 1.25 to 2.25 percentage points and
annual premiums from 0 to 0 .55 percentage points , depending on the
LTV and credit score of the borrower. The price changes were rolied
back by the Congress, however, which passed legislation prohibiting
the use of a risk-based pricing system after October l, 2008 . On that
dale , the FHA announced a new fee schedule with an upfront fee of
1.75 percentage points and an annual premium of 0.55 percentage
points for 30-year loans with LTVs of 90 percent and higher and
0.50 percentage points for those with lower LTVs . During the period in
which Ihe FHA charged risk -based rates (and during the post-March
fixed-rate period), FHA fees were lower than those of the GSEs with
PM! for all borrowers except those with high credit scores.
The VA charged a 2 . 15 percentage point upfront fee and no annual
premium for a veteran using the program for the first time with no
down payment (the dominant choice); the fee was reduced to 1.50 percentage poinls with a 5 percenl down paymenl and to 1.25 percentage
points with a down payment of 10 percent or more . Fees were higher
(at least 3.3 percentage poinls) for veterans using the program for a
second or third time (there are also lifetime limits on coverage, which
discourage or eJiminate multiple usages) . The VA has a streamlined
refinance program that allows the refinancing of a VA loan into another
VA loan with little documentation and a refinance fee of 0.50 percentage points (other refinance loans have the standard fees) . VA slatistics
state that the average VA premium in 2008 was 2 . 13 percentage points .
of the HMDA data filed by the PMI industry (appendix B). These data reAect the disposition of applications for mortgage insurance received by the eight
large PMI companies in 2008. These applications are
arrayed by month, disposition, and loan type (table 14).
For context, we also provide monthly information on
application disposition for conventional (GSE, portfolio, and private) and nonconventional (FHA, VA, and
Farm Service Agency or Rural Housing Service)
lending.
The data on PMI denial and withdrawal rates
reveal only mild evidence of a change in PMI companies' underwriting practices. Nevertheless, the sharp
reduction in PMI issuance during 2008 (for instance,
the ratio of PMI issuance to conventional homepurchase lending was almost 0.60 in January and fell
to 0.27 in December) is consistent with the view that
much of the high-LTV market shifted from the conventional market to the FHA and VA during 2008. In
fact, on a county-by-county basis, we find a strong
correlation between declines in PMI issuance and
increases in FHA lending. 42
42. Care must be exercised in comparing the PMI and loan data
reported in HMDA . Only the largest PMI companies report HMDA
data, but those that do report provide information on all their issuances , regardless of property location . HMDA loan reporting requirements favor urban areas, implying different underreporting patterns
than the PMI data . Further, some PM! policies are written "after the
fact " for loans that have already been originated, and as a result , the
The 2008 HMDA Data: The Mortgag e Market during a Turbulent Year
A191
14. Dispo ilion of home-purchase and refinance applications for privat mongage in 'urance. conventional loans. and
noneonventional loans. by monLh of action lfIken. 2008--Conlillued
Nonconventional
Purpose of loan and month of origination
Number of applications
I
I
Number of loans
I
Percent withdrawn
Percent denied
Home purchase
.
- ...
January .
. .. .. .. .. ..
February ..
March .
~ril .... .. ...... ... ............. ... ..... ay .....
. .. ... .. ..... .... ... , . . . .
June . . . . .
July . .
. ... ..... .... .... ....... ... .. .. ,.
August. . . . , ... .......
September .
.......... .........
October. ..
November
December
... ..... .... ..... .. .
48,005
60,525
82,971
106, 114
124,497
135.951
145,238
145,820
156.340
140.518
106,654
119,790
3 1,019
42,643
57,397
72,723
89.270
95,696
100.593
100.914
108.708
91.831
70:271
82.030
12.4
104
11. 1
11.5
10.3
10.7
11.3
11.5
11.4
13. 1
12.8
12.0
21.0
17.4
18. 1
18.6
16.2
16.9
17. 1
16.6
16.2
18.6
18.2
16.2
Refinance
January .
... .... ............ .
February .
March
... .. .. ... .. ..
. . . ... .... ... . ... ... ,
April .
May.
.... .... ....... ....... ..... .
June
...... ..... ...... ...... .. ...... .
July ..
August. . .
... . . . . ... ..
Se ptember .. ....... ... ...... .. ..... ..
October. .
November
.. ..... . .. .. ...
December ...
...... ........ ..... ...
58, 180
72,641
85.825
104,206
101 ,399
100,743
104,345
101.003
105,068
126.943
101,505
130,673
28,355
40.302
43.779
47,801
43,284
39.739
37,863
36 ,617
39.094
49,935
35 ,798
56.460
15.0
15.3
17.0
18.8
19.5
20.8
2 1.8
22.5
36.4
29. 1
32.5
37 .2
40.4
43.0
46.4
46.2
45.7
43.5
47.9
38.9
......
~
••• • •• 4
•
•
•
•
•
••
,
.
~
Data collected by LPS from the large mortgage
servicers provide more direct evidence that hi g h-LTV
borrowers shifted to government-backed loans during
2008 . These data show that the FHA share of firstlien, home-purchase loans w ith LTVs in excess of
80 percent rose sharply in 2008 from just over
20 percent to about 70 percent (figure 6). Similar to
figure 5, the share of high-LTV loans sold to the GSEs
began falling sharply just as the FHA ' s share began
accelerating. The GSE share fell fro m more than
50 percent to 20 percent during 2008.
The FHA share of loans with LTVs of 80 percent or
below in the LPS data also increased yet remained at
a low level, rising from 1 percent to almost 9 percent
in 2008 (data not shown in figure) . At the same time,
the share of loans with LTVs of 80 percent or below
that were sold to the GSEs held relatively constant
throughout thi s period (after a brief increase early in
2007 ) at levels just over 80 percent. These patterns
observed for home-purchase loans are also generally
observed for refinance loans in the LPS data.
The VA share of high-LTV home-purchase loans
grew modestly during most of 2007 and 2008, with a
somewhat sharper increase at the end of 2008. By
December 2008, this share exceeded 11 percent.
Somewhat differently, the VA sh are of high-LTV
timing of the two data sources may not align perfectly. Nevertheless,
the general relationship pan ems between the two series should be
informative.
ao
22.2
23.9
22.8
refinance loans peaked during the refinancing boom
in early 2008. This share declined somewhat after
that, but remained at higher levels than in 2007 . For
both home-purchase and refinance loans with LTVs
of 80 percent or less, the VA market share was higher
in 2008 than in 2007, but was consistently under
I percent.
6. Shan: of LP
Percentage poinls
FHA
70
60
50
40
30
20
VA
I
I
10
I
2007
,
,
I
I
I
I , .
I
,
I
I
,
I
I
I
1
I
2008
NOTE: The data are monthly . Loans are first liens. For more inform ati on
about Lender Processing Services, Inc. (LPS), sec text.
l. Other loans a re Farm Service Age ncy or Rural Housin g
Service-guaranteed loans and conve ntional loans not so ld to a GSE.
FHA Federal Housi ng Administration-insured .
GSE Government-spo nsored entit y-ow ned .
V A De panment of Veterans Affai rs-guaranteed.
SOURCE: Lender Processing Services , Inc.
A 192 Federal Reserve Bulletin 0 April 20 10
15. Percent of home-purchase and relinancl! loans lhal are higher priced. hy lhreshold and by Iype of loan and month of
origination , 2008
Percent
Type of loan by month
of origination
FHA
2008
January
February
March
April
May . .
JUlie
July.
August . , .
September
October ....
November . .
December
Tolal
2007
Second half. .
Total
... . ... . .. . .
VA
200S
January ... .
February . .
March . ...
April .. .
May . . ..
June .. . . . . . . . . . . - .
July .....
August _
September
October . . ... . ..... . .
November ..... . .. . ,.
December
Total .
2007
Second half. .
Total
GSE'
200S
January .
February .
..... ..... .. .
March .
April .. ........ .. . ,.
May .. ..... .... ....
June ..
July
August.
September ..
October . ..
November . .. . . ..... . .
December. . ..... . . . ....
Total . .
2007
Second half
Total .....
.
Home purchase
Refinance
Above HMDA I Above PMMS I Above PMMS I Hi~h payment· Above HMDA I Above PMMS I Above PMMS I;Hi!\h payment+ 1.75'
+ 2.75 '
to-lOCO me raoo
+ 1.75'
+ 2.75'
to-income ratio
5.8
4.6
4.0
4.4
3.8
4.1
6.0
15.7
17.3
20 .7
23 .2
19.1
11 .6
3.3
3.0
1.7
1.7
U
1.2
J.3
1.3
1.9
2.S
3.1
6.7
2.3
.2
.2
.2
.2
.2
.2
.3
.3
.3
.3
.3
1.0
.3
7.9
7.5
9.0
8.6
9.4
10.1
11.2
13. 1
13.2
13. 7
13.8
11 .6
11.3
8.9
7.4
7.1
7.4
7.2
8.2
" .7
23.9
22.7
22.1
25.9
17. 1
14.3
5.0
5.0
3.5
3. 1
2 .6
2.8
3.0
2.5
3.0
3.4
3.9
6.3
3.7
.2
.2
.3
.2
.3
.2
.3
.2
.2
.2
.2
.8
.3
9.8
8.2
10.5
10. 1
10.8
12.0
13.3
16.0
15.4
15.6
16. 1
11.6
12.5
5.2
4.3
2.4
2. 1
.3
9 .7
9.4
8.8
7.2
4.0
.3
3.4
.4
.5
" .2
.4
.3
.2
.4
.3
.3
.5
1.0
1.5
2.6
3.6
4. 1
1.3
.2
.2
.2
.2
.2
.1
.3
.2
.3
.3
.2
1.5
.3
.6
.1
.2
A
A
.3
.7
1.2
1.5
1.0
1.1
.2
15.9
14.2
16.2
14.9
14.9
16.3
17.2
17.8
17.4
16.4
15.2
12.5
15.8
.7
.3
.1
.1
.2
.1
.1
.1
.2
.1
.2
.1
A
.2
.1
.0
.0
.1
.0
.0
.0
.1
.1
.1
.0
.1
.1
3.0
2.9
3.6
4.7
5.3
5.0
4.0
4.8
4. 1
3.7
.2
.2
.1
.1
.0
.1
18.9
17.9
.3
.3
.1
.1
.0
.1
6.7
6.6
8.2
7.2
6.8
5.4
3. 1
2.3
2.3
5.3
5.1
6.4
5.8
4 .1
5. 1
6. 1
5.3
3. 6
1.2
1.0
.5
.2
.1
.0
.0
.0
.0
.0
.0
.0
13.7
12.3
13.3
12.5
12.8
I3 .S
14.7
14.7
14.4
14.0
13.6
12.2
13.5
3.5
1.9
2.4
2.7
3.1
3.0
2.8
5.6
5.7
4.8
5.4
2. 1
J .O
2.7
.5
.3
.3
.3
.2
.2
.1
10.0
9.0
7.2
6.6
15.8
14.9
6.6
5.1
204
1.1
.8
.5
.4
.5
.7
.5
.8
2.0
.0
.0
.1
.2
.2
.1
.2
.1
.2
.2
.2
.3
.3
2.5
2.2
Evidence on (he Quality of FHA and VA Loans
The HMDA data contain only limited information
indicative of the credit risk posed by borrowers. First,
a payment-to-income (PTI) ratio can be estimated
using reported income and loan size (if assumptions
are made about interest rates on loans based on the
date of loan origination). Second, loan pricing information reported in the HMDA data might also be
used to infer risk.
We examine the monthly profiles of both of these
risk measures by loan purpose and by the four loan
product types (table 15). For each loan purpose and
type, we show the proportion of loans that were
104
I I.S
3.5
3.0
304
.4
.n
.3
1.4
.0
.2
13.8
10.5
12.0
11.7
13.6
15. 1
16.6
17.0
15.8
14.2
14.6
lOA
12.9
4.8
3.6
1.3
.9
18.2
17. 1
1.5
1.4
1.5
1.5
1.5
.8
.5
.5
.6
.0
.0
.0
reported in HMDA as higher priced, those with a
PMMS spread (defined earlier) of at least 1.75 percentage points , and those with a PMMS spread
greater than 2.75 percentage points (likely subprime
loans). We also show the proportion of loans with
estimated PTIs above 30 percent-the edge of an
acceptable range In many loan underwriting
programs.
Table 15 shows a striking increase in the incidence
of HMDA-reported higher-priced FHA homepurchase and refinance lending. However, these
increases seem to be driven largely by the widening
gap between Treasury and mortgage market interest
rates during 2008. When incidence was calculated
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A193
15. Percent of home-purchase and refinance loan ' lhal are higher priced. by lbreshold and by type of Joan and month of
originalion. 2008-Coll/irwed
Pereen!
Type of loan by month
of origination
Other'
2008
January .
February ....
March
April ..
May .
June . . .
July ..
August .. .
September.
October. .
November _. ...
December.
Total
2007
Second half. .
Total . • ...
Total market
2008
January ..
February ..
March ....
April
May ..
June . ...
July
August . .
September
October
November .
December. .
Total ..... .. .. . .... ..
2007
Second hal f. .
Total . .. ....
Home purchase
Ab
I
I
.
Refinance
I
I
I
I,High
HMDA Above PMMS Above PMMS
paymentHMDA Above PMMS Above PMMS High payment- Ab
+ 1.751
+ 2.75 1
to-income ratio
ove
+ 1.75 1
+ 2.75 1
to-income ratio
ove
12.0
to.2
9.5
8.7
7.1
5.6
5.9
8.9
9.2
10.2
10.7
10.4
8.8
9.6
8.5
6.9
6.2
4.9
3.7
3.5
3.6
4.2
4.4
4.6
6.9
5.4
3.7
3.2
3.1
2.9
2.3
1.7
1.6
1.6
2.0
2.1
2.5
3.6
2.5
15 .6
13.4
14.7
13.9
13.8
13.8
14.4
14.7
14.5
13.6
13.6
11.8
14.0
19.7
12.1
13.3
14.6
15.5
14.5
16.8
22.7
24.5
19.2
22.2
14.3
16.1
17.8
10.9
10.8
11.7
11.8
11.0
12.1
13.7
16.5
11.8
14.2
11.2
12.4
11.3
6.6
6.7
7.0
7.3
6.9
7.9
9.2
10.8
7.8
9.7
7.4
7.8
16.1
12.4
13.9
12.8
13.2
14.1
14.8
14.5
14.6
14.2
14.5
11.8
1
'3.7
12.7
16.8
9.7
14.1
4.5
8.7
18. 1
17.8
23.1
28.0
19.7
24.7
12.0
16.3
20.7
21.9
9.1
7.7
7.0
6.1
4.6
3.9
4.7
9.8
11.1
12.5
13.6
11.9
8. 1
7.0
6.0
4.3
3.5
2.5
2.0
1.8
1.8
2.2
2.7
2.8
5.1
3.3
2.1
1.7
1.5
1.2
.9
.7
.7
.7
.8
.9
1.0
1.6
1.1
13.8
12.0
13.1
12.1
12.3
12.9
13.7
14.3
14.1
13.9
13.8
11.9
13.2
11.8
7.2
8.0
9.0
9.8
9.5
11.5
18.2
18.6
15.4
18.4
11.1
11.0
10.2
6.3
6.1
6.6
6.7
6.3
6.8
7.2
8.3
6.2
7.3
6.5
6.9
5.7
3.3
3.3
3.5
3.7
3. 5
4.0
4.4
4.9
3.4
4.2
3.4
3.8
14.4
11.1
12.6
11.9
12.8
13.9
14.8
15.4
15.0
14.4
14.8
11.1
13.1
10.7
12.7
7.8
10.3
3.3
5.6
16.6
16.2
17.8
28.0
14.7
24 .7
8.5
16.3
19.4
21.9
NOTE: First-lien mortgages for owner-occupied, 1-4 family, site-built properties; e~c1udes business loans. Government-sponsored entity (GSE) and other
loans have been adjusted for the fourth quarter of 2008; for more details . see
[lgage Di sclosure Act (HMDA) price·
tex!. For e~planati on of Home MO
reporting thres hold, see tex!. The threshold and annual percentage rates (APRs)
are for conventional first-lien 3D-year prime mortgages.
I. PMMS is the prime APR from the Freddie Mac Primary Mortgage Market Survey; see notes to figure I .
2. See note 2, table 13.
3. See note 3, table 13.
using the PMMS-adjusted spreads, which better reflect
the true credit-risk premium, higher-priced lending
rose far less dramatically. While the incidence of
HMDA reported higher-priced FHA home-purchase
loans more than doubled between 2007 and 2008
(4.3 percent versus 11.6 percent), the incidence of
loans with a PMMS spread greater than 1.75 percentage points was small and nearly unchanged (2.1 percent versus 2.3 percent). Virtually none of the FHA or
VA loans had PMMS spreads above 2.75 percentage
points.
Nevertheless, both FHA and VA show a significant
percentage of their loans with APRs in the range of
prime plus 1.00 to 1.75 percentage points, which
results in their being flagged as " higher priced" in
HMDA; these loans are clearly not priced as prime
loans. Much of the pricing can be attributed to FHA
and VA insurance and guarantee fees . By our estimates, the average FHA loan in October and Novem-
ber only had to be priced 0.25 percentage points
above prime to be reported as higher priced in
HMDA after insurance fees were factored into the
APR.4 3 VA loans only had to be priced 0.55 percentage points above prime to be reported as higher
priced during this period.
Caution must be exercised in drawing too strong an
inference about the quality of FHA and VA loans on
the basis of a low incidence of PMMS-spread, higherpriced loans. The FHA (and to a lesser extent, the VA)
cover most of the credit risk in a loan and , except for
the brief period in the summer of 2008, charged flat
rates. Consequently, pricing on FHA loans may not be
particularly sensitive to the loan's credit risk.44
43 . FHA fees added about 0.65 percentage points to an APR at the
beginning of 2008 and rose slightly during the year.
44. Even though the FHA and VA cover mos t of the credit risk in a
loan , they d o not cover all of it. Lenders face recourse risk in the case
A I 94
Federal Reserve Bu lletin 0 Apri I 2010
Table IS also shows an increase in the percentage
of FHA borrowers with high PTI ratios for both
home-purchase and refinance lending during 2008 as
well as relati ve to 2007, a potential sign of an
increased risk profile for the FHA program. We note
that this increase stems primarily from borrowers
whose loans were newly eligible for FHA financing
because of the limit increases. The incidence of high
PTI ratios for borrowers that would have been eligible for FHA loans under 2007 limits rose only
modestly (data not shown in tables).
LPS data provide more precise information on the
credit quality of government-backed loans. In addition to LTV, these data provide borrower FICO
scores, a commonly used credit score. Credit scores ,
such as FICO, provide a numeric ranking of the
relative credit risk posed by a borrower and are a
widely used measure of the credit risk of a loan. 45
In 2007 , the median FICO score of an FHA
home-purchase loan in the LPS data at time of
origination was approximately 625, just above the
range of credit scores often associated with subprime
borrowers and about 100 points below the median
FICO score for conventional loans in the LPS data
(data not shown in tables). Similarly, the median LTV
on 2007 FHA loans was 97.6 percent-more than
15 percentage points higher than the median for
conventional loans in 2007. 46
A comparison of the FICO scores of FHA borrowers in 2007 and 2008 suggests that the growth of FHA
loans has predominantly involved loans to borrowers
with higher credit scores. The median credit score
rose to 664 in 2008. The share of FHA homepurchase loans to prime borrowers (those with scores
greater than 660) grew from 30 percent in 2007 to
more than 50 percent in 2008. In addition, the LPS
data suggest that over 60 percent of the increase in
FHA home-purchase activity between 2007 and 2008
was to borrowers with prime-quality FICO scores .
of fraud and servicing costs in the case of borrowers who do not make
their payments. VA coverage may also be limited if the loan size is
above the loan ' s coverage cap .
45. FICO scores are one summary measure of the credit ri sk posed
by an indi vidual based solely on the information contained in the
credit reports maintained by the three nati onal credit reporting agencies. FICO scores are produced using statistical models developed by
Fair Isaac Corporation. A FICO score of 660 or more is often viewed
as a score range associated with prime quality borrowers; a score
under 620 is often associated with borrowers wilh subprime credit
qUality. For more information , see www.myfico.comlCreditEducation .
46. The LPS data tend to underrepresenl the share of subprime
loans; therefore, the median FICO score for conventional loans may be
overstated . Also, LPS does not collect information on the combined
LTV ratio of loans in its database. Because conventional loans may be
more likely to involve junior liens, medi an LTVs fo r conventional
loans will not accurately relleclthe amount of borrower equity in the
home.
The LPS data also indicate that FHA lending in
2008 continued to involve very low levels of borrower equity in the home. While the share of FHA
home-purchase loans with LTVs exceeding 95 percent fell modestly from 72.3 percent in 2007 to
67.4 percent in 2008, the median LTV on these loans
remained above 97 percent. Nevertheless , there is
evidence that the credit scores of high-LTV borrowers
improved as well. For example, while one-third of
2007 FHA home-purchase loans went to borrowers
with LTVs in excess of 95 percent and FICO scores
below 620, this share declined to 15 percent in 2008 .
The numbers for FHA- insured refinancing are somewhat different, but they show a very similar trend
toward borrowers with higher credit scores. Taken
together, the FICO scores and LTVs reported in the
LPS data for 2008 suggest that the growth of FHA
loans has predominantly involved loans with lowerrisk characteristics than in 2007 .
For VA loans , the LPS data indicate that 90 percent
of VA first-lien, home-purchase loans had LTVs in
excess of 95 percent in 2007, compared with 86 percent in 2008. Like FHA loans, while LTVs have
remained high on VA loans, the credit scores of VA
borrowers in the LPS data increased in 2008. The
median credit score for first-lien , home-purchase VA
borrowers was 672 in 2007 (within the range generally considered to be prime quality), and rose to 687
in 2008.
It is important to keep in mind when interpreting
the LPS data on FICO scores and LTVs that while
these data suggest that the expansion of the FHA and
VA programs has been primarily to borrowers with
higher credit scores , the performance of these loans
depends on many factors , including the future path of
house prices and economic activity. Predi c ting how
FHA and VA loans will perform is beyond the scope
of this article.
CHANGES IN TOTAL LEND/NG By BORROW R
AND AREA CHARACTERISTICS
As highlighted in a previous article, the mortgage
market experienced a severe contraction in lending
from the beginning of 2006 to the end of 2007 related
primarily to the collapse of the subpri me mortgage
market. 47 As discussed above, 2008 was characterized by the increased role of FHA and VA as the
overall mortgage market continued to decline. This
section examines whether these changes had a differ-
47 . See Avery, Brevoort, and Canner, "The 2007 HMDA Data."
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
ential effect across borrower groups. As before, particular focus is paid to the effect of the surge in FHA
and VA lending.
Overall Changes from 2006 through 2008
On the whole, lending for first-lien, site-built, owneroccupied home purchases reported in HMDA fell
22.3 percent from 2006 through 2007 and dropped an
additional 24.S percent from 2007 through 2008.
Refinance lending fell 18.3 percent from 2006 through
2007, and 20.9 percent from 2007 through 2008. 48
Although lending to all groups fell considerably
during these years, some groups experienced steeper
declines than others. Market shares for both black and
Hispanic white borrowers fell from 2006 through
2007 and further declined in 2008, implying that
lending to these groups fell more quickly than average between 2006 and 2008 (column 1, labeled
"market share" in tables 16.A and 16.B). In contrast,
the share of lending to Asian and non-Hispanic white
borrowers rose.
Overall patterns for lower-income lending (borrowers with incomes below 80 percent of the median
family income in their area or borrowers who live in
census tracts with median family incomes in the year
2000 that were less than 80 percent of the median
family income of their area) differ between homepurchase and refinance lending and between lowerincome borrowers and lower-income census tracts.
The share of home-purchase loans made to lowerincome borrowers increased each year, while the
share made to borrowers living in lower-income
census tracts consistently fell. The share of refinance
lending made to both lower-income groups decreased
each year with the exception of a slight uptick of
lending to lower-income borrowers in 2008 .49
48. The decline in lending from 2006 to 2007 is likely to be
overstated and the decline from 2007 to 2008 understated because of a
serious reporting problem in the 2007 data . Federal Reserve tracking
reports indicated that 169 lenders that reported HMDA data for 2006
and ceased operations sometime in 2007 or 2008 did not report
HMDA data for 2007 (in an earlier section, we di scuss the more
limited problem of IS nonreporting lenders in the 2008 HMDA data) .
Overall, these lenders accounted for about 8 percent of the site-built
conventional first -lien loans in 2006 . Since many of these lenders went
out of business at or before the middle of 2007, there is reason to
believe that loan activity in the first half of 2007 is understated in the
HMDA data (by up to 8 percent), though lending activity reported in
HMDA in the second half of the year is likely to be more accurate.
Since these lenders specialized in higher-priced subprime loans and
disproportionately served blacks and Hispanic whites, the undercounts
in the 2007 HMDA data were likely larger for these groups . For
additional information, see Avery, Brevoort, and Canner, " The 2007
HMDA Data."
49. Monthly data suggest that the refinance boom in the beginning
of 2008 may account for some of the overall decline in lower-income
refinance lending for 2008. The overall incidence of lower-income
A195
Borrowers of different demographic groups showed
large differences in their propensity to use different
types of lenders with signi ficant changes from year to
year. All groups showed significant increases in their
reliance on loans from banking institutions within
their assessment areas. 50 The substantial increase in
market share by banks in their assessment areas (see
bottom three rows) appears to have come from a
decline in independent mortgage companies' market
share between 2006 and 2007, and then a signi ficant
shift by banks from outside their assessment areas
(where their past lending activity was more similar to
that of independent mortgage companies) to lending
within assessment areas between 2007 and 2008.
Borrowers of different demographic groups showed
large differences in their propensity to use different
types of loans, with significant changes from year to
year. All groups showed significant increases in their
use of FHA and VA programs from 2006 through
2008 , especially black and Hispanic white borrowers.
In 2008, more than 60 percent of home-purchase
loans and almost 40 percent of refinance loans to
black borrowers were government-backed. For Hispanic white borrowers, nearly SO percent of homepurchase loans and 21 percent of refinance loans in
2008 were government-backed. 5 t
In contrast, the share of loans sold to a nongovernment entity fell sharply, particularly so among
loans to black and Hispanic white borrowers. About
one-half of their home-purchase and refinance loans
were sold in the nongovernment secondary market in
refinance lending fell from 31.7 percent in January to 27 .2 percent in
February and increased to 28.7 percent in March, suggesting that the
refinance boom disproportionately involved higher-income borrowers.
The damping of the incidence of lower-income refinance lending
during this period was sufficiently large to explain much of the
difference in the 2007-08 overall changes between home-purchase and
refinance lending.
50. The Community Reinvestment Act (CRA) requires commercial banks and savings institutions to identify the geographic areas that
they designate as their assessment areas. which are areas in which the
institution has special responsibilities under the CRA. Typically,
assessment areas correspond to the counties or markets in which the
institution has banking branches. Each year, larger banking institutions
file a list of the census tracts that compose their assessment areas. We
use this list to determine whether a loan originated by a banking
institution (or an affiliate) and reported in HMDA is within the
institution ' s assessment area . For s maller institutions who do not
s upply a list, we approximate their assessment area by taking into
account the counties in which they have banking offices.
51. One can derive from table 16 that there was a disproportionate
increase in higher-income FHA lending. The expansion of FHA loan
limits helps explain this disproportionate increase. For instance. only
8.6 percent of the FHA home-purchase loans originated in 2008 that
would /lot have been eligible under 2007 loan limits were made to
lower-income borrowers or tracts . In contrast, 48.0 percent of the 2008
FHA home-purchase loans that would have been eligible in earlier
years were deemed lower income , numbers largely unchanged fTom
2007 (47.5 percent and 41.5 percent, respectively) .
A 196
J6.
Federal Reserve Bulletin 0 April 20 I 0
Markel share of home-purchase and refinance J oan~, by Iype of Originator. type of loan, and loan pricing and by
characleri lie of borrower, of census traci. and of loan. 200(r08
A. Home purchase
Percent
Originating institution
Characteristic of borrower.
of census tract, and of loan
Year
Market
share
I
Minor;tv SlatllS4
Black or Afri can American . .
...... ..
Hispanic white
Asian . .. .. ... .. .. .. . .... ...
Other minority' ..... . .......
......
Non-Hispanic white .
Missing(' . _.
. .. . .
Incon,e'
Lower .. . . . . .. ..
., ' '''
B(irrOWer
..
Middle. .... ... .... .... ... ..
High . .
..... .. .
, . , ' . ... ....
. , .. . ..... . . . . . .
Missing6 .
CeflSuS-ITlU;t income H
Lower . ....
Middle . .. .,
,
.. .. , .... ...
.. " ... ... .. .....
High . . . ..... ....... .. ...
Missing6
.
...... ... .. ......
Subprime indicators
High PT[' .. .. ... ..
Piggyback
TUlal
...
",
.... .
....... ....... ....
... .... .. .. ..... .. ... ...
Type of loan
Depository (excluding
credit unions), by
propeny location
Credit Independent FHA
mortgage
Within CRA Outside CRA union
company
assessment
assessment
area'
area
I
Sold to a
VA
RHSIFSA GSE
8.7
7.6
6.3
12.1
9.5
8.5
4.5
4.5
4.9
1.0
.9
.9
62.7
66.8
69.1
10.9
10.6
10.4
20.8
32.4
40.8
23.8
38.0
47 .0
31.8
41.7
55.7
24.5
37.5
46.3
31.0
36.5
44.6
23.5
33.2
47 .2
33.3
36.4
21.2
32.0
34.0
16.2
32.3
32.4
17.2
33.6
35.4
21.2
34.9
36.3
24.8
30.3
34.7
21.3
1.3
2.0
2.7
.9
1.6
2.2
1.4
2.1
3.2
1.7
2.8
3.7
2.7
3.5
4.4
3.0
3.7
4.7
44.4
29.1
35.3
43 .2
26.5
34.6
34.4
23.7
24 .0
40.0
24.5
28.8
31.5
23 .7
26.2
43 .0
28 .3
26.7
9. 1
15.0
51.4
5.6
9.7
44.7
1.5
1.9
11 .9
6.4
10.1
39.1
6.1
7.3
27.4
4.0
6.0
26.7
4.2
6.0
10.8
1.4
2.2
4.5
.5
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
200S
23.5
24 .8
2S.1
24.7
25.2
27 .1
46.S
47.0
43. 1
5.0
3.1
1.7
31.6
3S.3
44.3
26.2
33.3
42.5
28.9
37.2
48.4
19.6
29.0
33.2
32.7
33.6
22 .9
35.1
36.4
23.5
34.6
36.6
23.0
24.2
33.1
19.2
2.S
3.5
3.9
2.6
3.5
4.1
2.1
2.9
4.2
33.0
24 .6
28.9
36.0
26.7
30.0
34.4
23.3
24 ..~
54.7
35.8
43 .2
11.4
11.7
37.6
8.0
10.S
35.6
2.6
4.4
20.6
1.1
3.3
30.4
2.4
2.6
4.3
4.0
4.S
7.7
2.2
2.9
5.5
.4
.9
3.8
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
15.7
14.4
13.1
49.6
49.7
49.9
33.8
35.1
35.9
1.0
.8
I.l
25.6
37.7
46.8
27.S
35.0
44.1
31.4
38.2
4B.O
2. 1
2.5
2J
33.0
34.8
20.6
34.9
37.1
24.3
33.0
34.3
22.1
15.2
23 .9
24.4
1.7
2.6
3.4
2.5
3.4
4.2
2.2
2.9
3.9
9.6
14.5
12.3
39.6
24.9
29.2
34.8
24.5
27.3
33.5
24.6
26.0
72.3
59.2
61.1
7.6
10.8
39.2
6.9
9.0
32.8
3.7
4.7
21.6
3.8
10.2
33.4
1.7
2.3
4.5
3.2
3.9
6.6
2.2
2.6
5.0
2.2
3.3
3.9
2.3
5.1
2006
2007
2008
2006
2007
2008
2006
2007
2008
16.4
16.2
13.2
22.2
10.8
1.7
100
100
100
25.4
35.1
43.4
15.9
33.3
68.3
28.4
36.2
45.4
31.8
34.6
21.7
34.0
38.5
IB.O
33.8
35.7
23.0
2.0
2.9
3.2
.4
1.0
4.8
2.3
3.2
4.1
40.6
27.4
31.7
49.4
27.4
8.9
35.5
24.9
275
3.7
4.5
25.4
.0
.0
.0
5.9
7.8
29.6
2.8
3.6
6.9
.0
.0
.0
2.6
3.2
5.7
.6
1.8
.0
.0
.0
.4
.8
2.2
NOTE: First-tien mortgages for owner-occupied , 1-4 family. site-built properties; excludes business loans.
I. Includes lending by nondeposilOry affiliates in the assessment areas of
depository institutions covered by the Community Reinvestment Act of 1977
(CRA) .
2. Includes loans sold into a private security, to another commercial bank ,
savings bank or savings association , or a life insurance company.
3. Freddie Mac Primary Mortgage Market Survey annual percentage rate
(PMMS APR) is for a 3D-year fixed-rate mortgage ; for more details, see text.
4. Categories for race and ethnicity reAect revised staJ.dards established in
1997 by the Office of Management and Budget. Applicants are placed under
only one category for race and ethnicity, generally according to the race and
ethnicity of the person listed first on the application . However, under race, the
application is designated joint if one applicant reported the single designation
of white and the other reported one or more minority races. If the application
is nor joint but more than one race is reported, the following designations are
made: If at least two minority races are reported, the application is designated
as two or more minority races; if the first person listed on the application
1.1
Held in
ponfolio
entlly'
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2.2
4.4
nongover~n~ent
.6
1.3
2.5
3.6
7.3
2.7
3.1
5.5
2.6
3.6
7. 1
.2
.6
2.1
.3
.8
2.3
.0
.1
.2
.4
.8
2.1
.6
1.0
2.6
.1
.3
.9
.~1.5
51.1
20.8
7.9
52.4
21.6
9.1
41.4
23.3
17.4
48.1
22.2
11 .2
35.1
23.9
16.3
42.3
23.4
13.6
22.4
31.6
12.9
26.5
38.2
16.5
30.2
40.3
23 .0
25.2
35.4
14.9
26.9
30.4
20.1
29.2
35.1
20.2
2.8
.1
.3
.6
.2
.5
3.0
25.7
33.6
23.4
26.4
33.7
25.6
24.1
32.2
33.2
11 .6
21.7
17.2
34.1
21.6
14.0
38.4
22.2
13.5
42.2
24.2
16.3
50.9
33.2
16.5
25.4
28.8
16.5
22.6
27.4
14.7
28.8
36.1
23 .9
35.8
40.4
29.1
.3
.7
1.9
.7
18.3
30. 1
24.4
24.9
25.8
27 .0
33.4
33. 1
1,[,2
19.0
15.0
46.0
21.3
11 .8
38.7
22.4
13.6
38.5
25.2
17.6
43.5
32.5
18.7
26.2
34.9
18.2
25.7
30.4
17.9
28.5
33.8
21.B
38.1
32.8
23 .9
17.7
30.0
28.8
13.4
33.0
56.7
24.4
32.6
28. 1
47 .3
25.9
17.9
66.1
33.6
IS .6
39.8
23.3
14.9
28 .1
35.5
19.2
20.4
33.4
24.7
26.8
32.2
19.4
1.0
1.6
4.2
.6
1.2
1.2
3.3
.2
.3
.8
1.2
J
13.1
25 .9
15.0
13.8
27.5
22.9
26.4
33.9
46.2
17.4
27.9
25.3
28.5
34.3
28.2
21.S
31.S
no
reports as two races, and one is white, the application is categorized under the
minority race. For loans with two or more applicants, lenders covered under
the Home Mortgage Disclosure Act report data on only two.
5. Other minority consists of American Indian or Alaskan Native, and Native Hawaiian or other Pacific Islander.
6. Information for the characteristic was missing on the application .
7. Borrower income is the IOta I income relied upon by the lender in the loan
underwriting . Income is expressed relative to the median family income of the
metropolitan statistical area (MSA) or statewide non-MSA in which the property being purchased is located . " Lower" is less than 80 percent of the median;
" middle" is 80 to 119 percent; and "high" is 120 percent or more.
8. The income category of a census tract is the median family income of the
tract relative to that of the MSA or statewide non-MSA in which the tract is located. " Lower" is less than 80 percent of the median; " middle" is 20 to
119 percent; and "high" is 120 percent or more.
9. High payment-to-income ratio (PTI) is 30 percent or more.
FSA Farm Service Agency.
RHS Rural Housing Service .
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A197
16. M arket share of home-purchase and refi nance loans. hy type of ori gimltor. type of loan, anJ loan pricing anJ by
characleri tic or borrower. of ce ns u~ trac t, and of loan. 2006---08
A. Home purchase-Continued
Percent
Loan pricing
I
Characteristic of borrower,
of census tract. and of loan
Higher priced, by percentage points above PMMS APR'
Year
Market share
Lower priced
-.
Less than 1.75
I
1.75- 2.74
I
2.75 or more
M i1lorifl' slallls4
Black or African
American.
.. ...
Hispanic white . .
Asian .
....... ....
... . .
... ..
Other minority' ..
Non-Hispanic white .. ......
Missing6
.
.......
Borro wer income 7
Lower ..
..
..
. .. . . .
Middle • . .. - .. . . .. . .
High ..... . . .
Missing6 ..
.. . .
.. . . ....
.. ...... .. ..
Cen.~us-Irac' incomeS
Lower . ..
Middle .
High
..... .. , ..... -
. . . . . . . . . .. . . . . .
..... .........
......
Missing" ... .. . .. ..
Suhprime indicators
High PT!" . ...... . . . . . . . . .. . '
Piggyback .... .
TOlat .
.. ......
...
~
.. .
..
.
. . ..
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
8.7
7.6
6.3
12. 1
9.5
8.5
4.5
4.5
4.9
1.0
.9
.9
62.7
66.8
69.1
10.9
10.6
10.4
53.3
72.3
85.6
57 .6
75 . I
84.8
83.6
92.4
96.0
68.8
83.4
90.5
83.9
90.4
92.8
74.4
87 .6
93 .6
3.4
3.9
8.8
4 .6
4.7
9.3
2.5
1.8
2.6
3.8
3.3
5.8
2.4
2.1
4.2
2.5
2.2
4.2
5.8
8.4
4.2
6.8
9. 1
4.2
2.9
3.0
1.0
5.3
6.0
2.3
3.3
3.7
1.9
3.6
4. 1
1.7
37.6
15.3
1.5
31.0
11.1
1.6
11.0
2.8
.4
22 .1
7.3
1.4
10.4
3.8
1.1
19.6
6.1
.6
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
23.5
24.8
28. 1
24.7
25 .2
27 .1
46.8
47.0
43 . 1
5.0
3.1
1.7
74.5
85.0
89.0
75.6
87.4
92.1
79.0
89.3
93.7
74.4
74 .0
91.7
2.9
3. 1
6.8
2.4
2.4
5.0
2.3
1.9
3.5
8.9
6.2
3.7
4.3
5.6
3.0
3.5
4.2
2.0
3.2
3.6
1.7
11.4
14.5
2.2
18.3
6.3
1.2
18.6
6.0
.9
15.5
5.1
1.1
5.3
5.3
2.5
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
IS .7
14.4
13. 1
49.6
49.7
49.9
33.8
35.1
35.9
1.0
.8
1.1
62.5
79. 1
87 .0
75.8
86.4
91.0
84.7
91.7
94.8
90.2
93.1
92.4
3.7
3.7
7.9
3.0
2.7
5.4
2. 1
1.7
3. 1
2.2
1.7
4. 1
5.5
7.3
3.7
4.2
5.0
2.4
2.8
3. 1
3.4
3.5
1.8
28 .3
9.9
1.4
17.1
5.9
1.2
10.3
3.5
.8
4.2
1.7
1.7
2006
2007
2008
2006
2007
2008
2006
2007
2008
16.4
16.2
13.2
22.2
10.8
1.7
100
100
100
63.2
82.4
93.9
55 .3
84.0
97 .0
76.9
87.3
91.9
1.6
2.4
3.2
3.4
2.0
1.5
2.8
2.S
4.9
2.6
4.7
1.6
4.8
2.9
1.1
3.9
4.6
2.2
32.6
10.6
1.3
36.5
11.0
.4
16.4
5.6
1.1
2006, compared to less than 10 percent in 2008. In
2007, the GSEs and portfolio lenders captured market
share among virtually all demographic groups. In
2008, the GSEs and portfolio lenders gave way in the
home purchase lending market to the FHA and VA;
however, the GSEs continued increasing their share
of refinance loans made to all demographic groups
that year.
The share of borrowers with income missing from
home purchase loan applications fell from 2006
1.3
through 2008, but rose slightly for refinance loans in
2008 from 2007. Almost 60 percent of these refinance
loans were FHA- or VA-backed, indicative of "streamlined" refinance programs in both agencies for which
income data are not used.
The incidence of higher-priced lending significantly declined among all groups from 2006 to 2008
(last three columns, tables 16.A and 16.B). In total,
the share of home-purchase loans priced 1.75 percentage points over PMMS fell from 20.3 percent in 2006
A 198
Federal Reserve Bulletin 0 April 20 I 0
16. M arkd share of hOO1I:-purchase and refinance loan., hy lyp vf originator. type 01 loan. and loan pricing and by
charac teri stic of borrower. of cen u tracl. and of loan. 2006-08
B. Refinance
Percent
Characteristic of borrower.
of census tract, and of loan
Year
Originating institution
Depository (excluding
credit unions). by
Market
Independent
propeny location
Credit
share
mortgage
FHA
Within CRA Outside CRA union
company
assessment
assessment
I
areal
20.9
27.9
39.9
29.4
40.4
52.9
34.8
42.3
55.4
29.0
37.4
47.9
29 .5
33.8
44.7
21.4
27.7
45 .2
37.3
44.2
27.8
28 .7
34.6
190
30.6
33.8
20.5
32.3
38.5
25 .2
35.2
39.1
27 .1
32.7
40.5
25.2
24.6
23 .3
23 .5
26.2
25.6
25.5
43.8
46.2
44 .9
5.4
5.0
6.2
27.1
32.0
44.0
25 .5
30.7
43.3
29.5
35.S
4S.3
24.8
31.2
37.0
2006
2007
2<X)8
2006
2007
2008
2006
2007
2008
2006
2007
2008
17.9
16.0
11.9
52.0
52.2
52.0
29.5
31.0
35. 1
.6
.7
1.0
2006
2007
200S
2006
2007
2008
24.0
20.1
13.1
VA
Sold to a
000Held in
RHS/FSA GSE
government ponfolio
enlj[y 2
area
9.5
8.3
6.0
10.5
9.2
5.7
30
3. 1
3.1
1.2
1.0
.7
61.3
64.4
72.5
14.5
14.0
12.0
Type of loan
Millo r;tv SllllUS4
Black or African American .
2006
2007
2008
Hispanic white ..... .. ' . ..... 2006
2007
2008
Asian . ... .. . . .. ..... ....
2006
2007
2008
2006
Other minority" .... . . .... ,
2007
2008
Non·Hispanic white.
.... 2006
2007
2008
Missing 6 , ..
...... ,
2006
2007
2008
Borrower income 7
Lower . .. .. . . . ,. .... .... .... 2006
2007
2008
2006
Middle . . .. , . , . .... . .. ...
2007
200S
High .. . .
.. ..... ..
2006
2007
200S
Missing 6 .. . .... .... ..
2006
2007
2008
...
~
3.7
9.1
35.1
1.8
3.8
19.5
.5
.9
4.4
2.0
3.7
16.0
2.3
4.5
14.7
1.6
3.8
17.5
4.0
.1
.2
1.2
.0
.1
.3
.2
.3
1.5
.3
.4
1.2
.3
.5
J.7
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
.0
12.5
19.7
22.4
14.7
24 .7
36.3
20.2
26.8
48.4
16.5
23 .8
35.2
22.4
27 .7
35.3
17.4
24.3
37.8
48 .9
23. 1
8.5
49 .2
23.9
11.8
41.5
22.8
16.2
44.8
6.6
3.7
4.8
7.4
3.0
3.7
7.1
39.5
24.6
26.9
40.2
22.3
22.5
32.6
21.0
18.4
36.4
20.7
20.2
31.8
22.3
20.7
42.6
28.1
22 .6
13. 1
38.2
23.9
16.9
49.4
28.4
14.4
34.3
47 .0
29.9
34.2
47.3
31.2
37.8
49.5
30.7
36.4
48.9
34.2
36.8
43 .6
31.8
31.3
43.0
28.6
34.9
40.0
26.7
34.8
40.2
26.4
33.3
38.0
25.5
35. 1
40.9
29.3
3.8
4.S
7.3
3.4
4.6
7.4
2.9
4.0
7.5
1.2
1.7
2.1
34.2
23.2
22.1
36.2
24.6
22.9
34.4
22.2
18.7
3S.S
26.5
31.7
2.S
5.6
17.9
2.5
6.0
19.2
1.0
2.5
10.2
7.7
11.7
41.7
.1
.2
.3
.2
.2
.4
.1
.1
.3
3.5
5.5
17.0
.0
.0
.1
.0
.0
.0
.0
.0
.0
.0
.0
.0
20.5
26.5
32.7
2\3
27.7
35.3
IS.7
25.6
38.4
17.9
23.1
23 .3
40.7
22 .9
15.2
42.3
24.0
15.8
43.3
25.6
17.6
40.1
23.2
5.0
35.9
44.8
33.9
33.7
42.2
29.3
37.0
46.2
33.5
30.7
36.5
13.0
24 .9
33.0
44.8
26.9
31.9
43 .7
31.1
36.8
49.2
2.7
2.4
2.2
33.1
39.5
25 .6
352
40.6
27.6
33.2
37.0
24.5
21.1
24.6
24.9
2.4
3.5
6.4
3.3
4.4
7.3
3.0
3.9
6.5
17.S
19.1
22.3
39.3
24.0
23.3
34.6
23 .1
21.4
32.S
22 .3
19.8
57.2
54.1
50.9
2.6
5.9
23.4
2.5
5.3
IS .6
1.4
2.7
10.2
1.6
8.2
22.1
.2
.3
1.2
.4
.5
1.6
.2
.3
15.2
22.9
30.5
20.6
26.7
33.9
21.4
27.3
39.5
10.3
19.1
20.5
47.2
24.3
12.5
41.1
23.7
14.9
4O.S
25.6
18.1
57.7
29 .1
19.7
34.7
46.6
32.3
35.5
43.S
31.0
36.2
44. 1
1.0
.6
1.6
.0
.0
.0
.0
.0
.0
.0
.0
.0
.1
.0
.1
20.3
28.2
39.5
32.9
40.5
27.3
1.6
2.5
4.5
44 .8
28.6
2S.6
.9
2.6
15.5
.1
.1
.4
.0
.0
.0
13.5
22.3
34.8
56.2
31.6
20.3
29.3
43.4
29.0
2.1
3.2
5.4
1.6
2.7
5.7
1.8
2.8
5.7
2.3
3.4
.7
J.I
ZJ3
Census-Iracl illcvmeN.
.... ...... . .. ...
Lower . .
Middle ..
,
... .. ... .........
High . ..........
Missing 6 ..
. ..... ... ...
.. .. , ..."' .... ..
Suhprime indiclIIVrs
High PT)" .. , _.....
Piggyback 10. .
Total
,
.. ..
... ......... -
..... ... . ..... ... ... ... ,
2006
2007
2008
1.1
...
100
100
100
27 .6
33.4
45.3
34.2
39.2
26.2
35.1
23.2
21.3
2.2
4.6
16.3
.3
.4
1.4
0
.0
.0
29.4
43.1
36.0
..
...
3.1
4.2
7.1
31.1
19.8
26.2
35.3
42.2
24.4
15.8
35.5
44.3
31.3
NOTE: See notes to table 16.A.
10. Piggyback data for refinance loans are omitted due to possibly significant underreporting of such loans .
. Not applicable.
to 10.2 percent in 2007 and further to 3.3 percent in
2008, reflecting the collapse of the subprime market.
This trend was driven primarily by the striking
dec/ine in very high-priced lending (2.75 percentage
points or more above PMMS). Black and Hispanic
white borrowers and borrowers in lower-income tracts
recorded the highest incidence of very high-priced
home-purchase lending in 2006, and saw outsized
declines in the incidence of these loans by 2008.
Other indicators of subprime lending also show
declines from 2006 through 2008 , For example, there
was a reduction in the number of borrowers with PTls
above 30 percent and a virtual elimination of piggyback loans. In 2006, more than 22 percent of home-
A 199
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
16. Market share of home-purchase and refinance loans. by Iype of originalor. Lype of loan. anti loan pricing and by
charaCleri lie of borrower. of census Irael. and of loan, 2006--08
B. Refinance-Continued
Percent
Loan pricing
Characteristic of borrower.
of census tracl, and of loan
Higher priced . by percentage points above PMMS APR'
Year
Market share
Lower priced
Less Ihan 1.75
I
1.75-2.74
I
2.75 or more
Mil/ orin' status4
Black or African American
Hispanic while .... ....
Asian ... .. .. .. . .
Olher minorily" . .. . ...
Non-Hispanic while .
......
Missing" .
Borrower income?
Lower ...
.....
. . .. .. .
Middle ..... .. ... . .
Higb . . . . . . . . . . . . , . . ,
MissingO . . . . . . . .. . . ..
...
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
9.5
8.3
6.0
10.5
9.2
5.7
3.0
3. 1
3. 1
1.2
1.0
.7
61.3
64.4
72.5
14.5
14.0
12.0
49.4
62. 1
77.1
63. 5
74 . 1
85 .3
80.5
87.6
96.8
67.4
75.6
84.5
75 .0
82.5
89.8
63.2
75 .3
90.3
4.2
3.7
7.4
4.6
4.2
5.5
3.2
2.4
1.4
4.0
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
24.6
23 .3
23.5
26.2
25 .6
25.5
43.8
46.2
44.9
5.4
5.0
6.2
62.4
73.8
82.9
66.7
77.3
88.0
74.2
82. 1
91.8
81.2
84.7
95.7
2006
2007
2008
2006
2007
2008
2006
2007
2008
2006
2007
2008
17.9
16.0
11.9
52.0
52.2
52 .0
29.5
3 1.0
35.1
.6
.7
10
57.7
69. 1
81.2
68.6
2006
2007
2008
2006
2007
2008
24 .0
20.1
13.1
4.3
3.2
2.4
.1 .8
3.6
3. 1
4.4
9.5
9.9
5.6
7.6
8.5
4.4
4.8
5.4
1.0
7.4
7.7
3.9
6. 1
5.9
2.9
7.7
7.5
3. 1
37.0
24.3
9.9
24.3
13.3
4.9
11.4
4.6
.7
21.2
13.3
7.3
IS .7
9.3
3.6
2S.6
14.2
2.3
3.6
3.0
S.9
3. 3
2.8
4.6
3.3
2.6
3. 1
5.8
3.7
2. 1
7.9
7.7
4.7
6.9
6.6
3.3
6.0
6. 1
2.4
8.0
7.7
1.1
26. 1
15.6
6.5
23.1
13.3
4.0
16.6
9.2
2.7
4.9
3.9
1.1
4.3
8V
78.7
85.9
94.1
85.0
90.3
91.8
6.5
3.6
2.9
4.7
2.9
2.2
2.4
3.0
1.8
3.0
8.6
9.0
5.2
7.2
7.0
3.6
5.0
4.9
1.8
5.3
4.6
2.4
29.5
18.1
7.1
20.6
12.2
4.5
13.5
7.0
1.7
6.7
3.3
2.8
54 ..1
70.6
89.7
2.4
2.3
3.0
5.4
6.3
2.6
37.9
20.7
4.7
3.4
Census-Iract incomeS
Lower ..
Middle , .... . .
.....
High ........ ... . .
Missing6
.
Towi ..
.. ....
......
.... ... ..
SlIbprime ;,uJit:atorJ
High PTI" .
Piggyback 10
.
•
..... .. ..
... .... ..... ..
...., .
. . .. .
.
2006
2007
2008
77.9
3.7
.
...
100
100
100
purchase loans had piggyback loans. Two-thirds of
these loans were sold into the private secondary
market, and more than 36 percent were very high
priced (PMMS spread of more than 2.75 percentage
points). By 2008, virtually none of the piggyback
loans that remained were higher priced, and most
were sold to the GSEs.
69.7
79.1
89.0
3.5
2.8
4. 1
..
. .
...
..
6.8
6.7
3. 1
20.0
II.S
3.8
Borrower In omes and Loan Sizes
More detailed information on borrower incomes and
loan sizes by year and loan type is shown in tables
17.A, 17.B, 18.A, and 18.B. The data show that the
mean income for borrowers using FHA, VA, and
"other" loans (almost all of which are conventional
A200 Federal Reserve Bulletin 0 April 20 to
17. Cumu lati e dislrihulion of home loans. by borrower income and by purpo ·c. lype, and pricing of loan, 2007-08
A . Home purchase
Percent
Upper bound of
borrower income
(thousands of dollars)'
FHA
I
VA
I
Other
I
Total
I
Higher priced
I
Adjusted higher
priced'
I
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
24 ... . . . . .. . . . . . .... . . .
49 ..
...... .. .. .. , .. .
74 .. ... ...... .... ..
99 . ... .. ........ .
124 . . . . . . . . . . . , . . .
149 . . . .. ..... . .
199 .... ... ..... .....
249 .
.. . .. . .....
299 .. . . . . . . . .
..
More than 299 . ...
4.6
43.5
78. I
92.4
96.9
98.4
99.3
99.6
99.7
100.0
3.0
35.7
68.9
86.5
93 .9
96.9
99.0
99.6
99.8
100.0
.8
28.2
66.3
87.5
95 .7
98 .5
99.8
99 .9
100.0
100.0
.6
24.1
60.5
82 .3
92.5
96_
8
99.3
99.8
99.9
100.0
2.9
26.2
50.4
67.7
78.7
85 . 1
92.0
95.1
96.6
100.0
3.0
25. 1
48. 2
65.5
76.9
83 .8
91.2
94 .5
% .2
100.0
3.0
27.6
53. 1
70.3
80.7
86.6
92.9
95 .6
96.9
100.0
2.9
28.2
55.1
72.7
82. 9
88.4
94.0
96.3
97.5
100.0
5.4
35.6
61.6
77.1
85.7
90.3
95.0
97.0
97 .8
100.0
6.6
42.2
68.8
82 .9
89.7
93. 2
96. 3
97.6
98.2
100.0
5.4
35.2
61.3
76.9
85.6
90.3
95 . 1
97. 1
97 .9
100.0
8. 1
42.8
67 .2
80.7
87.7
91.4
95.1
96.7
97 .6
100.0
MEM
O
Borrower income
by "elected 10a1l ,>pe
(thol/sands vf dol/ars) ,
Mean .. .. .. . . . .... . . ..
Median . .. .....
..
59.8
53.0
67.1
59.0
68.3
62.0
73.7
66.0
102.2
74.0
107. 1
77.0
97.7
71.0
93. 3
69.0
84.6
62.0
77.0
550
84.6
62.0
83 .1
55 .0
.
2007
Non: Includes only first-lien origi nations for owner·occupied, l-4-famil y.
site-built properties ; excludes business-related loans. For loans with two or
more applicants, lenders covered under the Home Mortgage Di sclosure ACI
(HMDA) repon data on only two. Income for two appUcants is reponed
jointly. For definitions of lower- and higher-priced lendi ng. see lext.
I. Income amounts are re poned under HMDA 10 the neareSI $ 1,000.
2008
2. Other loans include loans ori gi nated with a Farm Service Agency or Rural Housing Serv ice guarantee and convenljonal loans.
3. Adjusted hi gher-priced loans are those with annual percentage rates
(APRs) 1.75 percentage points or more above the 30- year fixed-rate APR from
the Freddie Mac Primary Mortgage Market Survey.
17. Cumu lative di lribulion of home loans, by borrower income and by purpose, lype. and priCing of loan . 2007-08
B. Refinance
Perce nt
Upper bound of
borrower income
(thousands of dollars)'
FHA
2007
I
VA
2008
2007
I
Other'
2008
2007
I
Total
2008
2007
24 .. . . ... . , . .... ..... ....
49 . . . . . . . . . . . . .. .. ..
74 . ... .... .. . , .... ..
99 ... ...... ... . . . . . . .
124 . .. . . ' .. .. .... ..
149 .. . ..... ... ......
199 . . . .. ... .. .. ....
... . , . . . .
249 .. ...
299 .. .. .. .. " . . ... .. . . . .
More than 299 . .. . - ... .
2.9
34.2
72.2
91.1
97.4
99. 1
96.7
99.8
99.8
100.0
2.6
30.5
65.9
86.3
94.8
97 .8
99.5
99. 8
99.9
100.0
3.6
29.4
65 .9
86.4
95 .5
98. 5
99 .6
99.9
99.9
100.0
2.7
23.9
57.3
80.1
91.6
96.4
99 .2
99.7
99 8
100.0
3.2
25.0
51.2
69.9
81.2
87.3
93 .5
96.0
97 .2
100.0
95.7
97.1
100.0
3.2
25.4
52.1
70.8
8 1.9
87.8
93.7
96.2
97.3
100.0
MEMO
Borrower income
b,' selected loan n'pe
(ihuusaruls of doliar,,) ,
Mean ..
..
.. . . .. .
Median . . . , . , . . . . . .. . . .
64.2
59.0
68.3
62.0
67 .7
63.0
75 .3
68.0
96.8
73.0
101.7
770
95.3
72.0
.
NOTE: See notes
10
3,3
23.1
47.7
66.5
78.8
85 .7
92.8
I
Higher
2008
2007
3.2
24 .2
50.4
69.5
81. 2
87.5
93 .8
96.3
97.5
100.0
96.7
74.0
pri c~d
I
Adjusted higher
priced '
I
2008
2007
2008
5.1
33.7
62.1
79 .1
87.9
92.1
96.1
97 .7
98 4
100.0
8. 5
42.1
70.5
85 .5
82.3
95.4
97.7
98.6
99.0
100.0
5.2
34.5
63.2
80.0
88.6
92 .6
96.4
97 .9
98.5
100.0
71.7
860
92.5
95.4
97.7
98.6
99.0
100.0
80.3
62.0
69. 1
55 .0
78.7
62 .0
67.5
54.0
9.9
44.4
table 17.A.
loans) increased for both home-purchase and refinance lending from 2007 through 2008. Though the
income of FHA and VA borrowers rose relative to
borrowers using other loans , FHA and VA borrowers
continued to have relatively low income levels. Meanwhile, the incomes of borrowers with higher-priced
loans, already lower than that of borrowers with
lower-priced loans, fell relatively more in 2008 .
Loan amounts also differed across loan types , with
government-insured or guaranteed loans generally
being smaller than conventional loans. In 2008 ,
though , the upward shift in the distributi on of loan
amounts for both FHA-insured and VA-guaranteed
loans contrasted with a downward shift in the distribution for other loans. Overall, average loan amounts
for all loans fell for both home-purchase and refinance lending, but the drop was largest among higherpriced loans.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A201
18. Cumulalive distribulion of home loans, by loan amollnl and by lype. 2007-08
A . Home purchase
Percent
Upper bound of
borrower income
(thousands of dollars) '
VA
FHA
2007
J
2008
2007
I
Total
Other
2008
.0
I
2007
2008
.5
J
2007
J
Higher priced
2008
2007
I
Adjusted higher
priced'
2008
2007
I
2~
24 ..... .. ....... ..
49 .... . .. ... ..... .. ..
74 ..
....
99 .... .. .. . .. ...... . ..
149 .. .... .. .. .. .. .. . ..
199 . . . . ........ ..
274 ... .. . .. . .... ..
417 ......... .. .... .... . .
.. . • .
625 .. .
.. ....... .
729 .
More than 799 .. .. . .. .
.1
2.2
11.4
26.6
60.6
85. 1
96.3
99.8
100.0
100.0
100.0
.1
1.5
7.9
18.9
47 .6
71.4
89.1
98.2
99.7
99.9
100.0
.0
.4
2.5
8.8
32.9
60.6
85.0
98.9
100.0
100.0
100.0
.3
2.2
7.3
28.7
55 .4
80.2
97.0
99.8
100.0
100.0
.4
2.3
7.8
15.5
35.9
53.4
71.4
88.6
96.1
97.4
100.0
2.8
8.4
16.0
35.6
52.4
70.6
89.0
96.5
97 .6
100.0
2.3
7.9
16.1
37.7
56.1
73.8
89 .8
96.5
97.7
100.0
.3
2.3
7.9
16.3
38.7
58.2
76.6
92.2
97.6
98.4
100.0
1.0
5.6
15.9
27.1
48. 1
63.1
77.7
91.2
97 .5
98.5
100.0
2.0
10.0
23.6
37.8
61.8
76.4
87.1
95 .3
98.4
98.9
100.0
1.1
5.8
16.3
27 .6
48.7
63 .5
78.0
91.4
97 .7
98.7
100.0
3.9
15.0
29.6
42 .5
63.3
75 .8
86.1
94.4
98.0
98.6
100.0
MF.MO
Loan amount
(thousands of dollars )
Mean . .. , .... ... ... ...
Median . .. .
...
142.3
134.0
171.3
154.0
193. 1
179.0
207.3
188.0
241.1
188.0
238.4
190.0
231.9
180.0
216.8
176.0
205.5
155.0
164.5
124.0
202 .6
152.0
164.6
116.0
NOTE: Includes only first-lien originations for owner-occupied, 1-4 family,
site-built properties; excludes business-related loans. For definiti ons of lowerand higher-priced lending, see text.
I. Loan amounts are reported under the Home MOJ1gage Disclosure Act to
the nearest $1 ,000.
2. See note 2 , table 17.A.
3. See note 3, table 17.A.
18. Cumulative distribulion of home loans. by loan <lffiOunl and by type , 2007-08
B . Refinance
Percent
Upper bound of
borrower incon1\!
(thousands of dollars)'
FHA
I
VA
I
Other
I
Total
I
Higher priced
J
Adjusted higher
priced'
I
2008
2007
2008
2007
2008
2007
2008
2007
2008
2007
24 . . . . . . . . . . . . .
49 .. ..
74 . . . .. .....
... .. .
99 ....... .... . ... . ... ...
149 .... .... . .. . .. .. .
199 .. .... ..... .. . . . .. .. .
274 . . . .. ..... . . .... ...
417 .. .. ...
......
625 .. .. . ... : : : . .. . .. .
729 ......... . .. .... ..
More than 799 ....... ..
.1
1.0
6. t
17.3
50.2
76.5
93.4
99.7
100.0
100.0
100.0
.0
.7
4.7
13.5
41.3
66.7
88.1
98.7
99.8
100.0
100.0
.1
.9
4.7
13.5
40.1
64.5
87 .5
99.3
100.0
100.0
100.0
.0
.7
4.0
10.9
32.6
56. 1
81.1
98.1
99.9
100.0
100.0
1.1
4.1
10.5
IS.5
37.2
53.7
71.4
88 .9
96.4
97 .7
100.0
1.1
4.8
11.7
20.2
39.7
56.4
74 .2
92.0
97 .7
98.4
100.0
1.0
3.9
10.3
18.4
37.8
54.8
72.5
89.4
96.6
97.8
100.0
.9
4.0
10.5
19.0
39.8
58.1
76.5
93. 1
98.1
98.7
100.0
2. 2
7.0
16.0
26.2
47 .2
63.2
78.2
91.5
97.7
98.6
100.0
5.3
17.7
33.1
46.8
68.7
81.8
91.1
97.2
99. 1
99.4
100.0
2.3
7. 1
16.3
26.8
48.4
64.4
79 ..~
92. 1
97.9
98 .8
100.0
37 .7
51.1
71.6
83.5
91.8
97 .3
99.1
99.4
100.0
MEMO
Loan amount
(thaI/sand.,' of dollars)
Mean .
Median ... . .... .. .....
160.3
149.0
179.6
164.0
181.7
168.0
200.2
186.0
235 .0
186.0
217 .2
178.0
23 1.4
183.0
210.8
175.0
202.3
157.0
138.0
105.0
197.0
153.0
130.6
97.0
• • • w • • • • • •
2007
2008
7 .1
21.5
NOTE: See notes L table IS .A.
