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Autumn 2005

Federal Reserve

BULLETIN
Recent Developments in the Credit Card Market
and the Financial Obligations Ratio
Report on the Condition of the U.S. Banking
Industry: Second Quarter, 2005

T h e Federal Reserve Bulletin (ISSN 0014-9209) is published quarterly by the Hoard of Governors of the
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Volume 91 • Number 4 • A u t u m n 2005

M Federal Reserve

Hi

*. A

BULLETIN

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

PUBLICATIONS COMMITTEE
Lynn S. Fox, Chair • Scott G. Alvarez • Sandra Braunstein • Marianne M. Emerson
• J e n n i f e r J. Johnson • Karen H. Johnson • Stephen R. M a l p h r u s • Vincent R. Reinhart
• Louise L. Roseman • Richard Spillenkothen • David J. Stockton

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is issued quarterly u n d e r the direction of the staff p u b l i c a t i o n s c o m m i t t e e . T h i s c o m m i t t e e is r e s p o n s i b l e for o p i n i o n s e x p r e s s e d

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Table of Contents
473 RECENT DEVELOPMENTS IN THE CREDIT
CARD MARKET AND THE FINANCIAL
OBLIGATIONS RATIO
Over the past fifteen years, U.S. households in
the aggregate have devoted an increasing share
of their after tax income to the payment of
financial obligations. Much of the increase is
attributable to a rise in the level of credit card
debt, which has raised the share of households'
aggregate after tax income that is devoted to
credit card payments.
This article argues that three important developments in the credit card market over the
period account for most of the rise in credit card
payments relative to income and played a strong
role in the rise of the total financial obligations
ratio (FOR). First, improvements in credit scoring technology and the advent of risk based
pricing of credit card debt have increased the
share of households particularly lower income
households with a credit card. Second, in the
1990s, credit card interest rates began to vary
with changes in broader market interest rates,
which in turn led to an especially pronounced
decline in credit card interest rates when, beginning in 2001, market rates turned sharply lower;
the decline in credit card rates raised the demand
for credit card debt. Finally, households have
increased their use of credit cards as a convenient means of paying for daily purchases.
T h e article also considers these findings in
relation to the possible economic implications of
the rise in the revolving credit FOR.

tion of the growth in residential mortgage loans
at some institutions was in adjustable-rate mortgages (ARMs), especially nontraditional products such as option-ARMs. Securities and
money market assets increased 0.8 percent,
much less rapidly than loans. Borrowings
funded a large portion of the growth in total
assets.
Shareholders' equity at reporting bank holding companies rose 3.3 percent ($29.5 billion),
outpacing the rate of growth in total assets.
Notwithstanding small changes during the quarter, regulatory capital ratios overall remained
strong for the industry. Credit quality continued
to improve, as nonperfWming assets fell to a
remarkably low 0.71 percent of loans and related
assets, a reduction of 5 basis points from the first
quarter. Earnings totaled $32.7 billion for the
second quarter, a little lower than in the previous
period despite an increase of $1.2 billion in
investment securities gains.
493 ANNOUNCEMENTS
Chairman Alan Greenspan names Governor
Donald L. Kohn as designee
Statement by Chairman Alan Greenspan on the
appointment of Ben S. Bernanke
Change in tentative Federal Open Market Committee meeting schedule for 2006
Federal Open Market Committee statements
Increase in discount rate
Proposed amendments to Regulation E

487 REPORT ON THE CONDITION OF THE U.S.
BANKING INDUSTRY: SECOND QUARTER,

Request for comment on Regulation Z

2005

Amendment to Regulation CC, appendix A

Assets of reporting bank holding companies rose
$235 billion in the second quarter, to $10.9 trillion, 2.2 percent higher than in the first quarter,
with loan growth accounting for almost 70 percent of this expansion. The strong increase in
loans occurred mainly in mortgage-related categories, both residential and commercial, and in
commercial and industrial loans. A sizable por-

Proposal to expand the definition of a small
bank holding company
Board statement on supervisory practices for
financial institutions and borrowers affected by
Hurricane Katrina
Orders exempting bank transfer agents affected
by Hurricane Katrina

Waiver of appraisal requirements for financial
institutions affected by Hurricanes Katrina and
Rita
Annual adjustments for reserve calculations and
deposit reporting
Proposed revisions
Accord (Basel I)

to

1998

Basel

Capital

Modifications to methodology used to calculate
private-sector adjustment factor
Fee schedules for Federal Reserve Bank priced
services
List of distressed and underserved nonmetropolitan middle-income geographies
Insured depository institutions encouraged to
assist displaced customers
Data s h o w continued improvement in credit
quality
Revised plan for implementation of Basel II
framework
C o m m e n t requested on suggested domestic riskbased capital modifications
July 2005 update to the Bank Holding
Supervision Manual

Company

Changes in publishing format of the Federal
Reserve Bulletin
Minutes of the Federal Open Market Committee

Minutes of the B o a r d ' s discount rate meetings
Meeting of the Consumer Advisory Council
Enforcement actions
Changes in Board staff
5 0 7 LEGAL DEVELOPMENTS

Various bank holding company, bank service
corporation, and bank merger orders
531 CHANGES IN PUBLISHING FORMAT OF THE
FEDERAL RESERVE BULLETIN
5 3 2 BOARD
STAFF

OF GOVERNORS

AND OFFICIAL

5 3 4 FEDERAL OPEN MARKET COMMIITEE
STAFF; ADVISORY COUNCILS
5 3 6 FEDERAL

RESERVE

BOARD

AND

PUBLICATIONS

5 3 8 ANTICIPATED SCHEDULE OF RELEASE
DATES FOR PERIODIC STATISTICAL
RELEASES
5 4 0 MAPS OF THE FEDERAL
5 4 2 FEDERAL RESERVE
AND OFFICES

RESERVE

BANKS,

5 4 4 INDEX TO VOLUME 91

SYSTEM

BRANCHES,

Recent Developments in the Credit Card Market
and the Financial Obligations Ratio
Kathleen W. Johnson, of the Board's Division of
Research and Statistics, prepared this article. Tsz-Yan
Doris Sum provided research assistance.
Over the past fifteen years, U.S. households in the
aggregate have devoted an increasing share of their
after-tax income to the payment of financial obligations. Much of the increase is attributable to a rise
in the level of credit card debt, which has raised the
share of households' aggregate after-tax income that
is devoted to credit card payments. In turn, the rising
share of credit card debt in overall financial obligations may stem from several notable changes in the
credit card market over this period.
Financial obligations such as credit card debt and
housing costs require monthly payments whose level
relative to income is, of course, a vital concern to the
individual household. A household's choice to take
on obligations that increase these payments may represent an accurate assessment by the household of
its ability to make payments on its obligations. However, devoting more income to required debt payments and other obligations will make the household
more likely to default in the event of job loss or
illness.
Likewise, an aggregate measure of payments on
household financial obligations relative to income
is of interest to economic policy makers because of
potential concerns about the vulnerability of the
household sector as a whole. In 1980, the Federal
Reserve Board began calculating and tracking the
ratio of households' aggregate required monthly payments on mortgage and consumer debt to their aggregate after-tax (that is, disposable) income, a measure
called the debt service ratio (DSR). To gain a broader
picture of households' financial position, the Federal
Reserve Board in 2003 introduced a new measure,
called the financial obligations ratio (FOR). 1 The new
measure added other types of obligations to those of
the DSR, namely payments on auto leases and housing expenses for rent, homeowner's insurance, and
real estate taxes. As with the DSR, the obligations in
1. F o r a d i s c u s s i o n of t h e D S R a n d F O R , s e e D y n a n , J o h n s o n , a n d
Pence (2003).

1.

H o u s e h o l d f i n a n c i a l o b l i g a t i o n s ratio ( F O R ) ,
1980-2005:Q2
Percent

—

1980

1985

1990

1995

18

2005

NOTK: T h e data are quarterly. Shaded bars are periods of recession as
defined by the National Bureau of Economic Research. The FOR consists of
the aggregate required monthly payments of the household sector on consumer debt, mortgages, h o m e o w n e r ' s insurance, real estate taxes, rent, and
auto leases as a percent of aggregate after-tax personal income.
SOURCE: Federal
Reserve
Board
(www.federalreserve.gov/releases/
housedebt).

the FOR are presented as a share of aggregate, aftertax income.
For a given level of aggregate income, no clear line
separates an appropriate level of payments on financial obligations from an excessive one, but the current level of the FOR is elevated relative to historical
experience. It stood at 18V3 percent in the second
quarter of 2005, a level noticeably above its value
fifteen years earlier (chart 1). Of the major components of the FOR, the ratio of credit card payments
to disposable income rose the most over this period.
Mortgage payments also rose significantly as a share
of income, but payments on other types of debt
obligations fell (chart 2).
This article argues that three important developments in the credit card market over the past fifteen
years account for most of the rise in credit card
payments relative to income. First, improvements
in credit-scoring technology and the advent of riskbased pricing of credit card debt have increased
the share of households—particularly lower-income
households—with a credit card. Second, in the 1990s,
credit card interest rates began to vary with changes

474

2.

Federal Reserve Bulletin • Autumn 2005

S e l e c t e d c o m p o n e n t s of t h e f i n a n c i a l o b l i g a t i o n s ratio,
1989—2(X)5:Q2
Percent

Mortgage FOR

cial vulnerability if households are willing and able
to pay off these card charges each month. In addition, the rise in payments associated with the increase
in credit availability due to credit scoring may be
accompanied by some benefits: More widespread
access to credit may help more households maintain
their consumption during temporary income disruptions and in turn contribute to the stability of the
macroeconomy.

Consumer nonrevolving credit FOR

DEVELOPMENTS
Consumer revolving credit FOR

Li
1990

1995

2000

2005

NOTE: T h e data are quarterly. For a description of consumer revolving
credit, see text note 2. Nonrevolving debt consists of credit accounts that
terminate when the balances are paid off; such accounts include loans for
motor vehicles, household goods, and education. Data shown for each type of
debt are the aggregate required monthly payments for that type as a percent of
aggregate after-tax income. See also note to chart 1.
SOURCE: Federal Reserve Board.

in broader market interest rates. In turn, this
co-movement led to an especially pronounced decline
in credit card interest rates when, beginning in 2001,
market rates turned sharply lower; the decline in
credit card rates raised the demand for credit card
debt. Finally, households have increased their use of
credit cards as a convenient means of paying for daily
purchases.
The article estimates the quantitative effect of each
of these three developments on the revolving consumer (that is, nonmortgage) credit portion of the
FOR—the ratio of required minimum payments on
revolving consumer credit relative to disposable
income. 2 The analysis indicates that these three developments in the credit card market together
accounted for most of the rise of the revolving credit
FOR and played a strong role in the rise of the total
FOR.
In a concluding section, the article considers these
findings in relation to the possible economic implications of the rise in the revolving credit FOR. For
example, a rise in required credit card payments
stemming from a greater use of credit cards to pay for
day-to-day purchases may not signal greater finan-

2. A c r e d i t c a r d a c c o u n t is a type of c o n s u m e r (that is, n o n m o r t g a g e ) r e v o l v i n g credit. G e n e r a l l y , r e v o l v i n g credit e x t e n s i o n s c a n b e
m a d e at t h e c u s t o m e r ' s d i s c r e t i o n , p r o v i d e d that they do n o t c a u s e the
o u t s t a n d i n g b a l a n c e of the a c c o u n t to e x c e e d a p r e a r r a n g e d credit
limit. R e v o l v i n g credit r e p a y m e n t s are also at the c u s t o m e r ' s d i s c r e tion, s u b j e c t to a p r e a r r a n g e d m i n i m u m , a n d m a y b e m a d e in o n e o r
m o r e i n s t a l l m e n t s . M o r e than 9 0 p e r c e n t of c o n s u m e r r e v o l v i n g d e b t
is credit c a r d debt.

IN THE CREDIT

CARD MARKET

Three developments in the credit card market likely
accounted for much of the rise in household financial
obligations over the past fifteen years: an expansion
in the prevalence of credit cards among lower-income
households, the widespread adoption of variable-rate
cards, and a greater willingness of households to use
their credit cards for day-to-day purchases of goods
and services. The available data—from the Federal
Reserve Board's triennial Survey of Consumer
Finances—allow a comprehensive analysis of the
importance of each development for the period. The
survey conducted nearest the beginning of the fifteenyear period was in 1989, and the survey for which the
most recent data are available was conducted in 2001.

The Expansion

of the Credit

Card Market

More and more households have gained access to
credit cards over the past decade and a half. The
share of households with at least one credit card rose
from 70 percent in 1989 to 76 percent in 2001
(table 1). Determining which group of cardholders in
2001 would not have been cardholders in 1989 will
help us estimate the effect that the expansion in
cardholding had on household financial obligations.
Broadly speaking, an expansion of cardholding could
arise through two channels. First, changes in supply
or demand conditions in the credit card market, holding the characteristics of households fixed, could
increase the share of households with credit cards.
Such developments may include changes in credit
card underwriting standards or a general increase in
households' desire for credit cards. Second, changes
in household characteristics may increase the percentage of households who qualify for a credit card under
a given set of underwriting standards.
The analysis presented below suggests that much
if not most of the rise in cardholding over the 19892001 period came from an expansion of supply to
riskier households—those that would not have quali-

Recent Developments

I.

in the Credit Card Market and the Financial Obligations Ratio

475

P r o p o r t i o n o f h o u s e h o l d s w i t h at l e a s t o n e c r e d i t c a r d , b y i n c o m e q u i n t i l e , s e l e c t e d y e a r s , 1 9 8 9 - 2 0 0 1
Percent

1989

1992

1995

1998

2001

Percent increase,
1989-2001'

All

69.5

71.9

74.4

72.7

76.3

9.8

Lowest
Second lowest
Middle
Second highest
Highest

29.3
57.1
75.9
87.1
95.5

33.0
66.9
74.2
88.8
94.6

38.2
63.9
78.3
91.5
98.0

34.7
64.4
77.7
88.5
96.6

42.9
67.4
82.1
88.5
97.1

46.5
18.1
8.3
1.7
1.7

I n c o m e quintile

NOTE: For t y p e s of credit cards c o n s i d e r e d and definition o f c o n c e p t s of
h o u s e h o l d and h e a d of h o u s e h o l d used in the tables, s e e text note 3.

.SOURCE: Here and in the f o l l o w i n g tables, Federal
Survey of C o n s u m e r R n a n c e s and author's calculations.

Reserve

Board's

1. C o m p u t e d f r o m unrounded data.

fied for a card in 1989. In the mid-1990s, card issuers
began ranking applicants according to their probability of default; instead of denying cards to all those
who posed too great a risk for a given interest rate
on the card, they began issuing cards to some of the
higher-risk applicants and set the interest rate on
these riskier accounts high enough to compensate the
lenders for the greater risk (Edelberg, 2003). The
practice of issuing cards to higher-risk household was
a significant change in the supply conditions in the
credit card market.

Credit Scoring and Risk-Based Pricing
Lenders can rank applicants according to their likelihood of default through a measure called a credit
score, which aggregates the factors in a potential
borrower's credit history that are associated with a
willingness and ability to pay. The higher the credit
score, the more likely is the applicant to pay as
agreed on a new credit account. The adoption of
flexible, or risk-based, pricing allows creditors to
issue cards to less-qualified applicants in exchange
for a higher interest rate on the card. Credit scoring
was considered by providers of consumer credit as
early as the late 1930s, but the practice did not
become widespread until the 1990s, when computers
capable of processing large amounts of data became
widely used (McCorkell, 2002).
Risk-based pricing has increased the availability of
credit cards for all households, but its effect has been
the greatest among riskier households. In particular,
the rate of cardholding among households in the
lowest quintile of the income distribution rose about
half, from 29 percent to 43 percent, between 1989
and 2001 (table 1), whereas the rate of cardholding
rose only 10 percent in the general population, from
70 percent to 76 percent. Among households in the
lowest income decile (not shown in the table), the
rate of cardholding about doubled over the period,
from 18 percent to 35 percent. The rate among house-

holds who reported having been previously denied
credit also rose more than did the overall rate.
These patterns are consistent with an expansion
of cardholding through the first channel—in this case,
a higher supply of cards through the use of credit
scoring. The possibility remains, however, that the
increase in cardholding may have also arisen, at least
in part, through the second channel—that is, the
characteristics of these new cardholders may have
improved over the period. For example, they may
have demonstrated a better employment history or a
better record of paying rent and utility bills; in this
case, a rise in creditworthiness could have produced
more widespread cardholding among lower-income
households rather than a change in underwriting standards. We can sort out the relative influence of the
two channels with a statistical model.

Who Are the New Cardholders?
I apply a statistical model to data from the Federal
Reserve Board's triennial Survey of Consumer
Finances (SCF). Each SCF obtains detailed demographic and financial information from a statistically
representative national sample of approximately
3,000 households. The model used here links the
characteristics of households in the survey to the
probability that they hold at least one credit card.
The characteristics used to predict cardholding
were income, wealth, number of children, the age of
the household head, and indicators for the sex, marital status, and education of the household head. 3 The
predictors also included an indicator for whether a
3. See Aizcorbe, Kennickell, and M o o r e (2003) for a presentation
of results of the 2001 S C F (the most recent survey for which data
are available); see p. 30 of that work for a definition of the terms
household
and head of household
used here. T h e types of cards
considered in the surveys include bank-issued cards, store cards and
charge accounts, gasoline company cards, and so-called travel and
entertainment cards such as American Express and Diners' C l u b
(p. 24, note 27).

476

2.

Federal Reserve Bulletin • Autumn 2005

S e l e c t e d c h a r a c t e r i s t i c s of h o u s e h o l d s , by w h e t h e r they
hold a credit card, 1989
Perecnt except as noted
Mean
Characteristic

Holds a
credit card

Income (thousands of dollars) . . .
Wealth (thousands of dollars)
Number of children
Recently delinquent 1
Head of household
Age (years)
No high school degree
College degree
Married
Male

Does not
hold a
credit card.

63.2
315.9
.7
3.3

20.0
60.4
.8
10.0

48.4
15.7
36.5
64.0
77.3

46.9
44.4
8.1
35.0
59.2

1. Delinquent sixty days or more in the past year.

household was two months or more behind in debt
payments in the past year (table 2).
These characteristics differ significantly between
those households with credit cards and those without
and thus serve as good predictors of cardholding. For
example, in the 1989 SCF, households that held credit
cards had significantly higher wealth and income
than non-cardholders (table 2, first and second columns). In addition, the heads of cardholding households were more often college-educated, married, or
male. Finally, cardholding households were less
likely to have been behind on a loan payment in the
preceding year.
The statistical model can focus on the effect that
each characteristic has on the probability of cardholding by keeping the other characteristics constant. 4
Estimates suggest that all the selected characteristics
except the age and marital status of the household
head had a large and statistically significant influence
on the probability that a household held a credit card
in 1989.
The model can also shed light on the extent to
which changes in supply factors (lenders' willingness
to issue a card to a given household) and demand
factors (a given household's interest in holding one)
together contributed to the rise in cardholding
between 1989 and 2001. 5 Any portion of the rise in
credit card availability not attributable to supply and
demand factors may be attributable to changes in the

financial characteristics that have increased the creditworthiness of households.
To separate these effects, I estimated the model
first with data from the 1989 SCF and then with data
from the 2001 SCF. Using the two sets of estimates
and the characteristics of households in the two years,
I first calculated the overall change in the estimated
probability of cardholding between 1989 and 2001
(table 3, first column). To isolate the effect of changes
in supply and demand conditions between these
years, I calculated a hypothetical probability of cardholding in 2001 based on the 1989 household characteristics and the 2001 estimation results. In other
words, I predicted which households in 2001 would
have been holding cards if there had been no changes
in the characteristics of households since 1989. The
difference between this hypothetical probability for
2001 and the estimated probability for 1989 corresponds to the effcct of changes in supply and demand
conditions from 1989 to 2001 (table 3, second column). The part of the overall change in the estimated
probability not explained by changes in supply and
demand is that associated with changes in household
characteristics (table 3, third column).
For the general population, the results imply that
changes in supply and demand conditions account
for only 2 percentage points of a 7 percentage point
overall rise in the estimated probability of cardholding. But, in the lowest quintile of income, where the
estimated probability of cardholding rose far more
than the average, more than half of the effect-—9 of
the 16 percentage points of gain in the probability—is
attributable to supply and demand factors. Although
the model cannot distinguish changes in supply from
changes in demand, the result is certainly consistent
with an increase in the supply of credit cards for the
lowest-income households (see also Bostic, 2002).

3.

C h a n g e in t h e e s t i m a t e d p r o b a b i l i t y t h a t a h o u s e h o l d
h o l d s a credit card, and s o u r c e of c h a n g e , by i n c o m e
quintile, selected years, 1 9 8 9 - 2 0 0 1
Percent except as noted
Source of change
Income quintile

4. T h i s t e c h n i q u e , called a probit m o d e l , h a s b e e n u s e d by K l e e
( 2 0 0 4 ) and D u c a and W h i t e s e l l ( 1 9 9 5 ) . T h e m o d e l d o e s a f a i r l y
a c c u r a t e j o b o f p r e d i c t i n g w h e t h e r e a c h h o u s e h o l d in the 1989 data set
held a credit c a r d . It c o r r e c t l y predicts actual c a r d h o l d i n g f o r 91 percent of h o u s e h o l d s with at least one c a r d and 5 6 p e r c e n t of h o u s e h o l d s
with no c a r d , f o r an overall c o r r e c t p r e d i c t i o n rate of 81 p e r c e n t .
5. T h e

model

demand factors.

cannot

identify supply

factors separately

All

Second lowest
Middle
Second highest

from
NOTE: For details, sec text.

Change in
probability

Change in
supply and
demand
conditions

Change in
household
characteristics

7

2

S

16
10
7
3
0

9
4

7
6
6
4
2

. 1
-1
-2

Recent Developments

in the Credit Card Market and the Financial Obligations Ratio

The m o d e l can also be used to identify the likely
households in each survey w h o acquired cards most
recently. Such households are termed here as " n e w
cardholders" and are defined as those households
with the lowest estimated probability of holding a
credit card. A n examination of changes in the characteristics of new cardholders over time also suggests
an increase in the supply of credit cards to riskier
households (table 4). N e w cardholders in surveys
after 1989 are more likely to have been delinquent on
a loan in the preceding six months and are also
younger and have more children; these patterns suggest that new cardholders now are likely less creditworthy than those in the past. Work by other
researchers, w h o examined the 1989-95 period, corroborates the view that the average cardholder has
become riskier over that period—the average cardholder had less job seniority, had lower income, had
lower liquid assets, was more willing to use debt to
finance consumption (an attitude considered to be a
"riskier" view of credit), and was more likely to be
single and b e a renter (Black and Morgan, 1998).
The credit card debt taken on by these new cardholders probably raises the ratio of aggregate measured revolving credit payments to aggregate income.
The effect on the overall F O R may be damped,
however, if these households substituted credit card
debt for other measured f o r m s of credit, such as
personal loans and installment loans. But given that
access to these forms of credit for these new cardholders was likely limited in the past, substitution
(to the degree it occurred) was probably out of

4.

Financial and d e m o g r a p h i c characteristics of existing
and n e w cardholders, selected years, 1992-2001
Percent except as noted
Cardholder and characteristic
Estimated existing cardholders
Income (thousands of dollars) . . .
Wealth (thousands of dollars)
Number of children
Recently delinquent 1
Head of household
Age (years)
No high school degree
College degree
Married
Male
Estimated new cardholders
Income (thousands of dollars) . . .
Wealth (thousands of dollars)
Number of children
Recently delinquent 1
Head of household
Age (years)
No high school degree
College degree
Married
Male

1992

1995

1998

200!

56.8
288.5
.7
3.0

61.4
318.9
.7
3.0

69.7
394.4
.7
4.0

85.3
532.2
.7
2.0

48.7
10.0
42.0
64.0
78.0

48.7
9.0
40.0
62.0
78.0

49.3
7.0
44.0
62.0
78.0

8.6
21.0
.7
9.0

11,4
24.2
.7
13.0

12.5
7.7
1.2
24.0

16.0
24.2
1.0
19.0

50.8
54.0
.3
19.0
63.0

52.1
53.0
5.0
24.0
54.0

44.6
51.0
6.0
16.0
66.0

46.1
43.0
2.0
21.0
61.0

NOTE: For calculation of existing and new cardholders, see text,
1. Delinquent sixty days or more in the past year.

.

49.7
6.0
45.0
63.0
79.0

All

unmeasured forms of debt. For example, in a survey
of households in low- and moderate-income areas of
Los Angeles, Chicago, and Washington, 53 percent
of respondents said they would rely on friends or
family to borrow $500 for three months, and 15 percent said they had obtained financing f r o m institutions not captured by aggregate statistics, such as
p a w n shops, payday lenders, and rent-to-own
establishments/'

Closer Relation of Credit
to Broader Market Rates

Card Interest

Rates

T h e second important development in the credit card
market is the closer relation of credit card interest
rates to broader market rates. In particular, this development allowed credit card interest rates to m o v e
d o w n when market rates began to fall in 2001, which
in turn significantly boosted the demand for credit
card debt and the payments required to service this
debt.
One might expect credit card interest rates to vary
with the cost of funds, given the important role of
these costs in lenders' credit card expenses. 7 But, in
the 1980s and early 1990s, credit card interest rates
changed little, showing a correlation with the prime
rate (a good measure of the cost of funds) of only
about 0.09 (see box "Theories of Credit Card Interest
Rate 'Stickiness' " for a discussion of some possible
reasons for this early unresponsiveness). The correlation subsequently rose sharply, and it has averaged
0.90 during the past ten years. Notably, the average
credit card interest rate in real terms (that is, adjusted
for inflation) declined in tandem with the real prime
rate f r o m the first quarter of 2001 to the second
quarter of 2004, when the real prime rate hit its most
recent low (chart 3).
The rapid growth of variable-rate cards since 1989
materially contributed to the increase in the flexibility
in interest rates on credit cards. A variable-rate credit
card carries an interest rate that maintains a constant margin, or spread, over a stated market reference rate such as the prime rate or the LIBOR (the
London interbank offered rate). In 1989, variable-rate
credit cards accounted for only about 3 percent of
credit card accounts. By 1994, this share had grown
6. S i e d m a n , H a b a b o u , and K r a m e r ( 2 0 0 5 ) . R e n t - t o - o w n e s t a b l i s h m e n t s o f f e r c o n s u m e r s the o p t i o n to a c q u i r e the o w n e r s h i p of m e r c h a n d i s e b y r e n t i n g it f o r a s p e c i f i e d p e r i o d of time.
7. O n e i n d u s t r y s o u r c e f o u n d that t h e c o st of f u n d s a c c o u n t e d f o r
4 3 p e r c e n t of the cost of credit e x t e n d e d t h r o u g h credit cards b e t w e e n
1990 and 1 9 9 3 ( C r e d i t Card News, M a y issue of various years).

478

3.

Federal Reserve Bulletin • Autumn 2005

A v e r a g e real credit card interest rate and
the real prime rate, 1 9 8 9 - 2 0 0 5 : Q 2
Percent

— 16

Credit card interest rate

Prime rate

1990

1995

2000

2005

NOTE: T h e d a t a are q u a r t e r l y .
SOURCE: F e d e r a l R e s e r v e B o a r d .

to about 60 percent; it is now probably close to
75 percent. 8
A key to the lender's choice of variable-rate versus
fixed-rate pricing lies in the behavior of cardholders
who are the most profitable to card issuers. 9 In general, the most profitable cardholders are those who
carry large amounts of debt on their cards because
they pay more interest than other cardholders
(although this benefit is offset by the fact that some
high-debt cardholders may have a higher likelihood
of default). Several factors have increased the odds
that profitable cardholders will switch to lower-rate
cards; these factors have thus increased the incentive
for lenders to lower credit card interest rates when
their cost of funds allows it.
The first of these factors is that households may
have become better able to predict how much credit
card debt they will carry from month to month in the
future and how much in interest costs they will incur.
According to recent research, most consumers who
were presented with a choice between two credit card
contracts chose the contract that was optimal given
their actual future borrowing. 1 0 This realistic assessment by cardholders of their borrowing needs implies
that a large proportion of borrowers who carry debt
will respond to an offer of a card with a lower rate.

8. S t a n g o ( 2 0 0 0 ) and a u t h o r ' s c a l c u l a t i o n s .
9. T h e g r e a t e r p r e v a l e n c e of v a r i a b l e - r a t e c a r d s c a n also b e
e x p l a i n e d by an i n c r e a s e in m a r k e t c o n c e n t r a t i o n ( s e e S t a n g o , 2 0 0 0 ) ,
a n d , i n d e e d , the ten largest c a r d i s s u e r s d o u b l e d their m a r k e t s h a r e
f r o m 4 0 p e r c e n t in 1989 to a b o u t 80 p e r c e n t in 2 0 0 4 .
10. A g a r w a l and o t h e r s ( 2 0 0 5 ) ; t h e data in that w o r k c a n n o t
d e m o n s t r a t e a c h a n g e f r o m t h e early to late 1990s in h o u s e h o l d s '
ability to a s s e s s their b o r r o w i n g n e e d s

A second reason that consumers with relatively
large amounts of credit card debt may be more
responsive to changes in credit card interest rates is
that the cost of searching for a lower-rate card has
declined. For example, a dramatic increase in advertising by credit card companies may have made it
easier to compare rates across cards. The number of
credit card solicitations jumped from about ten per
U.S. household in 1992 to more than forty in 2004. 1 1
In addition, the Internet has become a potent source
of information about credit card terms; a recent online search of the term "compare credit card interest
rates" yielded about 1,000 results. Changes in federal
law have probably also made it easier for households
to compare credit card terms. In 1988, the Congress
amended the Truth in Lending Act to require that all
credit card solicitations include information about the
annual percentage rate, annual fee, minimum finance
charge, transaction charge, grace period, balance
computation method, cash advance fee, late payment
fee, over-the-limit fee, and balance transfer fee. 1 2
Lastly, credit card lenders have invested in information technology that allows them to better identify
the least risky households with high levels of credit
card debt. As a result, lenders can make offers to only
those high-debt consumers who are expected to be
profitable. Thus, although consumers with high levels
of credit card debt are more likely than others to be
turned down for a credit card, the gap in probabilities
is narrowing. 1 3 All told, these developments have
likely increased the share of switching done by profitable households with high levels of credit card debt
and in turn increased the incentive for lenders to
adjust credit card interest rates.

Credit Cards as a Payment Method
A third important development in the credit card
market is an increase in the transactions demand for
credit cards. Such demand harks back to the purpose

11. h t t p : / / c o r e . s y n o v a t e . c o m / m a i l v o l . a s p ; a n d w w w . c e n s u s . g o v /
p o p u l a t i o n / w w w / i n d e x . h t m l ( u n d e r " P o p u l a t i o n D a t a by S u b j e c t "
select " F a m i l i e s " and then scroll to " T a b l e H H - 1 " ) .
12. E v e n with a d e c l i n e in search costs, credit card interest rates
may r e m a i n sticky if profitable, h i g h - d e b t c o n s u m e r s r e m a i n less
likely to s e a r c h than other h o u s e h o l d s . A n a l y s e s of S C F data b y
Calem and Mester (1995) do show a negative relationship between
high c r e d i t c a r d d e b t and w i l l i n g n e s s to s h o p for better credit c a r d
t e r m s ; h o w e v e r , w o r k by C a l e m , G o r d y , and M e s t e r ( 2 0 0 5 ) , C r o o k
( 2 0 0 2 ) , a n d the p r e s e n t a u t h o r i n d i c a t e that the r e l a t i o n s h i p has
w e a k e n e d s i n c e then.
13. T h i s a s s e r t i o n is b a s e d o n an a n a l y s i s of 1989 and 2 0 0 1 S C F
data by t h e p r e s e n t a u t h o r that b u i l d s o n w o r k b y C a l e m and M e s t e r
(1995).

Recent Developments

in the Credit Card Market and the Financial Obligations

Ratio

479

Theories of Credit Card Interest Rate "Stickiness"
Credit card interest rates did not respond to changes in
the cost of funds before the mid-1990s. The causes of this
interest rate "stickiness" have been debated in the economics literature. Many authors have asserted that when the cost
of funds declined, credit card lenders did not reduce their
interest rates because doing so seemed likely to attract
borrowers who were less profitable.1
One theory posited the existence of three types of credit
card consumer to explain why . only less profitable consumers were likely to switch to cards with lower interest rates
(Ausubel, 1991). The first type used a credit card only to
transact (make day-day-purchases) and did not carry a
balance. The second type used a card to borrow and planned
to carry a balance. The third type did not plan on borrowing
for the long term but ultimately was likely to carry a
balance. The first and third types would not switch cards
when a lower interest rate alterpative was presented because
they did not think they would borrow and pay interest; only
consumers who knew they would borrow would decide to
switch. If those who planned to carry a balance are less
profitable than other consumers (perhaps because they have
higher default rates) firms would be reluctant to reduce their
interest rates.
Another theory explained sticky interest rates by asserting that the most profitable customers had higher costs both
1. Because they were written at a time when general market rates were;
, declining, these papers do not address the causes of upward stickiness, that
is, the reasons why credit card interest rates did not rise with general market
rates.-;Y." ,

of the original third-party charge card, which was
issued in 1950 by D i n e r s ' C l u b for use in restaurants
(Evans and Schmalensee, 2005, p. 4). C h a r g e s had
to paid in full each m o n t h , so the card represented
only a convenient p a y m e n t m e t h o d rather than a way
to obtain longer-term financing. A m e r i c a n E x p r e s s
cards were launched in 1958, also as transaction
cards, but B a n k of A m e r i c a f o l l o w e d in the s a m e
year with the first general-purpose credit card on
which only a portion of the balance n e e d e d to be paid
each month.
Over time, many financial institutions began offering cards that offered the option of p a y i n g only a
portion of the b a l a n c e each month. A l t h o u g h the
long-term-loan c o m p o n e n t of credit card debt c a m e
to exceed the transactions c o m p o n e n t , the transactions d e m a n d for credit cards has nonetheless continued to grow. For transactions, credit cards h a v e several advantages over cash. First, unlike cash, a credit
card m a y o f f e r c o n s u m e r s protection w h e n it is lost
or stolen. Second, credit cards permit households to
earn interest on their f u n d s during the period b e t w e e n

of searching for a new card and of switching to that card
(Calem and Mester, 1995). In this argument, consumers
with high amounts of debt were the most profitable for the
credit card lenders.2 But these consumers were also the least
likely to search for a card with a lower interest rate because
they were more impatient (which is why they borrowed so
much) and because they were more likely to be turned
down for a new card owing to their high debt, All told,
these factors implied that a firm that lowered its rates would
have its pool of borrowers shift toward less profitable ones
(those with less debt) because they were the most likely to
switch to a lower-rate card.
A third theory asserted that credit card interest rates
appeared sticky because borrowers switched from credit
cards to other forms of financing when the cost of funds
declined (Brito and Hartley, 1995). In response to the loss
of borrowers, credit card lenders lent to riskier households
and charged them higher interest rates to compensate for
their higher probability of default. This change in the composition of credit card borrowers offset the effect of a lower
cost of funds; thus, credit card interest rates did not decline
with the cost of funds.
: 2. This assertion is plausible: According to Credit Card News (May issue,;
various years) interest charges on borrowing accounted for an average of
.73 percent of the"revenue of credit,card lenders between 1990 and 1993.
However, some portion of the profits: from interest charges levied on highdebt consumers would be offset by their greater propensity to default. - : V

the transaction and the p a y m e n t of the credit card bill
(the interest earned in this w a y is k n o w n as " f l o a t " ) .
Indeed, researchers have f o u n d that households with
credit cards tend to have lower balances in their
transactions accounts than do households without
credit cards, which suggests that households m a y be
holding f u n d s in accounts that offer higher yields
until they need to pay off their credit cards. 1 4 Credit
cards also offer the c o n s u m e r an advantage over
checks in that it is faster to swipe a card through a
terminal than to write a check.
In m o r e recent years, transactions d e m a n d f o r
credit cards has been spurred by card issuers that
h a v e responded to increasingly intense competition
by offering rewards for heavy credit card use. Such
rewards include cash-back rebates on purchases, discounts on merchandise, and " m i l e a g e " programs that
cover travel expenses. These programs, which add to

14. See, for example, D u c a and Whitesell (1995), White (1976),
and Mandell (1972). Transactions accounts are checking, savings, and
m o n e y market accounts us well as cash accounts at brokerages.

480

Federal Reserve Bulletin • Autumn 2005

the benefits of using cards over cash, encourage the
transactions use of cards because they generally do
not require the cardholder to carry the balance from
month to month to receive the rewards. 15
Transactions demand has also grown because
opportunities for credit card transactions have risen
in the past decade. 16 According to the Census Bureau,
sales over the Internet and by mail order have
increased considerably in recent years, and credit
cards likely are used for many of these transactions.
Sales in these categories have increased close to
15 percent per year since 1999, the first year for
which e-commerce data were collected. 17 Even traditional brick-and-mortar stores have increased their
acceptance of credit cards. In 1989, about 23/4 million
merchants accepted Visa cards; by 2000, that number
had reached 4lA million. 18
Increased transactions demand raises the aggregate
level of credit card debt outstanding as currently
measured. Suppose, for example, that a consumer
charges $500 on the fifteenth day of one month and
pays it off on the fifteenth day of the next month.
Aggregate credit is measured as the stock of debt
at the end of each month, so the measured estimates
will capture the $500 owed at the end of the month in
which the charge was made. Thus, measured aggregate credit includes debt that will be paid off in the
next month (transactions demand) as well as debt that
will be paid off over a longer period. If transactions
demand rises more rapidly than the demand for
longer-term debt, then measured aggregate debt will
also grow faster than the demand for debt.
According to recent research, transactions demand
as a share of measured revolving debt rose from
about 6 percent in 1992 to 11 percent in 2001
(Johnson, 2004). That analysis also suggests that the
growth in transactions demand was particularly rapid
in the latter part of the 1990s. Had transactions
demand remained constant from 1992 to 2001, the
15. Card issuers can benefit f r o m an increase in transactions
demand b e c a u s e they receive revenue f r o m the fees they levy on the
merchant for each transaction.
16. However, the increase in these opportunities has also enabled
the growth of a substitute for the transaction d e m a n d for credit
c a r d s — t h e use of debit cards. Z i n m a n (2005) provides evidence that
households that cannot take advantage of float because they carry a
balance on their credit cards tend to use debit cards. Klee (2004)
identifies several factors that may have led to an increase in debit card
use, perhaps at the expense of credit cards.
17. The C e n s u s Bureau defines e - c o m m e r c e sales as "sales of
goods and services where an order is placed by the buyer or price and
terms of sale are negotiated over an Internet, extranet, Electronic Data
Interchange (EDI) network, electronic mail, or other online system.
Payment may or may not be o n l i n e " (U.S. Department of C o m m e r c e ,
2005).
18. w w w . u s a . v i s a . c o m / a b o u t _ v i s a / n e w s r o o m / s t a t i s t i c s /
acceptance.html.

growth of measured credit card debt during that
period would have been slower by about 1 percentage
point per year, and the level of credit card debt in
2001 would have been 7Vi percent lower than it
actually was. These results are roughly consistent
with data suggesting that transactions demand
accounted for about 10 percent of measured credit
card debt over the past decade and a half. 19

DEVELOPMENTS
IN THE CREDIT CARD MARKET
AND THE REVOLVING CREDIT FOR

The l!/4 percentage point rise in the revolving consumer credit portion of the financial obligations ratio
over the past decade and half is almost as large as the
rise in the total FOR over that period. 20 How much of
the increase in the revolving credit FOR is attributable to the developments in the credit card market
discussed above? One can estimate the contribution
by comparing actual financial obligations with those
associated with "counterfactual" scenarios in which
the effect of changes in the credit card market are
removed from the data. The following sections
present a counterfactual scenario for each of the three
credit card market developments and one for all three
together.
The Effect of the Increase

in Cardholding

The effect of new cardholders on the revolving credit
FOR can be estimated by calculating the ratio under
the counterfactual scenario in which the proportion of
households holding at least one card remained at its
19. Data f r o m the Federal R e s e r v e ' s Quarterly Report of Credit
Card Interest Rates (FR 2835a), w w w . f e d e r a l r e s e r v e . g o v / b o a r d d o c s /
reportforms/ReportDetail.cfm (under " C a t e g o r i e s of f o r m s " select
" B u s i n e s s / c o n s u m e r c r e d i t " ) and a u t h o r ' s calculations.
20. The revolving c o n s u m e r credit portion of the F O R — t h e level
of monthly payments on sucli credit relative to disposable i n c o m e —
is calculated f r o m the level of revolving credit balances. Payments
on revolving credit balances—the n u m e r a t o r of the revolving credit
F O R — a r e assumed to be 2Vi percent of those balances. This assumption corresponds to the average m i n i m u m required p a y m e n t implied
by responses to the Federal Reserve S y s t e m ' s January 1999 Senior
Loan Officer Survey on Bank Lending Practices. In that survey, loan
officers also indicated that m i n i m u m s had not changed substantially
over the previous decade. Responses to the 2003 C o n s u m e r Action
survey of banks also implied an average m i n i m u m p a y m e n t of
between 2 percent and 3 percent ( C o n s u m e r Action News, "Annual
Credit Card Survey 2 0 0 3 " ) .
M o r e recently, s o m e lenders have changed their p a y m e n t f o r m u l a
so that m i n i m u m payments equal current finance charges and fees plus
some small amount of the outstanding balance ( C o n s u m e r Action
News, "Annual Credit Card Survey 2 0 0 5 " ) . This new formula could
raise or lower required payments, depending on the interest rate
and the a m o u n t of balance repaid. (For the Consumer Action News
surveys, see www.consumer-action.org/English/library/credit_cards/
index.php.)

