Full text of Federal Reserve Bulletin : May 1993

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VOLUME 7 9 •

NUMBER 5 •

MAY 1993

FEDERAL RESERVE

BULLETIN

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM, WASHINGTON, D . C .
PUBLICATIONS COMMITTEE
Joseph R. Coyne, Chairman • S. David Frost • Griffith L. Garwood • Donald L. Kohn
• J. Virgil Mattingly, Jr. • Michael J. Prell • Richard Spillenkothen • Edwin M. Truman

The Federal Reserve Bulletin is issued monthly under the direction of the staff publications committee. This committee is responsible for opinions
expressed except in official statements and signed articles. It is assisted by the Economic Editing Section headed by S. Ellen Dykes, the Graphics
Center under the direction of Peter G. Thomas, and Publications Services supervised by Linda C. Kyles.




Table of Contents
379 U.S. INTERNATIONAL TRANSACTIONS
IN 1992
After declining in each of the previous four
years, the U.S. current account deficit widened
substantially in 1992. A larger merchandise
trade deficit and the end of cash contributions
by foreign governments to help finance the
Persian Gulf War accounted for most of the
change. The current account deficit was more
than matched by recorded net capital inflows,
and the statistical discrepancy in the U.S.
international transactions accounts was
negative.
389 INDUSTRIAL PRODUCTION AND
CAPACITY UTILIZATION
FOR FEBRUARY 1993
Industrial production rose 0.4 percent in February, for its fifth consecutive monthly gain.
Total industrial capacity utilization increased
0.2 percentage point, to 79.9 percent, the highest rate since September 1991.
392 STATEMENTS TO THE CONGRESS
David W. Mullins, Jr., Vice Chairman, Board
of Governors, discusses the credit crunch and
the availability of credit for small businesses,
and says that although loan demand should
revive and banks have ample liquidity to support increased lending, the Federal Reserve is
working actively to identify and eliminate any
unwarranted bank regulatory impediments to
business lending, before the Senate Committee on Small Business, March 4, 1993.
395 The presidents of the Federal Reserve District
Banks discuss regional economic and monetary conditions before the Senate Committee
on Banking, Housing, and Urban Affairs,
March 10, 1993: Richard F. Syron, President,
Boston Federal Reserve Bank; E. Gerald




Corrigan, President, New York Federal
Reserve Bank; Edward G. Boehne, President
Philadelphia Federal Reserve Bank; Jerry L.
Jordan, President, Cleveland Federal Reserve
Bank; J. Alfred Broaddus, Jr., President, Richmond Federal Reserve Bank; Robert P.
Forrestal, President, Atlanta Federal Reserve
Bank; Silas Keehn, President, Chicago Federal Reserve Bank; Thomas C. Melzer, President, St. Louis Federal Reserve Bank; Gary H.
Stern, President, Minneapolis Federal Reserve
Bank; Thomas M. Hoenig, President, Kansas
City Federal Reserve Bank; Robert D.
McTeer, Jr., President, Dallas Federal Reserve
Bank; Robert T. Parry, President, San Francisco Federal Reserve Bank.
464 Vice Chairman Mullins discusses legislative
initiatives concerning the government securities market and says that the apparatus of
reporting requirements in this market that
could be implemented under H.R.618 might
reduce the cost of investigating abuses and
facilitate enforcement, but could also boost
the cost of every trade and reduce the number
of market participants, before the Subcommittee on Telecommunications and Finance of the
House Committee on Energy and Commerce,
March 17, 1993.
466 John P. LaWare, member, Board of Governors, discusses regulatory burden and says
that this burden has become substantial, raising the costs of banking services, and that
what is needed is new approaches to regulation that are more sensitive to cost-benefit
trade-offs, before the Subcommittee on Commerce, Consumer, and Monetary Affairs of the
House Committee on Government Operations,
March 17, 1993.
469 William J. McDonough, Executive Vice President, Federal Reserve Bank of New York,
reviews the market surveillance activities of

the New York Reserve Bank and says that
over the past year efforts have been focused
on apparent shortages of specific Treasury securities and that the Bank will continue to pursue each incident of unusual market activity,
before the Subcommittee on Telecommunications and Finance of the House Committee on
Energy and Commerce, March 17, 1993.
471 Alan Greenspan, Chairman, Board of Governors, discusses the burgeoning federal budget
deficit, which on a cyclically adjusted or structural basis has hovered around 3 percent of
potential GDP for the past ten years, and says
that unless it is addressed, it will increasingly
threaten the stability of our economic system,
before the Senate Committee on Finance,
March 24, 1993.
473 Chairman Greenspan discusses the availability of bank credit to small businesses and says
that although there has been a substantial
tightening of lending terms and standards that
has affected small businesses, banks' attitudes
toward loans and risktaking are improving,
before the House Commitee on Small Business, March 25, 1993.
477 ANNOUNCEMENTS
Meeting of the Consumer Advisory Council.
New procedures for processing applications
filed by foreign banks.
Amendment to Regulation C.
Amendment to Regulation DD.

continue to depress the growth of the broad
measures of money in relation to income in
1993. The range for total domestic nonfinancial debt was left unchanged at 4V2 to 6V2 percent. In keeping with the Committee's usual
procedures under the Humphrey-Hawkins
Act, the ranges would be reviewed at midyear, or sooner if deemed necessary, in light
of the growth and velocity behavior of the
aggregates and ongoing economic and financial developments.
For the intermeeting period ahead, the
Committee adopted a directive that called for
maintaining the existing degree of pressure
on reserve positions and that did not include a
presumption about the likely direction of any
adjustment to policy over the intermeeting
period. Accordingly, in the context of the
Committee's long-run objectives for price stability and sustainable economic growth, and
giving careful consideration to economic,
financial, and monetary developments, the
directive indicated that slightly greater or
slightly lesser reserve restraint would be
acceptable during the intermeeting period.
The reserve conditions contemplated at this
meeting were expected to be consistent with
little change in the levels of M2 and M3 over
the two-month period from January through
March.
495 LEGAL DEVELOPMENTS
Various bank holding company, bank service
corporation, and bank merger orders; and
pending cases.

Changes in Board staff.
Publication of the 79th Annual Report, 1992
and Annual Report: Budget Review, 1992-93.

553 DIRECTORS OF FEDERAL RESERVE
BANKS AND BRANCHES
List of directors by Federal Reserve District.

479 MINUTES OF FEDERAL OPEN MARKET
COMMITTEE MEETING
At its meeting of February 2-3, 1993, the
Committee reduced its ranges for monetary
growth in 1993 by Vi percentage point to rates
of 2 to 6 percent for M2 and Vi to 4V2 percent
for M3. The reductions did not signal any
change in monetary policy but were technical
in nature and intended to take account of
ongoing developments that were expected to



A1 FINANCIAL AND BUSINESS STATISTICS
These tables reflect data available as of
March 26, 1993.
A3 GUIDE TO TABULAR PRESENTATION
A4 Domestic Financial Statistics
A44 Domestic Nonfinancial Statistics
A53 International Statistics

A69 GUIDE TO STATISTICAL RELEASES AND
SPECIAL TABLES

A90 FEDERAL RESERVE BOARD
PUBLICATIONS

A84 INDEX TO STATISTICAL TABLES

A92 MAPS OF THE FEDERAL RESERVE
SYSTEM

A86 BOARD OF GOVERNORS AND STAFF
A88 FEDERAL OPEN MARKET COMMITTEE
AND STAFF; ADVISORY COUNCILS




A94 FEDERAL RESERVE BANKS, BRANCHES,
AND OFFICES

U.S. International Transactions in 1992
William L. Helkie, of the Board's Division
International Finance, prepared this article.

of

After declining in each of the previous four years,
the U.S. current account deficit widened substantially in 1992. A larger merchandise trade deficit
and the end of one-time cash contributions by
foreign governments associated with the Persian
Gulf War accounted for most of the change. Excluding the change in foreign cash transfers, the current
account deficit increased somewhat less than the
trade deficit, owing to a strengthening of net service receipts. Nevertheless, the widening of the
current account deficit was dramatic (chart 1).
A $23 billion increase in merchandise exports
was more than offset by a $46 billion increase
in merchandise imports, so that the merchandise
trade deficit widened for the first time since 1987
(table 1). The end of Gulf War-related cash grants
by foreign governments eliminated a $43 billion
offset to U.S. unilateral transfers abroad; overall,
net transfers swung from an inflow of $8 billion in
1991 to an outflow of $31 billion in 1992. Net
service receipts expanded $10 billion in 1992,
mainly because of reduced payments by the U.S.
military for services purchased abroad and insurance payments recovered from foreign reinsurers

for losses caused by hurricanes in the United States
and its territories. Net investment income receipts
declined $6 billion, mostly as a result of larger
direct investment payments to foreigners due to the
U.S. economic recovery.
The substantial current account deficit was more
than matched by recorded net capital inflows, both
official and private. Thus, the statistical discrepancy in the U.S. international transactions accounts
was negative.

MAJOR ECONOMIC INFLUENCES ON
U.S. INTERNATIONAL TRANSACTIONS
Cyclical movements in economic activity at home
and abroad, movements in U.S. international price
competitiveness, and swings in the rates of return
on real and financial assets at home and abroad
significantly influenced U.S. international transactions in 1992. The main economic factor in the
widening of the external deficit (excluding the transitory effects of payments for the Persian Gulf
War) was that economic growth in the United
States exceeded that of its major industrial country
trading partners.

Relative

1. U.S. external balances, 1982-92

Growth

Rates

Billions of dollars

The data are quarterly at seasonally adjusted annual rates.
SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis, U.S.
international transactions accounts.




From 1989 through 1991, economic growth abroad
on average exceeded growth in the United States
(chart 2). U.S. households and businesses struggled
to redress structural imbalances generated over the
1980s. Pressures to restructure balance sheets, reinforced by more cautious lending practices of U.S.
financial institutions, slowed U.S. economic
growth, and the relative slowdown in U.S. growth
contributed to the narrowing of the external deficit.
During 1992, balance sheet adjustment became less
of a restraint on the economy, and U.S. domestic
demand rose 3.7 percent. Much of the pickup was
in the consumer sector: Private consumption surged

380

1.

Federal Reserve Bulletin • May 1993

U.S. current account, 1987-92
Billions of dollars
1987

1988

1989

1990

1991

1992

Change,
1991-92

-151.3
-159.5
8.2

-114.3
-127.0
12.7

-90.1
-115.9
25.8

-76.8
-108.9
32.1

-28.1
-73.4
45.3

-41.2
-96.3
55.1

-13.0
-22.8
9.8

Investment income, net
Direct investment, net
Portfolio investment, net

11.0
30.7
-19.7

12.4
38.7
-26.3

14.3
47.8
-33.5

19.2
54.3
-35.1

16.4
52.9
-36.5

10.1
49.2
-39.1

-6.4
-3.7
-2.7

Unilateral transfers, net
Foreign cash grants to the United States
Other transfers

-23.1
.0
-23.1

-24.9
.0
-24.9

-25.6
.0
-25.6

-32.9
17.2
-50.1

8.0
42.5
-34.5

-31.4
1.3
-32.7

-39.4
-41.2
1.8

-163.4

-126.7

-101.1

-90.4

-3.7

-62.4

-58.7

-163.4

-126.7

-101.1

-107.6

—46.2

-63.7

-17.5

Item
Goods and services, net
Merchandise trade balance
Service transactions, net

Current account balance
MEMO:

Current account balance excluding
foreign cash grants

Because of rounding, calculations in this and subsequent tables may not
yield results shown.

SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transactions accounts.

at a 5 percent annual rate during the first quarter,
flattened during the second quarter, and rose more
than 4 percent at an annual rate during the second
half of the year. Real expenditures on residential
structures also picked up. In addition, real expenditures on business fixed investment rose sharply:
Significant price reductions and the push to acquire
state-of-the-art technology spurred real outlays for
office and computing equipment, and demand for
other machinery began to grow as well, as the pace
of economic expansion lifted expectations of future
sales, increased profits, and improved cash flow.
As a consequence of the pickup in domestic expenditures, real merchandise imports during 1992 rose
at double-digit rates.