O
D IFFERENCES IN LENDING OUTCOMES By
RACE, ETHN1C1TY, AND SEX OF THE
BORROWER
Analyses of HMDA data from earlier years revealed
substantial differences in the incidence of higherpriced 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.52 Studies also found that differ52. See Avery, Brevoort, and Canner, "The 2006 HMDA Data";
Avery, Brevoort, and Canner, "Higher-Priced Home Lending and the
2005 HMDA Data"; and Avery, Canner, and Cook, " New Information
Reported under HMDA ."
ences across groups in mean APR spreads paid by
those with higher-priced loans were generally smal1. 53
Here we examine the 2008 HMDA data to determine
the extent to which these differences persist, comparing results for 2008 with those for 2007.
Although the HMDA data include a variety of
detailed information about mortgage transactions,
53 . See, for example, Andrew Haughwout, Christopher Mayer, and
Joseph Tracy (2009), SlIbprime Mortgage Pricin}i: The Impact of
Race, Ethniciry, and Gender on the Cost of Borrowing, Staff Report
no. 368 (New York: Federal Reserve Bank of New York . April): and
Marsha Courchane (2007), "The Pricing of Home Mortgage Loans to
Minority Borrowers : How Much of the APR Differential Can We
Explain?" Journal of Real Estate Research, vol. 29 (4), pp. 400-39.
A202
Federal Reserve Bulletin 0 April 2010
many key factors that are con sidered by lenders in
credit underwriting and pricing are not included.
Accordingly, it is not possible to determine from
HMDA data alone whether racial and ethnic pricing
disparities reflect illegal discrimination. However,
analysis using the HMDA data can account for some
factors that are likely related to the lending process.
Given that lenders offer a wide variety of loan
products for which basic terms can differ substantially, the analysis here can only be viewed as suggestive.
Comparisons of average outcomes for each racial,
ethnic, or gender group are made both before and
after accounting for differences in the borrowerrelated factors contained in the HMDA data (income,
loan amount, location of the property or MSA, and
presence of a co-applicant) and for differences in
borrower-related factors plus the specific lending
institution used by the borrower. 54 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 borrower-rel ated factors
plus lender (or "lender modified") .
As described earlier, changes in the interest rate
environment over the course of 2008 may have
affected whether a loan ' s APR exceeded the reporting threshold set by the rules governing HMDA,
making comparisons of unadjusted data on reported
higher-priced lending potentially misleading. To cor-
54. Excluded from the analysis are applicant s residing outside the
50 states and the District of Columbia as well as applications deemed
to be business related .
Borrower-related factors are controlled for as follows: Loans are
placed in cells based on their size (arrayed into buckets), the borrower' s income (also arrayed into buckets), the product type , MSA ,
number of applicants (one or two), whether the loan was originated
through a preapproval program, and, for home-purchase loans, whether
a piggyback junior lien was associated with it. The applicant 's (and
co-applicanL' s) gender was further used to define cells in the analyses
of differences among racial and ethnic groups, and the applicant's (and
co-applicant's) race was used in the analyses of gender differences.
Once loans are placed in cells, "within cell" differences in the
incidence of higher-priced lending (or APR spreads or denial rates) are
computed . These differences are averaged across cell s to create a
modified dis parity controlling for borrower-related characteristics. For
the second stage of the analyses, cells are further defined by the
HMDA lender, and again, average within-cell disparities are com puted. These disparities control for bOLh borrower-related characteristics and lender.
For purposes of presentation, the average borrower- and lendercontrolled within-cell disparities for each comparison group are added
to the average gross incidence (or APR spread or denial rate) of the
base comparison group (non-Hispanic whites in the case of comparison by race and ethnicity, and males in the case of comparison by sex).
An interpretation of this number is that it is the best guess as to the
incidence of higher-priced lending (or APR or denial rate) that the
comparison group would have if it had the same average borrower
characteristics (and lender) as the base comparison group.
rect for the distortions introduced by these changes,
we rely on the PMMS spread, which was defined in
an earlier section as the difference between the APR
on a loan and the interest rate available on loans to
prime borrowers with the best credit quality, assuming the loan is a 30-year fixed-rate loan. In the
tables presented in this section, we report disparities
in the incidence and level of pricing using the
reported HMDA pricing definition of higher-priced
lending, labeled "unadjusted ," and the PMMSspread definition, labeled "PMMS-spread adjusted. "
A loan with a PMMS spread of greater than 1.75 percentage points is treated as higher priced in the
adjusted analysis.
Finally, in previous years, analyses were conducted
only for conventional loans , because the incidence of
higher-priced lending for FHA and VA loans was so
low that a meaningful statistical comparison across
different groups was not possible. As discussed earlier, this was not the case in 2008 when at least the
unadjusted incidence levels for nonconventional lending were at almost the same levels as conventional
lending. Con sequently, the analysi s for 2008 (but not
2007) was conducted separately for both conventional and nonconventionallending. 55
Incidence of Higher-Pri ed Lending by Race
and Ethllicity
The frequency of reported higher-priced lending varies across racial and ethnic groups . The 2008 HMDA
data, like those from earlier years, indicate that black
and Hispanic white borrowers are more likely, and
Asian borrowers less likely, to obtain conventional
loans with prices above the HMDA price-reporting
thresholds than are non-Hispanic white borrowers
(tables 19.A and 19.B). These relationships hold for
both home-purchase and refinance lending and persist
whether the analysis focuses on unadjusted or PMMSspread-adjusted data. However, relative to 2007, incidences declined in 2008, and differences among
groups appear to be narrowing. For example, the
gross PMMS-spread-adjusted home-purchase incidence was 29.7 percent for black borrowers in 2007,
falling to 10.5 percent in 2008. The PMMS-spreadadjusted incidence declined as well for non-Hispanic
white borrowers but by a smaller amount, from
8.4 percent to 3.7 percent.
55. Although results are reported for nonconventional lending as a
whole, the analysis controls for the spec ific type of governmenLbacked loan program (FHA , VA, or Farm Service AgencylRural
Housing Service) used .
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A203
19. In ide nee of higher-priced lending. unmodified and mooiticd for b rrower- and lender-relaled factors. for I1rsl liens on
)wncr-o cupied. one- to four-family. site-bu ill homes, by race. elhnicilY. and sex of borrower
A. Conventional home purchase. adjusted and unadjusted for changes in interest rales, 2007-08
Percent except as noted
Number of
loans
Race. ethnicity, and sex
Unmodi ijed
incidence
Modified incidence. by
modificatio n factor
Borrowerrelated
I
Number o f
loans
Borrowerrelated
plus lender
Unmodified
incidence
Modified incidence , by
modification factor
Borrowerrelated
J
Borrowerrelated
plus lender
2007
I
Unadjusted spread
Race ol"er Ihall ...hile on I\'
American Indian or Alaska Native ' "
. . . . ... . . . . ..
. ...
Asian
Blac k or African Ameri can
Native Hawaiian or other Pacifi c Islander
Two or more minority races
. ... . . , '
Joint
Missing
....
While. by elllllicil),
Hispanic white ... . . . .. . ... ,
Non-Hi spanic white . ... . . .. .... , ..
Adjusted s!,read
13.678
146.411
196.967
11,757
1.876
36.550
277.348
15.8
9.5
22. 5
14.2
13. 3
12.0
14.4
13.678
146.4 11
196,967
11.757
1,876
36.550
277 ,348
16 .4
5.9
29.7
14. 1
10.8
7.3
28.7
10.6
2 1.3
10.6
16.5
10.6
906. 127
664. 102
28.649
24.439
Sex
One male .. . ... .. ....... ...... .......
One female . .. ..... .. . .. .... ......
Two males . ..... . . .. . .. .. . .
Two females . .. .. . ..
. . .. ..
.. .
17.9
8.3
29.7
17.0
12.8
13.4
18.7
261 ,935
1,950.566
.
19.9
7.7
34 .1
17.7
13.0
8.9
14.2
11.7
15.0
6.5
25.9
14.0
10.4
11.1
15.9
13.0
7.6
18.6
11.4
10.7
9.6
11.8
261 ,935
1.950,566
23.6
8.4
17.5
8.4
13.0
8.4
18.6
17. 1
14.6
15.3
18 .6
16.4
14.6
13.3
18.6
17.2
14.6
14.0
906. 127
664. 102
28.649
24,439
15 .2
13.9
11.9
12.9
15.2
13.4
11 .9
11 .0
15.2
14. 1
11 .9
12.0
2008
Unadjusted spread
Race uther Ihan w"ile on/\,
American Indian or Alaska Native . ,- " ..
Asian . .
..... . . . . .
Black or African American . . . . .. . ... ..
Native Ha waiian or other Pacific Is lander
Two or more minority races . . . ... . .. .. .
Jo int . . . . . . . . . . .. . . . . . ... .. . .. .. . . .. ....
Missing .
... .. ....... . . . . . . .
5,969
105.1 56
55,987
4.986
1,13 2
21 ,2 15
146.339
Sex
One
One
Two
Two
male .. . . . . .. ... .. ..... .. -.. . . , .. ..
female .. .... . . .. .. .. . .. . .
males ..
.. ... .. . . . ..
females .
..
11.7
3.3
17. 1
7.2
5.0
4.9
4.9
10. 1
5.9
14.4
8.3
5.4
7.3
7.2
9.4
6.4
14.0
8.9
8.6
7.3
7.5
5.969
105, 156
55,987
4.986
1.132
21 ,2 15
146.3 39
7.2
1.4
10.5
3.2
2.0
2.8
2.4
5.7
3.2
8.7
4.5
3.0
4.2
3.9
5.0
3.6
8.0
4.6
4. 1
4.1
4.3
91.804
1, 109,587
While , by elhniciT),
Hispanic white . . . . . . . . . . . . . . . . . . . . .
Non-Hispanic white . . . . . . . . . . . ..... ...
.
.
Adjusted spread
15.4
6.5
11.9
6.5
11.1
6. 5
91 ,804
1, 109.587
8.5
3.7
6.8
3.7
5.8
3. 7
440, 197
314.078
17,547
13.498
8.9
7.7
9.6
7.6
8.9
7.5
9.6
7.7
8.9
7.9
9.6
9. 1
440. 197
314,078
17.547
13,498
5.0
4 .1
5.6
4.1
5.0
4.0
5.6
4. 1
5.0
4.4
5.6
5.4
I
.. ...
I
NOTE : Excludes trans itio n-peri od loans (those fo r which the applicati o n was
submitted before 2004), For de fini ti on of hi gher. priced lending an d ex planations of spread adjustme nt and mod ificatio n factors, see text . Loans taken out
jointly by a male and fe male are not ta bulated here because they would not be
directly comparable with loans taken out by one borrower or by two borrowers
of the same sex .
The gross differences in the incidence of higherpriced lending between non-Hispanic white borrowers , on the one hand , and black or Hi spanic white
borrowers , on the other, are rel atively large; these
differences are reduced some, but not completely.
after controlling for borrower-related factors plus
lender. For example, the gross 2008 PMMS-spreadadjusted difference for home-purchase lending between Hispanic white and non-Hispanic white borrowers falls 2.7 percentage points when other factors
are accounted for (8.5 percent minus 3.7 percent
versus 5.8 percent minus 3.7 percent). Differences in
the incidences of higher-priced lending between Asian
and non-Hispanic white borrowers are generally small
and largely disappear after adjusting for borrowerrelated factors and lender.
As noted, changes in the interest rate environment
had a particularly distorti ve effect on the incidence of
higher-priced lending reported for FHA and VA loans.
These distortions are apparent in comparisons across
racial and ethnic groups (table 19.C). The unadjusted
incidence of higher-priced home-purchase lending is
12.0 percent for black borrowers. almost 4 percentage
points higher than the incidence of 8.1 percent for
non-Hispanic whites. However, the PMMS-spreadadjusted incidences are only 2.6 percent and 1.5 percent for the two groups , respectively. Like conventionallending, controlling for borrower characteristics
and lender narrows the differences among groups, but
they do not entirely disappear. Overall . the results
suggest that racial and ethnic disparities in the incidence of higher-priced lending may be less of an issue
A204
Federal Reserve Bulletin 0 April 2010
19. Incidence of higher-priced lending. unmodified and modified for borrower- and lender-related factors, for Ir t liens on
owner-occupied. one- to four-family. site-built homes. by race, ethn i ity, and . ex or borrower
B. Conventional refinance, adjusted and unadjusted for changes in interest rates,
2007~8
Percent excepl as nOled
Race. ethnicily, and sex
Number of
loans
Unmodified
incidence
Modified incidence, by
modification faclor
Borrowerrelaled
Number of
loans
I Borrowerrelated
Unmodified
incidence
plus lender
Modified incidence. by
modification faclor
Borrowerrelaled
I Borrowerrelated
plus lender
2007
Unadj u Sled spread
Race other than white only
American Indian or Alaska Nalive ...
Asian .. ... . . . .. . . . ....... .....
Black or African American .
Nalive Hawaiian or olher Pacific Islander .
Two or more minorilY races .
",.
Joinl.
.. . . . . ..... .. . . . .
.. .. . . . .. ...
.....
Missing . . . .
White. b\' ethnicir.,.
Hispanic white .... . . .. .. .... .. , .. ... . . . .
Non-Hispanic while ... ... . ... ' . . .. ..
Sex
One
Olle
Two
Two
male.
. . . . .... . ...... .. . ....
female . ... . .. ... .. . .. . .... . . .....
males .. , , . . . . . . . . ...... ..
females . .... ... .. .......... .. . ..
~
.
Adjusled spread
19.508
108.317
266,661
15.801
2.556
34 .305
438,423
26.4
12.5
41.4
23.0
17.5
18.6
25.9
29.2
15.8
38. 8
26.9
19.3
23 .3
31.4
20. 3
17.3
25 . 1
21.9
20.6
19.0
22.7
19.508
108,317
266.661
15.801
2.556
34.305
438.423
23 . 1
10.1
37.8
19.5
15.3
16.4
22.8
26.1
U.4
35.3
23 .9
17.5
20.7
28.2
17.6
14.8
22.0
19.0
17.8
16.6
19.8
302,012
2. 174.308
27.0
18.2
25.3
18.2
21.4
18.2
302,012
2.174.308
22 .8
15.8
21.9
15.8
18.5
15.8
927,344
778,477
23 . 147
25.363
23.8
24.9
19.4
26.6
23 .8
23 .8
19.4
22.2
23.8
23.6
19.4
20.7
927.344
778.477
23.147
25,363
20.6
21.6
17.0
23 .8
20.6
20.5
17.0
19.6
20.6
20.4
17.0
18.3
200S
Unadjusted spread
Adjusled spread
Race other than white onlY
American Indian or Alaska Nalive .
Asian.
.. . " .
Black or African American .
Native Hawaiian or olher Pacific Islander .
Two or more minon ty races ... . .
. .... .. . .
Joinl ..
..... .
.. .
Missing . ....
White. b\' ethnici/)'
Hispanic while ...
Non-Hispanic while
... ..... . ... .. . ..
..... ....... . ... . -
9.693
83 ,697
102. 119
6,924
2.050
26.145
244,501
19.7
2.9
27 .9
10.7
6.2
8. 1
7.8
18.8
8.0
24.8
14.9
10.4
11.6
10.9
12.6
9 .3
15 .2
11.0
10.6
10.4
10.9
9.693
83.697
102.119
6.924
2.050
26. 145
244.501
15 .7
1.7
22.7
7.9
4.3
6. 1
5.4
15.4
5.6
20.4
11.2
7.4
8.6
7.6
9.3
6.8
11.0
7.7
7.1
7.7
8.0
IIS,457
1.708,479
14.4
9.9
11.2
9.9
11.4
9.9
118,457
1.708.479
10.2
7.1
9.5
7. 1
S.1
7.1
542.449
441 . 11 3
16.661
17.633
11.2
12.6
10.3
14.4
11.2
10.9
10.3
11.9
11.2
10.8
10.3
11.1
542.449
441 . 113
16.661
17.633
8.0
9.2
7.3
10.9
8.0
7.9
7 .3
8.9
8.0
7.8
7.3
7.7
Sex
One male .. . ,
One female .. ...
Two males .... .....
Two females .
..
. ,.f'
.. . ...
.. .. ...... . . .
'
... ..•. . .... ...
.. .
NOT E: See nOles to lable 19.A.
for FHA or VA lending than for conventional lending,
particularly when corrections are made for the distortions created by the interest rate environment. 56
56. It is difficulllO know how 10 interpret pricing disparities across
groups in FHA and VA lending programs. For the most part, neither
program's fees have been risk based, so it is tempting to attribute any
differences in rales across groups to discrimination or olher factors
unrelated to credit risk . However, this may be an unwarranted
simplification. Even though the FHA and VA cover most of the credit
risk in a loan, they do not cover all of it. Lenders face recourse risk in
the case of fraud . and elevated servicing costs in the case of borrowers
who do not make their payments. Thus, FHA and VA loan rates are still
likely to vary with credit risk, albeit not as much as they would if the
program fees were fully risk based. Beyond credit risk. other risk
factors, such as prepayment risk, may influence FHA and VA Joan
pricing.
Rate Spreads by Race and Elhnicity
The 2008 data indicate that among borrowers with
higher-priced loans, the gross mean prices paid relative to prime (the PMMS-adjusted spread) are similar
across groups for both home-purchase and refinance
lending (tables 20.A, 20.8, and 20.C). This circumstance holds for both conventional and nonconventional lending. For example, for conventional homepurchase loans, the gross mean PMMS-adjusted
spread was 2.76 percentage points for both Hispanic
white and black borrowers, while the mean APR
spread for non-Hispanic white borrowers was somewhat higher at 2.89 percentage points. Accounting for
borrower-related factors or the specific lender used by
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A205
19. Incidence of higher-priced lending, unmodified and modified fo r borrower- and lender-related factors. for first liens n
owner-occupied, one- to four-family, sile-built homes . by race, clhnicity. and sex of horrower
C. Nonconventional home purchase and refinance, 2008
Percent except as noted
Number of
loans
Race. ethnicity. and se x
Unmodified
incidence
Modified incidence, by
modificalion faclor
Borrowerrelated
Number of
loans
I Borrowerrelaled
Unmodified
incidence
plus lender
Modified incidence. by
modification faclor
Borrowerrelaled
I Borrowerrelaled
plus lender
Unadjusted spread
Home purchase
Refinance
Race other ,han whitt' Dilly
American Indian or Alaska Native .... . . .
Asian .
...... . . ... . ....
Black or African American ..
Native Hawaiian or olher Pacific Islander .
7.546
19.360
111.375
4,782
802
20.08 1
87,225
Joint .
. ....
Missing . . . . . . . .
.. . . . . . . . . .
White. by etl",id ly
Hispanic white ..... .. .. .... '
Non-Hispanic while ..
.... . .
.. . . . .
Sex
One male ...... . .. ... . .
- . . . . ..
One Ii:male . . . . . . . . . .... .. . ... . ..... , .
Two ma.les . ...... . ..
. ...
Two females . .. ... . .... ...... ..... . ..
.
.....
9.8
9.1
11.9
10.4
12.4
9.8
10.7
10.5
9.2
11.2
9.9
10.6
9.7
9.6
2.270
4,758
73.007
1,566
305
7.692
63.069
10.8
8.2
13.8
12.0
15.7
8.8
15.4
13.3
9.3
16. 1
16.5
20.5
11.2
16.8
12. 8
10.4
14.7
15.1
II I
11.3
12.9
12.4
8. 1
9.6
8.1
9.7
8. 1
32.361
368,192
10.3
11.7
12.0
11 .7
12.3
11 .7
328,082
213 ,682
21.843
17,412
Two or more minority races . . ..
8.1
7.9
12.0
8.8
11.3
7.0
8.4
107,031
719,687
"
9.6
10.6
12.1
12.3
9.6
8.8
12. 1
11.8
9.6
148.3 19
107.427
8.9
12. 1
5.988
6.8
7.148
Adjusted spread
12. 5
13.4
12.5
13.8
12.5
11.9
12.5
12.0
12.5
12.2
12.5
10.8
I
Home purchase
Refinance
Race other thaTi while OTi/)'
American Indian or Alaska Native . .
..
Asian . ........ . .
..... ... .... . .
Black or African American . . ........ .....
Native: Hawaiian or other Pacific Islande:r
Two or more: minority races ..
Joinl ..... . .
. ...
.. . ...
Missing .... . . . . ... .. ..... ... . .. .
7,546
19,360
111 ,375
4,782
802
20.081
87,225
1.4
1.1
2.6
1.5
3.1
1.4
1.6
1.7
1.2
2.4
1.8
4. 9
2.0
2.5
2.3
1.5
2.2
1.8
2.3
1.9
2.0
2.270
4,758
73.007
1,566
305
7.692
63.069
2.6
1.4
3.9
3.6
6.2
2.4
4.3
3.2
1.7
4.6
15
9.7
3.4
4.1
2.8
2.0
17
2.7
3.3
3.7
3.3
White. by ethnid ty
Hispanic white: ..
. . ... . . ..
Non-Hispanic white . . .. . . . . .. .. . .
107,031
719,687
2.3
1.5
1.7
1.5
1.7
1.5
32,361
368. 192
2.3
2.7
2.9
2.7
2.9
2.7
Sex
One male . .... ... .. .. ... ...... ... .. . .. .
One female. .... • ...... .. ... .... . .
Two males . .... .. ..
.. . .. . ...
Two females .
.... . . . . . . . , . . . .
328,082
213.682
21.843
17,4 12
1.8
2. 1
2.3
2.3
1.8
2.1
2. 3
2.2
1.8
1.6
148,3 19
107,427
5.988
7, 148
3.1
3.4
2.7
3.3
3.1
2.9
2.7
2.9
3. 1
10
2.7
2.9
....
~
,
NOTE: Excludes transition-period loans (those for which lbe app~cati on was
submiued before 2004). For definition of higher-priced lending and explana.
V
2.0
male are not tabulated here because they would not be directl y comparable
with loans taken out by one borrower or by twO borrowers of the same sex.
lion of modification fac tors, see text. Loans taken out j ointly by a male and fe-
the borrowers alters the relationships, but in unpredictable ways; black and Hispanic white borrowers
now have higher modified spreads relative to nonHispanic white borrowers. Patterns are similar when
the analysis focuses on nonconventional loans.
Pricing Difj'erence by Sex
The 2008 HMDA data, like those in previou s years,
reveal relatively little difference in pricing outcomes
(PMMS-spread adjusted or spread unadjusted) when
borrowers are distinguished by sex. This holds for
both incidence and rate-spread comparisons (tables
19 and 20).
Denial Rate by Race, Ethnicity, and e
Analyses of the HMDA data from earlier years have
consistently found that denial rates vary across applicants grouped by race or ethnicity. In 2008, for both
home-purchase and refinance conventional lending,
black and Hispanic white applicants had notably
higher gross denial rates than non-Hispanic white
applicants. Generally, denial rates for black applicants have been the highest, and denial rates for
Hispanic white applicants were between those for
black and those for non-Hispanic white applicants
(tables 21.A and 21.B). The pattern for Asians was
somewhat different, as the gross denial rate for this
A206
Federal Reserve Bulletin 0 April 20 I0
20. Mean APR ·preads. unmodified and modified for harrower- amI I~nd e r-rclated factors . for higher-priced loan!> on one- to
four-family h me . by typt! of loan and by race, ethnicity. and sex uf borrower
A. Coventional home purchase, adjusted and unadjusted for changes in interest rates, 2007-08
Percent except as noted
Number of
Unmodified
higher-priced
mean spread
loans
Race. ethnicity. and sex
Modi fied mean spread. by
modi fication factor
BorrowerI ted
re a
I related plus
Borrower-
Number of
Unmodified
higher-priced
mean spread
loans
lender
Modified mean spread . by
modification factor
Borrowerrelated
I related plus
Borrowerlender
2007
Unadjusted spread
Race other than white unll'
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 "tlmidt)'
Hispanic white .
Non-Hispanic white ..
Sex
One
One
Two
Two
.. ... .. .. .
.. ...... . ....
'
.
male.
.... ... ... .. . . . . . . , . .
female. .... ... .. ... .. ...... .. ..
males . . . . . . . . . . ... ...... ... .
females . .... . ... ... . .. . ...... .. . ...
.
Adjusted spread
.~ . 26
2.727
11 .263
67,231
2,086
243
3.264
39.267
4.46
4.29
4.94
4.52
4.78
4.65
4.68
4.48
4.33
4.92
4.59
4.83
4.64
4.80
4.49
4.39
4.67
4.53
4.75
4.52
4.60
2.244
8.627
58.491
1.654
203
2.667
32.511
3.27
3.18
3.73
3.42
3.62
3.52
3.52
3.22
3.71
3.42
3.64
3.47
3.63
3.34
3.27
3.49
3.40
3.67
3.38
3.43
75.103
206,469
4.52
4.42
4.49
4.42
4.45
4.42
61 ,754
164.132
3.35
3.28
3.31
3.28
3.30
3.28
168.684
113.427
4,189
3.743
4.55
4.54
4.54
4.81
4.55
4.54
4.54
4.63
4.55
4.55
4.54
4.59
138.085
92.374
3.397
3.153
3.39
3.39
3.40
3.65
3.39
3.40
3.40
3.46
3.39
3.40
3.40
3.41
2008
Unadjusted spread
Race other than white on/\'
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 ethnicity
Hispanic white . . . ... .. ......... .
. ...
Non-Hispanic white .... ...... .. . . . . . . . ..
....
Sex
One male .
... ..... ... ... .. ..... ....
.. . . . ... .. ... .. ..
... ... ........ . .. , ....
One female .
Two males
Two females.
.. . .. .
Adjusted spread
700
3,465
9.601
357
57
1.045
7,241
4.16
3. 65
3.88
3.70
3.73
4.05
3.69
4. 17
3.85
4.02
3.87
4.39
3.93
3.79
4.23
3.86
4.10
4.01
4.35
4.06
4.01
427
1.460
5.855
159
23
596
3.540
3.12
2.63
2.76
2.73
2.85
3.02
2.64
3.19
2.69
2.90
2.80
3.59
2.88
2.72
3.34
2.63
2.99
3.24
3.74
2.93
2.92
14. 130
72.549
3.83
3.97
3.96
-'.97
4.05
3.97
7.776
41 ,588
2.76
2.89
2.84
2.89
2.98
2.89
39,093
24.189
1,683
1.023
3.87
3.80
3.99
3.88
3.87
3.81
3.99
3.86
3.87
3.83
3.99
4.05
21.852
12,907
985
547
2.79
2.72
2.87
2.83
2.79
2.75
2.87
2.82
2.79
2.76
2.87
2.86
NOTE: Unadjusted-spread annual percentage rate (APR) is the difference between the APR on the loan and the yield on a comparable-maturity Treasury
secuoity. Adjusted-spread APR is the difference between the APR on the loan
and the estimated APR reported by Freddie Mac for a 30-year fixed-rate loan
in its Primary MOrlgnge Market Survey. Excludes transition-period loans
(those for which the application was submitted before 2004). For definition of
higher-priced lending and explanation of modification factors. see text. Loans
taken out jointly by a male and female are not tabulated here because they
would not be directly comparable with loans taken out by one borrower or by
two borrowers of the same sex.
group was higher for home-purchase loans than for
non-Hispanic whites , but about the same for
refi nancing.
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 reduces differences further, although
unexplained differences remain between nonHispanic whites and other racial and ethnic groups.
For home-purchase conventional lending, denial rates
increased only modestly for virtually all groups from
2007 through 2008 with differences between groups
also changing little. Patterns for conventional refinancing are less straightforward. Denial rates for
virtually all minority groups (with the exception of
Asians) increased by about one-tenth over the previous year while the denial rate fell for non-Hispanic
white applicants. As a result, denial-rate differences
between minorities and non-Hispanic whites widened.
The rank ordering of denial rates across groups is
similar for nonconventional lending in 2008
(table 21.C). However, differences among groups
are narrower because denial rates are uniformly
lower for black and Hispanic white applicants and
higher for Asians and non-Hispanic whites as compared with conventional lending. Group differences
are reduced, but do not disappear, when borrower
characteristics and lender are controlled for. With
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A207
20. Mean APR spreads, unmodified and modified for borrower- and lender-related factors, for hjgher-pri cd I ans on ooe- to
four-famjly homes, by type of loan and by race, ethnicity. and ex of borrower
B. Conventional refinance, adjusted and unadjusted for changes in interest rates, 2007-08
Percent e xce pt as noted
Number of
Unmodified
higher'priced
mean spread
loans
Race. ethnicity, and sex
Modified mean spread. by
modificati on foctor
Borrower.
ltd
re a e
I
Borrower·
related plus
lender
Number of
Unmodified
higher.priced
mean spread
loans
Modified mean spread. by
modification factor
Borrowerr lated
e
I
Borrowerrelated plus
lender
2007
Unadjusted spread
Adjusted spread
Race olher Ihall ",hile onll'
American Indian or Alaska Native .'
..... . . .. .. ........ , . .
Asian
Black or African American
.. ,.
Native Hawaiian or other Pacific Islander
Two or more minority races . . ...... .
Joint
.... . . ....... - ...
. . ..
Missing . . . . . . .
5,145
13,58 1
110.464
3,639
447
6,365
11 3,472
4.77
4.29
5.06
4.63
4.83
4.79
4 .88
4 .77
4.62
5.04
4.82
4.84
4.90
4.97
4.79
4.69
4.86
4 .8 1
4.75
4.82
4.7 5
4.51 5
10.950
100,695
3,075
392
5.63 1
100,08 1
3.52
3.11
3. 77
3.44
3.59
3. 53
.1 .64
3.50
3.41
3.75
3.55
3.58
3.63
3.71
3.54
3.47
3.61
3.56
3.51
3. 58
3. 51
While, by el/llli<"iry
Hispanic white . . .
. .. .. . ..
Non-Hispanic white ...
.. . .. .
.. .. ..
8 1,628
396, 194
4.68
4.71
4.77
4.71
4.80
4.71
68.909
344.009
3.50
3.47
3.54
3.47
3.57
3.47
male .. .
. .... ...
.
....
. ...
female . ... ......... . ...
..... .... ........ ...
males
....
females ...... .. .... . .
221.043
193,694
4,502
6.750
4.77
4.78
4.77
4.91
4.77
4.75
4.77
4.82
4.77
4 .76
4.77
4.79
191 ,322
167,975
3.937
6.046
3.55
3.55
3.53
3.52
3.57
3.55
3.53
3.52
3,52
.. . .. ..
Sex
One
One
Two
Two
..
... .
3.56
3. 52
3.64
2008
Unadjusted spread
Adjusted spread
Race OIher Ihan .... hire on/)'
American Indian or Alaska Native
..
.., ..
Asian .... . ... . . . .
.... ..
Black or African American
Nati ve Hawaiian or other Pacific Islander
Two or more minority races ..
., ...
. . ... , ... .. ,
Joint
Missi ng . , .. . . ,. . .. . ...
While. byelhnicil)'
.....
Hispanic white . . . . .. . .. .
. . .. . .
Non-Hispanic white ..... .........
Sex
One male . . ... .... . . , . . . . . . . . .
One female ....
... ...........
Two males
....... ..... .. ... . . . .
Two females . . . . . . . . . . . . . . . . . . . ... .
........
.. .
. I
1.91 4
2.429
28,476
743
128
2, 115
19,179
5. 12
4.08
5.28
4.7 1
4 .76
4 .72
4.46
5.00
4.47
5.38
4.91
5. 12
4.78
4.58
4.68
4.59
4.89
4.70
4.83
4.73
4.67
1.525
1,450
23 . 191
549
88
1,584
13. 155
3.93
3.08
4. 11
3.62
3. 89
3.58
3,42
3.79
3.43
4. 17
3.74
4.28
3.64
3.54
3.58
3.47
3.75
3.66
3.99
3. 58
3.52
17.025
168,484
4 .63
4.66
4.69
4.66
4.71
4.66
12.080
122,082
3.58
3.54
3.57
3.54
3.63
3.54
60.584
55,666
1.710
2,540
4.63
4.77
4.50
4.84
4 .63
4.72
4.50
4.68
4.63
4.63
4.50
4.39
43,232
40,779
1.22 1
1,92 1
3.56
3.69
3.36
3.72
3.56
3.64
3.36
3.45
3.56
3.54
3.36
3.28
NOTE : See notes to ta ble 20.A.
regard to the sex of applicants, there are no notable
differences for either conventional or nonconventional lending.
ome Limitations of the Data in Assessing
Fair Lending Compliance
Information in the HMDA data , including borrower
and loan characteristics, property location, loan origination date, and the lender identity, does not account
fully for racial or ethnic differences in the incidence
of higher-priced conventional lending or in denial
rates for all lending types; significant differences
remain unexplained. In contrast, only small differences across groups were found in the mean APR
spreads paid by those receiving higher-priced loans
and in the inc idence of higher-priced lending for
nonconventionallending. The latter finding is reassur-
ing given the apparent increase in higher-priced nonconventional lending in 2008. However, removing the
effects of the reporting distortions created by changes
in the interest rate environment eliminates much of
the difference in incidence rates among groups in
nonconventional lending. Regarding the sex of borrowers, only very small differences were found 10
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 often stem , at least in part, from credit-related
factors not available in the HMDA data, such as
measures of 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
Federal Reserve Bulletin 0 April 2010
A208
20. Mean APR spreads, unmodified and modified for horrnwcr- ~lnd lender-related factOfs. for higher-priced IOilns on onc- to
rouf· ramily homes. by type of loan and by rat:c, cthnieiLy, and sex of borrower
C. Nonconventional home purchase and refinance, 2008
Percentage points e xcept as noted
Number of
Unmodified
higher-priced
mean spread
loans
Race. ethnicity, and sex
Modi fied mean spread. by
modification faclor
Number of
Unmodified
higher-priced
mean spread
loans
Borrower- . I Borrowerrelated
related plus
lender
Modified mean spread, by
modi fication faclo r
BorrowerII d
re a e
1
Borrowerrel ated plus
lender
Unadjusted spread
Refinance
Home .purchase
Race nlher Ihun while nllly
American Indian or Alaska Native
. .....
.........
Asian ... .
Black or African American . . . . . . . .. . .
Nalive Hawaiian or other Pacific Islande r
Two or more minority races ...
. . . . . . . . . . . ..
.. . ...... '
Joint
Missing ..
...
. .. . . .... .. ...
610
1.527
13.388
422
91
1,399
7,335
3.34
3.32
3.39
3.36
3.38
3.49
3.34
3.34
3.31
3.40
339
3.37
3.39
3.39
3.38
3.37
3.41
3.38
3.3 1
139
3.40
245
392
10,103
188
48
674
9.71 2
3.38
3.31
3.40
3.62
3.37
3.38
3.38
3.43
3.31
3.39
3.32
3. 51
3.39
3.35
3.45
3.49
3.41
3.35
3.30
3.45
3.41
While. by ellmicir),
Hispanic white . . .... ... .... ... ...
Non-Hispanic white ... . ... . . .. .
13.267
58,517
3.40
3.37
3.38
3.37
3.37
3.37
3,334
42.901
3.44
3.37
3.82
3.37
3.37
3.37
31,483
22.722
2.650
2. 138
3.37
3.39
3.37
3. 36
3.37
3.40
3. 37
3.35
3.37
18,522
3.37
14.403
3.37
751
3. 35
985
Adjusted spread
3.38
3.40
.D6
3.37
3.38
3.50
3.36
3. 39
338
3.36
3.36
3.44
...
Sex
One
One
Two
Two
.
..
male .... . ............ ... .
female
... . . , . .. - . ... . ,
males .......... .. .
females
I
Home purchase
Race otlrer lhan white only
American Indian or Alaska Native
. . . . . . . . . . . . . . ... ..... . . ,
Asian
Black or African American . . . . . . .
...
Native Hawaiian or other Pacific Islander
Two or more minority races
Joint
Missing
,
..... ... , ....
While. by elhniciry
Hispanic white . . . . . . . . . . . . . . ,
Non-Hispanic white . .. ...... ..... .
.
Refinance
109
211
2,906
71
25
277
1.401
2.26
2.30
2.26
2,41
2. 17
2.91
2. 19
2.14
2.08
2.38
2. 16
1.74
2.31
2.37
2.36
2.27
2.45
2.27
2.21
2.29
2.40
58
67
2.831
56
19
181
2.713
2.07
2. II
2. 19
2.88
2.03
2.20
2.09
2.30
1.62
2. U
2.02
2.34
2. 16
2.02
2 .32
2.45
2.25
2.35
2 ..~4
2.42
2.32
2.411
10.553
2.47
2.36
2.35
2.36
2.27
2.36
731
10.057
2.61
2.24
3,42
2.24
2.23
2.24
5,992
4.386
498
392
2.30
2.36
2.30
2.26
2.30
2.50
2.30
2.28
2.30
2.28
2.30
2. 37
4.600
2.20
2.27
2.2 1
2. 13
2.20
2.27
2.21
1.71
2.20
2. 11
2.21
2.72
Sex
One male .. . .. . . . .. . ..... .. . ...... . ..
One female ... .. . • . .
Two males ..
Two females .
NOTE : Spread annual percentage rate (APR) is the difference between the
APR on Ihe loan and the yield on a comparable-marurily Treasury securilY. Ex·
eludes transition-period loans (those for which the appli cation was submined
before 2004). For definition of higher·priced lending and explanation of modi -
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 be due to 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 ProceduresY
57. The Interagency Fair Lending Examination Procedures are
available at www.ffiec.govIPOF/fairiend.pdf.
3.634
162
238
fi cation factors. see leXL Loans taken out jointly by a male and female are not
tabulaled here because they would nO! be directly comparable with loans take n
OUI by one borrower or by IWO borrowers of the same sex.
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
A209
21. Denial rales on applications. unmodified and modified for borrower- and lemler-related factors , for lirslliens on owneroccupied. one- La four-family, site-buill homes. hy race, ethnicily. and ex of applicant
A. Conventional home purchase, 2007---08
Percent except as noted
Number of
appUcations
acted upon
by lender
Race, ethnicity. and sex
Unmodified
denial rate
Modified denial rate.
by modification factor
Borrower·
I ted
re a
l
Borrowerrelated plus
lender
Number of
applications
acted upon
by lender
Unmodified
denial rate
BO~otw~rre a e
.1related plus
Borrowerlender
2008
2007
Race other tlran white on/)'
American Indian or Alaska Native . ....
. . . . , . . . . .. .
...
Asian .
Black or African American ..... .... ......
Native Hawaiian or other Pacific Islander
.
Two or more minOrity races ..
Joint .. .... .
.. .
. .... . . . .
Missing ... .
.. ....
Modi fied denial rate.
by modification factor
22,627
210.828
364.887
19,436
2,824
48.325
441 ,246
27.9
17.4
35.3
27.5
23 .5
14.5
24.5
24.8
15.0
30.4
21.9
21.7
18.2
23.2
20.7
15.1
23. 5
20.2
21.4
15.5
17.8
9,939
152.213
105.001
8.016
1.669
28.195
220.395
29.7
18.7
36.1
26.9
23.6
14.8
21.5
24.6
16.6
29.7
22.7
21.9
17.6
19.9
21.0
16.8
25.4
21.0
23.8
15.3
17.0
..
..
448.973
2.495.779
29.9
13.2
22.1
13 .2
19.5
13.2
160.823
1,425.869
31.1
13.6
22.7
13.6
22.0
13.6
Sex
One male . .... ,
......... .. . ... . . . .. .
One female . . . .. .. . ..... . .. . .. . . . . . ...
Two males ...... .. ... .... . . .. . .. . ... . . "
. . ... .. ..... .
Two females . . . . . .
1.349.2 11
967,818
41.128
35.184
22.7
21.6
21.0
21.1
22.7
21.3
21.0
19.3
22.7
21.7
21.0
19.5
640.030
443 .753
25 .195
19.148
21.3
19.8
2 1.1
20.4
21.3
19.4
21.1
19.3
21.3
19.9
21.1
19.6
.
..
While. by elhnicit)'
Hispanic white .
... .. ... .. .. ...
Non-Hispanic white .. .... . . . .. . ... ....
...
NOTE: Includes transition-period applications (those submitted before 2004).
For explanation or modification factors. see text. Applications made jointly by
a male and femak are not tabulated here because the y would nOI be direclly
comparable with applications made by one applicant or by two appUcanls of
the same sex .
21. Denial rates on appliculions, unmodified <tnd modi lied for borrower- and lender-related factors. for Ii ·t liens on Qwneroccupied. one- to four-family. ite-built home ', by race, ethnicity, and sex of applicanl
B. Conventional refinance, 2007---08
Percent except as noted
Race. ethnicity. and sex
Number of
applications
acted upon
by lender
Unmodified
denial rate
Modified denial rate.
by modification factor
Borrowerltd
re a e
I related plus
Borrowerlender
Number of
applications
acted upon
by lender
Unmodified
denial rate
2007
Modified denial rate.
by modi fication factor
Borrower.
related
I related plus
Borrowerlender
2008
Race other thun 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 .
..
59.774
202.414
737.786
38.851
6,204
70.982
1,147.462
57.0
32.6
53.3
46.3
51.0
41.4
49.4
53.7
37.2
53.5
48.5
51.2
46.5
49.8
42.5
38.0
43 .6
43 .0
44.6
38.5
40.4
36.265
150.970
343.389
19.275
4.682
53.200
532.425
65.4
31.6
61.2
51.8
50.5
41.8
41.5
56.7
35.4
59.9
52.2
49.7
46.0
42.5
43 .0
36.1
44.9
43.4
42.0
36.8
37.8
White. by elhnicity
Hispanic white . . . . . . . . . . . . , . , . . . . .... .
Non-Hispanic white. ... . . . , ... ....... ' "
695,537
3.917,492
43.4
34.0
44.0
34.0
41.6
34.0
320.845
2.894 .154
50.6
31.7
45 .3
31.7
41.3
31.7
Se.t
One male .. ....... .,.-..... ...
, .
One female .. ......
'"
Two males . . . ..... . . ... .. .. . .. .. ... ..
Two females . . .. . .
.. .... .... ... ..
2,016.750
1.606.563
48.099
55,312
42.2
40.6
41.5
44.7
42.2
39.5
41.5
42.2
42.2
40.6
41.5
40.9
l.l25.624
889,334
32 ,014
35 .706
41.5
40.7
38.2
41.7
41.5
39.0
38.2
38.5
41.5
.\9.6
38.2
36.9
...
..
NOTE: See notes to table 21 .A.
A210
Federal Reserve Bulletin 0 April 2010
21. Denial rales on appl ications, unmod i fied and modified for borrower- and lender-relHled factors . for fir t liens on owneroccupied. one- 10 four-family, site-built homes, by race, elhnicily, and sex of applicant
C. Nonconventional home purchase and refinance, 2008
Percent except as noted
Race, ethnicity, and sex
Number of
applications
acted upon
by lender
Unmodified
denial rate
Modified denial rate,
by modification factor
Borrowerltd
re a e
I
Borrowerrelated plus
lender
Number of
applications Unmodified
acted upon
denial rate
by lender II
Modified denial rate.
by modifi cation factor
BorrowerBorrower- I
'I related plus
related
lender
Refinance
Home purchase
Race other than while onll'
American Indian or Alaska Native . . .
Asian . . . . .
Black or African American . .
Native Hawaiian or other Pacific Islander
Two or more minority races ... ....
10int .. .. ..
.....
. ..
... ,
Missing . ...
. ... . . . .....
10. 154
26,711
161.187
6,581
1,141
25 , 123
121,400
19.7
21.3
25.0
21.7
23.8
14.7
21.9
20.6
19.2
24.0
18.9
23.3
16.2
20.8
18.6
18.6
22 .6
18.3
17.3
16.3
19.8
5.229
11.836
155.665
3.643
873
14.154
165,776
49.7
51.5
45.0
49.7
58.2
38.7
54.6
49.6
49.0
47 .2
47.7
59.7
44.1
47 .7
43 .6
45. 1
46. 1
47.2
53.1
42 .2
43 .9
While. by ellllliciry
. ..
Hispanic white .
. . . . . . . . ..
Non-Hispanic white . . .. .. ..... .... .....
152,228
890,659
24.0
14. 1
19.8
14.1
20.0
14.1
73 . 118
662,593
47 .6
37.5
44. 1
37.5
44.3
37.5
Sex
One
One
Two
Two
433.829
283,404
29.772
23 ,519
19.0
19.2
20.9
20.5
19.0
17.7
20.9
IB.7
19.0
17 .B
20.9
18.5
300.070
219.503
11,826
13,B08
42.8
44.0
41.B
41.2
42.8
41.2
41.B
40.3
42.8
41.3
41.B
40.3
.
......
..
male .
..
.
female . .. ........ .......... ... . . . .
males ....
...... _._, females . .
.. " . . . . . .. ..
..... . .
NOTE : See notes to table 21.A .
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 refinance loans:
For each application 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 applicant
denied (with the reasons for denial-voluntary
for some lenders
withdrawn by the applicant
file closed for incompleteness
• preapprovaJ program status (for home-purchase
loans only)
preapproval request denied by financial institution
preapproval request approved .but not accepted
by individual
• loan amount
• loan type
conventional
insured by the Federal Housing Administration
guaranteed by the U.S . Department of Veterans
Affairs
- backed by the Farm Service Agency or Rural
Housing Service
• lien status
- first lien
- junior lien
- unsecured
• loan purpose
home purchase
- refinance
- home improvement
• type of purchaser (if the lender subsequently sold
the loan during the year)
Fannie Mae
Ginnie Mae
Freddie Mac
Farmer Mac
Pri vate securitization
Commercial bank, savings bank, or savings association
Life insurance company, credit union, mortgage
bank, or finance company
Affiliate institution
Other type of purchaser
For each applicant or co-applicant
•
•
•
•
race
ethnicity
sex
income relied on in credit decision
The 2008 HMDA Data: The Mortgage Market during a Turbulent Year
For each property
• 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 to the Home Ownership
and Equity Protection Acl
• indicator of whether loan is subject to the Home
Ownership and Equity Protection Act
ApPENDrx B: PRIVATE MORTGAGE
INSURANCE DATA
Historically, mortgage lenders have required a prospective borrower 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 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 contrac-
A211
tually 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. 58 The PMI data largely
mirror the types of information submitted by lenders
covered by the Home Mortgage Disclosure Act of
1975 (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 preapproval, and an indicator of whether
a loan is subject to the Home Ownership and Equity
Protection Act are unavailable in the PMI data.
The eight PMI companies that issued PMI during
2008 submitted data to the FFlEC through MICA. In
total, these companies acted on more than 1.55 million applications for insurance, including 1.06 million
applications to insure mortgages for purchasing homes
and 490,000 applications to insure mortgages for
refinancing existing mortgages. PMI companies approved 87 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
58. Founded in 1973, MICA is the trade association for the PMI
industry. The FFIEC prepares disclosure statements for each of the
PMI companies. The statements are available at the corporate headquarters of each company and al a central depository in each metropolitan statistical area in which HMDA dala are held . The PM! data are
available from the FFIEC at www.ffiec.gov/reports .htm.
Legal Developments
BI
March 2009
Legal Developments: Fourth Quarter, 2008
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION
BANK HOLDING COMPANY ACT
3
OF THE
The PNC Financial Services Group, Inc.
Pittsburgh, Pennsylvania
Order Approving the Merger of Bank
Holding Companies
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 l to
acquire National City Corporation ("National City") and
thereby indirectly acquire National City's subsidiary bank,
National City Bank ("NC Bank"), both of Cleveland,
Ohio.2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 65,854 (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. 3
PNC, with total consolidated assets of approximately
$145.6 billion, is the 14th largest depository organization in
the United States, controlling deposits of approximately
$84.6 billion, which represent less than I percent of the
total amount of deposits of insured depository institutions
in the United States. 4 PNC controls two insured depository
institutions that operate in nine states and the District of
I. 12 U.S.C. § 1842.
2. PNC also proposes to acquire Ohio National Corporation Trade
Services, Cleveland, the agreement corporation subsidiary of National
City under section 25 of the Federal Reserve Act ("FRA") and the
Board's Regulation K, 12 U.S.c. §§ 601 et seq. and 12 CFR 211.5(g).
In addition, PNC proposes to acquire the nonbanking subsidiaries of
National City in accordance with section 4(k) of the BHC Act
(12 U.S.c. § 1843(k)).
3. Ninety-four commenters expressed concerns about certain aspects of the proposal.
4. Asset, national deposit. and ranking data are as of September 30,
2008. In this context, insured depository institutions include commercial banks. savings banks, and savings associations.
Columbia. s PNC is the 12th largest depository organization
in Ohio, controlling deposits of approximately $2.2 billion.6
National City, with total consolidated assets of approximately $143.7 billion, is the 16th largest depository organization in the United States. NC Bank, its only depository
institution, operates in nine states and controls deposits of
approximately $94.3 billion. National City is the largest
depository organization in Ohio, controlling deposits of
$34.7 billion.
On consummation of this proposal, and after taking into
account the proposed divestitures, PNC would become the
eighth largest depository organization in the United States,
with total consolidated assets of approximately $288.5 billion. PNC would control total deposits of $174.8 billion,
representing less than 1 percent of the total amount of
deposits of insured depository institutions in the United
States. In Ohio, PNC would become the largest depository
organization, controlling deposits of approxi mately
$36.9 billion, which represent approximately 17.4 percent
of the total amount of deposits of insured depository
institutions in the state.
FACTORS GOVERNING BOARD REVIEW OF THE
TRANSACTION
The BHC Act enumerates the factors the Board must
consider when reviewing the merger of bank holding
companies or the acquisition of banks. These factors are the
competitive effects of the proposal in the relevant geo-
graphic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the transaction; the convenience and needs of the
communities to be served;7 the records of performance
under the Community Reinvestment Act ("CRA")8 of the
insured depository institutions involved in the transaction;
5. PNC's subsidiary insured depository institutions are PNC Bank,
National Association ("PNC Bank"), Pittsburgh, Pennsylvania; and
PNC Bank, Delaware. Wilmington, Delaware.
6. Statewide deposit and ranking data are as of June 30, 2008.
7. A majority of commenters expressed concern that the proposed
acquisition would result in the loss of jobs. The effect of a proposed
transaction on employment in 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, 457 (1996).
8. 12 U.S.c. §2901 et seq.
B2
Federal Reserve Bulletin 0 March 2009
and the availability of information needed to determine and
enforce compliance with the BHC ActY In cases involving
interstate bank acquisitions, the Board also must consider
the concentration of deposits nationwide and in certain
individual states, as well as compliance with other provisions of section 3(d) of the BHC Act. IO
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
met. For purposes of the BHC Act, the home state of PNC
is Pennsylvania, II and NC Bank is located in nine statesY
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.13 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 Board has considered carefully the competitive effects
of the proposal in light of all the facts of record. 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 bank acquisition that
9. Some commenters urged the Board to deny the proposal hecause
National City's board of directors allegedly breached its fiduciary
duties in entering into the merger agreement with PNC and hecause
the purchase price was inadequate and would harm the interests of
National City's shareholders. These allegations are subject to litigation
before a court of competent jurisdiction and are not within the
discretion of the Board to resolve. See Western Bancshares, Inc. v.
Board a/Governors, 480 F.2d 749 (10th Cir. 1973). The Board also
notes that approval of the National City shareholders is required to
consummate the proposal.
10. 12 V.S.C. § 1843(d).
11. 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. See 12 V.S.C. § 1841(0)(4)(C).
12. 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. See 12 V,S.c' §§ t 84 I (0)(4H7) and 1842(d)(I)(A)
and (d)(2)(B). NC Bank operates branches in Florida, llIinois, Indiana,
Kentucky, Michigan, Missouri, Ohio, Pennsylvania, and Wisconsin.
13. 12 V.S.C. §§ 1842(d)(IH3). Applicant is adequately capitalized and adequately managed, as defined by applicable law. NC Bank
has been in existence and operated for the minimum period of time
required by applicable state laws, See 12 V.S.c. § 1842(d)(I)(B). On
consummation of the proposal, applicant would control less than
10 percent of the total amount of deposits of insured depository
institutions in the Vnited States (12 V.S.C. § I 842(d)(2)(A». Applicant
also would control less than 30 percent of, and less than the applicable
state deposit cap for, the total amount of deposits in insured depository
institutions in the relevant states (12 V.S.C. §§ I842(d)(2)(BHD». All
other requirements of section 3(d) of the BHC Act would be met on
consummation of the proposal.
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 transaction in meeting the convenience and needs of the community served. 14
PNC's subsidiary depository institutions and NC Bank
directly compete in 10 banking markets, including markets
in Florida, Kentucky, Ohio, and Pennsylvania. 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 comments on the proposal. 15 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 in the
markets ("market deposits") controlled by PNC's insured
depository institutions and NC Bank,16 the concentration
levels of market deposits and the increase in those levels as
measured by the Herfindahl-Hirschman Index ("HHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"),17 and other characteristics of the markets. In
addition, the Board has considered commitments made by
PNC to the Board to reduce the potential that the proposal
would have adverse effects on competition by divesting 61
NC Bank branches (the "divestiture branches"), which
14. 12 V.S.c. § 1842(c)(I).
15. Several commenters expressed general concerns about the
competitive effects of this proposal and the effects it could have on
consumer choices for banking services.
16. Deposit and market share data are as of June 30, 2008, adjusted
to reReet mergers and acquisitions through Novemher 4, 2008, and
generally are based on calculations in which the deposits of thrift
institutions are included at 50 percent. In recognition that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks, the Board regularly has included
thrift institution deposits in the market concentration and market share
calculations on a 50 percent weighted basis, See. e.x" First Hawaiian,
Inc., 77 Federal Reserve Bulietin 52, 55 (1991), In some markets
noted in this order, the market concentration and market share are
based on calculations in which the deposits of certain thrift institutions
are weighted at 100 percent. The Board previously has indicated that it
may consider the competitiveness of a thrift institution at a level
greater than 50 percent of its deposits when appropriate if competition
from the institution closely approximates competition from a commercial bank. See, e.g., Banknorth Group, Inc., 75 Federal Reserve
Bulletill 703 (1989). In evaluating when it is appropriate to increase
the weighting of a thrift institution'S deposits in a banking market, the
Board considers whether the thrift institution serves as a significant
source of commercial loans in the market and provides a broad range
of consumer, mortgage, and other banking products. See, e.g., The
PNC FifUlllcial Services Group, Inc., 93 Federal Reserve Bul/etin C65
(2007): First Ullion Corporation, 84 Federal Reserve Bulletin 489
(1998).
17. Vnder 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 ("001") has informed the Board that a bank merger or
acquisition generally will not he 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 for anticompetitive effects implicitly
recognize the competitive effects of limited-purpose lenders and other
nondepository financial entities.
Legal Developments: Fourth Quarter, 2008
account for approximately $4 billion in deposits, in five
banking markets in Pennsylvania.
A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in five of the banking markets in which PNC's
subsidiary depository institutions and NC Bank directly
compete. IS On consummation of the proposal, one market
would remain highly concentrated, two markets would
remain moderately concentrated, and two would remain
unconcentrated, as measured by the HHI. The change in
HHI in the one highly concentrated market would be small
and consistent with Board precedent and the thresholds in
the DOJ Guidelines. In each of the banking markets,
numerous competitors would remain.
B. Certain Banking Markets with Divestitures
After accounting for the branch divestitures, consummation
of the merger would be consistent with Board precedent
and the thresholds in the DOJ Guidelines in two banking
markets in Pennsy Ivania: Franklin-Titusville-Oil City
("FTO") and Warren.'9 Although both markets would
remain highly concentrated, the HHI would not increase in
either market. In addition, six competitors would remain in
the FTO banking market, including a depository institution
that would control 33 percent of market deposits. Although
only four competitors would remain in the Warren banking
market, one depository institution competitor of PNC
would control 52 percent of market deposits.
C. Three Banking Markets Warranting Special
Scrutiny
PNC's subsidiary depository institutions and NC Bank
compete directly in three banking markets in Pennsylvania
that warrant a detailed review: Pittsburgh, Erie, and Meadville. In each of these markets, all with proposed divestitures, the concentration levels on consummation of the
proposal would exceed the threshold levels in the DOJ
Guidelines or the resulting market share of PNC would
exceed 35 percent.
For each of these markets, the Board has considered
carefully 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 market. The number and strength of factors necessary to
mitigate the competitive effects of a proposal depend on the
18. These banking markets and the effects of the proposal on their
concentrations of banking resources are described in Appendi)( A.
19. These banking markets and the effects of the proposal on their
concentrations of banking resources are described in Appendi)( B. The
analysis of the effects of the proposal in these markets includes the
weighting of deposits controlled by one thrift institution operating in
both the markets at 100 percent. The thrift institution was deemed to
be an active commercial lender based on lending data and discussions
with personnel of the thrift institution and commercial bank competitors indicating that it was an active commercial lender in both markets.
B3
size of the increase in and resulting level of concentration
in a banking market,2° In each of these markets, the Board
has identified factors that indicate the proposal would not
have a significantly adverse impact on competition, notwithstanding the post-consummation increase in the HHI
and market share.
Among the factors reviewed, the Board has considered
the competitive influence of community credit unions in
these banking markets. Those credit unions offer a wide
range of consumer products, operate street-level branches,
and have membership open to almost all residents in the
applicable market. The Board has concluded that the
activities of such credit unions in the three markets exert
competitive influence that mitigates, in part, the potential
effects of the proposaJ.21
Pittsburgh. The structural effects of the proposal in the
Pittsburgh banking market ("Pittsburgh Market") as measured by applying the HHI to the June 30, 2008, Summary
of Deposit data ("SOD") would substantially exceed the
DOJ Guidelines. According to those data, PNC operates the
largest insured depository institution in the Pittsburgh
Market,22 controlling approximately $26 billion in deposits, which represents approximately 37 percent of market
deposits. NC Bank operates the second largest insured
depository institution in the Pittsburgh Market, controlling
approximately $11 billion in deposits, which represents
approximately 16 percent of market deposits. After the
proposed merger, PNC would remain the largest depository
institution in the market, controlling deposits of approximately $38 billion, representing approximately 53 percent
of market deposits.23
To reduce the potential adverse effects on competition in
the Pittsburgh Market, PNC has proposed to divest 50 of
NC Bank's branches that account for approximately $3.5 billion in deposits. On consummation of the merger and after
20. See Regions Financial Corp., 93 Federal Reserve Bulletin Cl6
(2007); NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).
21. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See. e.g.. Wells
Fargo & Company, 95 Federal Reserve Bulletin B39: The PNC
Financial Services Group, Inc., 93 Federal Reserve Bulletin C65
(2007); Regions FinanC'ial Corp., 93 Federal Reserve Bulletin CI6
(2007); Wachovia Corp., 92 Federal Reserve Bulletin CI83 (2006).
22. The Pittsburgh Market is defined as the counties of Allegheny,
Armstrong, Beaver, Butler. Fayette (e)(cept Point Marion Borough and
Springhill Township), Greene. Lawrence. Washington, and Westmoreland.
23. These market concentration and market share calculations
include the weighting of deposits controlled by five thrift institutions
in the market at 100 percent. Two of these thrift institutions were
considered to be active in the Pittsburgh commercial lending market as
a result of having a ratio of commercial and industrial ("C&I") loans
to assets of at least 5 percent. A third thrift institution had ratios of C&I
loans to total loans of more than 10 percent, which is comparable to
the national average for all commercial banks. The remaining two
thrift institutions had C&lloan-to-asset ratios slightly below 5 percent
and were deemed to be active commercial lenders based on discussions with personnel of the thrift institutions and commercial bank
competitors in the Pittsburgh Market, who indicated that the thrift
institutions were active participants in the market's commercial lending sector.
B4
Federal Reserve Bulletin D March 2009
accounting for the proposed divestiture, PNC would remain
the largest depository institution in the market, controlling
deposits of approximately $34 billion, which represent
approximately 48 percent of market deposits. The HHI
would increase 752 points to 2640.
The proposal raises special concerns in the Pittsburgh
Market because PNC, the largest institution in the banking
market, proposes to merge with the market's second largest
competitor and all other competitors in the market have
significantly smaller market shares. The Board has previously recognized that merger proposals involving the largest depository institutions in markets structured like the
Pittsburgh Market warrant close review due to the size of
those institutions relative to other market competitors. 24
The Board, therefore, has carefully considered whether
other factors indicate that the increase in market concentration, as measured by SOD data, overstates the potential
competitive effects of the proposal in the market
The Board has considered PNC's assertion that inclusion
of certain deposits that were received and booked at PNC's
head office in the Pittsburgh Market in calculations of
market share indices for this transaction would distort the
measures of the competitive effect of the proposal on the
Pittsburgh Market. PNC has argued that, for purposes of
evaluating the proposal's competitive effect in the Pittsburgh Market, the Board should exclude those deposits
booked at PNC's head office that have no relation to the
Pittsburgh Market. Approximately $17 billion of the deposits at PNC's head office are government deposits, out-ofmarket escrow deposits, correspondent banking deposits,
wholesale certificates of deposit and related accounts
("CDs"), broker-dealer trust accounts, and certain corporate deposits.
In conducting its competitive analysis in previous cases,
the Board generally has not adjusted its market share
calculations to exclude out-of-market deposits because all
deposits are typically available to support lending and other
banking activities at any location. The Board has adjusted
the market deposits held by an applicant to exclude specific
types of deposits only in limited situations, such as when
evidence supported a finding that the excluded deposits
were not legally available for use in that market and data
were available to make comparable adjustments to the
market shares for all other market participants. 25 The Board
also has adjusted deposit data in the limited circumstance
when there was strong evidence that a depository organization moved its national business-line deposits to a particular branch for business reasons unrelated to its efforts to
compete in that market and did not use those deposits to
enhance its competitive ability in that market or to manipu24. See First Busey Corporation, 93 Federal Reserve Bulletin C90,
C91 (2007); Firstar Corporation. 87 Federal Reserve Bulletin 236.
238 (2001).
25. See First Security Corp., 86 Federal Reserve Bulletin 122
(2000).
late SOD data used in competitive analyses by a federal
supervisory agency.26
PNC has stated that approximately $10 billion in out-ofmarket deposits was assigned to PNC's head office for
business reasons unrelated to its efforts to compete in the
Pittsburgh Market. PNC has represented that these deposits
were transferred because that office houses the "Intrader"
accounting system, which is used to track PNC's wholesale
CDs and broker-dealer trust accounts, both nationally and
internationally. In addition, PNC has represented that the
deposits maintained by the Intrader system are segregated
from the deposit account system on which the head office
generally operates. Furthermore. the head office systems
are separate from the retail branch located in the same
building, and the retail branch personnel cannot access the
Intrader system. 27 PNC has represented that it placed the
Intrader deposits in its head office for administrative convenience unrelated to PNC's efforts to compete in the Pittsburgh Market and that none of the account holders booked
on Intrader are domiciled in the Pittsburgh Market.
PNC has also argued that other deposits associated with
out-of-market customers should be excluded from PNC's
head office deposits, including deposits that were generated
from various municipalities and governments outside the
Pittsburgh Market, that involve escrow accounts for mortgages and other transactions outside the market, or that
represent correspondent banking accounts with institutions
outside the market. PNC is limited by law, contract, or
duration of relationship from using these deposits for any
activity other than to support the deposit account,28 Other
deposits PNC asserted should be excluded are accounts
from large corporations located outside the Pittsburgh
Market.
There is no evidence in the record that PNC moved the
deposits in question to the head office from another branch
in an attempt to manipulate the SOD data used for competitive analyses by the appropriate federal supervisory agency.
Although PNC holds approximately $26 billion in deposits
in the Pittsburgh Market based on SOD data, it holds loans
in the Pittsburgh Markel ("market loans") totaling approximately $2 billion, which represents a loan-to-deposit ratio
of 8.1 percent for PNC in the Pittsburgh Market. In
contrast, PNC's ratio of market loans to deposits associated
with customers in the Pittsburgh Market is 22.4 percent. In
addition, PNC's total market loans have decreased 3 percent in the period since December 31, 2006, while its total
deposits held at the Pittsburgh office have increased 29 percent. Furthermore, the market deposits of PNC associated
26. See Bank af America Corporation, 94 Federal Reserve Bulletin
C81, C84-C85 (2008); l.P. Morgan Chase & Co., 90 Federal Reserve
Bulletin 352. 355 (2004).
27. The wholesale funds booked to PNC's head office support the
entire multi state branch footprint of PNC and its national and international nonbank operational footprint.
28. See First Security Corp., 86 Federal Reserve Bulletin 122,
126-127 (2000).
Legal Developments: Fourth Quarter, 2008
B5
with out-of-market customers increased 41 percent during
the same period while its market deposits associated with
customers in the Pittsburgh Market increased 13 percent.
These facts, and in particular the fact of the decrease in loan
market share in comparison to a significant increase in the
deposits held by the Pittsburgh head office from out-ofmarket customers, is consistent with the conclusion that the
SOD deposit data significantly overstate PNC's competitive presence in the Pittsburgh Market.