Recent Developments

in the Credit Card Market and the Financial Obligations Ratio

1989 level. Using the statistical model described
above, cardholders were divided into one group that
probably acquired cards after 1989, called new cardholders, and another group that probably had credit
cards before 1989, called existing cardholders. The
counterfactual revolving credit FOR was based on
the debt of only the latter group, and the difference
between the counterfactual and actual revolving
credit FOR represents the effect of new cardholders.
New cardholders are defined as those households
with the lowest probability of holding a credit card
(see also table 2). For each triennial SCF from 1992
to 2001, enough new cardholders were removed from
the group of cardholders to reduce the share of households with cards to its 1989 value. 21 The growth in
credit card debt associated with the households who
acquired cards after 1989 accounted for about 9 percent of the growth in total credit card debt between
1989 and the second quarter of 2005. 2 2
The counterfactual revolving credit FOR with the
debt of the new cardholders removed is below the
actual level (chart 4). The results imply that had
the share of households with credit cards remained at
its 1989 level, the rise in the FOR would have been
about '/3 percentage point smaller than it actually
was. A general substitution toward credit cards from
other types of consumer loans and, more recently,
away f r o m credit cards toward mortgages also
affected the amount of credit card debt, although the
effect on overall household financial obligations is
ambiguous (see box "Substitution between Credit
Cards and Other Forms of Credit").

The Effect

of Variable

Interest. Rates

The greater responsiveness of credit card interest
rates to market rates, combined with a significant
change in market rates in the early part of this decade,
had a substantial effect on household financial obligations. The average real credit card interest rate fell
more than 3 percentage points from the fourth quarter
of 2001 to the second quarter of 2004, when it
reached its low point, about 11 V4 percent. When
credit card interest rates fall, households demand
21. About 3'A percent of cardholders were removed in 1992,
6'A percent in 1995, 4!/j percent in 1998, and almost 9 percent in
2001. To extend the analysis through the second quarter of 2005, the
share of credit card debt held by new cardholders was kept constant at
its 2001 value.
22. This estimated effect is slightly smaller than that calculated by
Yoo (1997, 1998), who assumes that new cardholders have the same
amount of debt as existing holders. However, new cardholders appear
to have a bit less debt than existing holders; for example, in 2001, the
average credit card balance of a new cardholder was about $2,180,
whereas the average balance of an existing cardholder was $2,332.

4.

481

E f f e c t on the revolving credit F O R of an increasing
share of h o u s e h o l d s that o w n credit cards,
1 9 8 9 - 2 0 0 5 :Q2
I'ercent

—

3.0

Revolving credit FOR

Counterfactual

I

I

I 1
1990

I

I

I

I I
1995

I

I

I

L_J
2000

LJ

I

I I
2005

I

NOTE: The data are quarterly. The counterfactual data consist of the consumer revolving credit FOR only for households that had a credit card in
1989. For details, see text; see also note to chart 2.
SOURCE: Federal Reserve Board and author's calculations.

significantly more credit card debt. For example,
researchers have estimated that a 1 percent decline in
interest rates on bank-issued credit cards leads to a
1V3 percent rise in the demand for credit card debt. 2 3
A decline in credit card interest rates that leads to
a smaller margin over the cost of funds could also
cause lenders to reduce their supply of credit card
debt, which in turn could damp the amount of credit
card debt outstanding. However, in the short run, the
effect seems unlikely to be large because credit cards
are open-ended credit contracts that specify only a
credit limit. Most lenders are unwilling to reduce the
credit line extended to existing customers in good
standing. In a recent survey, 53 percent of banks
reported reducing cardholder credit limits but usually
only because the borrower had become riskier in
some way. 24 Hence, the responsiveness of demand to
a change in rates would likely be the dominant determinant of the response of revolving debt outstanding
to such a change.
To gauge the effect of changes in credit card interest rates on the revolving credit FOR, a counterfactual level of revolving credit was estimated under
the assumption that interest rates on credit cards
remained at their level in the first quarter of 1989. In
particular, the change in real credit card debt predicted by the change in real credit card interest rates
was subtracted from the actual level of debt.
23. Gross and Soulcles (2002). This effect was estimated without
accounting for households switching balances between cards as interest rates change. Accounting for this switching reduces the rise in
demand to about 1 percent.
24. Consumer Action News, "Annual Credit Card Survey 2005."

482

F e d e r a l R e s e r v e Bulletin •

Autumn 2005

Substitution between Credit Cards and Other Forms of Credit
Over the past fifteen years, households appear to have
substituted some forms of credit for others. In the early part
of this period, the rise in the share of household debt
associated with credit card loans mirrored a decline in
so-called "personal loans" and loans tied specifically to the
purchase of durable goods other than vehicles. Trends in
more recent years suggest that households may have been
using mortgage loans as an alternative to credit card debt.
The effect of this substitution on household financial obligations depends on the different terms associated with the
different forms of debt.
Credit card loans have, in some respects, a significant
advantage over personal loans (defined as unsecured,
closed-end loans used to finance unspecified expenditures)
as well as over the installment loans from department stores
and finance companies that traditionally have been used to
purchase large durable goods other than vehicles. In particular, the open-ended nature of credit card loans implies a
lower fixed cost of borrowing: Households may draw on
their credit card accounts to obtain needed funds (as long as
borrowing remains below a pre-set limit) as opposed to
taking out an entirely new loan.
In deciding what form of credit to use, households weigh
this cost advantage of credit cards against other traits of
alternative loan types. One important feature is the interest
rate. Because neither credit card loans nor personal loans
are backed by collateral, interest rates are relatively high on
both types of credit. All else equal, interest rates on installment loans backed by nonvehicle durable goods tend to be
lower because they are secured. On balance, households
appear to find the convenience of credit card loans to be
appealing, as the ratio of nonvehicle nonrevolving loans to
consumer loans dropped from 12 percent in 1989 to 6 percent in 2001.
The substitution of credit cards for other types of consumer loans may not have a large effect on the amount of

consumer debt outstanding if households are simply replacing one form of credit for an equal amount of credit card
debt. However, substitution can affect households' debtrelated financial obligations if the terms of credit card debt
are different than the terms of the debt it replaced. For
example, at current interest rates, the minimum required
payment on a credit card loan would be 13 percent less than
the payment on a personal loan of the same size. Even
though the interest rates are similar, the credit card loan has
a payment equivalent to a personal loan with a maturity
almost one year longer than that of the typical personal
loan.
In the past couple of years, households may have been
substituting mortgage debt for credit card debt. For example, in 2004, outstanding mortgage debt increased about
14 percent while credit card loans grew only about 4 percent. Mortgage loans can be an attractive alternative to
credit card borrowing because they have lower interest
rates and because mortgage interest payments are tax
deductible. Indeed, in surveys, households report using a
significant share of the proceeds from cash-out mortgage
refinancing transactions—which involve liquidating home
equity by taking out a larger mortgage loan—to pay down
credit card loans (Canner, Dynan, and Passmore, 2002).
All told, substitution toward first-lien mortgages tends to
lower required payments on financial obligations because
they have lower interest rates and longer maturities. However, substitution toward mortgage debt does not always
reduce required debt payments; for example, the terms on
home equity lines of credit (generally a junior lien) are
usually similar to those on credit card debt. The transfer of
consumer debt to mortgage debt may be limited by the
higher costs of defaulting on a mortgage (which could
involve loss of the home) and the fact that only homeowners have access to mortgage credit.

F r o m 1 9 8 9 to 2 0 0 0 , t h e c o u n t e r f a c t u a l r e v o l v i n g

The Effect of Transactions Demand

c r e d i t F O R f o l l o w s the a c t u a l r e v o l v i n g c r e d i t F O R
f a i r l y c l o s e l y ( c h a r t 5); this t r a c k i n g is n o t s u r p r i s i n g
g i v e n t h a t t h e real i n t e r e s t r a t e m o v e d little o v e r this
p e r i o d . B e g i n n i n g in 2 0 0 1 , w h e n t h e r e a l c r e d i t c a r d
i n t e r e s t r a t e b e g a n to d e c l i n e , t h e c o u n t e r f a c t u a l
r e v o l v i n g c r e d i t F O R b e g a n to lag t h e a c t u a l . B y
m i d - 2 0 0 4 , the counterfactual scries w a s about
percentage point below the actual. This gap implies that
t h e d e c l i n e in real c r e d i t c a r d i n t e r e s t rates in t h e
e a r l y p a r t o f this d e c a d e a c c o u n t s f o r a m a t e r i a l p a r t
of t h e r i s e in the r e v o l v i n g c r c d i t F O R b e t w e e n 1 9 8 9

A s n o t e d a b o v e , t r a n s a c t i o n s - r e l a t e d c r e d i t c a r d bala n c e s as a s h a r e of m e a s u r e d r e v o l v i n g d e b t r o s e
f r o m a b o u t 6 p e r c e n t in 1 9 9 2 t o 11 p e r c e n t in 2 0 0 1 .
T o e s t i m a t e t h e e f f e c t of this i n c r e a s e in t r a n s a c t i o n s
d e m a n d on the revolving credit F O R , a counterf a c t u a l r a t i o w a s c a l c u l a t e d u n d e r t h e a s s u m p t i o n that
the transactions d e m a n d for credit cards did not grow
as a f r a c t i o n of total r e v o l v i n g c r e d i t a f t e r 1989. In
t h e s e c o n d q u a r t e r of 2 0 0 5 , t h e c o u n t e r f a c t u a l l e v e l
of t h e r e v o l v i n g c r e d i t F O R w a s a little m o r e t h a n

a n d t h e s e c o n d q u a r t e r of 2 0 0 5 . 2 5

25. This analysis ignores the point that interest rates on mortgages
fell as well over this period, a d e v e l o p m e n t that likely induced

households to borrow m o r e against their homes and use the proceeds
to pay d o w n credit card debt, which is m o r e costly. See box "Substitution between Credit Cards and Other Forms of C r e d i t " for further
discussion of this potential effect.

Recent Developments in the Credit Card Market and the Financial Obligations Ratio

5.

E f f e c t on t h e r e v o l v i n g credit l ; O R of a falling real
interest r a t e , 1989—2005:Q2
Percent

Revolving credit
FOR

—

3.0

Counterfactual

I J - L J -

I

I

I

1990

1995

2000

2005

NOTE: T h e d a t a a r e q u a r t e r l y . T h e c o u n t e r f a c t u a l d a t a c o n s i s t o f t h e c o n s u m e r r e v o l v i n g c r e d i t F O R p r e d i c t e d if t h e a v e r a g e r e a l c r e d i t c a r d i n t e r e s t
r a t e h a d r e m a i n e d at its 1 9 8 9 : Q I l e v e l . F o r d e t a i l s , s e e t e x t ; s e e a l s o n o t e t o
chart 2.
SOURCE: F e d e r a l R e s e r v e B o a r d a n d a u t h o r ' s c a l c u l a t i o n s .

16 percentage point lower than the actual revolving
credit FOR (chart 6); this gap represents the cumulative effect of the rise in transactions demand since
1989.

The Combined Effect of the Three Credit Card
Market Developments
A simple combination of the estimated effects of the
increase in the share of households that hold credit
cards, the fall in real credit card interest rates, and the
rise in transactions demand explains virtually all of
6.

E f f e c t o n t h e r e v o l v i n g credit F O R of rising
t r a n s a c t i o n s - r e l a t e d u s e of credit c a r d s , 1 9 8 9 - 2 0 0 5 : Q 2

483

the net increase in the overall revolving credit FOR
since 1989 (chart 7). However, these effects may not
be entirely independent of one another; as a result,
the sum of the three effects should be considered an
upper bound. For example, a decline in the interest
rate may cause an increase in debt partly because it
may prompt households to apply for a first credit
card; in this case, the sum of the influences captures
the interest rate effect twice. Yet, the overlap may be
limited by the fact that these effects, to some degree,
pertain to different segments of the credit card market. For example, transactions demand has grown
mainly among upper-income households that have
held credit cards for a long time and are not sensitive
to interest rates because they pay off their credit card
balances each month.
The counterfactual revolving credit FOR rose significantly through 1997, but it has since reversed
about all of the increase. This evolution raises a
question about the determinants of revolving credit
card debt apart from the three credit card developments analyzed above. One possible determinant is
consumer confidence: The counterfactual revolving
credit FOR seems to move broadly with consumer
sentiment (chart 8; the counterfactual FOR here is the
same as shown in chart 7). The co-movement hints,
perhaps, that when households become more confident, holding other market developments constant, they may choose to increase their revolving
debt faster than their disposable personal income
increases; conversely, when confidence declines, such
revolving debt increases more slowly than does disposable personal income.

7.

C o m b i n e d e f f e c t s o n the r e v o l v i n g c r e d i t F O R of
d e v e l o p m e n t s in the c r e d i t c a r d m a r k e t , 1 9 8 9 - 2 0 0 5 : Q 2

Percent
Percent

—

3.0
—

3.0

R e v o l v i n g credit F O R
Revolving credit F O R

Counterfactual

i

i

1990

i

i

i

i

i

i

i

1995

i

i

i.

i

i

i

2000

i

.i.

i

2005
1990

1995

2000

2005

NOTE: T h e d a t a a r e q u a r t e r l y . T h e c o u n t e r f a c t u a l d a t a c o n s i s t o f t h e c o n s u m e r r e v o l v i n g c r e d i t F O R p r e d i c t e d if t h e p r o p o r t i o n o f c r e d i t c a r d d e b t
a r i s i n g f r o m t r a n s a c t i o n s - r e l a t e d u s e h a d r e m a i n e d at its
d e t a i l s , s e c t e x t ; s e e a l s o n o t e t o c h a r t 2.
SOURCE: F e d e r a l R e s e r v e B o a r d a n d a u t h o r ' s c a l c u l a t i o n s ,

1989 level. For

N o r n : T h e data arc quarterly. T h e counterfactual data c o m b i n e the e f f e c t s
o f t h e d e v e l o p m e n t s s h o w n in c h a r t s 4 - 6 . F o r d e t a i l s , s e c t e x t ; s e e a l s o n o t e
t o c h a r t 2.
SOURCE: F e d e r a l R e s e r v e B o a r d a n d a u t h o r ' s c a l c u l a t i o n s .

484

8.

Federal Reserve Bulletin • Autumn 2005

Counterfaclual revolving credit F O R

9.

Household

financial

obligations ratio, I 9 8 0 - 2 0 0 5 : Q 2

and c o n s u m e r sentiment, 1989~2005:Q2
Percent
Percent

1 9 6 6 = 100

19
3.0 —

Counterfaclual
revolving credit FOB
(left scale)

—

FOR

110

2.5

Counterfactual

2.0 —

1.5

—

Consumer sentiment
(right scale)
I
I

I L-L-t
1990

LI
1995

I I I I I L
2000

2005

NOTI;: The data arc quarterly. For definition of the counterfactual revolving credit FOR, see note to chart 7.
SOURCE: For counterfactual data, Federal Reserve Board and author's calculations; for consumer sentiment, the University of Michigan Survey
Research Center.

CONCLUSION

Three developments in the credit card market contributed to the rise in the overall household FOR during
the past fifteen years. Had the share of households
with credit cards, the level of credit card interest
rates, and the transactions-related demand for credit
cards all remained at their 1989 levels, credit card
debt outstanding in 2005 would have been significantly lower. In the absence of other changes, the rise
in the total FOR over the past fifteen years would
have been as much as I percentage point smaller than
it actually was, a reduction that would have left the
the 2005 F O R well in line with levels that existed
earlier (chart 9).
The various sources of the rise in the revolving
credit F O R have differing implications for the health
of the household sector and the broader financial
system. For example, the part of the rise stemming
from a greater use of credit cards to pay for day-today purchases will not necessarily signal greater
financial vulnerability among households if they are
willing and able to pay off these card charges each
month. As a related matter, the growth of transactions
demand as a share of new borrowing may lessen the
exposure of credit card issuers to defaults if households are more likely to pay off transaction balances
than they are longer-term balances.
However, the implications of the rise in financial
obligations associated with the decline in credit card
interest rates in the early part of this decade arc more
complicated. A key issue would be the effect on
households as interest rates rise. An increase in inter-

1 I I I I I I I M I I I I II I I I I I
1980
1985
1990
1995
2000

15

I I
2005

NOTEI: The data are quarterly. The counterfactual series assumes that the
level of revolving debt equals the level used to calculate the counterfactual
revolving credit FOR. For details, see text; see also note to chart 7.
SOURCK: Federal Reserve Board and author's calculations.

est rates would likely damp demand for credit card
debt and thus lead to a partial reversal of the rise in
the revolving credit FOR. At the same time, rising
rates could make it more difficult for some households to repay their existing debt.
Whether the rise in the share of households with a
credit card is a cause for concern at the aggregate
level depends on whether the benefits to the macroeconomy of the expansion of credit card availability
outweigh the risks. New cardholders may be less
adept at managing their credit than existing cardholders, and ready access to credit may make them more
prone to taking on unmanageable levels of financial
obligations. However, this ready access to credit may
also help them maintain their consumption during
temporary income disruptions, which could help
smooth macroeconomic fluctuations. 26
All told, an important implication of the analysis
here is that researchers should exercise caution when
comparing levels of the financial obligations ratio
over long periods. Specifically, the factors behind an
increase in the FOR should be identified and evaluated before one concludes that the increase implies
greater financial fragility for the U.S. household sector or for the macroeconomy more broadly.

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Agarwal, Sumit, Souphala Chomsisengphet, Chunlin
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Do Consumers Forecast Their Future Borrowing?"
26. See Dynan, Hlmendorf, and Sichel (forthcoming).

Recent Developments

in the Credit Card Market and the Financial Obligations Ratio

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Aizcorbe, A n a M., Arthur B. Kennickell, and
Kevin B. Moore (2003). "Recent Changes in U.S.
Family Finances: Evidence from the 1998 and
2001 Survey of Consumer Finances," Federal
Reserve Bulletin, vol. 89 (January), pp. 1-32.
Ausubel, Lawrence M. (1991). "The Failure of Competition in the Credit Card Market," American
Economic Review, vol. 81 (March), pp. 50-81.
Black, Sandra E., and Donald P. Morgan (1998).
"Risk and the Democratization of Credit Cards,"
Research Paper 9815. New York: Federal Reserve
Bank of New York, June.
Bostic, Raphael W. (2002). "Trends in Equal Access
to Credit Products," in Thomas A. Durkin and
Michael E. Staten, eds., The Impact of Public Policy on Consumer Credit. Boston: Kluwer, pp. 171—
203.
Brito, Dagobert L., and Peter R. Hartley (1995).
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Calem, Paul S., Michael B. Gordy, and Loretta J.
Mester (2005). "Switching Costs and Adverse
Selection in the Market for Credit Cards: New
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Federal Reserve Bank of Philadelphia, July.
Calem, Paul S., and Loretta J. Mester (1995). "Consumer Behavior and the Stickiness of Credit-Card
Interest Rates," American
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vol. 85 (December), pp. 1327-36.
Canner, Glenn, Karen Dynan, and Wayne Passmore
(2002). "Mortgage Refinancing in 2001 and Early
2002," Federal Reserve Bulletin, vol. 99 (December), p p . 4 6 9 - 9 0 .
Crook, Jonathan (2002). "Adverse Selection and
Search in the Bank Credit Card Market." Credit
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papers2002.html.
Duca, John V., and William C. Whitesell (1995).
"Credit Cards and Money Demand: A Cross-

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Dynan, Karen, Douglas W. Elmendorf, and Daniel E.
Sichel (forthcoming). "Can Financial Innovation
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Dynan, Karen, Kathleen Johnson, and Karen Pence
(2003). "Recent Changes to a Measure of U.S.
Household Debt Service," Federal Reserve Bulletin, vol. 89 (October), pp. 4 1 7 - 2 6 .
Edelberg, Wendy (2003). "Risk-Based Pricing of
Interest Rates in Household Loan Markets,"
Finance and Economics Discussion Series 200362. Washington: Board of Governors of the Federal Reserve System, December.
Evans, David S., and Richard Schmalensee (2005).
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Buying and Borrowing, 2nd ed. Cambridge, Mass.:
MIT Press. 1st ed., 1999.
Gross, David B., and Nicholas S. Souleles (2002).
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vol. 117 (February), pp. 149—85.
Johnson, Kathleen W. (2004). "Convenience or
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of Governors of the Federal Reserve System,
September.
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Board of Governors of the Federal Reserve System, Division of Monetary Affairs, May.
Mandell, Lewis (1972). Credit Card Use in the
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Siedman, Ellen, Moez Hababou, and Jennifer Kramer

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Federal Reserve Bulletin • Autumn 2005

(2005). "A Financial Services Survey of Low- and
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Yoo, Peter S. (1997). "Charging Up a Mountain of
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Economics, October.
•

Report on the Condition of the U.S. Banking
Industry: Second Quarter, 2005
Assets at reporting bank holding companies rose
$234.6 billion in the second quarter, with loan growth
accounting for $163.5 billion, or almost 70 percent
of the increase in assets over the period. Aggregate
assets of reporting bank holding companies reached
$10.9 trillion, 2.2 percent higher than in the first
quarter. Figures for the second quarter do not reflect
any possible repercussions of the summer Gulf Coast
hurricanes, which occurred after June 2005.
The strong 3.2 percent increase in loans occurred
mostly in mortgage-related categories, both residential and commercial, and in commercial and industrial loans. A sizable portion of the growth in residential mortgage loans at some institutions was
reportedly in adjustable-rate mortgages (ARMs). A
significant portion of the growth in residential mortgages reportedly included conventional ARMs and
such nontraditional products as "option A R M s "
(which allow the borrower to select from a range of
payment amounts each month) as well as fixed-rate
interest-only loans. To some extent, the recently
heightened prominence of these nontraditional types
of mortgage loans has been associated with recent
and significant increases in home values coupled with
efforts by lenders and marginally qualified households to arrange financing for home purchases. Bank
holding companies continued to favor these
adjustable-rate loans amid market expectations of
future increases in interest rates. The growth in commercial real estate lending included substantial
increases in construction and land development loans,
some of which were used to finance the construction
of new homes. Unused commitments to lend rose
somewhat more slowly, at 2.6 percent.
Securities and money market assets increased
$31.0 billion, or 0.8 percent, much less rapidly than
loans. At the fifty large bank holding companies,
holdings of these assets rose $66.7 billion (2.2 percent), with much of the increase occurring in shortterm instruments. Securities and money market assets
declined at all other reporting bank holding companies (down $7.5 billion, or 1.6 percent). Most of the
decline occurred in mortgage-related securities as
these institutions reduced their holdings of fixed-rate
securities and used the proceeds of sold and maturing

securities to fund loan growth. Declines were also
evident at five large bank holding companies for
which banking operations represent only a small
component of the consolidated entity (not shown
separately), and were accompanied by a comparable
decrease in borrowings. 1
A large portion of the growth in total assets at
reporting bank holding companies was funded by
borrowings rather than deposits, although the pattern
of funding growth differed markedly across industry
segments. At the fifty large bank holding companies,
nondeposit borrowings rose some $128.3 billion,
roughly twice as much as deposits ($62.9 billion). In
contrast, at all other bank holding companies, which
are predominantly smaller firms, deposits rose about
$29.7 billion, but borrowings rose only $5.2 billion.
These smaller firms appeared to be more willing to
reduce their securities holdings than to seek significantly more nondeposit funding to accommodate
their asset growth.
Shareholders' equity at reporting bank holding
companies rose 3.3 percent ($29.5 billion), outpacing
the rate of growth in total assets. Accordingly, regulatory leverage capital ratios improved a few basis
points. Total risk-based capital ratios declined, however, as the mix of assets shifted slightly toward loans
and away from mortgage securities that are assigned
low risk weights in bank capital regulations. Notwithstanding these small changes, regulatory capital ratios
overall remained strong for the industry.
Credit quality continued to improve in the second
quarter. Nonperforming assets fell to a remarkably
low 0.71 percent of loans and related assets, a reduction of 5 basis points from the first quarter. Net
chargeoffs declined to 0.52 percent of average loans,

1. T h r e e of these live large bank holding companies are insuranceoriented and t w o are brokerage-oriented. At the end of the second
quarter these five firms had c o m b i n e d assets of $748.3 billion, more
than half in the securities and money market assets category. Financial
information for these five (inns is included in the all reporting bank
holding c o m p a n y data shown in table 1, but not in the data for the fifty
large bank holding companies (table 2) or in the all other reporting
bank holding companies (table 3). For further background on the
institutions included in each table's data, see the " R e p o r t on the
Condition of the U.S. Banking Industry: Third Quarter 2003," Federal
Resen'e Bulletin 90:1, Winter 2004.

488

Federal Reserve Bulletin • Autumn 2005

also down 5 basis points. Spurred by these further
improvements in asset quality, reporting bank holding companies reduced the size of their allowance for
loan losses $493 million, or 0.7 percent.
Earnings totaled $32.7 billion for the second quarter, a little lower than in the previous period despite

an increase of $1.2 billion in investment securities
gains. This small decline was attributable to a 1.3 percent drop in non-interest income—primarily in trading and investment banking revenues—and a 3.6 percent increase in provisions for loan losses to a level
that was still slightly below total net chargeoffs.

Tables start on page 489.

Report on the Condition of the U.S. Banking Industry

1.

489

Financial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2003
A c c o u n t or ratio 1

2

2000

2001

2002

2003

2004

2005

2004
Q4

Q1

Q2

Q3

Q4

Qi

Q2

Totul assets .

6,745,836

7,486,951

7,990,945

8,880,547

10,339,738

8,880,547

9,358,869

9,712,116

9,960,475

10,339,738

10,709,587

10,944,213

Loans
S e c u r i t i e s and m o n e y m a r k e t .
A l l o w a n c e for loan l o s s e s . , .
Other

3,728,569
2,197,434
-60,376
880,209

3,832,553
2,568,705
-68,833
1,154,528

4,080,049
2,866,857
-74,798
1,118,837

4,435,863
3,302,240
-73,835
1,216,279

5,109,786
3,799,442
-74,623
1,505.133

4,435,863
3,302,240
-73,835
1,216,279

4,615,601
3,542,873
-76,629
1,277,024

4,803,610
3,580,335
-76,416
1,404,588

4,949,500
3,628,275
-75,918
1,458,618

5,109,786
3,803,711
-74,623
1,500,864

5,184,670
4,064,142
-73,399
1,534,174

5,348,195
4,095,179
-72,905
1,573,744

Total liabilities .

6,227,975

6,901,281

7,350,200

8,177,563

9,453,154

8,177,563

8,614,689

8,938,434

9,108,359

9,453,154

9,819,118 10,024,216

Deposits . . .
Borrowings
Other3 . . . .

3 771,749
1,991,564
464,662

4,025,769
2,073,770
801,742

4,357,245
2,244,331
748,624

4,705,043
2,630,168
842,352

5,249,506
3,088,887
1,114,761

4,705,043
2,630,168
842,352

4,847,914
2,902,949
863,826

5,005,099
2,955,221
978,114

5,064,773
3,054,677
988,910

5,249,506
3,158,450
1,045,197

5,348,711
3,422,850
1,047,557

5,442,346
3,520,267
1,061,603

Total equity

517,861

585,670

640,745

702,984

886,584

702,984

744,180

773,682

852,116

886,584

890,469

919,997

3,297,511
n.a.
43,608

3,481,745
276,717
48,276

3,650,669
295,001
57,886

4,097,531 ' 4,823,334
353,978
298,348
89,115
72,914

4,097,531
298,348
72,914

4,350,963
308,543
79,273

4,420,773
314,258
83,109

4,569,881
313,436
84,723

4,823,334
353,978
89,115

4,909,895
366,430
92,623

5,039,143
367,755
96,656

73,168
197,695
27,604
200,872
258,213
-606

66,510
224,470
40,661
218,984
302,140
4,338

85,731
246,048
45,107
221,532
296,964
4,598

107,949
257,537
33,075
250,639
316,330
5,771

113,475
281,434
28,792
272,286
360,288
5,521

29,545
68,072
8,944
69,991
86,323
655

30,673
67,441
7,165
67,370
82,984
1,978

25,892
71,815
6,994
73,358
101,031
1,011

29,096
72,426
7,489
67,314
89,144
1,980

28,903
71,482
7,847
68,035
90,053
480

32,938
72,990
6,578
73,227
91,389
371

32,678
72,894
6,815
72,306
91,416
1,526

15.19
1.13
3.58
63.95

11.86
.91
3.61
66.92

14.11
1.11
3.74
62.38

16.28
1.26
3.51
61.72

14.28
1.16
3.39
63.71

17.25
1.34
3.59
62.62

17.05
1.33
3.42
61.35

13.52
1.07
3.49
67.10

14.04
1.18
3.46
63.42

13.40
1.12
3.28
64.30

14.87
1.24
3.18
60.47

14.60
1.20
3.08
61,34

1.09
.64
98.86

1.44
.89
95.20

1.44
1.04
93.64

1.15
.84
94.28

.82
.67
97.34

1.15
.98
94.28

1.09
.72
95.21

.96
,66
95.97

.89
.61
97.72

.82
.71
97.34

.76
.57
96.93

.71
.52
98.27

8.84
11.80
6.81

8.92
11.92
6.68

9.22
12.28
6.72

9,58
12.60
6.87

9.37
12.24
6.61

9.58
12.60
6.87

9.55
12.47
6.88

9.40
12.26
6.67

9.35
12.18
6.73

9.37
12.24
6.61

9.31
12.18
6.51

9.30
12.06
6.54

2,134

2,193

2,281

2,295

Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g 5
D e r i v a t i v e s (notional value, b i l l i o n s ) 6 .
Income statement
Net i n c o m e 7
Net interest i n c o m e
P r o v i s i o n s f o r loan l o s s e s
Non-interest i n c o m e
Non-interest expense
S e c u r i t y gains or l o s s e s
Ratios (percent)
R e t u r n on a v e r a g e e q u i t y
R e t u r n on a v e r a g e a s s e t s
Net interest margin 1 1
Efficiency ratio7
N o n p e r f o r m i n g assets to l o a n s and
related assets
Net cliarge-offs to a v e r a g e loans , .
L o a n s to deposits
Regulatory
capital
T i e r 1 risk-based
Total risk-based
Leverage

ratios

N u m b e r of reporting b a n k holding
companies
F o o t n o t e s appear o n p. 4 9 2 .

1,842

2,134

2,240

490

2.

Federal Reserve Bulletin •

Autumn 2005

Financial characteristics of fifty large bank holding companies in the United States
M i l l i o n s of d o l l a r s e x c e p t as noted, not seasonally a d j u s t e d
2004

2003
A c c o u n t or r a t i o 2 ' 9

2000

2001

2002

2003

2005

2004
Q4

Balance

Qi

Q2

Q3

Q4

Qi

Q2

sheet

Total assets

5,509,329

5,883,032

6,244,695

6,903,426

7,940,887

6,903,426

7,348,179

7,539,139

7,741,040

7,940,887

8,206,462

8,417,847

Securities and m o n e y m a r k e t
A l l o w a n c e for l o a n losses
Other

2,936,756
1,849,393
-49,224
772,404

2,956,272
2,053,128
-56,575
930,207

3,140,427
2,282,894
-61,180
882,553

3,387,295
2,629,416
-59,343
946,058

3,929,885
2,909,296
-59,484
1,161,189

3,387,295
2,629,416
-59,343
946.058

3,548,140
2,855,674
-61,854
1,006,218

3,683,748
2,841,338
-61,434
1,075,487

3,791,894
2,880,574
-60,811
1,129,382

3,929,885
2,909,296
-59,484
1,161,189

3,979,933
3,094,734
-58,123
1,189,918

4,097,920
3,161,422
-57,422
1,215,926

Total Nubilities

5,098,769

5,434,925

5,758,200

6,373,455

7,252,392

6,373,455

6,781,436

6,949,713

7,084,305

7,252,392

7,513,951

7,706,688

Deposits
Borrowings
Other3

2,847,117
1,814,179
437,474

3,022,829
1,878,346
533,750

3,261,241
2,040,891
456,068

3,512,801
2,358,645
502,010

3,948,310
2,713,445
590,637

3,512,801
2,358,645
502,010

3,629,595
2,614,743
537,099

3,759,012
2,642,532
548,170

3,793,285
2,742,512
548,509

3,948,310
2,713,445
590,637

4,019,042
2,896,853
598,057

4,081,979
3,025,103
599,607

410,560

448,107

486,496

529,971

688,495

529,971

566,743

589,426

656,735

688,495

692,511

711,159

3,072,864
n.a.
43,544

3,235,807
271,825
48,159

3,385,143
289,905
57,768

3,800,219
293,046
72,725

4,485,138
348,986
88,675

3,800,219
293,046
72,725

4,047,520
304,545
79,044

4,104,527
307,878
82,844

4,236,822
307,325
84,463

4,485,138
348,986
88,675

4,557,059
361,524
92,140

4,672,311
362,973
96,307

60,388
153,455
24,013
181,585
216,983
-603

52,530
166,652
35,786
174,378
224,502
4,319

68,308
183,796
39,416
172,642
215,915
5,039

87,644
192,298
28,587
195,668
229,336
5,186

90,155
209,097
25,360
211,896
263,397
4,626

24,422
51.232
7,877
55,543
63.226
632

25,159
50,689
6,396
53,378
60,792
1,608

19,494
52,809
6,212
56,126
74,478
697

22,998
54,067
6,704
51,540
64,415
1,723

23,595
53,262
6,752
54,644
66,635
524

26,402
53,632
5,770
57,507
66,232
174

24,977
53,316
6,037
54,869
65,574
1,470

15.86
1.14
3.44
64.09

12.22
.91
3.39
64.61

14.71
1.13
3.56
59.55

17,49
1.31
3.35
58.70

14.73
1.18
3.23
61.00

18.85
1.42
3.47
59.40

18.31
1.39
3.26
58.30

13.34
1.03
3.29
65.01

14.33
1.19
3.31
60.38

14.05
1.19
3.16
61.61

15.30
1.29
3.04
57.16

14.35
1.19
2.92
58.57

1.17
.73
103.15

1.57
1.01
97.80

1.56
1.21
96.30

1.22
.97
96.43

.84
.80
99.53

1.22
1.13
96.43

1.14
.88
97.76

1.00
.78
98.00

.91
.72
99.96

.84
.83
99.53

.78
.70
99.03

.72
.63
100.39

8.20
11.45
6.43

8.22
11.57
6.24

8.51
11.94
6.25

8.80
12.18
6.36

8.57
11.84
6.16

8.80
12.18
6.36

8.77
12.05
6.36

8.63
11.88
6.14

8.60
11.82
6.22

8.57
11.84
6.16

8.52
11.79
6.09

8.45
11.59
6.06

Total e q u i t y
Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g 5
D e r i v a t i v e s ( n o t i o n a l value, b i l l i o n s ) 6 , .
Income statement
Net i n c o m e 7
Net interest i n c o m c
Provisions f o r loan losses
Non-interest i n c o m e
Non-interest expense
Security gains or l o s s e s
Ratios (percent)
R e t u r n on a v e r a g e e q u i t y
Return on average assets
N e t interest m a r g i n 8
Efficiency r a t i o 7
N o n p e r f o r m i n g a s s e t s to loans a n d
related a s s e t s
N e t c h a r g e - o f f s to a v e r a g e l o a n s
L o a n s to d e p o s i t s
Regulatory
capital
T i e r 1 risk-based
Total risk-based
Leverage

ratios

F o o t n o t e s a p p e a r on p. 492,

Report

3.

on the Condition

of the U.S. Banking

Industry

491

Financial characteristics of all other reporting bank holding companies in the United States
M i l l i o n s of d o l l a r s except as n o t e d , not s e a s o n a l l y a d j u s t e d
2003
Account1,10

20(H)

2001

2002

2003

2004

2005

2004
Q4

Balance

Q1

Q2

Q3

Q4

Ql

Q2

sheet
1,178,273

1,290,686

1,414,391

1,549,979

1,709,090

1,549,979

1,590,705

1,636,305

1,674,215

1,709,090

1,738,128

1,778,206

767,464
319,514
-10,884
102,179

822,127
359,293
- t 1,894
121,160

885,466
408,750
-13,181
133,355

969,249
449,241
-14,075
145,565

1,097,600
474,035
-14,740
152,194

969,249
449,241
-14,075
145,565

996,874
465,449
-14,383
142,766

1,034,676
463,381
-14,628
152,875

1,069,967
465,577
-14,800
153,471

1,097,600
474,035
-14,740
152,194

1,123,765
471,150
-14,851
158,065

1,164,103
463,669
-15,030
165,463

1,076,381

1,174,315

1,283,635

1,407,777

1,550,889

1,407,777

1,444,384

1,490,587

1,519,327

1,550,889

1,580,087

1,614,877

Borrowings
Other3

912,804
142,782
20,794

988,825
159,804
25,687

1,078,022
174,398
31,214

1,169,677
203,755
34,345

1,281,284
228,930
40,675

1,169,677
203,755
34,345

1,202,669
201,409
40,306

1,228,499
223,675
38,413

1,253,522
224,912
40,893

1,281,284
228,930
40,675

1,310,496
227,218
42,373

1,340,212
232,457
42,208

Total e q u i t y

101,892

116,371

130,756

142,202

158,201

142,202

146,321

145,718

154,888

158,201

158,041

163,328

Off-balance-sheet
U n u s e d c o m m i t m e n t s to l e n d 4
Securitizations o u t s t a n d i n g 5
D e r i v a t i v e s ( n o t i o n a l value, b i l l i o n s ) * , .

215,583
n.a.
47

235,764
4,567
87

253,620
4,358
86

284,399
4,159
92

324,825
2,877
140

284,399
4,159
92

290,060
2,875
118

301,229
3,000
109

315,742
2,757
117

324,825
2,877
140

338,581
2,792
95

351,250
2,667
95

12,485
43,509
3,420
16,181
38,118
-9

13,841
46,215
4,438
22,434
44,389
729

16,634
51,029
5,059
24,591
46,957
639

17,904
53,139
4,271
27,754
51,486
993

19,654
57,386
3,200
26,650
53,586
558

4,220
13,639
1,127
6,754
13,440
187

4,826
13,867
802
6,768
13,159
310

4,846
14,014
786
6,707
13,145
111

5,042
14,539
798
6,615
13,319
133

4.941
14,965
813
6,560
13,962
5

5,260
15,268
678
6,708
13,998
105

5,389
15,576
724
6,664
13,947
64

13.09
1.12
4.31
62.24

12.53
1.13
4.20
63.80

13.53
1.25
4.26
61.12

13.10
1.21
4.00
62.94

13.23
1.21
3.93
62.68

12.06
1.J0
3.97
65.72

13.52
1.24
3.97
63.02

13.28
1.21
3.89
62.81

13.45
1.22
3,92
62.91

12.69
1.17
3.95
63.88

13.31
1.23
3.97
62.57

13.45
1.23
3.97
61.97

.77
.32
84.08

.97
.43
83.14

1,02
.46
82.14

.98
.39
82.86

.76
.25
85.66

.98
.51
82.86

.96
.23
82.89

.87
.25
84.22

.84
.23
85.36

.76
.31
85.66

.74
,17
85.75

.70
.18
86.86

11.83
13.29
8.52

12.27
13.83
8.81

12.50
14.11
8.93

12.59
14.30
9.06

12.45
14.09
9.16

12.59
14.30
9.06

12.62
14.31
9.12

12.48
14.15
9.10

12.46
14.11
9.15

12.45
14,09
9.16

12,33
13.95
9.14

12.15
13.75
9.13

1,652

1,779

1,916

2,071

2,071

2,131

2,149

2,182

Total a s s e t s

S c c u r i t i c s and m o n e y m a r k e t
A l l o w a n c e for loan l o s s e s
Other
Total liabilities

Income statement
Net i n c o m e 7
Net interest i n c o m e
P r o v i s i o n s f o r loan h i s s e s . .
Non-interest income
Non-interest expense
S e c u r i t y g a i n s or l o s s e s
Ratios (percent)
R e t u r n on a v e r a g e e q u i t y
R e t u r n on a v e r a g e a s s e t s
N e t interest m a r g i n 8
Bfiiciency r a t i o 7
N o n p e r f o r m i n g assets to loans and
related a s s e t s
Net c h a r g e - o f f s to a v e r a g e loans
Loans to deposits
Regulatory
capital
'I ier 1 r i s k - b a s e d
Total risk-based
Leverage

ratios

N u m b e r of other r e p o r t i n g bank h o l d i n g
companies
F o o t n o t e s a p p e a r on p. 4 9 2 .