At the same time, a slowdown in economic
growth in major U.S. export markets restrained
exports (table 2). Despite reductions in interest
rates and other measures taken by some foreign
governments to boost spending and stimulate activity, average year-over-year growth of the economies of the United States' industrial country trading partners was a disappointing 1 percent. Among
the major foreign industrial countries, only Canada,
where the earlier recession had been quite severe,
showed signs of a moderate pickup in growth,
boosted partly by the U.S. recovery. Growth in
Japan and Germany, previously fairly strong, weakened significantly. Most other European countries
also recorded only weak growth. Although departure from the exchange-rate mechanism (ERM) of
the European Monetary System in September

2. Growth of real gross domestic product, 1989-92
Percentage change from preceding quarter, annual rate

2.

Growth of real gross domestic product in selected
foreign economies, 1991 and 1992
Percentage change, year over year
Country
Canada
Germany (western)
United Kingdom
Italy
France

1989

1990

1991

1992

The data are quarterly at seasonally adjusted annual rates. The GDP for
foreign countries is the weighted average of the Group of Ten (G-10) countries,
other industrial countries, and developing countries. The weights are based on
U.S. bilateral nonagricultural exports.




China
Hong Kong

1. Data for 1992 are partly estimated.
SOURCES. Various national sources.

1991

19921

-1.7
4.1
3.8
-2.4
1.4
1.0

.9
1.3
1.1
-.5
1.0
1.7

7.0
4.2
8.4
.9
3.6

12.8
5.5
5.0
-1.5
2.8

U.S. International Transactions in 1992

allowed short-term interest rates in Italy and the
United Kingdom to fall, interest rates in Europe on
balance remained fairly high during the year as
German authorities sought to blunt inflationary
pressures. Other factors that appear to have contributed to the generally disappointing demand in industrial countries were persistent low levels of
business confidence, continued adjustments of
spending to reduce high levels of debt on household and firm balance sheets, a reduced pace of
lending in some countries, and worries about problems in the financial sector.
Among U.S. trading partners in developing countries, economic performance in 1992 appears to
have been mixed; on average, however, their
growth is estimated to have been stronger than in
major foreign industrial countries. Economic activity in Asia expanded at a particularly strong 7 percent annual rate, led by growth in China of nearly
13 percent. However, output growth fell to relatively low rates on average in countries in the
Western Hemisphere; growth declined sharply in
Brazil as a result of political problems and turned
down slightly in Mexico as the authorities sought
to limit the current account deficit and further
reduce inflation.
U.S. Price

Competitiveness

The change in price competitiveness of U.S. exportand import-competing industries depends on the
relative movements of inflation rates here and
abroad and on changes in the foreign exchange
value of the dollar. Because of relatively tighter
monetary policies abroad, 1992 inflation rates in
the foreign Group of Ten (G-10) countries were, on
average, lower than U.S. rates (chart 3). The continuing efforts of U.S. businesses to contain production costs and boost efficiency were reflected in the
U.S. consumer price index rising by just 3.1 percent for the year.
However, foreign price inflation fell even further
in 1992. All major industrial countries operated
below their potential rates of output (some considerably so), and inflation rates were generally moderate. Average CPI inflation in the foreign G-10
countries was only 2Vi percent, almost IV2 percentage points below the 1991 average rate. Passthrough effects from depreciation of exchange rates
in the United Kingdom, Italy, and Canada were




381

3. Change in the consumer price index, 1989-92
Percentage change, fourth quarter to fourth quarter

• United States
• Foreign

1989

1990

1991

1992

The CPI for foreign countries is the weighted average of the G-10 countries.
The weights are shares in U.S. non-oil imports.

moderate. Wage inflation also decelerated in most
foreign industrial countries. The main exception to
the generally deflationary pattern abroad was westera Germany, where inflation remained at about
3% percent and concerns about inflationary pressures contributed to the reluctance of monetary
authorities to ease more rapidly.
In nominal terms, the multilateral trade-weighted
foreign exchange value of the U.S. dollar, measured in terms of the other G-10 currencies, rose
nearly 6 percent from December 1991 to December
1992. The dollar appreciated over the first three
months of 1992 amid expectations of strengthening
economic recovery in the United States. Over the
summer, however, the dollar declined to a point
below the previous year's low, as growth of the
U.S. economy was perceived to be more sluggish
than expected and the Federal Reserve eased shortterm interest rates further. The dollar reversed direction again in the fall, strengthening sharply in the
wake of turmoil in the European Monetary System
and, more important, on evidence of increased
momentum of the U.S. economic expansion and
sluggish conditions in foreign industrial economies.
The net rise in the weighted average dollar over
1992 primarily reflected sharp declines in several
European currencies and in the Canadian dollar.
Denmark's rejection of the Maastricht Treaty in
early June called into question the future of European monetary and political union and led to pressures on the ERM. In September, the pressures
intensified enough to force Italy and the United
Kingdom to withdraw from the ERM, and their
currencies depreciated sharply. For the year as a

382

Federal Reserve Bulletin • May 1993

whole, the Italian lira and the British pound
declined 20 percent and 18 percent respectively
versus the U.S. dollar. Several other European currencies, including those of Spain, Portugal, and
several Scandinavian countries, also depreciated
sharply against the dollar in the fall. The parity of
the French franc with the German mark was maintained within the ERM, but at the cost of relatively high French short-term interest rates in the
face of a sluggish French economy and rising
unemployment.
The dollar fell more than 7 percent on balance
against the German mark from December 1991 to
August 1992, as German monetary policy, responding to relatively high German money growth and
inflation, remained tight longer than market participants had expected. That rise of the mark was more
than reversed over fall and winter, however, as it
became clear that German economic activity had
turned significantly downward and as German
monetary policy was eased somewhat.
The dollar depreciated about 4V2 percent on balance against the yen during 1992, despite a noticeable decline in Japanese gross domestic product
during the second and third quarters and a significant reduction in Japanese interest rates over the
year. The net strengthening of the yen probably
was due, at least in part, to market reactions to a
substantial widening of Japan's external surplus.
4. Real exchange value of the dollar against currencies of
selected countries, 1982-92
Index, 1987 = 100

A broad measure of the price competitiveness of
U.S. goods and services is the "real," or "priceadjusted," foreign exchange value of the dollar,
which is computed as the ratio of U.S. consumer
prices to foreign consumer prices translated into
dollars at current nominal exchange rates (chart 4).
U.S. prices have fallen relative to average prices in
dollars in both foreign G-10 and developing countries since the mid-1980s. However, because of
developments in foreign exchange markets during
1992, primarily during the fourth quarter, the real
value of the dollar against the foreign G-10 currencies ended the year higher than it began.
Another aggregated measure of U.S. export price
competitiveness, which gives a somewhat different
picture of recent developments, is the ratio of average consumer prices in dollars in G-10 and developing countries to U.S. export prices (chart 5).
From a long-term perspective, fluctuations in nominal exchange rates during 1992 did not significantly affect the improvement in the prices of U.S.
goods relative to the prices of foreign goods and
services as they had in earlier periods (that is,
1981-85). Some of the improvement is due to the
decline in prices of traded goods relative to prices
of nontraded goods during recent years.

DEVELOPMENTS IN MERCHANDISE TRADE
The merchandise trade deficit widened to $96 billion in 1992, up from $73 billion in 1991 (table 3).
Imports grew almost twice as fast as exports as
5. Ratio of foreign consumer prices to U.S export prices,
1968-92
Ratio scale, 1987:Q4 = 100

1982

1984

1986

1988

1990

1992

The real exchange value of the dollar is calculated using weighted nominal
exchange rates adjusted with weighted consumer prices. The weights in the
indexes are proportional to each country's share in world exports plus imports
during the years 1972-76. The countries in the G-10 index are BelgiumLuxembourg, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Switzerland, and the United Kingdom. The countries in the developingcountries index are Brazil, Hong Kong, Korea, Malaysia, Mexico, the Philippines, Singapore, and Taiwan. The data are quarterly.




Foreign prices are the weighted average of the G-10 countries expressed in
dollars. The data are quarterly.

U.S. International Transactions in 1992

the economic recovery in the United States gained
momentum but economic growth in markets for
U.S. exports remained sluggish. Early in the year,
the deficit narrowed somewhat when a drop in oil
prices lowered the value of imports. The deficit
widened sharply in the second quarter, however,
when imports surged and exports remained about
unchanged. During the remainder of 1992, both
imports and exports continued to grow strongly,
and the deficit increased further.

Exports
Merchandise exports grew 6V2 percent in real terms
over the four quarters of 1992. The increase in
nominal terms was only slightly less, as prices of
exports changed very little. Sixty percent of total
U.S. exports went to industrial countries: 26 percent to Western European countries, 21 percent to
Canada, 11 percent to Japan, and 2 percent to
Australia and New Zealand. These countries
accounted for only 15 percent of the growth in U.S.
exports, however. Most of the growth in exports
was due to increased shipments to developing
countries in Latin America and Asia.
About three-fourths of the increase in exports
was in capital goods and automotive products, and
more than one-third of the rise was in consumer
goods and agricultural products. Aircraft accounted

3.

383

for about 15 percent of the increase in exported
capital goods, but most of the rise occurred in the
first part of the year; deliveries in the second half of
the year were 12 percent less than those in the first
half. The value of machinery exports grew 7 percent; these exports expanded steadily throughout
the year, with more than 80 percent of the increase
going to developing countries (half the increase to
Asia and half to Latin America). The rise was
strongest in high-tech equipment, especially semiconductors, telecommunications equipment, and
computers (including accessories and parts).
For automotive products, most of the rise in
exported vehicles went to Taiwan, Saudi Arabia,
Venezuela, and Hong Kong, and most of the
increase in exported parts went to Mexico and
Canada. Two-thirds of the increase in exported
consumer goods went to developing countries
(largely to countries in Latin America, particularly
to Mexico).
The value of agricultural exports increased approximately 10 percent in 1992, as deliveries of wheat,
soybeans, meat, and dairy products increased
sharply. U.S. government programs (that is, loan
guarantees and donations) pushed up shipments of
wheat and dairy products to countries in Eastern
Europe and the former Soviet Union. Wheat shipments to these two areas were especially strong
during the first half of 1992, whereas dairy shipments to these areas were largest during the second

U.S. merchandise trade, 1990-92
Billions of dollars, seasonally adjusted
1991
Item

1990

1991

1992

1992
Q4

Ql

Q2

Q3

Q4

-109

-73

-96

-19

-18

-25

-28

-26

Exports
Agricultural
Nonagricultural
Capital goods
Automotive products
Consumer goods
Industrial supplies
All other exports

389
40
349
153
37
43
97
19

416
40
376
167
40
46
102
21

439
44
395
177
47
50
102
20

108
11
97
44
10
12
25
6

108
11
97
44
11
12
25
5

107
10
97
43
11
12
25
5

110
11
99
43
12
13
26

114
11
103
46
13
13
26
5

Imports
Petroleum and products
Nonpetroleum
Computers
Other capital goods
Consumer goods
Automotive products
Industrial supplies
Foods and other imports

498
62
435
23
93
105
88
83
44

489
51
438
26
95
108
85
81
44

536
51
484
32
103
123
91
88
47

126
12
114
7
24
30
22
21
11

125
10
115
7
24
29
22
21
11

132
13
119
8
25
30
22
22
12

138
14
123
9
26
32
23
22
12

140
14
127
9
27
32
24
23
12

Merchandise trade balance

SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis, U.S. international transactions accounts.