The Board has also taken into consideration the fact that
the next largest competitor (other than NC Bank) to PNC in
the Pittsburgh Market has significantly more branches than
PNC in the market but has average market deposits per
branch of less than 17 percent of PNC's average market
deposits per branch. The other commercial bank and thrift
institution competitors of PNC that have at least half as
many branches as PNC have average market deposits per
branch of less than 14 percent of PNC's average market
deposits per branch. PNC's high average market deposits
per branch further supports the conclusion that the SOD
deposit data significantly overstate PNC's competitive presence in the Pittsburgh Market.
Based on a careful review of these and all other facts of
record, the Board concludes that the concentration level for
PNC in the Pittsburgh Market, as measured by the HHI
using SOD data without adjustment, overstates the competitive effect of the proposal in the Pittsburgh Market. If the
$17 billion in deposits discussed above with no relation to
the Pittsburgh Market is excluded from the calculation of
its market concentration, the market share held by PNC on
consummation of the proposal would be approximately
38 percent, after accounting for the effects of the proposed
divestitures. PNC would remain the largest insured depository institution in the market on consummation of the
proposal, controlling adjusted market deposits of approximately $21 bilJion. If PNC's proposed divestitures were
purchased by the largest in-market institution, the resulting
HHI would increase 529 points to 1835.
The Board also examined other mitigating factors in the
Pittsburgh Market. A large number of commercial bank and
thrift institution competitors (57) would remain in the
market after consummation of the proposal, including two
competitors that each have more than a 12 percent market
share. 29 The proposed divestiture of 50 branches would
significantly strengthen the competitive position of a banking organization operating in the Piltsburgh Market or
bring a new, sizable competitor into the market. Furthermore, the record of recent entry into the Pittsburgh Market
is evidence of its attractiveness for entry by out-of-market
competitors. Six banking organizations have entered the
market in the past four years.
Based on a careful review of these and all other factors
of record, the Board concludes that, with the proposed
divestitures, appropriate adjustment, and consideration of
other mitigating factors, consummation of the proposal
would have no significantly adverse effects in the Pittsburgh Market.
Erie. In the Erie banking market (HErie Market"),30
PNC operates the largest depository 'institution in the
market, controlling deposits of approximately $820 million, which represent approximately 27 percent of market
deposits. NC Bank operates the second largest depository
institution in the market, controlling deposits of approximately $459 million, which represent approximately 15 percent of market deposits. To reduce the potential for adverse
effects on competition in the Erie Market, PNC Bank has
proposed to divest six of NC Bank's branches that account
for $294.6 million in total deposits. On consummation of
the merger and after accounting for the proposed divestitures, PNC would remain the largest depository institution
in the market, controlling deposits of approximately
$985 million, which represent approximately 32 percent of
market deposits. The HHI would increase 246 points to
2060. 31
Several factors indicate that the increase in concentration in the Erie Market, as measured by the HH1 and PNC's
market share, overstates the potential competitive effects of
the proposal in the market. After consummation of the
proposal, eight other commercial bank and thrift institution
competitors would remain in the market, including two
other competitors with a significant presence in the market.
The second and third largest depository institution organizations in the market would control approximately 24 percent and 12 percent of market deposits, respectively. The
second largest depository organization would also control
22 branches, the largest branch network of any depository
institution in the Erie Market.
In addition, the Board has evaluated the competitive
influence of four active community credit unions in the Erie
Market. These credit unions control approximately
$467 million in deposits in the market that, on a 50 percent
weighted basis, represent approximately 7.14 percent of
market deposits. Accounting for the revised weightings of
these deposits, PNC would control approximately 30.1 percent of market deposits, and the HHI would increase 212
points to 1795.
In addition, the record of recent entry into the Erie
Market is evidence of the market's attractiveness for entry.
Two depository institutions have entered the market since
2004.
Based on a careful review of all the facts of record, and
taking into account the proposed divestitures, the Board
29. The Board also has concluded that the activity of one community credit union in the market exerts sufficient competitive influence
to mitigate. in part, the potential adverse competitive effects of the
proposal. This active credit union controls approximately $554 million
of deposits in the market. Accounting for a 50 percent weighting of
these deposits, PNC would control approximately 37 percent of
market deposits, and the HHI would increase 522 points to 1813.
30. The Erie Market is defined as Erie County.
31. This analysis inclUdes the weighting of deposits controlled by
one thrift institution in the market at 100 percent. The thrift institution
was deemed to be an active commercial lender based on lending data
and discussions with personnel of the thrift institution and other
commercial banking competitors indicating that the thrift institution
was an active commercial lending participant in the Erie Market.
B6
Federal Reserve Bulletin D March 2009
concludes that consummation of the proposal would not
substantially lessen competition in the Erie Market.
Meadville. In the Meadville banking market ("Meadville Market"),32 PNC operates the third largest depository
institution in the market, controlling deposits of approximately $113 million, which represent approximately 13 percent of market deposits. NC Bank operates the largest
depository institution in the market, controlling deposits of
approximately $341 million, which represent approximately 40 percent of market deposits. To reduce the
potential for adverse effects on competition in the Meadville Market, PNC has proposed to divest three of NC
Bank's branches that account for $93.9 million in total
deposits. On consummation of the merger and after accounting for the proposed divestiture, PNC would become the
largest depository institution in the market, controlling
deposits of approximately $360 million, which represent
approximately 43 percent of market deposits. The HHI
would increase 130 points to 2498. 33
Several factors indicate that the increase in concentration in the Meadville Market, as measured by PNC's
market share, overstates the potential competitive effects of
the proposal in the market. After consummation of the
proposal, five other commercial banking and thrift institution competitors would remain in the market. The Board
notes that there are other competitors with a significant
presence in the market. The second and third largest
depository institution organizations in the market would
control approximately 16 percent and 14 percent of market
deposits, respectively. Furthermore, a commercial bank
competitor would have a larger number of branches in the
Meadville Market than PNC, and four other institutions
would have branch networks comparable to PNC's network.
In addition, the Board has evaluated the competitive
influence of one active community credit union in the
market. This credit union controls approximately $39 million in deposits in the market that, on a 50 percent weighted
basis, represents approximately 2.3 percent of market
deposits. Accounting for the revised weightings of these
deposits, PNC would control 4 J.6 percent of market deposits, and the HHI would increase 124 points to 2390.
Based on a careful review of all the facts of record, and
taking into account the proposed divestitures, the Board
concludes that consummation of the proposal would not
substantially lessen competition in the Meadville Market.
32. The Meadville Market is defined as Crawford County. excluding the city of Titusville.
33. This analysis includes the weighting of deposits controlled by
one thrift institution in the market at 100 percent. The thrift institution
is the same institution weighted at 100 percent in the Erie Market and
the basis for weighting this institution's deposits at 100 percent in the
Meadville Market is the same as the basis in the Erie Market. See
footnote 31 above.
D. View of Other Agencies and Conclusion on
Competitive Considerations
The DOl also has conducted a detailed review of the
potential competitive effects of the proposal and has
advised the Board that, in light of the proposed divestitures,
consummation of the proposal would not likely have a
significantly adverse effect on competition in any relevant
banking market. 34 In addition, the appropriate banking
agencies have been afforded an opportunity to comment
and have not objected to the proposal.
Based on these and all other facts of record, the Board
has concluded that consummation of the proposal would
not have a significantly adverse effect on competition or on
the concentration of resources in any relevant banking
market. Accordingly, based on all the facts of record and
subject to completion of the proposed divestitures, the
Board has determined that competitive considerations are
consistent with approval.
FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSIDERA TIONS
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 carefully
considered these factors in light of all the facts of record,
including confidential supervisory and examination information received from the relevant federal and state supervisors of the organizations involved, publicly reported and
other financial information, information provided by PNC,
and public comments received on the proposaJ.35
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 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 considers capital adequacy to be especially important. The
Board also evaluates the financial condition of the resulting
34. PNC has committed to the Board that it will comply with the
divestiture agreement between the DOJ and PNC dated December 11.
2008.
35. Many commenters expressed concern that National City was
not provided federal financial assistance to help it remain an independent organization while PNC is scheduled to receive federal funding
under the Department of the Treasury's Capital Purchase Program
("CPP"), which would help PNC finance the proposed transaction. As
explained in more detail above, the Board has carefully considered all
the facts of record in assessing the financial and managerial resources
and future prospects of the companies involved.
Legal Developments: Fourth Quarter, 2008 B7
organization at consummation, including its capital position, asset quality, earnings prospects, and the impact of the
proposed funding of the transaction. In addition, the Board
considers the ability of the organization to absorb the costs
of the proposal and the plans for integrating operations
after consummation.
The Board has carefully considered the financial resources of the organizations involved in the proposal in
light of information provided by PNC and National City
and supervisory information available to the Federal Reserve through its supervision of these companies and from
the OCC, the primary supervisor of the depository institution subsidiaries of these organizations. The Board has
considered that, although National City is well capitalized,
it has experienced severe financial strains and liquidity
pressures during the last year that have weakened its
condition and stressed its operations. National City has had
difficulty raising sufficient private capital to address these
issues without a merger partner. PNC is well capitalized,
would remain well capitalized after consummation of this
proposal, and would provide operational and capital strength
to National City. Consummation of this proposal would
create a combined organization that can withstand the
financial pressures in the present exigent market conditions
and restore a strong provider of banking and other financial
services in the markets served by National City. The
proposed transaction is structured as a share exchange.
Based on its review of the record, the Board finds that PNC
has sufficient resources to effect the proposal.
The Board also has considered the managerial resources
of the organizations involved in the proposed transaction.
The Board has reviewed the examination records of PNC,
its subsidiary depository institutions, and NC Bank and
other nonbanking companies involved in the proposal. In
addition, the Board has considered its supervisory experience and that of other relevant banking supervisory agencies, including the OCC, with the organizations and their
records of compliance with applicable banking law and
anti-money-laundering laws. 36
The Board also has considered carefully the future
prospects of the organizations involved in the proposal.
Moreover, the Board has considered information on PNC's
plans to implement its risk-management policies, procedures, and controls at National City and how PNC would
manage the integration of National City into PNC. The
Board also considered PNC's extensive experience in
acquiring bank holding companies and successfully integrating them into its organization.
PNC does not have a significant presence in many of the
markets served by National City. In particular, PNC does
not compete in the markets in Ohio and Indiana where
National City has the majority of its operations. Consum36. Several commenters expressed concern over reports of large
payments to be made to certain National City executives on the
acquisition by PNC. As part of its review of financial factors, the
Board has reviewed the proposed severance payments to be provided
by PNC as well as the limitations imposed on those payments in
connection with the request for funding under the CPP.
mation of this proposal will benefit those markets by
providing financial strength and stability to National City
that will allow it to continue to provide banking services to
households, businesses, and other customers. The proposed
acquisition will also allow those NC Bank offices to
provide additional services currently offered by PNC. The
record indicates that PNC has the financial and managerial
resources to serve as a source of strength to NC Bank and
the other operations of National City.
Based on all the facts of record, the Board has conduded
that the financial and managerial resources and the future
prospects of the organizations involved in the proposal are
consistent with approval, as are the other supervisory
factors.
CONVENIENCE AND NEEDS CONSIDERATIONS
AND CRA PERFORMANCE
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.37 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 (HLMI") neighborhoods, in
evaluating bank expansionary proposals. 3M
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 National
City, data reported by PNC and National City under the
Home Mortgage Disclosure Act ("HMDA"),39 as well as
other information provided by PNC, confidential supervisory information, and public comments received on the
proposal. Several commenters expressed general concerns
regarding the effect of the proposal on the amount of
community development lending or investment and charitable donations in areas served by NC Bank. 40 Two com37. 12 U.S.C. §1842(c)(2).
38. 12 U.s.c. §2903.
39. 12 U.S.c. §2801 et seq.
40. Two commenters also urged the Board to require or encourage
PNC to enter into agreements to provide CRA loans, investments, and
services to low-income communities or to require it to take certain
actions in the future. A community group commenter generally
supported National City's CRA record in Milwaukee but requested
that PNC meet with the group to discuss CRA-related concerns. 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 third-party
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
B8
Federal Reserve Bulletin 0 March 2009
menters also expressed concern regarding the potential
impact of branch closures. One commenter expressed
concern that the proposal would inhibit small business
lending in Michigan and Ohio.41 In addition, one commenter criticized PNC's and National City's records of
home mortgage lending in LMI and minority communities
in Ohio, PNC's home mortgage lending to minorities in
Pittsburgh and Philadelphia, and National City's home
mortgage lending to minorities in Cleveland.
A. eRA Performance Evaluations
As provided in the CRA, the Board has considered 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 National City. 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. 42
PNC's lead subsidiary insured depository institution,
PNC Bank, received an "outstanding" rating at its most
recent CRA performance evaluation by the OCC, as of
May 16,2006 ("PNC 2006 Evaluation"). Both of PNC's
other subsidiary insured depository institutions received an
"outstanding" or "satisfactory" rating at their most recent
CRA performance evaluations.4~ NC Bank received an
"outstanding" rating at its most recent CRA performance
evaluation by the OCC, as of June 30, 2005 ("NC Bank
2005 Evaluation" ).44
CRA Perfonnance oj PNC Bank. PNC Bank's 2006
Evaluation was discussed in the Board's order approving
PNC's acquisition of Sterling Financial Corporation, Lancaster, Pennsylvania, in 2008. 45 Based on a review of the
record in this case, the Board hereby reaffirms and adopts
the credit needs of its assessment areas at the time the Board reviews a
proposal under the convenience and needs factor.
41. One commenter expressed concern that the proposal would
have an adverse effect on loss mitigation efforts for assumed and
outstanding subprime mortgage loans from NC Bank.
42. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution's CRA
record. See Interagency Questions and Answers Regarding Community Reinvestment, 66 Federal Register 36,620 at 36,640 (2001).
43. PNC Bank, Delaware received an "outstanding" rating at its
most recent evaluation by the Federal Reserve Bank of Cleveland, as
of February 4, 2008.
44. One commenter expressed concern that NC Bank's 2005
Evaluation excluded the Pittsburgh Metropolitan Statistical Area
("MSA"). The commenter also criticized the length of time since the
most recent exam and requested that the OCC conduct a targeted CRA
exam for the Pittsburgh MSA At the time of the 2005 Evaluation, NC
Bank had a minimal presence in Pennsylvania, consisting of a single
branch in Philadelphia. An affiliated but separate institution, National
City Bank of Pennsylvania, Pittsburgh, held a significant market share
in the state. The two institutions merged in 2006, providing NC Bank
with much of its share of market deposits in Pennsylvania.
45. See The PNC Financial Services Group, Inc., 94 Federal
Reserve Bulletin C38 (2008) ( .. PNC-Sterling Order").
the facts and findings detailed in that order concerning PNC
Bank's CRA performance record. PNC also provided the
Board with additional information about its CRA performance since the Board last reviewed such matters in the
PNC-Sterling Order. In addition, the Board has consulted
with the OCC with respect to PNC Bank's CRA performance since the PNC-Sterling Order and has reviewed
information provided by PNC regarding its CRA-related
acti vities since that order.
In addition to PNC Bank's overall "outstanding" rating
in the PNC 2006 Evaluation,46 the bank received an overall
"outstanding" rating in Pennsylvania and in the Cincinnati
Metropolitan Area ("MA"). 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, and that its performance in the
Pittsburgh and Cincinnati assessment areas was excellent.
They further noted that PNC Bank's level of community
development lending in Pennsylvania and in the Cincinnati
MA was excellent and had a positive impact on the bank's
overall performance under the lending test.
Examiners reported that the bank's distribution of small
loans to businesses was excellent in Pennsylvania. 47 They
noted that the bank's market share of small loans to
businesses in LMI areas exceeded the bank's overall
market share of loans across its Pennsylvania assessment
areas in each year of the evaluation period. In Pennsylvania, examiners also noted that PNC Bank placed significant
community development lending emphasis on economic
revitalization and affordable housing, Since the PNC 2006
Evaluation, PNC Bank has continued its high level of CRA
lending activity by making more than $230 million in
community development loans in its assessment areas in
2006 and 2007,
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 was "high satisfactory" in the Pennsylvania
assessment area and was "outstanding" in the Cincinnati
MA. They noted that the bank's level of qualifying investments represented excellent responsiveness to the needs of
the Cincinnati MA community, particularly in relation to
affordable housing. Since the 2006 Evaluation, PNC Bank
has continued to make a significant amount of CRAqualified investments in community development projects.
In 2006 and 2007, PNC Bank made more than 160
investments totaling approximately $370 million.
Examiners also concluded that the bank's delivery systems overall were accessible to its customers. In the
46. The PNC 2006 Evaluation focused on PNC Bank's performance in assessment areas throughout Pennsylvania and New Jersey
and in the Philadelphia-Camden-Wilmington, PA-NJ-DE-MD Multistate Metropolitan Area, which together represented approximately
83 percent ofthe bank's deposits. The evaluation periods for different
a,pects of PNC Bank's CRA performance ranged from January J,
2002, to April 30, 2006.
47, "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.
Legal Developments: Fourth Quarter, 2008
Pennsylvania assessment area, examiners rated PNC Bank's
performance under the service test as "outstanding" and
reported that the bank's performance in the Pittsburgh
assessment area was excellent for both retail banking
services and community development services. PNC represented that there have been no material changes to its CRA
programs since the 2006 evaluation.
CRA Performance of NC Bank. The NC Bank 2005
Evaluation was discussed in the Board's order approving
National City's acquisition of Mid America Bank fsb,
Clarendon Hills, Illinois, in 2007. 4K Based on a review of
the record in this case, the Board hereby reaffirms and
adopts the facts and findings detailed in that order concerning NC Bank's CRA performance record.
In addition to the overall "outstanding" rating that NC
Bank received in its 2005 evaluation, the bank received
separate overall "outstanding" or "satisfactory" ratings for
its CRA performance in each of the states reviewed.
Examiners reported that the bank's distribution of HMDA
loans to borrowers of different income levels was excellent.
Examiners also stated that the bank's record of community
development lending and qualified community development investments demonstrated excellent responsiveness to
community credit and investment needs.
Examiners rated NC Bank's performance under the
investment test as "outstanding" or "high satisfactory" in
most of the states reviewed. 49 They reported that the bank's
investments demonstrated excellent responsiveness to the
needs of the community. Examiners concluded that NC
Bank's retail banking services generally were accessible to
geographies and individuals with different income levels.
They also reported that the bank generally provided a high
level of community development services.
B. Branch Closings
Two commenters expressed general concern that the proposal, or the eventual merger of PNC Bank and NC Bank
after consummation of the proposal, would lead to branch
closures and adversely affect banking services in LMI
areas. PNC has stated that it has not made any decisions
regarding potential branch closures but that any closures
would not take place until PNC merges PNC Bank and NC
Bank at some point after consummation of the proposal.
PNC also stated that it intends to continue to serve LMI
communities through its branch network.
In addition, PNC has stated that, on consummation of
the proposal, it expects to implement its current branch
closing policy at NC Bank. PNC's branch closing policy
requires the bank to make every effort to minimize the
customer impact in the local market and to provide a
48. See National Cit}' CorporaIion. 93 Federal Reserve Bulletin
CI27 (2007).
49. Two commenters expressed concern about the impact of the
proposal on charitable donations made by NC Bank. PNC represented
that it plans to surpass NC Bank's 2008 goal for charitable donations
across all markets. The Board notes that neither the CRA nor the
agencies' implementing rules require institutions to engage in charitable donations.
B9
reasonable alternative to acquire similar services. The
policy requires that, before a final decision is made to close
a branch, management will consult with members of the
community in an effort to minimize the impact of the
branch closing.
The Board also has considered that federal banking law
provides a specific mechanism for addressing branch closings,50 Federal law requires an insured depository institution to provide notice to the public and to the appropriate
federal supervisory agency before closing a branch and to
adopt a policy regarding branch closures. 51
In the most recent CRA performance examinations,
examiners found that the banks' records of opening or
closing branches had not adversely affected the accessibility of delivery systems, particularly in LMI areas and to
LMI individuals. In addition, the Board notes that the OCC
will continue to review the branch closing record of PNC
Bank and NC Bank in the course of conducting CRA
performance evaluations.
C. HMDA and Fair Lending Record
In light of the public comments received on the proposal,
the Board has considered carefully the compliance records
of PNC and National City with fair lending and other
consumer protection laws in its evaluation of the public
interest factors. Two commenters alleged, based on HMDA
data, that PNC and National City denied the home mortgage loan applications of African American and Hispanic
borrowers more frequently than those of nonminority applicants in certain MSAs. A commenter also alleged, based on
2007 HMDA data, that NC Bank made disproportionately
higher-cost loans to African American and Hispanic borrowers than to nonminority borrowers. 52 One commenter
also alleged that PNC extended a disproportionately small
SO. Section 42 of the Federal Deposit Insurance Act. 12 U.S.c.
§ 1831r-1 ("FDI Act"), as implemented by the Joint Policy Statement
Regarding Branch Closings (64 Federal Register 34,844 (1999)),
requires that a bank provide the public with at least 30 days' notice and
the appropriate federal supervisory agency and customers of the
branch with at least 90 days' notice before the date of the proposed
branch closing. The bank also is required to provide reasons and other
supporting data for the closure, consistent with the institution's written
policy for branch closings.
5 I. One commenter requested the Federal Reserve to hold hearings
under the FDI Act before any branch in a LMI area is closed. The FDI
Act provides that, in cases where an interstate bank proposes to close a
branch in an LMI area. an individual from the area where such branch
is located may request a meeting between the bank's primary federal
regulator and community leaders. Such requests must be made to the
bank's primary federal regulator after notice of a branch closure has
been made to its customers. As noted above, PNC has not made any
decisions regarding potential branch closures. which makes such a
request premature. In addition, any such requests for a hearing with
regard to branch closures by either PNC Bank or NC Bank must be
made to the OCC, the primary federal regulator of both banks. The
Board has forwarded the commenter's letter to the OCC for consideration.
52. Beginning January I. 2004. the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
B 10
Federal Reserve Bulletin 0 March 2009
percentage of loans to African Americans in Pittsburgh
when compared to the percentage of African American
households in that area.
The Board's analysis of the lending-related concerns
included a review of HMDA data reported by PNC Bank
and NC Bank and their lending affiliates. 53 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, or in the pricing of loans to such groups, they provide
an insufficient basis by themselves on which to conclude
whether or not PNC Bank or NC Bank has excluded or
imposed 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. 54 HMDAdata,
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.
Moreover, the Board believes that all bank holding companies and their affiliates must conduct their mortgage lending operations without any abusive lending practices and in
compliance with all consumer protection laws.
In carefully reviewing the concerns about the organizations' lending activities, the Board has taken into account
other information, including examination reports that provide on-site evaluations of compliance with fair lending
and other consumer protection laws and regulations by
PNC Bank, NC Bank, and their lending affiliates. The
Board also has consulted with the OCC, the primary federal
supervisor of both PNC Bank and NC Bank. In addition,
the Board has considered information provided by PNC,
including its plans for managing the consumer compliance
operations of PNC Bank and NC Bank after consummation
of the proposal.
The record, including confidential supervisory information, indicates that PNC has implemented many processes
to help ensure compliance with all consumer protection
laws and regulations. PNC's compliance program includes
employee training; review by senior management of credit
decisions, pricing, and marketing; and fair lending policies
and procedures to help ensure compliance with ConSumer
protection laws. PNC's 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. PNC
has stated that NC Bank operations will be integrated into
PNC's existing fair-lending and consumer-protection compliance programs after consummation of the proposal. 55
The Board also has considered the HMDA data in light
of other information, including the overall performance
records of the subsidiary banks of PNC and National City
under the CRA. These established efforts and record of
performance demonstrate that the institutions are active in
helping to meet the credit needs of their entire communities.
points for first-lien mortgages and 5 or more percentage points for
second-lien mottgages (12 CFR 203.4).
53. The Board reviewed HMDA data for 2006 and 2007 for PNC
Bank in the Pittsburgh assessment area and the Cincinnati and
Philadelphia MSAs; for NC Bank in the Cincinnati. Cleveland. and
Pittsburgh MSAs; and for both PNC Bank and NC Bank in Pennsylvania and Ohio.
54. 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, creditwotthy. 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.
AGREEMENT CORPORATION
D. 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 performance
records of the institutions involved, information provided
by PNC, comments received on the proposal, and confidential supervisory information. PNC represented that the
proposal would result in greater convenience for customers
of PNC and National City through expanded delivery
channels and a broader range of products and services. In
addition, the Board previously noted the severe financial
strains and liquidity pressures that National City has been
experiencing, which are likely to adversely affect services
to its customers. In light of these circumstances, the Board
recognizes that the proposed merger would allow the
combined organization LO continue to provide banking and
other financial services in support of the convenience and
needs of the communities currently served by both organizations. 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.
As noted, PNC also has provided notice under section 25 of
the FRA and the Board's Regulation K to acquire the
agreement corporation subsidiary of National City. The
55. One commenter reiterated concerns regarding alleged disparate
pricing of subprime loans originated by a former National City
subsidiary, First Franklin. that the commenter made in connection with
National City Corporation's application to acquire Provident Bank.
The Board considered those comments when it approved that proposal. See NatiofUlI City Corporation. 90 Federal Reserve Bulletin
382.384 (2004). National City sold First Franklin to Merrill Lynch &
Co .• Inc. in 2006.
Legal Developments: Fourth Quarter, 2008
Board concludes that all factors required to be considered
under the FRA and the Board's Regulation K are consistent
with approval.
CONCLUSION
Based on the foregoing, the Board has determined that the
applications under section 3 of the BHC Act and section 25
of the FRA should be, and hereby are, approved. 56 In
reaching its conclusion, the Board considered all the facts
of record in light of the factors that the Board is required to
consider under the BHC Act, the FRA, and other applicable
statutes.57 The Board's approval is specifically conditioned
56. A number of commenters requested an extension of the comment period or delayed action on the proposal, and one commenter has
requested Board review of a decision under authority delegated by the
Board that denied his request for an extension of the comment period,
See letter dated November 26, 2008, from Robert deV. Frierson,
Deputy Secretary of the Board_ to the Honorable Dennis 1. Kucinich,
As previously noted, notice of the proposal was published in the
Federal Register on November 5, 2008, Newspaper notices were
published on October 30 and November 3 in the appropriate newspapers of record, and the comment period ended on December 2,
Accordingly, interested persons had approximately 33 days to submit
their views, This period provided sufficient time for commenters to
prepare and submit their comments and, as noted above, many
commenters have provided written submissions, all of which the
Board has considered carefully in acting on the proposal, The Board
also has accumulated a significant record in this case, including reports
of examination, confidential supervisory information and public
reports and information, in addition to public comments. Moreover,
the Board is required under applicable law and its regulations to act on
applications submitted under the BHC Act within specified time
periods. Based on all the facts of record. the Board has concluded that
the record in this case is sufficient to warrant action at this time and
that neither an extension of the comment period nor further delay in
considering the proposal is necessary,
57. A number of commenters requested that the Board hold a public
meeting or hearing on the proposal. Section 3 of the BHC Act does not
B 11
on compliance by PNC with the conditions imposed in this
order and all the commitments made to the Board in
connection with the proposal. These conditions and commitments 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 acquisition of National City may not be consummated before the 15th calendar day, 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 December 15,2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke,
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
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 OCe. 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 material factual issues related to the application and to provide
an opportunity for testimony (12 CFR 225,16(e), 262.25(d)), The
Board has considered carefully the commenters' requests in light of all
the facts of record, As noted, 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 A
PNC AND NATIONAL CITY BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl
GUIDELINES WITHOUT DIVESTITURES
Market
deposit
shares
(percent)
Resulting
HHI
Change in
HRI
Rank
Amount
of deposits
(dollars)
Indian River County
PNC Pre-Consummation ..............
National City .............................
PNC Post-Consummation .............
14
3
2
30.9 mil.
361.2 mil.
392.1 mil.
.9
10.1
11.0
1,753
1,753
1,753
18
18
18
17
17
Naples Area-Collier County,
excluding the town of Immokalee
PNC Pre-Consummation ..............
National Cityl ............................
PNC Post-Consummation .............
34
42
34
15.5 mil.
o mil.
15.50 mil.
.2
.0
.2
993
993
993
0
0
0
43
43
43
Bank
•
Remaining
number of
competitors
FLORIDA BANKING MARKET
17
B 12
Federal Reserve Bulletin 0 March 2009
Appendix A-Continued
PNC AND NATIONAL CITY BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DO}
GUIDELINES WITHOUT DIVESTITURES-Continued
Bank
Rank
Amount
of deposits
(dollars)
Market
deposit
shares
(percent)
15
4
4
123.7 mil.
670.2 mil.
793.9 mil.
1.6
8.5
10.1
3
2.2 biL
4.0 bil.
6.2 bil.
2.4 bil.
2.9 biL
5.3 biL
Change in
HHi
Remaining
number of
competitors
848
848
848
27
27
27
35
35
35
10.1
18.8
28.8
1239
1,239
1,239
378
378
378
53
53
53
4.4
5.5
9.9
2,421
2,421
2,421
48
48
48
82
82
82
Resulting
HHi
KENTUCKY BANKING MARKET
Lexington-Bourbon, Clark, Fayette,
Jessamine, Nicholas. Powell, Scott,
and Woodford counties
PNC Pre-Consummation ..............
National City .............................
PNC Post-Consummation .............
Louisville, Kentucky-IndianaBullitt. Henry. Jefferson, Meade.
Nelson, Oldham. Shelby, and
Spencer counties, the Bedford
census county division in Trimble
County, the West Point census
county division and the cities of
Vine Grove and Radcliff in Hardin
County, and the city of Irvington in
Breckinridge County, all in
Kentucky; Clark, Floyd. Harrison.
and Washington counties, and
Crawford County, excluding Patoka
township, all in Indiana
PNC Pre-Consummation ..............
National City .............................
PNC Post-Consummation .............
Cincinnati. Ohio-IndianaKentucky-Brown, Butler, Clermont,
Hamilton. and Warren counties in
OhIO, Dearborn County, In Indtana,
Boone, Bracken. Campbell, Gallatin,
Grant, Kenton, and Pendleton
counties, and the New Liberty and
Owenton census county divisions in
Owen County, all in Kentucky
PNC Pre-Consummation ............ ..
National City ........................... ..
PNC Post-Consummation ........... ..
J
1
4
3
3
NOTE: Data are as of June 30, 2008. All amounts of deposits are unweighted, All rankings, market deposit shares. and HHis are based on thrift institution deposits weighted at 50 percent.
L National City established a branch in the Naples Area banking market in
late 2007. As of June 30. 2008, no deposits had been recorded.
_ _ _ _ _. ._ _ _~-,->v'.-""
t
"'
B 13
Legal Developments: Fourth Quarter, 2008
Appendix B
PNC AND NATIONAL CIIT BANKING MARKETS IN PENNSYLVANIA CONSISTENT WITH BOARD
PRECEDENT AND DO] GUIDELINES AFTER DIVESTITURES
Bank
Franklin-TItusville-Oil
Venango County and the city oj
Titusville in Craw ord Coun )
Pre-Di vestiture
PNC Pre-Consummation , ..... , ... .
National City ......................... .
PNC Post-Consummation ......... .
Post-Divestiture
PNC Post-Consummation ......... .
Branches Divested to
Out-of-Market Purchaser ......... ..
Warren-Warren County
Pre-Di vestiture
PNC Pre-Consummation .......... .
National City ......................... .
PNC Post-Consummation ........ ..
Post-Divestiture
PNC Post-Consummation ........ ..
Branches Divested to
Out-of-Market Purchaser .......... .
Rank
Amount
of deposits
(dollars)
Market
deposit
I
shares
lJJ?ercent)
Resulting
HHI
Change in
HHI
,
........
Remaining
number of
competitors
........
~.
~
..
7
2
I
40.8 miL
250.8 mil.
291.6 mil.
4.5
27.9
32.5
2,319
2,319
2,319
254
254
254
8
8
8
2
3
199.2 mil.
92.4 mil.
(I branch)
22.2
10.3
1,863
1,863
-202
-202
9
9
3
2
2
92.5 mil.
216.3 mil.
308.8 mil.
13.7
31.9
45.6
4,766
4,766
4,766
871
871
871
4
4
4
2
3
188.4 mil.
120.5 mil.
(I branch)
27.8
17.8
3,779
3,779
-117
-II7
-~
5
5
NOTE: Data are as of June 30. 2008. All amounts of deposits are unweighted.
All rankings. market deposit shares. and HHls are based on thrift institution
deposits weighted at 50 percent, except for one thrift institution operating in
both markets for which deposits are weighted at 100 percent.
ORDERS ISSUED UNDER SECTION
BANK HOLDING COMPANY ACT
4
OF THE
Bank of America Corporation
Charlotte, North Carolina
Order Approving the Acquisition of a
Savings Association and an Industrial Loan
Company
Bank of America Corporation ("Bank of America"), a
financial holding company within the meaning of the Bank
Holding Company Act (HBHC Act"), has requested the
Board's approval under sections 4(c)(8) and 4(j) of the
BHC Act and section 225.24 of the Board's Regulation yl
to acquire Merrill Lynch & Company, Inc. ("Merrill"), and
thereby indirectly acquire Merrill's subsidiary savings association, Merrill Lynch Bank & Trust Co., FSB ("ML
Bank"), both of New York, New York. In addition, Bank of
I. 12 U.S.c. §§ 1843(c)(8) and 0); 12 CFR 225.24.
America has requested the Board's approval to acquire
Merrill Lynch Bank USA (HML USA"), Salt Lake City,
Utah, and thereby engage in operating an industrial loan
company.2 Bank of America also has filed notice to acquire
Merrill Lynch Yatirim Bank A.S., Istanbul, Turkey, pursuant to section 4(c)(l3) of the BHC Act and the Board's
Regulation K.3
Notice of the proposal, alrording interested persons an
opportunity to submit comments, has been published in the
Federal Register (73 Federal Register 61, 130 (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 section 4 of the BHC Act.
Bank of America, with total consolidated assets of
$ 1.8 trillion, is the largest depository organization in the
United States, as measured by deposits, and controls deposits of approximately $774.2 billion, which represent approximately 10.8 percent of the total amount of deposits of
2. 12 CFR 225.28(b)(4)(i).
3. 12 U.S.c. § 1843(c)(I3); see 12 CFR 211.9(0. Bank of America
also proposes to acquire Menill" s other subsidiaries in accordance
with sections 4(c)(I3) or 4(k) of the BHC Act(l2 U,S.c. §§ 1843(c)(I3)
and (k)).
Bl4
Federal Reserve Bulletin D March 2009
insured depository institutions in the United States. 4 Bank
of America controls six insured depository institutions5 that
operate in thirty-one states and the District of Columbia.
Merrill has total consolidated assets of approximately
$875 billion and controls deposits of approximately
$77.8 billion, which represent approximately 1.1 percent of
the total amount of deposits of insured depository institutions in the United States. ML Bank and ML USA operate
in nine states.
On consummation of the proposal, Bank of America
would remain the largest depository organization in the
United States, with total consolidated assets of approximately $2.7 trillion. Bank of America would control deposits of approximately $852 billion. representing approximately 11.9 percent of the total amount of deposits of
insured depository institutions in the United States. 6
FACTORS GOVERNING BOARD REVIEW OF THE
PROPOSAL
The Board previously has detennined by regulation that the
operation of a savings association and an industrial loan
company by a bank holding company are activities closely
related to banking for purposes of section 4(c)(8) of the
BHC Act.7 The Board requires that savings associations,
industrial loan companies, and any other entities acquired
by bank holding companies or financial holding companies
conform their direct and indirect activities to the requirements for permissible activities under section 4 ofthe BHC
4. Asset and nationwide deposit-ranking data are as of lune 30.
2008. In this context. insured depository institutions include commercial banks. savings banks, and savings associations.
5. Bank of America, National Association ("BAN A"), CharloUe,
North Carolina, is Bank of America's largest subsidiary depository
institution, as measured by both assets and deposits.
6. The Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994 (HRiegle-Neal Act") provides that the Board may not
approve an application for the interstate acquisition of a bank if
consummation of the acquisition would result in the applicant controlling more than 10 percent of the total amount of deposits of insured
depository institutions in the United States. Pub. L. 103-328 (1994),
codified at 12 U.S.c. § I 842(d). ML Bank is chartered as a federal
savings bank under the Home Owners' Loan Act and. therefore, is
exempt from the definition of "bank" (12 U.S.c. § 1461 et seq.;
12 U.S.c. § 1841(c)(2)(B». ML USA operates as an industrial loan
company and also is exempt from the definition of "bank" under the
BHC Act. See 12 U.S.c. § l841(c)(2)(H). As a reSUlt, ML Bank and
ML USA are not "banks" for purposes of the BHC Act and its
nationwide deposit cap. Accordingly, the Riegle-Neal Act's prohibition against approving proposals that would result in the applicant
exceeding the nationwide deposit cap does not apply to the proposed
acquisition of Merrill, ML Bank, and ML USA. After consummation
of the proposal, however, the calculation of Bank of America's total
deposits would include the deposits of ML Bank and ML USA for
purposes of calculating compliance with the nationwide deposit cap
prohibition in connection with any subsequent application by Bank of
America to acquire a bank pursuant to section 3 of the BHC Act or by
one of its subsidiary banks to merge with an unaffiliated bank pursuant
to the Bank Merger Act (12 U.S.c. § 1828(c».
7. 12 CFR 225.28(b)( I), (2), (4). (5). (6). (7). and (12).
Act and Regulation Y,8 Bank of America has certified that
Merrill is substantially engaged in activities that are financial in nature, incidental to a financial activity, or otherwise
permissible for a financial holding company under section 4(c) of the BHC Act. 9 Bank of America has committed
that it will confonn, terminate, or divest, within two years
of the acquisition of Merrill, all the activities and investments of Merrill that are not pennissible for a bank holding
company under section 4(c) of the BHC Act. 10
To approve the proposal, section 4(j)(2)(A) of the BHC
Act requires the Board to detennine that the proposed
acquisition of ML Bank and ML USA "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." II
As part of its evaluation under these public interest factors,
the Board reviews the financial and managerial resources of
the companies involved, the eirect 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 or an insured industrial loan company, the
Board also reviews the records of performance of the
relevant insured depository institutions under the Community Reinvestment Act ("CRA").I>
COMPETITIVE CONSIDERATIONS
The Board has considered carefully the competitive effects
of Bank of America's acquisition of Merrill, including the
acquisition of ML Bank and ML USA, in light of all the
facts of record, Bank of America and Merrill have subsidiary insured depository institutions that compete directly in
11 banking markets in California, Massachusetts, Nevada,
New York, and Oregon. 14 The Board has reviewed care8. A savings association operated by a bank holding company may
engage only in activities that are permissible for bank holding
companies under section 4(c)(8) of the BHC Act (12 CFR 225.28(b)(4)
and 225.86(a».
9. A company is substantially engaged in activities permissible for
a financial holding company if at least 85 percent of the company's
consolidated total annual gross revenue is derived from, and at least
85 percent of the company's consolidated total assets is attributable to,
the conduct of activities permissible for a financial holding company
12 CFR 225.85(a)(3)(iO.
10. 12 CFR 225.85(a)(3).
11. 12 U.S.c. § 1843G)(2)(A).
12. See 12 CFR 225.26. See, e.g.. Waehol'ia Corporation, 92 Federal Reserve Bulletin CI83 (2006): Bane One Corporation, 83 Federal Reserve Bulletill 602 (1997).
13. 12 U.S.c. §2901 et seq.
14. ML Bank operates 54 branches in California, Connecticut,
Massachusetts, Nevada, New Jersey, New York. Oregon, and Pennsylvania and offers a full range of banking products and services to its
customers. ML USA operates three branches in New Jersey, New York,
and Utah. ML USA accepts money market deposit accounts, transaction accounts, and certificates of deposit. It also makes loans and
Legal Developments: Fourth Quarter; 2008 B15
fully the competitive effects of the proposal in all 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 each market ("market deposits") controlled by Bank of America and Merrill, 15 the concentration
levels of market deposits and the increase in those levels as
measured by the Herfindahl-Hirschman Index (HHHI")
under the Department of Justice Merger Guidelines ("DOJ
Guidelines"),16 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 the banking markets in which the insured
depository institutions of Bank of America and Merrill
directly compete. I? On consummation of the proposal, two
of the banking markets would remain unconcentrated and
eight would remain moderately concentrated. One banking
market would continue to be highly concentrated but with
no increase in the HHI. In each of the 11 banking markets,
numerous competitors would remain.
The DOJ also reviewed 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 or in any relevant market. The
appropriate federal supervisory agencies also have been
afforded an opportunity to comment and have not objected
to the proposal.
serves as a transfer agent. subaccountant, registrar, and fiscal agent for
nonproprietary money market funds and mutual funds.
15. Deposit and market share data are as of June 30, 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, 387 (1989); National Ciry 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 .• Fiw Hawaiian.
Inc .• 77 Federal Reserve Bulletin 52, 55 (1991). In the market share
calculations in this case, the Board weighted the deposits of ML Bank
at 50 percent on a pre-acquisition basis and at 100 percent on a
posl-acquisition basis to reflect the resulting control of such depOsits
by a commercial banking organization. ML USA offers only limited
services and its offices are not open to the public. The Board, therefore,
excluded the deposits of ML USA on a pre-acquisition basis and
weighted them at 100 percent on a post-acquisition basis to reflect the
resulting control of such deposits by a commercial banking organization.
16. Under the DO] Guidelines. a market is considered unconcentrated if the post-acquisition HHI is under 1000, moderately concentrated if the post-acquisition HHI is between 1000 and 1800, and
highly concentrated if the post-acquisition 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 postacquisition HHI is at least 1800 and the acquisition increases the HHi
more than 200 points. The OOJ 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. Those banking markets and the effects of the proposal on their
concentration of banking resources are described in the appendix.
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 relevant banking market. Accordingly, the Board has determined that competitive
considerations are consistent with approval.
FINANCIAL AND MANAGERIAL RESOURCES
In reviewing the proposal under section 4 of the BHC Act,
the Board has considered carefully the financial and managerial resources of Bank of America, Merrill, and their
subsidiary insured depository institutions and the effect of
the transaction on those resources. This review was conducted in light of all the facts of record, including confidential reports of examination, other supervisory information
from the primary federal and state supervisors of the
organizations involved in the proposal, and publicly reported and other financial information, including information provided by Bank of America. The Board also has
consulted with the Office of Thrift Supervision (HOTS")
and Federal Deposit Insurance Corporation ("FDIC"), the
primary federal supervisors of Merrill's subsidiary insured
depository institutions.
In evaluating financial resources in expansionary 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 the organizations' 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 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. In addition, the Board considers the ability of
the organization to absorb the costs of the proposal and the
plans for integrating operations after consummation.
The Board has considered carefully the financial factors
of the proposal. Bank of America and its subsidiary depository institutions are well capitalized and would remain so
on consummation of the proposal. ML Bank and ML USA
also are well capitalized and would remain so after consummation of the proposal. Based on its review of the record,
including all of the considerations noted above, the Board
finds that Bank of America has sufficient financial resources
to effect the proposal.1 8
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 Bank of America and its subsidiary depository
18. The proposed transaction is structured as a share exchange and
would not increase the debt-service requirements of the combined
company.
B 16
Federal Reserve Bulletin 0 March 2009
institutions, and ML Bank and ML USA, 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 federal
supervisory agencies with the organizations and their
records of compliance with applicable banking laws and
with anti-money-laundering laws. The Board also has
considered carefully Bank of America's plans for implementing the proposal, including its proposed riskmanagement systems after consummation. Bank of America
plans to implement enhanced risk-management policies,
procedures, and controls at the combined organization and
is devoting significant financial and other resources to
address all aspects of the post-acquisition integration process. The Board also has considered Bank of America's
record of successfully integrating large organizations into
its operations and risk-management systems after acquisitions.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources of the organizations involved in the proposal are
consistent with approval under section 4 of the BHC Act.
RECORDS OF PERFORMANCE UNDER THE eRA
As noted previously, the Board reviews the records of
performance under the CRA of the relevant insured depository institutions when acting on a notice to acquire an
insured depository institution, including a savings association or industrial loan company. 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
the relevant depository institution's record of meeting the
credit needs of its entire community, including low- and
moderate-income (HLMI") neighborhoods, in evaluating
bank expansionary proposals.1 9
As provided in the CRA, the Board has evaluated the
proposal 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 application 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.20
Bank of America's lead bank, BANA, received an
"outstanding" rating at its most recent CRA performance
evaluation by the Office of the Comptroller of the Currency,
as of December 31, 2006. 21 All other insured depository
19. 12 U.S.c. §2903
20. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
21. The period for the BANA evaluation was January 1. 2004,
through December 31, 2006.
institutions of Bank of America were rated "outstanding"
or "satisfactory" at their most recent CRA performance
evaluations.
ML USA received an "outstanding" rating at its most
recent CRA performance evaluation by the FDIC, as of
January 10, 2006.22 ML Bank has not yet received a CRA
rating because before its conversion to a savings association on August 5, 2006, it was a trust company and thus not
subject to the CRA. Bank of America has represented that it
will institute the community development and community
investment policies of BANA at ML Bank to strengthen the
bank's CRA policies, and to help meet the credit needs of
the communities it serves.
Based on a review of the entire record, and for the
reasons discussed above, the Board has concluded that
considerations relating to the CRA performance records of
the relevant insured depository institutions are consistent
with approval of the proposal.
PUBLIC BENEFITS
As part of its evaluation of the public interest factors under
section 4 of the BHC Act, the Board 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 currently
served by ML Bank and ML USA by providing them access
to additional banking and nonbanking products and services from Bank of America, Bank of America has represented that it would grant customers of ML Bank and ML
USA access 1O BANNs ATM network and branches on the
same terms and conditions as BANA customers, As noted,
Bank of America also would implement enhanced riskmanagement systems at the combined organization.
For the reasons discussed above and based on all the
facts of record, the Board has determined that the conduct
of the proposed nonbanking activities within the framework of Regulation Y and Board precedent is not likely to
result in significantly adverse effects, such as undue concentration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices. For the
reasons discussed above and based on the entire 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 the standard of section 4(j)(2) of the BHC
Act is consistent with approval.
Bank of America also has provided notice under section 4(c)(13) of the BHC Act and the Board's Regulation K
to acquire Merrill Lynch Yatirim Bank A.S. The Board
concludes that all factors required to be considered under
the BHC Act and the Board's Regulation K are consistent
with approval.
22. The period for the ML USA evaluation was April J, 2003,
through December 31,2005.
Legal Developments: Fourth Quarter, 2008
-------------------CONCLUSION
Based on the foregoing and all the facts of record, including
reports of examination of the institutions involved, information provided by Bank of America, and confidential supervisory information, the Board has determined that the
proposal 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 Bank of America with the conditions imposed in this order and all the commitments made
to the Board in connection with the proposal. The Board's
approval also is subject to all the conditions set forth in
Regulation Y, including those in sections 225.7 and
225.25(c),23 and to the Board's authority to require such
modification or termination of the activities of the bank
holding company or any of its subsidiaries as the Board
B 17
finds necessary to ensure compliance with, and to prevent
evasion of, the provisions of the BHC Act and the Board's
regulations and orders issued thereunder. For purposes of
this action, these conditions and commitments are deemed
to be conditions imposed in writing by the Board in
connection with its findings and decisions herein and, as
such, may be enforced in proceedings under applicable law.
The proposal shall not 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 Richmond, acting pursuant to
delegated authority.
By order of the Board of Governors, effective November 26, 2008.
Voting for this action: Chairman Bernanke. Vice Chairman Kohn.
and Governors Warsh. Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
23. 12 CFR 225.7 and 225.25(c).
Appendix
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND DOl GUIDELINES
Bank
Rank
Amount
of deposits
(dollars)
-~'----..
Market
deposit
shares
(percent)
Resulting
HHI
Change in
HHI
Remaining
number of
competitors
CALIFORNIA BANKING MARKETS
Los Angeles-the Los Angeles Ranally
Metropolitan Area and the cities of
Acton in Los Angeles County and
Rosamond in Kern County
Bank of America Pre-Consummation ...
Merrill ..........................................
Bank of America Post-Consummation ..
1
40
I
58.8 bil.
1.4 bil.
60.3 bil.
19.8
.3
20.3
824
824
824
16
16
16
198
198
198
2
16
2
423.8 mil.
32.8 mil.
456.7 mil.
16.0
.6
17.2
1,127
1,127
1,127
27
27
27
18
18
18
1
23
1
1.2 bil.
18.9 mil.
1.2 bil.
19.1
936
936
936
9
26
26
26
Napa-the Napa Ranally Metropolitan
Area and the cities of Calistoga and St.
Helena in Napa County
Bank of America Pre-Consummation ...
Merrill ..........................................
Bank of America Post-Consummation ..
Palm Springs-Cathedral City-Palm
Desert-the Palm Springs-Cathedral
City-Palm Desert and Indio-Coachella
Ranally Metropolitan Areas and the
cities of Joshua Tree, Twentynine Palms,
and Yucca Valley in San Bernardino
County
Bank of America Pre-Consummation
Merrill ........................................ ..
Bank of America Post-Consummation ..
.2
19.3
9
9
BI8
Federal Reserve Bulletin 0 March 2009
Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
Bank
Rank
. L~"t
Market
Amount • d
.
of deposits
h
s ares
(dollars)
(percent)
....- - - - . .
....
DOl GUIDELINES-Continued
':1;b ,
.!
R""'bng , ChOOg
HHI
•
HHI
~
....
...
..
Remaining
num e~ 0
competitors
....
.._-
San Diego-the San Diego Ranally
Metropolitan Area and the cities of
Camp Pendleton and Pine Valley in
San Diego County
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
I
17
I
7.9 bi!.
633.6 mil.
8.5 bi\'
17.3
.7
18.6
1,090
1,090
1,090
34
34
34
70
70
70
I
12
I
56.8 bi!.
5.1 bi!.
61.9 bi!.
25.3
1.I
27.3
1,497
1,497
1,497
85
85
85
115
115
2
2
648.8 mil.
162.2 mi!.
811 mil.
10.4
1.3
12.8
1,423
1,423
1,423
18
18
18
18
18
18
2
16
2
845.6 mil.
62.7 mil.
908.4 mil.
12.9
.5
13.8
1,003
1,003
1,003
16
16
16
21
21
21
I
67
1
29.6 bi!.
314.2 mil.
29.9 bi!.
22.0
.I
22.2
1,202
1,202
1,202
7
7
7
159
159
159
San Francisco-Oakland-San Jose-the
San Francisco-Oakland-San Jose
Ranally Metropolitan Area, and the
cities of Byron in Contra Costa County,
Hollister and San Juan Bautista in San
Bonito County, Pescadero in San Mateo
County and Point Reyes Station in
Marsh County
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
liS
Santa Barbara-the Santa Barbara
Ranally Metropolitan Area
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
13
Santa Rosa-the Santa Rosa Ranally
Metropolitan Area and the city of
Cloverdale in Sonoma County
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
MASSACHUSETTS BANKING MARKET
Boston-the Boston Ranally
Metropolitan Area and the towns of
Amherst, Antrim, Atkinson, Bennington,
Brookline, Chester; Danville, Deering,
Derry, Dublin, East Hamstead,
Fitzwilliam, Francestown, Fremont,
Greenfield, Greenville, Hampstead,
Hancock, Hollis, Hudson, Jaffrey,
Kingston, Litchfield, Lyndeboro, Mason,
Merrimac, Milford, Mont Vernon,
Nashua City, New Ipswich, Newton,
Pelham, Peterborough, Plaistow,
Raymond, Rindge, Salem, Sandown,
Seabrook, Sharon, South Hampton,
South Nashua, Temple, Wilton, and
Windham in New Hampshire
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
Legal Developments: Fourth Quarter, 2008
B 19
Appendix-Continued
BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
Amount
Bank
Rank
of deposits
DO] GUIDELINES-Continued
Market
deposit
Change in
HHI
(dollars)
Remaining
number of
competitors
NEVADA BANKING MARKET
Las Vegas-the Las Vegas Ranally
Metropolitan Area
Bank of America Pre-Consummation
Merrill ..........................................
Bank of America Post-Consummation ..
3
27
3
6.8 bil.
99.9 mil.
6.9 bil.
4.2
.0
4.2
3,635
3,635
3,635
-1
-1
-I
47
47
47
2
17
2
67.2 bil.
12.2 bil.
79.4 bil.
8.5
.8
10.0
1,278
1,278
1,278
8
8
8
301
301
301
2
42
2
4.8 bil.
0
4.8 bil.
17.5
.0
17.5
1,304
1,304
1,304
0
0
0
44
44
44
NEW YORK BANKING MARKET
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,
Mercer, Middlesex, Monmouth, Morris,
Ocean, Passaic, Somerset, Sussex,
Union, and Warren counties in New
Jersey; Monroe and Pike counties in
Pennsylvania; and Failfield County and
portions of Litchfield and New Haven
counties in Connecticut
Bank of America Pre-Consummation ...
Merrill ..........................................
Bank of America Post-Consummation ..
OREGON BANKING MARKET
Portland-the Portland Ranally
Metropolitan Area; the cities of Banks,
Molalla, Mount Angel, North Plains,
Saint Helens, Scappoose, Vernonia. and
Woodburn in Oregon; and the city of
Yacolt in Washington
Bank of America Pre-Consummation ...
Merrill ..........................................
Bank of America Post-Consummation ..
NOTE: All ranlcings. market deposit shares. and HHls are based on thrift in·
stirotion deposits weighted at 50 percent, except tor the savings association de·
posil' of Merrill, which are weighted at 50 percent before consummation of the
proposal and I()() percent after consummation. The deposits of ML Bank US
were excluded on a pre-acquisition basis and weighted at I ()() percent on a
post·acquisition basis. The effects of these modifications on the post.
consummation market shares and HHls are more evident in some markets [han
in others.
B20
Federal Reserve Bulletin 0 March 2009
ORDERS ISSUED UNDER SECTIONS 3 AND
OF THE BANK HOLDING COMPANY ACT
4
American Express Company
New York, New York
American Express Travel Related Services
Company, Inc.
New York, New York
Order Approving Formation of Bank Holding
Companies and Notice to Engage in Certain
Nonbanking Activities
American Express Company ("AMEX") and American
Express Travel Related Services Company, Inc. (" AMEX
Travel") (collectively, "Applicants") have requested the
Board's approval under section 3 of the Bank Holding
Company Act ("BHC Act")1 to become bank holding
companies on conversion of American Express Centurion
Bank ("AMEX Bank"), Salt Lake City, Utah, to a bank. 2
AMEX Bank currently operates as an industrial loan
company and is exempt from the definition of "bank"
under the BHC Act. 3 Applicants have also filed with the
Board elections to become financial holding companies on
consummation of the proposal pursuant to sections 4(k) and
(l) of the BHC Act and section 225.82 of the Board's
Regulation Y. 4
In addition, as part of their proposal to become bank
holding. companies, AMEX and AMEX Travel have requested the Board's approval under sections 4(c)(8) and
4(j) of the BHC Act and section 225.24 of the Board's
Regulation ys to retain their voting shares of American
Express Bank, FSB, Salt Lake City (HAMEX Thrift"), a
federal savings association. 6 AMEX has also provided
notice of its proposal to retain its foreign bank subsidiaries
under section 4(c)(13) of the BHC Ac£.1
Section 3(b)( 1) of the BHC Act requires that the Board
provide notice of an application under section 3 to the
appropriate federal or state supervisory authority for the
banks to be acquired and provide the supervisor a period of
time (normally 30 days) within which to submit views and
recommendations on the proposal. 8 Section 4(i)(4) of the
BHC Act imposes a similar requirement with respect to a
notice to acquire a savings associationY The BHC Act also
1. 12 U.S.C. § 1842.
2. AMEX Bank is a direct subsidiary of AMEX Travel and an
indirect subsidiary of AMEX.
3. 12 U.S.c. § I 84I(c)(2)(H).
4. 12 U.S.C. §§ I 843(k) and (I); 12 CFR 225.82.
5. 12 U.S.C. §§ I 843(c)(8) and (i); 12 CFR 225.24.
6. AMEX Thrift is a direct subsidiary of AMEX Travel and an
indirect subsidiary of AMEX.
7. 12 U.s.c. § 1843(c)(I3).
8. 12 U.S.C. § I842(b)(I); 12 CFR 225.15(b).
9. 12 U.S.c. § 18430)(4).
authorizes the Board to reduce or eliminate these notice
periods under certain circumstances. 10
In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in
accordance with the provisions of the BHC Act and the
Board's regulations. I I The Board has provided notice to the
primary federal and state supervisors of AMEX Bank, the
Federal Deposit Insurance Corporation ("FDIC") and
Commissioner of the Utah Department of Financial Institutions; to the primary federal supervisor of AMEX Thrift,
the Office of Thrift Supervision ("OTS"): and to the
Department of Justice ("DOJ"). Those agencies have
indicated that they have no objection to approval of the
proposal. For the same reasons, and in light of the fact that
this transaction represents the conversion of an existing
subsidiary of Applicants from one form of a depository
institution to another, the Board has also waived public
notice of this proposal.'2
AMEX, with total consolidated assets of approximately
$127 billion, provides charge and credit payment-card
products and travel-related services and engages in other
activities both in the United States and abroadP AMEX
Bank has total consolidated assets of approximately
$25.3 billion and controls deposits of approximately
$7.2 billion. It engages primarily in financing and lending
activities and taking deposits of the type that are permissible for an industrial loan company under the exception in
section 2(c)(2)(H) of the BHC Act. AMEX Thrift has total
consolidated assets of approximately $25 billion and controls deposits of approximately $7.2 billion. AMEX Thrift
engages primarily in credit card lending activities.
FACTORS GOVERNING BOARD REVIEW OF
TRANSACTION
The BHC Act sets forth the factors that the Board must
consider when reviewing the formation of a bank holding
company or the acquisition of a bank. These factors are the
competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the proposal; the convenience and needs of the community to be served, including the records of performance
under the Community Reinvestment Act l4 ("CRA") of the
insured depository institutions involved in the transaction;
and the availability of information needed to determine and
enforce compliance with the BHC Act and other applicable
federal banking laws. 15
10. 12 U.S.c. §§ I 842(b)(I) and 1843(1)(4).
11. ld.; 12 CFR 225.16(b)(3), 225.16(g)(2), 225.25(d), and 262.3(1).
12. 12 CFR 22S.l6(b)(3). 225.16(g)(2), 225.25(d), and 262.3(1),
13. Asset data for AMEX are as of September 30, 2008, and asset
and deposit data for AMEX Bank and AMEX Thrift are as of June 30,
2008.
14. 12 V.S.c. §2901 et seq.
15. In cases involving interstate bank acquisitions by bank holding
companies. the Board also must consider the concentration of deposits
Legal Developments: Fourth Quarter; 2008
An acquisition of a savings association requires Board
approval under sections 4(c)(8) and 4(j) of the BHC Act. 16
The Board previously has detennined by regulation that the
operation of a savings association is closely related to
banking for purposes of section 4(c)(8) of the BHC Act. 17
The Board also must detemline that the operation of
AMEX Thrift by Applicants "can reasonably be expected
to produce benefits to the public, such as greater convenience, increased competition, or gains in efficiency, that
outweigh possible adverse etfects, such as undue concentration of resources, decreased or unfair competition, confiicts of interests, or unsound banking practices." IH
COMPETITIVE CONSIDERA nONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly. The
BHC Act also prohibits the Board from approving a
proposed 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. 19 In addition, the Board must
consider the competiti ve effects of a proposal to acquire a
savings association under the public benefits factor of
section 4(j) of the BHC Act.
The proposal involves the conversion of an existing,
wholly owned industrial loan company subsidiary of Applicants into a bank, with no resulting change in the ownership of Applicants, AMEX Bank, or AMEX Thrift. In
addition, Applicants do not propose to acquire any additional depository institution as part of this proposal. Based
on all the facts of record, the Board concludes that consummation of the proposal would not result in any significantly
adverse effects on competition or on the concentration of
banking resources in any relevant banking market and that
the competitive factors are consistent with approval of the
proposal.
FINANCIAL, MANAGERIAL, AND OTHER
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. 2o The Board also reviews
the financial and managerial resources of the organizations
involved in the proposal under section 4 of the BHC Act.
in the nation and relevant individual stales, as well as compliance with
the other provisions of section 3(d) of the BHC Act. Because the
proposed transaction does not involve an interstate bank acquisition by
a bank holding company, the provisions of section 3(d) of the BHC Act
do not apply in this case.
16. 12 U.S.C. §§ I 843(c)(8) and IS43(j); See 12 U,S.c. § 1843(i),
17, 12 CFR 225.28(b)(4)(ii).
IS, 12 U.S,c. § I 843(j)(2)(A).
19, 12 U.S.c. § I 842(c)(I),
20. 12 U,S,c. § IS42(c)(2) and (3).
B21
The Board has carefully considered these factors in light of
all the facts of record, including supervisory and examination infonnation received from the relevant federal and
state supervisors of the organizations involved in the
proposal and other available financial information, including infonnation provided by AMEX and AMEX Travel. In
addition, the Board has consulted with the primary federal
and state supervisors of Applicants, AMEX Bank, and
AMEX Thrift.
The Board consistently has considered capital adequacy
to be an especially important aspect in analyzing financial
factors. AMEX and AMEX Travel are adequately capitalized and all the AMEX entities that are subject to regulatory capital requirements currently exceed the relevant
requirements. In addition, AMEX Bank and AMEX Thrift
are currently well capitalized under applicable federal
guidelines. AMEX Bank and AMEX Thrift also would be
well capitalized on a pro forma basis on consummation of
the proposal. Other financial factors are consistent with
approval.
In addition, the Board has carefully considered the
managerial resources of AMEX and AMEX Travel in light
of all the facts of record, including confidential supervisory
and examination infonnation and infonnation provided by
Applicants. The Board has considered the supervisory
experience of the relevant federal and state supervisory
agencies of Applicants and their insured depository institutions with the organizations and institutions and their
records of compliance with applicable banking law and
anti-money-laundering laws. 21
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved
are consistent with approval, as are the other supervisory
factors under the BHC Act.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSiDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board 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 depository
institutions under the CRA.22 The Board must also review
the records of performance under the CRA of the relevant
insured depository institutions when acting on a notice
21. A former subsidiary of Applicants was subject to a cea>e and
desist order and concurrent ci vii money penalties related to Bank
Secrecy Act violations issued by the Board on August 3, 2007. AMEX
Travel was subject to related civil money penalties issued by the
Financial Crimes Enforcement Network. The subsidiary at which the
violations occurred, and against which the cease and desist order was
applied, American Express Bank International, was sold by Applicants
in late 2007. In reviewing the statutory factors, the Board has
consulted with the relevant federal and state supervisors about the
compliance by Applicants and their subsidiary depository institutions
with anti-money-Iaundering laws,
22, 12 U,S.c. §2903,
B22
Federal Reserve Bulletin 0 March 2009
under section 4 of the BHC Act to acquire voting securities
of an insured savings association. 23
The Board has carefully considered the convenience and
needs factor and the CRA performance records of the
subsidiary depository institutions of the Applicants in light
of all the facts of record. As provided in the CRA, the
Board evaluates the record of performance of an institution
in light of examinations by the appropriate federal supervisors of the CRA performance records of the relevant
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.24
AMEX Bank received an "outstanding" rating under the
CRA at its most recent performance evaluation by the
FDIC as of January 9, 2006 (the "FDIC Examination").
Consistent with the CRA regulations adopted by the federal
banking agencies, AMEX Bank was evaluated under the
community development test as a limited-purpose institution. 25 The FDIC Examination indicated that AMEX Bank
originated and funded new community development loans
totaling $6.04 million during the examination period (January 28, 2003, through January 9, 2006) and had more than
$3 million in community development loan commitments.
The FDIC Examination also determined that AMEX Bank
provided an outstanding level of community development
investments. Applicants have represented that the conversion of AMEX Bank to a bank for purposes of the BHC Act
will enhance its ability to meet the convenience and needs
of its communities by permitting the bank to offer a wider
array of deposit products.
AMEX Thrift received an "outstanding" rating under
the CRA at its most recent performance evaluation by the
OTS, as of October 12, 2006 (the "OTS Examination").
AMEX Thrift also was evaluated under the community
development test as a limited-purpose institution. The OTS
Examination indicated that AMEX Thrift originated and
funded new community development loans totaling
$16.0 million during the examination period (March I,
2004, through September 30, 2006), and that it provided
more than $118.8 million in qualifying community development investments.
Based on a review of the entire record, and for the
reasons discussed above, the Board has concluded that
considerations relating to convenience and needs considerations and the CRA performance records of AMEX Bank
and AMEX Thrift are consistent with approval of the
proposal.