2,199

2,199

2,227

2,240

492

4.

Federal Reserve Bulletin • Autumn 2005

Nonfinancial characteristics of all reporting bank holding companies in the United States
M i l l i o n s of d o l l a r s c x c c p t as noted, not seasonally a d j u s t e d
2003
2000

Account

2001

2002

2003

2004

2005

2004
Q4

Bank holding
companies
that qualify
financial
holding
companies1
'•12
Domestic
Number
Total assets
F o r e i g n - o w n e d 13
Number
Total assets

Q4

Ql

Q2

300
4,497,781

435
5,921,277

452
6,610,314

474
7,462,507

452
6,610,314

465
6,856,173

471
7,082,367

477
7,279,238

474
7,462,507

472
7,650,556

469
7,893,437

10
621,442

11
616,254

12
710,441

14
1,376,333

12
710,441

13
994,672

14
1,117,266

14
1,193,984

14
1,376,333

15
1,526,168

15
1,516,573

6,416,080

6,897,142

7,397,839

8,207,673

7,397,839

7,614,478

7,850,587

8,041,198

8,207,673

8,403,885

8,534,505

5,657,210
229,274
243,603

5,942,670
230,467
242,944

6,429,158
227,016
240,968

6,941,042
219,223
237,575

7,785,991
209,177
212,505

6,941,042
219,223
237,575

7,173,463
205,391
235,623

7,409,187
211,725
229,675

7,599,697
208,696
232,805

7,785,991
209,177
212,505

7,991,901
204,795
207,189

8,119,047
206,259
209,200

n.a.
n.a.
102,218
132,629
1,234,714

426,462
n.a.
91,170
138,977
1,674,267

372,405
630,851
107,422
145,344
561,712

437,503
656,775
133,056
170,630
678,088

579,111
719,242
191,201
216,758
1,128,179

437,503
656,775
133,056
170,630
678,088

468,168
713,794
139,713
184,366
844,638

583,073
710,485
156,033
226,094
862,230

579,785
756,869
162,396
230,569
887,848

579,111
892,571
191,201
216,758
1,128,179

574,466
1,168,482
194,267
219,828
1,045,116

582,023
1,165,603
198,290
231,564
836,733

n.a.
n.a.

. .

389
5,440,842

9
502,506

Assets associated
with nonbanking
activitiesl2'15
Insurance
Securities broker-dealers
Thrift institutions
Foreign n o n b a n k institutions
Other nonbank institutions

bank

Q3

6,130,086

By ownership
Reporting bank holding companies
Other bank holding companies
Independent banks

Foreign-owned
13
companies
Number
Total assets

Q2

as

Total U.S. c o m m e r c i a l b a n k
assets14

Number
of bank holding
companies
engaged
in nonbanking
activities
Insurance
Securities broker-<lealers
Thrift institutions
Foreign nonbank institutions
Other nonbank institutions

Q1

143
n.a.

12 15

50
25
633

38
32
743

96
47
32
37
880

102
50
27
42
1,042

97
44
27
39
1,026

102
50
27
42
1,042

100
49
29
42
1,010

101
48
27
41
1,030

98
45
25
40
1,050

97
44
27
39
1,026

97
43
27
38
926

99
45
26
37
886

21
636,669

23
764,411

26
762,901

27
934,085

29
1,537,208

27
934,085

27
1,145,476

28
1,271,378

28
1,349,900

29
1,537,208

29
1,690,119

30
1,698,361

1,859,930

1,985,981

1,992,559

2,034,358

2,162,179

2,034,358

2,099,126

2,085,733

2,133,299

2,162,179

2,168.024

2,196,793

5,509,329
5,319,129

5,883,032
5,732,621

6,244,695
6,032,000

6,903,426
6,666,488

7,940,887
7,940,955

6,903,426
6,666,488

7,348,179
7,045,844

7,539,139
7,385,384

7,741,040
7,644,504

7,940,887
7,940,955

8,206,462
8,206,462

8,417,847
8,417,847

78.90

76.60

75.50

75.10

75.10

75.30

76.00

76.70

76.80

76.60

76.90

holding

E m p l o y e e s of r e p o r t i n g b a n k h o l d i n g
companies (full-time equivalent)
Assets of fifty large bank holding
companies9-17
F i x e d p a n e l ( f r o m t a b l e 2)
Fifty large as of reporting date
P e r c c n t o f all r e p o r t i n g
bank holding companies

..

NOTE: A l l d a t a a r e a s o f t h e m o s t r e c e n t p e r i o d s h o w n . T h e h i s t o r i c a l f i g u r e s m a y n o t
m a t c h t h o s e in e a r l i e r v e r s i o n s o f t h i s t a b l e b e c a u s e o f m e r g e r s , s i g n i f i c a n t a c q u i s i t i o n s o r
divestitures, or revisions or restatements to b a n k holding c o m p a n y financial reports. Data for
t h e m o s t r e c e n t p e r i o d m a y n o t i n c l u d e all l a t e - f i l i n g i n s t i t u t i o n s ,
1. C o v e r s t o p - t i e r b a n k h o l d i n g c o m p a n i e s e x c e p t ( 1 ) t h o s e w i t h c o n s o l i d a t e d a s s e t s o f l e s s
than $ 1 5 0 million and with only o n e subsidiary b a n k a n d (2) multibank holding c o m p a n i e s
w i t h c o n s o l i d a t e d a s s e t s of less than $ 1 5 0 m i l l i o n , with n o d e b t o u t s t a n d i n g to the g e n e r a l
p u b l i c a n d n o t e n g a g e d in c e r t a i n n o n b a n k i n g a c t i v i t i e s .
2. D a t a for all r e p o r t i n g b a n k h o l d i n g c o m p a n i e s and the fifty large b a n k holding, c o m p a n i e s r e f l e c t m e r g e r a d j u s t m e n t s t o t h e fifty l a r g e b a n k h o l d i n g c o m p a n i e s . M e r g e r a d j u s t ments account for mergers, acquisitions, other business combinations and large divestitures
t h a t o c c u r r e d d u r i n g t h e t i m e p e r i o d c o v e r e d in t h e t a b l e s s o t h a t t h e h i s t o r i c a l i n f o r m a t i o n o n
e a c h of t h e fifty u n d e r l y i n g i n s t i t u t i o n s d e p i c t s , to the g r e a t e s t e x t e n t p o s s i b l e , the institut i o n s a s t h e y e x i s t in t h e m o s t r e c e n t p e r i o d . In g e n e r a l , a d j u s t m e n t s f o r m e r g e r s a m o n g b a n k
h o l d i n g c o m p a n i e s reflect the c o m b i n a t i o n of historical data f r o m p r e d e c e s s o r b a n k holding c o m p a n i e s .
T h e data for the fifty large bank holding c o m p a n i e s have aiso been adjusted as necess a r y t o m a t c h t h e h i s t o r i c a l f i g u r e s in e a c h c o m p a n y ' s m o s t r e c e n t l y a v a i l a b l e f i n a n c i a l
statement.
In g e n e r a l , t h e d a t a a r e n o t a d j u s t e d f o r c h a n g e s in g e n e r a l l y a c c e p t e d a c c o u n t i n g
principles.
3 . I n c l u d e s m i n o r i t y i n t e r e s t s in c o n s o l i d a t e d s u b s i d i a r i e s .
4. I n c l u d e s credit card lines of credit as well as c o m m e r c i a l lines of credit.
5 . I n c l u d e s l o a n s s o l d t o s e c u r i t i z a t i o n v e h i c l e s in w h i c h b a n k h o l d i n g c o m p a n i e s r e t a i n
s o m e interest, w h e t h e r through recourse or seller-provided credit e n h a n c e m e n t s o r b y servici n g t h e u n d e r l y i n g a s s e t s . S e c u r i t i z a t i o n d a t a w e r e first c o l l e c t e d o n t h e F R Y - 9 C r e p o r t f o r
June 2001.
6 . T h e n o t i o n a l v a l u e o f a d e r i v a t i v e is t h e r e f e r e n c e a m o u n t of a n a s s e t o n w h i c h a n i n t e r e s t r a t e o r p r i c e d i f f e r e n t i a l is c a l c u l a t e d - T h e t o t a l n o t i o n a l v a l u e o f a b a n k h o l d i n g
c o m p a n y ' s d e r i v a t i v e s h o l d i n g s is t h e s u m of t h e n o t i o n a l v a l u e s o f e a c h d e r i v a t i v e c o n t r a c t
r e g a r d l e s s o f w h e t h e r t h e b a n k h o l d i n g c o m p a n y is a p a y o r o r r e c i p i e n t o f p a y m e n t s u n d e r t h e
contract. T h e actual cash (lows and fair market values associated with these derivative
c o n t r a c t s a r e g e n e r a l l y o n l y a s m a l l f r a c t i o n of t h e c o n t r a c t ' s n o t i o n a l v a l u e .
7. I n c o m e s t a t e m e n t s u b t o t a l s f o r all r e p o r t i n g b a n k h o l d i n g c o m p a n i e s a n d the fifty l a r g e
b a n k h o l d i n g c o m p a n i e s e x c l u d e e x t r a o r d i n a r y i t e m s , t h e c u m u l a t i v e e f f e c t s o f c h a n g e s in
a c c o u n t i n g p r i n c i p l e s , a n d d i s c o n t i n u e d o p e r a t i o n s at t h e fifty l a r g e i n s t i t u t i o n s a n d t h e r e f o r e
w i l l n o t s u m t o N e t i n c o m e . T h e e f f i c i e n c y r a t i o is c a l c u l a t e d e x c l u d i n g n o n r e c u r r i n g i n c o m e
and expenses.
8. C a l c u l a t e d o n a f u l l y - t a x a b l e - e q u i v a l e n t basis.
9 . In g e n e r a l , t h e f i f t y l a r g e b a n k h o l d i n g c o m p a n i e s a r c t h e fifty l a r g e s t b a n k h o l d i n g
c o m p a n i e s a s m e a s u r e d by total c o n s o l i d a t e d assets for the latest p e r i o d s h o w n . E x c l u d e s a
f e w large bank holding c o m p a n i e s w h o s e commercial banking operations account for only a
small portion of assets and earnings.

76.80

10. E x c l u d e s p r e d e c e s s o r b a n k h o l d i n g c o m p a n i e s t h a t w e r e s u b s e q u e n t l y m e r g e d i n t o
o t h e r b a n k h o l d i n g c o m p a n i e s in t h e p a n e l o f fifty l a r g e b a n k h o l d i n g c o m p a n i e s . A l s o
e x c l u d e s t h o s e b a n k h o l d i n g c o m p a n i e s e x c l u d e d f r o m t h e p a n e l o f fifty l a r g e b a n k h o l d ing c o m p a n i e s b e c a u s e c o m m e r c i a l b a n k i n g o p e r a t i o n s represent only a small pari of their
consolidated operations.
11. E x c l u d c q u a l i f y i n g i n s t i t u t i o n s t h a t a r e n o t r e p o r t i n g b a n k h o l d i n g c o m p a n i e s .
12. N o d a t a r e l a t e d t o f i n a n c i a l h o l d i n g c o m p a n i e s a n d o n l y s o m e d a t a o n n o n b a n k i n g
activities w e r e collected o n the F R Y-QC r e p o r t b e f o r e i m p l e m e n t a t i o n of the G c a m m L e a c h - B l i l e y A c t in 2 0 0 0 .
13. A b a n k h o l d i n g c o m p a n y i s c o n s i d e r e d " f o r e i g n - o w n e d " if it is m a j o r i t y - o w n e d b y a
foreign entity. D a t a for f o r e i g n - o w n e d c o m p a n i e s d o not i n c l u d e data for b r a n c h e s and agenc i e s o f f o r e i g n b a n k s o p e r a t i n g in t h e U n i t e d S t a t e s .
14. T o t a l a s s e t s of i n s u r e d c o m m e r c i a l b a n k s in t h e U n i t e d S t a t e s a s r e p o r t e d in ( h e c o m mercial b a n k Call R e p o r t ( F F I E C 0 3 1 or 0 4 1 , R e p o r t s of C o n d i t i o n and I n c o m e ) . E x c l u d e s
d a t a f o r a s m a l l n u m b e r o f c o m m e r c i a l b a n k s o w n e d b y o t h e r c o m m e r c i a l b a n k s t h a t file
s e p a r a t e c a l l r e p o r t s y e t a r e a l s o c o v e r e d b y t h e r e p o r t s filed b y t h e i r p a r e n t b a n k s . A l s o
e x c l u d e s data for mutual savings banks.
15. D a t a f o r t h r i f t , f o r e i g n n o n b a n k , a n d o t h e r n o n b a n k i n s t i t u t i o n s a r e t o t a l a s s e t s o f e a c h
t y p e of s u b s i d i a r y a s r e p o r t e d in t h e F R Y - 9 L P r e p o r t . D a t a c o v e r t h o s e s u b s i d i a r i e s in w h i c h
the top-tier b a n k h o l d i n g c o m p a n y directly or indirectly o w n s or c o n t r o l s m o r e t h a n
5 0 percent of the o u t s t a n d i n g v o t i n g stock a n d that has been c o n s o l i d a t e d using g e n e r a l l y
a c c e p t e d a c c o u n t i n g p r i n c i p l e s . D a t a f o r s e c u r i t i e s b r o k e r - d e a l e r s a r c n e t a s s e t s ( t h a t is, t o l a l
a s s e t s , e x c l u d i n g i n t e r c o m p a n y t r a n s a c t i o n s ) o f b r o k e r - d e a l e r s u b s i d i a r i e s e n g a g e d in a c t i v i ties p u r s u a n t to the G r a m m - L e a c h - B l i l e y Act, as r e p o r t e d o n s c h e d u l e H C - M o f t h e
1-"R Y - 9 C r e p o r t . D a t a f o r i n s u r a n c e a c t i v i t i e s a r e a l l i n s u r a n c e - r e l a t e d a s s e t s h e l d b y t h e b a n k
h o l d i n g c o m p a n y as reported on s c h e d u l e H C - f of the F R Y - 9 C report,
B e g i n n i n g in 2 0 0 2 : Q 1 , i n s u r a n c e t o t a l s e x c l u d e i n t e r c o m p a n y t r a n s a c t i o n s a n d s u b s i d i a r i e s e n g a g e d in c r e d i t - r e l a t e d i n s u r a n c e o r t h o s e e n g a g e d p r i n c i p a l l y in i n s u r a n c e a g e n c y
a c t i v i t i e s . B e g i n n i n g in 2 O 0 2 : Q 2 , i n s u r a n c e t o t a l s i n c l u d e o n l y n e w l y a u t h o r i z e d i n s u r a n c e
activities under the G r a m i n - L e a c h - B l i l e y Act.
16. A g g r e g a t e a s s e t s o f t h r i f t s u b s i d i a r i e s w e r e a f f c c t e d s i g n i f i c a n t l y b y t h e c o n v e r s i o n o f
C h a r t e r O n e ' s t h r i f t s u b s i d i a r y ( w i t h a s s e t s o f $ 3 7 b i l l i o n ) t o a c o m m e r c i a l b a n k in t h e s e c o n d
q u a r t e r o f 2 0 0 2 a n d t h e a c q u i s i t i o n b y C i t i g r o u p o f G o l d e n S t a t e B a n c o r p (a t h r i f t i n s t i t u t i o n w i t h a s s e t s o f $ 5 5 b i l l i o n ) in t h e f o u r t h q u a r t e r o f 2 0 0 2 .
17. C h a n g e s o v e r t i m e in t h e t o t a l a s s e t s o f t h e t i m e - v a r y i n g p a n e l o f fifty l a r g e b a n k h o l d i n g c o m p a n i e s a r e a t t r i b u t a b l e t o ( 1 ) c h a n g e s in t h e c o m p a n i e s that m a k e u p t h e p a n e l a n d
(2) to a s m a l l e x t e n t , r e s t a t e m e n t s of financial r e p o r t s b e t w e e n p e r i o d s .
n.a, N o t a v a i l a b l e
SOURCE: F e d e r a l R e s e r v e R e p o r t s F R Y - 9 C a n d I ; R Y - 9 L P , F e d e r a l R e s e r v e N a t i o n a l
Information Center, and published financial reports.

493

Announcements
CHAIRMAN

ALAN

GREENSPAN

GOVERNOR DONALD
AS DESIGNEE

NAMES

L. KOHN

Federal Reserve Board Chairman Alan Greenspan
named on August 17, 2005, Governor Donald L.
Kohn to replace Governor Edward M. Gramlich as
the Chairman's designee on four federal loan guarantee boards, effective September 1, 2005. Governor
Gramlich's resignation from the Board of Governors
of the Federal Reserve System, became effective
August 31, 2005.
Governor Kohn will serve as chairman of the Air
Transportation Stabilization Board, the Emergency
Steel Loan Guarantee Board, and the Emergency
Oil and Gas Loan Guarantee Board, and as a
member of the L O C A L Television Loan Guarantee
Board.

STATEMENT

BY CHAIRMAN

ON THE APPOINTMENT

ALAN GREENSPAN

OE BEN S. BERNANKE

" T h e President has made a distinguished appointment in Ben Bernanke. Ben comes with superb academic credentials and important insights into the
ways our economy functions. I have no doubt that he
will be a credit to the nation as Chairman of the
Federal Reserve Board."

CHANGE

IN TENTATIVE

MARKET

Co MM TIT EE MEETING

FEDERAL

FEDERAL

OPEN MARKET

COMMITTEE

STATEMENTS

OPEN
SCHEDULE

FOR 2006
The Federal Open Market Committee announced on
September 9, 2005, a change in its tentative meeting
schedule for 2006.
The Committee plans to hold its first scheduled
meeting of the year on Tuesday, January 31, 2006. It
had previously planned to meet for two days: January 31 and February 1. This schedule change avoids a
meeting that spans the terms of two Chairmen.
In keeping with past practice, Chairman Greenspan
plans to attend this meeting.

The Federal Open Market Committee decided on
September 20, 2005, to raise its target for the federal
funds rate 25 basis points, to 3% percent.
Output appeared poised to continue growing at a
good pace before the tragic toll of Hurricane Katrina.
The widespread devastation in the Gulf region, the
associated dislocation of economic activity, and the
boost to energy prices imply that spending, production, and employment will be set back in the
near term. In addition to elevating premiums for
some energy products, the disruption to the production and refining infrastructure may add to energy
price volatility.
While these unfortunate developments have
increased uncertainty about near-term economic performance, it is the Committee's view that they do not
pose a more persistent threat. Rather, monetary policy accommodation, coupled with robust underlying
growth in productivity, is providing ongoing support
to economic activity. Higher energy and other costs
have the potential to add to inflation pressures. However, core inflation has been relatively low in recent
months and longer-term inflation expectations remain
contained.
The Committee perceives that, with appropriate
monetary policy action, the upside and downside
risks to the attainment of both sustainable growth
and price stability should be kept roughly equal. With
underlying inflation expected to be contained, the
Committee believes that policy accommodation can
be removed at a pace that is likely to be measured.
Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the F O M C monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn;
Michael H. Moskow; Anthony M. Santomero; and
Gary H. Stern. Voting against was Mark W. Olson,
who preferred no change in the federal funds rate
target at this meeting.

494

Federal Reserve Bulletin • Autumn 2005

In a related action, the Board of Governors unanimously approved a 25-basis-point increase in the
discount rate, to 43A percent. In taking this action, the
Board approved the requests submitted by the Boards
of Directors of the Federal Reserve Banks of Boston,
New York, Philadelphia, Richmond, Chicago, Minneapolis, and Kansas City.
The Federal Open Market Committee decided on
November 1, 2005, to raise its target for the federal
funds rate 25 basis points, to 4 percent.
Elevated energy prices and hurricane-related disruptions in economic activity have temporarily
depressed output and employment. However, monetary policy accommodation, coupled with robust
underlying growth in productivity, is providing ongoing support to economic activity that will likely be
augmented by planned rebuilding in the hurricaneaffected areas. The cumulative rise in energy and
other costs have the potential to add to inflation
pressures; however, core inflation has been relatively
low in recent months and longer-term inflation expectations remain contained.
The Committee perceives that, with appropriate
monetary policy action, the upside and downside
risks to the attainment of both sustainable growth and
price stability should be kept roughly equal. With
underlying inflation expected to be contained, the
Committee believes that policy accommodation can
be removed at a pace that is likely to be measured.
Nonetheless, the Committee will respond to changes
in economic prospects as needed to fulfill its obligation to maintain price stability.
Voting for the FOMC monetary policy action were:
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Susan S. Bies; Roger W. Ferguson, Jr.; Richard W. Fisher; Donald L. Kohn;
Michael H. Moskow; Mark W. Olson; Anthony M.
Santomero; and Gary H. Stern.
In a related action, the Board of Governors unanimously approved a 25-basis point increase in the
discount rate, to 5 percent. In taking this action, the
Board approved the requests submitted by the Boards
of Directors of the Federal Reserve Banks of Boston,
New York, Philadelphia, Cleveland, Richmond,
Atlanta, Chicago, St. Louis, Minneapolis, Kansas
City, Dallas, and San Francisco.

ing the discount rate at the Bank from AVJ percent to
AVA percent.
The Board also approved an action by the Board of
Directors of the Federal Reserve Bank of St. Louis,
increasing the discount rate at the Bank from 4'/2 percent to 4% percent, effective September 21, 2005.
On September 22, 2005, the Federal Reserve
Board approved actions by the Boards of Directors of
the Federal Reserve Banks of Cleveland, Atlanta, and
Dallas, increasing the discount rate at the Banks from
4'/2 percent to 4:]A percent.

PROPOSED

IN DISCOUNT

RATE

The Federal Reserve Board approved on September 20, 2005, an action by the Board of Directors of
the Federal Reserve Bank of San Francisco, increas-

TO REGULATION

E

The Federal Reserve Board published on August 19,
2005, proposed amendments to Regulation E (Electronic Fund Transfers), which implements the Electronic Fund Transfer Act, and to the regulation's
official staff commentary that clarify the disclosure
obligations of automated teller machine (ATM)
operators with respect to fees imposed on a consumer
for initiating an electronic fund transfer or a balance
inquiry at an ATM. The commentary interprets the
requirements of Regulation E to facilitate compliance
primarily by financial institutions that offer electronic
fund transfer services to consumers.
The regulation provides that an ATM operator that
charges a fee for initiating an electronic fund transfer
or balance inquiry must post notices at ATMs that a
fee will be imposed. The proposed revisions would
clarify the intent of the rule that ATM operators can
satisfy the requirement by providing a notice that a
fee "may" be imposed if there are circumstances
under which some consumers would not be charged
for services. ATM operators must continue to provide
the consumer with a separate notice, either on the
screen of the ATM or on paper, that a fee will be
imposed and the amount of the fee, before the consumer is committed to paying a fee.
The Board is continuing to consider other issues
that were addressed in its proposed September 2004
update to Regulation E.
Comments were due on or before October 7, 2005.

REQUEST
INCREASE

AMENDMENTS

FOR COMMENT

ON REGULATION

Z

The Federal Reserve Board, on October 11, 2005,
issued for public comment a second advance notice
of proposed rulemaking (ANPR) concerning the
open-end (revolving) credit rules of the Board's
Regulation Z (Truth in Lending), which implements

Announcements

495

the Truth in Lending Act (TILA). The second ANPR
solicits public comments on ways the Board should
implement amendments to TILA made by the Bankruptcy Abuse Prevention and Consumer Protection
Act of 2005 (Bankruptcy Act). The amendments
principally deal with open-end credit accounts and
require new disclosures on periodic statements and
on credit card applications and solicitations.
The Board periodically reviews each of its regulations to update them, if necessary. In December 2004
the Board published an initial ANPR to commence a
comprehensive review of the open-end credit rules
and to solicit comment on a variety of issues relating
to the format of open-end credit disclosures, the
content of disclosures, and the substantive protections provided under the regulation. The comment
period closed in March 2005.
In April 2005 the Bankruptcy Act was enacted,
which contains several amendments to TILA, including provisions requiring new disclosures for openend credit accounts. The Board plans to implement
the amendments as part of its review of Regulation Z
and is publishing this second ANPR to reopen and
extend the public comment period. Combining the
two rulemakings will allow the Board to coordinate
the changes to the TILA disclosures and should
impose less regulatory burden on creditors.
Comments were to be received on or before
December 16, 2005.

0442 and 2442 routing symbols, currently assigned to
the Columbus office of the Federal Reserve Bank of
Cleveland, will be reassigned to that Reserve B a n k ' s
Cincinnati Branch office. As of February 11, 2006,
banks with 0440, 2440, 0441, and 2441 routing symbols, also currently assigned to the Columbus office,
will be reassigned to the Cleveland Reserve B a n k ' s
head office and the Columbus office will cease processing checks. The Federal Reserve Banks' transfer
of the Columbus office's check-processing operations
to both the Cincinnati Branch office and the Cleveland head office differs from earlier announcements
indicating that the entirety of the Columbus office's
operations would be transferred to the Cleveland
head office. The Reserve Banks believe that this
arrangement will better serve the needs of affected
depository institutions.
To ensure that the information in appendix A accurately describes the structure of check-processing
operations within the Federal Reserve System, the
final rule revises the lists of routing symbols associated with Federal Reserve offices to reflect the
reassignments discussed above. Each appendix A
revision will be effective on the date of the underlying check-processing change. The Board is providing earlier-than-usual notice of the amendments to
the appendix A routing symbol lists under the Federal
Reserve Bank of Cleveland because these amendments differ from earlier announcements.

AMENDMENT

PROPOSAL TO EXPAND
SMALL BANK HOLDING

APPENDIX

TO REGULATION

CC,

A

The Federal Reserve Board announced on October 12, 2005, amendments to appendix A of Regulation CC (Availability of Funds and Collection of
Checks) that reflect the restructuring of the Federal
Reserve's check-processing operations in the Fourth,
Tenth, and Eleventh Districts. These amendments
are part of a series of amendments to appendix A
that will take place through the first quarter of
2006, associated with the previously announced
restructuring of the Reserve Banks' check-processing
operations.
Appendix A provides a routing symbol guide that
helps depository institutions determine the maximum
permissible hold periods for most deposited checks.
As of December 10, 2005, the Oklahoma City Branch
office of the Federal Reserve Bank of Kansas City
will no longer process checks, and depository institutions that were assigned to that office have been
reassigned to the head office of the Federal Reserve
Bank of Dallas. As of January 21, 2006, banks with

THE DEFINITION
COMPANY

OF A

The Federal Reserve Board proposed on September 7, 2005, expanding the definition of a small bank
holding company (BHC) under the Board's Small
Bank Holding Company Policy and the Board's riskbased and leverage capital guidelines for bank holding companies. The policy statement facilitates the
transfer of ownership of small community banks by
permitting debt levels at small BHCs that are higher
than what would be permitted for larger BHCs.
Because small BHCs may, consistent with the policy
statement, operate at a level of leverage that generally is inconsistent with the capital guidelines, the
capital guidelines provide an exemption for small
BHCs.
The policy statement and the capital guidelines
define a small BHC as one with consolidated assets
of less than $150 million. However, a small BHC
with consolidated assets of less than $150 million can
be ineligible for treatment under the policy statement
if it meets certain qualitative criteria.

496

Federal Reserve Bulletin • Autumn 2005

The Board is proposing to raise the small BHC
asset-size threshold from $150 million to $500 million and to amend the related qualitative criteria for
determining eligibility as a small BHC for the purposes of the policy statement and the capital guidelines. The proposed amendments to the threshold and
the qualitative criteria are designed to reflect changes
in the industry since the initial issuance of the policy
statement in 1980.
The Board is also proposing changes to the policy
statement that would clarify the treatment of subordinated debt associated with issuances of trust preferred securities.
The proposal indicates that such subordinated debt
would be considered debt for most purposes under
the policy statement, subject to a transition period.
In the near term, the Board anticipates issuing a
separate request for public comment on a proposal
that would make related changes in regulatory financial reporting requirements. Under that proposal,
qualifying small BHCs would only be required to file
parent-only financial data on a semiannual basis
(FR Y-9SP).

BOARD STATEMENT ON SUPERVISORY
PRACTICES FOR FINANCIAL INSTITUTIONS
BORROWERS AFFECTED BY HURRICANE

AND

KATRINA

The Federal Reserve Board on September 15, 2005,
encouraged banking organizations to work with
borrowers and other customers in communities
affected by Hurricane Katrina. Additionally, the
Board reminded banking organizations that regulatory flexibility is available to facilitate recovery in
areas affected by this disaster.

ORDERS EXEMPTING BANK TRANSFER AGENTS
AFFECTED BY HURRICANE KATRINA

The federal banking agencies announced on September 28, 2005, the issuance of orders granting emergency relief to bank transfer agents affected by
Hurricane Katrina. The orders cover national banks,
state member banks, state nonmember banks, bank
holding companies, and bank subsidiaries. The
relief applies retroactively for the period beginning
August 29, 2005, through October 17, 2005.
Transfer agents maintain records related to the
issuance and transfer of securities and provide operational assistance in the sale and transfer of ownership
of securities. These agents also may disburse divi-

dends and send corporate information, including
proxies, to holders of securities. The storm and its
aftermath have resulted in a lack of communications,
facilities, and available staff, that could hamper the
efforts of transfer agents to access securities, records,
and funds, and to process securities transactions.
To address compliance issues caused by Hurricane
Katrina and its aftermath, the orders conditionally
exempt banks, bank holding companies, and bank
subsidiaries acting as transfer agents from compliance with section 17A of the Securities Exchange Act
of 1934. These orders, which are being issued by the
Board of Governors of the Federal Reserve System,
the Federal Deposit Insurance Corporation, and the
Office of the Comptroller of the Currency, complement an order issued by the Securities and Exchange
Commission on September 15, 2005, that exempts
transfer agents under the SEC's jurisdiction from
the requirements of section 17A of the Securities
Exchange Act of 1934.
Any transfer agents or other persons requiring
additional assistance are encouraged to contact staff
at the agencies for individual relief or interpretive
guidance.

WAIVER OF APPRAISAL REQUIREMENTS FOR
FINANCIAL INSTITUTIONS AFFECTED BY
HURRICANES KATRINA AND RITA

The Federal Reserve Board announced its approval
on October 6, 2005, of an order waiving its appraisal
requirements for three years for regulated financial
institutions affected by Hurricanes Katrina and Rita.
This action was coordinated with the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration,
collectively referred to as "the agencies."
The waiver covers transactions involving real
estate located in certain Alabama, Mississippi, and
Texas counties and Louisiana parishes that have been
designated by the Federal Emergency Management
Agency as qualifying for "Individual and Public
Assistance" (all categories) and "Individual and Public Assistance" (Categories A and B) as a result of
Hurricanes Katrina and Rita. A listing of the designated disaster areas is on the Board's web site
at www.federalreserve.gov/boarddocs/press/bcreg/
2005/200510062/attachment.pdf. Exceptions for the
major disaster declared due to Hurricane Katrina will
expire on August 29, 2008, in Alabama, Mississippi,
and Louisiana, and for Hurricane Rita on September 24, 2008, in Louisiana and Texas.

Announcements

To qualify for the waiver, a financial institution
needs to document that: (1) the transaction involves
real property located in the designated disaster areas;
(2) the property involved was directly affected by the
major disaster or the transaction would facilitate
recovery f r o m the disaster(s); (3) there is a binding
commitment to fund the transaction that is made
within three years after the date the major disaster
was declared; and (4) the value of the real property
supports the institution's decision to enter into the
transaction.
This waiver is being issued pursuant to the authority granted to the agencies under the Depository
Institutions Disaster Relief Act of 1992. The act
allows for the appraisal requirements of Title XI
of the Financial Institutions Reform, Recovery, and
Enforcement Act and the agencies' appraisal regulations to be waived for up to thirty-six months when
the President of the United States determines that
a major disaster exists and the agencies determine
that such waiver would both facilitate recovery in
the disaster area and be consistent with safety and
soundness.

ANNUAL ADJUSTMENTS
FOR RESERVE
CALCULATIONS
AND DEPOSIT REPORTING

The Federal Reserve Board announced on October 4,
2005, the annual indexing of the low reserve tranche
and of the reserve requirement exemption amount for
2006. These amounts are used in the calculation of
reserve requirements of depository institutions. The
Board also announced the annual indexing of the
cutoff level for nonexempt deposit and the reduced
reporting limit that will be used to determine deposit
reporting panels, effective September 2006.
All depository institutions must hold a percentage
of certain types of deposits as reserves in the form of
vault cash, as a deposit in a Federal Reserve Bank, or
as a deposit in a pass-through account at a correspondent institution. Reserve requirements currently are
assessed on the depository institution's net transaction accounts (mostly checking accounts). Depository
institutions must also regularly submit reports of their
deposits and other reservable liabilities.
For reserve requirements in 2006, the first $7.8 million of net transaction accounts (up from $7,0 million
in 2005), will be exempt from reserve requirements.
A 3 percent reserve ratio will be assessed on net
transaction accounts more than $7.8 million up to
and including $48.3 million (up from $47.6 million in
2005). A 10 percent reserve ratio will be assessed on
net transaction accounts in excess of $48.3 million.

497

The annual indexing of the low reserve tranche and
the reserve requirement exemption amount is based
on growth in net transaction accounts and total
reservable liabilities, respectively, at all depository
institutions between June 30, 2004, and June 30,
2005.
For depository institutions that report weekly, the
low reserve tranche and the reserve requirement
exemption amount for 2006 will first apply to the
fourteen-day reserve computation period that began
Tuesday, November 22, 2005, and the corresponding
fourteen-day reserve maintenance period that begins
Thursday, December 22, 2005.
For depository institutions that report quarterly, the
low reserve tranche and the reserve requirement
exemption amount for 2006 will first apply to the
seven-day reserve computation period that begins
Tuesday, December 20, 2005, and the corresponding
seven-day reserve maintenance period that begins
Thursday, January 19, 2006.
The Board also announced increases in two other
amounts, the nonexempt deposit cutoff level and the
reduced reporting limit, that are used to determine the
frequency with which depository institutions must
submit deposit reports. The Federal Register notice
containing a description of the new boundaries for
deposit reporting that will be effective September
2006 is on the Board's web site at www.
federalreserve.gov/boarddocs/press/bcreg/2005/2005
1004/attachment.pdf.

PROPOSED
ACCORD

REVISIONS
(BASEL

TO 1998

BASEL

CAPITAL

I)

The Federal Reserve Board decided on October 6,
2005, to request public comment on proposed revisions to the U.S. risk-based capital standards for
banking organizations. These current standards are
based upon the 1988 Basel Capital Accord, also
known as Basel I.
The proposed revisions should more closely align
risk-based capital requirements with the risk inherent in various exposures and could mitigate competitive inequalities that may arise as new capital
rules, known as Basel II, are implemented for
the most complex internationally active banking
organizations.
The modifications that the Board, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the Office of Thrift
Supervision are considering would apply to banks,
bank holding companies, and savings associations.
The modifications will be set forth in an advanced

498

Federal Reserve Bulletin • Autumn 2005

notice of proposed rulemaking to be published shortly
in the Federal Register.
In considering possible revisions, the agencies arc
seeking to enhance risk sensitivity without undue
complexity or regulatory burden.
Specifically, the agencies are soliciting comment
on:

results of three analytical models, including the
CAPM. The C A P M ROE will be based on the rate of
return of the overall market, as opposed to the longstanding practice of identifying a priced-services peer
group.

• increasing the number of risk-weight categories,
• permitting greater use of external ratings as an
indicator of credit risk for exposures for purposes of
determining the appropriate risk weight,
• expanding the types of guarantees and collateral
that may be recognized,
• modifying the risk weights associated with oneto-four family residential mortgages,
• applying credit conversion factors to certain
types of commitments, as well as the appropriate
risk-based capital treatment of certain securitizations
with early-amortization provisions, and
• modifying the risk weights for loans that are
ninety days or more past due or in non-accrual status,
as well as for certain commercial real estate exposures, and other retail and commercial exposures.

PRICED

FEE SCHEDULES

MODIFICATIONS
CALCULATE

TO METHODOLOGY

PRIVATE-SECTOR

USED TO

ADJUSTMENT

FACTOR

The Federal Reserve Board announced on October 12, 2005, modifications to the methodology used
to calculate the private-sector adjustment factor
(PSAF), which is used in setting fees for certain
payment services provided to depository institutions.
The Monetary Control Act of 1980 requires that
the Board establish fees for priced services provided
to depository institutions to recover, over the long
run, all direct and indirect costs actually incurred as
well as imputed costs that would have been incurred,
including financing costs, taxes, and certain other
expenses, and the return on equity (profit) that would
have been earned if a private business firm provided
the services. The methodology underlying the PSAF
is reviewed periodically to ensure that it is appropriate and relevant in light of changes that may have
occurred in Reserve Bank priced-services activities,
accounting standards, finance theory, and regulatory
and business practices.
Beginning with the 2006 price setting, the Board
will use only a capital asset pricing model (CAPM) to
determine a return on equity (ROL^) that reflects the
return earned by private-sector service providers. Previously the ROE was calculated by averaging the

FOR FEDERAL

RESERVE

BANK

SERVICES

The Federal Reserve Board approved fee schedules
on November 2, 2005, for Federal Reserve Bank
payment services for depository institutions (priced
services), effective January 3, 2006.
The Reserve Banks project that they will recover
102.5 percent of all their priced services costs in
2006 and estimate that they will recover 103.6 percent of these costs in 2005.
From 1995 to 2004 the Reserve Banks recovered
97.5 percent of priced services costs, including operating costs, imputed costs, and targeted return on
equity (or net income), which amounts to a ten-year
total net income of slightly less than $550 million.
Since the mid-1990s there has been a national
trend away from the use of checks and toward the use
of more efficient electronic payment alternatives. In
response to this trend, the Reserve Banks have undertaken several initiatives to improve operational efficiencies and reduce costs. In particular, as part of
their check-restructuring initiative, the Reserve Banks
have reduced the number of Federal Reserve checkprocessing locations from forty-five in 2003 to
twenty-seven and have announced plans to further
reduce the number to twenty-two sites by the end of
2006. In 2006 the Reserve Banks are expected to
realize full-year operational efficiencies and cost savings associated with the check restructurings that
have already occurred and partial-year savings associated with the restructurings in 2006. In addition, the
Reserve Banks have reduced costs in a variety of
support and overhead areas and, as a result, the
Reserve Banks expect to fully recover the costs of
providing priced services in 2006.
Overall, the price level for Federal Reserve priced
services will increase about 3 percent in 2006 from
2005. This increase reflects an approximately 5 percent rise in paper check service fees combined with
a I percent decrease in fees for the Reserve Banks'
electronic payment services. The 2006 fee schedule for each of the priced services, except the check
service, which is more complex, is on the Board's
web site at www.federalrescrve.gov/paymentsystems/
pricing/2006repricingfedreg.pdf. Fee schedules for
all priced services are available on the Federal

Announcements

Reserve Banks' financial services web site at www.
frbservices.org.
In addition the Board approved the 2006 privatesector adjustment factor (PSAF) for Reserve Bank
priced services of $117.7 million. The PSAF is an
allowance f o r income taxes and other imputed
expenses that would have to be paid and profits that
would have to be earned if the Reserve Banks' priced
services were provided by a private business. The
Monetary Control Act of 1980 requires that the
Federal Reserve establish fees to recover the costs
of providing priced services, including the PSAF,
over the long run, to promote competition between
the Reserve Banks and private-sector service
providers.

LIST OF DISTRESSED AND UNDERSERVED
NONMETROPOLITAN
MIDDLE-INCOME
GEOGRAPHIES

The federal banking agencies announced on
August 30, 2005, the availability of the list of distressed and underserved nonmetropolitan middleincome geographies in which bank revitalization or
stabilization activities will receive consideration
under the Community Reinvestment Act (CRA) as
"community development" pursuant to the revised
CRA rules issued by the agencies on August 2, 2005.
The list is available on the Federal Financial Institutions Examination Council (FFIEC) web site
(www.FFIEC. gov/cra).
"Distressed nonmetropolitan middle-income"
geographies are those located in counties that meet
one or more triggers that generally reflect the "distress criteria" used by the Community Development
Financial Institutions Fund. The distress triggers are:
(1) an unemployment rate of at least 1.5 times the
national average; (2) a poverty rale of 20 percent or
more; and (3) a population loss of 10 percent or more
between the previous and most recent decennial census, or a net migration loss of 5 percent or more over
the five-year period preceding the most recent census.
The agencies will utilize annual information where
possible.
"Underserved nonmetropolitan middle-income
geographies" must meet criteria for population size,
density, and dispersion that indicate that an area's
population is sufficiently small, thin, and distant from
a population center such that the geography is likely
to have difficulty in financing the fixed costs of
essential community needs. The agencies will use as
the basis for these designations the "urban influence
codes" numbered 7, 10, 11, and 12 that are main-

499

tained by the Economic Research Service of the
United States Department of Agriculture.
The Board of Governors of the Federal Reserve
System, the Federal Deposit Insurance Corporation,
and the Office of the Comptroller of the Currency
will update the list of distressed and underserved
nonmetropolitan middle-income geographies annually, and will post updates on the FFIEC web site by
April 1 of each year. To the extent that changes
occur, the agencies are proposing adoption of a oneyear lag period, which would be in effect for the
calendar year following the date when a census tract
designated as distressed or underserved is removed
from the list. Revitalization or stabilization activities
undertaken during the lag period would still be
considered as community development activities
if they meet the primary purpose of community
development.