384

Federal Reserve Bulletin • May 1993

half of the year. Exports of soybeans were particularly strong in the third quarter because of a bunching of shipments to Japan, Mexico, and China.
Increased exports of meat went mostly to Japan
and Mexico.

Imports
During 1992, merchandise imports grew 11 percent
in real terms. As with exports, the increase was
about the same in nominal terms, as prices of
imports on average changed little during the year.
Although all major categories of imports rose,
nearly two-thirds of the increase was in capital
goods and consumer goods. Somewhat smaller
increases were recorded for automotive products
and industrial supplies. The value of imported oil
rose only slightly.
The value of imported capital goods, increasing
steadily throughout the year, rose 11 percent. As
with exports, the strongest increases were in hightech equipment. Computers (including accessories
and parts) accounted for more than 40 percent of
the increase in the value of imported capital goods;
the increase came largely from Japan and developing countries in Asia. U.S. domestic sales of computers were very strong beginning in the summer,
fueled by price wars and a push by U.S. businesses
to upgrade personal computers and workstations to
take advantage of improvements in software. Most
of the sales were at the lower end of the spectrum
of computer products—items that are often
imported. Excluding computers, imports of capital
goods rose 8 percent, led by semiconductors, telecommunications equipment, business equipment,
and aircraft (including engines and parts). Imported
aircraft came mainly from France, the Netherlands,
and the United Kingdom.
Imported consumer goods rose 14 percent. Most
of the increase occurred during the second half of
the year as the U.S. economy began to pick up
more strongly: Imports surged during the third
quarter and eased slightly during the fourth. Thirtythree percent of the increase in consumer goods
imports came from China, and another 45 percent
came from other developing countries in Asia and
Latin America; Western Europe and Canada
together contributed another 18 percent of the
increase, and Japan contributed 4 percent.




Imports of automotive products rose 7 percent.
About 50 percent of the increase came from Canada (two-thirds vehicles, one-third parts), and
another 30 percent came from Mexico (almost
entirely parts). The remaining increase came
mainly from Germany (almost entirely vehicles).
The value of automotive imports from Japan was
about the same in 1992 as in 1991.
Imported industrial supplies (other than oil) were
9 percent higher in 1992 than in 1991. Categories
recording increases outnumbered those showing
declines. Some of the larger increases were in
lumber, steel, chemicals, natural gas, and miscellaneous supplies; the larger declines were recorded in
newsprint and metals.
In 1992, 60 percent of U.S. non-oil imports came
from industrial countries (about 20 percent each
from Canada, Western Europe, and Japan). Non-oil
imports from these countries grew 8 percent and
accounted for more than 45 percent of the increase
in imports in 1992. Imports from developing countries in Asia and Latin America expanded 15 percent, with the largest increases coming from China
and Mexico.
The value of oil imports increased only slightly,
as a gain in oil consumption resulting from the
rebound in economic activity was roughly offset by
a decline in the price of imported oil. As a result of
mild winter weather and strong OPEC production,
oil prices began the year at relatively depressed
levels—approximately $19.00 per barrel for spot
West Texas intermediate (WTI) (chart 6). Spot
prices of WTI rose from March through June when
OPEC restrained output and oil market participants
6. Oil prices, 1982-92
Dollars per barrel

SOURCE. Petroleum Intelligence Weekly, various issues, and U.S. Department
of Commerce, Bureau of Economic Analysis.

U.S. International Transactions in 1992

perceived a shift in Saudi Arabian pricing policy in
light of European Community proposals for a carbon tax. The pickup in U.S. economic activity
helped keep prices firm through October as the
continued absence of Iraq left the oil market with
little excess capacity. Mild weather in the fourth
quarter, coupled with production increases by Saudi
Arabia, Iran, and Kuwait, pushed prices down
almost continuously through December, with spot
WTI prices at the turn of the year just above $19.00
per barrel, essentially where they had been at the
beginning of 1992. Near the end of January 1993,
spot WTI prices rose to more than $20.00 per
barrel as OPEC appeared ready to rein in production. Since then, spot WTI prices have fluctuated
between $19 and $21 per barrel as market perceptions of the adequacy of OPEC production cuts
have changed.
In three of the four quarters of 1992, the quantity
of oil imports posted increases relative to 1991
rates. The increases resulted from growing consumption (triggered by increased U.S. economic
activity) and declining domestic oil production. For
the year as a whole, consumption increased 0.3 million barrels per day while production fell 0.2 million barrels per day. Since 1985, U.S. oil production has generally been falling, with a temporary
increase in 1991 brought about by the large gain in
oil prices during the Persian Gulf crisis. In 1992,
U.S. oil production resumed the downward course
typical of mature oil exploration areas (table 4).

DEVELOPMENTS IN TRADE IN SERVICES
Net receipts from service transactions increased
$10 billion in 1992. Most of the change occurred as
payments by the U.S. military for services provided
by foreigners declined $3 billion and as $4 billion
of insurance was recovered from foreign reinsurers
4.

U.S. oil consumption, production, and imports,
selected years, 1980-92
Millions of barrels per day
Item
Consumption
Production
Imports

1980

1985

1990

1991

1992 P

17.1
10.8
6.9

15.7
11.2
5.1

17.0
9.7
8.0

16.7
9.9
7.6

17.0
9.7
7.9

p Preliminary.
SOURCE. U.S. Department of Energy, Energy Information Administration.




385

for damage caused by Hurricanes Andrew and Iniki
in late August and mid-September. However, areas
that had provided a solid boost to net service
receipts in earlier years, such as travel, passenger
fares, and business, professional, and technical services, increased very little, on net (table 5).
The slowdown in industrial economies abroad
restrained not only transportation service receipts
but also receipts from foreigners for other services.
After increasing in the first quarter of 1992, receipts
from foreign travelers in the United States leveled
off before picking up in the fourth quarter. The
depreciation of the U.S. dollar during the middle
of the year held down payments by U.S. travelers
abroad as well.
Transfers under U.S. military sales contracts
(exports) were about the same in 1992 as they were
a year earlier; after being especially high in the
fourth quarter of 1991 and the first quarter of 1992
because of a bunching of aircraft deliveries, military exports declined during the remainder of
the year. Military expenditures abroad (imports)

5.

U.S. service transactions, 1989-92
Billions of dollars
Item
Service transactions, net
Military, net
Insurance, net
Other service transactions,
net

1989

1990

1991

1992

Change,
1991-92

26
-7
1

32
-8
-0

45
-6
-1

55
-3
2

10
3
3

40

51

55

4

Service receipts
Military sales
Insurance receipts, net 1
Other service receipts
Travel and passenger
fares
Transportation
Royalties and license fees ..
Business, professional,
and technical
services
Other service receipts

127
9
2
117

32

149
10
2
137

164
11
2
151

179
11
2
165

15
0
0
14

47
21
13

59
23
16

64
24
18

72
25
17

7
1
-1

6
30

7
32

10
35

11
41

1
6

Service payments
Military payments
Insurance payments, net 2
Other service payments
Travel and passenger
fares
Transportation
Royalties and license fees ..
Business, professional,
and technical
services
Other service payments

101
15
1
85

117
18
2
97

118
16
3
99

123
13
0
110

5
-3
-3
10

42
21
3

48
23
3

48
23
4

55
23
4

8
0
0

2
18

2
21

3
22

3
24

0
2

Wmm

1. Premiums received less losses paid.
2. Premiums paid less losses recovered.
SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transactions accounts.

386

Federal Reserve Bulletin • May 1993

dropped $3 billion in 1992; key components such
as expenditures by U.S. military personnel on foreign services and expenditures for petroleum
declined rapidly, the decline reflecting the sizable
reduction of U.S. forces abroad. The pace of
decline for military imports was slowed by a continuing relatively strong level of expenditures on
contractual services.
Losses recovered from foreign reinsurers for
damage caused by Hurricanes Andrew and Iniki
increased net insurance receipts in the third quarter
of 1992. (The full amount of recoveries is recorded
on an accrual basis when disasters occur, rather
than when claims are presented to the insurance
companies. Net insurance transactions are part of
"other private services" in the current account).
The amount of insurance recovered from foreign
companies reduced recorded service payments, as
total insurance payments are calculated as premiums paid less losses recovered.

NONTRADE CURRENT ACCOUNT
TRANSACTIONS
In 1992, the U.S. current account recorded, besides
the $41 billion decline in foreign cash grants to the
United States to help finance the Persian Gulf War,
a $6 billion decline in net investment income and a
$2 billion rise in other net transfers.

Investment

Income

Net investment income fell. Net income from both
direct and portfolio investments contributed to the
decline (table 6).
The recovery in direct investment payments by
foreign-owned subsidiaries in the United States
accounted for the moderate $4 billion decline in net
direct investment income in 1992; the unprecedented net losses in 1991 were turned around to
small net profits of $0.4 billion. The swing resulted
primarily from a cyclical improvement in profits of
subsidiaries in manufacturing and the end of losses
reported by foreign-owned banks and insurance
companies. However, the level of direct investment
payments was far from the peak of $12 billion
reached in 1988.




6.

U.S. net investment income, 1989-92
Billions of dollars
Item

1989

1990

1991

1992

Investment income, net

14

19

16

10

Direct investment income, net
Receipts
Payments

48
54
7

54
55
1

53
49
-4

49
50
0

-33
86
81
6
120
84
36

-35
88
78
11
123
85
38

-36
76
68
8
113
74
39

-39
60
53
6
99
60
39

Portfolio investment income, net ...
Receipts
Private
Government
Payments
Private
Government

SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transactions accounts.

Direct investment receipts from U.S.-owned affiliates abroad rose slightly in 1992, to $50 billion.
Increased profits in other industries offset the
downturn in manufacturing and oil industries.
Net income on portfolio investments (private
plus government) fell $3 billion, despite a large
decrease in interest rates. Portfolio investment
receipts from foreigners amounted to $60 billion,
$16 billion less than in 1991. Portfolio income
payments to foreigners also declined, but by a
lesser amount—about $14 billion. A decrease in
interest rates usually reduces both receipts and
payments on portfolio investments; however, for
the United States an interest rate decline reduces
income payments more than receipts because the
United States has a net recorded liability position
in portfolio capital. Had the U.S. net portfolio
position been unchanged in 1992 from the level
recorded at the end of 1991, the decline in interest
rates by itself would have reduced net income
payments roughly $4 billion. But in 1992 the net
portfolio position deteriorated significantly, and the
deterioration more than accounted for the $3 billion
decline in net portfolio income during the year.

Unilateral

Transfers

The conclusion of transactions relating to the Persian Gulf War greatly affected net unilateral transfers, as foreign cash grants to the United States to
help finance the war declined $41 billion. At the
same time, U.S. government grants to foreign countries rose. A large part of the increase went to

U.S. International Transactions in 1992

Israel, the result of both additional grants to finance
military purchases and adjustments to the disbursement schedule; part of the grants that normally
would have been disbursed in the fourth quarter of
1991 were postponed until the second quarter of
1992, and the full amount of grants for fiscal year
1994 were paid out in the fourth quarter of 1992.
Another reason for the increase in net unilateral
transfers was larger contributions to meet the U.S.
share of expanded peacekeeping operations.

CAPITAL ACCOUNT TRANSACTIONS AND THE
STATISTICAL DISCREPANCY
In 1992, the U.S. current account deficit was substantial, net capital inflows were even larger than
the current account deficit, and the statistical discrepancy was significantly negative (table 7). In
contrast, the U.S. current account deficit, net capital
flows, and the statistical discrepancy in 1991 had
been close to zero.
Substantial inflows were recorded for both official and private capital. Foreign official holdings in
the United States increased $40 billion, more than
double the increase in 1991. Inflows from both
industrial and other countries were substantial.
The net inflow of private capital in 1992, $32 billion, is in contrast to 1991, when private capital
had recorded a net outflow. Banks, particularly
7.