23, See, e.g.• North Fork Bancorporation. Illc.• 86 Federal Reserve
Bulletin 767 (2000).
24. The Interagency Questions and Answers Regarding Commu·
nity Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution' s CRA
record. See 64 Federal Register 23.641 (1999).
25. See. e.g.. 12 CFR 228.2I(a)(2),
NONBANKING ACTIVITIES AND FINANCIAL
HOLDING COMPANY DECLARATIONS
Applicants engage in a wide range of nonbanking activities
that have been determined to be financial in nature or
incidental to a financial activity pursuant to section 4(k) of
the BHC Act,26 These activities include, among other
things, extending credit and servicing loans, engaging in
activities related to extending credit, issuing and selling
consumer-type payment instruments, providing data processing services, and operating travel agencies. 27
Applicants also have filed a notice under sections 4(c)(8)
and 40) of the BHC Act to retain their ownership interest in
AMEX Thrift and thereby operate a savings association. As
part of its evaluation of the public interest factors under
section 40) of the BHC Act, the Board also must determine
that the acquisition of the nonbank subsidiary and the
performance of the proposed nonbanking activities by
Applicants 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. 28
The record indicates that consummation of the proposal
would create a stronger and more diversified financial
services organization and would provide the current and
future customers of AMEX, AMEX Travel, and AMEX
Thrift with expanded financial products and services. For
the reasons discussed above, and based on the entire record,
the Board has determined that the conduct of the proposed
nonbanking activities within the framework of Regulation Y and Board precedent is not likely to result in
signi ficantly adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of
interests, or unsound banking practices. Moreover, 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 the standard of
section 40)(2) of the BHC Act is consistent with approval.
As noted, Applicants have filed elections to become
financial holding companies pursuant to sections 4(k) and
(I) of the BHC Act and section 225.82 of the Board's
Regulation Y. Applicants have certified that AMEX Bank
and AMEX Thrift are well capitalized and well managed
and have provided all the information required under
Regulation Y. Based on all the facts of record, the Board
has determined that these elections to become financial
holding companies will become effective on consummation
of the proposal if, on that date, AMEX Bank and AMEX
26. See 12 U.S.c. § 1843(k).
27. See 12 V,S,c. § 1843(k)(4)(A) and (F); 12 CFR 225,28(b)(1).
(2), and (13), Financial holding companies may engage, in the United
States and abroad. in travel agency services in connection with
financial services offered by the financial holding company or others
(12 U.S.C. § 1843(k)(4)(G); 12 CFR 225.86(b)(2».
28, See 12 U.S.C. § 1843G)(2)(A).
Legal Developments: Fourth Quarter, 2008 823
Thrift remain well capitalized and well managed and each
institution has a rating of at least "satisfactory" at its most
recent performance evaluation under the CRA.
Section 4 of the BHC Act by its terms also provides any
company that becomes a bank holding company two years
within which to conform its existing nonbanking investments and activities to the section's requirements, with the
possibility of three one-year extensions. 29 Applicants must
conform to the BHC Act any impermissible nonfinancial
activities and investments that they currently conduct or
hold, directly or indirectly, within the time requirements of
the act.
AMEX also has provided notice of its proposal to retain
its foreign bank subsidiaries under section 4(c)(l3) of the
BHC Act. Based on the record, the Board has no objection
to the retention of such subsidiaries.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
Caja de Ahorros y Monte de Piedad de
Madrid
Madrid, Spain
Caja Madrid Cibeles S.A.
Madrid, Spain
CM Florida Holdings, Inc.
Coral Gables, Florida
CONCLUSiON
Based on the foregoing and all the facts of record, the
Board has determined that the applications under section 3
and the notices under section 4 of the BHC Act 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 the Board is required to consider under the
BHC Act. The Board's approval is specifically conditioned
on compliance by Applicants with the conditions imposed
in this order and all the commitments made to the Board in
connection with the applications and notices. The Board's
approval of the nonbanking aspects of the proposal also is
subject to all the conditions set forth in Regulation Y,
including those in sections 225.7 and 225.25(c),30 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 BHC Act and the Board's regulations and
orders issued thereunder. 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 does not involve the acquisition, merger, or
consolidation of a bank. On this basis and after consultation
with the DOJ, the Board has determined that the postconsummation period in section 11 of the BHC Act does
not apply to consummation of the conversion of AMEX
Bank. 31 Accordingly, the transaction may be consummated
immediately but not 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 10, 2008.
29. See 12 V.S.c. § \843(a)(2).
30. 12 CFR 225.7 and 225.25(c).
31. 12 V.S.c. § 1849(b)(l).
Order Approving the Acquisition of a Bank
Holding Company
Caja de Ahorros y Monte de Piedad de Madrid ("Caja
Madrid"), Madrid, Spain, a foreign banking organization
subject to the Bank Holding Company Act ("BHC Act"), I
and its subsidiary holding companies, Caja Madrid Cibeles
SA ("CMC"), also of Madrid, and CM Florida Holdings,
Inc. ("CM Florida"), Coral Gables, Florida (collectively,
HApplicants"), have requested the Board's approval under
section 3 of the BHC Act 2 to acquire 83 percent of the
voting securities of City National Bancshares, Inc. ("CNB")
and thereby acquire control of its subsidiary bank, City
National Bank of Florida (HCN Bank"), both of Miami,
Florida. Caja Madrid is treated as a financial holding
company within the meaning of the BHC Act. CMC and
CM Florida (jointly, "FHC electors") have also filed with
the Board elections to become financial holding companies
on consummation of the proposal pursuant to section 4(k)
and (I) of the BHC Act and section 225.82 of the Board's
Regulation y.~
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 30,942 (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.
I. Caja Madrid operates an agency in the United States and is,
therefore, subject to the BHC Act (12 usc. §3106(a».
2. 12 U.S.c. § 1842.
3. See 12 V.S.c. § I 843(k) and (I); 12 CFR 225.82. FHC electors
have certified that CN Bank is well capitalized and well managed and
have provided all the information required under Regulation Y. Based
on all the facts of record, the Board has determined that these elections
to become financial holding companies will become effective on
consummation of the proposal if, on that date. CN Bank remains well
capitalized and well managed and has a rating of at least "satisfactory" at its most recent performance evaluation under the Community
Reinvestment Act CCRA") (12 U.S.C. §2901 et seq.)
B24
Federal Reserve Bulletin 0 March 2009
Caja Madrid, with total consolidated assets equivalent to
$269 billion, is the fourth largest depository organization in
Spain.4 Caja Madrid operates an agency in Miami.
CNB has total consolidated assets of approximately
$2.8 billion, and CN Bank operates only in Florida. CNB is
the 21 st largest depository organization in Florida, controlling deposits of $2.1 billion. 5
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 substantiaUy lessen competition in any relevant
banking market, unless the anticompetitive etlects 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. 6
Caja Madrid does not control a U.S. depository institution, and the proposal would not result in an expansion of
CNB's operations. Based on all the facts of record, the
Board concludes that consummation of the proposal would
have no significantly adverse etl'ect on competition or on
the concentration of resources in any 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 carefully 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, and publicly
reported and other financial information, including information provided by Applicants. The Board also has consulted
with the Bank of Spain, the agency with primary responsibility for the supervision and regulation of Spanish banks,
including Caja Madrid.
In evaluating the financial factors in proposals involving
the formation of bank holding companies, the Board
reviews the financial condition of the applicant and the
target depository institution. The Board also evaluates the
financial position of the pro forma organization, including
its capital position, asset quality, and earnings prospects,
and the impact of the proposed funding of the transaction.
4. Spanish asset and ranking data are as of June 30. 2008, and are
based on the exchange rate as of that date.
5. Statewide deposit and ranking data are as of June 30, 2007, and
reflect merger activity through October 10,2008.
6. 12 U.S.C. § 1842(c)(l).
The Board has carefully considered the financial resources of the organizations involved in the proposal. The
capital levels of Caja Madrid 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, CNB and CN Bank 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 cash purchase of
shares. Applicants will use existing resources to fund the
purchase.
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of Applicants, CNB, and CNB's subsidiary depository institution, 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 the Comptroller of
the Currency ("OCC"), with the organizations and their
records of compliance with applicable banking law and
with anti-money laundering laws. Applicants and CNB 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. 7
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.H As noted, the Bank
7. 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 disclo·
sure in the relevant jurisdictions in which Caja Madrid operates and
has communicated with relevant government authorities concerning
access to information. In addition, Caja Madrid previously has com·
mitted 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. Caja Madrid also previously has committed to cooperate with the Board to obtain any waivers or exemp·
tions 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 Caja Madrid has provided adequate assur·
ances of access to any appropriate information the Board may request.
8. 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 Regula·
tion K. See 12 CPR 22S.13(a)(4). Regulation K provides that a foreign
bank will be considered subject to comprehensive supervision or
Legal Developments: Fourth Quarter; 2008
of Spain is the primary supervisor of Spanish banks,
including Caja Madrid. The Board previously has determined that Caja Madrid is subject to comprehensive supervision on a consolidated basis by its home-country supervisorY Based on this finding and all the facts of record, the
Board has concluded that Caja Madrid 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 CRA.IO 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 necds of its entire community, including
low- and moderate-income neighborhoods, in evaluating
bank expansionary proposals. 11
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of CN Bank, data reported by CNB under the Home
Mortgage Disclosure Act ("HMDA"),12 other information
provided by Applicants, confidential supervisory information, and a public comment recei ved on the proposaL The
commenter alleged, based on HMDA data reported in 2006,
that CN 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 supervisor of the CRA performance
record of the relevant insured depository institution. 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. n
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).
9. See Caja de Ahorros y Monle de Piedad de Madrid. 87 Federal
Reserve Bulletin 785 (2001).
10. 12 U.S.c. § 1842 (c)(2).
II. 12 U.s.c. §2903.
12. 12 U.S.C. §2801 et seq.
13. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
B25
CN Bank received an "outstanding" rating at its most
recent CRA performance evaluation by the DCC, as of
April 6, 2006. 14 Applicants have represented that they do
not intend to make changes to CN Bank's CRA program on
consummation.
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending record
and HMDA data of CN Bank in light of the public
comment received on the proposal. The commenter alleged,
based on HMDA data, that CN Bank denied a disproportionate percentage of loan applications from African Americans in the Metropolitan Statistical Areas ("MSAs") that
include Miami and Ft Lauderdale. The Board focused its
analysis on the 2006 and 2007 HMDA data reported by CN
Bank. ls
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 CN Bank
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. 16
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
CN Bank. The Board also has consulted with the DCC
about the fair lending compliance record of CN Bank.
14. With the exception of community development loans, the
evaluation period was January 1, 2002, through December 31. 2005.
for the lending test. The evaluation period for community development
loans, the investment test, and the service test was January 6, 2003.
through April 6. 2006.
IS. The Board reviewed HMDA data from the Miami and Ft.
Lauderdale MSAs, as well as from CN Bank's entire CRA assessment
area.
16. The data, for example, do not account for the possibility that an
instiwtion'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.
B26
Federal Reserve Bulletin 0 March 2009
The record of this application, including confidential
supervisory information, indicates that CN Bank has taken
steps to ensure compliance with fair lending and other
consumer protection laws. CN Bank's compliance program
includes self-assessments, fair lending internal audits, and
ongoing fair lending training for its employees. Applicants
have stated that they do not intend to change CN Bank's
fair lending programs.
The Board also has considered the HMDA data in light
of other information, including the overall performance
record of CN Bank under the CRA. These established
efforts and record of performance demonstrate that CN
Bank is active in helping to meet the credit needs of its
entire community.
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 record of the
institution involved, information provided by Applicants,
comment received on the proposal, and confidential supervisory information. The proposal will result in increased
credit availability and access to a broader range of financial
services for customers of CN Bank. 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 record
of the relevant insured depository institution 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. 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
17. The commenter 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
225.I6(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,
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,
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 Atlanta, acting pursuant
to delegated authority.
By order of the Board of Governors, effective October 16, 2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke,
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
CIT Group Inc.
New York, New York
Order Approving Fonnation of a Bank
Holding Company and Notice to Engage in
Certain Nonbanking Activities
CIT Group Inc. ("CIT Group") has requested the Board's
approval under section 3 of the Bank Holding Company
Act ("BHC Act")1 to become a bank holding company on
conversion of CIT Bank, Salt Lake City, Utah, to a state
bank. CIT Bank currently operates as an industrial loan
company that is exempt from the definition of "bank"
under the BHC Act? CIT Group has also requested the
Board's approval pursuant to sections 4(c)(8) and 4(j) of
the BHC Act' to retain nonbanking subsidiaries that engage
in certain activities that are permissible for bank holding
companies under the Board's Regulation Y, including
credit extension, loan servicing, and related activities;
leasing; financial and investment advisory services; private
placement services; certain investment transactions as principal; and credit-related insurance agency and underwriting
activities. 4 In addition, CIT Group has provided notice of
its proposal to retain its foreign subsidiaries under section 4(c)(l3) of the BHC Act. s
Section 3(b)( 1) of the BHC Act requires that the Board
provide notice of an application under section 3 to the
appropriate federal or state supervisory authority for the
bank to be acquired and provide the supervisor a period of
time (normally 30 days) within which to submit views and
I.
2,
3,
4,
5,
12 U.S.c. § 1842,
12 U,S,c' § 184I(c)(2)(H).
12 U,S,c. §§ 1843(c)(8) and 18430).
See 12 CFR 22S.28(b)(1)-(3), (6), (8), and (II).
12 U,S.c. § 1843(c)(13).
-_ _ - . - - - - - - - - - - . - - - - - - -
Legal Developments: Fourth Quarter, 2008
B27
....
recommendations on the proposa\.6 The BHC Act also
authorizes the Board to reduce or eliminate this notice
period under certain circumstances.?
In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in
accordance with the provisions of the BHC Act and the
Board's regulations. s The Board has provided notice to the
primary federal and state supervisors of CIT Bank, the
Federal Deposit Insurance Corporation (HFDIC") and
Commissioner of the Utah Department of Financial Institutions and to the Department of Justice ("DOJ"). Those
agencies have indicated that they have no objection to the
approval of the proposal. For the same reasons, and in light
of the fact that this transaction represents the conversion of
an existing subsidiary of the CIT Group from one form of a
depository institution to another, the Board has also waived
public notice of this proposal. 9
CIT, with total consolidated assets of approximately
$80.8 billion, provides a variety of commercial financing
and leasing products and services. lO CIT Bank has total
consolidated assets of approximately $3.1 billion and controls deposits of approximately $2.3 billion. CIT Bank
engages primarily in financing and lending activities and in
taking deposits of the type that are permissible for an
industrial loan company under the exception in section 2(c)(2)(H) of the BHC Act.
FACTORS GOVERNING BOARD REVIEW OF
TRANSACTION
The BHC Act sets forth the factors that the Board must
consider when reviewing the formation of a bank holding
company or the acquisition of a bank. These factors are the
competitive effects of the proposal in the relevant geographic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the proposal; the convenience and needs of the community to be served, including the records of performance
under the Community Reinvestment Act" ("CRA") of the
insured depository institutions involved in the transaction;
and the availability of information needed to determine and
enforce compliance with the BHC Act and other applicable
federal banking laws. 12
6. 12 U.S.C. § 1842(b)(\); 12 CFR 225. I 5(b).
7. 12 U.S.c. § 1842(b)(1 l.
8. 12 U.S.c. § \ 842(b)(I); 12 CFR 225.l6(b)(3), 225. 16(g)(2), and
262.3(1).
9. ld.
10. Asset data for CIT Group and asset and deposit data for CIT
Bank are as of September 30, 2008.
II. 12 U.S.c. §2901 et seq.
12. In cases involving interstate bank acquisitions by bank holding
companies, the Board also must consider the concentmtion of deposits
in the nation and relevant individual states, as well as compliance with
the other provisions of section 3(d) of the BHC Act. Because the
proposed transaction does not involve an interstate bank acquisition by
a bank holding company, the provisions of section 3(d) of the BHC Act
do not apply in this case.
COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly. The
BHC Act also prohibits the Board from approving a
proposed 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."
The proposal involves the conversion of an existing,
wholly owned industrial loan company subsidiary of CIT
Group into a bank with no resulting change in the ownership of CIT Group or CIT Bank. In addition, CIT Group
does not propose to acquire any additional depository
institution as part of this proposal. Based on all the facts of
record, the Board concludes that consummation of the
proposal would not result in any significantly adverse
effects on competition or on the concentration of banking
resources in any relevant banking market and that the
competitive factors are consistent with approval of the
proposal.
FINANCIAL, MANAGERIAL, AND OTHER
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. 14 The Board has carefully
considered these factors in light of all facts of record,
including supervisory and examination information received from the relevant federal and state supervisors of the
organizations involved in the proposal and other available
financial information, including information provided by
CIT Group. In addition, the Board has consulted with the
primary federal and state supervisors of CIT Group and
CIT Bank.
The Board consistently has considered capital adequacy
to be an especially important aspect in analyzing financial
factors. CIT Group has converted debt and raised a material
amount of capital from third parties. CIT Group is adequately capitalized and as a result of its successful efforts
to raise additional capital, will be well capitalized prior to
consummation. In addition, CIT Bank is currently well
capitalized under applicable federal guidelines, and it will
remain well capitalized on a pro forma basis on consummation of the proposaL Other financial factors are consistent
with approval.
In addition, the Board has carefully considered the
managerial resources of CIT Group and CIT Bank in light
of all the facts of record, including confidential supervisory
and examination information and information provided by
CIT Group. The Board has considered the supervisory
experience of the relevant federal and state supervisory
13. 12 U.S.C. § I 842(c)(I).
14. 12 U.S.C. § 1842(cl(2) and (3).
B28
Federal Reserve Bulletin 0 March 2009
agencies of CIT Group and its insured depository institution with the organization and institution and their records
of compliance with applicable banking law and antimoney-laundering laws. The Board has engaged in discussions with the FDIC regarding its views on management
processes and risk-management systems at both CIT Group
and CIT Bank. In addition, the Board has carefully considered information from CIT Group about the organization's
business strategy and the actions it is taking and proposing
to take to strengthen the organization's risk-management
systems, as well as its business plans for the bank. The
Board also has consulted with the FDIC about these plans
and actions to strengthen CIT Group's risk-management
systems.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved
are consistent with approval, as are the other supervisory
factors under the BHC Act.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board 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 depository
institutions under the CRA.IS
The Board has carefully considered the convenience and
needs factor and the CRA performance records of CIT
Bank in light of all the facts of record. As provided in the
CRA, the Board evaluates the record of performance of an
institution in light of examinations by the appropriate
federal supervisors of the CRA performance records of the
relevant instilutions. 16
CIT Bank received a "satisfactory" rating under the
CRA at its most recent performance evaluation by the
FDIC, as of October 28, 2002. Consistent with the CRA
regulations adopted by the federal banking agencies, CIT
Bank was evaluated under the community development test
as a limited purpose institution,l7 CIT Group has represented that the conversion of CIT Bank to a bank for
purposes of the BHC Act will enhance the ability of the
bank to meet the convenience and needs of its community
and customers nationwide by permitting the bank to offer a
wider array of deposit products.
The Board has engaged in discussions about CIT Bank's
CRA and consumer compliance performance with the
FDIC, which is the primary federal supervisor for CIT
Bank and examines the bank for its CRA performance. In
particular, the Board has considered information collected
by the FDIC since its last evaluation. In addition, the Board
15. 12 U.S.c. §2903; 12 U.S.c. § 1842(c)(2).
16. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRAex:amination is an important and
often controlling factor in the consideration of an institution's CRA
record. See 64 Federal Register 23,641 (1999).
17. See. e.g., 12 CFR 228.2I(a)(2).
has reviewed information from CIT Bank about the actions
it proposes to take with respect to its consumer lending
activities and has consulted with the FDIC about these
proposed actions. Importantly, the Board has also considered the FDIC's most current review of the CRA performance and compliance activities of the bank and the
FDIC's views on this application,
Based on a review of the entire record and for the
reasons discussed above, including the consultations with
the FDIC, the Board has concluded that considerations
relating to convenience and needs and the CRA performance record of CIT Bank are consistent with approval of
the proposal.
NONBANKING ACTIVITIES
As noted, CIT Group also has filed a notice under sections 4(c)(8) and 4(j) of the BHC Act to engage in certain
lending, leasing, advisory, securities, investment, and insurance activities that are permissible for bank holding companies through its non banking subsidiaries. The Board has
determined by regulation that such activities are permissible for a bank holding company under Regulation Y,18
and CIT Group has committed to conduct these activities in
accordance with the limitations set forth in Regulation Y
and the Board's orders governing these activities.
To approve this notice, the Board must also determine
that the performance of the proposed activities by CIT
Group "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." 19 As part of its evaluation of these factors, the
Board has considered the financial and managerial resources of CIT Group and its subsidiaries and the efiect of
the proposed transaction on their resources. For the reasons
noted above, and based on all the facts of record, the Board
has concluded that financial and managerial considerations
are consistent with approval of the notice.
In addition, the Board must consider the competitive
efiects of a proposal to engage in nonbanking activities
under the public benefits factor of section 4(j) of the BHC
Act. The proposal involves the retention of CIT Group's
existing nonbank subsidiaries, and CIT Group would not
acquire any additional nonbank subsidiaries as part of this
proposaL Accordingly, the Board concludes that consummation of the proposal would not result in any significantly
adverse effects on competition in any relevant market.
CIT Group is a leading provider of factoring services in
the United States and a leading lender in the Small
Business Administration's 7a programs. The proposal
would benefit the public by strengthening CIT Group's
ability to offer its non banking products and services to
customers nationwide.
The Board concludes that the conduct of the proposed
nonbanking activities within the framework of Regula18. 12 CFR 225.28(b)(I H3). (6), (8), and (11).
19. See 12 U.S.c. § 1843(j)(2)(A).
Legal Developments: Fourth Quarter, 2008
tion Y and Board precedent can reasonably be expected to
produce public benefits that would outweigh any likely
adverse effects. Accordingly, based on all the facts of
record, the Board has determined that the balance of the
public benefits factor under section 40)(2) of the BHC Act
is consistent with approval.
CIT Group engages in a small amount of activities that
may not conform to the requirements of the BHC Act.
Section 4 of the BHC Act by its terms also provides any
company that becomes a bank holding company two years
within which to conform its existing nonbanking investments and activities to the section's requirements, with the
possibility of three one-year extensions. 20 CIT Group must
conform any impermissible nonfinancial activities and
investments that it currently conducts or holds, directly or
indirectly, to the requirements of the BHC Act within the
time periods provided by the act.
CIT Group also has provided notice of its proposal to
retain its foreign bank subsidiaries under section 4(c)(I3)
of the BHC Act. Based on the record, the Board has no
. objection to the retention of such subsidiaries.
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application under section 3
and notices under section 4 of the BHC Act should be, and
hereby are, approved. 21 In reaching its conclusion, the
Board has considered all the facts of record in light of the
factors that the Board is required to consider under the
BHC Act. The Board's approval is specifically conditioned
on compliance by CIT Group with all the conditions
imposed in this order and all the commitments made to the
Board in connection with the application and notices. The
Board's approval of the nonbanking aspects of the proposal
also is subject to all the conditions set forth in Regulation Y,
including those in sections 225.7 and 225.25(c),22 and to
the Board's authority to require such modification or
20. See 12 U.S.C. § 1843(a)(2).
21. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3(b) of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authorities for the bank to be acquired make a
timely written recommendation of denial of the application. The Board
has not received such a recommendation from the appropriate supervisory authorities. The Board's regulations provide for a hearing under
section 4 of the BHC Act if there are disputed issues of material fact
that cannot be resolved in some other manner (12 CFR 225.25(a)(2».
Under its regulations. the Board also may, in its discretion. hold a
puhlic meeting or hearing on an application to acquire a bank if a
meeting or hearing is necessary or appropriate to clarify factual issues
related to the application and to provide an opportunity for testimony
(12 CFR 225.16(e». The Board has considered carefully the commenter's request in light of all the facts of record. The request fails to
identify disputed issues of fact that are material to the Board's decision
that would be clarified by a public meeting or hearing. 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.
22. 12 CFR 225.7 and 225.25(c).
B29
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 BHC Act and the Board's regulations and
orders issued thereunder. These conditions and commitments 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 does not involve the acquisition, merger, or
consolidation of a bank. On this basis and after consultation
with the DOJ, the Board has determined that the postconsummation period in section II of the BHC Act does
not apply to consummation of the conversion of CIT
Bank. 23 Accordingly, the transaction may be consummated
immediately but not 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 December 22.2008.
Voting for this action: Chairman Bcrnanke, Vice Chairman Kohn.
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
GMAC LLC
IB Finance Holding Company, LLC
Detroit, Michigan
Order Approving Formation of Bank Holding
Companies and Notice to Engage in Certain
Nonbanking Activities
GMAC LLC and IB Finance Holding Company, LLC
("IBFHC") (collectively, "GMAC" or "Applicants") have
requested the Board's approval under section 3 of the Bank
Holding Company Act ("BHC Act")l to become bank
holding companies on conversion of GMAC Bank, Midvale, Utah, to a commercial bank. 2 GMAC Bank currently
operates as an industrial loan company and is exempt from
the definition of "bank" under the BHC AcP GMAC has
also requested the Board's approval pursuant to sections 4(c)(8) and 40) of the BHC Act4 to retain its
nonbanking subsidiaries that engage in certain activities
that are permissible for bank holding companies under the
Board's Regulation Y, including certain credit extension,
23. 12 U.S.C. § I 849(b)(1).
I. 12 U.S.c. § 1842.
2. GMAC Bank is a direct subsidiary of IBFHC and an indirect
subsidiary of GMAC LLC.
3. 12 U.S.c. § 184I(c)(2)(H).
4. 12 U.S,c. §§ I 843(c)(8) and (j).
B30
Federal Reserve Bulletin 0 March 2009
loan servicing, leasing, and related activities. s GMAC has
also provided notice to retain its foreign subsidiaries under
section 4(c)( 13) of the BHC Act. 6
Section 3(b)( I) of the BHC Act requires that the Board
provide notice of an application under section 3 to the
appropriate federal or state supervisory authority for the
banks to be acquired and provide the supervisor with a
period of time (normally 30 days) within which to submit
views and recommendations on the proposaJ.7 The BHC
Act also authorizes the Board to reduce or eliminate these
notice periods under certain circumstances.~
In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in
accordance with the provisions of the BHC Act and the
Board's regulationsY The Board has provided notice to the
primary federal and state supervisors of GMAC Bank, the
Federal Deposit Insurance Corporation ("FDIC") and the
Commissioner of the Utah Department of Financial Institutions ("UDFl"), and to the Department of Justice ("DOJ").
Those agencies have indicated that they have no objection
to approval of the proposaL For the same reasons, and in
light of the fact that this transaction involves the conversion
of an existing subsidiary of Applicants from one fonn of a
depository institution to another and the retention of Applicants' existing nonbanking subsidiaries, the Board has also
waived public notice of this proposaL lO
GMAC, with total consolidated assets of approximately
$211.3 billion, engages in automotive financing, commercial financing, mortgage financing, insurance, and other
activities both in the United States and abroad. 11 GMAC
Bank has total consolidated assets of approximately $33 billion and controls deposits of approximately $17 billion.
GMAC Bank engages primarily in lending and other
financing activities and taking deposits of the type that are
pennissible for an industrial loan company under the
exception in section 2(c)(2)(H) of the BHC Act
The BHC Act sets forth the factors the Board must consider
when reviewing the fonnation of a bank holding company
or the acquisition of a bank. These factors are the competitive effects of the proposal in the relevant geographic
markets; the financial and managerial resources and future
prospects of the companies and banks involved in the
proposal; the convenience and needs of the community to
be served including the records of perfonnance under the
Community Reinvestment Act ("CRA")12 of the insured
depository institutions involved in the transaction; and the
availability of infonnation needed to detennine and enforce
compliance with the BHC Act and other applicable federal
banking laws.13
In addition, this application presents a number of unique
issues. In particular, GMAC has a long historical relationship with General Motors Corporation ("GM"). Since
founding GMAC, GM has held a significant ownership
position in GMAC, and GMAC has been the primary
source of financing to customers and dealerships seeking to
purchase or lease GM vehicles. GMAC proposes to continue to provide funding to customers and dealerships to
enable them to acquire and lease vehicles from GM, though
as noted below, GMAC proposes to diversify its activities
and has modified in significant ways its agreement with
GM to provide customer and dealership financing. Although GM owns a significant portion of GMAC, a group
of entities controlled by or aftiliated with a private investment firm, Cerberus Capital Management, L.P. ("Cerberus"), currently owns a majority of the shares of GMAC.
Neither GM nor Cerberus is able to comply with the
nonbanking activities restrictions in the BHC Act. Consequently, neither may retain a controlling interest in GMAC,
within the meaning of the BHC Act, if this application is
approved.
In reviewing the factors under the BHC Act, including
the issues noted above, the Board has considered all the
facts and circumstances. This review has included the
record regarding the financial and managerial resources of
GMAC and GMAC Bank, their future prospects, and the
effects of this proposal on the convenience and needs of the
communities served by these entities. Among other things.
the Board has considered the business plans of GMAC's
management to diversify the activities of GMAC and its
plans for GMAC Bank; the successful efforts of management of GMAC to raise capital; the experience of senior
management of GMAC in other organizations that are
regulated as bank holding companies; the steps taken by the
management of GMAC and GMAC Bank to address
concerns raised by the bank's supervisors and to prepare to
operate within the framework established by the BHC Act;
and the public benefits that would accrue from approval of
this proposal, including those resulting from the operation
of GMAC as a regulated entity. The Board has also
considered the steps taken by the Department of the
Treasury to provide assistance to GM and thereby help
ensure the viability of a major business partner of GMAC
and GMAC Bank. In addition, the Board has had extensive
consultations with the FDIC, the primary federal supervisor
5. 12 CFR 225.28(b)(l)-{3).
6. 12 U.S.C. § I 843(c)(13).
7. 12 U.S.C § I842(b)(l); 12 CFR 225.15(b).
8. 12 U.S.C § I 842(b)(I).
9. 12 U.S.C. § 1842(b)(I); 12 CFR 225.16(b)(3), 225.16(g)(2), and
262.3(/).
10. 12 CFR 225.16(b)(3), 225.16(g)(2}. and 262.3(1).
II. Asset and deposit data for GMAC and GMAC Bank are as of
September 30. 2008.
12. 12 U.S.C §2901 et seq.
13. In cases involving interstate bank acquisitions by bank holding
companies. the Board also must consider the concentration of deposits
in the nation and relevant individual states, as well as compliance with
the other provisions of section 3(d) of the BHC Act. Because the
proposed transaction does not involve an interstate bank acquisition by
a bank holding company. the provisions of section 3( d) of the BHC Act
do not apply in this case.
FACTORS GOVERNING BOARD REVIEW OF THE
PROPOSED BANK HOLDING COMPANIES
Legal Developments: Fourth Quarter, 2008
-------
of GMAC Bank, and has consulted with the UDFI, the
chartering authority and state supervisor for GMAC Bank.
The Board has also carefully considered the plans and
commitments made by GM and Cerberus promptly to
conform their respective ownership interests in GMAC to
the requirements of the BHC Act. To address concerns that
GM could control GMAC and GMAC Bank for purposes
of the BHC Act, GM has committed to the Board that
before consummation of the proposal, GM will reduce its
ownership interest in GMAC to less than 10 percent of the
voting and total equity interest of GMAC. GM's remaining
equity interest in GMAC will be transferred to a trust that
has a trustee acceptable to the Board and the Department of
the Treasury, who will be entirely independent of GM and
have sole discretion to vote and dispose of the GMAC
equity interests. 14 The trustee must dispose of the equity
interests held in the trust within three years of the trust's
creation. In addition, GM has made commitments to the
Board that are similar to those the Board previously has
relied on to ensure that a company could not exercise a
controlling influence over a bank or bank holding company.IS Until the trust fully divests the shares, the limitations of sections 23A and 23B of the Federal Reserve Act
will apply to GM and GMAC Bank as if they were
affiliates. 16 GMAC has committed to amend its existing
agreements with GM to remove any restrictions on GMAC' s
ability to engage in transactions with unrelated third parties
and to ensure that GMAC has complete discretion to set the
terms of its financing arrangements.
To ensure that Cerberus's holdings in GMAC are consistent with the Board's precedent on noncontrolling investments in banks and bank holding companies, each Cerberus
fund that holds interests in GMAC will distribute its equity
interests in the company to its respective investors. As a
result of this distribution, the aggregate direct and indirect
investments controlled by Cerberus and its related parties
would not exceed 14.9 percent of the voting shares or
33 percent of the total equity of GMAC LLC. The investors
that receive shares in the distribution from the Cerberus
funds are each sophisticated investors and are independent
of Cerberus and independent of each other. No investor
WOUld, after this distribution, own, hold, or control 5 percent or more of the voting shares or 7.5 percent of the total
equity of GMAC LLC. Cerberus has made a number of
commitments previously found by the Board to be helpful
in limiting the ability of an investor to exercise a controlling interest over a banking organization. In addition,
Cerberus employees and consultants would cease providing
services to, or otherwise functioning as dual employees of,
GMAC, and neither Cerberus nor any affiliated entity will
14. The trust agreement and trustee must be acceptable to the
Board.
15. In rare and unusual situations when warranted by the public
interest. the Board previously has used the device of a trust as an
interim measure to facilitate the sales of shares to conform with the
requirements of the BHC Act. See Board Letter to Stuart M. Plevin,
Esq. dated June 26. 2000.
16. 12 U.S.C. §§ 371c and 371 c-1.
B3l
have any advisory relationships with GMAC or any investor regarding the vote or sale of shares or the management
or policies of GMAC or GMAC Bank. 17
Based on the entire record, and for the reasons explained
more fully below, the Board has determined that the
proposal meets the requirements of the BHC Act and,
consequently, has approved the proposal.
FINANCIAL, MANAGERIAL, AND OTHER
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. lg The Board also reviews
the financial and managerial resources of the organization
involved in the proposal under section 4 of the BHC Act.
The Board has carefully considered these factors in light of
all the facts of record, including supervisory and examination information received from the relevant federal and
state supervisors of the organizations involved in the
proposal and other available financial information, including information provided by Applicants. In addition, the
Board has consulted with the primary federal and state
supervisors of GMAC Bank.
In analyzing financial factors, the Board consistently has
considered capital adequacy to be an especially important
aspect. The Board has considered GMAC's successful
efforts to raise additional capital and that, as a reSUlt,
GMAC will be well capitalized on completion of the
proposal, as well as commitments GMAC has made to
maintain its capital at a high level for a specified time
period. In addition, GMAC Bank is currently well capitalized under applicable federal guidelines. GMAC Bank also
would be well capitalized on a pro forma basis on consummation of the proposal. The Board has consulted with the
FDIC, the primary federal supervisor of GMAC Bank,
about the adequacy of the bank's capital for its current and
pro forma operations and the future prospects of GMAC
Bank in light of its business plans. Moreover, as noted
above, the Board has considered that the Department of the
Treasury has taken a number of steps including providing
credit to GM, which for some time will continue to be a
major business partner of GMAC, in order to help stabilize
GM and improve its viability.
In addition, the Board has considered carefully the
managerial resources of Applicants in light of all the facts
of record, including confidential supervisory and examination information and information provided by the Applicants. The Board has considered the supervisory experience
of the relevant federal and state supervisory agencies with
17. A commenter opposed approval of the application because. in
the comrnenter' s view. approval would breach the separation between
banking and commerce in the BHC Act. As discussed above. GM and
Cerberus have restructured their respective ownership interests to be
consistent with the BHC Act limitations on banking and commerce
and with the Board's policies and precedent on noncontrolling investments in banks and bank holding companies.
18. 12 U.s.c. § I 842(c)(2) and (3).
B32
Federal Reserve Bulletin D March 2009
Applicants and GMAC Bank and their records of compliance with applicable banking law and anti-moneylaundering laws. The Board also has considered the experience of management of GMAC, both at GMAC and more
broadly in managing a regulated entity subject to the
requirements applicable to bank holding companies. The
Board has consulted the FDIC regarding its views on
management processes and risk-management systems at
both GMAC and GMAC Bank. In addition, the Board has
carefully considered information from GMAC about the
organization's business strategy, as well as its business
plans for the holding company and bank, and the actions it
is taking and proposing to take to strengthen the organization's risk-management infrastructure and to diversify its
customer base and sources of income. The Board also has
consulted with the fUIC about these plans and actions to
strengthen GMAC and GMAC Bank's risk-management
infrastructure and diversify its business operations.
The Board also has considered carefully the future
prospects of GMAC and GMAC Bank, including their
business plans, in light of all the facts and circumstances,
and the actions they already have taken and plan to take to
strengthen their financial condition and management systems and to diversify their business operations. As noted,
the Board also has considered the actions taken by the
Department of the Treasury to provide financial assistance
to stabilize GM, which would benefit GMAC and GMAC
Bank while they remain an important provider of financing
for vehicles manufactured by GM.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved
are consistent with approval, as are the other supervisory
factors under the BHC Act.
COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly. The
BHC Act also prohibits the Board from approving a
proposed bank acquisition that would substantially lessen
competition in any relevant banking market unless the
anticompetitive efrects of the proposal are clearly outweighed in the public interest by the probable efrect of the
proposal in meeting the convenience and needs of the
community to be served. 19
The proposal involves the conversion of an existing.
wholly owned industrial loan company subsidiary of Applicants into a bank with no resulting change in the ownership
of GMAC Bank. Applicants do not propose to acquire any
additional depository institution as part of this proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not result in any
significantly adverse efl'ects on competition or on the
concentration of banking resources in any relevant banking
19. 12 V.S.c. § 1842(c)(1).
market and that the competitive factors are consistent with
approval of the proposal.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board 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 depository
institutions under the CRA.20
The Board has carefully considered the convenience and
needs factor and the CRA performance records of GMAC
Bank in light of all the facts of record. As provided in the
CRA, the Board evaluates the record of performance of an
institution in light of examinations by the appropriate
federal supervisors of the CRA performance records of the
relevant institutions. 21
GMAC Bank received an "outstanding" rating under the
CRA at its most recent performance evaluation by the
FDIC, as of February 27, 2006 (the "FDIC Examination").
Consistent with the CRA regulations adopted by the federal
banking agencies, GMAC Bank was evaluated under the
community development test as a limited purpose institution. 22 Applicants have represented that the conversion of
GMAC Bank to a bank for purposes of the BHC Act will
enhance the ability of the bank to meet the convenience and
needs of its communities by permitting the bank to offer a
wider array of deposit products and strengthening the
bank's ability to continue to serve as a significant source of
automobile financing, including for vehicles from companies other than GM.
The Board has engaged in extensive consultation with
the FDIC about GMAC Bank's CRA and consumer compliance performance since its last evaluation. In addition,
the Board has received information from GMAC Bank
about the actions it will take with respect to its consumer
lending activities on conversion of the industrial loan
company to a bank and has consulted with the FDIC about
these proposed actions.
Based on a review of the entire record, and for the
reasons discussed above, the Board has concluded that
considerations relating to convenience and needs considerations and the CRA performance record of GMAC Bank
are consistent with approval of the proposal.
NONBANKING ACTIVITIES
As noted, GMAC also has filed a notice under sections 4(c)(8) and 4(j) of the BHC Act to engage in certain
credit extension and servicing, leasing, and related activities that are permissible for a bank holding company
20. 12 V.S.c. *2903; 12 V.S.c. § 1842(c)(2).
21. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution's CRA
record. See 64 Federal Register 23,641 (1999).
22. See, e.g.. 12 CFR 228.21 (a)(2).
Legal Developments: Fourth Quarter, 2008
directly and through its nonbanking subsidiaries. 23 GMAC
has committed to conduct these activities in accordance
with the limitations set forth in Regulation Y and the
Board's orders governing these activities.
To approve this notice, the Board must also determine
that the performance of the proposed activities by GMAC
"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."24 As part of its evaluation of these factors, the
Board has considered the financial and managerial resources of GMAC and its subsidiaries and the effect of the
proposed transaction on their resources. For the reasons
noted above, and based on all the facts of record, the Board
has concluded that financial and managerial considerations
are consistent with approval of the notice.
In addition, the Board must consider the competitive
effects of a proposal to engage in nonbanking activities
under the public benefits factor of section 40) of the BHC
Act. The proposal involves the retention of GMAC's
existing non banking subsidiaries, and GMAC would not
acquire any additional nonbanking subsidiaries as part of
this proposal. Accordingly, the Board concludes that consummation of the proposal would not result in any significantly adverse effects on competition in any relevant
market.
GMAC is one of the nation's largest automoti ve finance
companies. The proposal would benefit the public by
strengthening GMAC's ability to fund the purchases of
vehicles manufactured by GM and other companies and by
helping to normalize the credit markets for such purchases.
The Board concludes that the conduct of the proposed
nonbanking activities within the framework of Regulation Y and Board precedent can reasonably be expected to
produce public benefits that would outweigh any likely
adverse effects. Accordingly, based on all the facts of
record, the Board has determined that the balance of the
public benefits factor under section 40)(2) of the BHC Act
is consistent with approval.
GMAC engages in a small amount of activities that may
not conform to the requirements of the BHC Act. Section 4
of the BHC Act by its terms also provides any company
that becomes a bank holding company two years within
which to conform its existing nonbanking investments and
activities to the section's requirements, with the possibility
of three one-year extensions. 25 GMAC must conform to the
BHC Act any impermissible nonfinancial activities and
investments that they currently conduct or hold, directly or
indirectly, within the time requirements of the act.
GMAC also has provided notice of its proposal to retain
its foreign subsidiaries under section 4(c)(13) of the BHC
Act. Based on the record, the Board has no objection to the
retention of such subsidiaries.
23. 12 CFR 225.28(b)(I)-(3).
24. See 12 U.S.c. § 1843(j)(2)(A).
25. See 12 U.S.c. § 1843(a)(2).
B33
CONCLUSION
Based on the foregoing, the Board has determined that the
application under section 3 and the notices under section 4
of the BHC Act should be, and hereby are, approved. 26 In
reaching its conclusion, the Board has considered all the
facts of record in light of the factors that the Board is
required to consider under the BHC Act. The Board's
approval is specifically conditioned on compliance by
Applicants and GMAC's shareholders with the conditions
imposed in this order and all the commitments they made to
the Board in connection with the application and notices.
The Board's approval of the nonbanking aspects of the
proposal also is subject to all the conditions set forth in
Regulation Y, including those in sections 225.7 and
225.25(c),27 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 BHC Act and the Board's
regulations and orders issued thereunder. 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 does not involve the acquisition, merger, or
consolidation of a bank. On this basis and after consultation
with the DOl, the Board has determined that the postconsummation period in section 11 of the BHC Act does
not apply to the consummation of the conversion of GMAC
Bank. 28 Accordingly, the transaction may be consummated
immediately but may not 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 Richmond, acting pursuant to
delegated authority.
By order of the Board of Governors, effective December 24,2008.
26. A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3(b) of the B He 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
timely written recommendation of denial of the application. The Board
has not received such a recommendation from the appropriate supervisory authorities. The Board's regulations provide for a hearing under
section 4 of the BHC Act if there are disputed issues of material fact
that cannot be resolved in some other manner (12 CFR 225.25(a)(2».
Under its regUlations, the Board also may, in its discretion, hold a
public meeting or hearing on an application to acquire a bank if a
meeting or hearing is necessary or appropriate to claritY factual issues
related to the application and to provide an opportunity for testi mony
(12 CFR 22S.I6(e». The Board has considered carefully the commenter's request in light of all the facts of record. The request fails to
identify disputed issues of fact that are material to the Board's decision
that would be clarified by a public meeting or hearing. 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.
27. 12 CPR 225.7 and 225.25(c).
28. 12 U.S.c. § 1849(b)(I).
B34
Federal Reserve Bulletin 0 March 2009
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, and Kroszner. Voting against this action:
Governor Duke.
JENNIFER J. JOHNSON
Secretary of the Board
Mitsubishi UFJ Financial Group, Inc.
Tokyo, Japan
Order Approving Acquisition of Interests in a
Bank Holding Company and Certain
Nonbanking Subsidiaries
Mitsubishi UFJ Financial Group, Inc. ("MUFG"), a foreign banking organization that is a financial holding company I for purposes of the Bank Holding Company Act
(HBHC Act"), has requested the Board's approval under
section 3 of the BHC Act 2 to acquire up to 24.9 percent of
the voting shares of Morgan Stanley ("Morgan"),
New York, New York, and thereby indirectly acquire an
interest in Morgan's subsidiary bank, Morgan Stanley
Bank, National Association, Salt Lake City, Utah. In addition, MUFG has requested the Board's approval under
sections 4(c)(8) and (4)(j) of the BHC Act to acquire an
indirect interest in Morgan's subsidiary savings association, Morgan Stanley Trust, Jersey City, New Jersey, and
Morgan's subsidiary trust company, Morgan Stanley Trust
National Association, Wilmington, Delaware.' MUFG also
has provided notice of its proposal to acquire an indirect
interest in the foreign bank subsidiaries of Morgan under
section 4(c)(l3) of the BHC Act. 4
Section 3(b)( I) of the BHC Act requires that the Board
provide notice of an application under section 3 to the
appropriate federal or state supervisory authority for the
banks to be acquired and provide the supervisor a period of
time (normally 30 days) within which to submit views and
recommendations on the proposal. s Section 4(i)(4) of the
I. The elections by MUFG. The Bank of Tokyo-Mitsubishi UFJ,
Ltd., and Mitsubishi UFJ Trust and Banking Corporation, all of Tokyo,
and UnionBanCaI Corporation, San Francisco, California, to become
financial holding companies pursuant to sections 4(k) and (l) of the
BHC Act and sections 225.82(b)( \) and 225.91 (b)(I) of Regulation Y
became effective as of October 6, 200S. See Board leIter to Donald J.
Tourney, Esq., dated October 6, 200S.
2. 12 US.C. § 1842. See 12 CFR 225.15.
3. 12 US.C § IS43(c)(S) and (j). See 12 CFR 225.24. The Board
previously has determined by regulation that the operation of a savings
association and a trust company by a bank holding company is closely
related to banking for purposes of section 4(c)(S) of the BHC Act
(12 CFR 225.2S(b)(4)(ii) and (5»).
4. 12 U.S.c. § 1S43(c)(I 3).
5. 12 U.S.C. § 1842(b)(1); 12 CFR 225.15(b).
BHC Act imposes a similar requirement with respect to a
notice to acquire a savings association. 6 In light of the
unusual and exigent circumstances affecting the financial
markets and all other facts and circumstances, and in
accordance with the provisions of the BHC Act and the
Board's regulations, the Board has shortened to 10 days the
notice and comment period to the primary regulators of the
banks and savings associations involved in, and waived
public notice of, this proposal? The Board has contacted
the primary federal supervisors of the insured depository
institutions and the Department of Justice; those agencies
have indicated they have no objection to consummation of
the proposal.
Based on all the facts of record, the Board has concluded
that all the factors it must consider in acting on the
application and notices are consistent with approval. The
application and notices are hereby approved by the Board
for the reasons set forth in the Board's Statement, which
will be released at a laler date.
The Board's approval is specifically conditioned on
compliance by MUFG with all the commitments made in
connection with the proposal and on the receipt, in a form
acceptable to the Board, of commitments by MUFG that it
will not exercise a controlling influence over Morgan. This
approval also is subject to all the conditions set forth in
Regulation Yand to the Board's authority to require such
modification or termination of the nonbanking 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 BHC Act and the
Board's regulations and orders issued thereunder. 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 acquisition may not be consummated before the
fifth 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 San Francisco, acting
pursuant to delegated authority.
By order of the Board of Governors, effective October 6,
2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
6. 12 U.S.c. § 1843(i)(4).
7. 12 U.S.C. §§ I 842(b)(I) and 1843(i)(4); 12 CFR 225.16(b)(3),
225.16(g)(2), 225.25(d), and 262.3(1).
Legal Developments: Fourth Quarter, 2008
B35
------------------------------------~
Mitsubishi UFJ Financial Group, Inc.
Tokyo, Japan
Statement by the Board of Governors of the
Federal Reserve System Regarding the
Application and Notices by Mitsubishi UFJ
Financial Group, Inc., to Acquire Interests in
a Bank Holding Company and Certain
Nonbanking Subsidiaries
By Order dated October 6, 2008, the Board approved the
application of Mitsubishi UFJ Financial Group, Inc.
(HMUFG"), a foreign banking organization that is a financial holding company! for purposes of the Bank Holding
Company Act ("BHC Act"), under section 3 of the BHC
Act2 to acquire up to 24.9 percent of the voting shares of
Morgan Stanley (HMorgan"), New York, New York, and
thereby indirectly acquire an interest in Morgan's subsidiary bank, Morgan Stanley Bank, National Association
(HMS Bank"), Salt Lake City, Utah. 3 In addition, the Board
approved MUFG's notice under sections4(c)(8) and (4)(j) of
the BHC Act to acquire an indirect interest in Morgan's
subsidiary savings association, Morgan Stanley Trust
(HMST"), Jersey City, New Jersey, and Morgan's subsidiary trust company, Morgan Stanley Trust National Association ("MSTNA"), Wilmington, Delaware. 4 The Board also
approved MUFG's notice of its proposal to acquire an
indirect interest in the foreign bank subsidiaries of Morgan
under section 4(c)(l3) of the BHC Act. S The Board hereby
issues this Statement regarding its approval Order.
In light of the unusual and exigent circumstances afiecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal. 6
The Board has provided notice to the Office of the Comptroller of the Currency ("OCC") and the Office of Thrift
Supervision (HOTS"), the primary federal supervisors of
MS Bank and MST, respectively, and to the Department of
L The elections by MUFG, The Bank of Tokyo-Mitsubishi UFJ.
Ltd., and Mitsubishi UFJ Trust and Banking Corporation, all of Tokyo,
and UnionBanCal Corporation, San Francisco, California, to become
financial holding companies pursuant to sections 4(k) and (I) of the
BHC Act and sections 225.S2(b)(I) and 225.91(b)(l) of Regulation Y
became effective as of October 6, 200S. See Board letter to Donald J.
Tourney, Esq., dated October 6, 2OOS.
2. 12 U.S.c. § 1842. See 12 CFR 225.15.
3. As a result of acquiring Morgan's voting shares, MUFG would
acquire an indirect interest in Morgan Stanley Capital Management
LLC and Morgan Stanley Domestic Holdings, Inc., both financial
holding companies of New York, New York.
4. 12 U.S.C § 1843(cj(8) and (j). See 12 CFR 225.24. The Board
previously has determined by regulation that the operation of a savings
association and a trust company by a bank holding company is closely
related to banking for purposes of section 4(c)(8) of the BHC Act
(12 CFR 225.28(b)(4)(ii) and (5».
5. 12 U.S.c. § IS43(c)(l3).
6. See 12 U.S.c. §§ I 842(b)(l) and 1843(i)(4).
Justice ("DOJ"); those agencies have indicated that they
have no objection to the consummation of the proposaJ.7
For the same reasons, and in light of the fact that this
transaction represents a minority, noncontrolling investment in Morgan and its subsidiary depository institutions,
the Board has waived public notice of the proposal. 8
MUFG, with total consolidated assets of approximately
$1.7 trillion as of December 31, 2007, is the largest banking
organization in Japan. MUFG owns The Bank of TokyoMitsubishi UFJ, Ltd. ("BTMU") and Mitsubishi UFJ Trust
and Banking Corporation ("MUTB"), both of Tokyo.
BTMU operates branches, agencies, and representative
offices in several states,9 It also controls Bank of TokyoMitsubishi UFJ Trust Company (HBTMUT"), New York,
New York, and UnionBanCal Corporation and its subsidiary bank, Union Bank of California, N.A. ("Union Bank"),
both of San Francisco. MUTB operates a branch in
New York, New York, and controls Mitsubishi UFJ Trust &
Banking Corporation (U.SA) ("MUTB USA"), New York,
New York. MUFG controls deposits of approximately
$42 billion, which represent less than I percent of the total
amount of deposits of insured depository institutions in the
United States, 10
Morgan, with total consolidated assets of approximately
$1.0 trillion, engages in investment banking, securities
underwriting and dealing, asset management, trading, and
other acti vities both in and outside the United States, I J Its
principal subsidiaries include Morgan Stanley & Co., Incorporated, New York, New York, a broker-dealer registered
with the Securities and Exchange Commission under the
Securities Exchange Act of 1934 (I5 U.S.c. § 78a et seq.).
Through MS Bank and MST, Morgan controls deposits of
approximately $34.8 billion, which represent less than
I percent of the total amount of deposits of insured
depository institutions in the United States. 12 If MUFG
were deemed to control Morgan, MUFG would become the
7. Section 3(b)(l) of the BHC Act requires that the Board provide
notice of an application under section 3 to the appropriate federal or
state supervisory authority for the bank to be acquired and provide the
supervisor a period of time (normally 30 days) within which to submit
views or recommendations on the proposal. Section 40)(4) of the BHC
Act imposes a similar requirement with respect to a notice to acquire a
savings association. Sections 3(b)(1) and 4(i)(4) also permit the Board
to shorten or waive this notice period in certain circumstances
(12 USc. §§ 1842(b)(1) and 1843(1)(4); 12 CFR 225. 16(g)(2».
8. 12 CFR 225.I6(b)(3), 225.25(d), and 262.3(1).
9. BTMU operates branches in California, Illinois, New York,
Oregon. and Washington; agencies in Georgia and Texas; and has
representative offices in the District of Columbia, Kentucky, Minnesota, New Jersey, and Texas.
10. Deposit data for MUFG's subsidiary banks are as of June 30,
2008.
II. Asset data for Morgan are as of May 31, 200S, and asset and
deposit data for MS Bank and MST are as of June 30, 2008.
12. In this context, the "United States" includes any state of the
United States, the District of Columbia, any territory of the United
States, Puerto Rico, Guam, American Samoa, and the Virgin Islands.
Also in this context, depository institutions include commercial banks,
savings banks, and savings associations.
B36
Federal Reserve Bulletin 0 March 2009
14th largest depository organization in the United States,
with total consolidated assets of approximately $2.7 trillion, and would control deposits of approximately $76.6 billion.
NONCONTROLLlNG INVESTMENT
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 to obtain the Board's
approval before a bank holding company acquires more
than 5 percent of the voting shares of a bank suggests that
Congress contemplated acquisitions by bank holding companies of between 5 percent and 25 percent of the voting
shares of banks. L3 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 bank holding
company.L4
MUFG has stated that it does not propose to control or
exercise a controlling influence over Morgan and that its
indirect investment in Morgan's subsidiary depository institutions would also be a passive investment. MUFG has
provided certain commitments that are similar to 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 for purposes of the BHC Act. For example,
MUFG has committed not to exercise or attempt to exercise
a controlling influence over the management or policies of
Morgan or any of its subsidiaries and committed not to
have more than one representative serve on the board of
directors of Morgan or its subsidiaries. L5 The commitments
also include certain restrictions on the business relationships of MUFG with Morgan.
Based on these considerations and all the other facts of
record, the Board has concluded that MUFG would not
acquire control of, or have the ability to exercise a controlling influence over. Morgan or its subsidiary depository
institutions through the proposed acquisition of Morgan's
voting shares. The Board notes that the BHC Act would
require MUFG to file an application and receive the
Board's approval before it could directly or indirectly
acquire additional shares of Morgan or attempt to exercise
a controlling influence over Morgan. L6
13. See 12 U.S.C. § I 842(a)(3).
14. See. e.g .• The Bank of Nova Scotia. 93 Federal Reserve Bulletin
C 136 (2007); Passumpsic Bancorp, 92 Federal Reserve Bulletin C 175
(2006); Brookline Bancorp. MHC, 86 Federal Reserve Bullefin 52
(2000).
15. Consistent with the Board's policy statement on equity investments in banks and bank holding companies, MUFa proposes also to
have a representative serve as an observer at meetings of Morgan's
board of directors. See Policy Statement on Equity investments in
Banks and Bank Holding Companies (September 22, 2008)
(www.federalreserve.gov/newsevents/press/bcreg/20080922c.htm).
16. See, e.g., Emigrant Bancorp. inc., 82 Federal Reserve Bulletin
555 (1996); First Community Bancshares, inc.• 77 Federal Reserve
Bulletin 50 (1991).
COMPETITIVE CONSIDERATIONS
The Board has carefully considered the competitive effects
of the proposal in light of all the facts of record. 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. 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
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 servedP Under the public
benefits factor of section 4 of the BHC Act, the Board also
considers the competitive effects of a proposal to acquire a
savings association.
The Board previously has stated that one company need
not acquire control of another company to lessen competition between them substantially. IS The Board has found
that noncontrolling interests in directly competing depository institutions may raise serious questions under the BHC
Act and has stated that the specific facts of each case will
determine whether the minority investment in a company
9
would be anti competitive. L
The subsidiary insured depository institutions of MUFG
and MST compete directly in the Metropolitan New
York-New Jersey-Pennsylvania-Connecticut ("Metro
New York") banking market,20 The Board has reviewed
carefully the competitive effects of the proposal in the
Metro New York 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 banking market,
the relati ve shares of total deposits in depository institutions in the market ("market deposits") controlled by
MUFG and Morgan,2L and the concentration level of
market deposits and the increase in that level as measured
by the Herfindahl-Hirschman Index ("HHI") under the
17. 12 U.S.c. § 1842(c)(l).
18. See, e.g.• SunTntst Banks, inc., 76 Federal Reserve Bulletin
542 (1990).
19. See. e.g.. BDK Financial Corp., 81 Federal Reserve Bulletin
1052, 1053-54 (1995).
20. The Metro New York banking market includes 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.
21. 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);
NalimUlI 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 Hawaiiall, inc., 77 Federal Reserve Bulletin 52 (1991).
Legal Developments: Fourth Quarter; 2008
Department of Justice Merger Guidelines ("DOJ Guidelines").22 Consummation of the proposal would be consistent with Board precedent and within the thresholds in the
DOJ Guidelines in the Metro New York banking market.
On consummation, the Metro New York banking market
would remain moderately concentrated, and numerous
competitors would remain in the market. 23
The DOJ also has reviewed the proposal and has advised
the Board that it does not believe that MUFG's proposal
would likely have a significantly adverse effect on competition in any relevant banking market. 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 has concluded
that consummation of the proposal would not have a
significantly adverse effect on competition or on the concentration of resources in any relevant banking market.
Accordingly, the Board has determined that competitive
factors are consistent with approval of the proposal.
FINANCIAL, MANAGERIAL, AND OTHER
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
also reviews financial and managerial resources of the
organizations involved in a proposal under section 4 of the
BHC Act. 24 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 MUFG. In addition, the Board
has consulted with the Japanese Financial Services Agency
("FSA"), the agency with primary responsibility for the
supervision and regulation of Japanese banking organizations, including MUFG.
In evaluating the financial resources in expansion proposals by banking organizations, the Board reviews the
financial condition of the organizations involved both on a
22. Under the 001 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
lustice ("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 001 has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anticompetitive effects
implicitly recognize the competitive elfects of limited-purpose and
other nondepository financial entities.
23. On consummation. the HHI would remain unchanged at 1146,
and 265 insured depository institution competitors would remain in the
Metro New York banking market. The deposits of MUFG and Morgan,
on a combined basis, would represent less than I percent of market
deposits.
24. 12 CPR 225.26(b).
B37
parent-only and on a 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 pro forma organization, 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 MUFG 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 MUFG has sufficient financial resources to
effect the proposal.
The Board also has carefully considered the managerial
resources of the organizations involved. The Board has
reviewed the examination records of MUFG, its depository
institutions. and the U.S. banking operations of Morgan,
including assessments of their management, riskmanagement systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law and with anti-money-laundering laws.
Based on all the facts of record, the Board has concluded
that considerations relating to the managerial resources and
future prospects of the organizations involved are consistent with approval. 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.2~ As
noted, the FSA is the primary supervisor of Japanese
banking organizations. The Board previously has determined that BTMU and MUTB are subject to comprehensive supervision on a consolidated basis by their homecountry supervisor.26 In that determination, the Board took
25. 12 U.S.C. § IS43(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.I3(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).
26. See Mitsubishi Tokyo Finunciul Group. Inc., 87 Federul Reserve
Bulletin 349 (2001). At that time, BTMU was named The Bank of
Tokyo-Mitsubishi, Ltd. and MUTB was named The Mitsubishi Trust
and Banking Corporation.
B38
Federal Reserve Bulletin D March 2009
into account the FSA's supervisory authority with respect
to MUFG (operating at that time as Mitsubishi Tokyo
Financial Group, Ine.) and its nonbanking subsidiaries. 27
Based on this finding and all the facts of record, the Board
has concluded that BTMU and MUTB continue to be
subject to comprehensive supervision on a consolidated
basis by their home-country supervisor.
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. 28
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSlDERA TlONS
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 Community Reinvestment
Act ("CRA").29 In addition, the Board 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 voting securities
of an insured savings association. 30
As provided in the CRA, the Board has evaluated the
proposal 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.31
27. Id.
28. 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.
§ 1842(c)(3)(A)). The Board has reviewed the restrictions on disclosure in the relevant jurisdictions in which the applicant operates and
has communicated with relevant government authorities concerning
access to information. In addition. MUFG 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 law. MUFG 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 MUFG has provided adequate assurances of access to
any appropriate information the Board may request.
29. 12 U.S.c. §290l et seq.; 12 U.S.c. § I 842(c)(2).
30. See, e.g., North Fork Bancorporation, Inc .. 86 Federal Reserve
Bulletin 767 (2000).
31. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 at 36.640 (2001); 72 Federal Register 37.922 at 37.951 (2007).
MUFG's subsidiary banks each received "outstanding"
or "satisfactory" ratings, and MS Bank received an "outstanding" rating, at their most recent evaluations for CRA
performance by the OCC or the Federal Deposit Insurance
Corporation ("FDIC").32 Consistent with the CRA regulations adopted by the federal banking agencies, BTMUT,
MUTB USA, and MS Bank were evaluated under the
community development test as wholesale banks.:u
Based on all the facts of record, the Board has concluded
that considerations relating to convenience and needs of the
communities to be served and the CRA performance
records of the relevant depository institutions are consistent
with approval of the proposal.
NONBANKING ACTIVITIES
As noted above, MUFG has filed a notice under sections 4(c)(8) and 4(j) of the BHC Act for its proposed
indirect investment in MST and MSTNA, which are
engaged in activities that the Board has determined by
regulation are so closely related to banking as to be a
proper incident thereto for purposes of section 4(c)(8) of
the BHC Act. 34 To approve this notice, the Board must also
determine that the proposed acquisition of MST and
MSTNA "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. "35
As part of its evaluation of the public interest factors
under section 4 of the BHC Act, the Board 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 customers currently
served by Morgan. MUFG's investment in Morgan, and
thus indirectly in MST and MSTNA, would strengthen
Morgan's capital position and allow Morgan to better serve
its customers. For the reasons discussed above and based
on the entire record, 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 concludes that
consummation of the proposal can reasonably be expected
to produce public benefits that would outweigh any likely
32. The most recent eRA performance evaluation of Union Bank.
the largest of MUFG's subsidiary banks, by the oce was as of
October 2005. The most recent CRA performance evaluations of
BTMUT ("outstanding") and MUTB USA ("satisfactory") by the
FDIC were as of September 2007 and December 2006. respectively.
MS Bank received an "outstanding" rating under the eRA at its most
recent performance evaluation by the FDIC. as of January 2006.
MSTNA is not an insured depository institution. and MST is not
subject to the CRA pursuant to regulations issued by the OTS. See
12 CFR 563e.ll(c)(2).
33. See. e.g., 12 CFR 228.2I(a)(2).
34. See 12 CFR 225.28(b)(4)(ii) and (5).
35. See 12 U.S.c. § I 843(j)(2)(A).
Legal Developments: Fourth Quarter, 2008
adverse effects. Accordingly, the Board has determined that
the balance of the public benefits under section 4G)(2) of
the BHC Act is consistent with approval.
MUFG also provided notice of its proposal to acquire an
indirect interest in the foreign bank subsidiaries of Morgan
under section 4(c)(l3) of the BHC Act. Based on the
record, the Board has no objection to the acquisition of
such interesp6
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application and notices
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. As noted in the Board's Order approving
MUFG's proposal, the Board's approval is specifically
conditioned on compliance by MUFG with all the commitments made to the Board in connection with MUFG's
application and notices. The Board's approval of the nonbanking aspects of the proposal is also subject to all the
conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),37 and to the Board's authority
to require such modification or termination of the activities
of MUFG or any of its subsidiaries as the Board finds
necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's
regulations and orders issued thereunder. 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 decisions and, as such, may be
enforced in proceedings under applicable law.