INSURED DEPOSITORY
INSTITUTIONS
ENCOURAGED
TO ASSIST DISPLACED
CUSTOMERS

The Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the
National Credit Union Administration, the Office of
the Comptroller of the Currency, and the Office of
Thrift Supervision (the agencies), and the Conference
of State Bank Supervisors asked insured depository
institutions on September 1, 2005, to consider all
reasonable and prudent steps to assist customers' and
credit union members' cash and financial needs in
areas affected by Hurricane Katrina. The agencies are
working with state regulatory agencies, financial
industry trade groups, and affected financial institutions to identify customer needs and monitor institutions' restoration of services.
The agencies remind the public that deposit insurance is in full force and that money in FDIC- or
NCUA-insured accounts is protected by federal
deposit insurance. The agencies also note that a priority is to provide customer access to deposit accounts
and other financial assets. Many financial institutions
are implementing contingency plans, including procedures for consumers to have access to ATMs and use
of their debit cards.
The financial services community through its various trade associations is working together to assist
affected institutions. The agencies encourage financial institutions to assist affected institutions and consider all reasonable and prudent actions that could
help meet the critical financial needs of their customers and their communities. To the extent consistent

500

Federal Reserve Bulletin • Autumn 2005

with safe and sound banking practices, such actions
may include the following:
• waiving ATM fees for customers and noncustomers
• increasing ATM daily cash withdrawal limits
• easing restrictions on cashing out-of-state and
noncustomer checks
• waiving overdraft fees as a result of paycheck
interruption
• waiving early withdrawal penalties on time
deposits
• waiving availability restrictions on insurance
checks
• allowing loan customers to defer or skip some
payments
• waiving late fees for credit card and other loan
balances due to interruption of mail and, or billing
statements or the customer's inability to access f u n d s
• easing credit card limits and credit terms for new
loans
• delaying delinquency notices to the credit
bureaus
The agencies, in consultation with FinCEN, also
encourage depository institutions to be reasonable
in their approach to verifying the identity of individuals temporarily displaced by Hurricane Katrina.
Under the Customer Identification Program requirement of the Bank Secrecy Act, depository institutions must obtain, at a minimum, an individual's
name, address, date of birth, and taxpayer identification number or other acceptable identification
number before opening an account. The Customer
Identification Program requirement provides depository institutions with flexibility to design a program
that uses documents, nondocumentary methods, or a
combination to verify a customer's identity. Moreover, the regulation provides that verification of identity may be completed within a reasonable time after
the account is opened. Recognizing the urgency of
this situation, the agencies encourage depository
institutions to use nondocumentary verification
methods for affected customers that may not be able
to provide standard identification documents, as
permitted under the regulation. A depository institution in the affected area, or dealing with new customers f r o m the affected area, may amend its Customer Identification Program immediately and obtain
required board approval for program changes as soon
as practicable.
T h e agencies note that these measures could help
customers recover their financial strength and con-

tribute to the health of the local community and the
long-term interest of financial institutions and their
customers when undertaken in a prudent manner. The
agencies recognize that the needs and situation of
each financial institution and its community and customers are unique. T h e actions above may not be
feasible or desirable for all institutions and m a n y
institutions may provide additional services f r o m
those identified.
T h e agencies will continue to closely monitor the
situations and needs of insured depository institutions
and their customers and will provide additional guidance, as required, to help address those needs. Institutions needing assistance in dealing with customers
affected by the hurricane should contact their primary
supervisors.

DATA SHOW CONTINUED IMPROVEMENT IN
CREDIT QUALITY
The quality of syndicated bank credits showed continued i m p r o v e m e n t this year, according to the
Shared National Credit (SNC) review released on
September 15, 2005, by federal bank and thrift institution regulators. T h e review, which encompassed
credits of at least $20 million that are shared by three
or more financial institutions, also found that most
industries exhibit m u c h improved credit quality f r o m
peak problem levels experienced only a few years
ago.
The results—reported by the Board of Governors
of the Federal Reserve System, the Office of the
Comptroller of the Currency, the Federal Deposit
Insurance Corporation, and the Office of Thrift
Supervision—are based on analyses prepared in the
second quarter of 2005 and reflect business and economic conditions at that time.
Total classified credit commitments (those rated as
either substandard, doubtful, or loss) fell $21.5 billion, or 29 percent, f r o m the previous year, compared
with a net decrease of $78.2 billion, or 51 percent, the
year before. C o m m i t m e n t s rated special mention
decreased $7.0 billion, or 21 percent, in contrast to
2004 when they fell $22.4 billion, or 41 percent.
N o n e of these figures includes the effects of hedging
or other techniques that organizations often employ
to mitigate risk.
The ratio of classified credit commitments to total
commitments fell to 3.2 percent, the lowest level
since 1999. Total adversely rated credits (classified
and special mention combined) also fell considerably
to 4.8 percent of total commitments.

Announcements

REVISED

PLAN

FOR IMPLEMENTATION

OF

BASEL II FRAMEWORK

The four federal banking agencies (the Office of the
Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of Thrift
Supervision) announced on September 30, 2005, their
revised plans for the U.S. implementation of the
"International Convergence of Capital Measurement
and Capital Standards: A Revised Framework," otherwise known as Basel II. The agencies previously
announced on April 29, 2005, that they were delaying
issuance of a notice of proposed rulemaking (NPR),
pending additional analysis of the quantitative impact
study (QIS4) submissions. The agencies intend to
move forward with an NPR for domestic implementation of Basel II, but plan to introduce additional
prudential safeguards in the NPR to address concerns
identified in the analysis of the results of the QIS4
conducted with the industry. The agencies expect that
the U.S. Basel II proposal will be available in the first
quarter of 2006.
The agencies' Basel II implementation plan
includes the following elements:
• The agencies expect to propose a revised implementation timeline for Basel II. Under this revised
timeline, the first opportunity for a U.S. banking
institution to conduct a parallel run would be January
2008. In addition, U.S. institutions adopting the
Basel Il-based capital rules would be subject to a
minimum three-year transition period during which
the agencies would apply limits on the amount by
which each institution's risk-based capital could
decline with the application of Basel II. These limits
would be implemented through floors that are
intended to be simpler in design and more conservative in effect than those set forth in Basel II.
For institutions that plan to implement the Basel II
framework at the earliest possible implementation
date, the following timetable and transitional arrangements would be proposed in the NPR:

Year

Transitional
Arrangements

2008

501

under the Basel Il-based capital rules consistent with
the above schedule. As part of this assessment, the
primary federal supervisor will make a decision on
the termination of the floors after 2011 on an
institution-by-institution basis.
• Using information received during the U.S.
Basel II implementation process (including the transition period), the agencies will continue to evaluate
the effectiveness of the Basel Il-based capital rules.
The agencies anticipate that there will be further
revisions to the U.S. Basel Il-based capital rules
before the termination of the floors.
• The agencies will retain both the existing Prompt
Corrective Action and leverage capital requirements in the proposed domestic implementation of
Basel II.
The agencies expect to publish an advance notice
of proposed rulemaking for notice and comment on
possible modifications to the risk-based capital rules
for banks that do not become subject to Basel Ilbased capital rules. The revised transition schedule
for the domestic implementation of the Basel II
framework will permit industry consideration of and
public comment on these two rulemaking initiatives
along similar timeframes.

COMMENT REQUESTED
DOMESTIC RISK-BASED
MODIFICATIONS

ON SUGGESTED
CAPITAL

The four federal banking agencies—the Office of the
Comptroller of the Currency, the Board of Governors
of the Federal Reserve System, the Federal Deposit
Insurance Corporation, and the Office of Thrift
Supervision—published on October 20, 2005, an
interagency advance notice of proposed rulemaking
(ANPR) regarding potential revisions to the existing
risk-based capital framework. These changes would
apply to banks, bank holding companies, and savings
associations.
The ANPR document discusses various modifications to the U.S. risk-based capital standards
including:

Parallel R u n

2009

95% floor

2010

9 0 % floor

2011

8 5 % floor

• An institution's primary federal supervisor
would assess that institution's readiness to operate

• increasing the number of risk-weight categories
to which credit exposures may be assigned;
• expanding the use of external credit ratings as an
indicator of credit risk for externally rated exposures;
• expanding the range of collateral and guarantors
that may qualify an exposure for lower risk weights;

502

Federal Reserve Bulletin • A u t u m n 2005

• using loan-to-value ratios, credit assessments,
and other broad measures of credit risk for assigning
risk weights to residential mortgages;
• modifying the credit conversion factor for various commitments, including those with an original
maturity of less than one year;
• requiring that certain loans ninety days or more
past due or in a non-accrual status be assigned to a
higher risk-weight category;
• modifying the risk-based capital requirements
for certain commercial real estate exposures;
• increasing the risk sensitivity of capital requirements for other types of retail, multifamily, small
business, and commercial exposures; and
• assessing a risk-based capital charge to reflect
the risks in securitizations with early amortization provisions that are backed by revolving retail
exposures.
Comments must be received on or before January 18, 2006.

JULY 2 0 0 5 U P D A T E TO THE
BANK HOLDING COMPANY SUPERVISION
MANUAL

The July 2005 update to the Bank Holding Company
Supervision Manual has been published (supplement
no. 28). The Manual comprises the Federal Reserve
System's regulatory, supervisory, and inspection
guidance for bank holding companies (BHCs). The
new supplement includes guidance on the following
subjects:
1. Interagency Credit Risk Management Guidance for
Home-Equity Lending. The section on "Supervision of
Subsidiaries—Loan Administration and Lending Standards" has been revised to include this May 16, 2005,
guidance that was issued by the federal supervisory agencies to promote greater focus on sound risk-management
practices at banking organizations that have home-equity
lending programs. The guidance highlights the sound riskmanagement practices that a banking organization should
follow to align the growth and risk within its home-equity
portfolio. See SR letter 05-11 and its attachment. The
inspection objectives and procedures were revised to incorporate the interagency guidance.
2. Continued Limited Inclusion of Trust Preferred Securities in the Tier 1 Capital of Bank Holding Companies.
The section "Consolidated Capital—Examiner's Guidelines for Assessing the Capital Adequacy of B H C s " and
the section "Consolidated Capital—Leverage Measure"
were revised to incorporate the February 28, 2005 (published March 10, 2005), revision of the definition of tier 1
capital under the Board's risk-based and leverage capital

rules for BHCs. The revised rules allow the continued
inclusion of outstanding and prospective issuances of trust
preferred securities in BHCs' tier 1 capital and impose new
quantitative limits and qualitative standards on the components of tier 1 capital. The Board adopted revised quantitative limits on the aggregate amount of cumulative perpetual preferred and trust preferred securities, and minority
interests in the equity accounts of most consolidated subsidiaries (collectively, restricted core capital elements)
included in BHCs' tier 1 capital. The revised rule limits
restricted core capital elements as of March 31, 2009, to
25 percent of all core capital elements, net of goodwill less
any associated deferred tax liability. Internationally active
BHCs, defined as those with consolidated assets greater
than $250 billion or on-balance-sheet foreign exposure
greater than $10 billion, will be subject to a 15 percent
limit. They may, however, include qualifying mandatory
convertible preferred securities up to the generally applicable 25 percent limit. Amounts of restricted core capital
elements in excess of these limits generally may be
included in tier 2 capital, subject to the limit that the
aggregate amount of subordinated debt and restricted core
capital elements (other than cumulative perpetual preferred
securities) included in tier 2 capital may not exceed 50 percent of tier 1 capital. A transition period, ending March 31,
2009, is provided for the application of the quantitative
limits.
The revised rule addresses supervisory concerns, competitive equity considerations, and the changes in the treatment of trust preferred securities under generally accepted
accounting principles. In addition, it strengthens the definition of regulatory capital by incorporating longstanding
Board policies regarding the acceptable terms of capital
instruments included in BHCs' tier 1 or tier 2 capital.
These strengthened standards include a requirement that
junior subordinated notes underlying trust preferred securities generally comply with the Board's subordinated debt
policy statement. See 12 CFR 250.166. Updated inspection
objectives and procedures are also included. The Board's
Regulation Y, appendix A (12 CFR 225, appendix A)
includes the risk-based capital rule and the rule's appendix D (12 CFR 225, appendix D) sets forth the tier 1
leverage measure rule.
3. The Bank Holding Company RFI/C (D) Rating System. The " B H C Rating System" section has been updated
to replace the BOPEC bank holding company rating system with the RFI/C (D) rating system that was approved
by the Board on December 1, 2004 (effective January 1,
2005), and described in SR letter 04-18. Under this new
system, each BHC is assigned a " C " composite rating,
which is based on an evaluation and rating of the B H C s
managerial and financial condition and an assessment of
future potential risk to its subsidiary depository institution^). The other main components of the rating system
are: Risk management (R); Financial condition (F); and
potential Impact (I) of the parent company and nondepository subsidiaries (collectively, nondepository entities) on
the subsidiary depository institution(s). The Depository
institution(s) (D), will generally mirror the primary regulator's assessment of the subsidiary depository institution(s).
Several component ratings have subcomponent ratings.
The composite, component, and subcomponent ratings are
assigned to BHCs on the basis of a numeric scale. A " 1" is

Announcements

the highest rating; a " 5 " is the lowest. All of the B H C ' s
numeric ratings, including the composite, component, and
s u b c o m p o n e n t ratings, should be presented in the inspection report in accordance with Federal R e s e r v e supervisory
practices. M a n y of the manual's
sections that involve
supervisory risk-management-assessments during a B H C
inspection have been revised to incorporate, or reference,
the RFI/C (D) rating system.

503

20th and C Streets, N.W., Washington, D C 20551;
telephone (202) 452-3244; or send a facsimile to
(202) 728-5886. The Manual is also available on the
Board's public web site at www.federalreserve.gov/
boarddocs/supmanual/.

CHANGES IN PUBLISHING FORMAT OF THE
4. Interagency
Advisory on the Confidentiality
of the
Supervisory
Rating and Other Non-Public
Supervisory
Information.
A new section incorporates the February 28,
2005, interagency advisory that reminds banking organizations of the statutory prohibitions on the disclosure of
supervisory ratings and other confidential supervisory ratings to third parties. See SR letter 05-4.
5. Board Orders and Board Staff Interpretations
Involving Nonbanking
Activities. A new section, "Credit Card
B a n k E x e m p t i o n f r o m the Definition of B a n k , " discusses
the February 18, 2005, Board staff interpretation involving
the credit card bank exemption under section 2(c)(2)(F) of
the B H C Act. This statutory provision and the interpretation set forth the criteria that an institution must meet to
qualify for the so-called credit card bank exemption.
T h e section for " S e c t i o n 4(c)(4) of the B H C A c t —
Interests in N o n b a n k i n g O r g a n i z a t i o n s " has been revised
to include a qualifying foreign banking organization's
( F B O ' s ) N o v e m b e r 24, 2004, request for a Board staff
determination, which is based on section 4(c)(4) of the
B H C Act and on the availability of a fiduciary exemption that is f o u n d in the B o a r d ' s Regulation K, section 211.23(f)(4) (12 C F R 211.23(f)(4)) and in Regulation Y, section 225.22(d)(3) (12 C F R 225.22(d)(3)). T w o
of the F B O ' s asset-management subsidiaries proposed to
serve as trustee for foreign-based investment trusts that
would invest in U.S. real estate. As part of this assetm a n a g e m e n t activity, the two subsidiaries would take title
to U.S. real estate on behalf of the investment trusts and for
the benefit of the investors in the trusts.
T h e section " P e r m i s s i b l e Activities for F H C s (section 4(k) of the B H C A c t ) " and the section "Limited
Physical-Commodity Trading Activities (section 4(k) of
the B H C A c t ) " were revised for additional Board orders
(see 2004 Federal Reserve Bulletin, pp. 215 and 511) that
authorized engaging in limited amounts and types of commodity trading activities that c o m p l e m e n t the financial
activity of acting regularly as principal in BHC-permissible
c o m m o d i t y derivatives based on a particular commodity.
A financial holding c o m p a n y must submit, through the
filing of a notice under section 4 of the B H C Act, a written
request to the Federal Reserve Board to engage in a
complementary activity.

A more detailed summary of changes is included
with the update package. Copies of the new supplement were shipped directly by the publisher to the
Reserve Banks for their distribution to examiners
and other System staff. The public may obtain the
Manual and the updates (including pricing information) from Publications Fulfillment, Mail Stop 127,
Board of Governors of the Federal Reserve System,

FEDERAL

RESERVE

BULLETIN

The Federal Reserve Board announced on September 22, 2005, that beginning in 2006, the content of
t h e Federal

Reserve

Bulletin

will be published on the

Board's public web site (www.federalreserve.gov) on
a continuing basis, as it becomes available. The quarterly paper version of the Bulletin will no longer be
published. However, the Board will print an annual
compendium.
The online version of the Bulletin responds to the
increased use of the Internet to access information
and will make the planning and production of the
Bulletin more efficient. Publishing articles and reports
on the web as they become available will allow for
the more timely introduction of research and
information.
The online version of the Bulletin will continue
to include topical research articles, Legal Developments, Report on the Condition of the U.S. Banking
Industry, and links to other features.
Online access to the Bulletin will be free. A free
e-mail notification service will be available to alert
subscribers to new articles as they are released.
Articles published in the Bulletin can currently
be found online at www.federalreserve.gov/pubs/
bulletin.

MINUTES

OF THE FEDERAL

OPEN

MARKET

COMMITTEE

The Federal Reserve Board and the Federal Open
Market Committee released on August 30, 2005, the
minutes of the Committee meeting held on August 9,
2005.
On October 11, 2005, the Federal Reserve Board
and the Federal Open Market Committee released the
minutes of the Committee meeting held on September 20, 2005.
The minutes for each regularly scheduled meeting
of the Committee are made available three weeks
after the day of the policy decision and subsequently
are published in the B o a r d ' s Annual

Report.

The

summary descriptions of economic and financial conditions contained in the minutes are based solely on

504

Federal Reserve Bulletin • Autumn 2005

the information available to the Committee at the
time of the meetings.
FOMC minutes can be viewed on the Board's web
site at www.federalreserve.gov/fomc.

MINUTES

OF BOARD

DISCOUNT

RATE

MEETINGS

The Federal Reserve Board released on September 6,
2005, the minutes of its discount rate meetings from
July 18, 2005, through August 9, 2005.
On October 18, 2005, the Board released the minutes of its discount rate meetings from August 22,
2005, through September 20, 2005.

MEETING

OF THE CONSUMER

ADVISORY

COUNCIL

The Federal Reserve Board announced on September 29, 2005, that the Consumer Advisory Council
would hold its next meeting on Thursday, October 27, 2005. The meeting, which was open to
public observation, took place at the Federal Reserve
Board's offices in Washington, D.C., in Dining
Room E, Terrace level in the Board's Martin
Building.
The Council's function is to advise the Board on
the exercise of its responsibilities under various consumer financial services laws and on other matters on
which the Board seeks its advice. Time permitting,
the Council planned to discuss the following topics:
• Home Mortgage Disclosure Act
• Economic Growth and Regulatory Paperwork
Reduction Act
• Nontraditional Mortgage Loans
• Hurricane Katrina

ENFORCEMENT

Final Decisions

ACTIONS

and Orders of Prohibition

The Federal Reserve Board announced on August 17,
2005, the issuance of a final decision and order of
prohibition against Walter C. Cleveland, a former
employee of First National Bank, Lubbock, Texas.
The order, the result of an action brought by the
Office of the Comptroller of the Currency, prohibits
Mr. Cleveland from participating in the conduct of
the affairs of any financial institution or holding
company.

The Federal Reserve Board announced on September 15, 2005, the issuance of an order of prohibition
against Hanspeter Walder, a former employee and
officer of the New York Branch of UBS AG, Zurich,
Switzerland. The order was issued relating to
Mr. Walder's violations of law, unsafe and unsound
banking practices, and breaches of fiduciary duties
to UBS and its customers in connection with his
embezzlement of funds for personal use.
Mr. Walder, a private banker, embezzled more than
$70 million from at least twenty-two UBS private
client accounts under his responsibility. Mr. Walder
pleaded guilty to sixteen counts of embezzlement and
misapplication by a bank officer or employee and is
currently serving a ninety-seven month prison sentence. Mr. Walder was ordered to make restitution
of $70 million and to pay a fine of $1 million. As
required by the court at sentencing, Mr. Walder has
consented to the issuance of the order of prohibition.
The Federal Reserve Board announced on September 20, 2005, the issuance of a final decision and
order of prohibition against Brian Bonetti, a former
employee of National City Bank, Cleveland, Ohio.
The order, the result of an action brought by the
Office of the Comptroller of the Currency, prohibits
Mr. Bonetti from participating in the conduct of
the affairs of any financial institution or holding
company.
The Federal Reserve Board announced on September 28, 2005, the issuance of an order of prohibition against Jessica Faris, a former employee and
institution-affiliated party of SunTrust Bank, Atlanta,
Georgia.
Ms. Faris, without admitting to any allegations,
consented to the issuance of the order based on her
alleged violations of law and breaches of fiduciary
duty to SunTrust Bank and its customers in connection with embezzlement of funds and falsification of
the bank's books and records at a cash vault processing center.
The Federal Reserve Board announced on October 24, 2005, the issuance of a consent notice
of suspension and prohibition against William R.
Kahler, an officer of Primebank, LeMars, Iowa, a
state member bank.
A notice of suspension and prohibition was issued
under a provision of the Federal Deposit Insurance
Act that authorizes the Federal Reserve Board and
other bank regulators to limit the activities of bank
officials who have been charged with certain criminal
offenses pending the resolution of the charges.

Announcements

Written Agreements
The Federal Reserve Board and the New York State
Banking Department announced on October 14,
2005, the execution of a written agreement by and
among the Deutsche Bank Trust Company Americas,
New York, New York, the Federal Reserve Bank
of New York, and the New York State Banking
Department.
The written agreement addresses Bank Secrecy
Act and anti-money-laundering compliance at
Deutsche Bank Trust Company Americas, including
policies and practices relating to the provision of
correspondent banking services.

On October 26, 2005, the Federal Reserve Board
announced the termination of the following enforcement action.
• AmericasBank Corporation and AmericasBank,
Towson, Maryland
Written agreement dated August 3, 2001
Terminated October 12, 2005
The Federal Reserve's enforcement action web site,
www.federalreserve.gov/boarddocs/enforcemcnt, reports the terminations as they occur.

CHANGES

The Federal Reserve Board announced on October 14, 2005, the execution of a written agreement by
and between Surety Capital Corporation, Fort Worth,
Texas, and the Federal Reserve Bank of Dallas.

Termination of Enforcement Actions
The Federal Reserve Board announced on September 26, 2005, the termination of the enforcement
actions listed below.
• First State Bank of Warner, Warner, South
Dakota
Written agreement dated December 11, 2001
Terminated September 20, 2005
• Midwest Banc Holdings, Inc., Melrose Park,
Illinois, and Midwest Bank and Trust
Company, Elmwood Park, Illinois
Written agreement dated March 15, 2004
Terminated September 16, 2005
On October 5, 2005, the Federal Reserve Board
announced the termination of the following enforcement action.
• First Midwest Bank, Itasca, Illinois
Written agreement dated July 9, 2004
Terminated September 30, 2005
On October 25, 2005, the Federal Reserve Board
announced the termination of the following enforcement action.
• Ridgedale State Bank, Minnetonka, Minnesota
Written agreement dated July 29, 2004
Terminated October 25, 2005

505

IN BOARD

STAFF

The Board of Governors approved on August 29,
2005, the promotion of William C. Schneider, Jr., to
deputy associate director in the Division of Banking
Supervision and Regulation.
Mr. Schneider was promoted to reflect the range of
his continuing responsibilities for the National Information Center, which include overseeing key supervisory national applications such as BOND, NED,
RSSD, and CDTR; representing the division on the
interagency Call Report Modernization effort and the
Information Sharing Task Force of the FFIEC; and
being responsible for the division's information technology support.
Mr. Schneider joined the Board in 1976 in the
Division of Information Technology. He was
appointed assistant director in 1982. Mr. Schncider
transferred to the Federal Reserve Bank of Cleveland
as vice president in 1986. In 1990 he returned to the
Board and was appointed project director for the
National Information Center. He joined the Division
of Banking Supervision and Regulation in 1994.
Mr. Schneider holds a BS degree in business administration from Geneva College and an MBA with a
concentration in information technology from George
Mason University.
Joseph H. Hayes, Jr., assistant director in the Division of Reserve Bank Operations and Payment Systems, passed away on Sunday, September 4, 2005.
Mr. Hayes was responsible for the Board's oversight
of the Reserve Bank Human Resources programs. He
joined the Board in 1985.
The Board of Governors approved on September 26, 2005, the appointment of Leonard Chanin as
associate director and Sheila F. Maith as assistant
director in the Division of Consumer and Community
Affairs.

506

Federal Reserve Bulletin • Autumn 2005

Leonard Chanin will have oversight responsibility
for the Regulations branch, which handles the legal
analysis and regulation drafting functions. He will
also represent the Board in public and private forums
dealing with regulatory issues related to financial
services. Mr. Chanin worked as an attorney in the
Board's Division of Consumer and Community
Affairs from 1985 to 1999. He left the Board to join
the law firm of Morrison and Foerster, where he has
worked ever since. Mr. Chanin holds a BA degree
from the American University and a JD from the
Washington University Law School.
Sheila F. Maith will have oversight responsibility
for Board and System programs in both the community affairs function and the Consumer Advisory
Council. She will represent the Board at public- and
private-sector meetings and in discussions dealing
with policies and programs related to community and
economic development and the delivery of financial
services to underserved markets. Ms. Maith is
employed by the Fannie Mae Foundation, where she
manages the policy and leadership development
program. Her responsibilities include the development and implementation of the foundation's strategy
to advance affordable housing issues on the publicpolicy agenda, focusing on state and local government. Before her position with Fannie Mae,
Ms. Maith was senior counsel to Senator Edward M.
Kennedy, acting as an adviser on economic issues.
She holds an MA degree from the Kennedy School of
Government at Harvard University and a JD from the
Harvard Law School.
The Board of Governors approved on November 1,
2005, the appointment of Brian J. Gross as special
assistant to the Board in the Congressional Liaison
program in the Office of Board Members.

Mr. Gross joined the Office of Board Members as
congressional liaison assistant in 2003. Before joining the Board's staff, he served as chief counsel to the
executive director of the Securities and Exchange
Commission, as director of communications for the
SEC, as the deputy staff director and chief ethics
officer for the Senate Banking Committee, and as
chief counsel and legislative assistant to Senator Phil
Gramm. Mr. Gross holds a BA in economics and
history from Texas A & M University and a JD from
the Georgetown University Law Center.
The Board of Governors approved on November 2,
2005, the appointment of Jill Rosen to assistant director in the Division of Information Technology.
Ms. Rosen will have oversight responsibilities for the
National Information Center (NIC) Systems branch.
The newly created branch includes the NIC Architecture Redesign Initiative (NARI). The NARI project
will provide economists and financial analysts
throughout the Federal Reserve System easier and
more cost-effective access to structure, financial, and
supervisory data on financial institutions.
Ms. Rosen joined the Board in 1997 and was
promoted to manager in the Division of Information
Technology in 2000. She has managed software
development for many of the Board's key information systems. Before joining the Board, Ms. Rosen
worked for Computer Business Methods as a senior
management analyst and database administrator. She
holds a BS in clectrical engineering from George
Washington University, and she will receive an MS
in project management from George Washington
University in December 2005.
•

507

Legal Developments

ORDERS ISSUED UNDER BANK HOLDING
COMPANY ACT
Orders Issued U n d e r Section 3 of the Bank Holding
C o m p a n y Act
Associated Banc-Corp
Green Bay, Wisconsin
Order Approving the Merger of Bank Holding
Companies
Associated Banc-Corp ("Associated"), a bank holding
company within the meaning of the Bank Holding Company Act ( " B H C Act"), has requested the Board's
approval under section 3 of the BHC Act 1 to merge with
State Financial Services Corporation ("State Financial"),
Milwaukee, and thereby acquire its subsidiary bank, State
Financial Bank, National Association ("State Bank"),
Hales Corners, all of Wisconsin.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 38,930 (2005)). 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.
Associated, with total consolidated assets of approximately $20.8 billion, operates one depository institution,
Associated Bank, National Association ("Associated
Bank"), also in Green Bay, with branches in Wisconsin,
Illinois, and Minnesota. 2 Associated Bank is the third
largest depository institution in Wisconsin, controlling
deposits of approximately $8.4 billion, which represent
8.7 percent of the total amount of deposits of insured
depository institutions in the state ("state deposits"). Associated Bank is the 23rd largest depository institution in
Illinois, controlling deposits of approximately $2.2 billion,
which represent less than 1 percent of the total amount of
state deposits.
State Financial, with total consolidated assets of approximately $1.5 billion, operates one depository institution,
1. 12U.S.C. § 1 8 4 2 .
2. Associated B a n k M i n n e s o t a , National Association, Minneapolis,
Minnesota, and As s o c i a t e d Bank Chicago, Chicago, Illinois, were
merged into Associated B a n k on July 16, 2005. Asset, deposit, and
ranking data are as of J u n e 30, 2004, and are adjusted to reflect these
mergers. In this context, insured depository institutions include commercial banks, savings banks, and savings associations.

State Bank, with branches in Wisconsin and Illinois. State
Financial is the 24th largest insured depository organization in Wisconsin, controlling deposits of approximately
$472.1 million. State Bank is the 63rd largest depository
institution in Illinois, controlling deposits of approximately
$595.3 million.
On consummation of the proposal, Associated would
have consolidated assets of approximately $22.5 billion
and would control deposits of $13.2 billion, which represent less than 1 percent of the total amount of deposits of
insured depository institutions in the United States. Associated would remain the third largest depository organization in Wisconsin, controlling deposits of approximately
$8.9 billion, which represent 9.2 percent of state deposits.
Associated would become the 19th largest depository
organization in Illinois, controlling deposits of approximately $2.8 billion, which represent 1 percent of state
deposits.
Interstate

Analysis

Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home
state of such bank holding company if certain conditions
are met. For purposes of the BHC Act, the home state of
Associated is Wisconsin, 3 and State Financial is located in
Wisconsin and Illinois. 4
Based on a review of the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case. 5 In light of

3. A bank holding c o m p a n y ' s h o m e state is the state in which the
total deposits of all subsidiary banks of the c o m p a n y were the largest
on July 1, 1966, or the date on which the c o m p a n y b e c a m e a b a n k
holding company, whichever is later. 12 U.S.C. § 184l(o)(4)(C).
4. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch. 12 U.S.C. §§ 1841 (o)(4)—(7) and 1842(d)(1)(A) and
(d)(2)(B). Associated Bank also operates branches in Minnesota and
Illinois.
5. 12 U.S.C. §§ 1 8 4 2 ( d ) ( l ) ( A ) - ( B ) , 1842(d)(2)(A)-(B). Associated
is adequately capitalized and adequately m a n a g e d , as defined by
applicable law. A s s o c i a t e d ' s proposed acquisition of State F i n a n c i a l ' s
branches in Illinois is not subject to the m i n i m u m age requirement
or deposit limit i m p o s e d by Illinois law. O n c o n s u m m a t i o n of the
proposal, Associated would control less than 10 percent of the total
amount of deposits of insured depository institutions in the United
States and less than 30 percent of the total amount of deposits of

508

F e d e r a l R e s e r v e Bulletin •

Autumn 2005

all the facts of record, the Board is permitted to approve
the proposal under section 3(d) of the B H C Act.
Competitive

Considerations

Section 3 of the B H C Act prohibits the Board f r o m 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
Associated and State Financial compete directly in the
Milwaukee and Walworth banking markets in Wisconsin
and the Chicago banking market in Illinois. 7 The Board has
carefully reviewed the competitive effects of the proposal
in each of these banking markets in light of all the facts of
record, including the number of competitors that would
remain in the markets, the relative shares of total deposits
in depository institutions in each market ( " m a r k e t deposits") controlled by Associated Bank and State Bank, 8 the
concentration level of market deposits and the increase in
this level as measured by the Herfindahl-Hirschman Index
( " H H I " ) under the Department of Justice Merger Guidelines ( " D O J Guidelines"), 9 and other characteristics of the
markets.

insured depository institutions in Illinois. All other requirements of
section 3(d) of the B H C Act would be met on c o n s u m m a t i o n of the
proposal.
6. 12 U.S.C. § 1842(c)(1).
7. T h e M i l w a u k e e banking market is defined as M i l w a u k e e ,
Waukesha, and O z a u k e e Counties; Hast Troy township in Walworth
County; W a t c r f o r d , N o r w a y , and R a y m o n d t o w n s h i p s in Racine
County; Ixonia township in Jefferson County; and Polk, Jackson,
Richfield, a n d G e r m a n t o w n townships in Washington County, all in
Wisconsin. T h e Walworth banking market is defined as Walworth
County, e x c l u d i n g East Troy township; Burlington township in Racine
County, a n d Wheatland and Randall townships in Kenosha County,
all in W i s c o n s i n . T h e Chicago banking market is defined as Cook,
DuPage, and Lake Counties, all in Illinois.
8. D e p o s i t and market share data are as of June 30, 2004, and are
based on calculations in which the deposits of thrift institutions are
included at 5 0 percent. T h e Board previously has indicated that thrift
institutions h a v e become, or have the potential to b e c o m e , significant
competitors of commercial banks. See, e.g., Midwest Financial Group,
7 5 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984). Thus, the Board regularly has
included thrift deposits in the market share calculation on a 50 percent
weighted basis. See, e.g., First Hawaiian, Inc., 11 Federal Reserve
Bulletin 52 (1991).
9. U n d e r the D O J Guidelines, a market is considered nnconcentrated if the post-merger H H I is under 1000, moderately concentrated
if the p o s t m e r g e r H H I is between 1000 and 1800, and highly concentrated if the post-merger H H I exceeds 1800. T h e D epar tment of
Justice ( " D O J " ) 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 H H I
is at least 1800 and the merger increases the H H I by more than
2 0 0 points. T h e D O J has stated that the higher than normal HHI
thresholds f o r screening bank mergers and acquisitions for anticom-

Consummation of the proposal would be consistent with
Board precedent and within the thresholds in the DOJ
Guidelines in each of these banking markets. After consummation, the Milwaukee banking market would remain
moderately concentrated, and the Walworth and Chicago
banking markets would remain unconcentrated, as measured by the HHI. In each market, the increase in concentration would be small and numerous competitors would
remain. 1 0
The Department of Justice also has reviewed the anticipated competitive effects of the proposal and advised the
Board that consummation of the proposal would not likely
have a significant adverse effect on competition in any
relevant banking market. In addition, the appropriate banking agencies have been afforded an opportunity to comment and have not objected to the proposal.
Based on all the facts of record, the Board concludes that
consummation of the proposal would not have a significantly adverse effect on competition or on the concentration of resources in any of the banking markets in which
Associated and State Financial directly compete or in any
other relevant banking market. Accordingly, based on all
the facts of record, the Board has determined that competitive considerations are consistent with approval.
Financial,

Managerial,

and Supervisory

Considerations

Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered these factors in light of all the facts
of record, including confidential reports of examination,
other supervisory information f r o m the primary federal
supervisors of the organizations involved in the proposal,
publicly reported and other financial information, and information provided by the applicant.
In evaluating financial factors in expansion proposals by
banking organizations, the Board reviews the financial
condition of the organizations involved on both a parentonly and consolidated basis, as well as the financial condition of the subsidiary banks and significant nonbanking
operations. In this evaluation, the Board considers a variety
of measures, 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.
Based on its review of these factors, the Board finds that
Associated has sufficient financial resources to effect the
proposal. The proposed transaction is structured as a share

petitive effects implicitly recognize the competitive effects of limitedpurpose and other nondepository financial entities.
10. T h e effects of the proposal on the concentration of banking
resources in these banking markets are described in the appendix.

Legal Developments

exchange and cash purchase. Associated will use existing
resources to fund a cash purchase of fractional shares.
Associated and Associated Bank are well capitalized and
would remain so on consummation of the proposal.
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 Associated, State Financial, and their subsidiary
banks, including assessments of their management, riskmanagement 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. Associated, State Financial, and their
subsidiary depository institutions are considered to be well
managed. The Board also has considered Associated's
plans for implementing the proposal, including its proposed management after consummation.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial resources and future prospects of the organizations
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.
Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board 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"). 1 1 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 ( " L M I " ) neighborhoods, in evaluating bank
expansionary proposals. 12
The Board has considered carefully all the facts of
record, including data reported by Associated under the
Home Mortgage Disclosure Act ("HMDA"), 1 3 reports of
examination of the CRA performance records of the subsidiary banks of Associated and Stale Financial, 14 other
information provided by Associated, confidential supervi-

11. 12 U.S.C. § 2 9 0 1 e t s e q .
12. 12 U.S.C. § 2 9 0 3 .
13. 12 U.S.C. § 2 8 0 1 e t s e q .
14. The B o a r d ' s analysis of the H M D A data of Associated Bank
includes H M D A data reported by Associated Bank, Associated B a n k ' s
subsidiary m o r t g a g e lending company, and A s s o c i a t e d ' s subsidiary
banks that were subsequently merged into Associated Bank. T h e
Board reviewed H M D A data for 2002 and 2003 reported by Associated Bank in the b a n k ' s primary assessment areas. Specifically, the
Board reviewed H M D A data for Associated Bank in the Green Bay
and Milwaukee M S A s and in the b a n k ' s assessment areas on a
statewide basis in Wisconsin.

509

sory information, and public comment received on the
proposal. A commenter alleged, based on 2003 HMDA
data, that Associated Bank had low levels of home mortgage lending to LMI borrowers and on properties in LMI
census tracts, and to minority borrowers and on properties
in substantially minority census tracts, in the Milwaukee/
Waukesha Metropolitan Statistical Area ("Milwaukee
MSA"). 1 5 The commenter also criticized Associated
Bank's record of small business lending in LMI census
tracts in the Milwaukee MSA. In addition, the commenter
criticized Associated Bank's and State Bank's levels of
community development investments in LMI and minority
communities in that MSA.
A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations
by the appropriate federal supervisors of the CRA performance records of the 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. 16
Associated Bank received a "satisfactory" rating at its
most recent CRA evaluation by the Office of the Comptroller of the Currency ("OCC"), 1 7 as of November 10,
2003. 1S State Bank received an overall rating of "satisfactory" at its most recent CRA performance evaluation by
the OCC, as of August 26, 2002. 19 The Board also consulted with the OCC about the CRA performance of Associated Bank and State Bank since their most recent CRA

15. A substantially minority census tract means a census tract with
a minority population of 50 percent or more.
16. See Interagency Questions and Answers Regarding Community
Reinvestment,
66 Federal Register 36,620 and 36,639 (2001).
17. E x a m i n e r s evaluated Associated B a n k ' s C R A performance in
its twelve assessment areas in Wisconsin and took into consideration
the h o m e mortgage lending of the b a n k ' s subsidiary, Associated
Mortgage, Inc., De Pere, Wisconsin. T h e majority of the b a n k ' s
deposits, loans, and branches were in the M i l w a u k e e and Green Bay
M S A s and in the n o n - M S A areas of Wisconsin. T h e evaluation period
for h o m e mortgage loans and loans to small businesses and farms was
January 1, 1999, through D e c e m b e r 31, 2002. T h e evaluation period
for c o m m u n i t y development loans and the investment and service
tests was March 8, 1999, to N o v e m b e r 10, 2003.
18. A s noted, Associated Bank M i n n e s o t a , National Association
and Associated Bank C h i c a g o were merged into Associated Bank on
July 16, 2005. The most recent C R A p e r f o r m a n c e evaluation ratings
for these banks are as follows: Associated Bank C h i c a g o —
" s a t i s f a c t o r y " rating f r o m the Federal Deposit Insurance Corporation,
as of D e c e m b e r 1, 2003; and Associated Bank Minnesota, National
A s s o c i a t i o n — " s a t i s f a c t o r y " rating from the O C C , as of D e c e m b e r 6,
2004. Associated Trust Company, National Association, Milwaukee,
is a limited-purpose trust c o m p a n y that is not examined under the
C R A . See 12 C F R 25.11(c)(3).
19. T h e evaluation period for h o m e mortgage loans and loans to
small businesses was January 1, 2000, through June 30, 2002. T h e
evaluation period for c o m m u n i t y d e v e l o p m e n t loans and the investment and services tests was May 1, 2000, to August 26, 2002.