387

foreign-related banks, more than accounted for the
net inflow. The inflow coincided in general with an
expansion of U.S. assets at foreign-related banks
other than those based in Japan. In 1991, in contrast, foreign-based banks, spurred by a change in
reserve requirements, had rapidly expanded their
large time deposits in the United States and relied
less on inflows from abroad to finance asset growth.
Moreover, in 1991 demand for funds in the Euromarkets had been strong because of borrowing by
certain countries to fund contributions to the cost
of Desert Storm.
Securities transactions, reflecting the continued
growing internationalization of financial markets,
also contributed to the net inflow of capital in 1992.
Foreigners added substantially to their holdings of
U.S. government and corporate bonds. In contrast,
they made net sales of U.S. equities. U.S. net purchases of foreign stocks and bonds were very
strong, accompanied by a record pace for foreign
bond issues in the United States.
U.S. direct investment abroad was very strong in
1992, up from 1991. Outflows to Latin America
and Asia grew, and outflows to Europe were substantial. Foreign direct investment in the United
States, however, remained depressed, far below the
peak of almost $70 billion in 1989. Merger and
acquisition activity in the United States has generally fallen from the highs of the 1980s, and foreign
investors in particular may have been discouraged

Composition of U.S. capital flows, 1988-92
Billions of dollars
Item

1988

1989

1990

1991

1992

-127

-101

-90

-4

-62

Official capital, net
Foreign official assets in the United States
U.S. official reserve assets
Other U.S. government assets

39
40
-4
3

-16
9
-25
1

34
34
-2
2

28
18
6
3

43
40
4
-1

Private capital, net
Net inflows reported by U.S. banking offices
Securities transactions, net
Private foreign net purchases of the following:
U.S. Treasury securities
U.S. corporate bonds1
U.S. corporate stocks
U.S. net purchases of foreign securities
Direct investment, net
Foreign direct investment in the United States
U.S. direct investment abroad1
Other

88
14
35

114
12
42

9
24
-35

-23
-18
7

32
47
14

20
23
-1
-8
45
57
-12
-7

30
27
7
-22
43
68
-25
17

-3
11
-15
-29
17
45
-28
2

16
27
9
-45
-17
12
-28
5

35
32
-5
-49
-37
-4
-33
8

0

2

47

-1

-13

Current account balance

Statistical discrepancy

1. Transactions with finance affiliates in the Netherlands Antilles have
been excluded from direct investment outflows and added to foreign purchases of U.S. securities.




SOURCE. U.S. Department of Commerce, Bureau of Economic Analysis,
U.S. international transactions accounts,

388

Federal Reserve Bulletin • May 1993

by the disappointing returns on much recent foreign investment in the United States.

PROSPECTS FOR 1993
Over the year ahead, U.S. imports of goods and
services should grow more rapidly than U.S.
exports of goods and services as the U.S. domestic




economy continues to grow faster than the economies of its major industrial trading partners. The
degree to which the U.S. external deficits widen in
1993 will depend largely on the strength of the
economic recovery in foreign industrial countries
and on the effects of the recent appreciation of the
weighted average value of the dollar on U S . price
competitiveness.
•

389

Industrial Production and Capacity Utilization
for February 1993
Released for publication

March

17

In February, industrial production rose 0.4 percent,
for its fifth consecutive monthly gain. The gain was
slightly below the upward revised 0.5 percent rise
in January and equalled the revised gain in Decem-

ber. Although motor vehicle assemblies decreased
more than 2 percent, increases in other components
pushed up manufacturing output 0.3 percent. In
addition, the output of utilities, which had been
held down in January by relatively warm weather,
rebounded sharply. Mining output weakened, how-

Industrial production indexes
Twelve-month percent change

Twelve-month percent change

Capacity and industrial production
Ratio scale, 1987 production = 100

Ratio scale, 1987 production = 100

Percent of capacity
90
80
70

All series are seasonally adjusted. Latest series, February. Capacity is an index of potential industrial production.




390

Federal Reserve Bulletin • May 1993

Industrial production and capacity utilization
Industrial production, index, 1987=100
Percentage change
1992

Category

1993
2

19932

1992
Nov.

1

Dec.

1

Feb. 1992
to
Feb. 1993

r

Feb.P
.4

4.3

Jan.'

Feb.P

Nov/

Dec.'

Jan.

111.8

.6

.4

.5

.5

.2

.4

Total

110.4

110.8

111.3

Previous estimate

110.3

110.5

111.0

111.3
112.6
127.8
98.8
109.0

112.1
113.5
128.9
98.0
108.9

112.5
113.9
130.5
98.3
109.5

112.9
114.6
130.9
99.0
110.0

.6
.7
.8
.4
.8

.7
.8
.9
-.8
-.1

.4
.4
1.2
.3
.5

.4
.6
.3
.7
.5

4.4
5.3
8.2
3.1
4.0

111.3
110.2
112.7
99.4
112.4

111.6
110.8
112.7
98.7
114.2

112.5
112.0
113.2
98.4
112.2

112.8
112.4
113.4
96.4
116.3

.6
.6
.6
.6
1.5

.3
.5
.1
-.8
1.7

.8
1.1
.4
-.3
-1.8

.3
.4
.2
-2.1
3.7

4.4
5.1
3.5
-2.0
9.2

Major market

groups

Products, total3
Consumer goods
Business equipment
Construction supplies
Materials
Major industry

groups

Manufacturing
Durable
Nondurable
Mining
Utilities

MEMO

Capacity utilization, percent
1992
Average,
1967-92

Total
Manufacturing
Advanced processing
Primary processing .
Mining
Utilities

82.0
81.3
80.8
82.3
87.4
86.6

Low,
1982

High,
1988-89

71.8

85.0

70.0
71.4
66.8
80.6
76.2

85.1
83.6
89.0
87.2
92.3

1. Data seasonally adjusted or calculated from seasonally adjusted
monthly data.
2. Change from preceding month.

ever, because of reductions in oil and gas extraction
and a coal mining strike.
At 111.8 percent of its 1987 average, total industrial production in February was 4.3 percent above
its year-ago level. Total industrial capacity utilization increased 0.2 percentage point, to 79.9 percent,
the highest rate since September 1991.
When analyzed by market group, the data show
that the output of consumer goods rose about
0.6 percent. Along with the rise in the production
of residential utilities, a sharp pickup in the output of appliances and gains in the production of
consumer fuels contributed notably to the overall
improvement; the decrease in motor vehicle output
partly offset those increases. Production of business equipment other than motor vehicles increased
0.5 percent. The increase in the output of information processing equipment, 0.8 percent, led the way




1993

Capacity,
percentage
change,
Feb. 1992
to
Feb. 1993

Feb.

Nov.1

Dec.

Jan.

Feb.P

78.3

79.4

79.5

79.7

79.9

2.1

78.3
76.6
82.5
86.6
86.2

78.4
76.8
82.2
85.9
87.5

78.8
77.2
82.8
85.7
85.9

78.9
77.2
83.0
83.9
88.9

2.3
2.9
1.0
.1
.9

77.4
76.1
80.4
85.7
82.2

3. Contains components in addition to those shown,
r Revised,
p Preliminary.

again. The production of construction supplies
picked up 0.7 percent, although, on balance, it has
increased only slowly since fall. The output of
materials increased 0.5 percent. The production of
energy materials picked up, a move reflecting the
gain in utilities. The output of both durable and
nondurable materials strengthened, with significant
increases in the production of industrial chemicals
and equipment parts, particularly those related to
computers.
When analyzed by industry group, the data show
that within manufacturing, the output of durable
goods rose 0.4 percent, and the output of nondurable goods rose 0.2 percent. The gain in the production of durables was concentrated in a few
industries. Output of electrical and nonelectrical
machinery, furniture, and stone, clay, and glass
products all increased 1 percent or more. Along

Industrial Production and Capacity Utilization

with the continued weakness in aircraft manufacturing and the dip in motor vehicle production,
lower output of lumber, steel, and instruments held
down the increase in durables. Among nondurables, production of petroleum products, chemicals,
and leather products all rose significantly.
Capacity utilization in manufacturing increased
0.1 percentage point, to 78.9 percent. The gain
reflected further increases in utilization at primary
processing industries; the operating rate for
advanced-processing industries was unchanged.




391

The utilization rate for primary-processing industries now stands at 83.0 percent, 0.7 percent above
its 1967-92 average. By contrast, the operating rate
for advanced-processing industries remains more
than 3 percentage points below its long-run average. Few advanced-processing industries are operating at or above their long-run utilization rate,
with the largest shortfalls in aerospace and miscellaneous transportation equipment, instruments,
apparel, and printing and publishing.
•

392

Statements to the Congress
Statement by David W. Mullins, Jr., Vice Chairman,
Board of Governors of the Federal Reserve System,
before the Committee on Small Business, U.S. Senate, March 4, 1993

I am pleased to be here this morning to discuss the
credit crunch and the availability of credit for small
businesses.
The financing of small business enterprises is a
central issue in the future growth and vitality of the
U.S. economy. Small businesses account for almost
two-thirds of the nation's work force. They created 80
percent of the new jobs in the 1980s, a decade in which
the U.S. economy created almost twenty million jobs,
despite the fact that Fortune 500 firms reduced their
employment.
The sources of small business financing are substantially more limited than those of large firms that have
continuous access to the depth and liquidity of public
capital markets. For debt financing, small businesses
are generally dependent on financial institutions, primarily commercial banking firms. Because of the
importance of small businesses to the growth of the
U.S. economy, especially job growth, the protracted
weakness in business loans at banks is an important
public policy concern—one worthy of rigorous analysis and concrete action.
Why have business loans by banks fallen? In our
view, there are several contributing factors on both the
demand side and the supply side of this market.
First, the demand for bank loans typically declines
during recessions as economic activity slows, reducing
firms' needs for working capital and new plant and
equipment. In the recent downturn this decline has
been amplified by a broad-based desire by businesses
to reduce their dependence on debt financing. This
deleveraging phenomenon, which has been apparent
for both businesses and households, followed a decade
in which debt financing expanded to historically very
high levels. Excess leverage in conjunction with a
weak economy reduced the creditworthiness of many
firms as well.
Federal Reserve surveys indicate that supply side
constraints on the availability of financing may have
played a role in reduced business borrowing. The
surveys demonstrate that large banks have systemati-




cally tightened the terms and standards for granting
business loans to customers of all sizes. Of course,
some of this tightening was likely justified as an
appropriate response to the lax credit standards of the
1980s and the resulting heavy loan losses of the early
1990s. Although no substantial reversal or easing is yet
apparent, our surveys indicate that tightening of credit
standards has ceased.
An important factor influencing the availability of
financing during this period has been the condition of
the U.S. banking industry. The debt financing of the
1980s left banks with record nonperforming loans—
especially commercial real estate loans—in the early
1990s. These asset-quality problems produced large
loan losses that reduced the capital base of the U.S.
banking industry. In response, the banking industry
over the past 2Vi years has focused on identifying and
working out bad loans, and rebuilding capital and
liquidity. In short, the banking industry has been
engaged in an intensive process of financial healing—
dealing with embedded asset-quality problems and
rebuilding its financial strength.
This retrenchment process has involved reducing
loan growth, investing in government securities, cutting expenses to enhance earnings, retaining a larger
portion of these earnings, and issuing new equity to
bolster depleted capital bases. Although this process
may have adversely affected loan growth in the short
term, it was a necessary prerequisite to the industry's
return to financial strength that is capable of supporting and sustaining new lending and growth.
In our view, the Basle risk-based regulatory capital
standards appear not to have played a significant role
in motivating banks to curtail lending. During this
entire retrenchment period, the overwhelming majority of U.S. banks met these minimum standards,
most by a very wide margin. Indeed, those banks
with capital far above the minimum standards have
been responsible for the overwhelming majority of
bank investment in government securities. In investing in government securities it is not likely that these
very well capitalized banks were motivated by minimum capital standards. Finally, other financial institutions that are not subject to Basle risk-based standards, such as credit unions and finance companies,
exhibited the same pattern of retrenchment characterized by reduced lending growth and increased