B39
Wachovia Corporation ("Wachovia"),' Charlotte, North
Carolina, and thereby indirectly acquire Wachovia's subsidiary banks, Wachovia Bank, National Association ("Wachovia Bank"), Charlotte, and Wachovia Bank of Delaware,
National Association, Wilmington, Delaware. 2 In addition,
Wells Fargo has requested the Board's approval under
section 4 of the BHC Act 3 to acquire the nonbanking
subsidiaries of Wachovia, including Wachovia's two subsidiary savings associations. 4 Wells Fargo also proposes to
acquire the agreement corporation and Edge Act subsidiaries and the foreign operations of Wachovia pursuant to
sections 25 and 25A of the Federal Reserve Act and the
Board's Regulation K.5
Section 3(b)( I) of the BHC Act requires that the Board
provide notice of an application under section 3 to the
appropriate federal or state supervisory authority for the
banks to be acquired and provide the supervisor a period of
time (normally 30 days) within which to submit views and
recommendations on the proposal. 6 Section 4(i)(4) of the
BHC Act imposes a similar requirement with respect to a
notice to acquire a savings association.? In light of the
unusual and exigent circumstances affecting the financial
markets, the weakened financial condition of Wachovia,
and all other facts and circumstances, the Board has
shortened to 10 days the notice period to the primary
regulators of the banks and savings associations involved
in, and waived public notice of, this proposal, in accordance with the provisions of the BHC Act and the Board's
regulations. H The Board has contacted the primary federal
supervisors of the insured depository institutions and the
Department of Justice; those agencies have indicated that
they have no objection to the approval of the proposal.
October 7, 2008
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
Wells Fargo & Company
San Francisco, California
Order Approving the Acquisition of a Bank
Holding Company
Wells Fargo & Company ("Wells Fargo"), 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 acquire
36. Morgan became subject to the BHC Act on September 21,
2008, and as a new bank holding company has a two-year period, with
the possibility of three one-year extensions, to conform its existing
nonbanking investments and activities to the requirements of section 4
of the BHC Act (12 U.S.c. § 1842(a)(2». MUFG, as a financial
holding company, may acquire more than 5 percent of the voting
shares of a company, such as Morgan, that is substantially engaged in
financial activities subject to a two-year divestiture period (12 CFR
225.85(a)(3)).
37. 12 CFR 225.7 and 225.25(c).
I. 12 U.S.c. § 1842.
2. Wells Fargo initially would acquire shares of newly issued
voting preferred securities of Wachovia, representing approximately
39.9 percent of aggregate voting securities. After shareholder approval,
a wholly owned subsidiary of Wells Fargo would merge with and into
Wachovia, with Wachovia surviving the merger and becoming a
wholly owned subsidiary of Wells Fargo. Wells Fargo also seeks the
Board's approval pursuant to section 3 of the BHC Act to acquire
Wachovia's indirect ownership of 5.7 percent of the voting shares of
United Bancshares, Inc. ("United") and thereby indirectly acquire
voting shares of United's subsidiary bank, United Bank of Philadelphia, both of Philadelphia, Pennsylvania.
3. 12 U.S.c. § 1843.
4. Wachovia's two savings associations are Wachovia Mortgage,
ES.B., North Las Vegas, Nevada, and Wachovia Bank, ES.B., Houston, Texas. Wells Fargo also proposes to acquire all of Wachovia's
other nonbanking subsidiaries pursuant to section 4 of the BHC Act,
including (but not limited to) Wachovia Bank's insured credit card
subsidiary, Wachovia Card Services, National Association, Atlanta,
Georgia, and its nondepository trust company, Delaware Trust Company, National Association, Wilmington, Delaware. See 12 U.S.c.
§ 1843. Both of these Wachovia Bank subsidiaries engage only in
limited operations and, therefore, are not banks for purposes of the
BHC Act. See 12 U.S.c. § 1841(c)(2)(D) and (F).
5. 12 U.S.c. §§601 et seq. and 611 et seq.; 12 CFR Part 211.
6. 12 U.S.c. § 1842(b)(I); 12 CFR 225.25(b).
7. 12 U.S.c. § 1843(i)(4).
8. 12 U.S.c. §§ 1842(b)(l) and 1843(i)(4); 12 CFR 225.16(b)(3),
225.16(g)(2), 225.25(d), and 262.3(1).
B40
Federal Reserve Bulletin 0 March 2009
The Board has carefully considered the statutory factors
in light of all the facts of record, including confidential
examination and other supervisory information, publicly
reported and additional financial information, the supervisory experiences of the Board and the other federal supervisors of the organizations and institutions involved in the
proposal, information provided by Wells Fargo and Wachovia, and comments received on the proposal. Based on all
the facts of record, the Board has concluded that all the
factors the Board must consider in acting on the application
and notices are consistent with approval. The application
and notices are hereby approved by the Board for the
reasons set forth in the Board's Statement, which will be
released at a later date.
The Board's approval is specifically conditioned on
compliance by Wells Fargo with all the commitments made
in connection with the proposal, including the commitments and conditions discussed in the forthcoming Statement. This approval 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 nonbanking
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 BHC
Act and the Board's regulations and orders issued thereunder. 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 bank-related acquisitions may not be
consummated before the fifth calendar day after the effective date of this order, and the proposal may not 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 San
Francisco, acting pursuant to delegated authority.9
By order of the Board, effective October 12, 2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
Wells Fargo & Company
San Francisco, California
Statement by the Board of Governors of the
Federal Reserve System Regarding the
Application and Notices by Wells Fargo &
Company to Acquire Wachovia Corporation
and Wachovia's Subsidiary Banks and
Nonbanking Companies
By order dated October 12, 2008, the Board approved the
application of Wells Fargo & Company ("Wells Fargo"), a
financial holding company within the meaning of the Bank
9. 12 U.S.c. § 1849(b)(I); 12 CFR 225.16(h)(2).
Holding Company Act ("BHC Act"), under section 3 of
the BHC Act, I to acquire Wachovia Corporation ("Wachovia"),2 Charlotte, North Carolina, and thereby indirectly
acquire Wachovia's subsidiary banks, Wachovia Bank,
National Association ("Wachovia Bank"), Charlotte, and
Wachovia Bank of Delaware, National Association, Wilmington, Delaware. 3 In addition, the Board approved Wells
Fargo's notice under section 4 of the BHC Act4 to acquire
all the nonbanking subsidiaries of Wachovia, including
Wachovia's two subsidiary savings associations, Wachovia
Mortgage, ES.B., North Las Vegas, Nevada, and Wachovia
Bank, ES.B., Houston, Texas. s The Board also approved
Wells Fargo's notice to acquire the agreement corporation
and Edge Act subsidiaries and the foreign operations of
Wachovia pursuant to sections 25 and 25A of the Federal
Reserve Act ("FRA") and the Board's Regulation K.6 The
Board hereby issues this statement regarding the approval
order.
In light of the unusual and exigent circumstances affecting the financial markets, the weakened financial condition
of Wachovia, and all other facts and circumstances, the
Board determined in its order that emergency conditions
existed that justified expeditious action on this proposal. 7
The Secretary of the Treasury (in consultation with the
President) determined, on the recommendation of the Federal Deposit Insurance Corporation ("FDIC") and the
Board (both by a vote of 5 members), that compliance by
the FDIC with the least-cost provisions of the Federal
Deposit Insurance Act ("FDI Act") with respect to Wachovia could likely result in serious adverse effects on economic conditions or financial stability. The proposed acquisition of Wachovia by Wells Fargo as currently structured
would avoid those adverse effects without reliance on
assistance by the FDIC. The Board provided notice of this
I. 12 U.S.c. § 1842.
2. Wells Fargo initially would acquire shares of newly issued
voting preferred securities of Wachovia, representing approximately
39.9 percent of aggregate voting securities. After shareholder approval,
a wholly owned subsidiary of Wells Fargo would merge with and into
Wachovia, with Wachovia surviving the merger and becoming a
wholly owned subsidiary of Wells Fargo.
3. The Board also approved the acquisition by Wells Fargo of
Wachovia's indirect ownership of 5.7 percent of the voting shares of
United Bancshares, Inc. ("United") and thereby the indirect acquisition of voting shares of United's subsidiary bank, United Bank of
Philadelphia, both of Philadelphia, Pennsylvania.
4. 12 U.S.c. § 1843.
5. Wells Fargo proposes to acquire Wachovia's other nonbanking
subsidiaries that are engaged in financial activities in accordance with
section 4(k)(4)(A)-(H) and section 225.86 of the Board's Regulation Y (12 U.S.c. § I 843(k)(4)(A)-(H); 12 CFR 225.86(a)-(d) and
225.170-177). In addition, Wells Fargo proposes to acquire Wachovia's non banking subsidiary that is engaged in certain physical
commodity trading activities as an activity that is complementary to a
financial activity under section 4(k)(I)(B) of the BHC Act ("Comple·
mentary Activity"). See Board letter to Elizabeth T. Davy, April 13,
2006. Wells Fargo also received authority to engage in such physical
trading activities as a Complementary Activity. See Board letter to
John Shrewsberry, April 10,2008. Wachovia also has other nonbank·
ing subsidiaries that do not require Board approval, in accordance with
section 225.22 of Regulation Y (12 CFR 225.22).
6. 12 U.S.c. §§601 et seq. and 611 et seq.; 12 CFR ParI 211.
7. See 12 U.S.c. §§ I 842(b)(l) and 1843(i)(4). A commenter object·
ing to the proposal asserted that expeditious action was not warranted.
Legal Developments: Fourth Quarter, 2008
proposal to the Office of the Comptroller of the Currency
("OCC') and the Office of Thrift Supervision ("OTS"),
the primary federal supervisors of Wachovia's subsidiary
banks and savings associations, in accordance with the
requirements of sections 3 and 4 of the BHC Act and the
Board's Regulation Y governing emergencies that require
expeditious action. The Board also provided notice of this
proposal to the Department of Justice ("DOJ"). Those
agencies have indicated that they have no objection to
approval of the proposal. s For the same reasons, and in
accordance with the provisions of the Board's regulations,
the Board waived public notice of this proposalY
Wells Fargo, with total consolidated assets of approximately $609.1 billion, is the fifth largest depository organization in the United States. 1O Wells Fargo controls nine
insured depository institutions that operate in twenty-three
states.
Wachovia, with total consolidated assets of approximately $812.4 billion, is the third largest depository organization in the United States. Wachovia controls five
insured depository institutions that operate in twenty-one
states and the District of Columbia. On consummation of
this proposal, Wells Fargo would become the second largest
depository organization in the United States, with total
consolidated assets of approximately $1.37 trillion.
FACTORS GOVERNING BOARD REVIEW OF THE
TRANSACTION
The BHC Act sets forth the factors that the Board must
consider when reviewing the acquisition of banks. For
direct or indirect acquisitions of banks under section 3 of
the BHC Act, these factors are the requirements for interstate bank acquisitions; the competitive effects of the
proposal in the relevant geographic markets; the financial
and managerial resources and future prospects of the
companies and banks involved in the proposal; the convenience and needs of the communities to be served; the
records of performance under the Community Reinvestment Act 11 ("CRA") of the insured depository institutions
involved in the transaction; and the availability of information needed to determine and enforce compliance with the
BHC Act and other applicable federal banking laws. 12
8. Section 3(b)( I) of the BHC Act requires that the Board provide
notice of an application under section 3 to the appropriate federal or
state supervisory authority for the bank to be acquired and provide the
supervisor a period of time (normally 30 days) within which to submit
views or recommendations on the proposal. Section 4(i)(4) of the BHC
Act imposes a similar requirement with respect to a notice to acquire a
savings association. Sections 3(b)(I) and 40)(4) also permit the Board
to shorten or wai ve this notice period in certain circumstances
(12 U.S.C. §§ I 842(b)(l) and 1843(i)(4); 12 CFR 225.16(g».
9. Id.; 12 CFR 225.16(b)(3), 225.25(d), and 262.3(1).
10. Asset, national deposit, and ranking data are as of June 3D,
2008. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.
II. 12 U.s.c. §2901 et seq.
12. The Board received comments from Citigroup Inc. ("Citigroup"), New York, New York, objecting to the proposal, which the
Board carefully considered. Among other things, Citigroup contends
B41
An acquisition of a savings association requires Board
approval under sections 4(c)(8) and 4(j) of the BHC Act.lJ
The Board previously has determined by regulation that the
operation of a savings association is closely related to
banking for purposes of section 4(c)(8) of the BHC Act. 14
The Board also must determine that the proposed acquisition ofWachovia's savings associations "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," 15
INTERSTATE AND DEPOSIT CAP 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 Wells
Fargo is Minnesota,16 and the banks to be acquired are
located in 21 states and the District of Columbia. 17
The Board may not approve an interstate proposal under
section 3(d) of the BHC Act if the applicant (including all
its insured depository institution affiliates) controls, or on
consummation of the proposal would control, more than
10 percent of the total amount of deposits of insured
depository institutions in the United States ("nationwide
deposit cap"). The nationwide deposit cap was added to
section 3(d) when Congress broadly authorized interstate
acquisitions by bank holding companies and banks in the
Riegle-Neal Interstate Banking and Branching Efficiency
Act of 1994. 1R Although the nationwide deposit cap prohibits interstate acquisitions by a company that controls deposthat Wells Fargo's agreement to acquire Wachovia violated Wachovia's prior agreement to negotiate exclusively with Citigroup on an
acquisition agreement and improperly interfered with plans by the
FDIC to provide assistance pursuant to section 13(c) of the FDI Act for
Citigroup's proposed acquisition of some or all of Wachovia (12 U.S.c.
§ 1823(c». These allegations are the subject of litigation between
Citigroup, Wells Fargo, and Wachovia. The litigation is before a court
of competent jurisdiction. and the matters at issue in the litigation are
not within the discretion of the Board to resolve. See Western
Bancshares, Inc. v. Board of Governors, 480 F,2d 749 (10th Cir. 1973)
("Western"). As explained in more detail above, as part of its review
of this proposal. the Board has carefully considered all of the facts of
record in assessing the financial and managerial resources and future
prospects of the companies involved.
\3. 12 U.S.c. §§ 1843(i), 1843(c)(8), and 1843(j).
14. 12 CFR 225.28(b)(4)(ii).
15. 12 U.S.C. § I 843(j)(2)(A).
16. See 12 U.S.C. § I842(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.
17. 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. See 12 U.s.c. §§ 184\(0)(4)-(7) and 1842(d)(l)(A)
and (d)(2)(B).
18. Pub. L No. 103-328, 108 Stat. 2338 (1994). The nationwide
deposit cap was intended to help guard against undue concentrations
of economic power. See S. Rep. No. 102-167 at 72 (1991).
B42
Federal Reserve Bulletin 0 March 2009
its in excess of the cap, it does not prevent a company from
exceeding the nationwide deposit cap through internal
growth and effective competition for deposits or through
acquisitions entirely within the home state of the acquirer.
As required by section 3(d), the Board has carefully
considered whether Wells Fargo controls, or on consummation of the proposed transaction would control, more than
\0 percent of the total amount of deposits of insured
depository institutions 19 in the United States. In analyzing
this matter, the Board calculated the percentage of total
deposits of insured depository institutions in the United
States and the total deposits that Wells Fargo controls, and
on consummation of the proposal would control, based on
the definition of "deposit" in the FDI Act,20 the latest
available deposit data collected in reports filed by all
insured depository institutions (data as of June 30,2008),21
deposit information available from the companies involved
in this transaction, other information available to the Board,
and the methods and adjustments used by the FDIC to
compute total deposits. These calculations have been made
using the methodology described in the Board's order in
2004 approving Bank of America Corporation's acquisition
of FleetBoston Financial Corporation22 and take into
account the use of revised Call Report and Thrift Financial
Report forms, which became etlective for calendar year
2008. 23 In light of the turmoil in the financial markets since
June 30, 2008, the Board also analyzed more recent
adjusted deposit data from Wells Fargo and Wachovia and
other sources of deposit data.
Based on data as of June 30, 2008, which represent the
latest adjusted deposit data available from all insured
depository institutions, the total amount of deposits of
19. The BHC Act adopts the definition of "insured depository
institution" used in the FDI Act. See 12 U.S.c. § 184l(n). The FDI
Acl's definition of "insured depository institution" includes all banks
(whether or not the institulion is a bank for purposes of the BHC Act),
savings banks, and savings associations that are insured by the FDIC,
and insured U.S, branches of foreign banks, as each of those terms is
defined in the FDI Act. See 12 U.S,c. § 1813(c)(2).
20, Section 3(d) of the BHC Act specifically adopts the definition
of "deposit" in the FDI Act (12 U.S.c. § 1842(d)(2)(E) incorporating
the definition of "deposit" at 12 U.S.c. § 1813 (I».
21, Each insured bank in the United States must report data
regarding its total deposits in accordance with the definition of
"deposit" in the FDI Act on the institution's Consolidated Report of
Condition and Income ("Call Report"). Each insured savings association similarly must report its total deposits on the institution's Thrift
Financial Report Deposit data for FDIC-insured U.S. branches of
foreign banks and federal branches of foreign banks are obtained from
the Report of Assets and Liabilities of U.S. Branches and Agencies of
Foreign Banks. These data are reported quarterly to the FDIC and are
publicly available.
22. Bank of America Corporation, 90 Federal Reserve Bulletin
217,219 (2004); see also Bank of America Corporation, 93 Federal
Reserve Bulletin C I 09 (2007) (order approving the acquisition of ABN
AMRa North America Holding Company); Bank of America Corporation, 92 Federal Reserve Bulletill C5 (2006) (order approving
merger with MBNA Corporation),
23. The revisions to the Call Report and Thrift Financial Report
that were introduced in 2007 have simplified the adjusted deposit-cap
calculation for depository organizations. The methodology for computing the amount of deposits held by institutions for purposes of
calculating the nationwide deposit cap is outlined in Appendix A.
insured depository institutions in the United States was
approximately $7.195 trillion. The data indicate that, on
June 3D, 2008, Wells Fargo controlled deposits of approximately $298.2 billion, and Wachovia controlled deposits of
approximately $429.6 billion. As of that date, the combined
firm would have controlled approximately 10.1 J6 percent
of the total amount of deposits of insured depository
institutions in the United States on consummation of the
proposaL
Wells Fargo and Wachovia provided data on their respective adjusted deposit totals as of September 30, 2008. These
data indicate that, on a combined basis, Wells Fargo would
control approximately $731.1 billion in deposits on consummation of the proposaL Deposit amounts for other
insured depository organizations are not available because
institutions are not required to file Call Reports for the third
quarter until the end of October, and such data will not be
available for review until later in November.
The prohibition in the BHC Act, by its terms, applies if
"upon consummation of the acquisition (emphasis added)"
the applicant would control more than J percent of the
total amount of deposits of insured depository institutions
in the United States. While the June 30, 2008, deposit data
are the most recent data currently available on a uniform
basis, the Board believes that other evidence indicates that
the June 30, 2008, data do not reHect the current situation
nor would those data accurately reHect the deposit ratio at
the time required by the statute, which is the time of
consummation of the acquisition.
Other data sources indicate, for example, that the total
amount of deposits in the United States has significantly
increased since June 30, 2008. Deposit data collected by
the Federal Reserve in its survey of domestically chartered
commercial banks and reported on the Board's H.8 Release
(Assets and Liabilities of Commercial Banks) for September 2008 indicate that total deposits of insured commercial
banks in the United States increased approximately
3.9 percent during the third quarter of 2008. Estimated
nationwide deposit growth in excess of 3 percent is corroborated by other deposit data sources. 24 If total deposits
reported on June 30, 2008, are adjusted to account for this
level of growth, the combined deposits of Wells Fargo and
Wachovia as of September 30, 2008, would be below
10 percent of nationwide deposits. Indeed, WelIs Fargo's
percentage of total nationwide deposits would be less than
10 percent if adjusted deposits for all insured depository
institutions in the United States grew by at least 1.62 percent since June 30, 2008, which would result in a total
amount of adjusted deposits all for insured depository
institutions of at least $7.311 trillion. Based on all the
information available to the Board, the Board concluded
that the combined organization would not control an
amount of deposits that would exceed the nationwide
deposit cap on consummation of the proposal. To ensure
compliance with the deposit limits on acquisitions, Wells
°
24. Deposit data collected from commercial banks on the FR 2900
(Report of Transaction Accounl~, Other Deposits and Vault Cash)
show a similar trend.
Legal Developments: Fourth Quarter, 2008
Fargo ha" committed that, on consummation, the combined
organization would not exceed the nationwide deposit cap
based on the data reported by all depository institutions as
of September 30, 2008. This commitment includes a commitment that Wells Fargo will reduce its deposits by any
amount that exceeds the nationwide deposit cap based on
Call Report data a" of September 30, 2008, by no later than
December 31, 2008. 25
Section 3(d) also prohibits the Board from approving a
proposal if, on consummation, the applicant would control
30 percent or more of the total deposits of insured depository institutions in any state in which both the applicant and
the organization to be acquired operate an insured depository institution, or the applicable percentage of state deposits established by state law ("state deposit cap").26 On
consummation of the proposal, Wells Fargo would control
less than 30 percent of, and less than any applicable state
deposit cap for, the total amount of deposits of insured
depository institutions in the relevant states.
All other requirements of section 3(d) of the BHC Act
also would be met on consummation of the proposal. 27
Based on all the facts of record, the Board is permitted to
approve the proposal under section 3(d) of the BHC Act.
COMPETITIVE CONSIDERATIONS
The Board has considered carefully the competitive effects
of the proposal in light of all the facts of record. 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 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 transaction in meeting the convenience and needs of the community to be served. 28 In
addition, the Board must consider the competitive effects of
a proposal to acquire a savings association under the public
benefits factor of section 4(j) of the BHC Act.
25. Institutions reponing quarterly deposit data may find it necessary to make adjustments after the due date of the quarterly report.
Accordingly, for purposes of this commitment, Wells Fargo and the
Board will evaluate the third quarter 2008 deposit data on Novemher 3D, 2008, by which time reponing institutions should have
completed any necessary adjustments.
26. 12 U.S.C. § 1842(d)(2)(BHD). Wells Fargo and Wachovia both
operate insured depository institutions in Arizona, California, Colorado, Illinois, Nevada. and Texas.
27. Wells Fargo is adequately capitalized and adequately managed
as required under section 3(d) (12 U.S.c. § 1842 (d)(I)(A)). The
subsidiary banks of Wachovia have been in existence and operated for
the minimum period of time required by applicable state law. See
12 V.S.c. § I842(d)(I)(B). Wachovia Bank's subsidiary insured credit
card company, Wachovia Card Services, National Association, Atlanta,
Georgia, was established in 2007 but engages only in limited operations and. therefore, is not a bank for purposes of the BHC Act. See
12 U.S.c. § 1841(c)(2)(D). The other requirements in section 3(d) of
the BHC Act also would be met on consummation of the proposal.
28. 12 U.S.C. § I 842(c)( I).
B43
Wells Fargo's and Wachovia's subsidiary depository
institutions directly compete in 49 banking markets, including markets in Arizona, California, Colorado, Illinois,
Nevada, and Texas. The Board has reviewed carefully the
competitive effects of the proposal in each of those 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 banking markets, the relative shares of total
deposits in depository institutions in the markets ("market
deposits") controlled by Wells Fargo and Wachovia,29 the
concentration levels of market deposits and the increase in
those levels as measured by the Herfindahl-Hirschman
Index ("HHI") under the Department of Justice Merger
Guidelines ("DO] Guidelines"), 30 and other characteristics
of the markets. In addition, the Board has considered
commitments made by Wells Fargo to the Board to reduce
the potential that the proposal would have adverse effects
on competition by divesting six branches (the "divestiture
branches"), which account for approximately $1.46 billion
of deposits,3l in six banking markets (Hthe divestiture
markets").32 Wells Fargo has proposed to transfer all the
divestiture branches to out-of-market competitors.
29. Deposit and market share data are as of June 3D, 2007, adjusted
to reflect mergers and acquisitions through October 3, 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 386,387 (1989); National City Corpora·
tion, 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). In this case, the
savings association deposits of Wachovia are weighted at 100 percent
both before and after consummation of the proposal because the
savings associations are, and on consummation would continue to be,
controlled by a bank holding company.
30. Under tbe DOJ Guidelines. a market is considered unconcentrated if the post-merger HHI is less than 1000, moderately concentrated if the post-merger HHI is hetween 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 nondepository financial entities.
31. Wells Fargo proposes to divest five Wachovia branches with
approximately $1.33 billion of deposits in California and one Wachovia branch with approximately $127 million of deposits in Colorado.
32. Wells Fargo has committed that, not later than 60 days after
consummating the proposed acquisition, it will exec ute an agreement
for the proposed divestitures in each divestiture market with a
purchaser that tbe Board determines to be competitively suitable.
Wells Fargo also has committed to divest total deposits in each
divestiture market of at least the amount specified in the commitment
and discussed in this order and to complete divestitures within 180
days of consummation of the proposal. In addition, Wells Fargo has
committed that, if it is unsuccessful in completing the proposed
divestiture within this time period, it will transfer the unsold branches
to an independent trustee that will be instructed to sell such brancbes
to an alternate purchaser or purchasers. without regard to price. Both
the trustee and any alternate purchaser must be acceptable to the
B44
Federal Reserve Bulletin 0 March 2009
A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in 37 of the banking markets in which Wells
Fargo's and Wachovia's subsidiary depository institutions
directly compete. 33 On consummation of the proposal, two
of these banking markets would remain unconcentrated,
twenty-seven banking markets would be moderately concentrated, and eight banking markets would be highly
concentrated, as measured by the HHI. The change in HHI
in the eight highly concentrated markets would be small or
otherwise within the DOJ Guidelines. In each of the 37
banking markets, numerous competitors would remain on
consummation of the proposal.
B. Certain Banking Markets with Divestitures
After accounting for the branch divestitures, consummation
of the merger would be consistent with Board precedent
and the thresholds in the DOJ Guidelines in five banking
markets. 34 In three of these markets, Wells Fargo proposes
to divest all branches to be acquired from Wachovia and,
therefore, the levels of concentration as measured by the
HHI would not increase on consummation of the merger
and the proposed divestitures. 35 In two markets, the HHI
would be consistent with Board precedent and thresholds in
the DOJ Guidelines on consummation of the merger and
the proposed divestitures. 36 After accounting for the proposed di vestitures, four banking markets would be moderately concentrated, and one banking market would be
highly concentrated on consummation. In addition, numerous competitors would remain in each of the five banking
markets.
C. Seven Banking Markets Warranting Special
Scrutiny
Wells Fargo and Wachovia compete directly in seven
banking markets that warrant a detailed review: Cottonwood, Arizona; Hanford, Hemet, Oroville, Placerville, and
Santa Cruz, all in California; and Grand Junction, Colorado. In each of these markets, including one with proposed
divestitures and six without proposed divestitures, the
concentration levels on consummation of the proposal
would exceed the threshold levels in the DOJ Guidelines or
the resulting market share of Wells Fargo would exceed
35 percent.
Board. See Regions Financial Corp., 93 Federal Reserve Bulletin C16
(2007); BankAmerica Corp., 78 Federal Reserve Bulletin 338 (1992);
United New Mexico Financial Corp., 77 Federal Reserve Bulletin 484
(1991).
33. The effects of the proposal on the concentrations of banking
resources in these banking markets are described in Appendix B.
34. The effects of the proposal on the concentrations of banking
resources in these markets are descrihed in Appendix C.
35. The three markets are Davis and Grass Valley. both in California, and Fremont County in Colorado.
36. The two markets are Monterey-Seaside-Marina and Sonora.
both in California.
For each of these markets, the Board has considered
carefully 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 market. The number and strength of factors necessary to
mitigate the competitive effects of a proposal depend on the
size of the increase in, and resulting level of, concentration
in a banking marketY In each of these markets, the Board
has identified factors that indicate the proposal would not
have a significantly adverse impact on competition, despite
the post-consummation increases in the HHI and market
shares.
Among the factors reviewed, the Board has considered
the competitive influence of community credit unions in
these banking markets. In each of the markets, certain
credit unions ofter a wide range of consumer products,
operate street-level branches, and have membership open
to almost all residents in the applicable market. The Board
has concluded that the acti vities of such credit unions in
each of these markets exert competitive influence that
mitigates, in part, the potential effects of the proposal. 38
BANKING MARKET IN ARIZONA
Cottonwood. In the Cottonwood banking market,39 Wells
Fargo is the second largest depository organization, controlling deposits of approximately $ I 72.8 million, which represent approximately 15.3 percent of market deposits.
Wachovia is the fifth largest depository organization in the
market, controlling deposits of approximately $129 million, which represent approximately IIA percent of market
deposits. On consummation of the merger, Wells Fargo
would remain the second largest depository organization in
the market, controlling deposits of approximately
$301.8 million, which represent approximately 26.6 percent of market deposits. The HHI would increase 347 points
to 2305.
Several factors indicate that the increase in concentration in the Cottonwood banking market, as measured by the
HHI and Wells Fargo's market share, overstates the potential competitive effects of the proposal in the market. After
consummation of the proposal, nine other commercial
banking and thrift institution competitors would remain in
the market. The Board notes that there are other competitors with a significant presence in the market. The largest
depository organization in the market would control
37. See Re!.[ions Financial Corp., 93 Federal Reserve Bulletin CI6
(2007); NationsBank Corporation, 84 Federal Reserve Bulletin 129
(1998).
38. The Board previously has considered the competitiveness of
certain active credit unions as a mitigating factor. See, e.g., The PNC
Financial Services Group. Inc., 93 Federal Reserve Bulletin C65
(2007); Regions Financial Corp., 93 Federal Reserve Bulletin Cl6
(2007); Wachovia Corp., 92 Federal Reserve Bulletin CI83 (2006);
F.N.B. Corporation, 90 Federal Reserve Bulletin 481 (2004).
39. The Cottonwood banking market in Arizona is defined as the
northeastern comer of Yavapai County and includes the towns of
Camp Verde and Clarkdale and the cities of Cottonwood, Sedona, and
West Sedona.
Legal Developments: Fourth Quarter; 2008
34.8 percent of market deposits, and two other bank
competitors each would control more than 12 percent of
market deposits.
The Board also has evaluated the competitive influence
of one active community credit union in the market. This
credit union controls approximately $88.3 million of deposil<; in the market, which, on a 50 percent weighted basis,
represents approximately 3.8 percent of market deposits.
After accounting for these credit union deposits, Wells
Fargo on consummation of the proposal would control
approximately 25.6 percent of market deposits, and the
HHI would increase 322 points to 2149.40
In addition, the record of recent entry into the Cottonwood banking market evidences the market's attractiveness
for entry. The Board notes that five depository institutions
have entered the market de novo since 2004. Other factors
indicate that the market remains attractive for entry. From
2004 to 2007, the annualized population growth for the
county in which the Cottonwood market is located exceeded the average annualized population growth for nonmetropolitan counties in Arizona.
BANKING MARKETS IN CALIFORNIA
Hanford. In the Hanford banking market,41 Wells Fargo is
the fourth largest depository organization, controlling
deposits of approximately $148.3 million, which represent
approximately 17.4 percent of market deposits. Wachovia
is the third largest depository organization in the market,
controlling deposits of approximately $159.9 million,
which represent approximately 18.7 percent of market
deposits. On consummation of the merger, Wells Fargo
would become the largest depository organization in the
market, controlling deposits of approximately $308.2 million, which represent 36.1 percent of market deposits. The
HHI would increase 650 points to 2045.
Several factors indicate that the proposal would not have
significantly adverse competitive effects in the Hanford
banking market. After consummation of the proposal, ten
other commercial banking competitors would remain,
including two other competitors with a significant presence
in the market. The second and third largest depository
organizations would control market deposits of more than
20 percent and 12 percent, respectively.
The Board also has evaluated the competitive influence
of three active community credit unions in the market.
These credit unions control approximately $200.6 million
of deposits in the market, which, on a 50 percent weighted
basis, represents approximately 10.5 percent of market
deposits. After accounting for these credit union deposits,
Wells Fargo on consummation of the proposal would
40. With the deposits of this credit union weighted at 50 percent,
Wells Fargo would be the second largest depository organization in the
market, with approximately 14,7 percent of market deposits. and
Wachovia would be the fifth largest depository organization in the
market. controlling approximately II percent of market deposits,
41. The Hanford banking market in California is defined as Kings
County and the city of Riverdale in Fresno County,
845
control approximately 32.3 percent of market deposits, and
the HHI would increase 521 points to 1675. 42
Hemet. In the Hemet banking market,43 Wells Fargo is the
sixth largest depository organization, controlling approximately $124.4 million of deposits, which represents approximately 7.2 percent of market deposits. Wachovia is the
largest depository organization in the market, controlling
deposits of $391.6 million. which represent 22.6 percent of
market deposits. On consummation of the proposal, Wells
Fargo would become the largest depository organization in
the market, controlling deposits of approximately $516 million. which represent approximately 29.8 percent of market
deposits. The HHI would increase 324 points to 1809.
Several factors indicate that the proposal would not have
a significantly adverse effect on competition in the Hemet
banking market. After consummation of the proposal. 12
other commercial banking and thrift institution competitors
would remain in the market. Three of those remaining
competitors would each control more than 10 percent of
market deposits.
In addition, the Board has concluded that the activities
of two community credit unions in the market exert a
sufficient competitive influence to mitigate, in part, the
potential adverse competitive effects of the proposal. These
active credit unions control approximately $186.3 million
of deposits in the market, which, on a 50 percent weighted
basis, represents approximately 5.1 percent of market
deposits. After accounting for those credit union deposits,
Wells Fargo would control approximately 28.2 percent of
market deposits on consummation of the proposal, and the
HHI would increase 292 points to 1644.44
Oroville. In the Oroville banking market,45 Wells Fargo is
the sixth largest depository organization, controlling deposits of approximately $49.1 million, which represent approximately 7.3 percent of market deposits. Wachovia is the
largest depository organization in the market, controlling
deposits of approximately $144.9 million, which represent
approximately 21.6 percent of market deposits. On consummation of the proposal, Wells Fargo would become the
largest depository organization in the market. controlling
deposits of approximately $194 million. which represent
29 percent of market deposits. The HHI would increase 317
points to 1854.
42, With the deposits of these credit unions weighted at 50 percent,
Wells Fargo would be the fourth largest depository organization in the
market, with approximately 15,5 percent of market deposits, and
Wachovia would be the third largest depository organization in the
market. controlling approximately 16.8 percent of market deposits.
43, The Hemet banking market in California is defined as the
Hemet Ranally Metro Area.
44, With the deposits of these credit unions weighted at 50 percent.
Wells Fargo would he the sixth largest depository organization in the
market. with approximately 6.8 percent of market deposits, and
Wachovia would be the largest depository organization in the market,
controlling approximately 21.4 percent of market deposits,
45. The Oroville banking market in California is defined as the
southern portion of Butte County. excluding the city of Chico but
including the towns of Gridley and Oroville,
B46
Federal Reserve Bulletin 0 March 2009
Several factors indicate that the increase in concentration in the Oroville banking market, as measured by the
HHI and Wells Fargo's market share, overstates the potential competitive effects of the proposal in the market. After
consummation of the proposal, seven other commercial
banking competitors would remain in the market. The
Board notes that there are other competitors with a significant presence in the market. The second largest depository
organization in the market would control approximately
21.6 percent of market deposits, and two other bank
competitors each would control more than 10 percent of
market deposits.
The Board also has evaluated the competitive influence
of two active community credit unions in the market. These
credit unions control approximately $37.5 million of deposits in the market, which, on a 50 percent weighted basis,
represents approximately 2.7 percent of market deposits.
After accounting for these credit union deposits, Wells
Fargo on consummation of the proposal would control
approximately 28.2 percent of market deposits, and the
HHI would increase 300 points to 1759. 46
Placerville. In the Placerville banking market,47 Wells
Fargo is the third largest depository organization, controlling deposits of approximately $137.6 million, which represent approximately 15.7 percent of market deposits.
Wachovia is the largest depository organization in the
market, controlling deposits of approximately $220.3 million, which represent approximately 25.1 percent of market
deposits. On consummation of the proposal, Wells Fargo
would become the largest depository organization in the
market, controlling deposits of approximately $357.9 million, which represent approximately 40.7 percent of market
deposits. The HHI would increase 784 points to 2403.
Several factors indicate that the proposal would not have
a significantly adverse effect on competition in the Placerville banking market. After consummation of the proposal,
seven other commercial banking and thrift institution competitors would remain in the market. The Board notes that
there are other competitors with a significant presence in
the market, including two bank competitors that each
would control more than 12 percent of the market deposits.
The Board also has evaluated the competitive influence
of five active community credit unions in the market. These
credit unions control approximately $277.2 million of
deposits in the market, which, on a 50 percent weighted
46. With the deposits of these credit unions weighted at 50 percent,
Wells Fargo would be the sixth largest depository organization in the
market, with approximately 7.1 percent of market deposits, and
Wachovia would be the largest largest depository org'anization in the
market, controlling approximately 21.1 percent of market deposits.
47. The Placerville banking market in California is defined as
western EI Dorado County outside of the Sacramento banking market,
including the cities of Diamond Springs, Georgetown, Placerville, and
Pollock Pines.
basis, represents approximately 13.1 percent of market
deposits. After accounting for these credit union deposits,
Wells Fargo on consummation of the proposal would
control approximately 33,8 percent of market deposits, and
the HHI would increase 538 points to 1738,48
Santa Cruz, In the Santa Cruz banking market,49 Wells
Fargo is the second largest depository organization, controlling deposits of approximately $653.9 million, which represent approximately 19.1 percent of market deposits.
Wachovia is the largest depository organization in the
market, controlling deposits of approximately $912 million, which represent approximately 26.6 percent of market
deposits. To reduce the potential for adverse effects on
competition in the Santa Cruz banking market, Wells Fargo
has proposed to divest one of Wachovia's branches, with
deposits of $285.2 million, to an out-of-market depository
organization. On consummation of the proposal and after
accounting for the proposed divestiture, Wells Fargo would
become the largest depository organization in the market,
controlling deposits of approximately $1.28 billion, which
represent 37.4 percent of market deposits. The HHI would
increase 394 points to 2103.
Several factors indicate that the proposal would not have
significantly adverse competitive effects in the Santa Cruz
banking market. After consummation of the proposal, 12
other commercial banking competitors would remain in the
market. The Board notes that there are other competitors
with a significant presence in the market, including three
bank competitors that would each control more than 10 percent of the market.
The Board also has evaluated the competitive influence
of three active community credit unions in the market.
These credit unions control approximately $511 million of
deposits in the market, which, on a 50 percent weighted
basis, represents approximately 6.9 percent of market
deposits. After accounting for these credit union deposits
and for the branch divestiture, Wells Fargo on consummation of the proposal would control approximately 34.8 percent of market deposits, and the HHI would increase 341
points to 1855. 50
In addition, the record of recent entry into the Santa Cruz
banking market evidences the market's attractiveness for
48. With the deposits of these credit unions weighted at 50 percent,
Wells Fargo would be the third largest depository organization in the
market, with approximately J3 percent of market deposits, and
Wachovia would be the largest depository organization in the market,
controlling approximately 20.8 percent of market deposits.
49. The Santa Cruz banking market in California is defined as the
Santa Cruz Ranally Metro Area.
50. With the deposits of these credit unions weighted at 50 percent,
Wells Fargo would be the second largest depository organization in the
market, with approximately 17.8 percent of market deposits, and
Wachovia would be the largest depository organization in the market,
controlling approximately 24.8 percent of market deposits.
Legal Developments: Fourth Quarter, 2008
entry. The Board notes that two depository institutions have
entered the market de novo since 2004.
BANKING MARKET IN COLORADO
Grand Junction. In the Grand Junction banking market,51
Wells Fargo is the largest depository organization, controlling deposits of approximately $500.9 million, which represent approximately 23.7 percent of market deposits.
Wachovia operates the second largest depository organization in the market, controlling deposits of approximately
$291.8 million, which represent approximately 13.8 percent of market deposits. On consummation of the proposal,
Wells Fargo would remain the largest depository institution
in the market, controlling deposits of approximately
$792.7 million, which represent 37.5 percent of market
deposits. The HHI would increase 653 points to 1877.
Several factors indicate that the increase in concentration in the Grand Junction banking market, as measured by
the HHI and Wells Fargo's market share, overstates the
potential competitive effects of the proposal in the market.
After consummation of the proposal, 13 other commercial
bank competitors would remain in the market.
The Board also has evaluated the competitive influence
of two active community credit unions in the market. These
credit unions control approximately $83.6 million in deposits in the market, which, on a 50 percent weighted basis,
represents approximately 1.9 percent of market deposits.
After accounting for these credit union deposits, Wells
Fargo on consummation of proposal would control approximately 36.7 percent of market deposits, and the HHI would
increase 628 points to 1808. 52
In addition, the record of recent entry into the Grand
Junction banking market evidences the market's attractiveness for entry. The Board notes that two depository institutions have entered the market de novo since 2004. Other
factors indicate that the market remains attractive for entry.
From 2004 to 2007, the market's annualized population
growth exceeded the average annualized population growth
for metropolitan counties in Colorado.
D. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also has reviewed the proposal and has advised
the Board that it does not believe that the proposal would
likely have a significant adverse effect on competition in
any relevant banking market at this time. The appropriate
federal supervisory agencies have been afforded an opportunity to comment and have not objected to the proposal.
Accordingly, based on all the facts of record, the Board
has concluded that consummation of the proposal would
51. The Grand Junction banking market in Colorado is defined as
Mesa County.
52. With the deposits of these credit unions weighted at 50 percent,
Wells Fargo would be the largest depository organization in the
market, with approximately 23.2 percent of market deposits, and
Wachovia would be the second largest depository organization in the
market, controlling approximately 13.5 percent of market deposits.
B47
not have a significantly adverse effect on competition or on
the concentration of 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 banks involved in the proposal and
certain other supervisory factors. The Board also reviews
the financial and managerial resources of the organizations
involved in the proposal under section 4 of the BHC Act.
The Board has carefully considered these factors in light of
all the facts of record, including confidential supervisory
and examination information received from the relevant
federal and state supervisors of the organizations involved,
publicly reported and other financial information, information provided by Wells Fargo and Wachovia, and public
comments received on the proposal..';3
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 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 considers capital adequacy to be especially important. The
Board also evaluates the financial condition of the resulting
organization at consummation, including its capital position, asset quality, earnings prospects, and the impact of the
proposed funding of the transaction.
The Board has carefully considered the proposal under
the financial factors. 54 The proposed transaction is structured as a share exchange. The subsidiary depository
institutions of Wells Fargo and Wachovia are well capitalized and would remain so on consummation of this proposal. Wells Fargo is well capitalized and has announced
that it intends to raise additional capital. In light of its
capital-raising efforts, Wells Fargo would remain well
capitalized after consummation of this proposal. The Board
has also considered the other financial factors noted above
53. Citigroup contends that its acquisition of Wachovia ultimately
would be less costly 10 the federal government than an acquisition by
Wells Fargo. In addition, Citigroup claims that Wells Fargo's acquisition of Wachovia would discourage companies from future involvement in a proposal which, like Citigroup's proposed acquisition of
Wachovia, involves FDIC assistance. These comments were weighed
in the Board's consideration of the financial and managerial resources
of the companies involved in the transaction to the extent they relate to
those factors. See Western.
54. Citigroup asserted that Wells Fargo's financial condition could
be adversely affected if a recent IRS ruling that provided banks
accelerated tax relief on certain built-in loan losses is invalidated. In
analyzing the financial factors in this proposal, the Board has reviewed
carefully information regarding the impact of the ruling on Wells
Fargo's overall financial condition.
B48
Federal Reserve Bulletin 0 March 2009
in light of infonnation provided by Wells Fargo and
Wachovia and supervisory information available to the
Federal Reserve through its supervision of these companies
and from the primary supervisors of the depository institution subsidiaries of these companies. Based on its review of
the record, the Board finds that Wells Fargo has sufficient
resources to effect the proposal.
The Board also has considered the managerial resources
of the organizations involved in the proposed transaction.
The Board has reviewed the examination records of Wells
Fargo and Wachovia, their respective subsidiary depository
institutions, and other nonbanking companies involved in
the proposal. In addition, the Board has considered its
supervisory experience and that of other relevant supervisory agencies, including the Gee and the GTS, with the
organizations and their records of compliance with applicable banking law and anti-money-Iaundering laws.
The Board also has considered the future prospects of
the organizations involved in the proposal. As part of this
evaluation, the Board considered infonnation regarding
how Wells Fargo would manage the integration of Wachovia into Wells Fargo. 55 The Board also considered Wells
Fargo's extensive experience in acquiring bank holding
companies and successfully integrating them into its organization. Moreover, as noted above, the Board found that
expeditious approval of the proposal was warranted in light
of the weakened condition of Wachovia and the tunnoil in
the financial markets. The record indicates that Wells Fargo
has the financial and managerial resources to serve as a
source of strength to Wachovia and its subsidiary depository institutions.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and the future
prospects of the organizations involved in the proposal are
consistent with approval, as are the other supervisory
factors.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHe Act, the
Board 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 depository
institutions under the eRA. 56 The Board also must review
the records of perfonnance under the eRA of the relevant
insured depository institutions when acting on a notice
55. Citigroup also questioned, in light of the risk profile of Wachovia's assets and the absence of FD IC assistance to the transaction,
whether Wells Fargo possesses sufficient financial and managerial
resources. The Board has considered carefully this comment in light of
information received about Wachovia's asset portfolio from the relevant supervisors of Wachovia's subsidiary banks, other supervisory
infonnation, and infonnation received from Wells Fargo, including
information about due-diligence reviews performed by Wells Fargo
with respect to Wachovia's asset portfolio.
56, 12 U.S,c. §2901 et seq.; 12 U.S.c. § 1842(c)(2).
under section 4 of the BHe Act to acquire voting securities
of an insured savings associationY
The Board has carefully considered the convenience and
needs factor and the eRA perfonnance records of the
subsidiary depository institutions of Wells Fargo and
Wachovia. The Board has considered carefully all the facts
of record, including the evaluations of the eRA performance records of the subsidiary depository institutions of
Wells Fargo and Wachovia, data reported by Wells Fargo
and Wachovia under the Home Mortgage Disclosure Act
("HMDA"),58 other infonnation provided by Wells Fargo,
confidential supervisory information, and comments received on the proposal,5,!
As provided in the eRA, the Board evaluates the record
of perfonnance of an institution in light of examinations by
the appropriate federal supervisors of the eRA performance records of the relevant institutions. An institution's
most recent eRA 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 eRA by its
appropriate federal supervisor,60
Wells Fargo's lead subsidiary insured depository institution, Wells Fargo Bank, National Association, Sioux Falls,
South Dakota, received an "outstanding" rating at its most
recent eRA performance evaluation by the Gee, as of
September 30, 2004. Each of Wells Fargo's other subsidiary insured depository institutions received an "outstanding" or "satisfactory" rating at its most recent eRA
perfonnance evaluation. 51
Wachovia's lead subsidiary insured depository institution, Wachovia Bank, received an "outstanding" rating at
its most recent eRA perfonnance evaluation by the ace,
as of June 30, 2006, Wachovia's other subsidiary insured
depository institutions also received "outstanding" ratings
at their most recent eRA perfonnance evaluations. 62
The Board also considered the fair lending records of,
and the 2007 lending data reported under HMDA by, Wells
Fargo and Wachovia in light of comment received on the
proposal,63 Although the HMDA data might reflect certain
57. See. e,g" North Fork Bancorporation, Inc, 86 Federal Reserve
Bulletin 767 (2000).
58. 12 U.S,C §2801 etseq.
59. A commenter expressed concern about certain subprime lending activities of Wells Fargo.
60. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution'S CRA
record. See 64 Federal Register 23,641 (1999).
6 L Appendix D provides the most recent CRA ratings of those
institutions.
62. Wachovia Bank of Delaware, National Association, was last
evaluated hy the OCC as of June 30, 2006. Wachovia Bank, F.S.B.,
and Wachovia Mortgage, ES.B.. formerly known as World Savings
Bank, ES.B. (Texas) and World Savings Bank, ES.B., respectively,
were last evaluated by the OTS as of August 15,2005. Wachovia Card
Services, National Association, was established in January 2007, and
has not yet been evaluated for CRA performance.
63, A commenter also asserted that Wachovia made a disproportionately larger percentage of higher-cost loans to Hispanic borrowers than
to nonminority borrowers. In addition, the commenter referred to news
Legal Developments: Fourth Quarter, 2008
disparities in the rates of loan applications, originations,
denials, or pricing among members of different racial or
ethnic groups in certain local areas, the data provide an
insufficient basis by themselves on which to conclude
whether or not Wells Fargo or Wachovia has excluded or
imposed higher costs on any group on a prohibited basis.
The Board recognizes that HMDA data alone, even with
the recent addition of pricing information,64 provide only
limited information about the covered loans.65 HMDAdata,
therefore, provide an inadequate basis, absent other information, for concluding that an institution has engaged in
illegal lending discrimination.
Accordingly, the Board has taken into account other
information, including examination reports by the primary
federal supervisors of the organizations' subsidiary institutions that provide on-site evaluations of compliance with
fair lending laws by institutions, and has consulted with
those supervisors. The record, including confidential supervisory information, also indicates that Wells Fargo has
taken steps to ensure compliance with fair lending and
other consumer protection laws and regulations, by establishing corporate policies and procedures and implementing audits of compliance management oversight. In addition, Wells Fargo employees involved in the lending
process receive fair lending training, and Wells Fargo
maintains second-review procedures for home mortgage
lending.
Based on a review of the entire record, and for the
reasons discussed above, the Board has concluded 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.
PUBLIC BENEFITS
As noted above, Wells Fargo has filed a notice under
sections 4(c)(8) and 4(j) of the BHC Act for its proposed
indirect acquisitions of Wachovia Mortgage, ES.B. and
reports that the city of Baltimore filed litigation against Wells Fargo
asserting that certain subsidiaries of Wells Fargo had engaged in
predatory lending in predominantly African American areas of Baltimore. The litigation is before a court of competent jurisdiction, and the
Board and the OCC will continue to monitor its progress and to review
Wells Fargo's compliance with fair lending and other consumer
protection laws and regulations in future examinations.
64. Beginning January I, 2004, the HMDA data required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate (APR) exceeds the yield for
U.S. Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CFR 203.4).
65. 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. [n 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.
B49
Wachovia Bank, F.S.B. As part of its evaluation of the
public interest factors under section 4 of the BHC Act, the
Board has reviewed carefully the public benefits and
possible adverse effects of the proposaL The record indicates that consummation of the proposal would benefit
consumers currently served by Wachovia's subsidiary savings associations by providing them access to additional
banking and non banking products and services of Wells
Fargo. As noted, the proposal would also strengthen
Wachovia and all its subsidiary depository institutions.
For the reasons discussed above, and based on the entire
record, 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
significantly adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of
interests, or unsound banking practices. Moreover, 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 the standard of
section 4(j)(2) of the BHC Act is consistent with approvaL
As noted. Wells Fargo also has provided notice under
sections 25 and 25A of the FRA and the Board's Regulation K to acquire the agreement corporation and Edge Act
subsidiaries and the foreign operations of Wachovia. The
Board concludes that all factors required to be considered
under the FRA and the Board's Regulation K are consistent
with approval.
CONCLUSION
Based on the foregoing, the Board determined in its order
of October 12 that the application and notices should be
approved. 66 In reaching its conclusion, the Board considered all the facts of record in light of the factors that the
66. A commenter requested that the Board hold a public 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. The Board's regulations provide for a hearing on a notice
filed under section 4 of the BHC Act if there are disputed issues of
material fact that cannot be resolved in some other manner (12 CFR
225.25(a)(2)). 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
225.16(e), 262.25(d». The Board has considered carefully the commenter's requests in light of all the facts of record. The commenter's
request fails to demonstrate why its written comments do not present
its views adequately or why a meeting or hearing otherwise would be
necessary or appropriate. In addition, in light of the unusual and
exigent circumstances affecting the financial markets, the weakened
financial condition of Wachovia, and all other facts and circumstances,
the Board waived public notice of this proposal. For these reasons, and
based on a11lhe facts of record, the Board has determined that a public
meeting or hearing was not required or warranted in this case, and the
request for a public meeting or hearing on the proposal is accordingly
denied.
B50
Federal Reserve Bulletin D March 2009
Board is required to consider under the BHC Act. As noted
in the Board's order, the Board's approval is specifically
conditioned on compliance by Wells Fargo with all the
commitments made to the Board in connection with the
application and notices, including the commitments and
conditions discussed in this order. The Board's approval of
the nonbanking aspects of the proposal also is subject to all
the conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c),67 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 BHC Act and the
Board's regulations and orders issued thereunder. 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.
OcTOBER 2 I, 2008
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
67. 12 eFR 225.7 and 225.25(c).
Appendix A
COMPUTATION OF THE AMOUNT OF DEPOSITS HELD BY INSTITUTIONS USING THE REVISED
CALL REPORT AND THRIFT FINANCIAL REPORT FORMS
Insured Banks without Foreign Deposits
The amount of deposits held by insured banks without
foreign deposits using the revised Call Report was computed by adding the "Total deposit liabilities before exclusions (gross) as defined in Section 3(1) of the FDI Act and
FDIC regulations," reported on Schedule RC-O, and the
"Interest accrued and unpaid on deposits in domestic
offices," reported on Schedule RC-G.
Insured Banks with Foreign Deposits
The amount of deposits held by insured banks with foreign
deposits using the revised Call Report was computed by
subtracting "Total foreign deposits" from the "Total
deposit liabilities before exclusions (gross) as defined in
Section 3(1) of the FDI Act and FDIC regulations,"
reported on Schedule RC-O, and adding the "Interest
accrued and unpaid on deposits in domestic offices,"
reported on Schedule RC-G.
Insured Savings Associations
The amount of deposits held by insured savings associations using the revised Thrift Financial Report was computed by subtracting "Total foreign deposits" from the
"Total deposit liabilities before exclusions (gross) as defined in Section 3(1) of the FDI Act and FDIC regulations," reported on Schedule DI, and adding the "Accrued Interest Payable-Deposits," reported on Schedule
SC.
Appendix B
W2':LLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
DO] GUIDELINES WITHOUT DIVESTITURES
Market
Increase in
HHI
Pro Forma
HHI
Pro Forma
market share
164
395
261
1,874
1,708
1,767
23.9
28.7
26.5
2
344
185
265
183
107
275
493
1,702
1,322
1,607
1,732
957
1,215
1,593
26.2
20.1
23.7
27.1
16.3
23.5
31.7
I
2
1
1
Pro Forma
rank
ARIZONA BANKING MARKETS
Phoenix .......................................... ..
Prescott ........................................... .
Tucson ........................................... ..
CALIFORNIA BANKING MARKETS
Chico .............................................. .
Fresno ............................................ ..
Hesperia-Apple Valley-Victorville ........ .
Lake County ................................... ..
Los Angeles .................................... ..
Modesto .......................................... .
Napa .............................................. .
2
1
1
Legal Developments: Fourth Quarter. 2008
B5l
Appendix B-Continued
WELLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
DOl GUIDELINES WITHOUT DIVESTITURES-Continued
Market
Increase in
HHI
Pro Forma
HHI
Pro Forma
market share
Oxnard-Thousand Oaks-Ventura ........... .
Palm Springs-Cathedral City ............... .
Riverside-San Bernardino ................... .
Sacramento ...................................... .
Salinas ............................................ .
San Diego ........................................ .
San Francisco-Oakland-San Jose .......... .
Santa Barbara ................................... .
Santa Maria ..................................... .
Santa Rosa ....................................... .
Stockton .......................................... .
Temecula ......................................... .
361
219
70
414
239
198
236
149
264
179
209
307
1,607
1,148
1.541
1,550
1,722
1,265
1,681
1,672
1,702
1,168
1,229
1,538
27.2
I
21.1
1
15
30.8
22.3
22.8
28.3
17.4
24.5
19.7
21.2
25.3
2
388
324
88
571
46
1,193
1,185
1,428
1,797
1,959
29.2
28
15.2
34.1
12.6
2
1
2
o
775
0.6
25
16
69
3,547
2,697
5.6
17.4
3
60
157
234
19
2,725
1,152
1,701
1,591
5,894
1,806
2,243
12.9
20.5
23.9
6.4
4.5
14.3
8.3
2
1
2
4
Pro Forma
rank
1
2
1
I
2
2
I
I
1
COLORADO BANKING MARKETS
Colorado Springs ............................... .
Denver-Boulder ................................ .
Fort Collins-Loveland ........................ .
Pueblo ............................................ .
Weld County .................................... .
1
1
ILLINOIS BANKING MARKET
Chicago ........................................... .
NEVADA BANKING MARKETS
Las Vegas ........................................ .
Reno .............................................. .
2
TEXAS BANKING MARKETS
Amarillo .......................................... .
Austin ............................................. .
Beaumont-Port Arthur ....................... ..
Dallas ............................................. .
Fort Worth ....................................... .
Houston .......................................... .
San Antonio ..................................... .
6
100
28
NOTE: Data are as of June 30, 2007. adjusted to reflect merger and acquisitions through October 3. 2008. All rankings, market deposit shares, and HHls
are based on thrift institution deposits weighted at 50 percent. except for the
savings association deposits of Wachovia. which are weighted at 100 percent
both before and after consummation of the proposal. These savings associa·
tions are, and on consummation will continue to be. controlled by a bank holdcompany.
purposes of this appendix. the definitions of the banking markets in Arizona, California. and Nevada may be found on the website of the Federal
3
2
4
Reserve Bank of San Francisco, www.frbsf.orglpublicationslbanking/marketf
marketdef.pdf: in Colorado on tbe website of the Federal Reserve Bank of
Kansas City. www.kansascityfed.orglhomelsubwebnav.cfm?level=3&theID=
9638&SubWeb=2: and in Texas on the website for the Federal Reserve Bank
of Dallas. dallasfed.orglbanking/apPs/mkdef.html.
The Chicago. Illinois banking market is defined as Cook. Du Page. and Lake
counties in Illinois.
B52
Federal Reserve Bulletin 0 March 2009
Appendix C
l¥ELLS FARGO AND WACHOVIA BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
DOl GUIDELINES AFTER DIVESTITURES
Change in
HHI
Pro Forma
HHI
Pro Forma
market share
Pro Forma
rank
CALIFORNIA BANKING MARKETS
Davis ...............................................
Grass Valley ......................................
Monterey-Seaside-Marina ....................
Sonora ...................... " ......................
0
0
147
-222
1,852
1,558
1,595
1,685
18.3
13.9
26.6
30.9
3
5
I
I
COLORADO BANKING MARKET
Fremont County .................................
0
1,726
15.3
4
Market
--~
..
--~
...
KOTE: Data are as of June 30. 2007. adjusted to reflect merger and acquisitions through October 3. 2008. All rankings. market deposit shares. and HHls
are based on thrift institution deposits weighted at 50 percent, except for the
savings association deposits of Wachovia, which are weighted at 100 percent
both before and after consummation of the proposal. These savings associa·
tions are. and on consummation will continue to be. controlled by a bank hold·
ing company.
For purposes of this appendix, the definitions of the banking markets in
California may be found on the website of the Federal Reserve Bank of San
Francisco. www.frbstorg/publicationsibanking/marketlmarketdef.pdf.
The Fremont County. Colorado banking market is defined as Fremont
County.
Appendix D
MOST RECENT CRA RATINGS OF l¥ELLS FARGO's SUBSIDIARIES
Subsidiary bank
Wells Fargo Bank Northwest,
National Association,
Ogden, Utah ..................................... ..
Wells Fargo HSBC Trade Bank,
National Association,
San Francisco, California .................... ..
Wells Fargo Financial National Bank,
Las Vegas, Nevada ............................ ..
Wells Fargo Financial Bank,
Sioux Falls, South Dakota .................... .
Shoshone First Bank,
Cody, Wyoming ................................. .
Sheridan State Bank,
Sheridan, Wyoming ............................ .
First State Bank of Pinedale,
Pinedale, Wyoming ............................ ..
Jackson State Bank and Trust,
Jackson, Wyoming ............................. ..
CRA rating
Date
- - -....
....- - -..
Supervisor
~
..
~
...
--~
Satisfactory
December 2005
OCC
Outstanding
June 2006
OCC
Outstanding
June 2006
OCC
Outstanding
March 2005
FDIC
Outstanding
February 2003
FRB
Satisfactory
February 2008
FRB
Satisfactory
August 2007
FRB
Satisfactory
July 2006
FRB
..
-~
Legal Developments: Fourth Quarter, 2008
ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT
Banco Espfrito Santo de Investimento, S.A.
Lisbon, Portugal
Order Approving Establishment of a Branch
Banco Espfrito Santo de Investimento, S.A. ("Bank"),
Lisbon, Portugal, a foreign bank within the meaning of the
International Banking Act ("IBA"), has applied under
section 7(d) of the IBAI 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 (The
New York Post, October 18, 2007). The time for filing
comments has expired, and the Board has considered all
comments received.
Bank is a wholly owned subsidiary of Banco Espfrito
Santo, S.A. eBES"), also in Lisbon, and an indirect
subsidiary of Credit Agricole SA ("Credit Agricole"),
Paris, France. Bank provides investment banking and advisory services, including project finance, corporate restructuring, securities trading and brokerage, and securities
underwriting and distribution. Outside Portugal, Bank operates branches in Spain and the United Kingdom, subsidiaries in Brazil and Ireland, and a joint venture in Poland.
Bank would be a qualifying foreign banking organization
under Regulation K.2
BES, with consolidated assets of $115 billion,) is the
third largest banking group in Portugal and provides banking services to retail and corporate customers through more
than 700 branches in Portugal. In the United States, BES
operates a branch in New York City and controls Espirito
Santo Bank, Miami, Florida. Credit Agricole provides a
wide range of banking and financial services to retail and
corporate customers around the world and is the largest
banking group in France, with assets of approximately
$2.3 trillion.
The proposed branch would facilitate transactions in the
United States, Canada, and Latin America for Bank's
clients by offering advisory and other services for project
finance, leveraged financing, and structured commodity
finance and by providing asset and derivatives trading.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a branch, the
Board must consider whether the foreign bank (I) engages
directly in the business of banking outside of the United
States; (2) has furnished to the Board the information it
I. 12 U,S.c. §3105(d),
2. 12 CFR 21 1.23(a) ,
3. Asset and ranking data are as of June 30, 2008.
B53
needs to assess the application adequately; and (3) is
subject to comprehensive supervision on a consolidated
basis by its home-country supervisors.4 The Board also
considers additional standards as set forth in the IBA and
Regulation K,5
As noted above, Bank, BES, and Credit Agricole all
engage 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.
With respect to supervision by home-country authorities
in connection with applications involving other banks in
Portugal, including BES, the Federal Reserve previously
has determined that those banks were subject to comprehensive supervision on a consolidated basis by their homecountry supervisor, Banco de PortugaL6 Bank is, and BES
remains, supervised by Banco de Portugal on substantially
the same terms and conditions. The Federal Reserve also
has previously determined that Credit Agricole is subject to
comprehensive supervision on a consolidated basis by its
home-country supervisor, the Commission Bancaire. 7 Credit
Agricole also remains supervised by the Commission
Bancaire on substantially the same terms and conditions.
Based on all the facts of record, it has been determined that
Bank, BES, and Credit Agricole are each subject to comprehensive supervision on a consolidated basis by their
respective home-country supervisors.
The additional standards set forth in section 7 of the IBA
and Regulation K have also been taken into account. K
4, 12 U.S,c, §§310S(d)(2); 12 CFR 211.24. In a5sessing 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 informa,
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.
S, 12 U.S.C. §§3105(d)(3)-(4); 12 CFR 211.24(c)(2)-(3).
6. See Banco Santander lima. SA.. 93 Federa/ Reserve Bulletin
C71 (2007); Caixa Ecotll}mica Montepio Gem/, 86 Federal Reserve
Bulletin 700 (2000): Banco Comercial Portu{?,ues. S.A., 86 Federal
Reserve Bulletin 6 I3 (2000); Banco Esp{rito Santo, SA, et al,.
86 Federal Reserve Bulletin 418 (2000).
7. See Federation Nationale du Credit Agrico/e, 92 Federal
Reserve Bulletin C 159 (2006),
8, The additional standards set forth in section 7 of the IBA and
Regulation K include the following (I) whether the bank's homecountry supervisor has consented to the establishment of the bmnch;
the financial and managerial resources of the bank; (2) whether the
appropriate supervisors in the home country may share information on
the bank's operations with the Board: (3) whether the bank and its
home country have adopted and implemented policies and procedures
to address and combat money laundering; and (4) 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.