510

Federal Reserve Bulletin • Autumn 2005

evaluations. 20 Associated has indicated that, on consummation of the proposal, it would evaluate the best practices for
CRA-related lending programs of Associated Bank and
State Bank, with the goal of using the institutions' combined resources to meet the credit and banking needs of
LMI individuals and neighborhoods, including minority
neighborhoods. 21
Associated Bank. The November 2003 CRA evaluation of Associated Bank was discussed in the Board's order
approving Associated's proposal to acquire First Federal
Capital Corporation ("First Federal Capital") and its
wholly owned subsidiary, First Federal Capital Bank, a
federally chartered savings association, both in La Crosse,
Wisconsin. 22 Based on a review of the record in this case,
the Board hereby reaffirms and adopts the facts and findings detailed in the First Federal Capital Order concerning
Associated Bank's CRA performance record. Associated
provided the Board additional information about its CRA
performance since its November 2003 evaluation.
In the November 2003 evaluation, examiners reported
that the total volume of Associated Bank's housing-related
and small business loans demonstrated excellent responsiveness to credit needs across the bank's assessment areas,
including the Milwaukee MSA. 2 1 Examiners stated that the
bank demonstrated good loan distribution among borrowers of different geographies and income levels and noted
favorably that the bank's market share of home purchase
loans to low-income areas exceeded its overall market
share in the Milwaukee MSA. Examiners noted, however,
that Associated Bank's opportunity to extend home finance
loans in LMI areas was limited by the small number of
owner-occupied units in those geographies.
Associated stated that the HMDA data did not reflect all
its lending programs designed to assist LMI borrowers and
small businesses. Associated represents that it participates

20. Associated has tiled an application under the Bank Merger Act
(12 U.S.C. § 1828(c)) with the O C C to m e r g e State Bank into Associated Bank, with Associated Bank as the surviving entity.
21. T h e c o m m e n t e r expressed concern that the proposed acquisition w o u l d negatively affect State B a n k ' s C R A p e r f o r m a n c e ,
which the c o m m e n t e r asserted was stronger than Associated B a n k ' s
performance.
22. T h e First Federal Capital proposal was approved by the Board
on A u g u s t 16, 2004 ( " F i r s t Federal Capital O r d e r " ) . Associated
RancCorp, 9 0 Federal Reserve Bulletin 5 0 3 (2004).
23. T h e c o m m e n t e r expressed concern that Associated Bank lagged
its competitors in h o m e mortgage lending to L M I individuals and on
properties in L M I census tracts in the M i l w a u k e e M S A . T h e percentages of Associated B a n k ' s total H M D A - r e p o r t a b l e loans originated
for borrowers in L M I census tracts in the M i l w a u k e e M S A was below
the percentage for the aggregate of lenders ( " a g g r e g a t e l e n d e r s " ) in
2003. However, the n u m b e r of loans Associated Bank originated on
properties in L M I census tracts in the M i l w a u k e e M S A increased
substantially f r o m 2 0 0 2 to 2003. In addition, other H M D A data
suggest that Associated B a n k ' s lending is more favorable. For e x a m ple, the H M D A data for 2 0 0 3 indicate that the percentages of Associated B a n k ' s total H M D A - r e p o r t a b l e loans originated to L M I borrowers in the M i l w a u k e e M S A exceeded the percentage for the M S A ' s
aggregate lenders. In this context, the lending data of the aggregate
lenders represent the cumulative lending for all financial institutions
that have reported H M D A data in a particular area.

in the home purchase and home improvement loan programs of the Wisconsin Housing and Economic Development Authority ("WHEDA"), which offer long-term,
below-market, fixed-rate financing for LMI first-time
homebuyers and home improvement loans at fixed interest
rates with no equity requirements for LMI homeowners. 24
Associated stated that it has provided more than $93 million in funding for WHEDA loans during the years 2001
through 2004. Associated noted that it was the state's
largest WHEDA loan producer in 2004 and had quadrupled
its number and dollar volume of loans extended under
the program from 2003 to 2004, from 147 loans totaling
$13.6 million to 609 loans totaling $59.2 million. 25 In
addition, Associated stated that it has further met the credit
needs of its communities through participation in lending
programs sponsored by the Small Business Administration
("SBA") and has extended more than $44 million in such
loans during 2004. 26
In the November 2003 evaluation, examiners reported
that the bank's level of qualified investments and grants
was good, considering the needs and opportunities available to the bank and its size and financial capability. 27
During the evaluation period, the bank's qualified investments in Wisconsin totaled more than $14 million. Examiners stated that Associated Bank's responsiveness to credit
and community development needs in the Milwaukee MSA
was excellent and that the bank was responsive to those
identified needs of the community. 28
In addition, examiners found that Associated Bank had
an adequate level of community development services and
that the bank's delivery systems were reasonably accessible to geographies and individuals of different income
levels. 29

24. Associated also noted that it participates in several Federal
H o m e Loan Affordable Housing pr ogr ams that provide d o w n - p a y m e n t
and closing-cost assistance to L M I borrowers. In addition, Associated
Bank recently started its o w n C o m m u n i t y A f f o r d a b l e Real Estate
M o r t g a g e Program ( " C A R E " ) . T h e C A R E program provides lowcost loans with no d o w n - p a y m e n t requirements for qualified buyers in
L M I areas, including L M I areas in the M i l w a u k e e M S A .
25. T h e s e loans w e r e not eligible for reporting as part of Associated B a n k ' s H M D A data.
26. Associated Bank stated that it has Preferred Lender and Dedicated Authority Express designations f r o m the SBA, which expedite
the lending process.
27. T h e c o m m e n t e r expressed concern that Associated B a n k ' s
qualified investments in the M i l w a u k e e M S A were primarily C R A qualified, mortgage-backed securities and not direct grants. T h e C R A
does not require banks to provide any particular type of qualified
C R A investments to meet the credit needs of their communities.
28. Associated stated that it recently established Associated C o m munity Development, L L C for the purpose of partnering and investing
in affordable housing and commercial development principally in
L M I areas, including L M I areas in the M i l w a u k e e M S A .
29. T h e c o m m e n t e r expressed concerns about Associated B a n k ' s
and State B a n k ' s branch distribution in L M I and predominantly
minority census tracts in the M i l w a u k e e M S A . A predominantly
minority census tract m e a n s a census tract with a minority population
of 80 percent or more. T h e O C C , as the appropriate federal supervisor
of A s s o c i a t e d ' s subsidiary banks, will continue to review Associated
B a n k ' s branch distribution in the course of conducting C R A performance evaluations of the bank.

Legal

State Bank.
As noted, State Bank received an overall
"satisfactory" rating in its August 2002 evaluation. The
institution received a "high satisfactory" rating under the
lending and service tests. Examiners commended the
bank's h o m e mortgage loan record among borrowers of
different income levels, including L M I individuals. In particular, examiners noted that the bank originated a higher
percentage of its home purchase loans in the Milwaukee
M S A to L M I borrowers than both the percentage of owneroccupied units and the bank's overall market share for
home purchase loans in the MSA. Examiners also noted
that State B a n k had a good distribution of delivery systems
that were accessible to geographies and individuals of
different income levels in the assessment area.
Although State Bank's overall investment test performance was rated "low satisfactory," examiners characterized the b a n k ' s performance under this test in the Milwaukee M S A as adequate. Examiners reported that the
institution's qualified community development investments
included grants to 15 community development organizations in its assessment area and an investment in a
minority-owned bank holding company that is certified
as a Community Development Financial Institution
( " C D F I " ) . T h e CDFI provided development banking services to the central city of Milwaukee through traditional
and nontraditional bank products and services.
B. H M D A a n d Fair L e n d i n g R e c o r d
The Board has carefully considered Associated's lending
record and H M D A data in light of public comment about
its record of lending to minorities and in predominantly
minority communities. The commenter expressed concern,
based on 2003 H M D A data, that Associated Bank lagged
its competitors in home mortgage lending to minorities and
on properties in substantially minority census tracts in
the Milwaukee MSA. As noted, the Board reviewed the
H M D A data for 2002 and 2003 reported by Associated
Bank in its primary assessment areas, including in the
Milwaukee M S A and on a statewide basis in Wisconsin.
The number of total HMDA-reportable loans originated
by Associated Bank to African-American or Hispanic borrowers and on properties in predominantly minority census
tracts as a percentage of the b a n k ' s total HMDA-reportable
loans generally lagged the performance of the aggregate
lenders in the markets reviewed. However, the data indicate that the number and percentage of loans Associated
Bank originated to African Americans and Hispanics
increased in those markets from 2002 to 2003. In addition,
the number of HMDA-reportable loans that Associated
Bank originated on properties in predominantly minority
census tracts in the Milwaukee M S A and the bank's
Wisconsin assessment areas more than tripled from 2002
to 2003.
Although the H M D A data may reflect certain disparities
in the rates of loan applications and originations among
members of different racial groups in certain local areas,
the H M D A data do not indicate that Associated is excluding any racial group or geographic area on a prohibited

Developments

511

basis. The Board nevertheless is concerned when H M D A
data for an institution indicate disparities in lending and
believes that all banks 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. The Board
recognizes, however, that H M D A data alone, even with the
recent addition of pricing information, provide only limited
information about the covered loans. 3 0 H M D A data, therefore, have limitations that make them an inadequate basis,
absent other information, for concluding that an institution
has engaged in illegal lending discrimination.
Because of the limitations of H M D A 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 the subsidiary
depository and lending institutions of Associated with fair
lending laws. Examiners noted no substantive violations
of applicable fair lending laws in the examinations of the
depository institutions controlled by Associated or State
Financial.
The record also indicates that Associated has taken steps
to ensure compliance with fair lending laws and other
consumer protection laws. Associated Bank represented
that its fair lending compliance program covers all aspects
of the bank's services and includes underwriting standards
and a second review of each loan marked for denial.
Exceptions to underwriting standards must be reviewed by
regional bank management. The bank stated that it monitors compliance by conducting internal tests of random
samples of loans. Associated B a n k ' s program will be
implemented at State Bank.
The Board also has considered the H M D A data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Associated and State Financial under the
CRA. These established efforts demonstrate that the institutions are active in helping to meet the credit needs of their
entire communities.
Conclusion

on CRA Performance

Records

The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by Associated,
comments received on the proposal, and confidential supervisory information. The Board notes that the proposal
would expand the availability and array of banking products and services to the customers of State Bank, including
access to expanded branch and ATM networks. Based on a
review of the entire record, and for the reasons discussed
30. T h e 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
w h o was denied credit was, in fact, creditworthy. Credit history
problems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available f r o m H M D A
data.

512

Federal Reserve Bulletin • A u t u m n 2005

above, the Board concludes that considerations relating
to the convenience and needs factor and the CRA performance records of the relevant depository institutions are
consistent with approval. 31
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. In reaching its conclusion, the Board
has considered all the facts of record in light of the factors
that it is required to consider under the BHC Act. The
Board's approval is specifically conditioned on compliance
by Associated 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 fifteenth 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 Chicago,
acting pursuant to delegated authority.
By order of the Board of Governors, effective September 8, 2005.

represent approximately 8.7 percent of market deposits.
State Financial operates the 14th largest depository institution in the market, controlling deposits of approximately
$26.4 million, which represent approximately 1.6 percent
of market deposits. After the proposed acquisition, Associated would remain the third largest depository institution in the market, controlling deposits of approximately
$167.5 million, which represent approximately 10.3 percent of market deposits. Nineteen depository institutions
would remain in the banking market. The HHI would
increase 28 points, to 971.
Chicago, Illinois
Associated operates the 42nd largest depository institution
in the market, controlling deposits of $484.9 million, which
represent less than 1 percent of market deposits. State
Financial operates the 58th largest depository institution
in the market, controlling deposits of approximately
$323.5 million, which represent less than 1 percent of
market deposits. After the proposed acquisition, Associated would operate the 33rd largest depository institution
in the market, controlling deposits of approximately
$808.4 million, which represent less than 1 percent of market deposits. One hundred and eighty-seven depository
institutions would remain in the banking market. The HHI
would remain unchanged at 751.
Moderately Concentrated Banking Markets

V o t i n g f o r this action: C h a i r m a n G r e e n s p a n , V i c e C h a i r m a n F e r g u son, and G o v e r n o r s Bies, O l s o n , and K o h n .

Milwaukee,

Wisconsin

R O B E R T DEV. FKIERSON

Deputy Secretary of the Board

Appendix
Market Data for Banking Markets
Unconcentrated Banking Markets
Walworth, Wisconsin
Associated operates the third largest depository institution
in the market, controlling deposits of $141.1 million, which

31. T h e c o m m e n t e r r e q u e s t e d that t h e B o a r d c o n d i t i o n its a p p r o v a l
of the p r o p o s a l on A s s o c i a t e d B a n k ' s m a k i n g certain l e n d i n g , se r v i c e ,
c o m m u n i t y r e i n v e s t m e n t , and other c o m m i t m e n t s . A s the B o a r d previo u s l y h a s e x p l a i n e d , an a p p l i c a n t m u s t d e m o n s t r a t e a s a t i s f a c t o r y
r e c o r d of p e r f o r m a n c e u n d e r the C R A w i t h o u t r e l i a n c e on p l a n s o r
c o m m i t m e n t s f o r f u t u r e actions. T h e B o a r d h a s c o n s i s t e n t l y stated that
n e i t h e r t h e C R A nor the federal b a n k i n g a g e n c i e s ' C R A r e g u l a t i o n s
r e q u i r e d e p o s i t o r y institutions to m a k e p l e d g e s o r e n t e r into c o m m i t m e n t s o r a g r e e m e n t s with a n y o r g a n i z a t i o n . See, e.g., The TorontoDominion
Bank, 91 Federal Reserve Bulletin 2 7 7 ( 2 0 0 5 ) ; Fifth Third

Associated operates the fourth largest depository institution in the market, controlling deposits of $1.7 billion,
which represent approximately 5.1 percent of market
deposits. State Financial operates the 15th largest depository institution in the market, controlling deposits of
approximately $445.7 million, which represent approximately 1.3 percent of market deposits. After the proposed
acquisition, Associated would remain the fourth largest
depository institution in the market, controlling deposits of
approximately $2.2 billion, which represent approximately
6.4 percent of market deposits. Fifty-four depository institutions would remain in the banking market. The HHI
would increase 13 points, to 1,772.

Bancorp, 91 Federal Reseive Bulletin 6 3 ( 2 0 0 5 ) ; Wachovia Corporation, 91 Federal Reseive
Bulletin 11 ( 2 0 0 5 ) ; J.P. Morgan Chase &
Co., 9 0 Federal Reserve Bulletin 3 5 2 ( 2 0 0 4 ) . In this case, as in past
c a s e s , the B o a r d instead h a s f o c u s e d o n the d e m o n s t r a t e d C R A
p e r f o r m a n c e r e c o r d of the a p p l i c a n t and the p r o g r a m s that the applic a n t h a s in p l a c e to s e r v e the credit n e e d s of its C R A a s s e s s m e n t areas
w h e n t h e B o a r d r e v i e w s the p r o p o s a l u n d e r the c o n v e n i e n c e and
n e e d s factor. In r e v i e w i n g f u t u r e a p p l i c a t i o n s by A s s o c i a t e d u n d e r this
factor, the B o a r d s i m i l a r l y will r e v i e w A s s o c i a t e d ' s actual C R A
p e r f o r m a n c e r e c o r d a n d the p r o g r a m s it h a s in p l a c e to m e e t the credit
n e e d s of its c o m m u n i t i e s at that time.

Legal Developments

Capital One Financial
McLean, Virginia

Corporation

Order Approving the Merger of Bank Holding
Companies
Capital One Financial Corporation ("Capital O n e " ) , a
financial holding company within the meaning of the Bank
Holding C o m p a n y Act ( " B H C A c t " ) , has requested the
Board's approval under section 3 of the B H C Act 1 to
acquire Hibernia Corporation ( " H i b e r n i a " ) and its subsidiary bank, Hibernia National Bank ( " H N B " ) , both of
N e w Orleans, Louisiana. 2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
(70 Federal Register 24,796 (2005)). 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.
Capital One, with total consolidated assets of approximately $55.6 billion, is the 26th largest depository organization in the United States, 3 controlling deposits of
approximately $25.9 billion. Capital One operates two
subsidiary depository institutions in Virginia: Capital One
Bank ( " C O B " ) , Glen Allen, and Capital One, F.S.B.
( " C O F S B " ) , McLean.
Hibernia, with total consolidated assets of approximately $22.2 billion, is the 50th largest depository organization in the United States, controlling deposits of
$17.7 billion, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States. In Louisiana, HNB is the largest
depository institution, controlling deposits of $12.4 billion,
which represent 22.4 percent of the total amount of deposits of insured depository institutions in the state. 4 H N B also
operates branches in Texas and two mortgage loan production offices in Mississippi.
On consummation of the proposal, Capital One would
become the 23rd largest depository organization in the
United States, with total consolidated assets of approxi1. 12 U.S.C. § 1842.
2. Hibernia is a financial holding c o m p a n y that offers a range of
financial products and services through its bank and nonbank subsidiaries, including t w o subsidiaries that engage in securities underwriting
and brokerage activities and insurance agency activities under section 4(k)(4) of the B H C Act. Capital O n e proposes to acquire those
nonbanking subsidiaries and engage only in activities listed in section 4 ( k ) ( 4 ) ( A ) - ( H ) of the B H C Act, pursuant to section 4(k) and the
post-transaction notice procedures of section 225.87 of Regulation Y.
12 U.S.C. § 1 8 4 3 ( k ) ( 4 ) ( A ) - ( H ) ; 12 C F R 225.87. After c o n s u m m a t i o n
of this proposal Capital O n e intends to operate H N B as a subsidiary
bank.
3. Asset and national ranking and deposit data are as of March 31,
2005. Asset and national ranking data are based on total assets
reported by bank holding companies on Consolidated Financial Statements for Bank Holding C o m p a n i e s and by thrifts on Thrift Financial
Reports. Deposit data reflect the total of the deposits reported by each
organization's insured depository institutions in their Consolidated
Reports of Condition and I n c o m e or Thrift Financial Reports.
4. State ranking and deposit data are as of J u n e 30, 2004. In this
context, insured depository institutions include commercial banks,
savings banks, and savings associations.

513

mately $80.1 billion (including pro forma accounting
adjustments), and would control deposits of approximately
$43.6 billion, which represent less than 1 percent of the
total amount of deposits of insured depository institutions
in the United States.
Interstate

Analysis

Section 3(d) of the B H C 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 h o m e
state of such bank holding company if certain conditions
are met. For puiposes of the B H C Act, the home state of
Capital One is Virginia, 5 and H N B is located in Louisiana
and Texas. 6
Based on a review of the facts of record, including a
review of relevant state statutes, the Board finds that all
conditions for an interstate acquisition enumerated in section 3(d) of the BHC Act are met in this case. 7 In light of
all the facts of record, the Board is permitted to approve
the proposal under section 3(d) of the B H C Act.
Competitive

Considerations

Section 3 of the B H C 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 B H C Act also
prohibits the Board f r o m approving a proposed 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 served. 8
Capital One and Hibernia 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 have no significant adverse effect on competition or on the concentration of banking resources in any
relevant banking market and that competitive factors are
consistent with approval.
5. A bank holding c o m p a n y ' s h o m e state is the state in which the
total deposits of all subsidiary banks of the c o m p a n y were the largest
on July 1, 1966, or the date on which the c o m p a n y became a bank
holding company, whichever is later. 12 U.S.C. § 1841(o)(4)(C).
6. For purposes of section 3(d), the Board considers a bank to be
located in the states in which the bank is chartered or headquartered or
operates a branch. 12 U.S.C. §§ 1841(o)(4)-(7) and 1842(d)(1)(A) and
(d)(2)(B).
7. 12 U.S.C. §§ 1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B).
Capital O n e is adequately capitalized and adequately m a n a g e d , as
defined by applicable law. H N B has been in existence and operated
for the m i n i m u m period of time required by applicable state law (five
years). On c o n s u m m a t i o n of the proposal, Capital O n e would control
less than 10 percent of the total a m o u n t of deposits of insured
depository institutions in the United States and less than 30 percent of
the total amount of deposits of insured depository institutions in Texas
and Louisiana. All other requirements of section 3(d) of the B H C Act
would be m e t on c o n s u m m a t i o n of the proposal.
8. 12 U.S.C. § 1842(c)(1).

514

Federal Reserve Bulletin •

Financial, Managerial,

Autumn 2 0 0 5

and Supervisory

Considerations

Section 3 of the BHC Act also requires the Board to
consider the financial and managerial resources and future
prospects of 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
reports of examination, other confidential supervisory
information from the primary federal and state supervisors
of the organizations involved, publicly reported and other
financial information, information provided by Capital
One, and public comments received on the proposal. 9
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 measures, 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.
Based on its review of these factors, the Board finds that
Capital One has sufficient financial resources to effect the
proposal. Capital One currently is well capitalized and
would remain so on consummation of the proposal. The
proposed transaction is structured as a partial share
exchange and partial cash purchase of shares. Capital One
will use existing resources to fund the cash purchase of
shares.
The Board also has considered the managerial resources
of Capital One and Hibernia and the managerial resources
of the combined organization. The Board has reviewed the
examination records of Capital One, Hibernia, and their
subsidiary depository institutions, including assessments of
their management, risk-management systems, and operations. 10 In addition, the Board has considered its supervi-

9. T h e c o m m e n t e r reiterated its concern about Capital O n e ' s lobbying efforts in the Virginia legislature raised in a previous application
by Capital O n e . See Capital One Financial Corporation,
90 Federal
Reserve Bulletin 4 7 9 (2004). As the Board previously noted, such
matters are outside the limited statutory factors that the Board is
authorized to consider when reviewing an application under the B H C
Act. See Western Bancshares,
Inc. v. Board of Governors, 4 8 0 F.2d
749 (10th Cir. 1973).
10. T h e c o m m e n t e r criticized Capital O n e ' s and H i b e r n i a ' s relationships with unaffiliated s u b p r i m e lenders, payday lenders, car-title
lending c o m p a n i e s , and other nontraditional providers of financial
services. As a general matter, these businesses are licensed by the
states w h e r e they operate and are subject to applicable state law.
Capital O n e stated that its business relationships with such providers
are limited to business credit-card loans or loans extended under
Small Business Administration ( " S B A " ) programs. Any such extensions of credit would be in the ordinary course of Capital O n e ' s small
business credit-card lending activities or in accordance with S B A

sory experiences and those of the other relevant banking
agencies with the organizations and their records of
compliance with applicable banking law. 11 Capital One,
Hibernia, and their subsidiary depository institutions are
considered well managed. The Board also has considered
Capital One's plans for implementing the proposal, including its proposed management after consummation. 12
Based on all the facts of record, including a review of
the comments received, the Board concludes that considerations relating to the financial and managerial resources
and future prospects of the organizations involved in the
proposal are consistent with approval, as are the other
supervisory factors under the BHC Act.
Convenience

and Needs Considerations

In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the Community Reinvestment
Act ("CRA"). 1 3 The CRA requires the federal financial
supervisory agencies to encourage financial institutions to
help meet the credit needs of local communities in which
they operate, consistent with their safe and sound opera-

requirements. H N B ' s Small Business Lending Division extends a
limited number of loans to businesses in these industries and H N B ' s
commercial loan division extends credit to certain s u b p r i m e lenders
subject to certain limits. H N B requires an opinion letter f r o m borrowers' counsel at the closing of each of these loans concluding that the
b o r r o w e r s ' loans c o m p l y with the Truth in Lending Act and applicable state law. In addition, the agreement H N B typically uses to
d o c u m e n t loans to consumer finance companies includes a negative
covenant that the borrower will not engage in activities that would
violate applicable law or regulation, including laws or regulations
related to predatory lending. H N B has represented that it monitors the
borrower for compliance with this covenant by reviewing the borrowe r ' s annual compliance audit. Capital O n e has represented that neither
it nor H N B plays any role in the lending practices or credit r e v i e w
processes of these firms.
11. T h e c o m m e n t e r also opposed the proposal based on n e w s
reports of lawsuits and investigations undertaken by the Attorneys
General of Minnesota and West Virginia in their respective states
relating to Capital O n e ' s marketing of its credit cards. T h e s e investigations and lawsuits are pending and have not yet reached conclusion,
and there has been no determination of liability, damage, or wrongdoing in these cases. T h e Board has consulted with the relevant state
authorities about these matters and will continue to monitor these
matters in the supervisory process. Board action under the B H C Act
would not interfere with the ability of the courts to resolve any
litigation pertaining to these matters.
12. T h e c o m m e n t e r also expressed concern about n e w s p a p e r
reports of a civil complaint filed by the Securities and E x c h a n g e
C o m m i s s i o n ( " S E C " ) . T h e Board has reviewed the complaint, which
alleges that a former Capital O n e officer engaged in insider trading
and failed to report to the S E C certain of his transactions in Capital
One securities. This action relates to that former officer's actions with
respect to the Capital One securities o w n e d by him and does not m a k e
allegations against Capital One as a corporate entity or any current
m e m b e r of management. T h e SEC, rather than the Board, has jurisdiction to investigate and adjudicate any violations of federal securities
laws. T h e Board has consulted with the S E C regarding this pending
complaint.
13. 12 U.S.C. § 2 9 0 1 et seq.

Legal Developments

tion, and requires the appropriate federal financial supervisory agency to take into account an institution's record of
meeting the credit needs of its entire community, including
low- and moderate-income ( " L M I " ) neighborhoods, in
evaluating bank expansionary proposals.
The Board has considered carefully the convenience and
needs factor and the CRA performance and mortgage lending records of Capital O n e ' s subsidiary insured depository
institutions and HNB in light of all of the facts of record,
including public comment on the proposal. A commenter
opposed the proposal and alleged, based on data reported
under the H o m e Mortgage Disclosure Act ( " H M D A " ) , 1 4
that HNB engaged in discriminatory treatment of minority
individuals in its home mortgage operations.

A. CRA Performance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA performance records of the relevant insured depository institutions. An institution's most recent C R A 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 C R A by its appropriate federal
supervisor. 15
Capital O n e ' s lead subsidiary depository institution,
COB, received an "outstanding" rating at its most recent
C R A performance evaluation by the Federal Reserve Bank
of Richmond ("Reserve B a n k " ) , as of April 28, 2003.
COFSB received a "satisfactory" rating at its most recent
C R A performance evaluation by the Office of Thrift
Supervision, as of April 28, 2003. H N B received a "satisfactory" rating from the Office of the Comptroller of the
Currency, as of January 12, 2004.
In addition, Capital One has indicated that it intends
to continue its level of support for community investment
and development and expects that the proposed transaction would allow it to expand the services and products
offered to customers in the communities served by Capital
One and H N B . Capital One has also indicated that it
does not expect the merger to result in the discontinuation
of any products or services offered by HNB, except to the
extent that Capital One offers a comparable product or
service.

B. C R A P e r f o r m a n c e of Capital O n e
1. Capital One Bank.
COB is engaged primarily in credit
card operations and has been designated a limited purpose
bank for purposes of evaluating its CRA performance. As
such, it is evaluated under the community development

14. 1 2 U . S . C . § 2 8 0 1 e t s e q .
15. See Interagency
Questions and Answers Regarding Community
Reinvestment,
66 Federal Register 36,620 and 36,639 (2001).

515

test. 1 6 Because C O B is designated as a limited purpose
bank, in assigning a rating, examiners may consider the
b a n k ' s community development investments, loans, and
services nationwide rather than solely in the bank's assessment area. In rating C O B "outstanding" at its April 2003
evaluation, Reserve Bank examiners noted that C O B ' s
nationwide qualified investments increased f r o m $28.5 million to approximately $82 million during the evaluation
period. 1 7 These investments included investments in lowincome-housing tax credit projects, bonds issued by the
Virginia Housing Development Authority, and entities that
support microenterprise development.
During the evaluation period, C O B contributed more
than $5 million to a variety of organizations that primarily
assist L M I individuals or areas or support microenterprise
development. Examiners also noted that C O B provided
technical assistance and financial expertise to organizations
dedicated to community development, including affordable
housing, social services, and small business development.
2. Capital One, FSB.
As noted above, COFSB received
an overall "satisfactory" CRA performance rating at its
April 2003 evaluation. 1 8 The institution received a "high
satisfactory" rating under the lending and services tests
and an "outstanding" rating under the investment test in
this evaluation.
Examiners noted that C O F S B ' s geographic distribution
of consumer loans was reasonable in relation to demographic characteristics of its assessment area, and the geographic distribution of small loans to businesses was commensurate with both demographic and peer lending data.
According to examiners, the percentage of consumer
installment loans made to L M I borrowers in the institution's assessment area exceeded the percentage of LMI
families residing in that area. C O F S B ' s distribution of
c o n s u m e r credit cards, according to borrower income
levels, was reasonable compared with the demographic
data. Examiners also noted the institution's innovative
special installment loan product that was primarily used by
L M I borrowers. 1 9
Examiners stated that C O F S B ' s community development lending, totaling approximately $11 million for the
evaluation period, was adequate and included innovative
lending arrangements with community development fund
initiatives, affordable housing organizations, and other nonprofit organizations that served LMI individuals.

16. See 12 C F R 228.25(a). If C O B engages in activities that cause
the bank to lose this designation, its C R A performance will be
evaluated under the appropriate tests and standards. See 12 C F R
228.25(b).
17. T h e evaluation period was f r o m M a y 7, 2001, to April 28,
2003.
18. T h e evaluation period was f r o m January 1, 2000, to M a r c h 31,
2003, except for the lending test, which was evaluated f r o m January 1,
2000, to D e c e m b e r 31, 2002. C O F S B is a nationwide provider of
c o n s u m e r and commercial lending and offers c o n s u m e r deposit
products.
19. This product featured low m i n i m u m loan amounts of $ 5 0 0
to $1000 and had no m i n i m u m income requirements. Approximately
87 percent of these loans were m a d e to L M I borrowers.

516

F e d e r a l R e s e r v e Bulletin • A u t u m n 2 0 0 5

During the evaluation period, C O F S B ' s qualified investments totaled approximately $81.5 million and included
purchases of qualified mortgage-backed securities and lowincome-housing tax credits, investments in small business
investment corporations, and deposits in community development fund initiatives. In addition, examiners noted that
COFSB made approximately $7 million in financial grants
during the assessment period.
Although C O F S B has no public offices, examiners noted
that it provided customer-service call centers with extended
hours and had begun to issue ATM cards to allow customers to access their money market accounts. Examiners also
noted C O F S B ' s contributions in the form of technical
assistance and financial expertise to a variety of nonprofit
organizations in its assessment area and the communities
in which C O F S B operated.
C . C R A P e r f o r m a n c e of H N B
As noted, H N B received an overall "satisfactory" rating in
its January 2004 evaluation. 2 0 T h e bank received a "high
satisfactory" rating under the lending and investment tests
and an "outstanding" rating on the service test in this
evaluation.
Examiners commended H N B ' s responsiveness to the
credit needs of its assessment areas, particularly in providing loan products to small businesses. Examiners also
noted H N B ' s good overall distribution of loans to borrowers of different income levels and recognized H N B ' s use of
innovative and flexible loan products designed to benefit
LMI individuals and geographies. In addition, examiners
characterized as significant H N B ' s community development lending, which consisted of approximately $140 million in loan originations in the areas receiving a full-scope
review during the evaluation period.
Examiners reported that during the evaluation period,
H N B had a good level of qualified community development investments in Louisiana and an adequate level in
Texas in light of H N B ' s resources and capacity. In addition, they noted that the bank's service delivery systems
were accessible to geographies and individuals of different
income levels throughout its assessment areas. Examiners
also reported that the bank's community development services were excellent.
D. H M D A and Fair L e n d i n g R e c o r d
The Board has carefully considered the lending record of
HNB in light of public comment received on the proposal.
A commenter alleged, based on a review of 2003 H M D A
data, that H N B ' s denial disparity ratios in certain markets
in Louisiana indicated that it disproportionately denied
African-American applicants for home mortgage loans. 21
20. T h e evaluation period was f r o m October 18, 1999, through
January 12, 2004, except for the lending test, which was evaluated
f r o m January 1, 2000, through D e c e m b e r 31, 2002.
21. T h e denial disparity ratio equals the denial rate for a particular
racial category (e.g., African A m e r i c a n ) divided by the denial rate for
whites.

The commenter also contended that H N B ' s denial disparity ratios in the Dallas Metropolitan Statistical Area
( " M S A " ) indicated that it disproportionately denied
African-American and Hispanic applicants for home mortgage loans. 2 2
T h e Board reviewed 2003 H M D A data reported by H N B
in various MSAs and the States of Louisiana and Texas. 2 3
The total HMDA-reportable lending data in Louisiana
and Texas indicate that H N B ' s denial disparity ratios for
African-American applicants were higher than, and for
Hispanic applicants generally comparable with, those ratios
for the aggregate of lenders ("aggregate lenders") in those
states. 2 4 The 2003 data in Louisiana also indicate that the
percentages of the bank's total HMDA-reportable loans
originated to African Americans were somewhat lower
than, and to Hispanics were generally comparable with, the
percentages for the aggregate lenders. In the Beaumont
and Texarkana MSAs, the percentages of H N B ' s H M D A reportable loans to African Americans exceeded the percentages for the aggregate lenders in that year. 25
Although the H M D A data may reflect certain disparities
in the rates of loan applications, originations, and denials
among members of different racial groups in certain local
areas, the H M D A data do not demonstrate that H N B is
excluding any racial group on a prohibited basis. T h e
Board is concerned when H M D A data for an institution
indicate disparities in lending and believes that all banks
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. The Board recognizes,
however, that H M D A data alone, even with the recent
addition of pricing information, provide only limited information about the covered loans. 2 6 H M D A data, therefore,

22. T h e c o m m e n t e r also alleged that H N B and Capital O n e
e n g a g e d in discriminatory lending based on a review of the prices
of loans extended to A f r i c a n - A m e r i c a n and Hispanic borrowers as
c o m p a r e d with white borrowers in 2004. T h e c o m m e n t e r based this
allegation on 2004 H M D A data derived f r o m loan application registers that it obtained f r o m H N B and Capital One. These data are
preliminary and 2004 data for lenders in the aggregate are not yet
publicly available. See Frequently Asked Questions About the New
HMDA Data (March 31, 2005) available at w w w . f e d e r a l r e s e r v e . g o v /
boarddocs/press/bcreg/2005.
23. This review included analysis of H M D A data for H N B ' s c o m bined lending activity in all the M S A s in which H N B had b r a n c h e s
in Texas and Louisiana, and in the Beaumont, Dallas, Texarkana,
N e w Orleans, Baton Rouge, and Shreveport M S A s . In 2003, a m a j o r ity of H N B ' s total H M D A - r e p o r t a b l e loans was originated to borrowers within M S A s in Louisiana.
24. T h e lending data of the aggregate lenders represent the c u m u l a tive lending for all financial institutions that have reported data in a
particular area.
25. H N B ' s percentages of H M D A - r e p o r t a b l e loans to A f r i c a n
A m e r i c a n s were greater than the percentages for the aggregate lenders
in the Beaumont and Texarkana M S A s . In those M S A s , H N B ' s
percentage of loans to Hispanics was slightly lower than that for the
aggregate lenders. In the Dallas M S A , H N B ' s percentages of loans to
A f r i c a n Americans and Hispanics w e r e smaller than the percentages
for the aggregate lenders.
26. The data, for example, do not account for the possibility that
an institution's outreach efforts may attract a larger proportion of

Legal Developments

have limitations that make them an inadequate basis, absent
other information, for concluding that an institution has
engaged in illegal lending discrimination.
Because of the limitations of H M D A data, the Board has
considered these data carefully and taken into account
other information, including examination reports that provide an on-site evaluation of compliance by H N B and its
subsidiaries with fair lending laws. Importantly, examiners
noted no fair lending issues or concerns in the performance
evaluations of HNB.
The record also indicates that H N B has taken steps
to help ensure compliance with fair lending laws and
other consumer protection laws. H N B has a fair lending compliance program that includes a second review
of each loan marked for denial and an annual fair lending
review of its mortgage portfolio to determine whether
there are any race- or ethnicity-based disparities in loan
underwriting.
The Board also has considered the H M D A data in light
of other information, including the programs described
above and the overall performance records of the subsidiary banks of Capital One and H N B under the CRA. These
established efforts demonstrate that the institutions are
active in helping to meet the credit needs of their entire
communities. Capital One has represented that it is in the
process of developing a new and comprehensive enterprisewide fair lending program and intends to implement a
similar program at HNB after the merger. Capital One
plans to incorporate the most effective policies and procedures of Capital O n e ' s and H N B ' s respective fair lending
programs into its comprehensive program for the combined
institution.

517

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application should be, and
hereby is, approved. 2 7 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 B H C Act and other
applicable statutes. The B o a r d ' s approval is specifically
conditioned on compliance by Capital One with the conditions imposed in this order and the commitments made to
the Board in connection with the application. For purposes
of this transaction, the commitments made to the Board
in the application process 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.
T h e proposal may not be consummated before the
fifteenth calendar day after the effective date of this order,
or later than three months after the effective date of this
order unless such period is extended for good cause by the
Board or the Reserve Bank, acting pursuant to delegated
authority.
By order of the Board of Governors, effective August 16,
2005.
V o t i n g for this action: C h a i r m a n G r e e n s p a n , V i c e C h a i r m a n F e r g u son, and G o v e r n o r s G r a m l i c h , B i e s , O l s o n , a n d K o h n .

R O B E R T D E V . FRIERSON

Deputy Secretary of the Board
Sixth Bancshares,
Salina, Kansas

Inc.

E. C o n c l u s i o n on C o n v e n i e n c e and N e e d s and C R A
Performance

Order Approving the Formation of a Bank Holding
Company

The Board has carefully considered all the facts of record,
including reports of examination of the C R A performance
records of the institutions involved, information provided
by the applicant, comments on the proposal, and confidential supervisory information. The Board notes that Capital
O n e ' s national presence and financial and managerial
resources will enhance H N B ' s ability to service its customers and broaden its geographic reach and that H N B ' s
branch banking business will allow Capital One to offer a
broader variety of products to its customers. 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 depository institutions are
consistent with approval.

Sixth Bancshares, Inc. ( " S i x t h " ) has requested the Board's
approval under section 3 of the Bank Holding Company

m a r g i n a l l y q u a l i f i e d a p p l i c a n t s t h a n o t h e r i n s t i t u t i o n s attract and d o
not p r o v i d e a b a s i s f o r an i n d e p e n d e n t a s s e s s m e n t of w h e t h e r an
applicant w h o w a s d e n i e d credit w a s , in fact, c r e d i t w o r t h y . C r e d i t
history p r o b l e m s a n d e x c e s s i v e d e b t l e v e l s relative to i n c o m e ( r e a s o n s
m o s t f r e q u e n t l y c i t e d f o r a credit d e n i a l ) a r e not a v a i l a b l e f r o m
H M D A data.

27. T h e c o m m e n t e r r e q u e s t e d that the B o a r d h o l d a p u b l i c m e e t i n g
o r h e a r i n g o n the p r o p o s a l . S e c t i o n 3 of the B H C A c t d o e s not r e q u i r e
the B o a r d to h o l d a p u b l i c h e a r i n g o n an application u n l e s s t h e
a p p r o p r i a t e s u p e r v i s o r y authority f o r the b a n k to b e a c q u i r e d m a k e s
a t i m e l y written r e c o m m e n d a t i o n of d e n i a l of t h e a p p l i c a t i o n . T h e
B o a r d h a s not r e c e i v e d s u c h a r e c o m m e n d a t i o n f r o m the a p p r o p r i a t e
s u p e r v i s o r y authorities. U n d e r its r e g u l a t i o n s , the B o a r d a l s o m a y , in
its d i s c r e t i o n , h o l d a p u b l i c m e e t i n g o r h e a r i n g on an a p p l i c a t i o n to
a c q u i r e a b a n k if a m e e t i n g o r h e a r i n g is n e c e s s a r y or a p p r o p r i a t e
to c l a r i f y f a c t u a l issues related to t h e a p p l i c a t i o n and to p r o v i d e an
o p p o r t u n i t y f o r t e s t i m o n y . 12 C F R 2 2 5 . 1 6 ( e ) . T h e B o a r d h a s c o n s i d e r e d c a r e f u l l y the c o m m e n t e r ' s r e q u e s t in light of all t h e f a c t s of
r e c o r d . In t h e B o a r d ' s v i e w , t h e c o m m e n t e r had a m p l e o p p o r t u n i t y to
s u b m i t its v i e w s , and in fact, the c o m m e n t e r has s u b m i t t e d w r i t t e n
c o m m e n t s that the B o a r d h a s c o n s i d e r e d c a r e f u l l y in acting o n t h e
p r o p o s a l . T h e c o m m e n t e r ' s r e q u e s t fails to d e m o n s t r a t e w h y t h e
written c o m m e n t s d o not p r e s e n t its v i e w s a d e q u a t e l y a n d f a i l s to
i d e n t i f y d i s p u t e d issues of fact that are material to t h e B o a r d ' s
d e c i s i o n that w o u l d b e clarified b y a p u b l i c m e e t i n g or h e a r i n g . F o r
these r e a s o n s , a n d b a s e d o n all t h e f a c t s of record, the B o a r d h a s
d e t e r m i n e d that a public m e e t i n g o r h e a r i n g is not r e q u i r e d o r w a r ranted in this c a se . A c c o r d i n g l y , the r e q u e s t for a public m e e t i n g or
h e a r i n g o n the p r o p o s a l is d e n i e d .