Statements

investment in government securities. This pattern
suggests that neither Basle capital standards nor
bank examiners were primarily responsible for these
adjustments. Indeed, all financial institutions responded in a similar manner to this economic environment of deleveraging and impaired asset quality
regardless of whether they were subject to risk-based
capital standards.
The pressure to increase capital beyond the regulatory minimum—in effect to build a notable cushion of
capital above the minimums—came from several
sources. Faced with uncertain large loan losses, banks
themselves raised their assessment of the necessary
capital base to sustain future lending; the capital
markets demanded higher capital in order for banks to
have low-cost access to funds; regulators, and changes
in statutes, recognized that a sound capital base is the
best protection for the federal safety net and the
taxpayer. All concluded that adequate capital is required for banks to be able, in the future, to sustain
lending in both good times and bad.
Finally, it is worth noting that this is a worldwide
phenomenon. The retrenchment from the financial imbalance built up in the 1980s has produced stress in
financial institutions in Japan, the United Kingdom,
Sweden, and Australia to name a few nations. This
financial retrenchment has contributed to the economic
slowdown in many industrial nations. Both in the
United States and the rest of the world, it is quite likely
that some banks, some bank lending officers, and some
bank examiners may have become overly cautious.
Indeed, in the United States, the federal banking agencies and the previous and current administrations have
attempted to ensure that our examiner staffs and examination guidelines do not impede the flow of sound loans
to creditworthy borrowers. These efforts continue.
Where do we stand today? The U.S. banking industry has made impressive progress in improving its
financial health. Over the past 43A years through the
third quarter of 1992, U.S. banks have charged off
$123 billion in bad loans; yet banks have increased
reserves by $5 billion and added $77 billion in equity
capital. Moreover, with loan-loss allocations declining
and after several years of stringent cost controls, 1992
was a record year for bank profitability. Bank capital
ratios now are at the highest level in more than a
quarter of a century. While a segment of the industry
remains under stress, the bulk of the U.S. banking
industry has made remarkable progress in working
through a very difficult economic cycle and emerging
with renewed financial strength.
Although this retrenchment process has been painful
and may have constrained credit availability during the
adjustment period, the banking industry now appears to
have a strong capital base and ample liquidity to fuel the



to the Congress

393

economic recovery. In addition, the interest rate
spreads on small business lending appear attractive
relative to alternative bank investments, and the
deleveraging process by firms seems to be well advanced, though perhaps not entirely completed.
The recently revised estimate of 4.8 percent growth
in gross domestic product (GDP) in the fourth quarter
of 1992 confirms that U.S. economic growth accelerated markedly during the second half of last year. This
suggests that loan demand should be picking up as
well. Thus, both improved supply and demand cyclical
factors bode well for the outlook for increased small
business lending.
Signs indicate that business lending at smaller
banks—whose customers tend to be smaller firms—
may have begun to strengthen. Such increases in small
business loans may well be masked in the aggregate
data by the extensive restructuring of corporate debt.
In recent years, larger businesses with access to the
public capital markets have issued record volumes of
bonds and stocks and used much of the proceeds to
repay short-term debt, including bank loans. More
generally, for at least two decades, banks have found
it difficult to retain those large business customers who
can directly tap U.S. and foreign markets more
cheaply. This widely recognized trend has contributed
to a decline in business loans as a share of total bank
assets. Although this trend may well continue, small
businesses will remain reliant on banks for their external finance. Thus, the continued importance of banks
to small businesses warrants taking a look at those
factors that may be constraining credit to small firms
that do not have access to public capital markets.
One possible contributing factor may be changes in
the nature of bank supervision and regulation in recent
years. The 1980s were characterized by a sharp increase in the failure of federally insured financial institutions, both savings and loan associations and banks.
In response, rigorous regulatory statutes were enacted,
including the savings and loan reform legislation, the
Financial Institutions Reform and Recovery Enforcement Act (FIRREA) in 1989, and the Federal Deposit
Insurance Corporation Improvement Act (FDICIA) in
1991.
These statutes produced, directly and indirectly, a
substantial increase in regulatory burden on the banking industry. For example, each of the federal banking
agencies had to create more than sixty separate working groups to write the regulations to implement
FDICIA regulations, a process that is still not entirely
completed. This process itself likely contributed to
subdued loan growth. Banks may have been understandably hesitant to launch major new lending initiatives before knowing the standards and regulations that
would apply to these new loans.

394

Federal Reserve Bulletin • May 1993

Although many of these new regulatory requirements
have been worthwhile and important and have enhanced safety and soundness, many of them provide
less clear-cut benefits that may not justify their cost in
comparison with the increased burden. Higher burdens
raise the cost of financial intermediation and can adversely affect the cost and availability of bank credit.
Recent research by Federal Reserve staff members has
suggested that the least risky and lowest cost credit
extensions to smaller businesses by banks in the 1980s
were unsecured relationship lending. If recent statutory
and regulatory changes have required additional documentation or collateral on such loans, the quantity of
lending to these safer borrowers may have declined,
because banks pass through the additional underlying
costs or because these borrowers cannot provide the
additional documentation or collateral.
Indeed there is every reason to think that recent
regulations and statutes have changed the nature of
supervision and regulation. The process has become
progressively more standardized and mechanical,
more dependent on documentation, analytical formulas, and rigid rules as opposed to examiner judgment.
This may have disproportionately affected small business lending, which often takes the form of character
and cash flow loans, requiring judgment, and where
the bank's return comes from a thorough knowledge
and working relationship with the borrower. These
loans are heterogeneous in nature, and they may be
less amenable to the increasing standardized character
of supervision and regulation.
At the same time, the focus on homogeneous, standardized lending products may have encouraged lenders to shift toward areas such as mortgages and consumer loans that are more easily documented, scored,
and categorized. To understand the potential bias from
this process, one need only consider the cost and
difficulty in documenting—especially for public or examiner scrutiny—the soundness of a character loan for
small firms with unaudited financial statements. Compare this with placing funds in standardized mortgages,
in mortgage-backed securities, or in consumer loans
amenable to computerized credit scoring.
Now it is true that a more rigorous supervisory
process has many beneficial consequences. But one
unintended effect may have been to make small business lending more difficult and costly, because such a
regulatory process may be in many ways simply
inconsistent with the inherent nature of small business
lending.
What can be done to ensure the availability of credit
for small businesses? First, we need more rigorous
insight into the nature of small business finance, and, to
this end, the Federal Reserve Board last year initiated a




substantial research project to sample the financial
behavior of a large number of small business firms. This
study will focus on the full range of financing alternatives available to small business, not just bank financing. The objective is to gain a rigorous understanding of
the nature, problems, and trends in this area. This is a
major research project that will take some time to
complete, and it underscores the Board of Governors'
commitment to this important component of the economy.
As for the near term, we need to ensure that the
regulatory process does not impede the flow of credit
to small businesses. The suggestions for accomplishing this goal that have appeared in the public debate
include exploring ways to reduce excessive documentation, perhaps by considering small business loans as
a portfolio, rather than requiring each individual loan
to bear the full regulatory documentation burden—an
approach currently employed for consumer loans.
Some have also suggested examining whether the
requirements for real estate appraisal under the
FIRREA have unintentionally imposed an undue burden on business lending, a large portion of which
involves real estate collateral. More generally, it is
useful to explore ways in which the regulatory process
might be tailored to be more congruent with the
inherent nature of small business lending, rather than
trying to force business lending into a standardized
regulatory mold.
To this end, the Treasury Department, the Federal
Reserve, and the other banking agencies are engaged
in a systematic analysis of the possible regulatory
impediments to business lending. The objective is to
design a set of regulatory actions that will eliminate
unwarranted restraints on lending. The scope of the
analysis encompasses the full range of issues associated with the regulatory burden on banks and possible
problems in the examination process. In addition, we
believe it is important to focus explicitly on impediments to small business lending. In attempting to
streamline regulatory procedures for such loans, we
are all committed to maintaining essential standards of
safety and soundness including adequate capital standards. Although it is premature to discuss specifics, a
detailed set of proposals should be completed in the
near future.
A further avenue of attack for this problem, and one
that has been proposed in various forms, is securitization. Securitization of business loans could measurably increase access to capital for small businesses.
Such programs would be most productive for loans
other than relationship loans because the latter Eire not
easily standardized. Because of the heterogeneous
nature of small business loans, establishing these

Statements

to the Congress

395

programs will not be easy. More work needs to be
done to standardize loan terms, and various legal,
regulatory, and accounting problems need to be resolved before securitization will be feasible.
We at the Board of Governors generally favor efforts,
including appropriate legislation, that would encourage
securitization. We generally do not favor the establishment of a new government-sponsored enterprise involving business loan securitization because of our
concern about adding to the already enormous overhang of contingent government liabilities.
Although securitization has the potential to increase
credit availability for small businesses, an important
role for banks in small business financing will still likely
remain. Securitization is unlikely to be feasible for a
basic staple of small business lending—the character
loan. These loans are critically dependent on lenders'
judgment, their knowledge of the firm, its principals,
business and community, and they require an ongoing
working relationship between the lender and the bor-

rower. Even if securitization is successful, large number of borrowers have loans that will not lend themselves to securitization. These borrowers are likely to
remain dependent on a healthy flow of bank credit.
In summary, the outlook for small business finance
seems encouraging. Loan demand should be reviving
as the economic recovery progresses, and the U.S.
banking industry now possesses a strong capital base
and ample liquidity to support increased lending.
Nonetheless, the weakness in bank business lending
and the importance of small businesses to job growth
suggest that it would be unwise to remain complacent
and rely entirely on improving cyclical conditions to
fuel growth in small business lending. This is why we
are working actively to try to identify and eliminate
any unwarranted bank regulatory impediments to business lending. We feel this effort is wholly consistent
with the Federal Reserve's fundamental objective of
promoting maximum sustainable noninflationary
growth in the U.S. economy.
•

Statement by Richard F. Syron, President, Federal
Reserve Bank of Boston, before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
March 10, 1993

gone periodically. Indeed, the Boston Fed's approach
to analyzing national economic developments may
well have been influenced by the region's historic
difficulties. In addition to national and international
financial developments, we tend to focus somewhat
heavily on the "real" sector of the economy and what
is happening to employment, output, and income
growth. In my view, the different analytical frameworks used by Reserve Banks and the Board of
Governors enrich the economic policy determination
process.
The present time is a period of severe economic
distress for New England. The job losses suffered by
the region in the late 1980s and early 1990s have
dwarfed those in all previous recessions since the end
of World War II. From early 1989 to the present,
nonfarm payroll employment in New England has
fallen 12 percent. 1 The nation, in contrast, experienced a drop in employment of 2 percent between the
peak in the summer of 1990 and early 1992. While the
national job loss is serious, it has been more severe in
New England.
These difficulties are attributable primarily to a
combination of factors: a real estate collapse and the
resulting stress on lending institutions, increased competition and restructuring in high technology industries, and cutbacks in defense spending. In each case

Thank you for this opportunity to discuss economic
conditions in the First Federal Reserve District and to
share my views on monetary policy. I believe the two
issues are integrally related. The regional experience
offers lessons that are critical to an understanding of
the national economy and to the formulation of sound
monetary policy. In turn, the single most important
factor affecting any region is the behavior of the
national economy.
The First District consists of the six New England
states: Maine, Massachusetts, New Hampshire,
Rhode Island, Vermont, and Connecticut with the
exception of Fairfield County, which falls in the Second District.
New England is very much an economic region and
sees itself as such. The six states share such advantages as a high level of education and such disadvantages as high energy costs, and over the years their
fortunes have moved together. One consequence of
the almost complete overlap of the boundaries of the
First District and New England is that over the years
the Federal Reserve Bank of Boston has been highly
involved in economic developments in the region. This
interest in New England also derives from the severe
bouts of economic distress that the District has under-




1. The attachment to this statement is available from the Federal
Reserve Bank of Boston, Boston, MA 02106-2076.

396

Federal Reserve Bulletin • May 1993

New England's problems are especially acute, but
they are part of broader developments and carry
lessons for the nation as a whole. In particular, New
England's experience demonstrates how industrial restructuring can aggravate cyclical downturns, and it
highlights the dangers of real estate booms and busts.