B54
Federal Reserve Bulletin D March 2009
Banco de Portugal has no objection to the establishment of
the proposed branch.
Portugal's risk-based capital standards are consistent
with those established by the Basel Capital Accord ("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 and for its operations in general.
Portugal is a member of the Financial Action Task Force
("FATF") and subscribes to its recommendations on measures to combat money laundering. In accordance with
these recommendations, Portugal has enacted laws and
developed regulatory standards to deter money laundering.
Money laundering is a criminal offense in Portugal, and
Portuguese financial institutions are required to establish
internal policies, procedures, and systems for the detection
and prevention of money laundering and terrorist financing
throughout their worldwide operations. Bank has policies
and procedures to comply with these laws and regulations
that are monitored by governmental entities responsible for
anti-money-Iaundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
government authorities have been contacted regarding
access to information. Bank and its parent companies have
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, 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 and its parent companies have
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 addition,
subject to certain conditions, Banco de Portugal may share
information on Bank's operations with other supervisors,
including the Board. In light of these commitments and
other facts of record, and subject to the conditions described
below, it has been determined that Bank has provided
adequate assurances of access to any necessary information
that the Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish a branch in New York,
New York, is hereby approvedY 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
9. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel.
pursuant to authority delegated by the Board.
federal statutes, the Board may require termination of any
of Bank's direct or indirect activities in the United States.
Approval of this application also is specifically conditioned
on compliance by Bank with the commitments made in
connection with this application and with the conditions in
this order. 10 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 12 U.S.c. § 1818 and other applicable law.
By order, approved pursuant to authority delegated by
the Board, effective November 5, 2008.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
China Construction Bank Corporation
Beijing, People's Republic of China
Order Approving Establishment of a Branch
China Construction Bank Corporation ("CCB"), Beijing,
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 IBAI 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 (The
New York Post, March 12, 2008). The time for filing
comments has expired, and the Board has considered all
comments received.
CCB, with total assets of approximately $1.1 trillion, is
the second largest bank in China. 2 The government of
China owns approximately 57.0 percent of CCB's shares.'
10. The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the state of
New York to license branches of a 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
("Department"). to license the proposed branch of Bank in accordance with any terms or conditions that the Department may impose.
I. 12 U.S.c. § 3 \05(d).
2. Asset and ranking data are as of September 30, 2008.
3. Central SAFE Investments Limited (also known as "Huijin")
directly and indirectly owns approximately 57.0 percent of CCB's
shares. Huijin is currently owned directly by the government of China
and was formed to assist in the restructuring of major Chinese banks.
The government transferred shares of several Chinese banks. including CCB. to Huijin at the time of the recapitalization and restructuring
of these banks between 2004 and 2006. Huijin also owns a majority
interest in Bank of China Limited. which operates three branches in
the United States. and. together with the Chinese Ministry of Finance.
it owns a majority interest in Industrial and Commercial Bank of
China Limited ("ICBC"). which operates a branch in New York. The
government of China intends to transfer the ownership of Huijin to
Legal Developments: Fourth Quarter, 2008
Bank of America Corporation4 and Temasek Holdings, a
sovereign wealth fund owned by the government of Singapore, own 19.1 and 5.7 percent, respectively, of the
shares of CCB. No other shareholder owns more than
5 percent of CCB's shares. 5
CCB engages primarily in corporate and retail banking
and treasury operations throughout China, including Hong
Kong and Macau. Outside China, CCB operates branches
in Singapore, Japan, South Africa, Korea, and Germany
and representative offices in the United Kingdom and
Australia. In the United States, CCB operates a representative office in New York. 6 CCB would meet the requirements for a qualifying foreign banking organization under
Regulation K.7
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 (l) 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.H The Board also
China Investment Corporation (,'CIC"), an investment fund that is
also wholly owned by the government of China. Both CIC and Huijin
are non-operating companies that hold investments on behalf of the
government of China. Neither CIC nor Huijin engages directly in
commercial or financial activities.
Under the IBA. any company that owns a foreign bank with a
branch in the United States is subject to the Bank Holding Company
Act (HBHC Act") as if it were a bank holding company. As a result of
the ownership by Huijin of Bank of China Limited and ICBC, Huijin is
subject to the BHC Act. On the transfer of Huijin to CIC. CIC would
also become subject to the BHC Act.
The Board has provided certain exemptions to CIC and Huijin
under section 4(c)(9) of the SHC Act (\ 2 U.S.C. § 1843(c)(9». which
authorizes the Board to grant exemptions to foreign companies from
the nonbanking restrictions of the BHC Act where the exemptions
would not be substantially at variance with the purposes of the act and
would be in the public interest. The exemptions provided to CIC and
Huijin would not extend to CCB or any other Chinese banking
subsidiary of CIC or Huijin that operates a branch or agency in the
United Stales. See Board letter to H. Rodgin Cohen. dated August 5,
2008.
4. Under the Board's Regulation K, Bank of America Corporation
is required to seek the Board's approval to retain its investment in
CCB once CCB establishes a branch in the United States.
5. HKSCC Nominees Limited holds 10.8 percent of the shares of
CCB as the registered nominee of several shareholders that each owns
less than 5 percent of the shares of CCB.
6. CCB represents that the New York representative office would be
closed when the branch is established.
7. 12 CFR 211.23(a).
8. 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 informa-
B55
considers additional standards as set forth in the IBA and
Regulation K.9
The IBA includes a limited exception to the general
standard relating to comprehensive, consolidated supervision. to 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. ll 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,12 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. 13 This is
the standard applied by the Board in this case.
As noted above, CCB engages directly in the business of
banking outside the United States. CCB 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 CCB's home-country supervisory authority is
actively working to establish arrangements for the consolidated supervision of the bank and that considerations
relating to the steps taken by CCB 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
of CCB, including its foreign subsidiaries and affiliates, for
all matters other than laws with respect to anti-money
laundering, 14 The CBRC has the authority to license banks,
regulate their activities and approve expansion, both domestically and abroad. It supervises and regulates CCB, including its subsidiaries and foreign operations, through a comtion 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.
9. 12 U.S.c. §3105(d)(3)-(4); 12CFR 211.24(c)(2)-(3).
10. 12 U.S,c. §3105(d)(6).
II. 12 U.S.c. § 3105(d)(6)(A).
12. 12 U.s.c. §3105(d)(6)(B).
13. Id.
14. Before April 2003, the People's Bank of China (UPBOC")
acted as both China's central bank and primary banking supervisor,
including anti-money-Iaundering 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 antimoney -laundering matters.
B56
Federal Reserve Bulletin D March 2009
bination 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 operation: corporate governance
and senior management responsibilities; capital adequacy;
asset structure and asset quality (including the 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 CBRC.
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, risk management, corporate governance, affiliate
transactions, and internal controls.
CCB 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 CCB' s financial statements, asset
quality, and internal controls. The CBRC may order a
special audit at any time. In addition, in connection with its
listings on the Shanghai and Hong Kong stock exchanges,
CCB is required to have external audits conducted under
both International Financial Reporting Standards and generally accepted accounting practices under Chinese law.
CCB is required to publish its financial statements annually. CCB conducts internal audits of its offices and operations, including its overseas operations, generally based on
an annual schedule. The internal audit results are shared
with the CBRC, the PBOC, and the external auditors of
CCB. 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 the power to apply
administrative penalties, including warnings, fines, and
removal from office, for violations of applicable laws and
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 1, 2007,
and the LVT/STR Rules became effective on March I,
2007. Together, the law and related rules establish a
regulatory infrastructure to assist China's anti-moneylaundering e1fort.
An Anti-Money Laundering Bureau ("AML Bureau")
was established within the PBOC in 2003. 15 The AML
Bureau coordinates anti-money-laundering efforts at the
PBOC and among other agencies. The AML Bureau also
supervised the creation of the China Anti-Money Laundering Monitoring and Analysis Center (HAML Center") in
September 2004. 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
(H}'ATF")16 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-laundering matters. Like the CBRC, the PBOC
supervises and regulates CCB through a combination of
on-site examinations and off-site monitoring. On-site examinations focus on CCB's compliance with anti-moneylaundering laws and rules, including the AML Law, AML
Rules, 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.
CCB has policies and procedures to comply with Chinese laws and rules regarding anti-money laundering. CCB
represents that it has taken additional steps on its own
initiative to combat money laundering and other illegal
activities. CCB states that it has implemented measures
consistent with the recommendations of the FATF and that
it has put in place policies, procedures, and controls to
ensure ongoing compliance with all statutory and regulatory requirements, including designating anti-moneylaundering compliance personnel and conducting routine
employee training at all CCB branches. CCB's compliance
with anti-money-Iaundering requirements is monitored by
the PBOC and by CCB's internal and external auditors.
The Board also has taken into account the additional
standards set forth in section 7 of the IBA and Regula15. 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.
16. China became a member of FATF in June 2007.
Legal Developments: Fourth Quarter, 2008
tion KY The CBRC has no objection to CCB'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").
CCB'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
CCB are consistent with approval, and CCB appears to
have the experience and capacity to support the proposed
branch. In addition, CCB has established controls and
procedures for the proposed branch to ensure compliance
with U.S. law. In particular, CCB 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 CCB's
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which CCB operates
and has communicated with relevant government authorities regarding access to information. CCB has committed to
make available to the Board such information on its
operations and any of its affiliates that the Board deems
necessary to determine and enforce compliance with the
IBA, the 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, CCB 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
conditions described below, the Board has determined that
CCB 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 CCB, as well as the terms and
conditions set forth in this order, CCB's application to
establish a branch is hereby approved. Should any restrictions on access to information on the operations or activities of CCB and its affiliates subsequently interfere with the
Board's ability to obtain information to determine and
enforce compliance by CCB or its affiliates with applicable
federal statutes, the Board may require termination of any
of CCB's direct or indirect activities in the United States.
Approval of this application also is specifically conditioned
on compliance by CCB with the commitments made in
17. See 12 U.S.c. §3105(d)(3)-(4); 12 CFR 21L24(c)(2J. The
additional standards set forth in section 7 of the IBA and Regulation K
include the following (I ) whether the bank's home-country supervisor
has consented to the establishment of the office; the financial and
managerial resources of the bank; (2) whether the appropriate supervisors in the home country may share information on the bank's
opemtions with the Board; and (3) whether the bank and its U.S.
affiliates are in compliance with U.S. law; the needs of the community;
the bank's record of operation.
B57
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 Board in
connection with this decision and may be enforced in
proceedings under 12 U.s.c. § 1818 against CCB and its
affiliates.
By order of the Board of Governors, effective December 8, 2008.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
Corpbanca
Santiago, Chile
Order Approving Establishment of a Branch
Corpbanca ("Bank"), Santiago, Chile, a foreign bank
within the meaning of the International Banking Act
("IBA"), has applied under section 7(d) of the IBAI 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
(New York Post, July ll, 2(07). The time for filing comments has expired, and all comments received have been
considered.
Bank, with total consolidated assets of approximately
$9.7 billion, is the fifth largest bank in Chile. 2 Corp Group
Banking S.A, Santiago, owns approximately 49.6 percent
of Bank's shares. 3 Two other entities, Compana Inmobiliaria y de Inversiones Saga S.A. ("Saga") and Inversiones
Mineras del Cantabrico S.A., directly own approximately
9.2 percent and 6.6 percent of Bank's shares, respectively.
18. The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the state of
New York 10 license offices of a foreign bank. The Board's approval of
this application does not supplant the authority of the stale of
New York or its agent, the New York State Banking Department
("Department"), to license the proposed office of CCB in accordance
with any terms or conditions that the Department may impose.
L 12 U.S.c. §3105(d).
2. Asset and ranking data are as of June 30. 2008.
3. Silver Star Securities Ltd. (HSilverstar"), Tortola, British Virgin
Islands, indirectly controls all the shares of Corp Group Banking S.A.
through two levels of intermediate holding companies. Mr. Alvaro
Saieh Bendeck, a citizen of Chile, and his family indirectly own all the
shares of Silverstar. Mr. Saieh Bendeck, his wife, and their fi ve
children each hold their Silverstar shares through a personal holding
company (collectively, "Personal Holding Companies").
B58
Federal Reserve Bulletin 0 March 2009
The remaining shares of Bank are held by the pUblic. No
other shareholder owns more than 5 percent of Bank's
shares.
Bank provides a variety of banking services to retail and
corporate customers. Bank's subsidiaries engage in insurance brokerage, securities brokerage, mutual fund management, financial advisory services, and legal advisory services. Bank, Silverstar, and the Personal Holding Companies
would be qualifying foreign banking organizations under
Regulation K.4
The proposed New York branch would be Bank's only
office outside Chile. It would engage in a wholesale
banking business, with a focus on trade finance, lending,
and banking services for high-net-worth individuals.
Under the IBA and Regulation K, in acting on an
application by a foreign bank to establish a branch, the
Board must consider whether the foreign bank (1) engages
directly in the business of banking outside of 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 supervisor. 5 The Board also
considers additional standards set forth in the IBA and
Regulation K.6 As noted above, 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.
With respect to supervision by home-country authorities,
the Board previously has determined, in connection with
applications involving other banks in Chile, that those
banks were subject to comprehensive supervision on a
consolidated basis by the Superintendencia de Bancos e
Instituciones Financieras ("SBIF"), Bank's primary homecountry supervisor.7 Bank is supervised by the SBIF on
substantially the same terms and conditions as those other
banks. Based on all the facts of record, it has been
4.12CFR211.23(a).
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 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.
6. 12 U.S.c. §3105(d)(3}-(4); 12 CFR 211.24(c)(2)--(3).
7. See Banco del Estado de Chile, 91 Federal Reserve Bullelin 442
(2005); Banco de Chile, 90 Federal Reserve Bulletin 550 (2004); and
Banco de Credito e Inversiones SA, 85 Federal Reserve Bulletin 446
(1999). See also, Banco de Chile, 80 Federal Reserve Bullet!1! 179
(1994).
determined that Bank is subject to comprehensive supervision on a consolidated basis by its home-country supervisor.8
The additional standards set forth in section 7 of the IBA
and Regulation K also have been taken into account.9 The
SBIF has no objection to the establishment of the proposed
branch.
Chile'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 Basel Capital 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, as well as controls and procedures for
its worldwide operations generally.
Chile is a member of GAFISUD (Financial Action Task
Force of South America), which is an associate member of
the Financial Action Task Force. Chile has enacted laws
and created legislative and regulatory standards to deter
money laundering. Money laundering is a criminal offense
in Chile, and financial institutions are required to establish
internal policies, procedures, and systems for the detection
and prevention of money laundering throughout their
worldwide operations. Bank has policies and procedures to
comply with these laws and regulations. Bank's compliance with applicable laws and regulations is monitored by
the SBIF and Bank's internal and external auditors.
With respect to access to information about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and
relevant government authorities have been communicated
with regarding access to information. Bank, Silverstar, and
the Personal Holding Companies have committed to make
available to the Board such information on the operations
of Bank and any of its affiliates that the Board deems
8. In reaching this conclusion, the oversight of Bank's parent
holding companies ha~ been considered. Bank's parent holding companies are required to provide financial and other relevant information
to the SBIF on a regular basis. The SBIF has authority to limit
transactions by Bank with its affiliates and can exercise direct supervision over all the subsidiaries of Bank. In addition, the Chilean General
Banking Law and the Chilean Corporations Law contain restrictions
on transactions with related parties. All the companies controlled by
Mr. Saieh Bendeck are considered to be related parties of Bank.
9. See 12 U.S.c. § 3105(d)(3H4); 12 CFR 211.24(c)(2)-(3). These
standards include (I) whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; (2) whether the bank has procedures to
combat money laundering. whether there is a legal regime in place in
the home country to address money laundering. and whether the home
country is participating in multilateral efforts to combat money
laundering; (3) whether the appropriate supervisors in the home
country may share information on the bank's operations with the
Board; and (4) 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.
Legal Developments: Fourth Quarter, 2008
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, Bank, Silverstar, and the Personal Holding
Companies have 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 addition, subject to certain conditions, the SBIF
may share information on Bank's operations with other
supervisors, including the Board. In light of these commitments and other facts of record, and subject to the condition
described below, it has been determined that Bank has
provided adequate assurances of access to any necessary
information that the Board may request.
Based on the foregoing and all the facts of record,
Bank's application to establish the proposed branch is
hereby approved.1O 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, Silverstar, and the
Personal Holding Companies with the commitments made
to the Board in connection with this application and with
the conditions in this order. I I These commitments and
conditions are deemed to be conditions imposed in writing
by the Board in connection with this decision and, as such,
may be enforced in proceedings under applicable law
against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective October 22, 2008.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
10, Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,
pursuantto authority delegated by the Board. See 12 CFR 265,7(d)(12),
II. The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the OCC to
license offices of a foreign bank. The Board's approval of this
application does not supplant the authority of the OCC to license the
proposed office of Bank in accordance with any terms or conditions
that it may impose,
B59
Monte de Piedad y Caja de Ahorros San
Fernando de Huelva, Jerez y Sevilla
Seville, Spain
Order Approving Establishment of a
Representative Office
Monte de Piedad y Caja de Ahorros San Fernando de
Huelva, Jerez y Sevilla ("Bank"), Seville, Spain, a foreign
bank within the meaning of the International Banking Act
("IBN'), has applied under section lO(a) of the IBAI to
establish a representative office in Miami, Florida. The
Foreign Bank Supervision Enhancement Act of 199 J,
which amended the IBA, provides that a foreign bank must
obtain the approval of the Board to establish a representative office 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 Miami (Miami Herald. July 25,
2008). The time for filing comments has expired, and all
comments received have been considered.
Bank, a savings bank with total consolidated assets of
approximately $43.6 billion,2 is the 15th largest bank in
Spain. 3 Bank provides retail banking services through its
branch network in Spain and provides corporate banking
services to Spanish and foreign corporations. Bank also
provides investment services primarily to its retail banking
customers and distributes insurance products. Bank currently does not have any offices outside Spain. The proposed representative office would promote and market
Bank's products and services, provide support to Spanish
companies with respect to their U.S. activities, identify
investment projects that could be financed from Spain, and
perform other typical representative office runctions:~
I. 12 U.S.c. §3107(a).
2, Asset data are as of June 30, 2008,
3. Bank has no shareholders. Bank's operations are controlled and
governed by a general assembly and a board of directors. The
membership of the 320-member general assembly includes representatives of the municipalities in which Bank operates (approximately
22 percent); Bank's depoSitors (approximately 27 percent); representatives designated by the regional parliament of the Autonomous
Community of Andalusia (15 percent); and Bank's employees (15 percent), Bank's board of directors is composed of 40 members, proportionally representing the entities constituting the general assembly,
4, A representative office may engage in representational and
administrative functions in connection with the banking activities of
the foreign bank, including soliciting new business for the foreign
bank; conducting research; acting as a liaison between the foreign
bank's head office and customers in the United States; performing
preliminary and servicing steps in connection with lending; and
B60
Federal Reserve Bulletin 0 March 2009
In acting on an application under the IRA and Regulation K by a foreign bank to establish a representative office,
the Board shall take into account whether the foreign bank
engages directly in the business of banking outside the
United States and has furnished to the Board the information it needs to assess the application adequately.s The
Board shall also take into account whether the foreign bank
is subject to comprehensive supervision on a consolidated
basis by its home-country supervisor.6 The Board also
considers additional standards set forth in the IRA and
Regulation K.7
As noted above, 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.
With respect to supervision by home-country authorities,
the Board previously has determined, in connection with
applications involving other banks in Spain, that those
banks were subject to comprehensive supervision on a
consolidated basis by their home-country supervisor, the
Bank of Spain. H Bank is supervised by the Bank of Spain
on substantially the same terms and conditions as those
other banks. Based on all the facts of record. it has been
determined that Bank is subject to comprehensive supervision on a consolidated basis by its home-country supervisor.
The additional standards set forth in section 7 of the IRA
and Regulation K also have been taken into account. Y With
performing back-office functions. A representative office may not
contract for any deposit or deposit-like liability, lend money, or engage
in any other banking activity (12 CFR 211.24(d)(\)).
5. 12 U.S.c. § 3107(a)(2).
6. [d.: 12 CFR 211.24(d)(2). In assessing this standard, the Board
considers. among other factors, 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 exposure on a
worldwide basis. These are indicia of comprehensive, consolidated
supervision. No single factor is essential, and other elements may
inform the Board's determination.
7. See 12 U.S.C. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). These
standards include (I) whether the hank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; (2) whether the bank has procedures to
combat money laundering, whether there is a legal regime in place in
the home country to address money laundering, and whether the home
country is participating in multilateral efforts to combat money
laundering; (3) whether the appropriate supervisors in the home
country may share information on the bank's operations with the
Board; and (4) 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.
8. See Caja de Ahorros del Mediterrdneo, 92 Federal Reserve
Bulletin C133 (2006); Caja de AllOrros de Galicia, Caixa Galicia.
92 Federal Reserve Bulletin CI32 (2006): Banco Popular Espaiiol
SA, 92 Federal Reserve Bulletin CI30 (2006).
9. See supra note 7.
respect to the financial and managerial resources of Bank,
taking into consideration its record of operations in its
home country, its overall financial resources, and its standing with its home-country supervisor, financial and managerial factors are considered consistent with approval.
Bank appears to have the experience and capacity to
support the proposed representative office. In addition,
Bank has established controls and procedures for the
proposed representative office to ensure compliance with
U.S. law and for its operations generally, The Bank of
Spain has no objection to the establishment of the proposed
office.
Spain is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering and international terrorism. In
accordance with those recommendations, Spain has enacted
laws and created legislative and regulatory standards to
deter money laundering, terrorist financing, and other illicit
activities. Money laundering is a criminal offense in Spain,
and Bank is subject to laws that require it to establish
internal policies, procedures, and systems for the detection
and prevention of money laundering throughout its worldwide operations. Bank has policies and procedures to
comply with these laws and regulations that are monitored
by governmental entities responsible for anti-moneylaundering compliance.
With respect to access to information about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and
the relevant government authorities have been communicated with 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 IRA, the Bank Holding Company Act of
1956, as amended. 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 below, it has been determined that
Bank has provided adequate assurances of access to any
necessary information that the Board may request.
On the basis of the foregoing and all the facts of record,
and subject to the commitments made by Bank to the
Board, as well as the terms and conditions set forth in this
order, Bank's application to establish a representative office
in Miami, Florida, is hereby approved. lo Should any restrictions on access to information regarding 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 termina10. Approved by the Director of the Division of Banking Supervision and Regulation. with the concurrence of the General Counsel.
pursuant to authority delegated hy the Board. See 12 CFR 265.7(d)( 12).
Legal Developments: Fourth Quarter, 2008
tion of any of Bank's direct or indirect activities in the
United States. Approval of this application also is specifically conditioned on compliance by Bank with the commitments made in connection with this application and with
the conditions in this order. I I 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 applicable law against Bank
and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective December 19, 2008.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
FINAL ENFORCEMENT DECISION
ISSUED BY THE BOARD
IN
THE MATTER OF
Kelly M. Dulaney, A former InstitutionAffiliated Party of Fifth Third Bank, Grand
Rapids, Michigan, Respondent.
Docket Nos. 08-008-B-I, 08-008-E-I
FINAL DECISION
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the FDI Act") in which the
Board Enforcement Counsel seeks to prohibit the Respondent, Kelly M. Dulaney ("Respondent"), from further
participation in the affairs of any financial institution and to
require her to pay restitution based on actions she took
while employed at Fifth Third Bank, Grand Rapids, Michigan (the "Bank").
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision ("Recommended Decision") of Administrative
Law Judge C. Richard Miserendino (the "AU"), and
orders the issuance of the attached Order of Prohibition and
to Cease and Desist.
B61
restitution or prohibition from banking (12 U.S.c.
§§ 1818(b), 1818(e)(4». The ALJ issues a recommended
decision that is referred to the Board together with any
exceptions to those recommendations filed by the parties.
The Board makes the final findings of fact, conclusions of
law, and determination whether to issue the requested
orders (12 CPR 263.38).
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or employee an order of prohibition from further participation in banking. To issue such an order, the Board must
make each of three findings ( I) that the respondent engaged
in identified misconduct, including a violation of law or
regulation, an unsafe or unsound practice, or a breach of
fiduciary duty; (2) that the conduct had a specified effect,
including financial loss to the institution or gain to the
respondent; and (3) that the respondent's conduct involved
either personal dishonesty or a willful or continuing disregard for the safety or soundness ofthe institution (12 U.S.c.
§ 1818(e)(l)(AHc»·
The FDI Act also spells out the requirements for an order
requiring restitution, which is a type of cease-and-desist
order under the Act. Specifically, a cease-and-desist order
may be imposed when the agency has reasonable cause to
believe that the respondent has engaged or is about to
engage in an unsafe or unsound practice in conducting the
business of a depository institution, or that the respondent
has violated or is about to violate a law, rule, or regulation
or condition imposed in writing by the agency (12 U.S.C.
§ l818(b)(I». Such an order may require the respondent to
make restitution if the respondent was "unjustly enriched"
in connection with the violation or practice, or the violation
or practice in involved "reckless disregard" of the law or
applicable regulations or a prior agency order (12 U.S.C.
§ 18 I 8(b)(6)(A».
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of charges setting forth
the basis for relief and the relief sought. Under the Board's
regulations, the respondent must file an answer within 20
days of service of the notice (12 CPR 263.l9(a». Failure to
file an answer constitutes a waiver of the respondent's right
to contest the allegations in the notice, and a tinal order
may be entered unless good cause is shown for failure to
file a timely answer (12 CFR 263.19(c)( 1».
1. STATEMENT OF THE CASE
B. Procedural History
A. Statutory and Regulatory Framework
Under the FDI Act and the Board's regUlations, the AU is
responsible for conducting proceedings on a notice of
charges relating to a proposed order requiring payment of
II. The Board's authority to approve the establishment of the
proposed representative office parallels the eontinuing authority of the
State of Florida to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the State
of Florida or its agent, the Florida Office of Financial Regulation, to
license the proposed representative office of Bank in accordance with
any terms or conditions that it may impose.
On April 11, 2008, the Board issued a Notice of Intent to
Prohibit and Notice of Charges and of Hearing ("Notice")
that sought an order of prohibition against Respondent
based on her conduct while employed at the Bank and an
order requiring her to make restitution to the Bank.
Enforcement Counsel sent the Notice to Respondent by
Federal Express and by certified mail on the date of
issuance, but both copies were returned stating that Respondent had moved and left no forwarding address. At the
direction of Enforcement Counsel, a licensed process server
personally served the Notice on Respondent on June 4,
B62
Federal Reserve Bulletin 0 March 2009
2008. The Notice directed Respondent to file a written
answer within 20 days of the date of service of the Notice
in accordance with 12 CFR 263.19, and warned that failure
to do so would constitute a waiver of her right to appear
and contest the allegations. Nonetheless, Respondent failed
to file an answer within the 20-day period or thereafter.
On July II, 2008, Enforcement Counsel filed a Motion
for Entry of an Order of Default against Respondent. On
July 28, 2008, the ALJ issued an Order to Show Cause,
providing Respondent until August 18, 2008, to show cause
why a timely answer to the Notice was not filed and why a
defauJtjudgment granting the relief requested in the Notice
should not be entered against Respondent. The Order was
delivered by overnight delivery to Respondent's address.
To date, Respondent has not filed any reply to the Order to
Show Cause or answered the Notice.
C. Respondent's Actions
The Notice alleges that Respondent was employed as a
customer service manager at the Port Orange, Florida,
branch location of the Bank and its predecessors from no
later than April 2004 through August 2006, when she
resigned from the Bank. Her responsibilities included
maintaining relationships with customers, creating certain
accounting entries, and reconciling the Bank's cash items
account. The cash items account was a general ledger
account where "rejected items," such as deposit tickets
with incorrect account numbers, were sent for reconciliation. Respondent had complete control over the cash items
account until shortly before she resigned.
By virtue of her responsibilities, Respondent was able to
falsify Bank debit and credit tickets and customer checks to
make unauthorized withdrawals from the certificate of
deposit ("CD") accounts of three of the Bank's customers,
using the proceeds for her own purposes. She concealed her
activity by making unauthorized transfers between the CD
accounts of the customers and the general ledger account.
When one of the Bank's customers sought to roll over a
matured CD into a new CD, Respondent provided the
customer with a CD account receipt and subsequently
requested that the CD be purged from the Bank's records in
order to conceal her activity.
Respondent's actions were discovered when that customer asked the Bank about the status of his CD accounts
and learned that one account had no remaining funds and
the other CD account had been purged. Respondent resigned several months before the customer's inquiry and
before the Bank's discovery of her defalcation. The Bank
restored its customer's accounts with interest for the
amounts defalcated by Respondent. As a result of these
actions, the Bank's total loss was approximately $203,923.
II. DISCUSSION
The Board's Rules of Practice and Procedure set forth the
requirements of an answer and the consequences of a
failure to file an answer to a Notice. Under the Rules,
failure to file a timely answer "constitutes a waiver of
[a respondent's] right to appear and contest the allegations
in the notice" (12 CFR 263.l9(c)). Ifthe ALJ finds that no
good cause has been shown for the failure to file, the judge
"shall file ... a recommended decision containing the
findings and the relief sought in the notice." Id. An order
based on a failure to file a timely answer is deemed to be
issued by consent. Id.
In this case, Respondent failed to file an answer to the
Notice despite notice to her of the consequences of such
failure, and also failed to respond to the ALl's Order to
Show Cause. Respondent's failure to file an answer constitutes a default.
Respondent's default requires the Board to consider the
allegations in the Notice as uncontested. The allegations in
the Notice, described above, meet all the criteria for entry
of an order of prohibition under 12 U.S.c. § 1818(e). It was
a breach of fiduciary duty, unsafe and unsound practice,
and violation of law, for Respondent to falsify Bank debit
and credit tickets and customer checks to make unauthorized withdrawals from the CD accounts of the Bank's
customers and to manipulate the Bank's systems and
records to conceal her actions. Respondent's actions resulted in loss to the Bank and financial gain to the
Respondent, in that the Respondent used the proceeds for
her own purposes and the Bank was forced to repay its
customer for the amounts defalcated by Respondent. Finally, such actions also exhibit personal dishonesty and
willful or continuing disregard for the safety and soundness
of the Bank.
For the same reasons, the allegations in the Notice meet
all the criteria for the entry of an order requiring restitution.
Respondent engaged in unsafe or unsound practices and
violations of law when she falsified Bank debit and credit
tickets and customer checks to make unauthorized withdrawals from the CD accounts of the Bank's customers and
manipulated the Bank's systems and records to conceal her
actions, and she was unjustly enriched by her actions in that
she used the proceeds of her defalcation for her own
purposes. Respondent's unsafe or unsound practices and
violations of law also involved a reckless disregard for the
law.
Accordingly, the requirements for an order of prohibition and for an order for restitution have been met and the
Board hereby issues such an order.
CONCLUSION
For these reasons, the Board orders the issuance of the
attached Order of Prohibition and Order to Cease and
Desist.
By Order of the Board of Governors, this 15th day of
December, 2008.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
Legal Developments: Fourth Quarter, 2008
ORDER OF PROHIBITION AND TO CEASE AND
DESIST
Whereas, pursuant to sections 8(b) and 8(e) of the Federal
Deposit Insurance Act, as amended, (the "FDI Act")
(12 U.S.c. § 1818(b) and (e», the Board of Governors of
the Federal Reserve System ("the Board") is of the opinion, for the reasons set forth in the accompanying Final
Decision, that a final Order of Prohibition and to Cease and
Desist should issue against KELLY M. DULANEY ("Dulaney"), a former employee and institution-affiliated party,
as defined in Section 3(u) of the FDI Act (12 US.c.
§ I8l3(u», of Fifth Third Bank, Grand Rapids, Michigan
(the "Bank").
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.c. § 18 I 8(e),
that:
I. In the absence of prior written approval by the Board,
and by any other federal financial institution regulatory
agency where necessary pursuant to section 8(e)(7)(B)
of the FDI Act (12 U.S.C. § 1818(e)(7)(B», Dulaney is
hereby prohibited:
(a) from participating in any manner in the conduct of
the affairs of any institution or agency specified in
section 8(e)(7)(A) of the FDI Act (12 US.C.
§ 1818(e )(7)(A», including, but not limited to, any
insured depository institution, any insured depository institution holding company or any U.S. branch
or agency of a foreign banking organization;
(b) from soliciting, procuring, transferring, attempting
to transfer, voting or attempting to vote any proxy,
consent or authorization with respect to any voting
rights in any institution described in subsection 8(e)(7)(A) of the FDI Act (12 U.S.C.
§ 18 I 8(e)(7)(A»;
B63
(c) from violating any voting agreement previously
approved by any federal banking agency; or
(d) from voting for a director, or from serving or acting
as an institution-affiliated party as defined in section 3(u) of the FDIAct (12 U.S.c. § I813(u», such
as an officer, director, or employee in any institution
described in section 8(e)(7)(A) of the FDI Act
(12 US.c. § I 818(e)(7)(A».
2. (a) Dulaney shall make restitution to the Bank in the
sum of $203,923 for its loss as a result of Dulaney's
violations of law and unsafe or unsound practices;
(b) the restitution shall be remitted in full, payable to
the "Board of Governors of the Federal Reserve
System" and forwarded to Jennifer 1. Johnson,
Secretary of the Board, Board of Governors of the
Federal Reserve System, Washington, DC 20551,
who shall make remittance of the same to the Bank.
3. Any violation of this Order shall separately subject
Dulaney to appropriate civil or criminal penalties or
both under section 8 of the FDI Act (12 US.c. § 1818).
4. This Order, and each and every provision hereof, is and
shall remain fully effective and enforceable until expressly stayed, modified, terminated, or suspended in
writing by the Board.
This Order is effective upon service on the Respondent.
By Order of the Board of Governors, this 15th day of
December, 2008.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
B64
Federal Reserve Bulletin D June 2009
Legal Developments: First Quarter, 2009
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT
Protective Life Corporation
Birmingham, Alabama
Order Approving Formation of Bank Holding
Company
Protective Life Corporation ("Protective Life") has requested the Board's approval under section 3 of the Bank
Holding Company Act ("BHC Act")l to become a bank
holding company by acquiring all the shares of Bonifay
Holding Company, Inc. ("BHCI") and its subsidiary bank,
the Bank of Bonifay ("Bank"), both of Bonifay, Florida.
Notice of the proposal under section 3 of the BHC Act,
affording interested persons an opportunity to submit comments, has been published (73 Federal Register 69,663
(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 section 3 of the
BHC Act.
Protecti ve Life. with total consolidated assets of $41.1 billion, is an insurance and financial services firm engaged
principally in the business of underwriting life and property
insurance. 2 Protective Life also offers annuity and other
investment products and related services.
Bank, which is the primary asset of BHCI, has total
consolidated assets of $220.0 million and is the l43rd
largest depository institution in Florida. It controls deposits
of approximately $209.4 million in the state, which represents less than 1 percent of the total amount of deposits of
insured depository institutions in the state. 3
1. 12 U.S.c. § 1842.
2. Asset data for Protective Life are as of September 30, 2008.
3. Asset data for Bank are as of September 30, 2008, and deposit
and ranking data are as of June 30, 2008.
FACTORS GOVERNING BOARD REVIEW OF THE
PROPOSED BANK HOLDING COMPANY
The BHC Act sets forth the factors the Board must consider
when reviewing the formation of a bank holding company
or the acquisition of a bank. These factors are the competitive effects of the proposal in the relevant geographic
markets; the financial and managerial resources and future
prospects of the companies and banks involved in the
proposal; the convenience and needs of the community to
be served, including the records of performance under the
Community Reinvestment Act ("CRA")4 of the insured
depository institutions involved in the transaction; and the
availability of information needed to determine and enforce
compliance with the BHC Act and other applicable federal
banking laws. 5
COMPETITIVE CONSIDERATIONS
Section 3 of the BHC Act prohibits the Board from
approving a proposal that would result in a monopoly. The
BHC Act also prohibits the Board from approving a
proposed 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. 6
The proposal involves the acquisition of a bank by
Protective Life, which does not own a commercial bank or
savings association. Based on all the facts of record, the
Board concludes that consummation of the proposal would
~ot result in any significantly adverse etl'ects on competitIOn or on the concentration of banking resources in any
relevant banking market and that the competitive factors
are consistent with approval of the proposal.
4. 12 U.S.c. §2901 et seq.
5. In cases involving interstate bank acquisitions by bank holding
~ompames. the Board also must consider the concentration of deposits
In the nation and relevant individual states, as well as compliance with
the other provisions of section 3(d) of the BHC Act. Because the
proposed transaction does not involve an interstate bank acquisition by
a bank holdmg company, the provisions of section 3(d) ofthe BHC Act
do not appl y in this case.
6. 12 U.S.C. § 1842(c)(I).
Legal Developments: First Quarter, 2009
FINANCIAL, MANAGERIAL, AND SUPERVISORY
CONSlDERA TlONS
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 a proposal and certain
other supervisory factors.? The Board has carefully considered these factors in light of all the facts of record,
including supervisory and examination infonnation received from the relevant federal and state supervisors of the
organizations involved in the proposal, publicly reported
and other available financial infonnation, and information
provided by Protective Life. In addition, the Board has
consulted with the Federal Deposit Insurance Corporation
(HFDIC"), the primary federal supervisor of Bank, about
the proposal's effect on the financial and managerial
resources and future prospects of Bank.
In evaluating financial factors, the Board consistently
has considered capital adequacy to be an especially important aspect. Protective Life is well capitalized, and all
entities of Protective Life that are subject to regulatory
capital requirements currently have capital levels that
exceed those relevant minimum requirements. Although
Bank reports capital ratios that meet the well-capitalized
standards under applicable federal guidelines, Bank's capital level is not considered sufficient given its current risk
profile.!! Bank's financial position would be improved,
however, through this transaction because a significant
portion of Bank's assets to be chosen by Protective Life
would be retained by BHCI's existing shareholders. Protective Life would remain well capitalized on consummation
of the proposal. Based on its review of the record, the
Board finds that Protective Life has sufficient resources to
effect the proposal and that all other financial factors are
consistent with approval.
In addition, the Board has carefully considered the
managerial resources of Protective Life in light of all the
facts of record, including confidential supervisory and
examination information and infonnation provided by Protective Life. The Board has considered the supervisory
experience of the relevant state supervisory agencies of
Protective Life and considered information submitted by
state insurance regulators in response to requests by the
Board. The Board has likewise considered its supervisory
experience with BHCI and the supervisory experience of
the relevant federal and state supervisory agencies of Bank
and Bank's record of compliance with applicable banking
law and anti-money-laundering laws. In addition, the Board
has carefully considered infonnation from Protective Life
about its business plans for BHCI and Bank, and the
actions it is taking and proposing to take to strengthen the
organization's risk-management infrastructure.
Based on all the facts of record, the Board concludes that
considerations relating to the financial and managerial
resources and future prospects of the organizations involved
7. 12 V.S.c. § 1842(c)(2) and (3).
8. Bank is subject to a cease and desist order from the Florida
Office of Financial Regulation.
B65
are consistent with approval, as are the other supervisory
factors under the BHC Act.
The Board notes further that a substantial proportion of
Protective Life's activities are conducted in subsidiaries
that are subject to functional regulation by state insurance
commissions or by the Securities and Exchange Commission ("SEC"). The Board will, consistent with the provisions of section 5 of the BHC Act, as amended by the
Gramm-Leach-Bliley Act, rely on the appropriate state
insurance regulators and the SEC for examination and other
supervisory infonnation to the extent appropriate in fulfilling the Board's responsibilities as the holding company's
supervisor.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board must consider the etfects of the proposal on the
convenience and needs of the communities to be served and
take into account the records of the relevant depository
institutions under the CRA.9 The Board has carefully
considered the convenience and needs factor and the CRA
performance records of Bank in light of all the facts of
record. As provided in the CRA, the Board evaluates the
record of perfonnance of an institution in light of examinations by the appropriate federal supervisors of the CRA
performance records of the relevant institutions. to Bank
received a "satisfactory" rating under the CRA at its most
recent perfonnance evaluation by the FDIC, as of October 1,2004 (the "FDIC Examination"). The FDIC Examination indicated that Bank's loans were reasonably dispersed among borrowers of different incomes and businesses
of different sizes and that its average loan-to-deposit ralio
was excellent in light of Bank's capacity and lending
opportunities within the assessment area. Protective Life
has represented that consummation of the proposal would
pennit Bank to continue its existing CRA programs and
strengthen its ability to service low- and moderate-income
communities. Based on a review of the entire record, the
Board has conduded that considerations relating to convenience and needs considerations and the CRA perfonnance
record of Bank are consistent with approval of the proposal.
NONBANKING ACTIVITIES
Protective Life engages in insurance and securities activities that are only permissible for a bank holding company
that elects to become a financial holding company I I and in
activities that may not conform to the requirements of the
BHC Act. Section 4 of the BHC Act by its terms provides
9. 12 V.S.c. §2903: 12 V.S.c. § 1842(c)(2).
10. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution's CRA
record. See 74 Federal Register 498 at 527 (2009).
II. See 12 V.S.c. § I 843(k).
B66
Federal Reserve Bulletin 0 June 2009
any company that becomes a bank holding company two
years within which to conform its existing nonbanking
investments and activities to the section's requirements,
with the possibility of three one-year extensions. 12 Protective Life must conform any impermissible nonfinancial
activities to the BHC Act and investments that it currently
conducts or holds, directly or indirectly, within the time
requirements of the act. Protective Life should be able to
conform the majority of its activitics to the requirements of
the BHC Act by filing an effective election to become a
flnancial holding company under section 4(1) of the BHC
Act. 13
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application under section 3
of the BHC Act 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 the Board is
required to consider under the BHC Act and other applicable statutes. The Board's approval is specifically conditioned on compliance by Protective Life with the conditions imposed in this order and all the commitments it 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 efiective date of
this order, unless such period is extended for good cause by
the Board or by the Federal Reserve Bank of Atlanta, acting
pursuant to delegated authority.
By order of the Board of Governors, elfective January 15, 2009.
Voting for this action: Chairman Bemanke. Vice Chairman Kohn.
and Governors Warsh, Kroszner, and Duke.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Southern BancShares (N.C.), Inc.
Mount Olive, North Carolina
Order Approving the Acquisition of Shares
of a Bank Holding Company
Southern BancShares (N.C.), Inc. ("Southern"), a bank
holding company within the meaning of the Bank Holding
Company Act ("BHC Act"), has requested the Board's
12. See 12 U.S.C. §1843(a)(2).
13. 12 U.S.c. 1843(1)(1): 12 CFR 225.82.
approval under section 3 of the BHC Act! to increase its
ownership interest to 9.9 percent of the voting shares of
ECB Bancorp, Inc. ("ECB") and thereby inerease its
indirect interest in ECB's subsidiary bank, The East Carolina Bank ("East Carolina Bank"), both of Engelhard,
North Carolina. Southern currently owns 4.9 percent of
ECB's voting shares.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 78,359 (2008». 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.
Southern, with total banking assets of approximately
$1.2 billion, controls one depository institution, Southern
Bank and Trust Company ("Southern Bank"), Mount
Olive, that operates only in North Carolina. Southern Bank
is the 17th largest insured depository institution in North
Carolina, controlling deposits of approximately $1.01 billion, which represent less than I percent of the total amount
of deposits of insured depository institutions in the state
("state deposits").2
East Carolina Bank, with total assets of approximately
$738 million, is the 33rd largest insured depository institution in North Carolina. The bank operates only in North
Carolina and controls deposits of approximately $588.9 million. If Southern were deemed to control ECB on consummation of the proposaI,3 Southern would become the
seventh largest banking organization in North Carolina,
controlling approximately $1.6 billion in deposits, which
would represent less than 1 percent of state deposits.
Southern has stated that it does not propose to control or
exercise a controlling influence over ECB and that its
indirect investment in East Carolina Bank would also be a
passive investment. In this light, Southern has agreed to
abide by certain commitments on which the Board has
previously relied in determining that an investing bank
holding company would not be able to exercise a controlI. 12 U.S.c. § 1842.
2. Asset data are as of June 30, 2008; statewide deposit and ranking
data are also as of June 30, 2008, and reflect merger and acquisition
activity through that date. In this context, insured depository institutions include commercial banks, savings banks, and savings associations,
3. 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 he 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 hetween 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 bank holding company. See. e.g .. Penn
Banc.\iU1res. inc., 92 Federal Reserve Builetin C37 (2006) (acquisition
of up to 24.89 percent of the voting shares of a bank holding
company); S&T Bancorp Inc., 91 Federal Reserve Bulletin 74 (2005)
(acquisition of up to 24.9 percent of a bank holding company);
Brookline BWleorp, MHC, 86 Federal Reserve Bulletin 52 (2000)
(acquisition of up to 9.9 percent of the voting shares of a bank holding
company).
------------ling influence over another bank holding company or bank
for purposes of the BHC Act ("Passivity Commitments").4
For example, Southern has committed not to exercise or
attempt to exercise a controlling influence over the management or policies of ECB or any of its subsidiaries; not to
have or seek to have any employee or representative of
Southern or its affiliates serve as an officer, agent, or
employee of ECB or any of its subsidiaries; and not to seek
or accept representation on the board of directors of ECB or
any of its subsidiaries. Southern has additionally committed not to enter into any agreement with ECB or any of its
subsidiaries that substantially limits the discretion ofECB's
management over major policies or decisions.
Based on these considerations and all the other facts of
record, the Board has concluded that Southern would not
acquire control of, or have the ability to exercise a controlling influence over, ECB or East Carolina Bank through the
proposed acquisition of the ECB's voting shares. The
Board notes that the BHC Act would require Southern to
file an application and receive the Board's approval before
the company could directly or indirectly acquire additional
shares of ECB or attempt to exercise a controlling influence
over ECB or East Carolina Bank. 5
COMPETITIVE CONSIDERATIONS
The Board has considered carefully the competitive etlects
of the proposal in light of all the facts of record. 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 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. 6
Southern Bank and East Carolina Bank compete directly
in six banking markets in North Carolina. 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 banking markets; the relative
shares of total deposits in depository institutions in the
markets ("market deposits") controlled by Southern Bank
and East Carolina Bank;7 the concentration level of market
4. The commitments made by Southern are set forth in Appendix A.
5, See. e,g .. Emigrant Bancorp. Inc" 82 Federal Reserve Bulletin
555 (1996); First Community Ballcshares. Inc., 77 Federal Reserve
Bulletin 50 (1991).
6. 12 U.S,c. § I 842(c)(l).
7, Deposit and market share data are as of June 30, 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, 387 (1989); National City Corporation, 70 Federal Reserve Bulletin 743, 744 (1984). The Board
Legal Developments: First Quarter; 2009
B67
deposits and the increase in the level as measured by the
Herfindahl~Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines");R
other characteristics of the market; and the Passivity Commitments made by Southern with respect to ECB and East
Carolina Bank.
A. Banking Markets within Established Guidelines
Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in five of the banking markets in which Southern Bank and East Carolina Bank directly compete. 9 On
consummation of the proposal, four markets would remain
highly concentrated, and one market would remain moderately concentrated, as measured by the HHI. The change in
HHI in the four highly concentrated markets would be
consistent with Board precedent and the thresholds in the
DOJ Guidelines. In each of the fIve banking markets, a
number of competitors would remain.
B. Banking Market Warranting Special Scrutiny
Southern Bank and East Carolina Bank compete directly in
one banking market in North Carolina that warrants a
detailed review: the Washington County banking market. [()
In this banking market, the concentration levels on consummation of the proposal would exceed the threshold levels in
the DOJ Guidelines. Southern Bank is the fifth largest
depository institution in the market, controlling $11.8 million in deposits, which represents 8.9 percent of market
deposits. East Carolina Bank is the third largest depository
institution in the market, controlling $24.2 million in
deposits, which represents 18.3 percent of market deposits.
If considered a combined organization on consummation of
the proposal, Southern Bank and East Carolina Bank would
be the second largest depository organization in the Washington County banking market, controlling $36 million in
deposits, which would represent approximately 27.2 percent of market deposits. The proposal would exceed the
DOJ Guidelines because the HHI for the Washington
County banking market would increase 326 points to 2609.
- - _..._ - - - - - - - - - - - - - - - - - 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),
8. Under the 001 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 HH I more than 200
points. The DOl has stated that the higher-than-normal HHI thresholds
for screening bank mergers and acquisitions for anti competiti ve effects
implicitly recognize the competitive effects of limited-purpose and
other nondeposilory financial entities.
9. These banking markets and the effects of the proposal on their
concentrations of banking resources are described in Appendix B.
10. The Washington County banking market includes Washington
County. North Carolina.
B68
Federal Reserve Bulletin 0 June 2009
The market indexes suggest that consummation of the
proposal would raise competitive issues in the Washington
County banking market. After careful analysis of the
record, however, the Board has concluded that no significant reduction in competition is likely to result from
Southern's proposed indirect investment in East Carolina
Bank. Of particular significance in this case is the structure
of the proposed investment and the commitments Southern
has provided to the Board, which are designed to limit the
ability of Southern to use its proposed investment to engage
in any anticompetitive behavior.
The Board previously has noted that one company need
not acquire control of another company to lessen competition between them substantially and has reeognized that a
significant reduction in competition can result from the
sharing of nonpublic financial information between two
organizations that are not under common control. In each
case, the Board analyzes the specific facts to determine
whether the minority investment in a competitor would
result in significant adverse competitive effects in a banking market. 11
The Board has conduded, after careful analysis of the
entire record, that no significant reduction in competition
will likely result from Southern's proposed minority investment in ECB. As noted, Southern has committed not to
exercise a controlling influence over ECB or East Carolina
Bank and not to seek or accept representation on the board
of directors of ECB or East Carolina Bank. Southern also
has committed not to acquire or seek to acquire non public
financial information from ECB or East Carolina Bank.
These commitments are designed to prevent anticompetitive behavior that otherwise might occur through either
influencing the behavior of ECB or East Carolina Bank or
the coordination of Southern's activities with those ofECB
or East Carolina Bank. In addition, there are no legal,
contractual, or statutory provisions that would otherwise
allow Southern to have any access to financial information
of ECB or East Carolina Bank beyond the information
already available to it as a shareholder with a less than
5 percent interest. These limitations restrict Southern's
access to confidential information that could enable it to
engage in anticompetitive behavior in the Washington
County banking market with respect to East Carolina Bank.
The Board also has considered additional facts indicating that the proposal is not likely to have a significantly
adverse effect on competition in the Washington County
banking market. In addition to Southern Bank and East
Carolina Bank, three other bank competitors, each with
market shares of at least 15 percent, provide additional
sources of banking services to the market. The Board also
notes that the market includes one community credit union
with broad membership criteria that include most of the
residents in the market, offers a wide range of consumer
I L See, e.g., The Bank ({[Nova Scotia, 93 Federal Reserve Bulletin
C136 (2007); Passumpsic Bancorp, 92 Federal Reserve Bulletin CI75
(2006) ("Passumpsic"); BOK Financial Corp., 81 Federal Reserve
Bulletin 1052, 1053-54 (1995); Sun Banks, Inc .. 71 Federal Reserve
Bulletin 243 (1985).
banking products, and operates street-level branches with
drive-up service lanes. 12
C. Views of Other Agencies and Conclusion on
Competitive Considerations
The DOJ also has reviewed the proposal and has advised
the Board that it does not believe that the acquisition would
likely have a significantly adverse effect on competition in
any relevant banking market. The appropriate banking
agencies have been afforded an opportunity to comment
and have not objected to the proposal.
Accordingly, in light of 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 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, other
supervisory information from the primary supervisors of
the organizations involved in the proposal, publicly reported and other financial information, and information
provided by Southern.
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. The Board also evaluates the financial condition
of the combined organization, including its capital position,
asset quality, and earnings prospects, and the impact of the
proposed funding of the transaction. In assessing financial
factors, the Board consistently has considered capital
adequacy to be especially important.
The Board has carefully considered the financial factors
of the proposal. Southern and Southern Bank are well
capitalized and would remain so on consummation of the
proposal. Based on its review of the record, the Board also
finds that Southern has sufficient financial resources to
effect the proposal and that the financial resources of
Southern and its subsidiaries would not be adversely
12. The Board previously has considered competition from certain
active credit unions as a mitigating factor. See Passumpsic at CI77;
Capital City Group. Inc .• 91 Federal Reserve Bulletin 418 (2005);
FN.B. Corporation, 90 Federal Reserve Bulletin 481 (2004); Gateway
Bank & Trust Co., 90 Federal Reserve Bulletin 547 (2004). If Southern
Bank and East Carolina Bank were considered as a combined organization on consummation of the proposal. the HHI for the Washington
County banking market would increase 263 points to 2209 when the
deposits of the credit union are weighted at 50 percent.
Legal Developments: First Quarter. 2009
affected by the proposaL The proposed transaction would
be funded by a dividend from Southern Bank and by
Southern's existing financial resources.
The Board also has considered the managerial resources
of Southern, ECB, and their subsidiary banks. The Board
has reviewed the examination records of these institutions,
including assessments of their management, riskmanagement systems, and operations. In addition, the
Board has considered its supervisory experiences and those
of other relevant banking supervisory agencies with the
organizations and their records of compliance with applicable banking law, including anti-money-laundering laws.
Southern, ECB, and their subsidiary banks are considered
to be well managed.
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
are consistent with approval, as are the other supervisory
factors under the BHC Act.
consider under the BHC Act and other applicable statutes.
The Board's approval is specifically conditioned on compliance by Southern 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 Federal Reserve Bank of Richmond,
acting pursuant to delegated authority.
By order of the Board of Governors, effective March 9,
2009.
Voting for Ihis action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Duke, and Tarullo.
CONVENIENCE AND NEEDS AND CRA
PERFORMANCE CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board 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 depository
institutions under the Community Reinvestment Act
("CRA" ).11 The Board has carefully considered the convenience and needs factor and the CRA performance records
of Southern Bank and East Carolina Bank in light of all the
facts of record. As provided in the CRA, the Board
evaluates the record of performance of an institution in
light of examinations by the appropriate federal supervisors
of the CRA performance records of the relevant institutions. 14 Southern Bank received an "outstanding" rating
and East Carolina Bank received a "satisfactory" rating at
their most recent examinations for CRA performance by
the Federal Deposit Insurance Corporation, as of February 28, 2006, and October 3, 2006, respectively. Based on a
review of the entire record, the Board has concluded that
considerations relating to convenience and needs considerations and the CRA performance records of Southern Bank
and East Carolina Bank are consistent with approval of the
proposaL
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the application under section 3
of the BHC Act 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
13. 12 U.s.e. §2901 et seq.; 12 U.s.e. §2903; 12 U.S.e.
§ 1842(c)(2).
14. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution's CRA
record. See 74 Federal Register 498 at 527 (2009).
B69
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Appendix A
PASSIVITY COMMITMENTS
Southern BancShares (N.C.), Inc., Mount Olive, North
Carolina ("Southern"), will not, without the prior approval
of the Board or its staff, directly or indirectly
l. Exercise or attempt to exercise a controlling influence
2.
3.
4.
5.
6.
7.
8,
over the management or policies of ECB Bancorp, Inc.,
Engelhard, North Carolina (HECB"). or any of its
subsidiaries, including The East Carolina Bank, Engelhard, North Carolina;
Seek or accept representation on the board of directors
of ECB or any of its subsidiaries;
Have or seek to have any employee or representative of
Southern and its affiliates (the "Southern Group")
serve as an officer, agent, or employee of ECB or any
of its subsidiaries;
Take any action that would cause ECB or any of its
subsidiaries to become a subsidiary of Southern;
Own, control, or hold with power to vote securities that
(when aggregated with securities that the officers and
directors of the Southern Group own, control, or hold
with power to vote) represent 25 percent or more of
any class of voting securities of ECB or any of its
subsidiaries;
Own or control equity interests that would cause the
combined voting and nonvoting equity interests of the
Southern Group and its officers and directors to equal
or exceed 25 percent of the total equity capital of ECB
or any of its subsidiaries;
Propose a director or slate of directors in opposition to
a nominee or slate of nominees proposed by the
management or board of directors of ECB or any of its
subsidiaries;
Enter into any agreement with ECB or any of its
subsidiaries that substantially limits the discretion of
ECB's management over major policies and decisions,
including, but not limited to, policies or decisions
about employing and compensating executive officers;
B70
Federal Reserve Bulletin 0 June 2009
engaging in new business lines; raising additional debt
or equity capital; merging or consolidating with another
firm; or acquiring, selling, leasing, transferring, or
disposing of material assets, subsidiaries, or other
entities;
9. Solicit or participate in soliciting proxies with respect
to any matter presented to the shareholders of ECB or
any of its subsidiaries;
10. Dispose or threaten to dispose (explicitly or implicitly)
of equity interests of ECB or any of its subsidiaries in
any manner as a condition or inducement of specific
action or non-action by ECB or any of its subsidiaries;
or
11. Enter into any other banking or nonbanking transactions with ECB or any of its subsidiaries, except that
the Southern Group may establish and maintain deposit
accounts with The East Carolina Bank, provided that
the aggregate balance of all such deposit accounts does
not exceed $500,000 and that the accounts are maintained on substantially the same terms as those prevailing for comparable accounts of persons unaffiliated
with ECB.
The terms used in these commitments have the same
meanings as set forth in the Bank Holding Company Act of
1956, as amended, and the Board's Regulation Y.
Appendix B
SOUTHERN AND ECB BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
GUIDELINES
Bank
Amount
of deposits
1i
Market
deposit
Resulting
DO]
i
R
..
Change in I : em~mm~
RankL!>!m~~:~;2(;:r~::t)_i__~H_I__,...._~~I~U_~~:~e~t~t~~r_s
Beaufort County, North CarolinaBeaufort County
Southern Pre-consummation .............. .
ECB ............................................ .
Southern Post-consummation ............ .
4
7
8.5
5
5
58.8
24.0
82.8
3.5
12.0
2,303
2,303
2,303
59
59
59
5
7
27.9
356.7
384.6
2.4
30.7
33.1
2,084
2,084
2,084
148
148
148
to
10
10
6
9
5
111.5
59.5
171.0
6.7
3.6
10.3
1,487
1,487
1,487
48
48
48
11
11
11
3
5
3
25.6
19.6
45.2
8.4
6.4
14.8
2,817
2,817
2,817
108
108
108
6
6
6
10
9
9
8.2
29.9
38.2
.4
1.3
1.7
2,223
2,223
2,223
4
Dare, North Carolina-Dare, Hyde, and
Tyrrell counties
Southern Pre-consummation ............. ..
ECB ............................................ .
Southern Post-consummation ............ .
Greenville, North Carolina-Includes
the Ranally Metro Area (RMA) and
non-RMA portions of Pitt County
Southern Pre-consummation .............. .
ECB ............................................ .
Southern Post-consummation ............ .
Martin County, North CarolinaMartin County
Southern Pre-consummation .............. .
ECB ............................................ .
Southern Post-consummation ............ .
New Bern, North Carolina-Carteret
County (excluding the Jacksonville RMA
portion), Craven County, Pamlico
County, and the eastern half of Jones
County (excluding the Jacksonville RMA
portion)
Southern Pre-consummation .............. .
ECB ............................................ .
Southern Post-consummation ........... ..
NOTE: Data are as of June 30. 2008. All amounts of deposits are unweighted. All rankings. market deposit shares. and HHls are based on thrift institution deposits weighted at 50 percent.
11
11
11
Legal Developments: First Quarter, 2009
B71
I. 12 U.S.C §§ 1843(c)(8) and (j); 12 CFR 225.24.
2. See 12 U.S.C §§ I 843(c)(8), 1843(i). As discussed more fully
accordance with the provisions of the BHC Act and the
Board's regulations. 6 The Board has provided notice to
OTS, the primary federal supervisor of FTC and Federal
Trust, and to the Department of Justice ("DOr). Those
agencies have indicated they have no objection to approval
of the proposaL For the same reasons, and because this
transaction represents a minority, noncontrolling investment in The Hartford and its proposed subsidiary depository institution, the Board has waived public notice of the
proposal.
Allianz, with total consolidated assets of approximately
$1.4 trillion, provides insurance, banking, and assetmanagement products and services in more than 70 countries. AIlianz's banking activities are conducted primarily
through Dresdner. Dresdner also owns Dresdner Kleinwort
Securities, LLC, a U.S. broker-dealer.
The Hartford, with total consolidated assets of $312 billion, is a diversified insurance and financial services company, with international operations in Japan, the United
Kingdom, Canada, Brazil, and Ireland. FTC, with total
consolidated assets of approximately $602 million, operates one insured depository institution, Federal Trust, which
has offices only in Florida and controls deposits of approximately $415 million.?
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)(8) of the BHC Act. s The Board requires that
savings associations acquired by bank holding companies
or financial holding companies conform their direct and
indirect activities to those permissible for bank holding
companies under section 4(c)(8) of the BHC Act. Allianz
has committed to conform or divest its interests in The
Hartford if The Hartford, FTC, Federal Trust, or any of
their subsidiaries engage in activities that are impermissible
under the BHC Act.
In reviewing the proposal, the Board is required by
section 40)(2)(A) of the BHC Act to determine that the
proposed acquisition of FTC and Federal Trust "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."9 As part
of its evaluation of a proposal 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. 10 In acting on a notice to
acquire a savings association, the Board also reviews the
below, the Board has determined that Allianz would not control or
exercise a controlling influence over The Hartford based on all the
facts and circumstances of the investment, including commitments and
representations provided by Allianz to the Board.
3. A foreign bank that operates a branch or agency in the United
States (and any company that owns or controls such foreign bank) is
subject to the BHC Act as if it were a bank holding company.
12 U.S.C § 3106(a).
4. 12 U.S.C § I 843(i)(4).
5. ld.
6. 12 U.S.C § I 843(i)(4); 12 CFR 225.25(d) and 262.3(1).
7. Asset data are as of June 30, 2008. Deposit data are as of
September 30, 2008.
8. 12 CFR 225.28(b)(4)(ii).
9. 12 U.S.C § 1843(j)(2)(Al.
10. See 12 CFR 225.26; see, e.g .. BancOne Corporation. 83 Federal Reserve Bulletin 602 (1997).
ORDERS ISSUED UNDER SECTION 4 OF
THE BANK HOLDING COMPANY ACT
Allianz SE
Munich, Germany
Order Approving the Acquisition of Shares
of a Savings Association
Allianz SE ("Allianz"), a company that is treated as a
financial holding company within the meaning of the Bank
Holding Company Act (HBHC Act"), has requested the
Board's approval under sections 4(c)(8) and 40) of the
BHC Act and section 225.24 of the Board's Regulation yl
to retain its interest in The Hartford Financial Services
Group, Inc. (,'The Hartford"), Hartford, Connecticut, on
consummation of The Hartford's proposal to become a
savings and loan holding company by indirectly acquiring
all the shares of Federal Trust Bank ("Federal Trust"),
Sanford, Florida, a federal savings association.
Section 4 of the BHC Act requires a bank holding
company to obtain the Board's approval before acquiring
more than 5 percent of the voting shares of a savings
association. regardless of whether the acquisition would
represent a controlling interest. 2 Allianz is subject to the
BHC Act as a result of its ownership of Dresdner Bank AG
("Dresdner"), Frankfurt am Main, Germany, which operates a branch in New York, New York. 3 AlIianz owns
23.7 percent of the voting shares of The Hartford, a
diversified financial services company. On November 14,
2008, The Hartford applied to the Office of Thrift Supervision ("OTS") to acquire Federal Trust Corporation
("FTC"), the parent savings and loan holding company of
Federal Trust, and thereby acquire control of Federal Trust.
Section 4(i)(4) of the BHC Act requires the Board to
provide the director of OTS with notice of an application to
acquire a savings association and to provide the director a
period of time (normally 30 days) within which to submit
views and recommendations on the proposaJ.4 The BHC
Act also authorizes the Board to reduce or eliminate this
notice period under certain circumstances. 5
In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal in
B72
Federal Reserve Bulletin D June 2009
records of performance of the relevant insured depository
institutions under the Community Reinvestment Act
("CRA").1l
In reviewing the proposal under section 4 of the BHC
Act, the Board has considered the financial resources of
Allianz, The Hartford, FTC, and Federal Trust. The Board
has also reviewed the effect that the transaction would have
on those resources in light of all the facts of record,
including confidential reports of examination, other supervisory information from the primary federal and state
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, and
information provided by Allianz.