518

Federal Reserve Bulletin • Autumn 2005

Act ( " B H C Act") 1 to become a bank holding company and
to acquire all the voting shares of Geneseo Bancshares,
Inc. ( " G e n e s e o " ) and control of its subsidiary, The Citizens State Bank, ( " C S B " ) , both of Geneseo, Kansas.
Notice of the proposal, affording interested persons an
opportunity to comment, has been published in the Federal
Register (70 Federal Register 34,120 (2005)) and locally
in accordance with the Board's Rules of Procedure. 2 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.
Section 3 of the BHC Act prohibits the Board f r o m
approving a proposal that would result in a monopoly or
that would be in furtherance of an attempt to monopolize
the business of banking. The BHC Act also prohibits the
Board f r o m 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. 3
Sixth is a newly organized corporation that does not
control a depository institution and has been formed to
acquire Geneseo and CSB. CSB, with total assets of
approximately $5.3 million, is the 334th largest banking
organization in Kansas, controlling deposits of approximately $4.9 million, which represent less than 1 percent of
the total amount of deposits of insured depository institutions in the state. 4 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 considerations are consistent with approval of the proposal.
In acting on proposals under section 3 of the BHC Act,
the Board is required to consider the effects of the proposal
on the convenience and needs of the communities to be
served and to take into account the records of the relevant
insured depository institutions under the Community Reinvestment Act ("CRA"). 5 CSB received a "Satisfactory"
rating at its most recent CRA performance evaluation by
the Federal Deposit Insurance Corporation ( " F D I C " ) , as
of April 30, 2003. Sixth plans to increase C S B ' s products
and services and expand its operations into the Salina,
Kansas, banking market. Sixth also has represented that it
will maintain C S B ' s existing CRA program for its operations in Geneseo and will institute similar programs in the
future for its operations in Salina. Based on all the facts of
record, the Board concludes that considerations relating
to the convenience and needs factor and the CRA performance record of the relevant depository institution are
consistent with approval.

1. 12 U.S.C. § 1842.
2. 12 C F R 262.3(b).
3. See 12 U.S.C. § 1842(c)(1).
4. Asset data are as of June 30, 2005. Deposit data and state
rankings are as of June 30, 2004.
5. 12 U.S.C. § 2 9 0 1 et seq.

Section 3 of the BHC Act also 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 information provided
by Sixth, confidential reports of examination and other
confidential supervisory information from the FDIC, the
primary federal supervisor of CSB, and public comments
received on the proposal.
In evaluating financial factors in proposals involving
newly formed small bank holding companies, the Board
reviews the financial condition of both the applicant and
the target depository institution. 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.
Based on its review of these factors, the Board finds that
Sixth has sufficient financial resources to effect the proposal. Sixth proposes to fund this transaction through an
offering of equity securities. CSB is well capitalized and
would remain so on consummation of this proposal.
The Board also has considered the managerial resources
of the applicant, including the proposed management of the
organization. The Board has reviewed the examination
record of CSB, including assessments of its current management, risk-management systems, and operations. In
addition, the Board has considered its supervisory experiences and those of the other relevant banking agencies with
Geneseo, CSB, and the proposed management officials and
principal shareholders of Sixth. 6 The Board also has considered Sixth's plans to implement the proposal, including
its proposed expansion of C S B ' s operations.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of Sixth and CSB are consistent with approval, as are the other supervisory factors
under the BHC Act.
Based on the foregoing and after considering all the
facts of record, the Board has determined that the application should be, and hereby is, approved. In reaching its
conclusion, the Board has considered all the facts of record

6. T h e Board received more than 5 0 c o m m e n t s in support of the
proposal. In addition, the Board received a c o m m e n t f r o m Security
Savings Bank, F.S.B. ( " S e c u r i t y " ) , Olathe, Kansas, the f o r m e r employer of the organizers of Sixth, objecting to the proposal. A m o n g
other things, Security expressed concern about the managerial ability
of S i x t h ' s organizers and made certain allegations concerning their
conduct before and after leaving Security. Sixth's organizers denied
the allegations. T h e Board notes that it has reviewed confidential
reports of examination of Security and consulted with the Office of
Thrift Supervision, S e c u r i t y ' s primary federal supervisor, about the
managerial record of S i x t h ' s organizers at Security. In addition, the
Board has consulted with the Office of the State Bank C o m m i s s i o n e r
of Kansas, which is considering an application by Sixth to acquire
control of C S B . T h e Board also notes that, to the extent the c o m m e n t
reflects allegations surrounding the end of organizers' e m p l o y m e n t
with Security, the Board does not have jurisdiction to adjudicate
disputes about such e m p l o y m e n t matters.

Legal Developments

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 Sixth with the conditions imposed
in this order and the commitments made to the Board in
connection with the application and receipt of all other
regulatory approvals. For purposes of this transaction, the
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 proposed transaction may not be consummated before the fifteenth calendar day after the effective date of
this order, or later than three months after the effective date
of this order, unless such period is extended for good cause
by the Board or the Federal Reserve Bank of Kansas City,
acting pursuant to delegated authority.
By order of the Board of Governors, effective August 1,
2005.
Voting for this action: Chairman Greenspan, Vice Chairman Ferguson, and Governors Gramlich, Bies, Olson, and Kohn.
ROBERT DEV. FRIERSON

Deputy Secretary of the Board

Orders Issued Under Sections 3 and 4 of the Bank
Holding Company Act
iTeam Companies, Inc.
Brookfield, Wisconsin
Order Approving the Formation of a Bank Holding
Company and Notice to Engage in a Nonbanking
Activity
iTeam Companies, Inc. ("iTeam") has requested the
Board's approval under section 3 of the Bank Holding
Company Act ("BHC Act") 1 to become a bank holding
company by acquiring all the voting shares of Bank of
Kenney, Kenney, Illinois. In addition, iTeam has requested
the Board's approval under sections 4(c)(8) and 4(j) of
the BHC Act 2 and section 225.28(b)(14) of the Board's
Regulation Y 3 to engage in permissible data processing
activities through its subsidiary, iStream Imaging, Inc.
("iStream"), Brookfield, Wisconsin.
Notice of the proposal, affording interested persons an
opportunity to comment, has been published in the Federal
Register (70 Federal Register 13,031 (2005)). The time for
filing comments has expired, and the Board has considered
the application and notice and all comments received in
light of the factors set forth in sections 3 and 4 of the BHC
Act.
Applicant is a newly organized corporation formed to
acquire Bank of Kenney and engage in data-processing

1. 12U.S.C. §1842,
2. 12 U.S.C. §§ 1843(c)(8) and 1843(j).
3. 12 CFR 225.28(b)(14).

519

activities through iStream. Bank of Kenney, with total
assets of approximately $5.3 million, is the 658th largest
insured depository institution in Illinois, controlling deposits of approximately $4 million. 4
Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approving a proposal that would result in a monopoly or that
would be in furtherance of an attempt to monopolize the
business of banking in any relevant banking market. The
BHC Act also prohibits the Board from approving a proposed bank acquisition that would substantially lessen
competition in any relevant banking market, unless the
Board finds that 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. 5
iTeam is a newly organized corporation that does not
control a depository institution. Based on all the facts of
record, the Board has concluded that consummation of the
proposed transaction would have no significantly adverse
effect on competition or on the concentration of banking
resources in any relevant banking market and that competitive considerations are consistent with approval.
Financial, Managerial, and Supervisory Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and depository institutions involved in
the proposal and certain other supervisory factors. The
Board has considered, among other things, confidential
reports of examination, other confidential supervisory
information from the primary federal supervisor of Bank
of Kenney, the Federal Deposit Insurance Corporation
("FDIC"), the Office of Thrift Supervision, and the Illinois
Department of Financial and Professional Regulation, Division of Banks and Real Estate.
In evaluating financial factors in BHC Act proposals
involving newly formed small bank holding companies,
the Board reviews the financial condition of both the
applicant and target depository institution. 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.
Based on its review of these factors, the Board finds that
iTeam has sufficient financial resources to effect the proposal. Bank of Kenney is well capitalized and would
remain so on consummation of this proposal. The transaction is structured as a cash purchase. After the proposed
acquisition, iTeam plans to inject capital into Bank of
Kenney.

4. Asset data are as of June 30, 2005. Deposit data and state
ranking are as of June 30, 2004. Ranking data are adjusted to reflect
mergers and acquisitions completed through July 29, 2005.
5. See 12 U.S.C. § 1842(c)(1).

520

F e d e r a l R e s e r v e Bulletin • A u t u m n 2 0 0 5

T h e Board also has considered the managerial resources
of the applicant, including the proposed management of
the organization. The Board has reviewed the examination
record of Bank of Kenney, including assessments of its
current management, risk management systems, and operations. In addition, the Board has considered the supervisory
experiences of the other relevant banking agencies with
Bank of Kenney and the management officials and principal shareholders of iTeam. The Board also has considered
iTeam's plan for the proposed acquisition, including the
proposed changes in management at Bank of Kenney after
the acquisition.
Based on all the facts of record, the Board has concluded
that considerations relating to the financial and managerial
resources and future prospects of iTeam and Bank of
Kenney are consistent with approval, as are the other
supervisory factors the Board is required to consider under
the B H C Act.
Convenience

and Needs Considerations

In acting on the proposal, the Board is also 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
institution under the Community Reinvestment Act
( " C R A " ) . 6 The Board has carefully considered all the facts
of record, including reports of examination of the C R A
performance record of Bank of Kenney, information provided by iTeam, confidential supervisory information, and
public comment received on the proposal.
Bank of Kenney received a "Satisfactory" rating at
its most recent CRA performance evaluation by the FDIC,
as of November 29, 2001. iTeam has represented that it
would maintain Bank of Kenney's CRA program after the
proposed acquisition. Additionally, iTeam has represented
that after consummation Bank of Kenney would offer an
expanded range of mortgage products, in the Kenney area
and nationwide, through a planned new mortgage subsidiary. The Board received several comments f r o m individuals concerned that iTeam might close Bank of Kenney's
office in Kenney after the acquisition, which, they asserted,
could cause hardship for the community. iTeam represented that it has no current plans to close Bank of
Kenney's office in Kenney.
Based on all the facts of record, the Board concludes that
considerations relating to the convenience and needs factor
and the C R A performance record of Bank of Kenney are
consistent with approval of this proposal.
Nonbanking Activities
iTeam also has filed a notice under sections 4(c)(8) and
4(j) of the B H C Act to engage in data-processing activities
through iStream. iStream intends to offer check-imaging
and check-processing services to merchants. The Board
has determined by regulation that financial and banking
6. 12U.S.C. §2901 etseq.

data-processing activities are permissible for a bank holding company under Regulation Y,7 and iTeam 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 the notice, the Board also must determine
that the performance of the proposed activities by iTeam
"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." s As part of its evaluation of these factors, the Board
has considered the financial and managerial resources of
iTeam and its subsidiaries, including the background and
experience of the proposed principals and senior officers of
iTeam and iStream, and the effect of the proposed transaction on those 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.
The Board also has carefully considered the competitive
effects of the proposal, which involves de novo entry into
the market for check-imaging and check-processing services. Commencement of nonbanking activities de novo
is presumed under Regulation Y to result in benefits to
the public through increased competition in the market for
the relevant service. 9 Based on all the facts of record, the
Board concludes that iTeam's proposed nonbanking activities are not likely to have any adverse competitive effects.
T h e Board also has carefully reviewed the public benefits
of the proposed nonbanking activities. The proposal is
expected to benefit the public by providing iStream customers with a more efficient means of check collection, as
well as a wider variety of check-processing services.
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 that it must consider under section 4(j)(2) of the B H C Act is consistent with approval.
Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application and notice
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
B H C Act. The Board's approval is specifically conditioned
on compliance by iTeam with the conditions imposed in
this order and the commitments made to the Board in
connection with the application and notice. The Board's
approval of the nonbanking aspects of the proposal is also

7. 12CFR 225.28(b)(14).
8. See 12U.S.C. § 1843(j)(2)(A).
9. See 12 CFR 225.26(c).

Legal

subject to all the conditions set forth in Regulation Y,
including those in sections 225.7 and 225.25(c), 1 0 and to
the B o a r d ' s authority to require such modification or termination of the activities of the bank holding c o m p a n y or any
of its subsidiaries as the Board finds necessary to ensure
compliance with and to prevent evasion of the provisions
of the B H C A c t and the B o a r d ' s regulations and orders
issued thereunder. For purposes of these actions, the conditions and c o m m i t m e n t s 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 u n d e r applicable law.
T h e acquisition of B a n k of Kenney may not be consummated b e f o r e the fifteenth calendar day after the effective date of this order, and no part of the proposal may
be c o n s u m m a t e d 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 B a n k of
Chicago, acting pursuant to delegated authority.
By order of the Board of Governors, effective August 4,
2005.
Voting for this action: C h a i r m a n Greenspan, Vice C h a i r m a n Ferguson, and G o v e r n o r s G r a m l i c h , Bies, Olson, and K o h n .
ROBERT DEV. FRIERSON

Deputy Secretary

FINAL ENFORCEMENT
DECISIONS
BOARD OF GOVERNORS

of the Board

ISSUED

BY THE

In the M a t t e r of
Brian Bonetti
Former Sales and Service
National City Bank,
Cleveland,
Ohio

Representative,

Docket No. OCC-AA-EC-04-68
Final Decision
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ( " t h e FDI A c t " ) in which the
Office of the Comptroller of the Currency of the United
States of A m e r i c a ( " O C C " ) seeks to prohibit the Respondent, Brian Bonetti ( " R e s p o n d e n t " ) , f r o m further participation in the affairs of any financial institution based on
actions he took while employed at National City Bank,
Cleveland, O h i o (the " B a n k " ) . Under the FDI Act, the
O C C may initiate a prohibition proceeding against a f o r m e r
employee of a national bank, but the Board must make the
final determination whether to issue an order of prohibition. 12 U.S.C. § 1818(e)(4).

10. 12 C F R 225.7 and 225.25(c).

Developments

521

Upon review of the administrative record, the B o a r d
issues this Final Decision adopting the R e c o m m e n d e d
Decision of Administrative L a w Judge A n n Z. C o o k (the
" A L J " ) , and orders the issuance of the attached Order of
Prohibition.

I. S t a t e m e n t of t h e C a s e
A. Statutory

and Regulatory

Framework

Under the F D I Act and the B o a r d ' s regulations, the A L J
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recomm e n d e d decision that is referred to the deciding agency
together with any exceptions to those r e c o m m e n d a t i o n s
filed by the parties. The Board makes the final findings
of fact, conclusions of law, and determination whether to
issue an order of prohibition in the case of prohibition
orders sought by the O C C . Id.; 12 C F R 263.40.
The FDI Act sets forth the substantive basis upon which
a federal banking agency may issue against a bank official
or e m p l o y e e an order of prohibition f r o m further participation in banking. To issue such an order, the Board must
m a k e each of three findings: (1) 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 of the institution.
12 U.S.C. § 1 8 1 8 ( e ) ( l ) ( A ) - ( C ) .
An e n f o r c e m e n t proceeding is initiated by filing and
serving on the respondent a notice of intention to prohibit.
Under the O C C ' s and the B o a r d ' s regulations, the respondent must file an answer within 20 days of service of the
notice. 12 C F R 19.19(a) and 263.19(a). If the respondent
does not file an answer within the time provided, the
respondent waives his or her right to appear and contest the
allegations in the notice, and Enforcement Counsel may
file a motion for entry of an order of default. See 12 C F R
19.19(c)(1) and 263.19(c)(1). Upon a finding that no good
cause has been shown for the failure to file a timely
answer, the A L J shall file with the Comptroller and the
Board a r e c o m m e n d e d decision containing the findings and
the relief sought in the notice. Id.
B. Procedural

History

On February 3, 2005, the O C C served upon Respondent
a Notice of Intention to Prohibit Further Participation,
Notice of Charges for Issuance of an Order to Cease and
Desist for Restitution and Notice of Assessment of a Civil
Money Penalty ( " N o t i c e " ) that sought, inter alia, an order
of prohibition against Respondent based on his conduct
while e m p l o y e d at the Bank. Specifically, the Notice
alleged that Respondent, as a sales and service representative for the Bank, diverted portions of customer loan pro-

522

Federal Reserve Bulletin • Autumn 2005

ceeds on thirteen home-equity loans that Respondent made,
authorized and/or booked, by issuing checks from the loan
proceeds to make payments on his own credit card
accounts (or accounts for which he was an authorized user)
and payments on a loan in the name of related persons, or
by depositing checks into accounts that were owned or
controlled by Respondent. The Notice further alleges that
Respondent falsified internal loan documents to hide from
the Bank the fact that he was charging customers broker
fees that exceeded the Bank's broker fee cap and gave
customers misleading HUD-1 Settlement Statements that
masked the broker fees charged. In addition, the Notice
alleged that Respondent's violations caused loss to the
Bank in the approximate amount of $84,970.00
The Notice directed Respondent to file a written answer
within 20 days from the date of service of the Notice in
accordance with 12 CFR 19.19(a) and (b), and that failure
to answer within this time period "shall constitute a waiver
of the right to appear and contest the allegations contained
in the Notice, and shall, upon the OCC's motion, cause the
Administrative Law Judge or the Comptroller to find the
facts in this Notice to be as alleged." The Notice was
served in accordance with OCC rules, via overnight delivery and first class U.S. mail. The record shows that Respondent was also personally served on February 26, 2005.
Nonetheless, Respondent failed to file an answer within the
20-day period or thereafter.
On June 3, 2005, Enforcement Counsel filed a Motion
for Entry of an Order of Default against Respondent. On
the same day, the ALJ issued an Order to Show Cause,
providing Respondent until June 20, 2005, to file an answer
to the Notice and to show good cause for having failed to
do so previously. The Order to Show Cause, which was
served upon Respondent by Federal Express and first class
mail, also provides that if Respondent fails to submit an
answer and to show good cause by the June 20 deadline,
"the relief requested in the Notice will be recommended."
To date, Respondent has not filed any reply to the Order to
Show Cause or answered the Notice.

II. Discussion
The OCC'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 19.19(c). If the 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 the instant matter, Respondent failed to file an answer
to the Notice despite notice to him of the consequences of
such failure, and also failed to respond to the ALJ'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, conflict of interest, unsafe and
unsound practice, and violation of law, for Respondent to
divert portions of customer loan proceeds on 13 home
equity loans without the customers' knowledge, consent, or
approval; falsify internal loan documents in order to hide
from the Bank the fact that he was charging customers
broker fees that exceeded the Bank's broker fee cap; and
give customers misleading HUD-1 Settlement Statements
that masked the broker fees charged. Respondent's actions
also resulted in loss to the bank in the amount of approximately $89,740.00 and financial gain to Respondent, in
that he diverted loan proceeds by issuing checks to make
payment on his own credit card accounts or to be deposited
into his own accounts. Finally, such actions also exhibit
personal dishonesty and willful disregard for the safety and
soundness of the Bank. Accordingly, the requirements for
an order of prohibition 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.
By order of the Board of Governors, this 20th day of
September 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board

Order of Prohibition
WHEREAS, pursuant to section 8(e) of the Federal Deposit
Insurance Act, as amended, (the "FDI Act") (12 U.S.C.
§ 1818(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 should issue against BRIAN
BONETTI ("Bonetti"), a former employee and institutionaffiliated party, as defined in section 3(u) of the FDI Act
(12 U.S.C. §1813(u)), of National City Bank, Cleveland,
Ohio.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that;
1. 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 Act (12 U.S.C. § 1818(e)(7)(B)), Bonetti is hereby
prohibited:

Legal Developments

(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 U.S.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;
(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 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.
2. Any violation of this Order shall separately subject
Bonetti to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
3. 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 shall become effective at the expiration of 30
days after service is made.
By order of the Board of Governors, this 20th day of
September 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board

In the Matter of
Walter C. "Charlie" Cleveland,
Former Director and Senior Vice President,
First National Bank,
Lubbock, Texas
Docket No. OCC-AA-EC-04-47
Final Decision
This is an administrative proceeding pursuant to the Federal Deposit Insurance Act ("the FDI Act") in which the
Office of the Comptroller of the Currency of the United
States of America ( " O C C " ) seeks to prohibit the Respondent, Walter C. "Charlie" Cleveland ("Respondent"), from
further participation in the affairs of any financial institution based on actions he took while employed at First
National Bank, Lubbock, Texas (the "Bank"). Under the
FDI Act, the OCC may initiate a prohibition proceeding

523

against a former employee of a national bank, but the
Board must make the final determination whether to issue
an order of prohibition.
Upon review of the administrative record, the Board
issues this Final Decision adopting the Recommended
Decision of Administrative Law Judge Ann Z. Cook (the
"ALJ"), and orders the issuance of the attached Order of
Prohibition.
I. Statement of the Case
A. Statutory and Regulatory

Framework

Under the FDI Act and the Board's regulations, the ALJ
is responsible for conducting proceedings on a notice of
charges. 12 U.S.C. § 1818(e)(4). The ALJ issues a recommended decision that is referred to the deciding agency
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 an order of prohibition in the case of prohibition
orders sought by the OCC. Id.\ 12 CFR 263.40.
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: (1) 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 of the institution.
12 U.S.C. §1818(c)(l)(A)-(C).
An enforcement proceeding is initiated by filing and
serving on the respondent a notice of intent to prohibit.
Under the OCC's and the Board's regulations, the respondent must file an answer within 20 days of service of the
notice. 12 CFR 19.19(a) and 263.19(a). Failure to file an
answer constitutes a waiver of the respondent's right to
contest the allegations in the notice, and a final order may
be entered unless good cause is shown for failure to file a
timely answer. 12 CFR 19.19(c)(1) and 263.19(e)(1).
B. Procedural

History

On September 16, 2004, the OCC served upon Respondent 1 a Notice of Charges for Issuance of an Order to

1. Service of the initial Notice and every other document served on
Respondent by the ALJ or O C C E n f o r c e m e n t Counsel was effected by
service on R e s p o n d e n t ' s counsel rather than on Respondent personally. Contrary to O C C rules, R e s p o n d e n t ' s counsel did not file a notice
of appearance pursuant to 12 C F R 19.6(a)(3). Accordingly, at least the
initial Notice should have been served on Respondent himself, rather
than his counsel. See 12 C F R 19.11(c)(2). In cases of default, it is
particularly important to ensure that service of papers meets the
m i n i m u m standards of due process. W h i l e the Board is concerned

524

Federal Reserve Bulletin • Autumn 2005

Cease and Desist and Notice of Assessment of a Civil
Monetary Penalty ("Notice") against Respondent based on
his conduct while employed at the Bank. On October 15,
2004, Respondent through counsel filed an answer to the
original Notice ("Answer"), along with a timely request
for a hearing on the civil money penalty.
On February 28, 2005, the OCC served the First
Amended Notice of Charges for Issuance of an Order for
Prohibition and Notice of Assessment of a Civil Money
Penalty ("Amended Notice") upon Respondent. The
Amended Notice repeated allegations made in the original
Notice, 2 added new, substantive allegations relating to a
loan made to Raintree Investment, Inc. (the "Raintree
Loan"), and sought an order of prohibition. Amended
Notice, Article III. The Amended Notice directed Respondent to file an answer within 20 days and warned that
failure to do so would constitute a waiver of his right to
appear and contest the allegations. The Amended Notice
was served in accordance with the OCC rules by overnight
delivery, signature requested, in care of Respondent's
counsel. Respondent failed to file an answer within the
20-day period.
On March 31, 2005, Enforcement Counsel fded a
Motion for Entry of an Order of Default against Respondent. On April 6, 2005, the ALJ issued an Order to Show
Cause, noting that although Respondent was not in default
as to the Original Notice, since he had filed an answer to it,
the new allegations could be the basis for a default granting
the relief sought. The Order provided Respondent until
April 22, 2005, to file an answer to the Amended Notice
and to show good cause for having failed to do so previously. To date, Respondent has not filed any reply to the
Order to Show Cause or answered the Amended Notice.
C. The Raintree Loan
The Amended Notice alleges that Respondent, as a senior
loan officer for Bank, caused the Bank to loan $53,000
to Raintree Investment, Inc. ("Raintree"). The President
of Raintree is Russell Baxter, Respondent's father-in-law;
Respondent also served as trustee of the Deed of Trust for
the property securing the loan. Respondent failed to disclose his interest in the Raintree Loan (an insider-related
loan) to Bank's Board of Directors or to OCC examiners.
Respondent also received two cashier's checks from the
about the notice procedures followed in this case, it concludes that in
light of R e s p o n d e n t ' s c o u n s e l ' s participation in the case on behalf of
his client, the m i n i m u m requirements of the Rules and of d u e process
have been met. See Mullane v. Central Hanover Bank & Trust Co.,
339 U S . 306, 314 (1950) (notice must be reasonably calculated, under
all the circumstanccs, to apprise interested parties of the pendency of
the action and afford them an opportunity to present their objections);
12 C F R 1 9 . l l ( c ) ( 2 ) ( v ) (permitting service " b y any other method
reasonably calculated to give actual noticc"). T h e Board will, however, direct that O C C E n f o r c e m e n t Counsel serve a copy of the Order
of Prohibition on the Respondent by various means, including by
certified mail to his last known address, which does not appear in the
current record.
2. B e c a u s e the motion for default is based solely on the allegations
newly m a d e in the A m e n d e d Notice, the Board does not consider any
of the allegations in the original Notice in its determination.

proceeds of the loan, totaling $14,892, which he converted
to his personal use, applying the bulk of the proceeds
toward the closing costs on his personal residence. Respondent made cash payments on the loan until his departure
from the Bank, thereby concealing the loan from the named
borrower. Respondent additionally instructed Bank personnel not to send letters regarding the loan to Raintree,
and on at least one occasion personally removed mail
addressed to Raintree from the Bank's outgoing mail.
Over a month after Respondent left his position with the
Bank in June 2004, Mr. Baxter responded to a Bank
communication regarding the Raintree loan stating that
he was unaware he had a loan at the Bank any longer. A
survey ordered by the Bank determined that some of the
property securing the loan had been sold, with no record of
the sale in the Bank's loan file.3
II. Discussion
The OCC'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 19.19(c). If the 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
Amended Notice despite notice to him of the consequences
of such failure, and also failed to respond to the ALJ's
Order to Show Cause. Respondent's failure to file an
answer constitutes a default.
Respondent's default requires the Board to consider the
new allegations in the Amended Noticc as uncontested.
The new allegations in the Amended 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, conflict of interest, unsafe and unsound practice, and
violation of law, for Respondent to: fail to remove himself
from approving the Raintree loan made to a family member; administer the loan while acting as trustee for its
collateral; and fail to disclose his interest in the insider loan
to the Bank and to OCC examiners. He received financial
benefit from the loan by using proceeds of the loan for
closing costs on his own personal residence. He demonstrated both personal dishonesty and willful disregard for
the safety and soundness of the Bank by purposefully
withholding information about the Raintree loan from the
named borrower's principal, with the effect of hiding from
Mr. Baxter the fact that Baxter had an outstanding loan at
the Bank; and willfully interfering with the Bank's communications with a borrower regarding the borrower's obligation to the Bank.

3. Mr. Baxter subsequently paid the balance of the loan.

Legal Developments

Accordingly, the requirements for an order of prohibition have been met and the Board hereby issues such an
order. As noted above, 4 the Board directs OCC Enforcement Counsel to serve the order of prohibition on Respondent personally, by delivering to his last known address, in
addition to service on his counsel.
Conclusion
For these reasons, the Board orders the issuance of the
attached Order of Prohibition.
By order of the Board of Governors, this 17th day of
August 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. JOHNSON
Secretary of the Board

525

(d) from voting for a director, or from 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)).
2. Any violation of this Order shall separately subject
Cleveland to appropriate civil or criminal penalties or both
under section 8 of the FDI Act (12 U.S.C. § 1818).
3. 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 shall become effective at the expiration of
thirty days after service is made.
By order of the Board of Governors, this 17th day of
August 2005.
Board of Governors of the
Federal Reserve System

Order of Prohibition
WHEREAS, pursuant to section 8(e) of the Federal
Deposit Insurance Act, as amended, (the "FDI Act")
(12 U.S.C. § 1818(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 should issue against
WALTER C. "CHARLIE" CLEVELAND ("CLEVELAND"), a former employee and institution-affiliated
party, as defined in section 3(u) of the FDI Act (12 U.S.C.
§ 1813(u)), of First National Bank, Lubbock, Texas.
NOW, THEREFORE, IT IS HEREBY ORDERED, pursuant to section 8(e) of the FDI Act, 12 U.S.C. § 1818(e),
that:

JENNIFER J. JOHNSON
Secretary of the Board
In the Matter of
Jean Peyrelevade,
A former institution-affiliated

party of Credit Lyonnais

03-041-CMP-I
03-041-B-I
03-041-E-I
Determination

on Motion for Interlocutory

Review

Background
1. 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 Act (12 U.S.C. § 1818(e)(7)(B)), Cleveland 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 U.S.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. § 1818(e)(7)(A));
(c) from violating any voting agreement previously
approved by any federal banking agency; or

4. See footnote 1.

This issue arises out of an enforcement proceeding brought
by the Board of Governors of the Federal Reserve System
(the "Board") against Jean Peyrelevade (the "Respondent"), the former chief executive officer of Credit
Lyonnais. In a Notice of Charges against Respondent, the
Board alleged that Respondent engaged in violations of
the Bank Holding Company Act in connection with Credit
Lyonnais's ownership and control over a California insurance company, Executive Life, in the early 1990s, and that
Respondent made false representations to the Board in
2001 and 2002 concerning the knowledge of Credit
Lyonnais's then senior management (including Respondent) relating to these activities.
At the request of Board Enforcement Counsel, the
Administrative Law Judge ("ALJ") overseeing this proceeding issued a subpoena to Cleary Gottlieb Steen &
Hamilton ("Cleary Gottlieb"), attorneys for Credit
Lyonnais, seeking notes taken by Cleary Gottlieb attorneys
at interviews conducted as part of an internal investigation of the Executive Life matter. Among the documents
requested were notes taken during two interviews of

526

F e d e r a l R e s e r v e Bulletin • A u t u m n 2 0 0 5

Dominique Bazy ( " B a z y " ) , a former Credit Lyonnais
executive, that took place in May and September 1999.
Bazy asserted that both sets of interview notes were subject
to the attorney-client privilege and that the September
1999 interviews were protected by the joint defense or
common interest privilege. At B a z y ' s request, Cleary Gottlieb declined to produce the notes of these interviews.
After Board Enforcement Counsel filed a motion with
the ALJ to overrule these, and other, privilege objections,
Bazy filed an opposition to Enforcement Counsel's motion
and a sur-reply to its reply brief. Cleary Gottlieb represented that it and its client Credit Lyonnais do not object to
producing the internal interview notes. On June 21, 2005,
the ALJ issued an Order rejecting Bazy's privilege claims
and ordering Cleary Gottlieb to produce the requested
interview notes within 20 days. On July 1, 2005, Bazy filed
with the ALJ a motion for interlocutory review of the
June 21, 2005, Order, and requested the ALJ to stay the
production of the disputed documents pending the interlocutory review request. In his motion, Bazy contends that
the ALJ ignored evidence demonstrating that he had an
objectively reasonable belief that his May 1999 and September 1999 meetings with Cleary Gottlieb lawyers were
subject to attorney-client privilege; applied an inappropriate standard in determining the attorney-client privilege
issue given Bazy's circumstance; and improperly held that
Cleary Gottlieb could unilaterally waive the joint defense
agreement privilege with respect to the content of the
September 1999 meetings. Board Enforcement Counsel
filed a response to B a z y ' s motion, arguing that the Board's
Rules of Practice ( " R u l e s " ) do not allow a nonparty such
as Bazy to seek interlocutory review by the Board. In a
reply to Enforcement Counsel's response, Bazy argued that
he is an interested party to the proceeding as it relates to
the enforcement of the subpoena served on Cleary Gottlieb
and that the Board's Rules of practice merely failed to
contemplate his particular circumstance. On July 11, 2005,
the ALJ granted a stay of the order requiring Cleary
Gottlieb to produce the documents, and, pursuant to Uniform Practice Rule 263.28(c), referred Bazy's motion to
the Board for final disposition.

Discussion
A. Availability of Interlocutory Review
The B o a r d ' s Rules of Practice provide that "|a]ny request
for interlocutory review shall be filed by a party with the
administrative law judge within 10 days of his or her ruling
. . ." 12 CFR 263.28(c) (emphasis added). The Rules also
specifically define " p a r t y " to include only "the Board and
any person named as a party in any notice." 12 CFR
263.3(j). Thus, under this definition, the only " p a r t y " in
this proceeding, other than the Board, is Jean Peyrelevade,
and Bazy, as a nonparty, is not entitled to interlocutory
review under the Board's rules.
Bazy's arguments to the contrary are not persuasive.
Bazy first argues that he is plainly "an interested party to

the action as it relates to Enforcement Counsel's attempt to
obtain production of the meeting n o t e s " based upon his
substantial participation in the proceedings relating to the
notes. While Bazy obviously has an interest in the o u t c o m e
of the production issue, the Board's rules are clear that
interlocutory review is available only to a "person named
as a party in [the] notice."
Bazy also argues that the Rules " d o not appear to
contemplate the unique procedural posture of his present
circumstance." T h e lack of an available administrative
remedy for Bazy's circumstance does not, in and of itself,
demonstrate a failure to contemplate the existence of such
a circumstance, nor does it leave Bazy without a remedy.
In fact, the Rules contemplate allowing a party to seek
interlocutory review of an ALJ discovery order that
requires the production of allegedly privileged materials,
while including no comparable provision for nonparty
subpoenas, such as the subpoena at issue here. Compare
12 CFR 263.25 (document requests to parties) with 12 C F R
263.26 (document subpoenas to nonparties).
This distinction in the Rules pertaining to remedies
available in party and nonparty discovery is logical. If a
party fails to comply with a discovery order, the Board
can review the discovery orders at the end of the proceeding or on an interlocutory basis under Rule 263.28 and
impose effective relief. If a nonparty fails to comply with a
discovery order, however, the remedy is court enforcement.
See 12 CFR 263.26(c). Administrative subpoenas are not
otherwise self-enforcing. See generally, Government of the
Territory of Guam v. SeaLand Service, Inc. 958 F.2d 1150,
1153-54 (D.C. Cir. 1992) (noting that party to
administrative proceeding may apply to district court to
enforce subpoena issued by ALJ under agency procedures). Thus, if Cleary Gottlieb declined to produce the
documents in violation of the A L J ' s Order, Enforcement
Counsel could seek to enforce the subpoena in district
court. 12 CFR 263.26(c). Similarly, in the event that Cleary
Gottlieb decides to produce the documents pursuant to the
A L J ' s Order, Bazy could initiate a court action and assert
any alleged privilege claims in an attempt to enjoin Cleary
Gottlieb from complying with the Order. Thus, the B o a r d ' s
discovery rules reflect a conscious decision to distinguish
between party and nonparty discovery, as demonstrated by
the enactment of separate rules setting forth distinct procedures to be applied with regard to each category of discovery requests.
Interlocutory appeals are generally disfavored because
they interrupt the main proceeding and distract from the
completion of the case. They present the decisionmaker
with small and often disjointed parts of the underlying
case, often out of context, prior to the development of the
entire case. Accordingly, federal court rules and practice
evince a "firm congressional policy against interlocutory
or 'piecemeal' appeals, and courts have consistently given
effect to that policy." Abney v. United States, 431 U.S. 651,
656 (1976).
The Board's rules and prior decisions reflect the same
policy against interlocutory review. Interlocutory review
is always discretionary even when the rules permit it, see

Legal Developments

12 CFR 263.28(b) (the Board " m a y exercise interlocutory
review" under specified circumstances), and in prior cases
the Board has noted that "the scope within which such
discretion should be exercised is extremely narrow,"
reflecting "a strong and longstanding policy against piecemeal appeals before a final judgment." In the Matter of
Incus Co., 86 Federal Reserve Bulletin 246 (2000). In that
light, the B o a r d ' s rules limiting interlocutory review to a
party are consistent with other aspects of the rules relating
to such reviews.
In short, because the Board's Rules expressly reserve
interlocutory review to parties, Bazy is not entitled to
interlocutory review of the A L J ' s June 21, 2005, Order.

B. Bazy's Privilege Claims
In the alternative, given the deferential standard with which
the Board treats an A L J ' s discovery decisions, even if the
Board were to grant interlocutory review, it would affirm
the A L J ' s Order with respect to Bazy's privilege claims.
1. Attorney-Client

Privilege

Claim

Using the widely adopted five-factor test set forth by the
Third Circuit in Bevill, Bresler & Schulman Asset Management Corp., 805 F.2d 120, 125 (3d Cir. 1986) to determine
whether a corporation's attorney is separately representing
a corporate employee, the ALJ properly determined that
Cleary Gottlieb represented only Credit Lyonnais and not
Bazy during the interviews conducted by the firm in May
1999 and September 1999 as part of Credit Lyonnais's
internal investigation. Under settled law, corporate employees seeking to establish the existence of a separate
attorney-client privilege with corporate counsel must
show, among other things, that "the substance of their
conversations with [counsel] did not concern matters
within the company or the general affairs of the company."
Id., 805 F.2d at 123. Here, it is undisputed that Bazy's
interview related specifically to "matters within the comp a n y " ; he does not claim that he was seeking advice from
Cleary Gottlieb in his individual capacity. Thus, the conflicting record evidence regarding Bazy's asserted belief
that the interviews were confidential is immaterial to the
determination regarding privilege. Moreover, by the time
of the September 1999 interview, Bazy had retained his
own counsel at the request of Credit Lyonnais. This refutes
any reasonable argument that Bazy believed Cleary Gottlieb was acting as his attorney during the September 1999
meeting.
2. Joint Defense

Privilege

Claim

Finally, Bazy has failed to demonstrate that a joint defense
privilege applies to the content of his September 1999
interviews. Although Bazy cites case law noting that a joint
defense privilege protects communications between an
individual and an attorney for another when the communications are part of an ongoing and joint effort to set up a

527

common defense strategy, he has failed to present any
evidence demonstrating the existence of a joint defense
agreement between himself and Credit Lyonnais. While a
written agreement is not required to establish the existence
of a joint defense privilege, a party must show, among
other things, that "the parties had agreed to pursue a joint
defense strategy." Bevill, Bresler, supra, 805 F.2d at 126;
see also U.S. v. Weissman, 195 F.3d 96, 100 (2d Cir. 1999)
(noting that in order to demonstrate the existence of a joint
defense privilege, a showing of some form of joint strategy
is necessary, "rather than merely the impression of one
side").
Bazy's only support for his joint defense privilege claim
is his stated belief that it was "[his] understanding that the
Cleary Gottlieb attorneys would maintain the confidentiality of [his] statements during [the September 1999] meeting." Bazy Declaration, lJ[7. Bazy has made no assertion
that Cleary Gottlieb or Credit Lyonnais directly or indirectly communicated to him an agreement to pursue a joint
defense strategy. Bazy's unilateral belief is plainly insufficient to establish the existence of a joint agreement, as
noted in the cases cited above. Accordingly, Bazy has
failed to establish that a joint defense privilege exists with
respect to his September 1999 interview.
As set forth herein, the arguments advanced by Bazy fail
to demonstrate an appropriate basis upon which the Board
may grant interlocutory review of the A L J ' s Order given
his nonparty status. In the alternative, even if the Board
were to grant interlocutory review, it would affirm the
A L J ' s June 21, 2005, Order with regard to Bazy's privilege
claims. Accordingly, the Board declines Bazy's request for
interlocutory review of the A L J ' s June 21, 2005, Order.
By order of the Board of Governors, this 5th day of
August, 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. J O H N S O N
Secretary of the Board

In the M a t t e r of
Jean Peyrelevade,
A former institution-affiliated

party

of Credit Lyonnais

03-041-CMP-I
03-041-B-I
03-041-E-I
Determination

on Motion for Interlocutory

Review

Background
On December 18, 2003, Board Enforcement Counsel initiated this proceeding against Respondent Jean Peyrelevade
("Peyrelevade"). In the Notice of Charges, Enforcement
Counsel alleged that Peyrelevade participated in alleged

528

Federal Reserve Bulletin • Autumn 2005

violations of the Bank Holding Company Act of 1956 in
his role as chairman of Credit Lyonnais, specifically with
respect to Credit Lyonnais's ownership and control over
a California insurance business, Executive Life, and that
Peyrelevade made false representations to the Federal
Reserve Board in 2001 and 2002 regarding his knowledge
of these alleged violations. Peyrelevade, who resides in
France, is also currently under indictment in the United
States District Court for the Central District of California
for alleged conduct relating to the Executive Life matter,
but has not appeared in the United States to defend the
pending charges. France's extradition treaty with the
United States does not permit French nationals to be extradited to the United States. See Article 3, Paragraph 1, 1996
U.S.T. LEXIS 53 (entered into force February 1, 2002,
www.state.gov/documents/organization/38535.pdf).
On February 1, 2005, in response to the parties' Joint
Motion for the Issuance of Requests for International Judicial Assistance ("the Joint Motion"), the Administrative
Law Judge ("ALJ") issued Letters of Request and Commissions to a consular official under the Hague Convention
for the Taking of Evidence Abroad authorizing testimony
to be taken in Paris of 13 French national witnesses proposed by the parties, including Peyrelevade. The Joint
Motion noted that the parties were not asking the ALJ to
determine at that point whether particular depositions were
for discovery purposes or for preservation of testimony
purposes. In fact, the Joint Motion specifically indicated
Enforcement Counsel's intention to file a motion with the
ALJ regarding the proposed testimony of Respondent (as
well as two other French witnesses of Respondent who
were also named in the indictment charges in California),
but that because of the lead time necessary to schedule the
depositions in France, the parties agreed to submit their
request to the ALJ, pending the outcome of Enforcement
Counsel's anticipated motion. 1
Accordingly, on February 18, 2005, Board Enforcement
Counsel filed a Motion in Limine, requesting, among other
things, that the ALJ rule that Peyrelevade be permitted
to testify only by appearing in person at the hearing in
the United States, rather than by a deposition to be taken
in France. In its Motion in Limine, Enforcement Counsel argued that Peyrelevade should not be considered
"unavailable" under the Board's Rules of Practice ("the
Rules") merely because he was residing overseas, given
that he would be using the deposition testimony to substitute for live testimony in order to avoid arrest for
the pending criminal indictment in California, and that
in-person testimony is necessary to enable the ALJ to
properly assess Peyrelevade's credibility. After extensive
briefing from Peyrelevade and Enforcement Counsel, on
June 6, 2005, the ALJ issued an Order ("the June 6
Order") finding that Peyrelevade's residence abroad "does
not . . . meet the standards of 'unavailable'" and accordingly, that Peyrelevade's deposition could not be taken to
preserve his testimony under Rule 263.27 of the Board's
1. Notably, on August 26, 2005, the French Ministry of Justice
authorized the requested depositions.