HIGH

TECH AND

DEFENSE

New England's current problems have their origins in
events of the early and mid-1980s. After suffering more
than most parts of the country in the 1975 recession,
New England began regaining ground in the late 1970s,
as computers and other high technology industries that
were more important in the region than nationally
enjoyed increasingly vigorous demand for their products. New England also accounts for a disproportionate share of the nation's defense procurement and,
thus, benefited from the Carter-Reagan defense
buildup.
In large part because of the strength of its high
technology industries, the region fared much better
than most of the country in the recessions of 1980 and
1981-82. High tech continued to fare well during the
early recovery as both civilian and defense demand
rose. Then in 1985 the high technology engine began to
sputter. Numerous layoffs occurred at computer and
electronics firms in 1985 and 1986.
At first, this seemed an aberration. The vigor the
industry had displayed over the previous ten years
made a quick return to prosperity seem likely. But the
layoffs continued. And still continue. Meanwhile,
more traditional manufacturing industries, which have
been in a competitive struggle in New England for
most of this century, were also cutting payrolls. The
combination of job losses in high tech and steady
erosion of the traditional industrial base has caused
manufacturing employment in New England to fall
almost 30 percent from its peak in 1984.
Even with the wisdom of hindsight, no completely
satisfactory explanation for this abrupt reversal
emerges. To some degree, the region was a victim of
its earlier success. During most of the 1980s, wages
rose more rapidly in New England than the nation,
increasing the cost of doing business in the region.
Defense cutbacks have been a drag in recent years. In
addition, the computer industry has matured, and the
large New England firms were concentrated in products and followed strategies that were no longer on the
cutting edge. The persistent layoffs in these areas have
overwhelmed the new jobs created in biotech and
software and other regional growth sectors.
While the problems created by the maturing of the




computer industry and the cutbacks in defense are
especially severe in New England, they are manifestations of the restructuring and downsizing of major
corporations that are occurring nationwide. Structural
job losses are aggravating cyclical cutbacks. Nationwide, the fraction of job losers who were on temporary
layoff in 1992 was smaller, and the proportion who
were on permanent layoff was correspondingly larger,
than they have been in twenty-five years.
Eventually, this aggressive cost-cutting may produce more-competitive firms, higher productivity, and
a stronger economy. Certainly, the conversion from
military to civilian production should ultimately lead
to higher standards of living. But the transition is very
painful. New England's experience highlights the drag
that such long-term structural changes can exert on the
economy and shows how they may stretch out and
deepen a cyclical downturn.

REAL

ESTATE

AND

BANKING

Despite the seriousness of the difficulties faced by
New England's high tech industries, overall employment growth in the region remained strong until the
late 1980s. Labor shortages, not layoffs, were the
focus of concern from 1984 to 1988, as unemployment
rates in some years dipped toward 3 percent.
The cutbacks in manufacturing were masked by
vigorous growth in construction and related financial
and other services industries. The region's strong
performance in the early 1980s, after a period in which
construction activity was low and the supply of housing and office space had tightened, sparked a construction and real estate boom. Real house prices in the
Boston area more than doubled between 1982 and
1987; prices in other New England cities rose just as
fast. On the commercial side, office vacancy rates
plummeted and rents soared.

CONSTRUCTION

RESPONDED

Construction employment in New England increased
70 percent between 1982 and 1987. Growth was also
very strong in such related industries as real estate and
architectural and engineering services. Retail activity
received a boost, as rising home prices made New
England homeowners wealthier, encouraging them to
spend more. And the banking industry flourished—for
a time—as it pursued the opportunities created by the
real estate boom.
Commercial banks and thrift institutions in New
England found the investment opportunities generated

Statements

by the real estate boom irresistible. Commercial bank
assets in New England almost doubled in the second
half of the 1980s, largely on the basis of increased real
estate lending. Between 1984 and 1989 the share of New
England commercial bank assets in the form of loans
backed by real estate almost doubled, from 17 percent
to 32 percent. Although the real estate share of commercial bank assets in the country as a whole rose less,
it still increased very significantly, from 15 percent to 23
percent. Lenders' willingness to fund real estate
projects was further fuel for the real estate boom.
The boom came to an end as housing prices became
less and less affordable and as more and more homeowners and investors began to think that values were
approaching their peak. The Tax Reform Act of 1986
reduced the attractiveness of rental properties to individual investors, and the difficulties facing high technology industries removed a major source of demand
for research and development and light industrial
space in suburban areas.
Once the boom ended, it turned to bust almost
overnight. Much of the New England economy had
come to depend upon the construction and real estate
boom. Lawyers, accountants, and insurers, as well as
bankers, real estate agents, and construction workers,
had prospered as real estate values rose and construction activity expanded. Thus, many tenants of the new
office buildings, patrons of the retail outlets, and new
homebuyers worked in sectors whose fortunes were
tied to real estate and construction. As the cycle
turned down, these sectors contracted, aggravating
the downward pressure on real estate values. New
England's experience in this regard provides insights
into what can happen in other parts of the country and
even in other countries where real estate markets are
weakening.

IMPACT

ON BANKS

AND THEIR

BORROWERS

As boom turned to bust, banks' nonperforming real
estate assets increased rapidly. Existing provisions for
loan losses proved to be inadequate, and additions to
these reserves caused bank capital to plummet. At
their peak in the first half of 1991, nonperforming
assets exceeded commercial banks' total equity plus
loan-loss reserves.
Around the beginning of 1990, we at the Federal
Reserve Bank of Boston began to hear reports that
New England banks' difficulties with their real estate
portfolios were affecting the availability of credit in the
region. Not only were banks unwilling to lend to real
estate projects, but they were also reported to be
imposing considerably more stringent standards for




to the Congress

397

loans that were not linked to real estate or for which
real estate provided only supplemental collateral. This
tightening in turn exacerbated the region's economic
problems.

MONETARY

POLICY

I would like to finish by making a few observations
about the Boston Fed's approach to monetary policy
and our views of the challenges we face. As I have
noted previously, although financial variables such as
interest rates and stock prices contain valuable information about the economy, the Boston Fed's approach tends to focus on our ultimate objectives—real
growth and price stability—and how these will respond to policy actions. Because monetary policy acts
with a lag, our approach is forward-looking: What will
be the consequences for output and prices a year from
now of an action today?
To help answer this question, the Boston Fed carefully constructs its own forecast and monitors those of
other respected forecasters to determine the most
likely economic outlook and the risks surrounding that
outlook. Over the years, we have devoted considerable attention to analyzing different forecasting techniques, and we favor forecasts that combine formal
structural macroeconometric models with the judgment that comes from experience. Such forecasts have
the advantage of making explicit the channels through
which policy works, as well as the ways in which
actions could go awry.
We also confer with private sector and academic
economists and meet frequently with leaders from the
business, government, and general communities.
These communications have provided valuable signals
about emerging trends in the economy, sometimes in
advance of the statistics.
The past few years have been particularly challenging for the economy and thus for the conduct of
monetary policy. Structural shifts have been a significant depressant. In addition, the recent recession has
been remarkably uneven in its geographic impact.
New England, and to a lesser extent the entire Northeast and now California, have suffered extraordinary
job losses, while other parts of the country continued
to grow. In contrast, the 1975 recession was felt
throughout the nation; and even in the 1982 downturn,
which was much more severe in the industrial heartland than along the coasts, the regional experience was
more uniform than in the present period. Unfortunately, monetary policy is not a precise tool; one
cannot administer a stimulus to one part of the country
without affecting the whole.

398

Federal Reserve Bulletin • May 1993

The clear objective of monetary policy is to maximize the long-term real income of all Americans. Price
behavior that does not distort the decisionmaking of
individuals or firms is an important means to that end.
My own view is that monetary policy has been broadly
successful over the past few years, particularly when
viewed in the context of a period that has encompassed a variety of economic challenges. After a
period of fits and starts, the economy seems to be
entering a somewhat more promising growth path.
Importantly, we are beginning to benefit from the
substantial increases in the productivity growth that
the United States lacked for so long. The inflation
situation is encouraging. My primary concern about
the early economic recovery has been in the area of
job growth and unemployment.
Until most recently, the pace ofjob creation has been
quite disappointing. One month's data do not make an
economic trend, but we all hope that last month's
report signals the beginning of an improvement in this
area. Earlier, slow job growth had been greatly exacerbated by the kinds of structural problems that have
been particularly pronounced in New England. The
overload of commercial real estate has acted as a drag
on the economy directly and has also impaired the
ability of many banks to lend as aggressively as in
earlier recessions, thus hampering the growth of small
business. Similarly, although the conversion from military to civilian production and the restructuring of
many companies as a result of competitive pressures

should ultimately lead to higher standards of living,
they impose real pain on the workers affected in the
process. All this has been reflected in the number of
workers permanently losing their jobs.
My own fear has been that if the emerging improvement in the employment market were to reverse,
income growth would slow and consumers would have
to retrench, thereby jeopardizing the recovery itself.
A monetary policy that promotes the maximum
sustainable growth of the economy is essential to
promoting continued employment growth. However,
because of the structural nature of much of the
problem, monetary policy alone will not be an adequate mechanism for dealing with all our employment problems. Macropolicy will probably need to
be augmented by measures that will aid firms and
workers affected by defense conversion and by restructuring more broadly. Thus, improving employment prospects may be the major challenge for all
economic policy.
In conclusion, and at the risk of repeating myself, I
believe that the variety of economic frameworks used
by the Reserve Banks and the information brought
from the individual Federal Reserve Districts make a
valuable contribution to the formulation of monetary
policy. However, monetary policy is inherently national policy, and I believe it is very useful for those of
us from the Reserve Banks to have the opportunity to
appear before the Banking Committee to express our
views and to answer questions.
•

Statement by E. Gerald Corrigan, President, Federal
Reserve Bank of New York, before the U.S. Committee on Banking, Housing, and Urban Affairs, U.S.
Senate, March 10, 1993

and (3) the results of the latest informal survey of ten
large and fifteen smaller businesses regarding the
economic outlook as seen by those firms.
Although the Second District is relatively small in
geographic terms—representing, for example, only a
small fraction of the land area of my former Federal
Reserve home in the Minneapolis District—it is quite
large and important in economic terms. For example,
it is home for about 10 percent of the U.S. population,
and it accounts for about 11 percent and 12 percent
respectively of national GDP and personal income.

I am pleased to have this opportunity to discuss with
you recent economic trends in the Second Federal
Reserve District. In keeping with your request, my
prepared remarks are very brief, but I have included
with my statement a great deal of statistical and
anecdotal information bearing on recent trends in the
District. 1 These materials include (1) a comprehensive
set of charts and tables on various indicators of
economic conditions; (2) a digest of observations and
comments made by the members of the Bank's Small
Business and Agriculture Advisory Council at its most
recent meeting, which was held on February 5, 1993,
1. The attachment to this statement is available from the Federal
Reserve Bank of Philadelphia, Philadelphia, PA 19106-1574.