NONCONTROLLING INVESTMENT
AlIianz has stated that it does not propose to control or
exercise a controlling influence over The Hartford and that
as a result, its indirect investment in FTC and Federal Trust
would be a passive investment. Allianz has provided certain commitments that are similar to 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 company for
purposes of the BHC Act. For example, AlIianz has committed not to exercise or attempt to exercise a controlling
influence over the management or policies of The Hartford
or any of its subsidiaries and has committed not to have
more than one representative serve on the board of The
Hartford or its subsidiaries. The commitments also include
certain restrictions on the business relationships of AlIianz
with The Hartford, FTC, and Federal Trust.
Based on these considerations and all other facts of
record, the Board has concluded that Allianz would not
control The Hartford or its subsidiary depository institution
solely by virtue of the proposed retention of its interest in
The Hartford. The Board notes that the BHC Act would
require Allianz to file an application and receive the
Board's approval before it could directly or indirectly
acquire additional shares of, or attempt to exercise a
controlling influence over, The Hartford}2
FINANCIAL AND MANAGERIAL RESOURCES
In evaluating financial resources, 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 pro
II. 12 U.S.c. §2901 et seq.
12. See. e.g., Emigrant Bancorp, Inc., 82 Federal Reserve Bulletill
555 (1996); First Community Bancshares, Inc., 77 Federal Re.lerve
Bulletin 50 (1991).
forma organization, including its capital position, asset
quality, and earnings prospects, and the impact of the
proposed funding of the transaction.
The capital levels of AlIianz exceed the minimum levels
that would be required of a foreign bank 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. The Board has also consulted with
the OTS about the financial resources of The Hartford,
FTC, and Federal Trust, including those resources on
consummation of the proposal. Based on its review of the
record, the Board finds that Allianz has sufficient resources
to retain its interest in The Hartford.
The Board also has considered the managerial resources
of the organizations involved. The Board has considered
available supervisory information concerning Dresdner's
U.S. operations, FTC, and Federal Trust. 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-money-laundering laws.
The Board has also consulted with the OTS about the
managerial resources of, and its supervisory experiences
with, FTC and Federal Trust.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources of the organizations involved in the proposal are consistent with approval
under section 4 of the BHC Act.
COMPETITIVE CONSIDERATIONS AND CRA
PERFORMANCE RECORDS
As part of the Board's consideration of the public interest
factors under section 4 of the BHC Act, the Board has
considered carefully the competitive effects of the proposal
in light of all the facts of record. The Board has found that
noncontrolling interests in directly competing depository
institutions may raise serious questions under the BHC Act
and has stated that the specific facts of each case will
determine whether the minority investment in a company
would be anticompetitive. 13 Dresdner, the subsidiary foreign bank of Allianz, however, does not compete directly
with FTC in any relevant banking market. Based on all the
facts record, the Board concludes that the consummation of
the proposal would have no significantly adverse effect on
competition or on the concentration of banking resources in
any relevant banking market.
As provided in the CRA, the Board has evaluated the
proposal 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
13. See. e.g. BOK Financial Corp., 81 Federal Reserve Bulletin
1052, 1053-54 (1995).
Legal Developments: First Quarter. 2009
appropriate federal supervisor.'4 Federal Trust received a
"satisfactory" rating on June 26, 2006, its most recent
CRA examination. Based on a review of the entire record
and for the reasons stated above, the Board concludes that
the CRA performance records of the relevant depository
institutions are consistent with approval.
B73
By order of the Board of Governors, effective January 14.2009.
Voting for this action: Chairman Bernanke. Vice Chairman Kohn.
and Governors Warsh, Kroszner, and Duke.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
PUBUC BENEFITS
As part of its evaluation of the public interest factors under
section 4 of the BHC Act, the Board 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 currently
served by FTC and Federal Trust by strengthening the
financial and managerial resources available to Federal
Trust and thereby enhancing Federal Trust's future prospects.
For the reasons discussed above and based on all the
facts of record, the Board has determined that the conduct
of the proposed nonbanking activities within the framework of Regulation Y and Board precedent is not likely to
result in significantly 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 the standard of
section 4(j)(2) of the BHC Act is consistent with approval.
ORDERS ISSUED UNDER FEDERAL
RESERVE ACT
ICE US Trust LLC
New York, New York
Order Approving Application for
Membership
ICE US Trust LLC ("ICE Trust"). a de novo uninsured
trust company organized under New York law,' has requested the Board's approval under section 9 of the Federal
Reserve Act ("Act")2 to become a member of the Federal
Reserve System. 3 ICE Trust proposes to operate as a central
counterparty ("CCP") and clearinghouse for credit default
swap ("CDS") transactions conducted by its participants.
ICE Trust will become a wholly owned subsidiary of
ICE US Holding Company LP ("ICE LP"),4 which will be
controlled indirectly by Intercontinental-Exchange, Inc.
("ICE" )•.5 an operator of futures exchanges and over-thecounter markets for commodities and derivative financial
products. 6 ICE has entered into an agreement to acquire
CONCLUSION
Based on the foregoing and all the facts of record, the
Board has determined that the notice 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
Allianz with the conditions imposed in this order and the
commitments made to the Board in connection with the
notice. The Board's approval also is subject to all the
conditions set forth in Regulation Y, including those in
sections 225.7 and 225.25(c), 15 and to the Board's authority
to require such modification or termination of the activities
of Allianz or any of its subsidiaries as the Board finds
necessary to ensure compliance with, and to prevent evasion of, the provisions of the BHC Act and the Board's
regulations and orders issued thereunder. For purposes of
this action, these conditions and commitments are deemed
to be conditions imposed in writing by the Board in
connection with its findings and decisions herein and, as
such, may be enforced in proceedings under applicable law.
14. See Interagency Questions and Answers Regarding Community
Reinvestment. 74 Federal Register 498 at 527 (2009).
15. 12 CFR 225.7 and 225.25(c).
I. Under New York law, a limited liability trust company may not
accept deposits from the general public and must obtain an exemption
from the general requirement under state law that New York-chartered
banks and trust companies have federal deposit insurance. See
New York Banking Law §§ 32, I02a. The New York State Banking
Board ("NYSBB") has approved ICE Trust's charter application and
its exemption from the deposit insurance requirement. Letter from
NYSBB to Bradley K. Sabel, Esq .• Decemher 4,2008.
2. 12 U.S.c. §321 et seq.
3. 12 U .S.c. §§ 221 and 321. ICE Trust is a bank for purposes of the
Act and. therefore, is eligible for membership in the Federal Reserve
System.
4. ICE LP is organized under the law of the Cayman Islands but has
consented to the jurisdiction of United States courts and government
agencies with respect to matters arising out of federal banking laws.
ICE LP also has committed to make available to the Board such
information on the operations of ICE Trust and its affiliates as the
Board deems necessary to enforce compliance with the Act and other
applicable federal law.
5. ICE's wholly owned subsidiary, ICE US Holding Company GP
LLC ("ICE GP"), a Delaware limited liability company, will be the
general partner of ICE LP. ICE, ICE GP, and ICE LP have committed
that ICE LP will not, without the prior approval of the Board. engage
in any activity or make any investment other than holding an interest
in ICE Trust and TCC.
6. ICE Trust is not a bank as defined in the Bank Holding Company
Act ("BHC Act") (12 U.S,c. § 1841 et seq.). See 12 U.S.c.
§ 1841(c)(I). ICE LP, ICE GP, and ICE, therefore, would not he bank
holding companies for purposes of the BHC Act. No bank holding
B74
Federal Reserve Bulletin 0 June 2009
The Clearing Corporation (HTCC"), a derivatives clearinghouse. 7
ICE Trust is being organized to reduce the risk associated with the trading and settlement of CDS transactions.lI
The CDS market as measured by the total notional amount
of outstanding contracts has grown significantly, from
approximately $6.4 trillion by year-end 2004 to approximately $57.3 trillion by mid-year 2008.9 In the second half
of 2008, however, dealers in CDS contracts were able to
reduce the total notional amount of outstanding contracts
by approximately $32 trillion through regular and frequent
portfolio compression activity. CCPs interpose themselves
between counterparties to flnancial contracts, becoming the
buyer to the seller of the contract and the seller to the
contract's buyer. In the absence of a CCP, each market
participant bears the risk, known as counterparty credit
risk, that one or more of its counterparties will default. By
interposing itself between participants and thereby assuming counterparty credit risk, a CCP enables market participants to accept the best bids and offers without concern that
a counterparty may default.
By assuming counterparty credit risk and enforcing
participation standards and margin requirements, CCPs
also can help diminish systemic risk in market settlement
activities. In addition, establishment of a CCP can lower
systemic risk by instituting procedures for the orderly close
out of the positions of any participant who defaults and by
mutualizing the cost of the close-out process.
PROPOSED ACTIVITIES
ICE Trust would act as the CCP for its participating
financial institutions by novating CDS contracts between
participants. Through novation, ICE Trust would be positioned between the parties to a CDS contract, thereby
becoming the counterparty to each party. ICE Trust would
net out the overall positions of each participam and,
accordingly, would receive payments from and make payments to each participant on a net basis. In this manner, ICE
Trust would reduce the volume of settlement paymems
among participants and reduce the counterparty, credit, and
other risks and the transaction costs associated with CDS
contracts.
company will directly or indirectly control more than 5 percent of the
voting shares of ICE Trust.
7. TCC also will become a wholly owned subsidiary of ICE LP.
TCC will provide certain clearing services to ICE Trust.
8. In the simplest form of a CDS arrangement, the seller of a CDS
agrees to pay the buyer the full principal amount of the debt obligation
underlying the CDS in exchange for periodic payments to cover the
cost of the credit-risk protection. Tbe seller is then obligated to pay the
buyer if the maker of the obligation defaults or declares bankruptcy. In
index-based CDS contracts, the parties' payment obligations are based
on an index of debt obligations of multiple companies, such as an
index of U.S. investment-grade or emerging-market bonds, rather than
on a single obligation.
9. See Bank for International Settlements, ors Derivatives Market
Activity in the First Half of 2008 (November 2008); Bank for
International Settlements, ors Derivatives Market Activity in the
Second Half of 2005 (May 2006). The notional amount refers to the
principal amount of obligations underlying CDS contracts.
Initially, ICE Trust proposes to clear only contracts that
are based on certain CDX North American indices and are
submitted by the participants as principals. 10 Incidental to
clearing such transactions, ICE Trust also would provide
certain transaction-related administrative services to participants. ICE Trust proposes to charge a fee for its CDS
clearing services to participants primarily on a pertransaction basis.
As a member of the Federal Reserve System, ICE Trust
would be eligible to open an account with, and receive
payment services from, the Federal Reserve Bank of
New York. ICE Trust proposes to obtain a number of
services from TCC and ICE. ICE Trust would use TCC's
existing infrastructure for clearing operations and its riskmanagement services, ICE would provide internal audit
functions for ICE Trust.
FACTORS GOVERNING BOARD REVIEW OF THE
PROPOSAL
In acting on an application for membership in the Federal
Reserve System, the Board is required by the Act and
Regulation H to consider the financial history and condition
of the applying bank; the adequacy of its capital in relation
to its assets and to its prospective deposit liabilities and
other corporate responsibilities; its future earnings prospects; the general character of its management; whether its
corporate powers are consistent with the purposes of the
Act; and the convenience and needs of the community to be
served, II Because ICE Trust's primary business would be
acting as a CCP and clearinghouse for CDS transactions,
the Board has reviewed the applicable financial and managerial factors in light of the Federal Reserve's Policy on
Payments System Risk (HPSR Policy"), including its minimum standards for systemically important central counterparties. 12 These standards address, among other matters,
financial resources, measurement and management of credit
exposures, margin requirements, and default procedures.
FINANCIAL CONSIDERATIONS
In considering the financial history and condition. future
earnings prospects, capital adequacy of ICE Trust, and
other financial factors, the Board has reviewed its business
plan and financial projections and has assessed the adequacy of ICE Trust's anticipated capital levels in light of
10. These indices include certain investment·grade indices;
investment-grade, high-volatility sub-indices; and high-yield indices.
II. 12 U.S.C. §§ 322 and 329; 12 CFR 208.3(b)(3).
12. Federal Reserve Policy on Payments System Risk. available at
www.federalreserve.gov/paymentsystems/psr/default.htm. The PSR
Policy incorporates the minimum standards for systemically important
central counterparties in the RecommendatiollS flJr Central Counterparties ("RCCP"), jointly issued in November 2004 by the Committee on Payment Settlement Systems of the Bank for International
Settlements and by the Technical Committee of the International
Organization of Securities Commissioners.
Legal Developments: First Quarter, 2009
its proposed assets and liabilities. 13 ICE Trust would maintain capital that is adequate to cover its start-up costs,
projected operational losses, and unanticipated losses and
to allow for an orderly wind-down of positions if confronted with the need to cease operations.
In assessing the adequacy of ICE Trust's capital levels,
the Board has taken into account the financial resources
maintained by ICE Trust to enable it to withstand a default
in extreme but plausible market conditions by the participant to which it has the largest exposure.1-l For ICE Trust,
as for many CCPs, these resources include margin collateral posted by participants based on the value and risk
associated with their open positions and participants' contributions to a guaranty fund. The Board expects ICE Trust
at all times to maintain financial resources commensurate
with the level and nature of the risks to which it is exposed.
If a participant defaults, ICE Trust would draw on
margin collateral posted by the participant. If the margin
collateral is insufficient, ICE Trust would then look to the
defaulting participant's guaranty fund contribution. Should
the defaulting participant's margin collateral and guaranty
fund contribution be insufficient to cover any losses on the
defaulted obligations, ICE Trust would be authorized to
use, as needed, other participants' guaranty fund contributions to satisfy any remaining obligations of the defaulting
party. If the guaranty fund in total is inadequate to cover
losses on the defaulted obligations, ICE Trust would have
the ability to assess additional guaranty fund contributions
on nondefaulting participants.
To limit the risk of default by participants, ICE Trust
proposes to establish strong and objective participant eligibility requirements. For example, only a firm with a net
worth of $5 billion or more and a credit rating of "A" or
better may become a participant. Among other criteria,
each prospective participant also would be required to
demonstrate that it has systems, management, and riskmanagement expertise with respect to CDS transactions.
Margin requirements for participants in ICE Trust would
be comprised of two components: (I) initial margin collateral provided at the time of contract novation that is
intended to cover losses from a defaulting participant's
positions under normal market conditions; and (2) mark-tomarket margin requirements that are calculated at the end
of each day based on a participant's outstanding positions.
ICE Trust plans to regularly perform stress testing on its
13. 12 V.S.c. §§322 and 329; 12 CFR 20S.3(b)(3). As required by
its regulations, the Board has used the definition of capital in Appendix
A to Regulation H in assessing ICE Trust's capital adequacy (12 CFR
208.4(a». In light of the fact that ICE Trust would (I) take no deposits
from the general public, (2) have no federal deposit insurance,
(3) engage in no activities apart from serving as a CCP and clearinghouse. and (4) have assets and liabilities that reHeet its status as a CCP
and clearinghouse, the Board will not require ICE Trust to meet the
risk-based capital requirements or the leverage requirements set forth
in Appendices A, B, E, and F of Regulation H. The Board retains the
authority. however. to specify capital requirements for ICE Trust and
to require ICE Trust to increase its capital if the Board at any time
concludes that ICE Trust's capital is inadequate in view of its assets,
liabilities, and responsibilities (12 CPR 208.4(a)).
14. RCCP at 23.
B75
calculations of credit exposure and margin requirements to
determine the sufficieney of the financial resources needed
to withstand participant defaults under a range of plausible
market scenarios. To ensure its liquidity, margin collateral
would be required to be in the form of cash or G7
government debt.
In addition to margin requirements, ICE Trust would
require each participant to contribute a minimum of
$20 million to the guaranty fund plus additional amounts
based on the participant's expected level of position exposures. Additional contributions would be assessed at least
quarterly.
The establishment of ICE Trust as a CCP for CDS
contracts is expected to minimize the impact on financial
markets of a failure by a single participant by collateralizing counterparty risk exposures through the standardized
application of margin and guaranty fund requirements, by
reducing exposures through the netting of CDS transactions
on a multilateral basis, and by standardizing and centrally
managing the close out of a defaulting participant's positions with the CCP.
After carefully considering all the facts of record, the
Board has concluded that ICE Trust's financial condition.
capital adequacy, future earnings prospects, and other
financial factors are consistent with approval of the proposal.
MANAGERIAL CONSIDERATIONS
In reviewing ICE Trust's managerial resources, the Board
has considered carefully the experience of ICE Trust's
proposed management, as well as its planned riskmanagement systems, operations, and anti-moneylaundering compliance program. In addition, because ICE
Trust proposes to be a CCP, the Board has considered ICE
Trust's plans for managing the counterparty credit risk,
operational risk, legal risk, and other risks that CCPs
commonly encounter. IS
The most significant risk that a CCP for CDS transactions experiences is counterparty credit risk. The Board has
carefully reviewed ICE Trust's risk-management framework and its ability to measure accurately its exposure to
counterparty credit risk. ICE Trust proposes to measure its
credit-risk exposures to clearing participants on a daily
basis, using a value-at-risk methodology to calculate the
appropriate level of margin, and to calculate the margin
requirement and collect the required margin collateral from
each participant daily. ICE Trust has conducted extensive
validation of its models for each of the products it initially
intends to clear, The Board also has reviewed independent
assessments of ICE Trust's models. To manage concentration risk, ICE Trust will charge additional margin collateral
for positions exceeding pre-set notional thresholds. To
15. ICE Trust has committed that it will provide the Federal
Reserve System with a 60-day prior notice of material changes to its
rules to provide time for an adequate review by the Federal Reserve
System and the opportunity to raise any supervisory or regulatory
objections.
B76
Federal Reserve Bulletin 0 June 2009
address liquidity risk, ICE Trust will ensure that it has
ready access to sufficient sources of liquidity to meet its
payment obligations on a same-day basis.
The Board also has reviewed ICE Trust's other mechanisms for controlling counterparty credit risk, including the
adequacy of its policies and procedures for identifying any
instance of default by a participant and for the orderly close
out of a defaulting participant's positions. The Board has
carefully reviewed ICE Trust's plan to limit investment risk
by investing cash margin it receives in certain highly liquid
instruments. To address settlement risks associated with
participants' payments of margin collateral, guaranty fund
contributions, and other monies, ICE Trust will establish a
program to monitor payment concentration among settlement banks, evaluate the impact of settlement-bank failure,
and develop measures to mitigate associated risks.
The Board has also considered the legal framework
within which ICE Trust would operate as a CCP, including
the planned contractual arrangements and applicable governing statutes and regulations with respect to the novation
process, netting arrangements, settlements, and procedures
in the event of a participant default. The Board also has
considered information regarding the legal implications of
cross-border participation in ICE Trust. In addition, the
Board has reviewed ICE Trust's proposed operational and
information technology infrastructure, including its business continuity plans and the adequacy of its management
controls.
Based on this review and all the facts of record, the
Board has concluded that the general character of ICE
Trust's management is consistent with approval of the
proposal.
OTHER CONSIDERATIONS
In considering whether the corporate powers exercised by
ICE Trust are consistent with the purposes of the Act, the
Board notes that ICE Trust's proposed activities are permissible for a state member bank under the Act's applicable
provisions. 16 Under Regulation H, ICE Trust would be
required to obtain the Board's approval before changing the
general character of its business or the scope of the
corporate powers it exercises. 17 In addition, ICE Trust has
provided the Board with several commitments intended to
ensure that the Board will have adequate enforcement
authority over ICE Trust as an uninsured state member
bank. IS For these reasons and based on a review of the
entire record, the Board has concluded that this consideration is consistent with approval of the proposal.
16. See 12 U.S.C. §§ 330 and 335.
17. 12 CFR 208.3(d)(2),
18, ICE Trust has stipulated that it would be subject to the
supervisory, examination, and enforcement authority of the Board
under the Federal Deposit Insurance Act as if ICE Trust were an
insured depository institution for which the Board is the appropriate
federal banking agency under thaI act.
The Board also has considered the convenience and
needs of the community to be served. 19 As noted, the
establishment of ICE Trust as a CCP for CDS contracts is
expected to benefit financial markets significantly, by
reducing systemic risks associated with counterparty credit
exposures in CDS transactions, and thereby enhance the
stability of the overall financial system. In addition, ICE
Trust would promote greater market transparency by making publicly available the closing settlement price and
related volume and open interest data for each cleared
product, on terms that are fair, reasonable, and not unreasonably discriminatory. For these reasons and based on a
review of the entire record, the Board has concluded that
the convenience and needs considerations are consistent
with approval of the proposal.
CONCLUSION
Based on the foregoing and all the facts of record, including
all the commitments, stipulations, and representations made
in connection with the application, and subject to all the
terms and conditions set forth in this order, the Board has
determined that ICE Trust's proposed membership in the
Federal Reserve System should be, and hereby is, approved.
The Board's approval is specifically conditioned on compliance with Regulation H,20 with receipt of required
authorizations from certain other agencies,21 and with all
the commitments, stipulations, and representations made in
connection with the application, including the commitments and conditions discussed in this order. The commitments, stipulations, representations, 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.
ICE Trust will become a member of the Federal Reserve
System on its purchase of stock in the Federal Reserve
Bank of New York ("Reserve Bank"). This transaction
must occur not 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 March 4,
2009.
Voting for Ihis action: Chairman Bernanke. Vice Chainnan Kohn,
and Governors Warsh. Duke. and Tarullo.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
19. Because ICE Trust will not accept deposits or have federal
deposit insurance. it will not be subject to the Community Reinvestment Act (12 U.S ,C. § 2901 et seq,).
20. 12 CFR Part 208,
21, Those agencies are the NYSBB and the Securities and Exchange Commission.
Legal Developments: First Quarter, 2009
ORDERS ISSUED UNDER
INTERNATIONAL BANKING ACT
DekaBank Deutsche Girozentrale
Frankfurt am Main, Germany
Order Approving Establishment of a
Representative Office
DekaBank Deutsche Girozentrale ("Bank"), Frankfurt am
Main, Germany, a foreign bank within the meaning of the
International Banking Act ("IBA"), has applied under
section lO(a) of the IBA I to establish a representative office
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 representative office in the United
States.
Notice of the application, affording interested persons an
opportunity to submit comments, has been published in a
newspaper of general circulation in New York (The New York
Times, October 3, 2007). The time for filing comments has
expired, and all comments received have been considered.
Bank, with total consolidated assets of approximately
$198 billion? is the 18th largest bank in Germany by asset
size. Bank engages in wholesale banking and investment
fund activities and provides investment fund management
services to German savings banks and other financial
service providers. Outside Germany, Bank has subsidiaries
in Luxembourg, Switzerland, Ireland, and Grand Cayman
and representative offices in Italy and Spain.
Deutscher Sparkassen- und Giroverband O.K.
(UDSGY"), Bonn, Germany, owns 50 percent of Bank. 3
GLB GmbH & Co. OHG ("GLB"), Frankfurt am Main,
owns 49.2 percent of Bank. The remaining shares of Bank
are owned by Niedersiichsische Bank GmbH (HNieba").
Landesbank Baden-Wilrttemberg ("LBBW"), Stuttgart,
Germany, owns 30.05 percent of GLB.4 LBBW is one of
the largest savings banks in Germany. In the United States
it operates through a New York branch and nonbanking
subsidiaries. Both LBBW and its parent, SBW, are treated
as financial holding companies. Norddeutsche Landesbank
Girozentrale, directly and through its subsidiaries, Bremer
1. 12 U.S.c. § 3107(a).
2. Unless otherwise indicated, data are as of September 30, 2008.
3. The 12 shareholders of DSGV, all of which are German regional
savings banks associations, exercise their voting rights directly in
Bank in proportion to their participation in DSGV. The seven savings
banks associations that own an interest of 5 percent or more in DSGV
are Sparkassenverband Baden-Wtirttemberg, Rheinischer Sparkassenund Giroverband, Westfalisch-Lippischer Sparkassen- und Giroverband, Sparkassen- und Giroverband Hessen-Thtiringen, Sparkassenverband Bayem, Sparkassenverband Niedersachsen, and Sparkassenund Giroverband Rheinland-Pfalz.
4. Sparkassenverband Baden-Wtirttemberg ("SBW"), Stuttgart,
owns 35.61 percent of LBBW.
B77
Landesbank Kreditanstalt Oldenburg-Girozentrale and
Nieba, controls 19.22 percent of GLB.s
The proposed representative office would market real
estate credit and loan products on behalf of the Bank's head
office in Germany. The office would perform representational and administrative functions, such as acting as a
liaison between Bank's offices outside the United States
and correspondent banks in the United States, and would
engage in market research, business solicitation, loan production, and relationship-management activities. 6
In acting on an application under the IBA and Regulation K by a foreign bank to establish a representative office,
the Board shall take into account whether the foreign bank
and any parent foreign bank directly engages in the business of banking outside of the United States and whether
the foreign bank has furnished to the Board the information
it needs to assess the application adequatelyJ The Board
shall also take into account whether the foreign bank and
any foreign bank parent are subject to comprehensive
supervision on a consolidated basis by their home-country
supervisor.~ The Board also considers additional standards
set forth in the IBA and Regulation K,9
As noted above, Bank and its parent bank, LBBW,
engage directly in the business of banking outside the
5. Other shareholders that own an interest of more than 5 percent in
GLB are HSH Nordbank AG, WestLB AG, Landesbank HessenThiiringen Girozentrale, and Bayerische Landesbank.
6. A representative office may engage in representational and
administrative functions in connection with the banking activities of
the foreign bank, including soliciting new business for the foreign
bank. conducting research. acting as a liaison between the foreign
bank's head office and customers in the United States, performing
preliminary and servicing steps in connection with lending, and
performing back-office functions. A representative office may not
contract for any deposit or deposit-like liability. lend money, or engage
in any other banking activity (12 CPR 211.24(d)(I».
7. 12 U.S.C. § 3107(a)(2).
8. [d.; 12 CPR 211.24(d)(2). In assessing this standard, the Board
considers, among other factors, 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. These are indicia of comprehensive, consolidated
supervision. No single factor is essential, and other elements may
inform the Board's determination.
9. See 12 U.S.C. §3I05(d)(3)-(4); 12 CPR 211.24(c)(2H3). These
standards include (I) whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; (2) whether the bank has procedures to
combat money laundering, whether there is a legal regime in place in
the home country to address money laundering, and whether the home
country is participating in multilateral efforts to combat money
laundering; (3) whether the appropriate supervisors in the home
country may share information on the bank's operations with the
Board; and (4) 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.
B78
Federal Reserve Bulletin
0 June 2009
United States. Bank also has provided the Board with
information necessary to assess the application through
submissions that address the relevant issues.
With respect to supervision by home-country authorities,
the Board previously has determined that LBBW's predecessor, Siidwestdeutsche Landesbank Girozentrale, was
subject to comprehensive consolidated supervision and
regulation in connection with its application to establish a
branch olIke in the United States. to In addition, the Board
has determined that other German banks are subject to
home-country supervision on a consolidated basis by the
Bundesanstalt Finanzdiestleistungsaufsicht (" BaFin"), the
primary regulator of commercial banks in Germany. II Bank
is supervised by BaFin on substantially the same terms and
conditions as those other banks. Based on all the facts of
record, it has been determined that Bank is, and LBBW
continues to be, subject to comprehensive supervision and
regulation on a consolidated basis by their home-country
supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K have also been taken into account. 12
BaFin has no objection to the establishment of the proposed
representati ve office.
With respect to the financial and managerial resources of
Bank, taking into consideration its record of operations in
its home country, its overall financial resources, and its
standing with its home-country supervisor, financial and
managerial factors are consistent with approvaL Bank
appears to have the experience and capacity to support the
proposed representative office and has established controls
and procedures for the proposed representative office to
ensure compliance with U.S. law.
Germany is a member of the Financial Action Task
Force ("FATF") and subscribes to its recommendations on
measures to combat money laundering. In accordance with
these recommendations, Germany has enacted laws and
created legislative and regulatory standards to deter money
laundering, terrorist financing, and other illicit activities.
Money laundering is a criminal offense in Germany, and
credit institutions are required to establish internal policies,
procedures, and systems for the detection and prevention of
money laundering throughout their worldwide operations.
Bank has policies and proeedures to comply with these
laws and regulations that are monitored by governmental
entities responsible for anti-money-Iaundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
government authorities have been eommunicated with
regarding access to information. Bank. GLB, and DSGV
10. See Siidwestdeutsche Landesbunk Girozentrule, 83 Federal
Reserve Bulletin 937 (1997).
II. See e.g.. Deutsche Genossenschafts-Hypothekenbunk AG,
92 Federal Reserve Bulletin C61 (2006).
12. See supra note 9.
have committed to make available to the Board such
information on the operations of Bank and any of its
affiliates as the Board deems necessary to determine and
enforce compliance with the IBA, the BHe 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, GLB, and DSGV have 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 addition, subject to
certain conditions, BaFin may share information on Bank's
operations with other supervisors, including the Board. In
light of these commitments and other facts of record, and
subject to the condition described below, it has been
determined that Bank, GLB, and DSGV have provided
adequate assurances of access to any necessary information
that the Board may request.
On the basis of the foregoing and all the facts of record,
and subject to the commitments made by Bank, GLB, and
DSGV, and the terms and conditions set forth in this order,
Bank's application to establish the representative office is
hereby approved, U 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 and
indirect activities in the United States. Approval of this
application also is specifically eonditioned on compliance
by Bank with the conditions imposed in this order and the
eommitments made to the Board in connection with this
application. 14 For purposes of this action, these commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its finding and
decision and may be enforced in proceedings under
12 U.S.c. § 1818 against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective January 13, 2009.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
13. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,
pursuantto authority delegated by the Board. See 12 CFR 265.7(d)(12).
14. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of New York to license offices of a 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, to
license the proposed office of Bank in accordance with any terms or
conditions that it may impose.
Legal Developments: First Quarter, 2009
FINAL ENFORCEMENT DECISION
ISSUED BY THE BOARD
IN
THE MATTER OF
G. Craig Chupik, A fanner InstitutionAffiliated Party of PlainsCapital Bank,
Dallas, Texas
Docket Nos. 09-37-E-I, 09-37-CMP-I
ORDER OF PROHIBITION AND ORDER OF
ASSESSMENT OF CIVIL MONEY PENALTY
ISSUED UPON CONSENT PURSUANT TO
SECTIONS 8(E) AND 8(1) OF THE FEDERAL
DEPOSIT INSURANCE ACT, AS AMENDED
WHEREAS, pursuant to sections 8(e), 8(i)(2) and 8(i)(3) of
the Federal Deposit Insurance Act, as amended (the "FDI
Act"), 12 U.s.C. §§ 1818(e), (i)(2) and (i)(3), the Board of
Governors of the Federal Reserve System (the "Board of
Governors") issues this combined Order of Prohibition and
Order of Assessment of Civil Money Penalty (the "Order")
upon the consent of G. Craig Chupik, a former employee
and institution-affiliated party, as defined in section 3(u) of
the FOI Act, 12 U.S.c. § 1813(u), of PlainsCapital Bank
(the "Bank"), a state member bank;
WHEREAS, Chupik, while employed as a vice president
and loan officer at the Bank, allegedly engaged in violations
of law, unsafe and unsound banking practices, and breaches
of fiduciary duty, including, inter alia, Chupik's (i) receipt
of cash fees from prospective bank customers in exchange
for recommending the approval of Bank loans to such
customers; (ii) withdrawal of proceeds from a relative's
line of credit at the Bank for Chupik's personal use; and
(iii) check writing activities from his personal accounts.
WHEREAS, by affixing his signature hereunder, Chupik
has consented to the issuance of this Order by the Board of
Governors and has agreed to comply with each and every
provision of this Order, and has waived any and all rights
he might have pursuant to 12 U.S.c. § 1818, 12 CFR Part
263, or otherwise (a) to the issuance of a notice of intent to
prohibit or notice of assessment of civil money penalty on
any matter implied or set forth in this Order; (b) to a
hearing fOf the purpose of taking evidence with respect to
any matter implied or set forth in this Order; (c) to obtain
judicial review of this Order or any provision hereof; and
(d) to challenge or contest in any manner the basis,
issuance, terms, validity, efJ'ectiveness, or enforceability of
this Order or any provision hereof.
NOW THEREFORE, prior to the taking of any testimony or adjudication of or finding on any issue of fact or
law implied or set forth herein, and without this Order
constituting an admission by Chupik of any allegation
made or implied by the Board of Governors in connection
with this proceeding, and solely for the purpose of settle-
B79
ment of this proceeding without protracted or extended
hearings or testimony:
IT IS HEREBY ORDERED, pursuant to sections 8(e),
(i)(2) and (i)(3) of the FDI Act, 12 U.S.c. §§ 1818(e), (i)(2)
and (3), that:
I. Chupik, without the prior written approval of the Board
of Governors and, where necessary pursuant to section 8(e)(7)(B) of the FDIAct, 12 U.S.c. § 1818(e)(7)(B),
another federal financial institutions regulatory agency,
is hereby and henceforth prohibited from:
(a) participating in any manner in the conduct of the
affaifs of any institution or agency specified in
section 8(e)(7)(A) of the FDI Act, 12 U.S.c.
§ 1818(e)(7)(A), including, but not limited to, any
insured depository institution Of any holding company of an insured depository institution;
(b) soliciting, procuring, transferring, attempting to
transfer, voting Of attempting to vote any proxy,
consent, or authorization with respect to any voting
rights in any institution described in section 8(e)(7)(A) of the FDI Act, 12 U.S.c.
§ 1818(e )(7)(A);
(c) violating any voting agreement previously approved
by any federal banking agency; or
(d) voting for a directof, or serving or acting as an
institution-affiliated party, as defined in section 3(u)
of the FDI Act, 12 U.S.C. § 1813(u), such as an
officer, director or employee, in any institution
described in section 8(e)(7)(A) of the FDI Act,
12 U.S.c. § 1818(e)(7)(A).
IT IS HEREBY FURTHER ORDERED, pursuant to
section 8(i) of the FDI Act, 12 U.S.C. § 1818(i), that:
2. Chupik shall forfeit and pay a ci vii money penalty in the
amount of $20,000.
3. The civil money penalty paid by Chupik pursuant to this
Order shall be remitted in full prior to the date this Order
becomes effective, payable to "the Board of Governors
of the Federal Reserve System" and forwarded with an
executed copy of this Order to Jennifer 1. Johnson,
Secretary of the Board, Board of Governors of the
Federal Reserve System, Washington, DC, 20551, or,
alternatively, by Fedwire transfer to the Federal Reserve
Bank of Richmond, ABA No. 05 1000033, beneficiary,
Board of Governors of the Federal Reserve System. The
Board of Governors or the Federal Reserve Bank of
Richmond on its behalf shall remit the funds to the
United States Treasury as required by statute.
4. No portion of the penalty paid pursuant to this Order
shall be, directly or indirectly, paid, advanced, reimbursed or otherwise funded by Bank.
5. All communications regarding this Order shall be addressed to:
(a) Richard M. Ashton, Esq.
Deputy General Counsel
Board of Governors of the Federal Reserve System
20th & C Sts. N.W.,
Washington, DC 20551
(b) Mr. G. Craig Chupik
5109 Birchman Ave.
Fort Worth, TX 76107
With a copy to:
David Reed
Meadows Collier Reed Cousins & Blau LLP
3700 Bank of America Plaza
901 Main Street
Dallas, TX 75202
B80
Federal Reserve Bulletin 0 June 2009
6. Any violation of this Order shall separately subject
Chupik to appropriate civil or criminal penalties, or
both, under sections 8(i) and (j) of the FDI Act, 12 U.S.C
§§ 1818(i) and (j).
7. The provisions of this Order shall not bar, estop, or
otherwise prevent the Board of Governors, or any other
federal or state agency or department. from taking any
other action affecting Chupik; provided, however, that
the Board of Governors shall not take any further action
against Chupik relating to the matters addressed by this
Order based upon facts presently known by the Board of
Governors.
8. Each provision of this Order shall remain fully effective
and enforceable until expressly stayed, modified, terminated, or suspended in writing by the Board of Governors.
By order of the Board of Governors of the Federal
Reserve System, effective this 19th day of March, 2009.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
(signed)
JENNifER J. JOHNSON
Secretary of the Board
(signed)
G. Craig Chupik
B81
August 2009
Legal Developments: Second Quarter, 2009
ORDERS ISSUED UNDER BANK
HOLDING COMPANY ACT
ORDERS ISSUED UNDER SECTION 3 OF
THE BANK HOLDING COMPANY ACT
Allied Irish Banks, p.l.c.
Dublin, Ireland
M &T Bank Corporation
Buffalo, New York
First Empire State Holding Company
Buffalo, New York
Manufacturers and Traders Trust Company
Buffalo, New York
Order Approving the Acquisition of a Bank
Holding Company, Merger of Banks, and
Establishment of Branches
Allied Irish Banks, p.l.c. ("Allied Irish") and its subsidiary.
M&T Bank Corporation ("M&T"), bank holding companies within the meaning of the Bank Holding Company Act
("BHC Act"), and First Empire State Holding Company
("First Empire")1 (collectively, "Applicants") have requested the Board's approval under section 3 of the BHC
Act 2 to acquire Provident Bankshares Corporation ("Provident") and thereby indirectly acquire Provident's subsidiary bank, Provident Bank of Maryland ("Provident Bank"),
both of Baltimore, Maryland. In addition, M&T's subsidiary state member bank, Manufacturers and Traders Trust
Company ("M&T Bank"), Buffalo, has requested the
Board's approval under section 18( c) of the Federal Deposit
Insurance Act 3 ("Bank Merger Act") to merge with Provident Bank, with M&T Bank as the surviving entity. M&T
I. First Empire also has applied to become a bank holding company
in connection with this application. First Empire is a newly formed,
wholly owned subsidiary of M&T. M&T proposes to merge Provident
into First Empire, with First Empire as the survivor.
2. 12 U.S.C. § 1842.
3. 12 U.S.c. § I 828(c).
Bank also has applied under section 9 of the Federal
Reserve Act to establish and operate branches at the main
office and branches of Provident Bank. 4
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(74 Federal Register 5656 (2009». 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.
Allied Irish, with total consolidated assets equivalent to
approximately $244 billion. is the second 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. 5 Allied Irish
operates a branch in New York and through M&T controls
two subsidiary banks, M&TBank and M&TBank, National
Association, Oakfield, New York, which operate in seven
states and the District of Columbia. 6 M&T, with total
consolidated assets of $64.8 billion, is the 23rd largest
depository organization in the United States, controlling
$38.4 billion in deposits. M&T is the fifth largest depository organiz.ation in Maryland, controlling deposits of
approximately $7.4 billion.
Provident has total consolidated assets of approximately
$6.6 billion, and Provident Bank, Provident's only subsidiary insured depository institution,7 operates in Maryland,
Pennsy Ivania, Virginia, and the District of Columbia. Provident is the eighth largest depository organization in Maryland, controlling deposits of approximately $3.85 billion.
On consummation of the proposal, M&T would become
the 21st largest depository organization in the United
States, with total consolidated assets of approximately
$71.4 billion. M&T would control deposits of approximately $43.2 billion, which represent less than I percent of
the total amount of deposits of insured depository institutions in the United States. In Maryland, M&T would
become the second largest depository organiz.ation, controlling deposits of approximately $11.3 billion, which repre-
4.12U.S.C.§321.
5. Asset and nationwide deposit-ranking data are as of December 31, 2008. Statewide deposit and ranking data are as of June 30,
2008, and reflect merger activity through April 16,2009.
6. M&T Bank operates in Delaware, Maryland, New Jersey.
New York, Pennsylvania, Virginia, West Virginia, and the District of
Columbia. Top of Form M&T Bank, National Association, operates
only in New York.
7. For purposes of this order, insured depository institutions include
commercial banks, savings banks, and savings associations.
B82
Federal Reserve Bulletin 0 August 2009
sent approximately 12 pereent of the total amount of
deposits of insured depository institutions in the state.
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 M&T
is New York,s and Provident is located in Maryland,
Pennsylvania, Virginia, and the District of ColumbiaY
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. 10 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 CONSIDERA TIONS
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. I I
Applicants and Provident have subsidiary depository
institutions that compete directly in three banking markets:
Washington, DC-Maryland-Virginia-West Virginia; Baltimore, Maryland-Pennsylvania; and Annapolis, Maryland.
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 bank8. 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.
9. 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)(l)(A) and 1842(d)(2)(B).
10. 12 U.S.c. §§ I 842(d)(l)(A)-(B) and I 842(d)(2)-(3). Applicants are adequately capitalized and adequately managed, as defined
by applicable law. Provident Bank has been in existence and operated
for the minimum period of time required by Maryland law and for
more than five years. See 12 U.S.C. § 1842(d)(I)(B)(iHii), 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 (12 U,S.c. § 1842(d)(2)(A», Applicants also would control less than 30 percent of, and less than the
applicable state deposit cap for, the total amount of deposits in insured
depository institutions in the relevant states (12 U.S.c.
§§ 1842(d)(2)(B)-(0)). All other requirements of section 3(d) of the
BHC Act would be met on consummation of the proposal.
II. 12 U.S.C. § 1842(c)(1) and 12 U.S,c. § I828(c)(5).
ing markets, the relative shares of total deposits in depository institutions in the markets ("market deposits") controlled by Applicants' subsidiary depository institutions
and by Provident Bank,12 the concentration levels of market deposits and the increase in those levels as measured by
the Herfindahl-Hirschman Index (HHHI") 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 within the thresholds in the DOJ
Guidelines in all three banking markets. 14 On consummation of the proposal, each of the three markets would
remain moderately concentrated, as measured by the HHI,
and the chartge in the HHI would be less than 200 points in
each market. In addition, numerous competitors would
remain in all three 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 three banking markets where
the subsidiary depository institutions of Applicants and
Provident 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 re12. Deposit and market share data are as of June 30, 2008, adjusted
to reflect mergers and acquisitions through March 30, 2009, 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); Provident 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).
13. 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 ("001") has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anti competitive 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.
14. Those banking markets and the effects of the proposal on their
concentrations of banking resources are described in the appendix.
Legal Developments: Second Quarter. 2009
sources and future prospects of the companies and depository institutions involved in the proposal and certain other
supervisory factors. The Board has considered these factors
carefully in light of all the facts of record, including
confidential supervisory and examination information from
the U.S. banking supervisors of the institutions involved,
and publicly reported and other financial information,
including information provided by Applicants. The Board
also has consulted with the Irish Financial Services Regulatory Authority ("Financial Regulator"), the agency with
primary responsibility for the supervision and regulation of
Irish banks, including Allied Irish. 15
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 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, 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. lo In addition, M&T, Provident, 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 share exchange.
15. The Central Bank of Ireland was restructured and renamed
as the Central Bank and Financial Serv ices Authority of Ireland
("CBFSAI") in 2003. The Financial Regulator is an autonomous
entity within the CBFSAI and has responsibility for financial sector
regulation and consumer protection.
16. The Irish government has announced a plan, subject to certain
approvals, to invest up to $4.9 billion in Allied Irish in exchange for
noncumulative preference shares plus warrants. The minister for
finance would have the right to appoint 25 percent of the board of
directors of Allied Irish and would have 25 percent of total ordinary
voting rights for change of control proposals and board appointments.
The recapitalization program will be funded from the National Pensions Reserve Fund ("Fund"), which is an asset of the Irish government and appears on the government's balance sheet. The Fund is
controlled and managed by the National Pensions Reserve Fund
Commission. which is a government agency and performs its functions through another government agency, the National Treasury
Management Agency. Because the investment in Allied Irish is being
made and managed by the Irish government. and not through a
government-owned or government-controlled company, approval is
not required under section 3 of the BHC Act for the government's
indirect investment in M&T or Provident.
B83
The Board also has considered the managerial resources
of the organizations involved. The Board has reviewed the
examination records of Applicants. Provident. 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 Federal Deposit Insurance
Corporation ("FDIC"), with the organizations and their
records of compliance with applicable banking law and
with anti-money-laundering laws. 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 factorsY
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
Financial Regulator is the primary supervisor of Irish
banks. 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. '9 Based on this finding and all the facts of
record, the Board has concluded that Allied Irish continues
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
and those of its affiliates that the Board deems appropriate to determine and enforce compliance with the BHC Act (12 U.S.c.
§ IS42(c)(3)(A)). The Board has reviewed the restrictions on disclosure in the relevant jurisdictions in which Allied Irish operates and has
communicated with relevant government authorities concerning access
to information. In addition, Allied Irish has committed that, to the
extent not prohibited by applicable law, it will make available to the
Board such information on its operations and those 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 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 the facts of record, the Board has concluded that Allied
Irish has provided adequate assurances of access to any appropriate
information the Board may request.
IS. 12 U.S.C. § IS43(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
hank's overall financial condition and its compliance with laws and
regulations. See 12 CFR 211.24( c)(I).
19. See. e.g., Allied Irish Banks. p.l.c., 94 Federal Reserve Bulletin
CII (2007).
B84
Federal Reserve Bulletin 0 August 2009
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 and
the Bank Merger 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 (HCRA").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 moderate-income ("LMI") neighborhoods, in evaluating bank expansionary proposals. 21
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of M&T Bank and Provident Bank, data reported
by M&T under the Home Mortgage Disclosure Act
(HHMDA"),22 other information provided by Applicants,
confidential supervisory information, and a public comment received on the proposal. The commenter generally
commended M&T Bank's CRA performance record and
commitment to community development, but the commenter recommended that M&T Bank strengthen its affordable home mortgage lending product, increase community
development and multifamily loans in LMI census tracts,
provide more community development loans to not-forprofit organizations, and increase the number of its branches
in LMI neighborhoods.
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 supervisor of the CRA performance
record of the relevant insured depository institution. 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
M&T Bank received an "outstanding" rating at its most
recent CRA performance evaluation by the Federal Reserve
Bank of New York ("Reserve Bank"), as of May 12,2008
("2008 Evaluation"}.24 Provident Bank received a "satis-
20. 12 U.S.c. § I 842(c)(2).
21. 12 U.S.c. § 2903.
22. 12 U.S.c. §2801 et seq.
23. See Interagency Questions and Answers Regarding Community
Reinvestment, 74 Federal Register 498 and 527 (2009).
24, M&T s other bank subsidiary. Manufacturers and Traders Bank,
National Association, received a "satisfactory" rating at its most
factory" rating at its most recent CRA performance evaluation by the FDIC, as of July 2, 2007. 25
In addition to the overall "outstanding" rating that M&T
Bank received in the 2008 Evaluation, the bank received
separate overall "outstanding" or "satisfactory" ratings in
all the states and multistate metropolitan areas reviewed. 26
Examiners reported that M&T Bank's geographic distribution of loans was good. They also stated that the bank's
distribution of loans to borrowers reflected a good penetration among customers of different income levels and to
businesses of different revenue sizes. 27 In addition, examiners noted that M&T Bank offered a Federal National
Mortgage Association affordable mortgage product in all its
assessment areas that had resulted in the origination of
almost 1,000 mortgages totaling $89 million during the
evaluation period.
In the 2008 Evaluation, examiners characterized M&T
Bank as a leader in making community development loans
in its assessment areas, reporting that the bank made more
than 455 community development loans totaling $1.96 billion during the evaluation period. 28 Examiners noted that
the bank's community development lending volume generally exceeded similarly situated banks in the New York,
Pennsylvania, and Maryland assessment areas. 29
In the 2008 Evaluation, examiners rated M&T Bank's
overall performance under the investment test as "outstanding." Qualifying community development investments
totaled more than $246 million, representing an increase
from its previous evaluation.
In addition, examiners concluded that the bank's performance under the service test was "outstanding." Examiners found that the bank's retail delivery systems were
readily accessible to all portions of its assessment areas. 30
recent CRA performance evaluation by the Office of the Comptroller
of the Currency, as of May 26, 2006,
25. Examiners considered home mortgage loans. small business
loans, and consumer loans originated during 2005 and 2006, The bank
did not originate any small farm loans during the evaluation period.
26. Examiners considered HMDA-related and CRA·reportable
small business loans that were originated between January I. 2006,
and December 31, 2007. Examiners also reviewed community devel·
opment loans, investments. services, and activities pertaining to the
service test for the same period,
27, The commenter criticized M&T Bank's affordable mortgage
product, alleging that it is less attractive than such products offered by
other banks and that the bank does not have a sufficient number of loan
officers who are familiar with New York City's lower-income communities and the housing groups that serve those communities. M&T has
represented that the mortgage division of M&T Bank has added
full-time originators to its staft· who specialize in lending to LMI
borrowers to better serve its urban markets.
28. The commenter a~serted that the bank should commit to make
at least 50 percent of its community development loans to not-forprofit borrowers. The CRA does not require banks to provide any
particular type of qualified community development loans to meet the
credit needs of their communities,
29. These states received full-scope assessments during the 2008
Evaluation,
30, The commenter criticized the fact that M&T Bank's branch
network includes New York County (Le., Manhattan) but excludes
Bronx County, one of tbe area's poorest counties. Examiners reviewed
the bank's activities in the New York-Northern New Jersey-Long
Legal Developments: Second Quarter; 2009
They reported that 20 percent of M&T Bank's branches
were in LMI tracts and that 19 percent of the bank's ATMs
were in LMI areas, which enhanced the bank's performance under the service test in those communities. Examiners also noted that M&T Bank's customers could use
ATMs owned by institutions that had business relationships
with the bank without paying a fee and that six of them
were in LMI areas. In addition, examiners noted that M&T
Bank is a leader in providing community development
services throughout its assessment areas, including sponsoring and participating in a significant number of seminars
and presentations relating to affordable mortgages, small
business assistance, and other banking education. These
types of events provided technical assistance and training
to LMI indi viduals, community organizations, small businesses, and housing agencies.
B. 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,
a public comment received on the proposal, and confidential supervisory information. Applicants represented that
the proposal will result in increased credit availability and
access to a broader range of financial services for customers of M&T Bank and Provident Bank. Based on a review
Island. NY·NJ·PA Multistate Metropolitan Area ("the Multistate
Area") and concluded that the bank's retail delivery systems were
reasonably accessible to significant portions of the bank's geographies
and individuals of different income levels in the Multistate Area.
Although the bank does not have any branches in Bronx County. the
bank originated 22 HMDA-related loans and 17 small business loans
in the county during 20m, representing 8.5 percent and 8.6 percent,
respectively. of the bank's HMDA and small business loan volume in
the five counties of New York City. In the Multistate Area, M&T Bank
originated 132 community developments loans totaling $457 million
and made 209 community development investments totaling $29 million during 2006 and 2007.
B85
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. 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, the Federal Reserve
Act, and the statutory factors it is required to consider when
reviewing an application for retaining and operating
branches. 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 proposal, 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 Reserve Bank, acting pursuant to delegated
authority.
By order of the Board of Governors, effective May 8,
2009.
Voting for this action: Chairman Bernanke, Vice Chairman Kohn,
and Governors Warsh, Duke, and TaruIJo.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
B86
Federal Reserve Bulletin 0 August 2009
Appendix
M&T AND PROVIDENT BANKING MARKETS CONSISTENT WITH BOARD PRECEDENT AND
GUIDELINES
Market
!
Resulting
deposit
shares
HHI
(percent)
DO]
Bank
Rank
Amount
of deposits
(dollars)
Washington DC-MD-VA-WVincludes the Washington. D. C.
Ranally Metropolitan Area
(URMA
the non-RMA portions of
the counties of Calvert, Charles,
Frederick. Prince George's, and Sf.
Mary's, Maryland. and Fauquier
and Loudoun, Virginia; the cities of
Alexandria. Fairfax. Falls Church,
and Manassas, Virginia; and
Jefferson County, West Virginia
M&T Pre-Consummation .............
Provident ..................................
M&T Post-Consummation ............
10
14
8
2.04 bit.
1.14 bil.
3.18 bil.
1.9
.9
2.8
1,259
1,259
1,259
3
3
3
91
91
91
Baltimore MD-PA-includes the
Baltimore. Maryland RMA. the nonRMA portions of the counties of
Harford and Carroll, Maryland
(excludes the Washington DC-MDVA-WV RMA portion); and
Baltimore, Maryland
M&T Pre-Consummation .............
Provident ..................................
M&T Post-Consummation ............
2
5
2
5.2 bi!.
3.1 bil.
8.3 bi!.
12.5
7.4
19.9
1,430
1,430
1,430
185
185
185
73
73
73
Annapolis-includes the Annapolis.
Maryland RMA
M&T Pre-Consummation ............ .
Provident ................................. .
M&T Post-Consummation ........... .
9
17
9
133 mil.
16 mil.
149 mil.
1,157
1,157
1,157
3
3
3
19
19
19
Change in
HHI
Remaining
number of
competitors
H
).
3.97
.48
4.45
,",OTE: Data are as of June 30. 2008. All amounts of deposits are unweighted. All rankings. market deposit shares. and HHIs are based on thrift institution deposits weighted at 50 percent.
Morgan Stanley
New York, New York
Order Approving the Acquisition of
Additional Shares of a Bank Holding
Company
Morgan
financial
Holding
Board's
Stanley ("Morgan"), New York, New York, a
holding company within the meaning of the Bank
Company Act ("BHC Act"), has requested the
approval under section 3 of the BHC Act l to
I. 12 V.S,c. § 1842.
acquire up to an additional 5.1 percent of the voting shares
of Chinatrust Financial Holding Company, Ltd. (HChinatrust"), Taipei, Taiwan,2 and thereby increase its indirect
interest up to 9.9 percent in Chinatrust Bank (U.S.A.)
2, Morgan proposes to acquire the additional voting shares of
Chinatrust through open market transactions by the following subsid·
iaries: (I) MS Holdings, Inc., Morgan Stanley Private Equity Asia Ill,
Inc" Morgan Stanley Private Equity Asia m, L.L.c., and MSPEA
Holdings. Inc" all of Wilmington. Delaware; and (2) Morgan Stanley
Private Equity Asia III, L.P., Morgan Stanley Private Equity Asia
Employee Investors III, L.P" Morgan Stanley Private Equity Asia III
Holdings (Cayman) Ltd" MSPEA Formosa Holdings (Cayman) Limited, and Morgan Stanley Formosa Holdings (Cayman) Limited, all of
George Town, Grand Cayman, Cayman Islands.
Legal Developments: Second Quarter. 2009
B87
("Bank"), Torrance, California. Morgan has also filed a
notice under section 4(c)(l3) of the BHC Act 3 and the
Board's Regulation K4 to increase its indirect interest in
Chinatrust. 5
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 76,653 (200S». 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 sections 3 and 4 of the BHC Act,li
Morgan, with total consolidated assets of approximately
$626 billion, engages in commercial and investment banking, securities underwriting and dealing, asset management, trading, and other activities both in the United States
and abroad. Morgan controls Morgan Stanley Bank, National Association ("Morgan Bank"), Salt Lake City, Utah,
which operates one branch in the state, with total consolidated assets of approximately $66.2 billion and deposits of
approximately $54.1 billion. In addition, Morgan controls
Morgan Stanley Trust (HMS Trust"), Jersey City, New Jersey, a federal savings association, with total consolidated
assets of $6.6 billion and deposits of $5.S billion.7
Chinatrust, with total consolidated assets of $53.9 billion, is the sixth largest depository organization in Taiwan.s
Chinatrust, through Chinatrust Bank, operates a statelicensed branch in New York, New York, a representative
office in Los Angeles, California, and Bank.
Bank, with total consolidated assets of approximately
$2.4 billion, operates in four states'> and controls deposits of
approximately $2 billion. 10
investment.!! In this light, Morgan has agreed to abide by
certain commitments substantially similar to those on
which the Board has previously relied 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").!2 For example, Morgan has committed
not to exercise or attempt to exercise a controlling influence
over the management or policies of China trust or any of its
subsidiaries; not to seek or accept more than one representative on the board of directors of Chinatrust (the same
director may serve on the board of directors of Chinatrust
Bank under conditions outlined in the Passivity Commitments); and not to have any other director, officer, employee, or agent interlocks with Chinatrust or any of its
subsidiaries. The Passivity Commitments also include certain restrictions on the business relationships of Morgan
with Chinatrust.
Based on these considerations and all the other facts of
record, the Board has concluded that Morgan would not
acquire control of, or have the ability to exercise a controlling influence over, Chinatrust, Chinatrust Bank, or Bank
through the proposed acquisition of the Chinatrust voting
shares. The Board notes that the BHC Act requires Morgan
to file an application and receive the Board's approval
before it directly or indirectly acquires additional shares of
Chinatrust or attempts to exercise a controlling influence
over Chinatrust, Chinatrust Bank, or Bank. 13
NONCONTROLLING INVESTMENT
The Board has considered carefully the competitive effects
of the proposal in light of all the facts of the record. 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. The BHC Act also
prohibits the Board from approving a proposal that would
substantially lessen competition in any relevant banking
Morgan has stated that it does not propose to control or
exercise a controlling influence over Chinatrust and that its
indirect investment in Chinatrust Bank would be a passive
3. 12 V.S.c. § I 843 (c)(1 3).
4. 12 CFR 211.
5. Chinatrust owns Bank indirectly through Chinatrust Commercial
Bank. Ltd. ("Chinatrust Bank"). Taipei. and also engages in securities.
insurance. venture-capital. and asset-management activities outside
the United States.
6. Thirty-seven commenters expressed concerns about certain
aspects of the proposaL Several commenters objected to the Boatd' s
waiver of public notice of Morgan's application last September to
become a bank holding company. In its order approving that application and Morgan's election to hecome a financial holding company. the
Boatd explained its rationale for waiving the public comment period.
Morgan Stanley, 94 Federal Reserve Bulletin CI03 (2008) ("Morgan
FHC Order").
7. Asset and deposit data ate as of Match 31. 2009. Morgan also
controls Morgan Stanley Trust, National Association ("MSTNA").
Wilmington. Delaware. a limited-purpose national bank that engages
solely in trust or fiduciary activities and is exempt from the definition
of "bank" under the BHC Act pursuant to section 2(c)(2)(D) of the
BHC Act (12 U.S.c. § 1841(c)<2)(D».
8. Taiwanese asset data ate as of Septemher 30. 2008, and ranking
data ate as of December 31, 2007.
9. Bank operates branches in California, New Jersey, New York.
and Washington.
10. Asset and deposit data are as of Match 31.2009.
COMPETITIVE CONSIDERATIONS
market, unless the anticompetitive effects of the proposal
clearly are outweighed in the public interest by the probII. 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 Boatd's approval be obtained before a bank holding company
acquires more than 5 percent of the voting shates of a bank suggests
that Congress contemplated the acquisition by bank holding companies of between 5 percent and 25 percent of the voting shates of banks.
See 12 V.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 bank holding company. See, e.g.,
Mitsubishi UFG Financial Group, Inc .. 95 Federal Reserve Bulletin
B34 (2009) (acquisition of up to 24.9 percent of the voting shates of a
bank holding company); Brookline Bancorp, MHC. 86 Federal
Reserve Bulletin 52 (2000) (acquisition of up to 9.9 percent of the
voting shates of a bank holding company); Mansura Bancshares. Inc.•
79 Federal Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of
the voting shates of a bank holding company).
12. These commitments are set forth in the appendix.
13. 12 U.S.C. § 1842. See, e.g., Emigrant Bancorp, Inc .• 82 Federal
Reserve Bulletin 555 (\996).
B88
Federal Reserve Bulletin 0 August 2009
able effect of the proposal in meeting the convenience and
needs of the community to be served. 14
Morgan and Chinatrust do not compete directly in any
relevant banking market. 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 concentration of banking resources in
any relevant banking market and that competitive factors
are consistent with approval of the proposal.
FINANCIAL, MANAGERIAL, AND OTHER
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 received from the relevant federal
and state supervisors of the organizations involved, publicly reported and other financial information, information
provided by Morgan, and public comment received on the
proposal. Several commenters opposed the combination of
commercial banking and investment banking in Morgan.
Congress specifically has authorized the combination of
commercial banking and investment banking for bank
holding companies that meet certain requirements and elect
to become financial holding companies. 15 Morgan met
those requirements when it elected to be a financial holding
company and has continued to satisfy the criteria for
financial holding company status. If>
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 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. 17
The Board has carefully considered the financial factors
of the proposal. Morgan, Morgan Bank, and MS Trust are
well capitalized. Bank is also well capitalized, and the
financial factors related to Chinatrust are consistent with
approval. Based on its review of the record, the Board also
14. 12 U.S.C. § 1842(c)(I).
15. See 12 U.S.c. § I 843(k); 12 U.S.c. § 1843(1).
16. Morgan FHC Order.
17. As previously noted, Morgan would acquire only up to 9.9 percent of Chinatrust. Under these circumstances, Morgan would not
consolidate the financial statements of Chinatrust for regulatory
purposes.
finds that Morgan has sufficient capital and other resources
to effect the proposal. The proposed transaction is structured as a share purchase in the open market and would be
funded from Morgan's available funds. The Board also
notes that Morgan has recently raised a substantial amount
of private capital.l~
The Board also has considered the managerial resources
of the organizations involved in the proposed transaction. 19
The Board has reviewed the examination records of Morgan, Morgan's subsidiary depository institutions, Bank,
and Chinatrust Bank's U.S. offices, 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 antimoney-laundering laws.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and the future
prospects of Morgan, its subsidiary depository institutions,
and Bank are consistent with approval of this application,
as are the other supervisory factors the Board must consider
under section 3 of 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 Community Reinvestment
18. The Board also considered public comments related to Morgan's financial condition. Commenters alleged that Morgan does not
have the financial capacity to complete the acquisition of Chinatrust,
noting that a credit rating agency had lowered Morgan's credit rating
with a negative outlook. Several comments also referenced funding
that Morgan received from the U.S. Department of the Treasury under
the Troubled Asset Relief Program and Morgan's alleged use of those
funds for purposes other than providing liquidity to the credit markets
in the United States.
19. Several commenters expressed general concerns ahout Morgan's management, including allegations about Morgan's accounting
practices, activities relating 10 auction-rate securities, an investigation
on energy pricing by a Morgan affiliate, and allegations that a Morgan
Stanley employee violated the Foreign Corrupt Practices Act. In
approving Morgan's application under the BHC Act last September,
the Board carefully considered the managerial resources of Morgan in
light of all the facts of record, including confidential supervisory
information and information provided by Morgan. See Morgan FHC
Order, at C105. The Board also has communicated with relevant
federal and state agencies with respect to the auction-rate securities
activities and pricing investigation. The Board considered the August
2008 settlement between Morgan and tbe Attorney General of the state
of New York and pending litigation involving these matters. As part of
its ongoing supervision of Morgan, the Board monitors the status of
government investigations, consults as needed with relevant regulatory authorities, and periodically reviews Morgan's potential liability
from material litigation. In addition, Morgan announced that it has
fired the employee who allegedly violated the Foreign Corrupt Practices Act, reported the activity to appropriate authorities, and will
continue to investigate the matter.
Legal Developments: Second Quarter, 2009
Act ("CRA").2o 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 expansionary proposals. 21
B89
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.24
Morgan Bank received an "outstanding" rating at its
most recent CRA evaluation by the Federal Deposit Insurance Corporation ("FDIC"), as of January 30, 2006 ("2006
Evaluation").25 The Board considered Morgan Bank's
CRA performance record and discussed the 2006 Evaluation in the Morgan FHC Order. Based on a review of the
record in this application, the Board hereby reaffirms and
adopts the facts and findings concerning Morgan Bank's
CRA performance record. The Board also has considered
information provided by Morgan about its CRA performance since the Board reviewed such matters in connection
with the Morgan FHC Order.
Consistent with the CRA regulations adopted by the
federal banking agencies, the FDIC evaluated Morgan
Bank under the community development test as a wholesale bank. 26 In the 2006 Evaluation, examiners found
Morgan Bank to be highly proactive with regard to assessing the needs of its community and providing extensive
resources in addressing the resulting needs identified.
Examiners reported that the bank extended, funded, and
committed almost $59 million in qualified community
development loans and investments during the evaluation
period. 27 Examiners also reported that bank personnel and
affiliate staff provided more than 5,000 CRA qualified
service hours to their respective communities.
Morgan Bank's current CRA plan prioritizes meeting the
community development needs of its assessment area,
which includes Salt Lake County, part of the Salt Lake
City, Utah, Metropolitan Statistical Area ("MSA"), as well
as the needs of the adjoining counties to its assessment area
and the rest of Utah and the contiguous states. 28 The bank's
CRA program is currently focused on community development activities that revitalize or stabilize LMI individuals
and geographies. These activities include financing affordable housing construction and rehab financing; promoting
economic development; targeting community services to
LMI individuals; and using Morgan Bank's financial exper-
20. 12 U.S.c. §2901 et seq.; 12 U.S.c. §2903; 12 U.S.c.
§ 1842(c)(2).
21. 12 U.S.c. § 2903.
22. 12 U.S.c. §2801 et seq.