Rules or offered into evidence at the hearing under
Rule 263.36 of the Board's Rules.
On July 1, 2005, Peyrelevade filed with the ALJ a
Request for Interlocutory Review of the June 6 Order ("the
Request"). In the Request, Peyrelevade contends that interlocutory review is appropriate and necessary in this case
because the ALJ's ruling improperly resolves a controlling
issue of law by denying consideration of Peyrelevade's
deposition testimony and by barring Peyrelevade from
preserving his testimony by way of a testimonial deposition pursuant to Rule 263.27 of the Board's Rules, thereby
eliminating his ability to "preserve a full and accurate
record for the Board's consideration." Peyrelevade also
contends that interlocutory review is appropriate in order
to avoid the additional delay and expense of reinitiating the
lengthy process of arranging and taking Peyrelevade's
deposition in France, which would be required in the event
that the Board later modifies the ALJ's June 6 Order.
Board Enforcement Counsel filed a response to Peyrelevade's Request for Interlocutory Review, arguing that the
Board has previously denied an almost identical request for
interlocutory review in an earlier enforcement action and
that Peyrelevade has failed to satisfy any of the elements
necessary for the Board to find that the circumstances "are
extraordinary enough" to merit interlocutory review. On
July 22, 2005, the ALJ, pursuant to Rule 263.28(c) of the
Board's Rules, referred Peyrelevade's Request for Interlocutory Review to the Board for final disposition. 2
Discussion
I. Applicable Standard
Rule 263.28 of the Board's Rules provides that the Board
may exercise interlocutory review of an ALJ's ruling if the
Board finds that:
(1) the ruling involves a controlling question of law or
policy as to which substantial grounds exist for a
difference of opinion;
(2) immediate review of the ruling may materially
advance the ultimate termination of the proceeding;
(3) subsequent modification of the ruling at the conclusion of the proceeding would be an inadequate remedy; or
(4) subsequent modification of the ruling would cause
unusual delay or expense.
12 CFR 263.28(b). These provisions are similar to
28 U.S.C. § 1292(b), which sets forth the circumstances
under which federal appellate courts may exercise jurisdiction over interlocutory appeals. Thus, the Board has previously observed that "[w]hile section 1292(b) and case law
governing interlocutory review in civil proceedings are not
2. On August 15, 2005, the ALJ granted a request by Peyrelevade
for leave to file an additional reply in support of his Request for
Interlocutory Review. Accordingly, Peyrelevade's additional reply
was transmitted to the Hoard on August 15, 2005.

Legal Developments

binding in this administrative proceeding, they provide
useful guidance to the [agencies] in deciding procedural
issues such as the one presented here." In re Incus Co. Ltd,
86 Federal Reserve Bulletin 246 (2000) (citations omitted).
T h e Board has also repeatedly emphasized that interlocutory review is discretionary, and that "the scope within
which such discretion should be exercised is extremely
narrow." Id. (citations omitted). The Board's limitation
on interlocutory review reflects a strong and longstanding federal policy against piecemeal appeals before a
final judgment. Id. (citing Switzerland Cheese Ass'n, Inc. v.
E. Home's Market, Inc., 385 U.S. 23, 2 4 - 2 5 (1966)).
Accordingly, while a finding of one of the four circumstances set forth in Rule 263.28(b) is a necessary precondition to interlocutory review by the Board, it is not alone
sufficient to require that the Board grant such review." Id.
All four of the prerequisites are to be used to guide the
Board in the exercise of its discretion. Id. at 246.
Interlocutory appeals are generally disfavored because
they undermine the independence of the trial judge, expose
the parties to harassment and the burdensome costs of a
succession of separate appeals, promote delay, and require
the unnecessary expenditure of scare judicial resources.
See Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368,
374 (1981); Catlin v. United States, 324 U.S. 229, 233-34
(1945). Thus, the Board has stated that a party seeking
interlocutory review, "has the burden of persuading the
Board that exceptional circumstances justify a departure
f r o m the basic policy of postponing appellate review until
after the entry of final judgment." Incus, at 246-47, (quoting Coopers & Lybrand v. Livesay, 437 U.S. 463, 475
(1978)).
For the reasons set forth below, the Board determines
that Peyrelevade has failed to meet that burden, and his
request for interlocutory review is denied.
II. Analysis of J u n e 6 O r d e r U n d e r Standard of
Rule 2 6 3 . 2 8 ( b )
A. Existence

of Controlling

Question

of Law or Policy

Peyrelevade contends that the June 6 Order involves a
"controlling question of law or policy as to which substantial grounds exist for a difference of opinion." The Board
has previously noted that " [pjretrial rulings on the admissibility of evidence are not ordinarily subject to interlocutory
review." In re Pharaon, Order Denying Motion for Interlocutory Review, Docket Nos. 91-037-E-I7 and 91-043-E17, p. 3 (Sept. 12, 1995) (citing Coursen v. A.H. Robins
Co., Inc., 764 F.2d 1329, 1342 (9th Cir. 1985)). More
specifically, the Board has determined, on nearly identical
facts, that no controlling question of law or policy existed,
where the ALJ issued a prehearing order ruling that a
foreign national respondent subject to a related pending
criminal indictment may not present his testimony at the
hearing via a deposition taken abroad. Pharaon, Order
Denying Motion for Interlocutory Review, at p. 4. In denying the motion for interlocutory review in Pharaon, the
Board observed that " [i]t is impossible to know whether

529

and to what extent an in limine ruling on the admissibility
of evidence would control the outcome of a proceeding
absent the holding of the hearing, a ruling in the context of
that hearing, and the issuance of a recommended decision." Id.
Peyrelevade contends that the instant matter is distinguishable f r o m Pharaon and does involve a controlling
issue of law in that the ALJ has ruled not only that
Peyrelevade may not introduce his deposition as testimony
at the hearing, but also that his deposition cannot be taken
to preserve his testimony pursuant to Rule 263.27, thereby
eliminating his ability to "preserve a full and accurate
record for the Board's consideration." 3 The Board finds,
however, that the ultimate impact of the A L J ' s ruling on
the outcome of this case is still entirely speculative. For
instance, Peyrelevade may ultimately decide to testify in
person at the hearing despite his current position; or he
could prevail in the hearing without recourse to his testimony. Either one of these outcomes would moot the questions presented at this stage. Moreover, it is entirely
unclear at this stage what impact his deposition testimony,
even if permitted, would have on the outcome of the
hearing. As the Ninth Circuit noted in Coursen, "[i]n
limine rulings are by their very nature preliminary. It is
impossible to determine whether the movant will be prejudiced by such ruling absent a trial, a ruling in the context of
trial, and the return of a verdict." Coursen 764 F.2d at
1342.
Even if the A L J ' s June 6 ruling did involve a "controlling question of law or policy," Peyrelevade has failed to
establish that "substantial grounds exist for a difference of
opinion" on the issue of whether he has a right under these
circumstances to testify at the hearing by deposition. 4 To
the contrary, the D.C. Circuit Court of Appeals upheld the
A L J ' s decision in Pharaon, on nearly identical facts, that a
foreign respondent was required to testify in person if he
wanted his testimony considered at the hearing.
In his June 6 Order, the ALJ ruled that because Peyrelevade's testimony will involve "significant determinations
regarding credibility," it is "both important and proper that
[Peyrelevade] be required to appear in person at hearing if
he intends to testify." The D.C. Circuit, in explaining its
conclusions with respect to the A L J ' s ruling in Pharaon,
noted that "[g]iven the significance of personal observation to credibility determinations, we cannot say that [the
A L J ' s ] ruling amounted to an abuse of discretion."
Pharaon v. Board of Governors of the Federal Reserve
System, 135 F.3d 148 (D.C. Cir. 1998), cert, denied,
525 U.S. 947 (1998). Particularly in absence of authority to
the contrary, this opinion demonstrates that no substantial
grounds exist for a difference of opinion with regard to the
June 6 Order.

3. Peyrelevade is listed on his own witness list but not on Enforcement C o u n s e l ' s . W h i l e E n f o r c e m e n t Counsel could take Peyrele v a d e ' s deposition under the B o a r d ' s discovery rules, 12 C F R 263.53,
E n f o r c e m e n t Counsel have indicated that they do not intend to do so.
4. Unless lie has that right, the issue of whether he is " u n a v a i l a b l e "
within the meaning of the B o a r d ' s rules is ultimately unimportant.

530

F e d e r a l R e s e r v e Bulletin • A u t u m n 2 0 0 5

IS. Other Rule 263.28(b) Criteria
Additionally, the Board does not find that immediate
review of the June 6 Order would materially advance the
ultimate termination of the proceeding or that subsequent
modification of the Order would be an inadequate remedy
or cause unusual delay or expense. Peyrelevade combines
his arguments with respect to these three criteria, contending only that because the June 6 Order precludes the taking
of Peyrelevade's deposition for the purpose of preserving
testimony, unusual and unnecessary delay and expense will
result if review and modification of the June 6 Order are
deferred until the conclusion of the proceedings before the
ALJ. Peyrelevade argues that because such delay and
expense can be avoided through the Board's exercise of
interlocutory review, the ultimate termination of this proceeding would be materially advanced by the Board's
decision to exercise review.
In Pharaon,
the Board determined that immediate
review of the A L J ' s similar in limine ruling would not
materially advance the ultimate termination of the proceeding and, moreover, that subsequent modification of the
A L J ' s ruling would not lead to unusual expense or delay.
The Board specifically rejected Pharaon's argument that
the entire proceeding would have to be repeated if the
Board subsequently decided that Pharaon should have been
permitted to testify by deposition. See In re Pharaon,
Order Denying Motion for Interlocutory Review, Docket
Nos. 1-037-E-I7 and 91-043-E-I7, p. 4 (Sept. 12, 1995).
Peyrelevade points out that the Board's decision denying
interlocutory review in Pharaon assumed that Enforcement
Counsel in that proceeding would take Pharaon's deposition for discovery purposes and expressly anticipated that
the ALJ would transmit the deposition transcript to the
Board along with any other rejected exhibits. This was not,
however, the controlling basis for the Board's denial of
interlocutory review in Pharaon and does not warrant a
different outcome with respect to the A L J ' s June 6 Order in

this matter. 5 Even if the Board ultimately determines that
the June 6 Order is improper and that Peyrelevade should
be permitted to testify by deposition, the Board can simply
remand the matter for consideration of a deposition of
Peyrelevade by the ALJ. While Peyrelevade and Enforcement Counsel disagree on the amount of delay that would
be caused by rescheduling Peyrelevade's deposition, it
seems unlikely at this point that any substantial delay or
expense would result even if it is ultimately necessary
to re-request authorization for Peyrelevade's deposition,
given that the French Ministry of Justice authorized the
requested depositions (including Peyrelevade's) on
August 26, 2005. Therefore, as the Board noted in
Pharaon, "the extent to which subsequent modification
would result in any delay and expense, let alone unusual
delay and expense, is wholly speculative." Id. (emphasis in
original).
As set forth herein, the arguments advanced by
Peyrelevade fail to provide an appropriate basis upon
which the Board may grant interlocutory review of the
A L J ' s Order. Peyrelevade has not demonstrated the exceptional circumstances necessary to justify a departure f r o m
the Board's basic policy of postponing review until the
conclusion of the hearing and the close of the record.
Accordingly, the Board declines Peyrelevade's request for
interlocutory review of the A L J ' s June 6, 2005 Order.
By order of the Board of Governors, this 16th day of
September, 2005.
Board of Governors of the
Federal Reserve System
JENNIFER J. J O H N S O N
Secretary of the Board

5. The; Board notes that Pharaon ultimately declined to appear for a
deposition in that matter.

531

Change in Publishing Format of the
Federal Reserve Bulletin
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timely introduction of research and information to
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• at 202-728-5886, or by mail to Publications Fulfillment, MS 127, Board of Governors of the Federal
Reserve System, Washington DC 20551.

532

Federal Reserve Bulletin • Autumn 2005

Federal Reserve Board of Governors
and Official Staff
November 1, 2005

A L A N G R E E N S P A N , Chairman

S U S A N SCHMIDT B I E S

ROGER W . FERGUSON, JR., Vice Chairman

MARK W . OLSON

OFFICE

DIVISION
OF BANKING
SUPERVISION
AND REGULATION—CONTINUED

OF BOARD

MEMBERS

M I C H E L L E A . S M I T H , Director

WINTHKOP P. HAMULEY, Assistant to the Board and
Director for Congressional Liaison
ROSANNA PIANAI.TO-CAMERON, Special Assistant to the Board
DAVID W. SKIDMORE, Special Assistant to the Board
LARICKE D. BLANCHARD, Special Assistant to the Board
for Congressional Liaison
BRIAN J. GROSS, Special Assistant to the Board
for Congressional
Liaison
ROBERT M. PRIBBLE, Special Assistant to the Board
for Congressional
Liaison
LEGAL

DIVISION

SCOTT G. ALVAREZ, General Counsel
RICHARD M . ASHTON, Deputy General Counsel
KATHLEEN M. O'DAY, Deputy General Counsel
STEPHANIE MARTIN, Associate General Counsel
ANN E. MISHACK, Associate General Counsel
KATHF.RINE H. WHEATI.EY, Associate General Counsel
KIERAN J. FAI.LON, Assistant General Counsel
STEPHEN HORACE MEYER, Assistant General Counsel
PATRICIA A. ROBINSON, Assistant General Counsel
CARY K. WILLIAMS, Assistant General Counsel
OFFICE

OF THE SECRETARY

J E N N I F E R J . J O H N S O N , Secretary

ROBERT DEV. FRIERSON, Deputy Secretary
MARGARET M. SHANKS, Associate Secretary
DIVISION

OF BANKING

SUPERVISION

AND REGULATION
R I C H A R D S P I L L E N K O T H E N , Director

STEPHEN M. HOFFMAN, JR., Deputy Director
ROGER T. COLE, Senior Associate Director
MICHAEL G. MARTINSON, Senior Adviser
DEBORAH P. BAILEY, Associate Director
NORAH M, BARGER, Associate Director
BETSY CROSS, Associate Director
GERALD A. EDWARDS, JR., Associate Director
JACK P. JENNINGS, Associate Director
ROBIN I.. LUMSDAINE, Associate Director
PETER J. PURCELL, Associate Director
MOLLY S. WASSOM, Associate Director
DAVID M. WRIGHT, Associate Director
BARBARA J. BOUCHARD, Deputy Associate Director
ANGELA DESMOND, Deputy Associate Director
JAMES A. EMBERSIT, Deputy Associate Director
CHARLES H. HOI.M, Deputy Associate Director
WILLIAM C. SCHNEIDER, JR., Deputy Associate Director

WILLIAM G. SPANIEL, Deputy Associate
STACY COLEMAN, Assistant Director
JON D. GREENLEE, Assistant Director
WALT H. MILES, Assistant Director
WILLIAM F. TRF.ACY, Assistant Director

Director

S T E P H E N M . R O B E R T S , Adviser

DIVISION

OF INTERNATIONAL

FINANCE

K A R E N H . J O H N S O N , Director

THOMAS A. CONNORS, Senior Associate Director
RICHARD T. FREF.MAN, Associate Director
STEVEN B. KAMIN, Associate Director
WILLIAM L. I-IELKIE, Senior Adviser
DALE W. HENDERSON, Senior Adviser
JON W. FAUST, Assistant Director
JOSEPH E. GAGNON, Assistant Director
MICHAEL P. LEAHY, Assistant Director
D. NATHAN SHEETS, Assistant Director
RALPH W. TRYON, Assistant Director
DIVISION

OF RESEARCH

AND STATISTICS

D A V I D J . S T O C K T O N , Director

PATRICK M. PARKINSON, Deputy Director
DAVID W. WILCOX, Deputy Director
MYRON L. KWAST, Senior Associate Director
STEPHEN D. OI.INER, Associate Director
LAWRENCE SLIFMAN, Associate Director
CHARLES S. STRUCKMEYEK, Associate Director
A L I C E PATRICIA W H I T E , Associate

Director

JOYCE K. ZICKLER, Associate Director
S. WAYNE PASSMORE, Deputy Associate Director
DAVID L. REIFSCHNEIDER, Deputy Associate Director
JANICE SIIACK-MARQUEZ, Deputy Associate Director
WILLIAM L. WASCHER III, Deputy Associate Director
MICHAEL S. CRINGOLI, Assistant Director
DOUGLAS ELMENDORF, Assistant Director
MICHAEL GIBSON, Assistant Director
DIANA HANCOCK, Assistant Director
J. NELLIE LIANG, Assistant Director
ROBIN A. PRAGER, Assistant Director
DANIEL SICHEL, Assistant Director
MARY M. WEST, Assistant Director
GLENN B. CANNER, Senior Adviser
DAVID S. JONES, Senior Adviser
THOMAS D. SIMPSON, Senior Adviser

DONALD L. KOHN

DIVISION

OF MONETARY

AFFAIRS

DIVISION

OF INFORMATION

TECHNOLOGY

V I N C E N T R . R K I N I I A R T , Director

M A R I A N N E M . E M E R S O N , Director

BRIAN F. MADIGAN, Deputy Director
JAMES A. CLOUSE, Deputy Associate Director
WILLIAM C. WHITESELL, Deputy Associate Director
CHERYL L. EDWARDS, Assistant Director
WILLIAM B. ENGLISH, Assistant Director

MAUREEN T. HANNAN, Deputy Director
TII.LENA CJ. CLARK, Assistant Director
GEARY L. CUNNINGHAM, Assistant Director
WAYNE A. EDMONDSON, Assistant Director
P o KYUNC. KIM, Assistant Director
SUSAN F. MARYCZ, Assistant Director
SHARON L. MOWRY, Assistant Director
RAYMOND ROMERO, Assistant Director
JILL ROSEN, Assistant Director

A T H A N A S I O S O R P H A N I D F . S , Adviser

DEBORAH J. DANKER, Special Assistant
DIVISION
AND

to the Board

OF CONSUMER

COMMUNITY

AFFAIRS
DIVISION

S A N D R A F . B R A U N S T E I N , Director

GLENN E. LONEY, Deputy Director
ADRIENNE D. HURT, Associate Counsel
I R E N E S H A W N M C N U L T Y , Senior

and Adviser

Adviser

LEONARD CHANIN, Associate Director
MARY T. JOHNSEN, Associate Director
TONDA E. PRICE, Associate Director
SUZANNE G. KILLIAN, Assistant Director
SHEILA F. MAITH, Assistant Director
JAMF.S A. MICHAELS, Assistant Director
OFFICE

OF STAFF

DIRECTOR

FOR MANAGEMENT
STEPHEN R. MALPHRUS, Staff Director
SHEILA CLARK, EEO Programs Director
LYNN S. Fox, Senior Adviser
MANAGEMENT

OF RESERVE

AND PAYMENT

DIVISION

H. FAY PETERS, Director
DARREI.L R. PAULEY, Deputy Director
STEPHEN J. CLARK, Senior Associate Director
CHRISTINE M. FIELDS, Associate Director
MARSHA W. REIDHILL, Associate Director
BILLY J. SAULS, Associate Director
DONALD A. SPICER, Associate Director
CHARI.ES O'MALLEY, Assistant Director
JAMES RIESZ, Assistant Director

BANK

OPERATIONS

SYSTEMS

L O U I S E L . R O S E M A N , Director

JEFFREY C. MARQUARDT, Deputy Director
PAUL W. BETTC.E, Senior Associate Director
KENNETH D. BUCKLEY, Associate Director
DOROTHY LACHAPEI.LE, Associate Director
JACK K. WALTON II, Associate Director
GREGORY L. EVANS, Assistant Director
JOSEPH H. HAYES, JR., Assistant Director
LISA HOSKINS, Assistant Director
MICHAEL J. LAMBERT, Assistant Director
MICHAEL J. STAN, Assistant Director
JEFF J. STEIIM, Assistant Director
OFFICE

OF THE INSPECTOR

GENERAL

BARRY R. SNYDER, Inspector General
DONALD L. ROHINSON, Deputy Inspector General
ELIZABETH A. COLEMAN, Assistant Inspector General
LAURENCE A. FROEHLICH, Assistant Inspector General
WILLIAM L. MITCHELL, Assistant Inspector General

534

Federal Reserve Bulletin • Autumn 2005

Federal Open Market Committee
and Advisory Councils
November 1, 2005

FEDERAL

OPEN

MARKET

COMMITTEE

MEMBERS

A L A N G R E E N S P A N , Chairman

T I M O T H Y F . G E I T H N E R , Vice

Chairman

SUSAN SCHMIDT BIES

DONALD L. KOHN

ANTHONY M . SANTOMERO

R O G E R W . F E R G U S O N , JR.

MICHAEL H . MOSKOW

GARY H . STERN

RICHARD W . FISIIER

MARK W. OLSON

ALTERNATE

CHRISTINE M . CUMMING

JEFFREY M . LACKER

JACK G U Y N N

MEMBERS

SANDRA PIANALTO

J A N E T L . YELLF.N

STAFF
V I N C E N T R . R E I N I I A U T , Secretary
D E B O R A H J . D A N K E R , Deputy

and

Economist

Secretary

M I C H E L L E A . S M I T H , Assistant

B R I A N F. M A D I G A N , Associate

Secretary

S C O T T G . A L V A R E Z , General

General

Economist

S T E P H E N D . OI.INF.R, Associate
Counsel

Economist

A R T H U R J . R O I . N I C K , Associate

Economist

K A R E N H . J O H N S O N , Economist

H A R V E Y R O S E N B L U M , Associate

D A V I D J . S T O C K T O N , Economist

J O S E P H S . T R A C Y , Associate

T H O M A S A . C O N N O R S , Associate
C H A R L E S L . E V A N S , Associate

Economist

Economist
Economist

L O R E T T A M E S T E R , Associate

Counsel

T I I O M A S C . B A X T E R , J R . , Deputy

R I C H A R D T . F R E E M A N , Associate

D A V I D W . W I L C O X , Associate

Economist

Economist
Economist

Economist

DINO KOS, Manager, System Open Market Account

FEDERAL

ADVISORY

COUNCIL

M A R T I N G . M C G U I N N , President
J E R R Y A . G R U N D I I O E E R , Vice

President

JAMES C . SMITH, F i r s t D i s t r i c t

D E N N I S J. KUESTER, S e v e n t h D i s t r i c t

THOMAS A . RENYI, S c c o n d D i s t r i c t

J. K E N N E T H GLASS, E i g h t h D i s t r i c t

BRUCE L. HAMMONDS, T h i r d District

JERRY A . G R U N D H O F E R , N i n t h D i s t r i c t

MARTIN G . M C G U I N N , Fourth District

BYRON G . THOMPSON, T e n t h D i s t r i c t

G . KENNEDY THOMPSON, F i f t h D i s t r i c t

GAYLE M . EARLS, E l e v e n t h D i s t r i c t

FRED L. G R E E N III, S i x t h D i s t r i c t

R I C H A R D M . KOVACEVICH, T w e l f t h D i s t r i c t

J A M E S E . A N N A B I . E , Secretary

CONSUMER

ADVISORY

COUNCIL

MARK PINSKY, Philadelphia, Pennsylvania, Chair
LORI R. SWANSON, St. Paul, Minnesota, Vice Chair

STELLA ADAMS, D u r h a m , North Carolina
DENNIS L. ALGIF.RE, Westerly, Rhode Island
FAITH L. ANDERSON, Fort Worth, Texas
SUSAN BREDEHOET, Cherry Hill, New Jersey

ELSIE MEEKS, Rapid City, South Dakota
BRUCE B. MORGAN, Roeland Park, Kansas

SHF.ILA C A N A V A N , B e r k e l e y , C a l i f o r n i a

BENJAMIN ROBINSON III, C h a r l o t t e , N o r t h C a r o l i n a

DEBORAH HICKOK, O o l t e w a h , T e n n e s s e e
W . JAMES K I N G , C i n c i n n a t i , O h i o

CAROLYN CARTER, G e t t y s b u r g , P e n n s y l v a n i a

MARY JANE SEEBACH, C a l a b a s a s , C a l i f o r n i a

MICHAEL COOK, B e n t o n v i l l e , A r k a n s a s

LISA SODEIKA, Prospect Heights, Illinois

DONALD S. CUKRIE, B r o w n s v i l l e , T e x a s

PAUL J. SPRINGMAN, A t l a n t a , G e o r g i a

A N N E DIEDRICK, N e w Y o r k , N e w Y o r k

FORREST F. S T A N L E Y , C l e v e l a n d , O h i o

DAN DIXON, Washington, District of Columbia

DIANE THOMPSON, East St. Louis, Illinois

HATTIE B . DORSEY, A t l a n t a , G e o r g i a

ANSELMO VILLARREAL, W a u k e s h a , W i s c o n s i n

K U R T EGGERT, O r a n g e , C a l i f o r n i a

CLINT WALKER, W i l m i n g t o n , D e l a w a r e

JAMES G A R N E R , B a l t i m o r e , M a r y l a n d

KELLY K . WALSH, H o n o l u l u , H a w a i i

R. CHARLES GATSON, Kansas City, Missouri

MARVA E . W I L L I A M S , C h i c a g o , I l l i n o i s

THRIFT INSTITUTIONS

ADVISORY

COUNCIL

CURTIS L. HAGE, Sioux Falls, South Dakota, President
ROY M. WHITEHEAD, Seattle, Washington, Vice President

ELDON R . ARNOLD, P e o r i a , Illinois

JEFFREY H . FARVER, S a n A n t o n i o , T e x a s

H . BRENT BEESLEY, St. G e o r g e , U t a h

DOUGLAS K . FREEMAN, A l p h a r e t t a , G e o r g i a

CRAIG G . B L U N D E N , R i v e r s i d e . C a l i f o r n i a

DAVID H . H A N C O C K , G r a n d v i e w , M i s s o u r i

ALEXANDER R . M . BOYLE, B e t h e s d a , M a r y l a n d

G E O R G E JEFFREY RECORDS, JR., O k l a h o m a C i t y , O k l a h o m a

ROBERT M . COUCH, B i r m i n g h a m , A l a b a m a

D A V I D R U S S E L L TAYLOR, R a h w a y , N e w J e r s e y

536

Federal Reserve Bulletin • Autumn 2005

Federal Reserve Board Publications
For ordering
assistance,
write P U B L I C A T I O N S F U L F I L L MENT, M S - 1 2 7 , Board of Governors of the Federal Reserve
System, Washington, D C 20551, or telephone (202) 452-3245,
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should accompany request and be made payable to the Board of
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BOOKS
ANNUAL

AND

MISCELLANEOUS

PERCENTAGE

RATE

(Truth

in

Lending—

ANNUAL REPORT, 2 0 0 4 .
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STATISTICAL DIGEST: period covered, release date,
pages, and price.
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712 pp.
March 1991
1990
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215 pp.
November 1992
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215 pp.
December 1993
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190 pp.
1994
December 1995
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November 1996
4 0 4 pp.
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RESERVE

136 pp.
GUIDE

TO

THE

FLOW

OF

FUNDS

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January

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EDUCATION
PAMPHLETS
Short pamphlets suitable for classroom
available without charge.

use. Multiple

copies

are

Choosing a Credit Card
C o n s u m e r Guide to Check 21 and Substitute Checks
C o n s u m e r ' s Guide to M o r t g a g e Lock-Ins
C o n s u m e r ' s Guide to Refinancings
C o n s u m e r ' s Guide to Settlement Costs
Consumer Handbook on A d j u s t a b l e Rate Mortgages (also available in Spanish)
C o n s u m e r H a n d b o o k to Credit Protection L a w s
Guide to Business Credit for W o m e n , Minorities, and Small
Businesses
H o m e Mortgages: Understanding the Process and Your Right
to Fair Lending
H o w to File a C o n s u m e r Complaint about a Bank (also available
in Spanish)
In Plain English: Making Sense of the Federal Reserve
Keys to Vehicle Leasing (also available in Spanish)
Looking for the Best Mortgage (also available in Spanish)
Making Sense of Savings
Privacy Choices for Your Personal Financial Information
Protecting Yourself f r o m O verdraft and Bounced-Check Fees
Putting Your H o m e on the Loan Line Is Risky Business (also
available in Spanish)
Series on the Structure of the Federal Reserve System
Board of Governors of the Federal Reserve System
Federal O p e n Market C o m m i t t e e
Federal Reserve Bank Board of Directors
Federal Reserve Banks
T h e r e ' s a Lot to Learn about M o n e y
W h a t You Should Know About H o m e Equity Lines of Credit
(also available in Spanish)
W h a t You Should Know About Your Checks
W h e n Is Your Check Not a C h e c k ? (also available in Spanish)

537

STAFF STUDIES: Only Summaries
BULLETIN

Printed

in the

170.

T I O N S : A N A N A L Y S I S O F E X P E R I E N C E W I T H T H E T R U T H IN

Studies and papers on economic and financial subjects that are of
general interest. Staff Studies 1-J58, 161, 163, 165, 166, 168, and
169 are out of print, but photocopies of them are available. Staff
Studies 165-176 are available online at www.federalreserve.gov/
pubs/staffstudies.
Requests to obtain single copies of any paper or
to be added to the mailing list for the series may be sent to
Publications Fulfillment.

SAVINGS ACT, by Gregory Elliehausen and Barbara R.
Lowrey. December 1997. 17 pp.
171.
172.

N E W D A T A ON T H E P E R F O R M A N C E O F N O N B A N K S U B S I D I -

Donald Savage. February 1990. 12 pp.
BANKING
VICES

BY

MARKETS
SMALI.

AND

AND

THE

OF

MEDIUM-SIZED

FINANCIAL

SER-

BUSINESSES,

by

LOAN

RATES

IN

TWENTY

CITIES,

by

Stephen

A.

164.

1989-92

CREDIT

CRUNCH

FOR

REAL

ESTATE,

by

1 6 7 . S U M M A R Y O F M E R G E R P E R F O R M A N C E S T U D I E S IN B A N K I N G ,
1 9 8 0 - 9 3 , A N D AN A S S E S S M E N T O F T H E " O P E R A T I N G P E R AND

"EVENT

DISCLOSURE

IN

BANKING,

STUDY"

METHODOLOGIES,

Stephen A. Rhoades. July 1994. 37 pp.

by

by

Study

B A N K MERGERS AND B A N K I N G STRUCTURE IN THE U N I T E D
FUTURE

OF

RETAIL

ELECTRONIC

PAYMENTS

176.

BANK MERGER ACTIVITY

SYSTEMS:

IN T H E U N I T E D S T A T E S ,

2003, by Steven J. Pilloff. May 2004. 23 pp.

James T. Fergus and John L. Goodman, Jr. July 1993.
20 pp.

FORMANCE"

PUBLIC

INDUSTRY INTERVIEWS AND ANALYSIS, Federal Reserve
Staff, for the Payments System Development Committee,
Federal Reserve System. December 2002. 27 pp.

1 6 2 . E V I D E N C E O N T H E S I Z E O F B A N K I N G M A R K E T S FROM M O R T -

Rhoades. February 1992. 11 pp.

IMPROVING

STATES, 1980-98, by Stephen Rhoades. August 2000. 33 pp.
175.

Gregory E. Elliehausen and John D. Wolken. September
1 9 9 0 . 35 pp.
GAGE

OF M A R -

Group on Disclosure, Federal Reserve System. March 2000.
3 5 pp.
174.

USE

U S I N G S U B O K D I N A T E D D E B T AS A N INSTRUMENT

KET DISCIPLINE, by Study Group on Subordinated Notes
and Debentures, Federal Reserve System. December 1999.
6 9 pp.

ARIES O F B A N K H O L D I N G C O M P A N I E S , b y N e l l i e L i a n g a n d
160.

COST OF BANK REGULATION: A REVIEW OF THE EVIDENCE,

by Gregory Elliehausen. April 1998. 35 pp.

173.
159.

COST OF IMPLEMENTING CONSUMER FINANCIAL REGULA-

1994-

538

Federal Reserve Bulletin • Autumn 2005

ANTICIPATED
BOARD

SCHEDULE

OF GOVERNORS

OF RELEASE

DATES

OF THE FEDERAL

FOR PERIODIC

RESERVE

For ordering
assistance,
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or FAX (202) 728-5886. You may also use the publications
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release
days 1

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which data refer

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table n u m b e r s 2

Weekly Releases
H.2.

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n.a.

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H.3.

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the Monetary B a s e 3

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n.a.

Thursday

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previous
Wednesday

1.20

$20.00

n.a.

Thursday

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previous
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1.11, 1.18

H.4.1. Factors Affecting Reserve Balances
of Depository Institutions and
Condition Statement of
Federal Reserve B a n k s 3
H.6.

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n.a.

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H.8.

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II. 10. Foreign Exchange Rates 3

H.15.

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Selected Interest Rates 3

Releases

G.5.

Foreign Exchange R a t e s 3

$ 5.00

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First of month

Previous month

3.28

G.17.

Industrial Production and
Capacity Utilization 3

$15.00

n.a.

Midmonth

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2.12, 2.13

G.19.

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Fifth working day
of month

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previous

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539

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mail
rate

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rate

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release
1 1
days 1

P

I

>

°
which data Jeter

Corresponding
Bulletin or
Statistical
^
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table numbers 2

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Survey of Terms of Business
Lending 3

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March, June,
September, and
December

February, May,
August, and
November

E. 11. Geographical Distribution of
Assets and Liabilities of
Major Foreign Branches of
U.S. Banks

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15th of March,
June,
September, and
December

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E.16.

Country Exposure Lending
Survey 3

$ 5.00

January, April,
July, and
October

Previous quarter

Z. 1.

Flow of Funds Accounts
of the United States:
Flows and Outstandings 3

$25.00

Second week of
March, June,
September, and
December

Previous quarter

E.2.

1. Please note that for s o m e releases, there is normally a certain variability in the release date b e c a u s e of reporting or processing procedures.
Moreover, for all series unusual c i r c u m s t a n c e s may, f r o m time to time,
result in a release d a t e b e i n g later than anticipated.
2. Beginning w i t h the W i n t e r 2 0 0 4 issue (vol. 90, no. 1) of the Bulletin,
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4.23

1.57, 1.58,
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Bulletin. Statistical tables are n o w published in the Statistical Supplement
to the Federal Reserve liulletin', the table n u m b e r s , however, remain the
same.
3. These releases arc also available on the B o a r d ' s w e b site,
www.federalreserve.gov/releases.
n.a. Not available.

540

Federal Reserve Bulletin •

Autumn 2005

Maps of the Federal Reserve System

I'

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•
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Federal R e s e r v e B a n k city
B o a r d of G o v e r n o r s of the F e d e r a l

• Federal Reserve Branch city
—

Branch boundary

Reserve System, Washington, D.C.

NOTE
The Federal Reserve officially identifies Districts by number and Reserve Bank city (shown on both pages) and by
letter (shown on the facing page).
In the 12th District, the Seattle Branch serves Alaska,
and the San Francisco Bank serves Hawaii.
The System serves c o m m o n w e a l t h s and territories as
follows: the N e w York Bank serves the C o m m o n w e a l t h

of Puerto Rico and the U.S. Virgin Islands; the San Francisco Bank serves American Samoa, Guam, and the C o m monwealth of the Northern Mariana Islands. T h e Board of
Governors revised the branch boundaries of the System
most recently in February 1996.

541

2-B

1-A

4-D

3-C

5-E
Pittsburgh

Balti

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ATLANTA

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ST. LOUIS

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10-J

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Y

12-L

ALASKA

KANSAS CITY
11-K

San Antonio
HAWAII

DALLAS

S A N FRANCISCO

542

Federal Reserve Bulletin • Autumn 2005

Federal Reserve Banks, Branches, and Offices
A u g u s t 16, 2 0 0 5

F E D E R A L R E S E R V E BANK
or B R A N C H

Zip

Chairman
Deputy Chairman

President
First Vice President

BOSTON*

02205

Samuel O. Thier
Blenda J. Wilson

Cathy E. Minehan
Paul M. Connolly

NEW YORK*

10045

John E. Sexton
Jerry I. Speyer
Marguerite D. Hambleton

Vice President
in charge of Branch

Timothy F. Geithncr
Christine M. C u m m i n g

Buffalo

14202

Barbara L. Walter 1

PHILADELPHIA

19105

Ronald J. Naples
Doris M. D a m m

Anthony M. Santomero
William H. Stone, Jr.

CLEVELAND*

44101

Sandra Pianalto
Robert Christy Moore

Cincinnati
Pittsburgh

45201
15230

Robert W. Mahoney
Charles E. Bunch
James M. Anderson
Roy W. Haley
T h o m a s J. Mackell, Jr.
Theresa M. Stone
William C. Handorf
Michael A. Almond

Jeffrey M. Lacker
Walter A. Varvel

David M. Ratcliffe
V. Larkin Martin
James H. Sanford
Fassil Gabremariam
Edwin A. Jones, Jr.
Beth Dortch Franklin
Earl L. Shipp

Jack Guynn
Patrick K. Barron

W. James Farrell
Miles D. White
Edsel B. Ford II

Michael H. Moskow
Gordon R.G. Werkema

Walter L. Metcalfe, Jr.
Gayle P. W. Jackson
Stephen M. Erixon
Norman E. Pfau, Jr.
Russell Gwatney

William Poole
W. LeGrande Rives

Linda Hall Whitman
Frank L. Sims
Lawrence R. Simkins

Gary H. Stern
James M. Lyon

Robert A. Funk
Richard H. Bard
Thomas Williams
Tyree O. Minner
James A. Ti m m erm an

T h o m a s M. Hoenig
Richard K. Rasdall, Jr.