Like so much of the rest of the country, the past
several years have been difficult for the District in
economic and financial terms. Indeed, by many indicators, the period of subpar economic performance in
the District probably began a little earlier, cut a little
deeper, and lasted a little longer than is the case for the
nation as a whole. Although it is difficult to generalize,
the reasons for this probably center on disproportionately greater problems—either directly or indirect-

Statements

ly—in several areas, including (1) commercial real
estate overbuilding, (2) defense and aerospace cutbacks, (3) the cutbacks in employment in banking and
finance, (4) corporate restructuring more generally,
and (5) the slower growth of exports, especially to
Europe.
Having said that, I believe it is fair to suggest—drawing
on both statistical and anecdotal information—that the
near-term outlook has improved, even if it remains true
that certain structural elements will continue to exert a
drag on the District economy for some time.
Although some of these lingering problems are
very real, the fact remains that the District's economy is rich and diverse and has certain sources of
underlying strength. For example, the State of New
York produces a dramatically disproportionate number of the most scientifically talented high school
seniors in the United States, accounting for 43 percent of those cited in the 1991 Westinghouse Talent
Search and 35 percent of the outright winners in that
competition. Another important source of its
strength rests in its strong ties to the international
community at large—ties that extend well beyond
New York City's critical role as one of the most
important, if not the most important, international
financial center in the world. Here, too, the statistics
tell quite an interesting and often overlooked story
that includes the following features:
• In 1990, an astonishing 28 percent of all residents
in New York City were foreign-born.
• Foreign-owned firms employ about a half million
workers in the New York metropolitan area, which is
the equivalent of about 25 percent of total employment
in the greater Washington, D.C., metropolitan area.
• New York ranks third behind California and Texas
in the value of goods exports and would probably be
our largest exporting state if data on service exports
were available on a state-by-state basis.

Statement by Edward G. Boehne, President, Federal
Reserve Bank of Philadelphia, before the Committee
on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993

BACKGROUND

ON THE THIRD

DISTRICT

Thank you for the opportunity to appear before this
committee to discuss District economic conditions and
monetary policy. The Third Federal Reserve District,
headquartered in Philadelphia, includes the State of




to the Congress

399

While the District as a whole has a broad and diverse
economic base—including its strong international orientation—New York City has a very special place in the
economy of the region, the District, the nation, and,
indeed, the world. While the term "Big Apple" is widely
cited, we sometimes forget just how big the apple really is.
For example:
• If New York City were a stand-alone country, its
economy—using conservative estimates—would rank
twelfth among the nations of the world.
• Manhattan alone has more office space than the
combined total of the next eight largest central business districts in the United States.
I cite these statistics not simply because they are so
dramatic, but also because the recent period of weak
economic performance has been even more pronounced
in the city than in the District as a whole. While there are
straws in the wind that suggest the economy of the city
may at last be firming, the strains on the city's economic
and social infrastructure growing out of this prolonged
period of subpar economic performance have been quite
serious. Despite this, the city, and the state, too, have
done a commendable job in managing their fiscal affairs,
but not without great difficulty. Moreover, the city's
demographic profile is such that the burden associated
with social, educational, and health care costs will remain
a formidable problem for both the public and private
sectors for as far as the eye can see.
In summary, the city, the state, and the District as a
whole have—like much of the nation—gone through a
difficult period. At present, most indicators point to
improving conditions, but several more fundamental or
structural factors will tend to moderate the process of
recovery. Taking a somewhat longer view, I am quite
confident that the underlying strength and diversity of
the District economy will provide the framework for
renewed vitality and growth—a process that will feed
on itself as the structural overhangs of the past abate.

Delaware, the southern half of New Jersey, and roughly
two-thirds of the State of Pennsylvania. About onethird of New Jersey's population and more than 70
percent of Pennsylvania's population are in the District.
The three states that are either wholly or partially in the
District represent more than 8 percent of the U.S.
population, employment, and income. The District itself, although small in size geographically, represents
about 5 percent of the U.S. economy in terms of
population, employment, and personal income. More
than 25 of the Fortune 500 companies are headquartered within the District boundaries.

400

Federal Reserve Bulletin • May 1993

The largest concentration of economic activity in the
District is in the Philadelphia metropolitan area. The
Philadelphia area is the fourth most populous metropolitan area in the country, with almost 5 million residents.
It ranks among the ten largest U.S. markets in both
industrial and commercial office space. The city of
Philadelphia is the fifth largest city in the country and
has the nation's sixth largest downtown office market.
In general, the economy in the three states of the
District is quite diversified and could be described as a
microcosm of the U.S. economy because the nonfarm
economy in the three states mirrors the nation quite
closely. The proportions of jobs in most nonfarm categories differ little from the proportions at the national
level.1 The two major nonfarm sectors in which the
percentage of jobs diverges significantly from the national average are business and personal services and
government services. Compared with the nation, about
2 percent more of the jobs in the tristate area are in the
private service industries (including accounting, private
education, and health care), and about 2 percent fewer
jobs are in the government sector. Agriculture and
agricultural services contribute about 1 percent to the
total output of the three states—somewhat less than the
U.S. average. But agriculture remains a major industry
in parts of south Jersey, southern Delaware, and southcentral Pennsylvania.
The District used to have a high proportion of its
jobs in manufacturing, but that has changed. In the
early 1970s more than one-third of the jobs in the three
states were in manufacturing—about 7 percent more
than at the national level. As late as 1980 more than
one-quarter of the jobs were in manufacturing, still
higher than the national average. Today the percentage of jobs in manufacturing in the Third District states
is less than 20 percent and very close to the national
average.
Within the broad business categories, the chemical
industry and health services are more heavily represented in the Third District than in the nation. The
production of industrial chemicals in the District is
concentrated in Delaware. Pharmaceutical research
and production, also classified among the chemical
industries, is concentrated in central New Jersey and
in the Philadelphia area. The higher-than-average
number of jobs in health services in the District is the
result of two factors: The average age of the population in the District is higher than that in the nation, and
there are many large medical schools, hospitals, and
health research facilities in the District.

1. The attachment to this statement is available from the Federal
Reserve Bank of Philadelphia, Philadelphia, PA 19106-1574.




Even though the District as a whole is not highly
dependent on defense spending, certain parts of the
District, such as the areas around Dover Air Force
Base in Delaware and McGuire Air Force Base in New
Jersey, are heavily dependent on defense. In Philadelphia, the Navy Yard and the Personnel Support and
Industrial Supply Centers employ a large number of
workers. In addition, the District has some major
defense contractors, such as Boeing Helicopter and
GE Aerospace (which is currently in the process of
being sold to Martin Marietta).

DISTRICT

EMPLOYMENT

AND

UNEMPLOYMENT

The Third District economy enjoyed solid growth
during the expansion of the 1980s even as it continued
to shift away from manufacturing and toward services.
The history of state unemployment rates illustrates
how the region's economy performed during most of
the 1980s. In the late 1970s and early 1980s unemployment rates in all three states in the District were
regularly at or above the national average. During the
long expansion in the 1980s, unemployment rates in all
three states fell below the national average. By the end
of the decade Pennsylvania's rate was a percentage
point below the nation's rate in some months, and the
rates in Delaware and New Jersey were even further
below the national rate. For a time Delaware's unemployment rate was below 3 percent, and the rate in
New Jersey was between 3l/z percent and 4 percent.
Job growth in our District was very good in the last
decade, but not quite as good as the drop in unemployment rates would suggest. Combined job growth in the
three states of the District was slower than job growth
at the national level, although some labor markets
were notable exceptions. Jobs in Atlantic City and
Monmouth-Ocean Counties in New Jersey, in Lancaster and State College in Pennsylvania, and in the
State of Delaware all grew appreciably faster than the
national average. In Delaware jobs grew more than
one-and-a-half times the national rate. Some of these
fast-growing areas benefited from special circumstances.
The introduction of casino gambling in Atlantic City
in the late 1970s, for example, resulted in very rapid
job growth. Atlantic City was the fastest growing labor
market in our District in the 1980s; jobs increased
more than 35 percent. Delaware experienced a major
boom as financial service firms moved in to take
advantage of the state's 1981 Financial Center Development Act. Jobs in the financial service sector more
than doubled in the state during the 1980s.
Unemployment rates in the District came down

Statements

relative to the national unemployment rate during the
1980s, despite overall job growth that was slower than
the national average, because the District's labor force
generally grew more slowly than that in the nation.
With the exception of Delaware, labor force growth in
the three states in the District lagged growth in the
nation. This slower growth was partly a function of the
age distribution in our District. Fewer young people
entered the labor force than in earlier decades. The
number of jobs in the three states of the District
increased about twice as fast as the slowly growing
labor force during the expansion of the 1980s, so many
labor markets became very tight near the end of the
expansion.
By the late 1980s, the economy in several parts of
the District was showing signs of becoming overheated. Wages and prices were rising faster in the
Northeast than in the nation as a whole. The rate of
increase in the regional consumer price index (CPI) for
the Wilmington-Philadelphia-Trenton area, for example, was 0.5 to 1.5 percentage points higher than the
CPI inflation rate for the nation as a whole during the
latter part of the 1980s. The region's inflation rate is
now close to the national average. Inflation and wage
costs are not a concern I hear much about now in the
District.
In contrast to the District's better-than-average performance during much of the 1980s, the District has
suffered a more serious recession and slower recovery
than has the nation in the 1990s. One of the most
frequent complaints I heard in the late 1980s when I met
with business people was their inability to find qualified
workers. Now I hear from people who cannot find jobs.
The job situation turned around dramatically in the
District, especially in New Jersey. As measured by the
period in which jobs were generally declining, the
recession lasted longer in most parts of our District than
in the nation. Jobs began to decline in our region before
they did in the nation. In New Jersey the general
decline began in early 1989—more than a year before
the onset of the national recession. In Pennsylvania the
general decline began three months before the official
beginning of the recession. Mirroring the national pattern, jobs continued to decline in the District beyond
the official end of the recession. In New Jersey, there
has not yet been any sustained job growth.
The job picture following this most recent recession
stands in marked contrast to the average job growth
after the other recessions since 1970.1 have included a
set of charts comparing the job growth in each state in
our District after this recession with the average
growth after the recessions of 1970, 1974-75, and
1981-82.
Twenty-two months into the national recovery, only




to the Congress

401

Delaware has more jobs than it did at the end of the
recession. The net increase is slightly more than 1
percent, far short of the more than 6 percent average
for earlier recoveries. In New Jersey jobs are more
than 2 percent below their levels at the official end of
the recession, and in Pennsylvania they are still
slightly below their levels at that time. By this time in
earlier recoveries, jobs in these two states averaged
2Vi percent to 5 percent above their levels at the
trough of the business cycle.
Given the extended period of job declines in most of
our District, it is not surprising that the percentage loss
of jobs has been deeper than the loss at the national
level. Recently revised numbers show that the job
declines in the District were not as severe as earlier
numbers suggested, but District losses were still
steeper than the national decline. While the U.S. lost
less than 2 percent of its jobs, Pennsylvania and
Delaware lost 2.4 percent and 2.7 percent respectively. New Jersey had the highest percentage of job
losses; the state lost almost one out of every fourteen
jobs between 1989 and 1992.
Job losses in the District were spread across every
sector of the economy. The goods-producing industries took the biggest hit, as they typically do in any
recession. More than three-quarters of the jobs lost in
our states were in construction and manufacturing,
even though they account for less than one-fourth of
the jobs. A larger-than-usual percentage of the job
losses in this recession, however, were in the serviceproducing industries. In every other recession during
the past twenty years, the private service-producing
industries suffered little or no net job loss. This time
almost 25 percent of the job losses in our region
(between first quarter 1990 and first quarter 1992) were
in the private service-producing industries.
Whether in the goods sector or the service sector,
the job losses this time seem to be more permanent as
many firms have undergone major restructuring. Our
District has suffered, or is about to suffer, cutbacks by
several large employers. DuPont has gone through a
major restructuring that has reduced its work force by
6,000 in Delaware alone. Last year, Bell Atlantic
announced reductions of more than 1,000 positions in
New Jersey and almost 1,000 in Pennsylvania. General
Motors is slated to close an auto parts plant in Trenton, New Jersey, and an assembly plant in Wilmington, Delaware; Sears closed a distribution facility in
Philadelphia; and Bethlehem Steel closed its division
in Johnstown, Pennsylvania, eliminating 1,900 jobs.
The continuing job losses beyond the end of the
national recession meant that unemployment rates in
most of the District did not peak until mid-1992.
Except for Delaware, the state unemployment rates in

402

Federal Reserve Bulletin • May 1993

the District are again higher than the national average,
as they were in the 1970s and early 1980s. Pennsylvania did not quite have the boom times in the 1980s that
New Jersey did, and Pennsylvania has not fallen as far
during the past two years either. Pennsylvania's unemployment rate, which had been quite a bit below the
national average during the late 1980s, has more
recently been very close to the national average.
Within Pennsylvania and New Jersey we have a wide
range of unemployment rates. Some are in the 5
percent to 6 percent range; others are more than 10
percent. These differences across the states represent
differences in the mix of industries in these geographical areas.
The emerging recovery from the recession is uneven across the District.. So far, the low point for jobs
in the District's three states combined was September 1992. Employment was up slightly in the fourth
quarter for the District as a whole. I must caution,
however, that we have had temporary improvements
in the job picture earlier in the national recovery only
to see the gains evaporate, so we continue to closely
monitor the job picture in the region.