23. Two commenters also urged the Board to require Morgan to
enter into agreements or to take certain future actions in connection
with its community development activities: 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 third-party pledges, initiatives, or agreements is outside the CRA. See, e.g., The PNC Financial Services
Group, Inc., 95 Federal Reserve Bulletin B I (2009); 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.
24. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often controlling factor in the consideration of an institution's CRA
record. See Interagency Questions and Answers Regarding Community Reinvestment, 74 Federal Register 498 at 527 (2009).
25. Morgan Bank converted to a national charter on September 23,
2008. MSTNA is not an insured depository institution, and MS Trust is
not subject to the CRA pursuant to regulations issued by the Office of
Thrift Supervision. See 12 CFR 563e.ll (c)(2).
26. See 12 CFR 345.21(a)(2).
27. The 2006 Evaluation covered the period from March 1 I, 2003,
through January 20, 2006.
28. Several commenters criticized Morgan and Morgan Bank's
records of home mortgage lending in LMI communities, indicated that
the bank's assessment area for purposes of CRA performance evaluation should be expanded to include the office locations of affiliates
(such as Morgan's broker-dealer offices), and alleged that Morgan has
not provided a sufficient CRA plan for making credit and other
banking services available to LMI communities in such an expanded
assessment area. Under the CRA regulations, the assessment area for a
wholesale or limited-purpose bank consists generally of one or more
MSAs or Metropolitan Divisions, or one or more contiguous subdivisions in which the bank has its main office, branches, and deposittaking ATMs. See 12 CFR 25.41; 12 CFR 228.41; 12 CFR 345.41. A
bank's CRA assessment area is not determined by the location of
offices of affiliates. The Office of the Comptroller of the Currency
("OCC"), as the primary supervisor of Morgan Bank, will evaluate
the bank's qualification as a wholesale bank and its assessment area
and CRA plan as part of its ongoing supervision of the bank.
The Board has considered carefully all the facts of
record, including evaluations of the CRA performance
records of Morgan's and Chinatrust's subsidiary banks,
data reported by Morgan under the Home Mortgage Disclosure Act ("HMDA"),22 other information provided by
Morgan, confidential supervisory information, and public
comments. Commenters criticized Morgan's record of lending in LMI communities and its CRA plan. 23 In addition,
commenters alleged, based on HMDA data, that Morgan
has engaged in disparate treatment of LMI and minority
individuals in home mortgage lending. Some commenters
expressed concern about the CRA performance record of
Chinatrust Bank. Commenters also expressed concern over
sub prime lending by Morgan and by Saxon Mortgage, Inc.
("Saxon Mortgage"), a subsidiary Morgan acquired in
2006. Morgan represented that it currently does not directly
or indirectly originate subprime loans, nor does it provide
warehouse lending or custodian services for subprime
lenders.
A.
eRA Performance Evaluations
B90
Federal Reserve Bulletin 0 August 2009
tise to provide financial services activities. Morgan Bank's
community development lending and investment activities
have included direct lending to nonprofit affordable housing organizations; construction participation loans with
retail banks; investments in loan consortia that manage and
fund small business loans, multifamily rental housing, and
financing and construction of community facilities; and
direct investments in Small Business Investment Company
venture-capital and various national community reinvestment funds.
Bank received a "needs to improve" rating at its most
recent CRA evaluation by the FDIC, as of July 16, 2007
("2007 Evaluation"). Some commenters raised concerns
about this rating and Bank's CRA performance generally.
Chinatrust has developed a corrective action plan to
improve Bank's CRA performance and has been submitting
quarterly reports to the FDIC. The Board has consulted
with the FDIC about actions Chinatrust has taken to
improve Bank's CRA performance since the 2007 Evaluation.
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Morgan in light of public comments
received on the proposal. Several commenters alleged,
based on 2007 HMDA data, that Saxon Mortgage made a
disproportionately larger number of high-cost loans to
African American, Hispanic, and other minority borrowers
than to nonminority borrowers. This issue was previously
raised by a different commenter and considered by the
Board in the application by Morgan to retain up to 9.9 percent of the voting shares of Herald National Bank,
New York, New York. 29 The Board hereby reaffirms and
adopts the facts and findings concerning Morgan Bank's
HMDA and fair lending record made in the Morgan Herald
Order.
The Board's consideration of HMDA-related comments
included a review of 2007 HMDA data reported by Saxon
Mortgage and Morgan Stanley Credit Corporation
("MSCC"). Morgan acquired Saxon Capital, Inc. ("Saxon
Capital"), the parent of Saxon Mortgage, in 2006 and
MSCC in 1997. Morgan now originates residential mortgage loans only through MSCC, which currently originates
only prime mortgage loans. Morgan services mortgage
loans through Saxon Capital, including subprime loans
originated by Morgan and others.
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing 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
Morgan is excluding or imposing higher costs on any racial
or ethnic 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
29. Morgan Stanley, 95 Federal Reserve Bulletin B93 (2009)
("Morgan Herald Order").
the covered loans.3o 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.
Moreover, the Board believes that all bank holding companies and their affiliates must conduct their mortgage lending operations without any abusive lending practices and in
compliance with all consumer protection laws.
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 by Morgan's subsidiary
insured depository institutions with fair lending laws. The
Board also has consulted with the FDIC and DCC, the
former and current primary federal supervisors, respectively, of Morgan Bank. In addition, the Board has considered information provided by Morgan about its compliance
risk-management systems.
As noted in the Morgan Herald Order, the record,
including confidential supervisory information, indicates
that Morgan has taken steps to ensure compliance with fair
lending and other consumer protection laws and regulations. 31 Morgan currently originates residential mortgage
loans only through MSCC and services subprime loans
only through Saxon Capital. Morgan represented that
MSCC and Saxon Capital have policies and procedures to
help ensure compliance with fair lending and other consumer protection laws and regulations. For example, MSCC
uses an automated underwriting and loan-pricing system
that substantially limits discretionary criteria and, before
30. 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.
31. Commenters expressed concern about Morgan's alleged warehouse financing to subprime lenders and securitization of sub prime
loans. Morgan represented that it does not provide warehouse lending
or custodian services for subprime lenders. To the extent it provides
servicing activities for subprime loans, Morgan asserted that it conducts due diligence to promote compliance with fair lending laws.
Morgan also has asserted that, to the extent it underwrites securities for
or participates in commercial loans to subprime lenders, Morgan has
no role in the lending or credit review practices of those lenders. In
addition. Morgan has represented that. to the extent it underwrites
securities for subprime lenders, its due diligence procedures seek to
ensure that mortgage pools supporting securitizations do not include
loans subject to the Home Ownership and Equity Protection Act of
1994 or loans with predatory lending features. As noted above. the
Board will continue to require all bank holding companies and their
affiliates to conduct their lending operations without any abusive
lending practices and in compliance with all applicable laws.
Legal Developments: Second Quarter, 2009
denying a loan application, MSCC makes reasonable efforts
to gather additional information that could appropriately
qualify an applicant. MSCC employees do not have override authority in pricing loans, and their compensation is
not based on loan pricing. Morgan has represented that
Saxon Capital clearly discloses fees to consumers and
monitors fees to ensure compliance with applicable law. In
addition, MSCC and Saxon Capital provide training in fair
lending and consumer protection law to employees involved
in originating and servicing loans and maintain complaint
resolution systems. MSCC's fair lending compliance procedures include reviews of loan origination and pricing data
that use statistical and comparative file analyses.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
record of Morgan Bank. These established efforts and this
record of performance demonstrate that Morgan Bank is
active in helping to meet the credit needs of its entire
community.
C. Conclusion on Convenience and Needs and
CRA Performance
The Board has carefully considered all the facts of record,
including reports of examination of the CRA performance
records of the institutions involved, information provided
by Morgan, comments received on the proposal, and confidential supervisory information. 32 Based on a review of the
entire record, including the noncontrolling nature of the
proposed investment in Chinatrust, 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.
CONCLUSION
Based on the foregoing and all the facts of record. the
Board has determined that the application and notice 33
32. Commenters also alleged that Morgan has not taken sufficient
action to prevent foreclosures. Morgan noted that through Saxon
Capital. it modified approximately 12,875 mortgages in 2008 and that
Saxon Capital has initiatives underway to increase its modification
capacity in 2009. In addition to modifications, Saxon Capital has
pursued other forms of home preservation and loss mitigation to avoid
foreclosures where possible. Finally, Morgan indicated that Saxon
Capital remains actively engaged in industry-wide efforts and other
public and private partnerships to address the current foreclosure
crisis, including Hope Now, the State Foreclosure Prevention Working
Group, the Ohio Compact to Prevent Foreclosures, and the National
Community Stabilization Trust.
33. Morgan proposes to acquire an indirect interest in Chinatrust's
FHC-permissible nonbanking business pursuant to section 4(k) of the
BHC Act. As noted above, Morgan proposes to acquire its indirect
interest in Chinatrust's businesses that are not being acqui red pursuant
to section 3 or 4(k) of the BHC Act pursuant to section 4(c)(I3) of the
BHC Act and Regulation K. Because Morgan's investment in Chinatrust qualifies as a portfolio investment under section 211.8 of
Regulation K (12 CFR 211.8(e», Chinatrust's U.S. activities are
permitted, provided that Chinatrust derives no more than 10 percent of
its total revenues from activities in the United States (12 CFR
211.8(e)(l)(ii)(A». Based on all the facts of record, the Board has
B91
should be, and hereby are, approved. 34 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. 35 The Board's
approval is specifically conditioned on compliance by
Morgan 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 acquisition of Chinatrust's 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
New York, acting pursuant to delegated authority.
By order of the Board of Governors, effective June 26,
2009.
Voting for this action: Chairman Bernanke and Governors Warsh.
Duke, and Tarullo. Absent and not voting: Vice Chairman Kohn.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
---------"""---""
determined that all factors required to be considered under the BHC
Act and Regulation K are consistent with approval.
34. The Board also has approved the indirect acquisition of the
interest in Chinatrust by Mitsubishi UFJ Financial Group, Inc.
("MUFG"), Tokyo, Japan. MUFG, a financial holding company
within the meaning of the BHC Act. currently controls approximately
21 percent of the voting shares of Morgan Stanley. The Board notes
that MUFG has provided no funding for Morgan's acquisition of the
Chinatrust shares, and Morgan's acquisition of the Chinatrust shares
would not alter the current structure of MUFG's investment in
Morgan. In addition. MUFG's U.S. subsidiary banks remain well
capitaliz.ed. The Board previously has determined that the foreign
banks controlled by MUFG are subject to comprehensive supervision
on a consolidated basis by their home-country supervisor, the Japanese
Financial Services Agency ("FSA"). The Board has determined that
these banks continue to be subject to comprehensive supervision on a
consolidated basis by the FSA. The other statutory factors are consistent with approval.
35. 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
225.16(e) and 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. r'or these reasons, and based on all the facts of record,
the Board has determined that a public meeting or bearing is not
required or warranted in this case. Accordingly. the requests for a
public meeting or hearing on the proposal are denied.
B92
Federal Reserve Bulletin 0 August 2009
Appendix
Passivity Commitments
Morgan Stanley ("Morgan"), New York, New York, and its
subsidiaries (collectively, the "Morgan Stanley Group")
will not, without the prior approval of the Board or its staff,
directly or indirectly:
I. Exercise or attempt to exercise a controlling inHuence
2.
3.
4.
5.
6.
7.
8.
9.
over the management or policies of Chinatrust Financial Holding Company, Ltd., Taipei, Taiwan, Republic
of China ("Chinatrust") or any of its subsidiaries;
Have or seek to have any representative of the Morgan
Stan~e~ <!roup se~ve on the board of directors of any
subsldlanes of Chmatrust, except that the single representative of Morgan Stanley Group who serves on the
board of Chinatrust may also serve as a director of
Chinatrust Commercial Bank, Ltd. ("CCB") if all
other outside directors of Chinatrust also serve on the
board of directors of CCB;
Have or seek to have more than one representative of
the Morgan Stanley Group serve on the board of
directors of Chinatrust, and CCB under the terms of the
prior commitment, or permit any representative of the
Morgan Stanley Group who serves on the board of
dir~ctors of Chinatrust and CCB to serve (i) as the
chaIrman of the board of directors of Chinatrust or
CCB, (ii) as the chairman of any committee of the
board of directors of Chinatrust or CCB, or (iii) serve
as a member of any committee of the board of directors
of Chinatrust or CCB if such representative occupies
more than 25 percent of the seats on the committee;
Have or seek to have any employee or representative of
the Morgan Sta~ley Group serve as an officer, agent, or
employee of Chmatrust or any of its subsidiaries'
:rake an,Y .ac~ion that would cause ~hinatrust or ~y of
Its subsidlanes to become a subsidiary of Morgan;
Own, control, or hold with power to vote securities that
(when aggregated with securities that the officers and
directors of the Morgan Stanley Group own control or
hold with power to vote) represent 25 perc~nt or m~re
of any class of voting securities of Chinatrust or any of
its subsidiaries;
Own or control equity interests that would result in the
combined voting and nonvoting equity interests of the
Morgan Stanley Group and its officers and directors to
eql!al or exceed 25 percent of the total equity capital of
Chmatrust or any of its subsidiaries;
Except in C~:)flnection with the Morgan Stanley Group's
representatIOn on the board of directors of Chinatrust
or C.CB (or. efforts to continue such representation)
consistent with paragraph 3 above, propose a director
or slate of directors in opposition to a nominee or slate
of nominees proposed by the management or board of
direct~rs of Chinatrust or any of its subsidiaries;
Enter mto any agreement with Chinatrust or any of its
subsidiaries that substantially limits the discretion of
Chinatrust's management over major pOlicies and decis!ons, including, but. not limited to, policies or decisions about employlOg and compensating executive
officers; engaging in new business lines; raising addi-
ti~nal debt or equity capital; merging or consolidating
wlt~ anothe~ fi~; or acquiring, selling, leasing, trans-
femng, or dlsposmg of material assets, subsidiaries or
other entities;
,
10. Except in c~:)flnection with the Morgan Stanley Group's
representation on the board of directors of Chinatrust
or C.CB (or. efforts to continue such representation)
70nsls.te.n~ With pa~gra~h 3 above, solicit or participate
10 soliCiting proxies With respect to any matter presented to the shareholders of Chinatrust or any of its
subsidiaries;
II. Dispo~e o.r threaten to di.spose (explicitly or implicitly)
?f e9U1ty IOterests of ChlOatrust or any of its subsidiarIes 10 any manner as a condition or inducement of
specific action or nonaction by Chinatrust or any of its
subsidiaries; or
12. ~nter i,:to any other banking or nonbanking transactIOns With <;hm~trust or a~y of its subsidiaries, except
for transactions 10 the ordmary course of business that
are non:exclusive (ex~ept to the extent any individual
transaction may contalO an exclusivity provision limited to that transaction) and are on terms and under
circumstances that in good faith would be offered to, or
would apply to, companies that are not affiliated with
Morgan or Chinatrust, including, but not limited to
securitie~ l!~derwriti.ng, hroke:age and trading, merger~
and acquisitions adViSOry services and investment management ser~ices, provided that the aggregate balance
of all deposit. accounts he I? by the Morgan Stanley
Group at Chmatrust and Its subsidiaries does not
exceed I percent of the total deposits held at Chinatrust
a.nd its subsidiaries and that the aggregate amount of
(I) gross revenues Morgan, on a consolidated basis
earns from its business relationships with Chinatrust
and its subsidiaries does not exceed 0.5 percent of
Morgan's annual gross revenues, on a consolidated
basis, and (ii) gross revenues Chinatrust, on a consolidated basis, earns from its business relationships with
the M?rgan Stanley Group does not exceed 0.5 percent
of ChlOatrust's annual gross revenues, on a consolidated basis, in each case under (i) and (ii) as calculated
based on the rolling average of the prior four quarters.
The terms used in these commitments have the same
meanings as those set forth in the Bank Holding Company
Act of 1956 (HBHC Act"), as amended, and the Board's
Regulation Y.
Morgan understands that these commitments constitute
conditions imposed in writing in connection with the
Board's findings and decisions in Morgan's application to
acquire additional common shares up to 9.9 percent of the
outstanding common shares of Chinatrust, pursuant to
section 3(a)(3) of the BHC Act, and, as such, may be
enforced in proceedings under applicable law. Morgan
further understands that it generally must file an application
and receive prior approval of the Board, pursuant to
section 3(a)(3) of the BHC Act, for any subsequent acquisition of control of voting shares of Chinatrust that would
result in Morgan, directly or indirectly, owning or controlling additional voting shares in excess of 9.9 percent of the
outstanding common shares of Chinatrust.
Legal Developments: Second Quarter, 2009
Morgan Stanley
New York, New York
Order Approving Retention of Shares of a
Bank
Morgan Stanley ("Morgan"), 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 retain up to 9.9 percent of the
voting shares of Herald National Bank ("Herald"), both of
New York, New York, a newly chartered national bank. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(73 Federal Register 66,246 (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 section 3 of the BHC Act.3
Morgan, with total consolidated assets of approximately
$626 billion, engages in commercial and investment banking, securities underwriting and dealing, asset management, trading, and other activities in the United States and
abroad. Morgan controls Morgan Stanley Bank, National
Association ("Morgan Bank"), Salt Lake City, Utah, which
operates one branch in the state, with total consolidated
assets of approximately $66.2 billion and deposits of
approximately $54.1 billion. In addition, Morgan controls
Morgan Stanley Trust ("MS Trust"), Jersey City, New Jersey, a federal savings association, with total consolidated
assets of $6.6 billion and deposits of $5.8 billion. 4 Herald,
which controls deposits of $114.7 million, operates only in
New York.s
I. 12 U.S.C § IS42.
2. Herald began operations on November 24, 200S, as Heritage
Bank, National Association, until it was renamed on January 2.2009.
Morgan holds the shares of Herald through two subsidiary hedge
funds: Frontpoint Financial Services Fund. L.P. and Frontpoint Financial Horizons Fund, L.P., both of Greenwich, Connecticut. Morgan
acquired the shares in Herald's public offering as a passive fund
investment. No shareholder of Herald controls more than 10 percent of
the bank's voting shares, although SCJ, Inc .. Irvine, California, and the
Carpenter Funds it controls, have received approval under section 3 of
the BHC Act to acquire up to IS percent of Herald's voting shares.
3. A commenter objected to the Board's waiver of public notice of
Morgan's application Jast September to become a bank holding
company. In its order approving that application and Morgan's election to become a financial holding company, the Board explained its
rationale for waiving the public comment period. Morgan Stanley,
94 Federal Reserve Bulletin CI03 (2008) ("Morgan FHC Order").
4. Asset and deposit data are as of March 31, 2009. Morgan also
controls Morgan Stanley Trust National Association ("MSTNA"),
Wilmington, Delaware, a limited-purpose national bank that engages
only in trust or fiduciary activities and is exempt from the definition of
"bank" under the BHC Act pursuant to section 2(c)(2)(D) of the BHC
Act (12 US.C § IS41(c)(2)(D».
5. In acting on Morgan's application last September, the Board
determined that emergency conditions existed at the time that justified
the Board's expeditious action on the proposal. Morgan FHC Order.
When Morgan's application was approved on September 21, 2008,
Herald was well advanced in its preparations to commence operations.
In light of the emergency conditions when the Board approved
Morgan's application, the timing of Herald's plans to commence
B93
NONCONTROLLING INVESTMENT
Morgan has stated that it does not intend to control or
exercise a controlling influence over Herald and that its
investment in Herald is a passive investment,6 In this light,
Morgan has agreed to abide by certain commitments substantially similar to those on which the Board has previously relied 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 ofthe BHC Act ("Passivity Commitments"),7 For
example, Morgan has committed not to exercise or attempt
to exercise a controlling influence over the management or
policies of Herald or any of its subsidiaries; not to seek or
accept more than one representative on the board of
directors of Herald; and not to have any other ollicer,
employee, or agent interlocks with Herald or any of its
subsidiaries. The Passivity Commitments also include certain restrictions on the business relationships of Morgan
with Herald.
Based on these considerations and all the other facts of
record, the Board has concluded that Morgan has not
acquired control of, nor has the ability to exercise a
controlling influence over, Herald through the acquisition
of the bank's voting shares. The Board notes that the BHC
Act requires Morgan to file an application and receive the
Board's approval before it directly or indirectly acquires
additional shares of Herald or attempts to exercise a
controlling influence over Herald. s
COMPETITIVE CONSIDERA TlONS
The Board has considered carefully the competitive effects
of the proposal in light of all the facts of the record. 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, The BHC Act also
operations, and Morgan's status as a minority investor in Herald,
Morgan has been permitted to retroactively file an application to retain
the Herald shares.
6. 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 § IS42(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 bank holding company. See, e.g.,
Mitsubishi UFG Financial Group, 95 Federal Rese!1;e Bulletin B34
(2009) (acquisition of up to 24.9 percent of the voting shares of a bank
holding company); Brookline BatU'orp, MHC, S6 Federal Reserve
Bulletin 52 (2000) (acquisition of up to 9.9 percent of the voting shares
of a bank holding company); Mansura Bancshares, Inc., 79 Federal
Reserve Bulletin 37 (1993) (acquisition of 9.7 percent of the voting
shares of a bank holding company).
7. These commitments are set forth in the appendix.
8. 12 U.S.c. § 1842. See, e.g., Emigralll Bancorp, Inc., 82 Federal
Reserve Bulletin 555 (1996).
B94
Federal Reserve Bulletin 0 August 2009
prohibits the Board from approving a bank acquisition that
would substantially lessen competition in any relevant
banking market, unless the Board finds that the anticompetitive 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
servedY
The Board has previously stated that one company need
not acquire control of another company to lessen competition between them substantially,lO The Board has found
that noncontrolling interests in directly competing depository institutions may raise serious questions under the BHC
Act and has stated that the specific facts of each case will
determine whether the minority investment in a company
would be anticompetitive,ll
Morgan and Herald compete directly in the Metro
New York banking market. 12 The Board has reviewed
carefully the competitive effects of the proposal in the
Metro New York banking market in light of all the facts of
the record, In particular, the Board has considered the
number of competitors that remain in the banking market,
the relative shares of total deposits in depository institutions in the market (Hmarket deposits") controlled by
Morgan and Herald, 13 and the concentration level of market
deposits and the increase in the level as measured by the
Herfindahl-Hirschman Index ("HHI") under the Department of Justice Merger Guidelines ("DOJ Guidelines"),14
9. 12 U.S.c. § I842(c)(I).
10. See. e.g.• Sun Trust Banks. [nc., 76 Federal Reserve Bulletin 542
(1990).
II. See, e.g.. BOK Financial Corp., 81 Federal Reserve Bulletill
1052 (1995).
12. The Metro New York banking market includes Bronx. Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond.
Rockland, Suffolk, Sullivan, Ulster, and Westchester counties in
New York; Bergen, Essex, Hudson, Hunterdon, Mercer, 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.
13. Except for deposit data for Herald. which are based on its
March 31, 2009. call report, deposit and market share data are based
on data reported by insured depository institutions in the summary of
deposits data as of June 30, 2008. The data are also 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 Fillancial Group. Ille ..
75 Federal Reserve Bulletin 386 (1989); National City Corporatioll,
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 Hawaiiall. Inc., 77 Federal
Reserve Bulletill 52 (1991).
14. 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 (,,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
Consummation of the acqUiSItIOn was consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in the Metro New York banking market. On
consummation, the banking market remained moderately
concentrated, and numerous competitors remained in the
market,lS
The DOJ also has reviewed the matter and has advised
the Board that it does not believe that Morgan's ownership
interest in Herald is likely to have a significant adverse
effect on competition in any relevant banking market. The
appropriate banking agencies have been afforded an opportunity to comment and have not objected to the application.
Based on all the facts of record, the Board has concluded
that approval of Morgan's application would not have a
significantly adverse effect on competition or on the concentration of resources in any relevant banking market.
Accordingly, the Board has determined that competitive
factors 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 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 received from the relevant federal and state supervisors of the organizations involved, publicly reported and
other financial information, information provided by Morgan, and public comments received on the application.
In evaluating the 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 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 financial condition of the applicant, including its
capital position, asset quality, earnings prospects, and the
impact of the proposed funding of the transaction.
The Board has carefully considered the financial factors
in this case. Morgan, its subsidiary depository institutions,
and Herald are well capitalized. Based on its review of the
record, the Board also finds that Morgan had sufficient
capital and other resources to effect the acquisition. The
implicitly recognize the competitive effects of limited-purpose and
other nondepository financial entities.
15. Taking into account the deposits of Mitsubishi UFJ Financial
Group. Inc. ("MUFG"), Tokyo, Japan, which controls approximately
21 percent of Morgan, the HHI would remain unchanged at 1357, with
284 insured depository institutions competing in the Metro New York
banking market. The combined deposits of MUFG, Morgan, and
Herald represent less than I percent of market deposits.
Legal Developments: Second Quarter; 2009
transaction was structured as a cash purchase using Morgan's existing resources.
The Board also has considered the managerial resources
of the organizations involved. 16 The Board has reviewed
the examination records of Morgan and its 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 U.S. banking operations of Morgan and
their records of compliance with applicable banking law,
including anti-money-laundering laws.
Based on all the facts of record, the Board has concluded
that the financial and managerial resources and the future
prospects of Morgan, Herald, 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.
CONVENIENCE AND NEEDS CONSIDERATIONS
In acting on a proposal under section 3 of the BHC Act, the
Board also must consider the effect'> 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 R,einvestment
Act (HCRA").17 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 expansionary proposals. ls
The Board has considered carefully all the facts of
record, including reports of examination of the CRA performance records of Morgan's subsidiary insured depository
institutions, data reported by Morgan under the Home
Mortgage Disclosure Act (HHMDA"),19 as well as other
information provided by Morgan, confidential supervisory
information, and public comment received on the proposal.
A commenter alleged, based on HMDA data, that Morgan
has engaged in disparate treatment of minority individuals
in home mortgage lending. The commenter also expressed
concern over subprime lending by Morgan and by Saxon
16, A commenter expressed concern about Morgan's role in the
auction-rate securities market. The Board considered the August 2008
settlement between Morgan and the Attorney General of the state of
New York and pending litigation involving these matters. As part of its
ongoing supervision of Morgan. the Board monitors the status of
government investigations, consults as needed with relevant regulatory authorities, and periodically reviews Morgan's potential liability
from material litigation.
17. 12 U,S.c. §2901 et seq.; 12 U.S,c. §2903; 12 U.S,C.
§ 1842(c)(2).
18. 12 U,S.c. §2903.
19. 12 V.S,c. §2801 etseq.
B95
Mortgage, Inc. ("Saxon Mortgage"), a subsidiary Morgan
acquired in 2006. Morgan represented that it currently does
not directly or indirectly originate subprime loans and that
it has no plans to engage in such lending.
A. eRA Performance Evaluations
As provided in the CRA, the Board has considered 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
Morgan. 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. 20
Morgan Bank received an Houtstanding" rating at its
most recent CRA performance evaluation by the Federal
Deposit Insurance Corporation ("FDIC"), as of January 30, 2006. 21 Herald has not yet been evaluated under the
CRA by the Office of the Comptroller of the Currency
("OCC").
B. HMDA and Fair Lending Record
The Board has carefully considered the fair lending records
and HMDA data of Morgan in light of public comments
received on the application. Those comments alleged,
based on 2007 HMDA data, that in certain metropolitan
statistical areas (MSAs), Saxon Mortgage disproportionately made higher-cost loans to African American and
Hispanic borrowers than to nonminority borrowers. 22 The
Board's consideration of HMDA-related comments included a review of 2007 HMDA data reported by Saxon
Mortgage and Morgan Stanley Credit Corporation
(HMSCC"). Morgan acquired Saxon Capital, Inc. ("Saxon
Capital"), the parent of Saxon Mortgage, in 2006 and
MSCC in 1997. Morgan now originates residential mortgage loans only through MSCC, which currently originates
only prime mortgage loans. Morgan services mortgage
loans through Saxon Capital, including subprime loans
originated by Morgan and others.
20. The Interagency Questions and Answers Regarding Community Reinvestment provide that a CRA examination is an important and
often control! ing factor in the consideration of an institution's CRA
record. See Interagency Questions and Answers Regarding Community Reinvestment, 74 Federal Register 498 at 527 (2009).
21, Morgan Bank became a national bank on September 23, 2008,
on its conversion from a Utah-chartered industrial bank, The 2006
evaluation was conducted before this conversion. MSTNA is nol an
insured depository institution. and MS Trust is a limited-purpose
savings association not subject to the CRA, See 12 CPR 563e.ll(c)(2).
22. Beginning January I, 2004, the HMDA dala required to be
reported by lenders were expanded to include pricing information for
loans on which the annual percentage rate exceeds the yield for V,S.
Treasury securities of comparable maturity 3 or more percentage
points for first-lien mortgages and 5 or more percentage points for
second-lien mortgages (12 CPR 203.4).
B96
Federal Reserve Bulletin 0 August 2009
Although the HMDA data might reflect certain disparities in the rates of loan applications, originations, denials,
or pricing 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
Morgan is excluding or imposing higher costs on any racial
or ethnic 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 10ansP 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 aU 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.
Moreover, the Board believes that all bank holding companies and their affiliates must conduct their mortgage lending operations without any abusive lending practices and in
compliance with all consumer protection law.
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 by Morgan's subsidiary
insured depository institutions with fair lending laws. The
Board also has consulted with the FDIC and DCC, Morgan
Bank's former and current primary federal supervisors,
respectively. In addition, the Board has considered information provided by Morgan about its compliance riskmanagement systems,
The record of this application, including confidential
supervisory information, indicates that Morgan has taken
steps to ensure compliance with fair lending and other
consumer protection laws and regulations. 24 As noted,
Morgan currently originates residential mortgage loans
only through MSCC and services subprime loans only
through Saxon Capital. Morgan represented that MSCC
and Saxon Capital have policies and procedures to help
ensure compliance with fair lending and other consumer
protection laws and regulations, For example, MSCC uses
an automated underwriting and loan-pricing system that
substantially limits discretionary criteria and, before denying a loan application, MSCC makes reasonable efforts to
gather additional information that could appropriately
qualify an applicant. MSCC employees do not have override authority in pricing loans, and their compensation is
not based on loan pricing. Morgan has represented that
Saxon Capital clearly discloses fees to consumers and
monitors fees to ensure compliance with applicable law. In
addition, MSCC and Saxon Capital provide training in fair
lending and consumer protection law to employees involved in originating and servicing loans and maintain
complaint resolution systems. MSCC's fair lending compliance procedures include reviews of loan origination and
pricing data that use statistical and comparative file
analyses.
23. 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.
24. A commenter expressed concern about Morgan's alleged warehouse financing to subpri me lenders and securitization of subpri me
loans. Morgan represented that it does not provide warehouse lending
or custodian services for subprime lenders. To the extent it provides
servicing activities for subprime loans. Morgan asserted that it conducts due diligence to promote compliance with fair lending laws.
Morgan also has asserted that, to the extent it underwrites securities for
or participates in commercial loans to subprime lenders, Morgan has
no role in the lending or credit review practices of those lenders. In
addition, Morgan has represented that, to the extent it underwrites
securities for subprime lenders, its due diligence procedures seek to
ensure that mortgage pools supporting securitizations do not include
loans subject to the Home Ownership and Equity Protection Act of
1994 or loans with predatory lending features. As noted above, the
Board will continue to require all bank holding companies and their
CONCLUSION
C. Conclusion on Convenience and Needs and
CRA Performance
The Board has carefully considered all the facts of record,
including the evaluation of the CRA performance record of
Morgan Bank, information provided by Morgan, comments
received on the proposal, and confidential supervisory
information. Morgan represented that its investment in
Herald has helped provide consumers with additional
choices for meeting their banking needs. Based on a review
of the entire record, including the noncontrolling nature of
the investment, 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 transaction.
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. 25 In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
affiliates to conduct their lending operations without any abusive
lending practices and in compliance with all applicable laws.
25. The Board also has approved the retention of the indirect
interest in Herald held by MUFG. MUFG, a financial holding company within the meaning of the BHe Act, currently controls approximately 21 percent of the voting shares of Morgan Stanley. The Board
notes that MUFG provided no funding for Morgan's acquisition of the
Herald shares, and Morgan's retention of those shares would not alter
the current structure of MUFG's investment in Morgan. In addition,
MUFG's U.S. subsidiary banks remain well capitalized. The Board
previously has determined that the foreign banks controlled by MUFG
are subject to comprehensive supervision on a consolidated basis by
their home-country supervisor, the Japanese Financial Services Agency
("FSA"). The Board has determined that these banks continue to be
subject to comprehensive supervision on a consolidated basis by the
Legal Developments: Second Quarter, 2009
that it is required to consider under the BHC Act and other
applicable statutes. 26 The Board's approval is specifically
conditioned on compliance by Morgan with the conditions
imposed in this order and the commitments made to the
Board in connection with the applicationP 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.
By order of the Board of Governors, effective June 26,
2009.
Voting for this action: Chairman Bernanke and Governors Warsh,
Duke, and Tarullo. Absent and not voting: Viee Chairman Kohn.
ROBERT DEV. FRIERSON
Deputy Secretary of the Board
Appendix
PASSIVITY COMMITMENTS
Morgan Stanley ("Morgan"), New York, New York, and its
subsidiaries (collectively, "the Morgan Stanley Group"),
FSA. All other factors are consistent with approval of MUFG's
retention of its indirect interest in Herald.
26. A commenter requested an extension of the comment period on
the application. Notice of the application was published in the Federal
Register on November 7, 2008. Newspaper notices were published on
October 31 and November 4 in the appropriate newspapers of record.
and the comment period ended on December 4. 2008. Accordingly,
interested persons had approximately 34 days to submit views. This
period provided sufficient time to the commenter to prepare and
submit its comments and, as noted above, the commenter pruvided a
written submission. which the Board considered carefully in acting on
the application. The Board also has accumulated a significant record in
this case, including reports of examination, confidential supervisory
information and public reports and information, in addition to public
comments. Moreover, the Board is required under applicable law and
its regulations to act on applications submitted under the BHC Act
within specified time periods. Based on all the facts of record, the
Board has concluded that the record in this case is sufficient to warrant
action at Ihis time and that no extension of the comment period is
neeessary.
27. A commenter 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 OCC. 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
material factual issues related to the application and to provide an
opportunity for testimony (12 CFR 22S.16(e) and 262.2S(d». The
Board has considered carefully the commenter's request in light of all
the facts of record. As noted, 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 public meeting or hearing on the application is denied.
B97
will not, without the prior approval of the Board or its staff,
directly or indirectly
I. Exercise or attempt to exercise a controlling influence
over the management or policies of Herald National
Bank ("Herald"), New York, New York, or any of its
subsidiaries;
2. Have or seek to have any representative of the Morgan
Stanley Group serve on the board of directors of any
subsidiary of Herald;
3, Have or seek to have more than one representative of
the Morgan Stanley Group serve on the board of
directors of Herald or permit any representative of the
Morgan Stanley Group who serves on the board of
directors of Herald to serve as (i) the chairman of the
board of directors of Herald, (ii) the chairman of any
committee of the board of directors of Herald, or (iii) a
member of any committee of the board of directors of
Herald if such representative occupies more than
25 percent of the seats on the committee;
4. Have or seek to have any employee or representative of
Morgan Stanley Group serve as an officer, agent, or
employee of Herald or any of its subsidiaries;
5. Take any action that would cause Herald or any of its
subsidiaries to become a subsidiary of Morgan;
6. Own, control, or hold with power to vote securities that
(when aggregated with securities that the officers and
directors of the Morgan Stanley Group own, control, or
hold with power to vote) represent 25 percent or more
of any class of voting securities of Herald or any of its
subsidiaries;
7. Own or control equity interests that would cause the
combined voting and nonvoting equity interests of the
Morgan Stanley Group and its officers and directors to
equal or exceed 25 percent of the total equity capital of
Herald or any of its subsidiaries;
8. Except in connection with the Morgan Stanley Group's
representation on the board of directors of Herald
consistent with paragraph 3 above, propose a director
or slate of directors in opposition to a nominee or slate
of nominees proposed by the management or board of
directors of Herald or any of its subsidiaries;
9. Enter into any agreement with Herald or any of its
subsidiaries that substantially limits the discretion of
Herald's management over major policies and decisions, including, but not limited to, policies or decisions about employing and compensating executive
officers; engaging in new business lines; raising additional debt or equity capital; merging or consolidating
with another firm; or acquiring, selling, leasing, transferring, or disposing of material assets, subsidiaries, or
other entities;
10, Except in connection with the Morgan Stanley Group's
representation on the board of directors of Herald
consistent with paragraph 3 above, solicit or participate
in soliciting proxies with respect to any matter presented to the shareholders of Herald or any of its
subsidiaries;
II. Dispose or threaten to dispose (explicitly or implicitly)
of equity interests of Herald or any of its subsidiaries in
any manner as a condition or inducement of specific
action or non-action by Herald or any of its subsidiaries; or
12. Enter into any banking or nonbanking transactions
with Herald or any of its subsidiaries, except that
(a) The Morgan Stanley Group may establish and
maintain deposit accounts with Herald; provided,
that the aggregate balance of all such deposit
B98
Federal Reserve Bulletin D August 2009
accounts does not exceed $500,000 and that the
accounts are maintained on substantially the same
terms as those prevailing for comparable accounts
of persons unaffiliated with Herald; and
(b) The Morgan Stanley Group and Herald may sell
loan participations to each other, provided that
(i) the Morgan Stanley Group and Herald each are
free to enter into similar transactions with other
parties; (ii) the Morgan Stanley Group and Herald
each use its own underwriting criteria to evaluate
potential participations; (iii) any and all loan
participation transactions between the Morgan
Stanley Group and Herald are at market terms and
on an arm's-length basis; (iv) the aggregate balance of all such loan participations purchased by
Herald from the Morgan Stanley Group does not
exceed the dollar amount equal to 5 percent of
Herald's total loans and leases, net of unearned
income; and (v) the aggregate balance of any such
loan participations sold by Herald to the Morgan
Stanley Group does not exceed the dollar amount
equal to 5 percent of Herald's total loans and
leases, net of unearned income.
The terms used in these commitments have the same
meanings as those set forth in the Bank Holding Company
Act of 1956, as amended, and the Board's Regulation Y.
Morgan understands that these commitments constitute
conditions imposed in writing in connection with the
Board's findings and decision on Morgan's application to
retain up to 9.9 percent of the voting shares of Herald,
pursuant to 12 U.S.c. § 1842, and, as such, may be
enforced in proceedings under applicable law.
ORDER ISSUED UNDER
INTERNATIONAL BANKING ACT
Standard Chartered Bank
London, England
Order Approving Establishment of a
Representative Office
Standard Chartered Bank ("Bank"), London, England, a
foreign bank within the meaning of the International Banking Act ("IDA"), has applied under section lOCal of the
IDAl to establish a representative office in Houston, Texas.
The Foreign Bank Supervision Enhancement Act of 1991,
which amended the IDA, provides that a foreign bank must
obtain the approval of the Board to establish a representative office 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 Houston (Houston Chronicle,
January 16, 2009). The time for filing comments has
expired, and all comments received have been considered.
1. 12 U.S.c. §3107(a).
Bank, with total consolidated assets of approximately
$435 billion,2 is the ninth largest bank in the United
Kingdom by asset size.} Bank engages in a broad range of
consumer banking and wholesale banking activities through
numerous offices and subsidiaries located throughout the
world. In the United States, Bank operates state-licensed
branches in Pasadena, California, and New York, New York,
and representative offices in San Diego and San Francisco,
California; Miami, Florida; Atlanta, Georgia; and Jersey
City and Newark, New Jersey. Bank also owns two Edge
corporation subsidiaries (Standard Chartered Overseas
Investment Inc. and Standard Chartered Bank International
(Americas) Limited ("SCBI"» and an agreement corporation subsidiary, Standard Chartered International (USA)
Ltd. Bank is wholly owned by Standard Chartered Holdings Limited,4 which is wholly owned by Standard Chartered PLC ("Standard Chartered"), both of London, England. Standard Chartered and its subsidiaries offer
international banking and financial services in over 50
countries and territories worldwide. s
The proposed representative office would serve as a
liaison between Bank and its customers.O The ollice would
also solicit new business for Bank's wholesale banking
products and services from potential customers in the
United States and serve as a point of contact for clients and
prospective clients of such business in Texas and Latin
America, with an initial focus on clients in the energy
sector. 7
In acting on an application under the IBA and Regulation K by a foreign bank to establish a representative ollice,
the Board shall take into account whether the foreign bank
directly engages in the business of banking outside of the
United States and whether the foreign bank has furnished to
the Board the information it needs to assess the application
adequately.H The Board shall also take into account whether
the foreign bank is subject to comprehensive supervision
on a consolidated basis by its home-country supervisor."
2. Unless otherwise indicated. data are as of December 31, 2008.
3. Ranking data are as of December 31, 2007.
4. Standard Chartered Holdings Limited's only activity is holding
100 percent of the shares of Bank.
5. As of March 2, 2009, Temasek Holdings (Private) Limited
(''Temasek''), Singapore. held 18.81 percent of the voting rights of
Standard Chartered. Temasek does not have representation on the
board of directors of Standard Chartered.
6. A representative office may engage in representational and
administrative functions in connection with the banking activities of
the foreign bank, including soliciting new business for the foreign
bank, conducting research, acting as a liaison between the foreign
bank's head office and customers in the United States, perrorming
preliminary and servicing steps in connection with lending, and
perrorming back-office functions. A representative office may not
contract for any deposit or deposit-like liability, lend money. or engage
in any other banking activity (\2 CFR 211 24(d)(\)).
7. Any transactions resulting from the activities of the representative office will be conducted with Bank's branch in New York.
8. 12 U.S.C. §3107(a)(2)
9. Id.; 12 CFR 211.24(d){2). In assessing the supervision 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
Legal Developments: Second Quarter, 2009
The Board also considers additional standards set forth in
the IBA and Regulation K.1O
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with infonnation necessary to assess the application through submissions that address the relevant issues.
With respect to supervision by home-country authorities,
the Board previously has detennined, in connection with
applications involving other banks in the United Kingdom,
that those banks were subject to home-country supervision
on a consolidated basis by the Financial Services Authority
("FSA"), the primary regulator of commercial banks in the
United Kingdom.11 Bank is supervised by the FSA on
substantially the same terms and conditions as those other
banks. Based on all the factors of record, including the
above infonnation, it has been determined that Bank is
subject to comprehensive supervision on a consolidated
basis by its home-country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K have also been ta~en into account. 12 The
FSA has no objection to the proposed representative office.
With respect to the financial and managerial resources of
Bank, taking into consideration its record of operation in its
home country, its overall financial resources, and its standing with its home-country supervisor, financial and managerial factors are consistent with approval. Bank appears to
have the experience and capacity to support the proposed
representative office and has established controls and procedures for the proposed representative office to ensure
compliance with U.S. law, as well as controls and procedures for its worldwide operations generally. 13
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 the 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.
10. See 12 U.S.c. § 3105(d)(3}--(4); 12 CFR 211.24(c)(2). These
standards include (I) whether the bank's home-country supervisor has
consented to the establishment of the office; the financial and managerial resources of the bank; (2) whether the bank has procedures to
combat money laundering, whether there is a legal regime in place in
the home country to address money laundering. and whether the home
country is participating in multilateral efforts to combat money
laundering; (3) whether the appropriate supervisors in the home
country may share information on the bank's operations with the
Board; and (4) 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.
II. See, e.g., Barclays pic, 91 Federal Reserve Bulletin 48 (2005);
HBOS Treasury Services pic, 90 Federal Reserve Bulletin 103 (2004);
The Royal Bank of Scotland Group, 89 Federal Reserve Bulletin 386
(2003).
12. See supra note 9.
13. On August 3, 2007, American Express Bank International, now
SCBI, came under a Cease and Desist Order from the Board and
entered into a Deferred Prosecution Agreement with the U.S. Department of Justice for persistent deficiencies in its anti-money-Iaundering
B99
The United Kingdom is a member of the Financial
Action Task Force and subscribes to its recommendations
on measures to combat money laundering. In accordance
with these recommendations, the United Kingdom has
enacted laws and created legislative and regulatory standards to deter money laundering, terrorist financing, and
other illicit activities. Money laundering is a criminal
offense in the United Kingdom, and credit institutions are
required to establish internal policies, procedures, and
systems for the detection and prevention of money laundering throughout their worldwide operations. Bank has policies and procedures to comply with these laws and regulations that are monitored by governmental entities responsible
for anti-money-laundering compliance.
With respect to access to information on Bank's operations, the restrictions on disclosure in relevant jurisdictions
in which Bank operates have been reviewed and relevant
governmental authorities have been communicated with
regarding access to information. Bank and Standard Chartered have 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 detennine and
enforce compliance with the IBA, the Bank Holding Company Act of 1956, as amended, and other applicable federal
law. To the extent that the provision of such infonnation to
the Board may be prohibited by law or otherwise, Bank and
Standard Chartered have committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
infonnation. In addition, subject to certain conditions, FSA
may share infonnation on Bank's operations with other
supervisors, including the Board. In light of these commitments and other facts of record, and subject to the conditions described below, it has been detennined that Bank and
Standard Chartered provided adequate assurances of access
to any necessary information that the Board may request.
On the basis of the foregoing and all the facts of record,
and subject to commitments made by Bank and Standard
Chartered to the Board, as well as the terms and conditions
set forth in this order, Bank's application to establish the
representative office is hereby approved. 14 Should any
restrictions on access to information regarding the operations or activities of Bank and its affiliates subsequently
interfere with the Board's ability to obtain information to
detennine 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. Approval of this application also is
specifically conditioned on compliance by Bank and Standard Chartered with the conditions imposed in this order
program. Separately. AEBL, now Standard Chartered International
(USA) Ltd., and the New York State Banking Department entered into
a Written Agreement for the same matters. SCBI and Standard
Chartered International (USA) Ltd. are providing periodic reports
required in their respective enforcement actions and are making
satisfactory progress in addressing the deficiencies.
14. Approved by the Director of Banking Supervision and Regulation, with the concurrence of the General Counsel, pursuant to
authority delegated by the Board. See 12 CFR 265.7(d)(l2).
B 100
Federal Reserve Bulletin 0 August 2009
and the commitments made to the Board in connection with
this application. I5 For purposes of this action, the commitments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its finding and
decision and may be enforced in proceedings under
12 U.S.c. § 1818 against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective May 7, 2009.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
FINAL ENFORCEMENT DECISION
ISSUED BY THE BOARD
IN THE MATTER OF
Francesco Rusciano,
Former Institution-Affiliated Party of
UBSAG,
Zurich, Switzerland
Docket Nos. 09-007-I-E, 09-007-I-CMP
Determination on Request for Private Hearing
BACKGROUND
This is an enforcement proceeding brought by the Board of
Governors of the Federal Reserve System (the "Board")
against Francesco Rusciano pursuant to the Federal Deposit
Insurance Act (the "FDI Act"). Rusciano traded foreign
exchange and debt instruments for the account of UBS AG.
In a Notice of Intent to Prohibit and Notice of Assessment
of a Civil Money Penalty (the "Notice") issued on January 23, 2009, the Board alleged that Rusciano manipulated
UBS's trade recordation systems by falsifying information
about actual transactions and entering fictitious trades in
order to conceal mounting losses in his trading book. The
Notice seeks civil money penalties and an order of prohibition against the Respondent.
In accordance with section 8(u)(2) of the FDI Act,
12 U.S.c. § 1818(u)(2), the Notice advised the Respondent
that any hearing held in this matter would be public, unless
the Board determines that an open hearing would be
contrary to the public interest. The Notice informed
Respondent that he could submit a statement detailing any
reasons why the hearing should not be public. Respondent
duly filed a motion with the Board seeking a private
hearing in this matter. Board Enforcement Counsel opposed
the motion.
15. The Board's authority to approve the establishment of the
proposed representative office parallels the continuing authority of the
state of Texas to license offices of a foreign bank. The Board's
approval of this application does not supplant the authority of the state
of Texas or its agent, the Texas Department of Banking. to license the
proposed representative office of Bank in accordance with any terms
or conditions that it may impose.
In a brief and conclusory pleading, Respondent asserted
that disclosure of the allegations in the Notice would
"damage [Respondent's] reputation and good name" and
that it would "not be possible to undo the damage" if
Respondent is vindicated. Respondent also noted that he
has not been affiliated with a Board-supervised institution
since 2006, so that public disclosure "is unnecessary to
protect the public interest."
DISCUSSION
The enforcement provisions of the Federal Deposit Insurance Act provide that all administrative hearings must be
public unless the Board, in its discretion, determines that a
public hearing would be "contrary to the public interest."
The Board's regulations echo this requirement (12 CFR
263.33(a». In two cases in 1999, the Board set forth the
standard by which requests for private hearings would be
determined. Specifically, the Board ruled that
Before the Board exercises its discretion to close a
hearing, there should be a substantial basis for concluding that the case reflects unusual circumstances that
overcome the presumption in favor of open hearings. In
general, in light of the congressional requirement that
the proceeding be open unless "contrary to the public
interest," those circumstances should involve serious
safety and soundness concerns flowing from a public
hearing .... [A] party seeking a closed hearing should
be required to demonstrate how the effects of this
proceeding differ so significantly from those involving
other banks in terms of the public interest as to warrant
special treatment.
In the Matter of Incus Co., Ltd., 85 Federal Reserve
Bulletin 284, 285 (1999); In the Matter of Fonkenell,
85 Federal Reserve Bulletin 353 (1999) (same).
The reasons given by Respondent here for closing the
hearing to the public do not establish that an open hearing
would be contrary to the public interest. The Board has
previously rejected the argument that reputational concerns
of the respondent or third parties justify closing a hearing to
the public. See In the Matter of Zbinden, 80 Federal
Reserve Bulletin 360 (1994); Fonkenell, 85 Federal Reserve Bulletin at 354; Incus, 85 Federal Reserve Bulletin at
285. Similarly, the fact that Respondent is not currently
employed by a Federal Reserve-regulated institution does
not mean that a public hearing is "contrary to the public
interest." (12 u.s.c. § 1818(u)(2) (emphasis added». Accordingly, these arguments fail to meet the standard
required by the Board to close a hearing to the public.
Accordingly, Respondent's request for a private hearing
is denied.
By order of the Board of Governors, this I st day of
April, 2009.
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
BIO]
November 2009
Legal Developments: Third Quarter, 2009
ORDER ISSUED UNDER
INTERNATIONAL BANKING ACT
Canadian Imperial Bank of Commerce
Toronto, Canada
Order Approving Retention of an Agency
Canadian Imperial Bank of Commerce ("Bank"), Toronto,
Canada, a foreign bank within the meaning of the International Banking Act (HIDA"), has applied under section 7(d)
of the IDA 1 to retain an agency in New York, New York.
The Foreign Bank Supervision Enhancement Act of 1991,
which amended the IDA, provides that a foreign bank must
obtain the approval of the Board to establish an agency 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 Post,
May 11,2(09). The time for filing comments has expired,
and all comments recei ved have been considered.
Bank, with total consolidated assets of approximately
$309 billion,2 is the fifth largest bank in Canada by asset
size. Bank's shares are widely held, with no shareholder or
group of shareholders controlling more than 10 percent of
its outstanding shares. 3 Bank engages in a broad range of
retail banking, commercial banking, private banking, asset
management, and investment banking activities through
numerous offices and subsidiaries located throughout the
world. Outside Canada, Bank has operations in the United
States, the Caribbean, the United Kingdom, Ireland, Australia, Japan, and Singapore.
In the United States, Bank operates a branch in Chicago,
IIIinois;4 two agencies in New York, New York; and
representative offices in Houston, Texas; and Los Angeles,
I. 12 U.S.c. §3l05(d).
2. Unless otherwise indicated, data are as of July 31, 2009,
3, As of July 31, 2009, Royal Bank of Canada, Montreal, Canada,
holds, directly and indirectly in a fiduciary capacity, 10 percent of
Bank's total shares outstanding. Harris Financial Corp., Wilmington,
Oclaware, a subsidiary of Bank of Montreal, Montreal, holds indirectly 5,6 percent of Bank's total shares outstanding, of which
5.1 percent are held in a fiduciary capacity. No other shareholder or
group of shareholders controls more than 5 percent of Bank's outstanding shares.
4. The Chicago branch conducts limited activities and reports no
assets,
California,S Bank is a qualifying foreign banking organization under Regulation K.6
Bank operates a New York agency at 300 Madison
Avenue, The 300 Madison Avenue agency engages in
trading activities, such as securities investments and other
treasury activities, and extends a small volume of credit
products, Some agency activities were recently moved to
425 Lexington Avenue, including real estate financing and
commercial lending, necessitating this application under
section 7(d) of the IDA to retain this location as an agency,
Under the IDA and Regulation K, in acting on an
application by a foreign bank to establish an agency, the
Board must consider whether the foreign bank (I) engages
directly in the business of banking outside of 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 supervisor. 7
As noted above, 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.
With respect to supervision by home-country authorities,
the Board previously has determined that Bank is subject to
comprehensive supervision on a consolidated basis. 8 There
has been no material change in the manner in which Bank
is supervised by Canada's Office of the Superintendent of
Financial Institutions ("OSFI"). Based on all the facts of
record, it has been determined that Bank is subject to
5. Bank downgraded its Los Angeles agency to a representative
office in May 2009,
6. 12 CFR 211.23( a).
7. 12 U,S.c. §3105(d)(2); 12 CFR 211.24(c)(I). In assessing this
standard, the Board considers, among other factors, the extent to which
the home-country supervisors (i) ensure 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 ba~is 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. These are indicia of comprehensive, consolidated supervision. No single factor is essential. and other
elements may inform the Board's determination.
8. Canadian Imperial Balik of Commerce, 87 Federal Reserve
Bulletin 678 (2001); Canadian Imperial Bank (!fCommerce, 85 Federal Reserve Bulletin 733 (1999).
B 102
Federal Reserve Bulletin 0 November 2009
comprehensive supervision on a consolidated basis by its
home-country supervisor.
The additional standards set forth in section 7 of the IBA
and Regulation K have also been taken into accountY The
OSFI has no objection to the proposed agency.
Canada's risk-based capital standards are consistent with
those established by the Basel Capital Accord. Bank's
capital is in excess of minimum levels that would be
required of a U.S. banking organization. Managerial and
other financial resources of Bank also are considered
consistent with approval, and Bank appears to have the
experience and capacity to support the proposed agency.
Bank has established controls and procedures for the
proposed agency to ensure compliance with U.S. law and
for its operations in general.
Canada is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering and terrorist financing. In accordance with those recommendations, Canada has enacted
laws and adopted regulations to deter money laundering
and terrorist financing. Money laundering is a criminal
offense in Canada, and financial institutions are required to
establish internal policies, procedures, and systems for the
detection and prevention of money laundering and terrorist
financing throughout their worldwide operations. Bank has
policies and procedures to comply with these laws and
regulations, and its compliance with applicable laws and
regulations is monitored by Bank's auditors and the OSFI.
With respect to access to information about Bank's
operations, the restrictions on disclosure in relevant jurisdictions in which Bank operates have been reviewed and
relevant government authorities have been communicated
with 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, 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 addition, subject to certain conditions, the
OSFI may share information on Bank's operations with
other supervisors, including the Board. In light of these
commitments and other facts of record, and subject to the
conditions described below, it has been determined that
Bank has provided adequate assurances of access to any
necessary information that the Board may request.
On the basis of the foregoing and all the facts of record,
Bank's application to retain an agency is hereby approved. 1o 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. Approval of this application
also is specifically conditioned on compliance by Bank
with the conditions imposed in this order and the commit~
ments made to the Board in connection with this application.!l
By order, approved pursuant to authority delegated by
the Board, effective September 17, 2009.
ROBERT DEY. FRIERSON
Deputy Secretary of the Board
9. See 12 U.S.c. §3105(d)(3)-(4); 12 CFR 211.24(c)(2). These
standards include 0) whether the bank's home-country supervisor has
consented to the establishment of the office; Oi) the financial and
managerial resources of the bank; (iii) whether the bank has procedures to combat money laundering, whether there is a legal regime in
place in the home country to address money laundering, and whether
the home counlry is participating in multilateral efforts to combat
money laundering; (iv) whether the appropriate supervisors in the
home country may share information on the bank's operations with the
Board; (v) whether the bank and its U.S. affiliates are in compliance
with U.S. law; (vi) the needs of the community; and (vii) the bank's
record of operation.
10. Approved by the Director of the Division of Banking Supervision and Regulation, with the concurrence of the General Counsel,
pursuant to authority delegated by the Board.
II. The Board's authority to approve the agency parallels the
continuing authority of the state of New York to license offices of a
foreign bank. The Board's approval of this application does not
supplant the authority of the state of New York to license Bank's
New York offices in accordance with any terms or conditions that it
may impose.
Index
Cl
Index
A
ACCOUNT debits and overdrafts, AI06
Articles
Changes in U.S. Family Finances from 2004 to 2007: Evidence
from the Survey of Consumer Finances, AI-56
Appendix, survey procedures and statistical measures, A52-55
Assets, A 15--37
Checking accounts, decisions about, A21
Data used in the article, A6
Errata, A56
Financial services, shopping for, A 12-13
Income, A3-10
Liabilities. A37 - 52
Net worth, AIO-15
Financial Crisis and U.S. Cross-Border Financial Flows, The,
A147-167
Banking developments, A 156-160
Conclusion and global overview: Similar porfolio shifts in
other country statistics?, AI64-167
Difficulties in assessing the market value of securities during
the financial turmoil, A 153
F1ight-to-safety shifts in portfolios during the crisis. A148-156
Reductions in foreign exposure in securities. banking, and
nonbank positions, A 160-163
Treasury International Capital (TIC) data reporting system, AI49
HMDA 2008 Data, The: The Mortgage Market during a
Turbulent Year, A169-211
2008 HMDA data on loan pricing, A180-186
2008: A turbulent year, A 170
Changes in total lending by borrower and area characteristics.
AI 94-200
Differences in lending outcomes by race. ethnicity, and sex of
the horrower, A201-21O
Disposition of applications by loan characteristics in 2008,
AI77-180
Mortgage market trends from the HMDA data. AI7O-I77
Private mortgage insurance data, appendix B, A211
Requirements of Regulation C (Home Mortgage Disclosure).
appendix A, A210-211
Surge in FHA and VA lending, A186-194
Industrial Production and Capacity Utilization: The 2009 Annual
Revision, A125-145
Appendix tables, A137-145
Results of the revision. A126-132
Technical aspects of the revision, A132-136
Profits and Balance Sheet Developments at U.S, Commercial
Banks in 2008, A57-97
Adjustments to balance sheet data for structure activity, A62
Appendix tables, A87-97
Balance sheet developments, A61-74
Developments in early 2009, A84-86
International operations of U.S, commercial banks, A83-84
Trends in profitability, A 74-83
US. Households' Access to and Use of Electronic Banking,
1989-2007, A99-121
Accessibility of banking services, A99-104
Appendix A: Sources of data, A118-119
Changes in consumer attitudes toward e-banking over time,
AII4-118
Expansion of e-banking, AI18
How would you like to pay for that?, AIOO
Identity theft, risk reduction, A 117
Mobile banking and payments. A 112·113
Policy challenges and opportunities, A I 18
Survey of Consumer Finances, AI19 (see a/so Articles)
Trends in consumer adoption of e-banking, AI04-114
University of Michigan Surveys of Consumers, A119-120
Assets and liabilities, U.S. families, A I-56
Avery, Robert B., article, A169-211
B
BANK Holding Company Act, orders issued under
AlIianz SE, B71-73
Allied Irish Banks, p.J.c" B81-85
American Express Company, B20-23
American Express Travel Related Services, B20-23
Bank of America Corporation, B 13-19
Caja de Ahorros y Monte de Piedad de Madrid, B23-26
Caja Madrid Cibeles SA, B23-26
CIT Group Inc" B26-29
CM Florida Holdings, Inc" B23-26
First Empire State Holding Company, B81-85
GMAC LLC, B29-34
M&T Bank Corporation, B81-85
Manufacturers and Traders Trust Company. B81-85
Mitsubishi UFJ Financial Group, Inc" B34-39
Morgan Stanley, B86-98
PNC Financial Services Group, Inc" The. BI-13
Protective Life Corporation, B64-80
Southern Bancshares (N.C.), Inc., B66-70
Wells Fargo & Company, B39-52
Banking industry, U.S" A57-97
Bech, Morten L., article, A57-97
Bell, Catherine 1., article, A99-121
Bertaut. Carol c., article, A147-167
Bhutta, Neil, article, A 169-211
Brevoort, Kenneth P., article, A169-211
Bucks, Brian K., article, A I-56
C
CANNER, Glenn 8., article, A 169-211
Capacity utilization, A125-145
Changes in US. Family Finances from 2004 to 2007: Evidence
from the Survey of Consumer Finances, AI-56
Checking accounts, decisions about, A21
Consumers, payment methods and trends, A99-121
Cross-border securities, purchases, A147-167
Current account deficit. US., A147-167
D
DEMOGRAPHICS, income and net worth, AI-56
E
E-BANKlNG, A99-121
E-payment methods and trends, A99-121
Economic indicators. industrial production and capacity utilization,
A125-145
Economy, output, A125-145
Electronic banking, A99-121
Electronic payments and trends, A99-121
Enforcement actions (See Litigation, final enforcement decisions)
Errata notice, Changes in US. Family Finances from 2004 to 2007:
Evidence from the Survey of Consumer Finances, A56
F
FANNIE MAE and Freddie Mac, agency debt, Al54
Federal Reserve Act, orders issued under
ICE US Trust LLL, B73-76
C2
Federal Reserve Bulletin • 2009
Finances, US. families, A I-56
Financial Crisis and US. Cross-Border Financial Flows, The,
A147-167
Financial crisis of 2007-2008, effect on cross-border investment,
A 147-167
Financial crisis, effect on housing market, A 169-211
Financial inflows and outflows, cross-border, A147-167
Financial services, shopping for, A 12
Foreign investment in the United States, A147-167
G
GIBBS, Christa N., article, A169-211
H
HALL, Anne, article, A125-145
HMDA 2008 Data, The: The Mortgage Market during a Turbulent
Year, AI69-211
Hogarth, Jeanne M., article, A99-121
Home Mortgage Disclosure Act of 1975 (HMDA), A 169-2 I I
Homeownership, A 169-21 1
Housing data, A169-211
I
IDENTITY theft, risk reduction, AI17
Income and net worth, US. families, AI-56
Industrial Production and Capacity Utilization: The 2009 Annual
Revision, A125-145
International Banking Act, orders issued under
Banco Espfrito Santo de Investimento, S.A., B53-54
Canadian Imperial Bank of Commerce, BIOI-102
China Construction Bank Corporation, B54-57
Corpbanca, B57-59
DekaBank Deutsche Girozentrale, B77-78
Monte de Piedad y Caja de Ahorros San Fernando de Huelva,
Jerez y Sevilla, B59-61
Standard Chartered Bank, B98-100
International investment, A 147-167
K
KENNICKELL, Arthur B., article, AI-56
L
LEGAL Developments
(See also Bank Holding Company Act, orders issued under; Federal
Reserve Act, orders issued under; International Banking Act,
orders issued under)
First quarter, 2009, B64-80
Fourth quarter. 2008, B 1-63
Second quarter, 2009, B81-100
Third quarter, 2009, B101-102
Lehman Brothers Holdings Inc., AI49
Litigation, final enforcement decisions
Chupik, G. Craig, B79-8O
Dulaney, Kelly M.. B61-63
Rusciano, Francesco, and UBS AG, BIOO
Loans, mortgages, A169-211
M
MACH, Tmci L., article, AI-56
Mobile banking and payments, A112
Moore, Kevin B., article, AI-56
Mortgage data, A 169-211
N
NATIONAL output, industrial production and capacity utilization,
A125-145
Noncash payments, United States, A99-121
o
OUTPUT, manufacturing: Mining and electric and gas utilities,
A125-145
P
PHYSICAL output: Factories, mines, and utilities, A125-145
Pounder, Laurie. article, A147-167
Profits and Balance Sheet Developments at US. Commercial Banks
in 2008, A57-97
R
RICE, Tara. article, A57-97
Robbins, Eric, article, A99-121
S
SECURITIES, foreign and US. purchases, A147-167
Securities, market value assessment during financial turmoil, A 153
Survey of Consumer Finances, A 119 (see also Articles)
T
TREASURY International Capital (TIC) data reporting system.
AI49
u
US. banking industry, A57 -97
US. Households' Access to and Use of Electronic Banking,
1989-2007, A99-121
University of Michigan Surveys of Consumers, A 119120
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