Ray L. Hunt
Patricia M. Patterson
Ron C. Helm
Lupe Fraga
Elizabeth Chu Richter

Richard W. Fisher
Helen E. Holcomb

George M. Scalise
David K.Y. Tang
James L. Sanford
James H. Rudd
H. Roger Boyer
Mic R. Dinsmore

Janet L. Yellen
John F. Moore

RICHMOND
Baltimore
Charlotte
ATLANTA
Birmingham
Jacksonville
Miami
Nashville
New Orleans

23261
21203
28230
30309
35242
32231
33178
37203
70161

CHICAGO*

60690

Detroit

48231

ST. LOUIS

63166

Little Rock
Louisville
Memphis

72203
40202
38101

MINNEAPOLIS

55480

Helena
KANSAS CITY
Denver
Oklahoma City
Omaha
DALLAS
El Paso
Houston
San Antonio
SAN F R A N C I S C O *
Los Angeles
Portland
Salt Lake City
Seattle

59601
64198
80217
73125
68103
75265
79901
77252
78295
94120
90051
97208
84130
98124

Barbara B. Henshaw
Robert B. Schaub

David E. Beck 1
Jeffrey S. Kane 1
James M. M c K e e 1
Lee C. Jones
Christopher L. Oakley
Juan Del Busto
Melvyn K. Purcell 1
Robert J. Musso 1

Glenn Hansen 1

Robert A. H o p k i n s 4
Maria Gerwing H a m p t o n 4
Martha Perine B e a r d 4

Samuel H. Gane

Pamela L. Weinstein
D w a y n e E. Boggs
Kevin A. Drusch

Robert W. Gilmer 3
Robert Smith III 1
D. Karen Diaz 3 ' 5

Mark L. Mullinix 2
Mary Lee 3 ' 4
Andrea P. Wolcott
Mark Gould 1

' A d d i t i o n a l o f f i c e s of these B a n k s are located at W i n d s o r L o c k s , C o n n e c t i c u t 0 6 0 9 6 ; East R u t h e r f o r d , N e w Jersey 0 7 0 7 3 ; Utica at Oriskany, N e w York 13424;
C o l u m b u s , O h i o 4 3 2 1 6 ; D e s M o i n e s , I o w a 5 0 3 2 1 ; M i d w a y at B e d f o r d Park, Illinois 6 0 6 3 8 ; P h o e n i x , A r i z o n a 85073.
1.
2.
3.
4.
5.

Senior Vice President
E x e c u t i v e V i c e President
Acting
Senior Branch Executive
Assistant V i c e P r e s i d e n t

International Journal of Central Banking

The International Journal of Central Banking (IJCB), a new quarterly publication
jointly sponsored by the world's major central banks (including the G-10 central
banks, the European Central Bank, and the Bank for International Settlements)
as well as many emerging-market central banks, seeks submissions for its
2006 issues.
The editors are soliciting manuscripts of high analytical quality on the theory
and/or practice of central banking, with special emphasis on research bearing
on monetary and financial stability.

Topic areas of published research will include but not
be limited to macroeconomics, monetary economics,
econometric modeling, finance and capital markets, banking
and financial intermediation, the analysis of payments
systems, prudential regulation and supervision, issues
relating to domestic and international financial stability, and
international finance more generally.

For complete submission guidelines, visit http://www.ijcb.org or e-mail
editor@ijcb.org for more information.
Editor: John Taylor, Stanford University
Co-editors: Hyun Shin, London School of Economics, Frank Smets, European Central Bank;
Kazou Ueda, Bank of Japan: Michael Woodford, Columbia University

544

Index to Volume 91
Pages
A M E R , H o w a r d A., D e p u t y Associate Director, Division of
B a n k i n g Supervision and Regulation, retirement
47
A n t i - m o n e y - l a u n d e r i n g manual, outreach events
4 0 8 , 409, 4 1 2
Articles
Background on F O M C meeting minutes
175-79
C o m m u n i t y b a n k s and rural development: Research
relating to proposals to revise the regulations that
i m p l e m e n t the C o m m u n i t y Reinvestment Act
202-35
Fair value accounting
26-29
Indexes of the foreign exchange value of the dollar
1-8
Industrial production and capacity utilization:
T h e 2004 annual revision
9-25
Monetary policy reports to the Congress
117-42, 3 1 9 - 4 3
New i n f o r m a t i o n reported under H M D A and its
application in fair lending e n f o r c e m e n t
344-94
Profits and balance sheet d e v e l o p m e n t s at U.S.
c o m m e r c i a l banks in 2004
143-74
Recent d e v e l o p m e n t s in the credit card market and
the financial obligations ratio
473-86
Trends in the use of p a y m e n t instruments in the
United States
180-201
Ashton, R i c h a r d M., p r o m o t e d to deputy general counsel,
Legal Division
253
Asset-size e x e m p t i o n thresholds
38, 2 0 6 - 1 5
Automated c l e a r i n g h o u s e ( A C H ) p a y m e n t s or returns
183, 195
Automated teller m a c h i n e (ATM), disclosure requirements
494
Availability of F u n d s and Collection of Checks
(Reg. C C ) , check-processing operations,
amendments
2 4 1 - 4 2 , 243, 402, 4 9 5
Avery, Robert B., articles
202-35, 344-94
B A L A N C E sheet developments, commercial banks
146-55
Bank holding companies, proposed a m e n d m e n t
and revisions
37, 4 9 5 - 9 6
Bank H o l d i n g C o m p a n y Act of 1956, orders issued under
Associated B a n c - C o r p
507-13
Banco Bilbao Vizcaya Argentaria, S.A., Bilbao, Spain . . . 2 5 8 - 6 2
BancWest Corporation
51-63
Barclays, P L C , L o n d o n , England
48-51
Barclays B a n k , P L C , L o n d o n , England
48-51
Barclays G r o u p US, Inc
48-51
B N P Paribas, Paris, France
51-63
Capital City Bank
418-21
Capital City Bank Group, Inc
418-21
Capital O n e Financial Corporation
513-17
C-B-G, I n c
421-24
Citigroup, Inc
262-69
Colonial B a n c G r o u p , Inc., T h e
269-77
Fifth T h i r d B a n c o r p
63-74
Fifth Third Bank
63-74
Fifth T h i r d Financial Corporation
63-74
iTeam C o m p a n i e s , Inc
519-21
Park National Coiporation
97-99
P N C Financial Services Group, Inc., The
424-29
Republic B a n c o r p , Inc
429-31
Sixth Bancshares, Inc
517-19
S & T B a n c o r p , Inc
74-77
Toronto-Dominion Bank, T h e , Toronto, C a n a d a
277-84
Wachovia Corporation
77-97
Webster Financial Corporation
285-89
Wells F a r g o & C o m p a n y
431-38
Westamerica Bancorporation
289-95
Westamerica B a n k
289-95
Bank Holding Company Supervision Manual
247, 502—3
Banking industry
Profits and d e v e l o p m e n t s
155-62
U.S., reports on condition of
3 0 - 3 4 , 236—40, 3 9 5 - 9 9 , 4 8 7 - 9 2
Banking services, g u i d a n c e for m o n e y services businesses . . . 4 0 5 - 6
Bank Merger Act, order issued under, Citizens Bank, T h e .. 4 3 8 - 4 0

Pages
Bankruptcy A b u s e Prevention and C o n s u m e r Protection
Act of 2005
495
Bankruptcy Act, proposed a m e n d m e n t s to Truth
in Lending Act
495
Bank Secrecy Act/Anti-Money
Laundering Examination
Manual
408, 4 0 9 , 4 1 2
Bank transfer agents, emergency relief to those affected by
Hurricane Katrina
496
Basel Capital Accord (Basel I), proposed revisions to
497-98
Basel II, implementation and surveys
40, 244, 4 0 6 , 501
Bayard, Kimberly, articic
9-25
B e r n a n k e , Ben S., Chairman G r e e n s p a n ' s statement regarding
appointment
493
Bernard, N o r m a n d R.V., Special Assistant to the Board,
Division of Monetary Affairs, retirement
46
Bettge, Paul W., promoted to senior associate director,
Division of Reserve Bank Operations and Payment
Systems
252
Biern, Herbert A., Senior Associate Director, Division of
B a n k i n g Supervision and Regulation, retirement
416
Bies, G o v e r n o r Susan Schmidt, article
26-29
Board of Governors
C o n s u m e r Advisory Council
Meetings
249, 4 1 3 , 504
M e m b e r s and officers, appointments
44-46
N o m i n a t i o n s for appointments requested
413-14
C o n s u m e r and C o m m u n i t y Affairs, Division of,
new structure
252
Discount rate meetings, minutes, and
actions
43, 249, 413, 494, 5 0 4
Financial education project with U S A Today
413
Greenspan, Chairman Alan
Ben S. Bernanke, statement on appointment of
493
Donald L. Kohn named designee
493
W i m Duisenberg, statement regarding
400
Members
Bies, G o v e r n o r Susan Schmidt, article
26-29
Gramlich, Edward M., resignation
400
LaWare, John P., passing
35
M e m b e r s h i p history
300-302, 455-57
Official staff changes
Amer, Howard A
47
Ashton, Richard M
253
Bernard, N o r m a n d R.V.
46
Bettge, Paul W.
252
Biern, Herbert A
416
Buckley, Kenneth D
252
Chanin, Leonard
505-6
C o l e m a n , Elizabeth A
46
Cringoli, Michael S
417
Ettin, Edward C
416
Evans, Gregory L
252
Fallon, Kieran J
253
Froehlich, Laurence A
46
Gross, Brian J
506
Hayes, Joseph H., Jr
505
Houpt, James V.
417
Hurt, Adrienne D
251-52
Johnsen, Mary T.
251
Killian, Suzanne G
251
Kwast, Myron L
416
LaChapelle, Dorothy
252
Lambert, Michael J
252-53
Lumsdaine, Robin L
416
Maith, Sheila F.
505-6
Marquardt, Jeffrey C
252
Martin, Stephanie
253
McNulty, Irene Shawn
252, 417
Meyer, Stephen H
253

545

Pages
Board of G o v e r n o r s — C o n t i n u e d
Official staff c h a n g e s — C o n t i n u e d
Misback, A n n E
Mitchell, W i l l i a m L
O ' D a y , Kathleen M
Parkinson, Patrick M
Passmore, S. W a y n e
Prager, R o b i n A
Pribble, R o b e r t M
Pricc, T o n d a E
Roberts, S t e v e n M
Robinson, Patricia A
Rosen, Jill R
Schneider, William C., Jr
S h a c k - M a r q u e z , Janice
Shanks, M a r g a r e t M
Walton, J a c k K„ II
Wheatlcy, Katherine H
White, Patricia A
Thrift Institutions Advisory Council
Web site i m p r o v e m e n t s
Buckley, K e n n e t h D., promoted to associate director,
Division o f Reserve Bank Operations and P a y m e n t
Systems
Business f i n a n c e
125-28,
Business sector, loans and developments
1 2 5 - 2 8 , 146,

253
46
253
416
416
416
254
251
253-54
253
506
505
416
254
252
253
416
43-44
248-49

252
325-28
325-28

C A L L Report M o d e r n i z a t i o n Project
244
C A M E L S ratings, disclosure restrictions
246
Canner, Glenn B., articles
202-35, 344-94
Capacity utilization (See Industrial production and capacity
utilization)
Capital, c o m m e r c i a l b a n k s
152
Capital, risk-based, modifications
501-2
Capital f r a m e w o r k , revisions
497-98
Cash, use of in United States
195-96
Cash structure, Federal Reserve Bank changes in
404
Central Data Repository ( C D R )
244, 4 0 7 - 8
Chanin, L e o n a r d , appointed associate director, Division of
C o n s u m e r and C o m m u n i t y Affairs
505-6
C h e c k - p r o c e s s i n g operations
Availability of Funds and Collection of C h e c k s
(Reg. C C )
2 4 1 - 4 2 , 243, 402, 495
Electronic
40
Federal R e s e r v e Banks
403^t
Checks, use of in United States
181-83, 194
Coleman, Elizabeth A., Assistant Inspector General, Office of
Inspector General
46
Commercial and industrial loans
160
Commercial Bank Examination
Manual
42-43, 410-12
Commercial banks
Balance sheet d e v e l o p m e n t s
146-55
Capital
152
Derivatives transactions
153-55
Income and expenses, tables
164-74
Interest, i n c o m e and expense
156-58
International operations
162
Liabilities
151-52
Loans and p e r f o r m a n c e
146, 147-51, 151, 159-61,
165-69, 1 7 5 - 7 9
Non-interest-bearing instruments
173, 1 7 4 - 7 5
Profitability
155-62
Securities holdings
151
Securitized loans
161
C o m m e r c i a l credit exposures, proposal for
classification of
246-47
C o m m e r c i a l real estate loans
148, 149, 160
C o m m u n i t y b a n k s and rural development: Research relating
to proposals to revise the regulations that implement
the C o m m u n i t y Reinvestment Act, article
202-35
Community development
2 1 5 - 3 5 , 242
C o m m u n i t y Reinvestment Act
2 0 2 - 6 , 242, 246, 4 0 8
Condition of U.S. Banking Industry
3 0 - 3 4 , 236^40,
395-99, 487-92
C o n s u m e r Advisory Council
Meetings
249, 413, 5 0 4
M e m b e r s and officers, appointments
44^16
Nominations for appointments requested
413-14

Pages
C o n s u m e r and C o m m u n i t y Affairs, Division of,
new structure
252
C o n s u m e r information, disposal of
41-42
C o n s u m e r spending
121-23, 322
C o o k , Robert E., article
344-94
C o r p o r a t e profits
126-28, 3 2 7 - 2 8
Credit card
Holders
475-77
Interest rates
477-78, 481-82
Market d e v e l o p m e n t s
474-80
Payment methods
184, 4 7 8 - 8 0
Credit card market and the financial obligations ratio,
article
473-86
Credit eligibility, rules on use of medical information
407
Credit quality, i m p r o v e m e n t in
500
Cringoli, Michael S., appointed assistant director, Division of
R e s e a r c h and Statistics
417
Currency weights, revision of
8
C u s t o m e r information breaches, guidance on response
programs
246
Czerwinski, Henry, F o r m e r First Vice President, Kansas City
Federal Reserve Bank, passing
244
D A N K E R , Deborah J., article
175-79
Debit card p a y m e n t s in the United States
183-84
Debt, b a n k credit, and M 2
138, 3 3 9
Debt and financial intermediation
338
Debt service ratio (DSR)
473-74
Depository institutions
Assistance to displaced customers
499-500
E x e m p t i o n thresholds
38, 2 0 6 - 1 5
Municipal securities services by Federal Reserve Banks
243
Payments and withdrawals f r o m
185-95
Private-sector adjustment factor, modifications to
498
Reserve requirement exemption a m o u n t for 2 0 0 6
497
Derivatives transactions
153-55
Disclosure tables; changes to
37-38
Discount rate
Approvals of actions
43, 4 9 4
Meetings, minutes of
43, 249, 413, 5 0 4
Distressed nonmetropolitan m i d d l e - i n c o m e geographies,
list available
499
Duisenberg, W i m , statement on
400
E C O N O M I C developments, by sector
Business
125-28, 3 2 5 - 2 8
Financial markets
136-39, 3 3 6 - 3 9
Foreign
130-32, 139-42, 3 3 1 - 3 3 , 3 4 0 ^ 3
Government
128-30, 3 2 8 - 3 1
Household
121-25, 3 2 2 - 2 5
Labor
132-34, 3 3 3 - 3 5
Prices
134-36, 3 3 5 - 3 6
Productivity
132-34, 3 3 5 - 3 6
E c o n o m y , emerging-markets, d e v e l o p m e n t s
142, 3 4 2
E c o n o m y , U.S.
D e v e l o p m e n t s in 2004 and 2005
120-46, 3 2 1 - 4 3
M o n e t a r y policy reports
117-42, 3 1 9 - 4 3
Projections for 2005 and 2 0 0 6
120, 321
Electronic benefits transfer p a y m e n t s in the United States
185
Electronic check payments
40-41
Electronic Fund Transfers (Reg. E)
494
Employment
132-34, 3 3 3 - 3 4
E n f o r c e m e n t actions (See Litigation, Final enforcement
decisions issued by Board of G o v e r n o r s )
Equity markets
138, 338
Ettin, E d w a r d C., Deputy Director, Division of Research and
Statistics, retirement
416
Evans, Gregory L., appointed assistant director, Division
of Reserve Bank Operations and P a y m e n t Systems
252
Examiners, post-employment restrictions
409
E x c h a n g e rate indexes, p e r f o r m a n c e of
6-8
FACT Act (Fair and Accurate Transactions Act of 2003),
rules for use of medical information
407
Fair lending e n f o r c e m e n t and H M D A information, article .. 3 4 4 - 9 4
Fair value accounting, article
26-29
Fallon, Kieran J., appointed assistant general counsel,
Legal Division
253
Federal g o v e r n m e n t , e c o n o m i c developments
128-30, 3 2 8 - 3 1

546

Federal Reserve Bulletin

Autumn 2005

Pages
Federal O p e n Market C o m m i t t e e
History of minutes, article
175-79
Minutes
43, 413, 5 0 3 - 4
Schedule for 2 0 0 6
401, 4 9 3
Statements
35, 241, 400, 4 9 3
Federal R e s e r v e Act, order issued under, R B C Centura
100-101
Federal R e s e r v e Banks
Cash structure, c h a n g e s in
404
Check-processing operations
2 4 1 - 4 2 , 243, 402, 403^1, 495
C/.erwinski, Henry, F o r m e r First Vice President,
Kansas City Federal Reserve Bank, passing
244
Fee schedules for priced services
36-37, 498-99
Fisher, Richard W., appointed president, Federal Reserve
Bank of Dallas
38-39
Income
figures
39
Municipal securities service
243
Federal Reserve Bulletin, change in publishing format . . . . 503, 531
Federal R e s e r v e System, financial education web site
redesign
410
Fees for Federal Reserve Bank payment services
36-37, 498-99
Finance
124-25, 1 2 6 - 2 8
Financial account, U.S
132, 332
Financial education
410, 4 1 3
Financial institutions, restictions on release of supervisory
( C A M E L S ) ratings
246
Financial intermediation, debt and
338
Financial markets, e c o n o m i c d e v e l o p m e n t s
120, 136-39,
321-22, 336-39
Financial obligations ratio (FOR)
473-74, 480-81
Fisher, Richard W., appointed president, Federal Reserve
Bank of Dallas
38-39
Fixed investments
125, 3 2 5 - 2 6
F O M C (See Federal Open M a r k e t C o m m i t t e e )
Foreign e x c h a n g e value of the dollar, indexes of, article
1-9
Foreign sector, e c o n o m i c d e v e l o p m e n t s
1 3 0 - 3 2 , 139—42,
331-33, 340-43
Froehlich, Laurence A., Assistant Inspector General,
Office of Inspector General
46
G E R D E S , G e o f f r e y R., article
180-201
Gilbert, Charles, article
9-25
G o v e r n m e n t sector, e c o n o m i c d e v e l o p m e n t s
128-30, 3 2 8 - 3 1
Gramlich, G o v e r n o r E d w a r d M., resignation
400
Greenspan, C h a i r m a n Alan
Ben S. B e r n a n k e , appointed new C h a i r m a n
493
Donald L. Kohn n a m e d designee
493
Wim Duisenberg, statement on
400
Gross, Brian J., appointed special assistant to the Board,
Office of Board M e m b e r s
506
H A Y E S , Joseph H., Jr., passing
505
H M D A and its application in fair lending enforcement,
article
344-94
H o m e equity lending, guidance on risk m a n a g e m e n t
406
H o m e M o r t g a g e Disclosure Act ( H M D A ) data
247, 3 4 4 - 9 4
H o m e M o r t g a g e Disclosure (Reg. C)
37, 38, 3 4 5 - 5 2
H o m e m o r t g a g e disclosure requirements
345-52, 403
H o m e O w n e r s h i p and Equity Protection Act
(HOEPA)
350,371-72,392
Host state loan-to-deposit ratios
408
Houpt, J a m e s V., Associate Director, Division of Banking
Supervision and Regulation, retirement
417
Household sector
Economic developments
121—25, 3 2 2 - 2 5
Finance
124-25, 3 2 5
Loans
147-51, 160
Hurricanes, Katrina and Rita, proposal and guidance
to banking organizations
496-97, 499-500
Hurt, A d r i e n n e D., Associate Counsel and Adviser,
Division of C o n s u m e r and C o m m u n i t y Affairs
251-52
I M P O R T developments
Income, c o m m e r c i a l banks, Federal Reserve Banks
Index, foreign exchange value of the dollar, article
Industrial economies, d e v e l o p m e n t s
Industrial production and capacity utilization
Annual revision, 2004, article
Capacity and capacity utilization
Industrial production

130-32, 3 3 1 - 3 2
39, 1 6 4 - 7 4
1-8
141-42, 3 4 1 ^ 1 2
9-25
13-14
11-13

Pages
Industrial p r o d u c t i o n — C o n t i n u e d
Posting of G.17 statistical release
42, 2 4 9
Revision results
10-14
Tables
19-25
Technical aspects of the revision
14-18
Interagency
Guidance on Response Programs for Unauthorized
Access to Customer Information
and Customer Notice
246
Interest, income and expense, c o m m e r c i a l banks . . . 1 5 6 - 5 8 , 1 8 1 - 9 1
Interest rates, credit cards
477-78, 481-82
Interest rates, financial m a r k e t s
137-38, 3 3 7 - 3 8
International Banking Act of 1978, orders issued u n d e r
A o z o r a Bank, Ltd., T o k y o , Japan
441-42
B a n c o del Estado de Chile, Santiago, Chile
442^14
B a n c o Financiera C o m e r c i a l H o n d u r e n a , S.A.,
Tegucigalpa, H o n d u r a s
444-46
N a t i o n a l Financiera, S.N.C., M e x i c o City, M e x i c o
295-97
International
Convergence
of Capital Measurement
and
Capital Standards: A Revised Framework
(Basel II)
40, 244, 406, 5 0 0 - 5 0 1
International
Journal of Central Banking
410
International monetary policy d e v e l o p m e n t s
139-42, 3 4 0 - 4 3
International operations, U.S., c o m m e r c i a l banks
162
International sector, e c o n o m i c d e v e l o p m e n t s
130-32, 1 3 9 - 4 2 ,
331-33, 340-43
International trade
130-32, 3 3 1 - 3 2
Inventory investments
125-26, 326
Investments
Fixed
125, 3 2 5 - 2 6
Inventory
125-26, 326
Residential
123, 3 2 3 - 2 4
J O H N S E N , Mary T., appointed associate director, Division of
C o n s u m e r and C o m m u n i t y Affairs
251
Johnson, Kathleen W., article
473-86
K I L L I A N , S u z a n n e G., appointed assistant director,
Division of C o n s u m e r and C o m m u n i t y Affairs
Klee, Elizabeth C , article
Kohn, Donald L., n a m e d C h a i r m a n ' s d e s i g n e e
Kwast, Myron L., p r o m o t e d to senior associate director,
Division of Research and Statistics

251
143-74
493
416

L A B O R costs and markets, e c o n o m i c
developments
132-34, 3 3 3 - 3 5
LaChapelle, Dorothy, promoted to deputy associate director,
Division of Reserve Bank O p e r a t i o n s and P a y m e n t
Systems
252
Lambert, Michael J., appointed assistant director, Division of
Reserve Bank Operations and P a y m e n t S y s t e m s
252-53
LaWare, John P., passing
35
Legal developments (See Bank Holding C o m p a n y Act of 1956,
orders issued under; Bank M e r g e r Act, order issued under;
Federal Reserve Act, order issued under; International
Banking Act of 1978, orders issued under; l i t i g a t i o n )
Liabilities of, commercial banks
151-52
Litigation
Cease and desist orders issued by Board of G o v e r n o r s
A m e r i b a n c Holdings, Inc
46
B a n c o de Chile, Santiago, Chile
250
Darden, T h o m a s C
46
Eagle National Holding C o m p a n y
250
Eighteen former institution-affiliated parties of First
Western Bank
415
French, Frank
415
Riggs Bank, N.A
250
Riggs International Banking Corporation
250
Riggs National Corporation
250
Stromgren, M a t t h e w T
415
Civil money penalties
T h e Bank
414
Bank of Pontiac
414
C u m b e r l a n d Bank
46
First Bank and Trust C o m p a n y
414
First Interstate Bank
249
Five Points Bank
46
French, Frank
415
Frontier Bank
414
H o m e F e d e r a l Bank
250
Irwin Union Bank
414

Index to Volume 91

Pages
Litigation—Continued
Civil money penalties—Continued
Midwest BankCentre
250
Security Bank
414
Final enforcement decisions issued by Board of Governors
Bonetti, Brian
504, 5 2 1 - 2 2
Buckley, Forrest
446-52
Cleveland, Walter C
504, 5 2 3 - 2 5
Coleman, Kenneth L
297-99
Crowe, J a m e s C
446-52
Eighteen f o r me r institution-affiliated parties of First
Western Bank
415
Guinn, Harper
446-52
Guinn, Jeff
446-52
Jones, Johnny V.
446-52
Kushner, Charles
244-45
McKinney, Donald K
415, 4 5 3 - 5 4
Mellon Bank, N.A
297-99
NorCrown Trust
244-45, 249
Phillips, Herbert
446-52
Phillips, Lloyd
446-52
Phillips, Rhonda
446-52
Phillips, R . L
446-52
Phillips, Stanley
446-52
Thomas, Carl V.
415, 4 4 6 - 5 2
Thomas, E v a June
446-52
Thomas, Marguerite
446-52
Thomas, Mary Beth
446-52
Thomas, Stephen P.
446-52
Tomlinson, Charles
446-52
Ward, A n g e l a
446-52
Ward, Scott
446-52
Orders of prohibition
Bonetti, Brian
504, 5 2 2 - 2 3
Caton, Frank G
415
Cleveland, Walter C
504, 525
Coleman, Kenneth L
249
Faris, Jessica
504
Kahler, William R
504
McKinney, Donald K
415, 4 5 2 - 5 4
Milmine, Stephanie
415
Stromgren, Matthew T.
415
Thomas, Carl V.
415, 452
Walder, Hanspeter
504
Peyrelevade, Jean, motions for interlocutory
review
525-27, 5 2 7 - 3 0
Termination of enforcement actions issued by Board of
Governors
AmericasBank
505
AmericasBank Corporation
505
Banco Atlantico, S.A., Barcelona, Spain
251
Banco Atlantico, S.A. New York Agency
251
B A N K F I R S T Corporation
251
Bank of the Orient
415
Citizens Deposit Bank and Trust Company
251
First Midwest Bank
505
First State Bank of Warner
505
Gold Bank
415
Independent Southern Bancshares, Inc., Employee Stock
Ownership Trust
251
Metamora Bancorp, Inc
251
Metamora State Bank, The
251
Midwest Banc and Trust Company
505
Midwest Banc Holdings, Inc
505
Ridgedale State Bank
505
Rurban Financial Corp
251
Southern Commercial Bank
251
Written agreements approved by Federal Reserve Board
Asian Bank
250
Banco Industrial de Venezuela, C.A., Caracas, Venezuela . 415
Banco Industrial de Venezuela, C.A., Miami Agency
415
Banco Industrial de Venezuela, C.A., N e w York Agency .. 415
Bank of America Corporation
250
Civitas BankGroup, Inc
414
Collier, William J
46
Deutsche Bank Trust Company Americas
505
First Citizens Bank of Butte
415
Huntington Bancshares, Incorporated
251
NorCrown Trust
245

547

Pages
Litigation—Continued
Written agreements—Continued
Prineville Bancorporation
46
Reese, Jesse L
46
Surety Capital Corporation
505
Liu, May X, article
180-201
Loans
Business
146
Commercial and industrial
146, 160
Commercial bank
146-51
Commercial real estate
148, 149, 160
Household
147-51, 160
Loss provisions for
161
Mortgage, data on
344-94
Performance of
159-61
Pricing of
363-71
Securitized
161
Loretan, Mico, article
1-9
Luecke, Matthew M., article
175-79
Lumsdaine, Robin L., appointed associate director, Division
of Banking Supervision and Regulation
416
MAITH, Sheila F., appointed associate director, Division of
Consumer and Community Affairs
505-6
Major currencies index, dollar value
5-6
Marquardt, Jeffrey C., promoted to deputy director, Division
of Reserve Bank Operations and Payment Systems
252
Martin, Stephanie, appointed associate general counsel,
Legal Division
253
McNulty, Irene Shawn, Senior Adviser, Division of
Consumer and Community Affairs
2 5 1 - 5 2 , 417
Medical information, rules on use of for credit eligibility
407
Membership of the Board of Governors,
historical list
300-302, 455-57
Meyer, Stephen H., appointed assistant general counsel,
Legal Division
253
Misback, Ann E., promoted to associate general counsel,
Legal Division
253
Mitchell, William L., Assistant Inspector General, Office of
Inspector General
46
Mok, Shannon C., article
202-35
Monetary aggregates (M2)
138, 339
Monetary policy, reports to the Congress
117-42, 3 1 9 - 4 3
Money services business, guidance for banks
405-6
Money stock data, revision
254-57
Mortgage loans, reporting requirements
3 4 4 - 9 4 , 403
NATAL.UCCI, Fabio M „ article
143-74
New information reported under H M D A and its application
in fair lending enforcement, article
344-94
Non-interest-bearing instruments
173, 174-75
Non-interest income, commercial banks
158
O'DAY, Kathleen M., promoted to deputy general counsel,
Legal Division
Open-end credit rules, Reg. Z
Overdraft protection programs, guidance on

253
36
245-46

PARKE, Darrel W„ article
180-201
Parkinson, Patrick M., promoted to deputy director, Division
of Research and Statistics
416
Passmore, S. Wayne, promoted to deputy associate director,
Division of Research and Statistics
416
Payment instruments in the United States
180-201
Payments system risk, policy statement changes
37
Post-employment restrictions for senior examiners
409
Prager, Robin A., appointed assistant director, Division of
Research and Statistics
416
Pribble, Robert M., appointed special assistant to the Board,
Office of Board Members
254
Price, Tonda E., promoted to associate director, Division of
Consumer and Community Affairs
251
Prices, economic developments
134-36, 3 3 5 - 3 6
Private-sector adjustment factor, modification
498
Production (See Industrial production and capacity utilization)
Productivity, economic developments
132-34, 334
Profits, corporate
126-28, 3 2 7 - 2 8
Profits and balance sheet developments at U.S. commercial
banks in 2004, article
143-74

548

Federal Reserve Bulletin : Autumn 2005

Pages
Profits at c o m m e r c i a l banks
155-62
Publications
Bank Holding Company Supervision Manual
247, 5 0 2 - 3
Bank Secrecy Act/Anti-Money
Laundering
Examination
Manual
408, 409, 4 1 2
Commercial Bank Examination
Manual
42-43, 410-12
Federal Reserve Bulletin, c h a n g e in publishing format .. 503, 531
International
Journal of Central Banking
410
R E A L estate loans, commercial
160
Recent d e v e l o p m e n t s in the credit card market and the
financial obligations ratio, article
473-86
Regulations, Board of G o v e r n o r s
C, H o m e M o r t g a g e Disclosure
37-38, 345-52
E, Electronic Fund T r a n s f e r s
494
Z, Truth in Lending
36, 4 9 4 - 9 5
CC, Availability of Funds and Collection
of C h e c k s
2 4 1 - 4 2 , 243, 402, 4 9 5
DD, Truth in Savings
402
Reports on the condition of the U.S. banking
industry
30-34, 236-40,
395-99, 487-92
Reserve requirement a d j u s t m e n t for 2 0 0 6
497
Residential investments
123-24, 3 2 3 - 2 4
Return on capital, imputing method
403
Risk-based capital modifications
501-2
Roberts, Steven M., appointed adviser, Division of B a n k i n g
Supervision and Regulation
253-54
Robinson, Patricia A., appointed assistant general counsel,
Legal Division
253
Rosen, Jill R., appointed assistant director, Division of
I n f o r m a t i o n Technology
506
S C H N E I D E R , William C., Jr., promoted to deputy associate
director, Division of Banking Supervision and
Regulation
Securities
Definitive municipal, proposed discontinuation of Federal
R e s e r v e Bank services to depository institutions
Holdings of
151,
Trust preferred

505

243
169
243

Pages
Senior examiners, p o s t - e m p l o y m e n t restrictions
409
S b a c k - M a r q u e z , Janice, p r o m o t e d to deputy associate director,
Division of Research and Statistics
416
Shanks, M a r g a r e t M., p r o m o t e d to associate secretary of
the Board, Office of the Secretary
254
Shared National Credit Review, data collection
41, 245
Sokolov, D a n S., article
202-35
State g o v e r n m e n t s , e c o n o m i c d e v e l o p m e n t s
130, 330
Supervisory ratings, financial institutions, restrictions
on release of
246
T H R I F T Institutions A d v i s o r y Council (TIAC), n e w
m e m b e r s , officers, and appointments
Trust preferred securities, final rule
Truth in L e n d i n g Act, a m e n d m e n t s related to
Bankruptcy Act
Truth in L e n d i n g (Reg. Z )
Truth in Savings (Reg. D D )
U N D E R S E R V E D nonmetropolitan m i d d l e - i n c o m e
geographies, list available
Unemployment
U.S. c o m m e r c i a l banks, profits and balance sheet
developments, article

43-44
243
495
36, 4 9 4 - 9 5
402

499
132-34, 3 3 3 - 3 4
143-74

WALTON, Jack K., II, p r o m o t e d to associate director,
Division of R e s e r v e Bank Operations and P a y m e n t
Systems
252
Web-based Central Data Repository ( C D R )
244, 4 0 7 - 8
Web sites
Call Report M o d e r n i z a t i o n project
244
Federal Reserve Board
248-49
Wheatley, Katherine II., promoted to associate general
counsel, Legal Division
253
White, Patricia A., p r o m o t e d to associate director,
Division of Research and Statistics
416

549

Publications of Interest
STATISTICAL SUPPLEMENT TO THE
FEDERAL RESERVE BULLETIN
The Statistical
Supplement
to the Federal Reserve
Bulletin is a continuation of the Financial and Business
Statistics section that appeared in each m o n t h ' s issue of
the Federal Reserve Bulletin.
Published monthly, the Statistical
Supplement
is
designed as a compact source of e c o n o m i c and financial
data. All statistical series are published with the s a m e
frequency that they had in the Bulletin, and the numbering system for the tables remains the same.
FINANCIAL
DOMESTIC

AND BUSINESS
FINANCIAL

Subscriptions for the monthly Statistical Supplement
are available. For subscription i n f o r m a t i o n contact
Publications Fulfillment at (202) 452-3245, or send an
e-mail to publications-bog@frb.gov.
T h e statistical tables included in the Statistical
Supplement are listed below.

STATISTICS

STATISTICS

Money Stock and Bank Credit
Reserves and money stock measures
Reserves of depository institutions and Reserve Bank credit
Reserves and borrowings—Depository institutions
Policy Instruments
Federal Reserve Bank interest rates
Reserve requirements of depository institutions
Federal Reserve open market transactions
Federal Reserve Banks
Condition and Federal Reserve note statements
Maturity distribution of loans and securities
Monetary and Credit Aggregates
Aggregate reserves of depository institutions and monetary base
Money stock measures
Commercial Banking Institutions—Assets
and Liabilities
All commercial banks in the United States
Domestically chartered commercial banks
Large domestically chartered commercial banks
Small domestically chartered commercial banks
Foreign-related institutions
Financial Markets
Commercial paper outstanding
Prime rate charged by banks on short-term business loans
Interest rates—Money and capital markets
Stock market—Selected statistics

Consumer Credit
Total outstanding
Terms
Flow of Funds
Funds raised in U.S. credit markets
Summary of financial transactions
Summary of credit market debt outstanding
Summary of financial assets and liabilities
DOMESTIC
Selected

NONFINANCIAL

STATISTICS

Measures

Output, capacity, and capacity utilization
Industrial production—Indexes and gross value
INTERNATIONAL

STATISTICS

Summary Statistics
U.S. international transactions
U.S. reserve assets
Foreign official assets held at Federal Reserve Banks
Selected U.S. liabilities to foreign official institutions
Reported by Banks in the United States
Liabilities to, and claims on, foreigners
Liabilities to foreigners
Banks' own claims on foreigners
Banks' own and domestic customers' claims on foreigners
Reported by Nonbanking
Liabilities to foreigners
Claims on foreigners

Business Enterprises

in the United States

Federal Finance
Federal debt subject to statutory limitation
Gross public debt of U.S. Treasury—Types and ownership
U.S. government securities dealers—Transactions
U.S. government securities dealers—Positions and financing
Federal and federally sponsored credit agencies—Debt outstanding

Securities Holdings and Transactions
Foreign transactions in securities
Marketable U.S. Treasury bonds and notes—Foreign transactions

Securities Markets and Corporate Finance
New security issues—Tax-exempt state and local governments and
U.S. corporations
Open-end investment companies—Net sales and assets
Domestic finance companies—Assets and liabilities
Domestic finance companies—Owned and managed receivables

SPECIAL TABLES—Data Published

Real Estate
Mortgage m a r k e t s — N e w homes
Mortgage debt outstanding

Interest and Exchange Rates
Foreign exchange rates
Irregularly

Assets and liabilities of commercial banks
Terms of lending at commercial banks
Assets and liabilities of U.S. branches and agencies of foreign banks
Residential lending reported under the Home Mortgage Disclosure Act
Disposition of applications for private mortgage insurance
Small loans to businesses and farms
Community development lending reported under the Community
Reinvestment Act

550

Federal Reserve Bulletin • A u t u m n 2 0 0 5

Publications of Interest
FEDERAL RESERVE

REGULATORY

SERVICE

To p r o m o t e public understanding of its regulatory f u n c tions, the Board publishes the Federal Reserve Regulatory Service, a f o u r - v o l u m e loose-leaf service containing all Board regulations as well as related statutes,
interpretations, policy statements, rulings, and staff
opinions. For those with a m o r e specialized interest in
the B o a r d ' s regulations, parts of this service are published separately as h a n d b o o k s pertaining to monetary
policy, securities credit, consumer affairs, and the payment system.
These publications are designed to help those w h o
must frequently refer to the B o a r d ' s regulatory materials. They are updated monthly, and each contains citation indexes and a subject index.
The Monetary
Policy and Reserve
Requirements
Handbook
contains Regulations A, D, and Q, plus
related materials.
The Securities Credit Transactions
Handbook
contains Regulations T, U, and X, which deal with extensions of credit for the purchase of securities, and related
statutes, Board interpretations, rulings, and staff opinions. Also included is the B o a r d ' s list of foreign margin
stocks.
The Consumer
and Community
Affairs Handbook
contains Regulations B, C, E, G, M, P, Z, AA, BB, and
DD, and associated materials.

GUIDE

The Payment System Handbook deals with expedited
f u n d s availability, check collection, wire transfers, and
risk-reduction policy. It includes Regulations CC, J, and
EE, related statutes and c o m m e n t a r i e s , and policy
statements on risk reduction in the payment system.
For domestic subscribers, the annual rate is $ 2 0 0 for
the Federal Reserve Regulatory
Service and $75 for
each h a n d b o o k . For subscribers outside the United
States, the price including additional airmail costs is
$ 2 5 0 for the service and $90 for each handbook.
The Federal Reserve Regulatory Service is also available on C D - R O M for use on personal computers. For a
standalone PC, the annual subscription fee is $300. For
network subscriptions, the annual fee is $300 for 1 concurrent user, $750 for a m a x i m u m of 10 concurrent
users, $2,000 for a m a x i m u m of 50 concurrent users,
and $3,000 for a m a x i m u m of 100 concurrent users.
Subscribers outside the United States should add $50
to cover additional airmail costs. For further information, call (202) 452-3244.
All subscription requests must be accompanied by a
check or m o n e y order payable to the Board of Governors of the Federal Reserve System. Orders should be
addressed to Publications Fulfillment, Mail Stop 127,
Board of Governors of the Federal Reserve System,
Washington, D C 20551.

TO THE FLOW OF FUNDS ACCOUNTS

A new edition of Guide to the Flow of Funds Accounts
is now available f r o m the Board of Governors. T h e new
edition incorporates changes to the accounts since the
initial edition was published in 1993. Like the earlier
publication, it explains the principles underlying the
flow of f u n d s accounts and describes h o w the accounts
are constructed. It lists each flow series in the B o a r d ' s
flow of f u n d s publication, " F l o w of Funds Accounts of
the United States" (the Z . l quarterly statistical release),

and describes how the series is derived f r o m source
data. The Guide also explains the relationship between
the flow of f u n d s accounts and the national income and
product accounts and discusses the analytical uses of
flow of funds data. T h e publication can be purchased,
for $20.00, f r o m Publications Fulfillment, Mail Stop
127, Board of Governors of the Federal Reserve System, Washington, D C 20551.

551

Federal Reserve Statistical Releases
Available on the Commerce Department's
Economic Bulletin Board
The Board of Governors of the Federal Reserve System makes some of its statistical releases available to
the public through the U.S. Department of Commerce's economic bulletin board. Computer access
to the releases can be obtained by subscription.

For further information regarding a subscription to
the economic bulletin board, please call (202) 4821986. The releases transmitted to the economic bulletin board, on a regular basis, are the following:

Reference
Number

Statistical release

Frequency of release

H.3

Aggregate Reserves

Weekly/Thursday

H.4.1.

Factors Affecting Reserve Balances

Weekly/Thursday

H.6

Money Stock

Weekly/Thursday

H.8

Assets and Liabilities of Insured Domestically Chartered
and Foreign Related Banking Institutions

Weekly/Monday

H.10

Foreign Exchange Rates

Weekly/Monday

H.15

Selected Interest Rates

Weekly/Monday

G.5

Foreign Exchange Rates

Monthly/end of month

G.17

Industrial Production and Capacity Utilization

Monthly/midmonth

G.19

Consumer Credit

Monthly/fifth business day

Z. 1

Flow of Funds

Quarterly


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102