OTHER DISTRICT

INDICATORS

Other indicators give some evidence of a pickup in
economic activity in several sectors in the District.
The index of current activity from the Philadelphia
Fed's monthly Business Outlook Survey of manufacturers rose from close to zero in October 1992 to
almost 39 percent in February of this year. That means
that 39 percent more manufacturing firms reported
increases in current business activity than reported
decreases in activity. A similar index from our quarterly survey of all types of firms in southern New
Jersey rose from 12 percent in the third quarter to 34
percent in the fourth quarter.
Consumers in our region are also showing more
faith in the recovery. The Conference Board's consumer confidence index for the mid-Atlantic region
was up in the fourth quarter of last year and again in
January but fell back a bit in February. This bears
close watching because confidence in the region rose
twice before in this recovery before falling back to
low levels.
Retail sales in the region have increased since their
cyclical low in early 1991. The improvement has not
been as strong in New Jersey as it has been in
Pennsylvania. Moreover, the advance has been uneven over the past two years. (Monthly retail sales
data are not available for Delaware.)




DISTRICT

REAL

ESTATE

The real estate sector in the District deserves special
mention because a full recovery in that sector is
probably still several years away. There is no sign yet
of a real recovery in the commercial office market. In
the mid-Atlantic region, office construction, measured
in square feet, is down more than 75 percent from its
peak in 1987. In dollar terms it is down more than 60
percent. Office vacancy rates in the Philadelphia market remained high in 1992 despite the lack of any new
construction. Quoted rental rates in 1992 were down in
the downtown Philadelphia market and were unchanged in the suburbs.
High vacancy rates, lower rental rates, and sales of
some distressed properties have meant that purchase
prices per square foot in the Philadelphia area have
dropped dramatically. The average price per square
foot for properties sold dropped from $94 per square
foot in 1990 to $43 per square foot in 1992. Many of
these recent sales, however, were distress sales.
On the residential side, in contrast, a recovery has
been going on for some time, at least in parts of the
District. However, the increase in housing starts has
been neither steady nor evenly distributed. The housing recovery in New Jersey has been particularly
weak; housing starts there are only about 40 percent of
their 1987 level. Although some of the builders in
southern New Jersey have recently indicated improvement in activity, they have also expressed concern
that rising lumber prices (which have gone up 40
percent to 50 percent in a few months) could choke off
the recent rise in housing demand in the area.
Most of the improvement in housing has been in the
single-family market. With high vacancies and falling real
rents, there has been little incentive to invest in rental
housing. But there are some signs that the rental market is
stabilizing. In 1992 landlords offered fewer incentives,
such as one-month's free rent or free parking, to renters.

BANK

LENDING

IN THE

DISTRICT

Bank lending was very weak in the District in 1990 and
1991, as it was in the nation as a whole, as the
recession reduced loan demand and as deteriorating
asset quality led banks (and regulators) to be more
conservative in evaluating lending opportunities. Real
estate lending was especially limited in the face of
declining property values. The cost of financial intermediation rose because of increased capital requirements and higher deposit insurance premiums, and the
deterioration in loan quality increased the perceived
risk of default. These factors led, despite weak loan

Statements

demand, to a widening of spreads between loan rates
charged by banks and their cost of funds.
I believe, however, that we have started to see signs
of an improved environment for bank lending in the
District. We seem to be moving from a credit crunch to
credit caution. Banks have increased their capital
positions and reduced their net charge-offs during the
past two years, and nonperforming loans as a percentage of total loans declined last year. Consequently, the
region's banks are now in a better position to increase
their lending as loan demand picks up.
Loans by banks in our region have, in fact, increased
somewhat during the past year in all categories of lending:
real estate, consumer, and commercial and industrial.
Banks also reported at the beginning of this year that they
are beginning to see stronger loan demand from middlemarket firms and small businesses. Also, banks are becoming more active in seeking out lending opportunities.
For example, at a recent meeting of builders in southern
New Jersey, some bank loan officers attended the meeting—something we had not seen during the previous two
years. (In another region of the District, one developer
even reported receiving a phone call from a banker asking
if the developer was interested in borrowing money!)
Banks in the region also are no longer tightening credit
standards, and some banks reported an easing of their
loan terms. I expect to see further increases in lending
over the next year.
Nonetheless, obstacles remain to the resumption of
normal borrowing relationships, especially for small
and medium-sized businesses. In particular, we must
find ways to facilitate the so-called "character" loan
by easing up, where prudent, on excessive documentation and other costs that fall disproportionately on
small businesses.

SUMMARY

OF

DISTRICT

Overall, District economic activity has shown improvement since September of last year. The unemployment rate has declined in each of the District's
three states, and employment levels are up in the
District as a whole. Unfortunately, employment has
not risen very much since the end of the national
recession. Also, some large firms have announced
major layoffs that will affect our District. The District's growth has lagged the rest of the nation during
most of the past two years, and I expect this situation
to continue during 1993. Even though I expect employment to increase in each of the District's three states,
the improvement is likely to lag behind gains in the
nation as a whole. Among the states in our District,




to the Congress

403

growth in New Jersey is likely to be weaker than in
Delaware and Pennsylvania.

MONETARY

POLICY

Let me now turn from the District to monetary policy.
The Federal Reserve, against a background of weak
economic growth and lessening inflationary pressures,
has brought short-term rates down to their lowest
levels in about thirty years. The federal funds rate has
declined almost 7 percentage points since early 1989.
Monetary policy began to ease more than a year before
the onset of the 1990 recession, it eased substantially
during the recession, and it continued to ease during
the sluggish recovery. By this point in past recessionrecovery periods, the federal funds rate had, on average, risen from its low point a few months after the
trough of the business cycle. In contrast, in this most
recent recession-recovery period the federal funds
rate has continued to decline since the trough of the
recession in March 1991. This further decline of shortterm interest rates reflects a continued easing of monetary policy that has been entirely appropriate given
the weak growth of employment and real gross domestic product (GDP) through much of this recovery.
Because employment and real GDP growth have been
weaker during this recovery than in previous ones,
monetary policy has been unusually accommodative in
continuing to bring down short-term rates to try to get
the economy growing at a more sustainable pace. With
core inflation (that is, the CPI excluding food and
energy) somewhat above 3 percent during the past two
years and short-term rates falling to about 3 percent,
short-term real rates (that is, short-term rates adjusted
for core inflation) have been close to or a little below 0
percent since the trough of the recession, whereas in
previous recessions the real federal funds rate has
typically risen by now and become positive.
The pattern of declining short-term interest rates
during this recession-recovery period has been in
marked contrast to the behavior of M2 money growth.
M2 growth has been very sluggish in comparison to
past recoveries despite the continued easing of monetary policy. Because M2's relationship to economic
growth has been changing in ways that we do not fully
understand, M2 has become a less-reliable guide for
monetary policy. Indeed, the pace of economic activity in 1992 was much faster than could have been
anticipated using the historical relationship between
M2, income, and interest rates.
The pace of economic activity improved substantially over the last two quarters of 1992, and, as noted
in Chairman Greenspan's testimony to this committee

404

Federal Reserve Bulletin • May 1993

on February 19, the central tendency of the governors'
and Reserve Bank presidents' forecasts is for real
GDP to grow 3 percent to 3V4 percent during 1993,
with the unemployment rate continuing to decline to
around 63/4 percent to 7 percent. In light of the stillsubstantial degree of slack in the economy, I would
not be concerned by somewhat faster growth than this.
Much of the growth in output during 1992 reflected
sharp gains in productivity rather than gains in labor
input. This high rate of productivity growth is welcome news in one sense, in that it improves our
nation's competitive position in world markets. But
these productivity gains over the past two years have
meant that employment has not risen very much so far
during this recovery. Productivity gains as large as
those in 1992 are unlikely to persist in 1993, and
consequently I expect that employment growth will be
more substantial this year than last.
One factor that will be especially important in
contributing to continued, and perhaps even stronger,
growth during 1993 is the recent decline in long-term
interest rates. By the end of last year, long-term
interest rates had already declined substantially from
their peak in early 1989. The continued easing of
monetary policy in 1990, 1991, and 1992, along with
reduced private sector credit demands as the economy
went into recession, contributed to these reductions in
long-term interest rates.
The decline in actual inflation and in expectations of
future inflation was another very important contributor to the decline in long-term interest rates over the
past several years. Unlike the expansions of the 1970s,
when the rate of inflation rose in stepwise fashion from
one business cycle to the next, average inflation rates
have not exhibited a tendency for inflation to accelerate during the long expansion of the 1980s and the
recovery so far in the 1990s.
Not only did actual inflation remain relatively low in
1991 and 1992, but expectations of long-term inflation
fell as market analysts came to believe that the economy would not experience a resurgence of inflationary
pressures. Based on a survey of economic forecasters
in business and academia, the rate of inflation expected
to prevail over the next ten years fell nearly a full
percentage point from about 4.4 percent in early 1990 to
3.5 percent last month. This reduction in expected
inflation undoubtedly has been a major factor in helping
to reduce long-term bond and mortgage rates.
But at the current 3.5 percent level, long-term
expected inflation is still somewhat above the actual




rate of 3 percent CPI inflation experienced over the
past two years. I expect inflation will decline below 3
percent in 1993 and 1994, helping to bring expected
inflation down further and helping to keep long-term
interest rates low.
Proposed changes in fiscal policy also have contributed to low long-term rates. The Administration's
long-term deficit reduction proposal has received a
generally favorable reaction in financial markets. Evidently, the markets view it as a credible plan to
reduce the federal government's future demands for
credit. This has resulted in a significant reduction in
long-term interest rates in recent weeks. This reduction should be a big help to the housing market and
other interest-sensitive sectors of the economy during
1993. Consequently, I am more optimistic about the
future path of economic growth and employment than
I was at the beginning of the year.
Nonetheless, the economy continues to face some
serious obstacles to growth. A major concern is that
employment is not rising commensurately with the rise
in economic activity. Further increases in employment
would help ensure that an expansion in the economy
will be self-sustaining. In addition, several structural
impediments to the economy remain with us. The
overhang of commercial office space, still-high debt
burdens of some households and firms, substantial
cutbacks in defense spending, and the continued restructuring and layoffs of workers by some firms all will
continue to hold back the growth of the economy to
some extent in 1993. Keeping long-term interest rates
low will continue to be important in helping to ease the
debt burdens of firms and households and in offsetting
some of these other impediments to economic growth.
The objective of monetary policy is to help maximize sustainable growth in output, jobs, and living
standards. Keeping inflation low is a necessary ingredient for maximizing sustainable economic and job
growth. Low inflation promotes long-term planning
and investment by keeping long-term interest rates
low. We now have inflation rates back to levels of the
1960s, and these levels will help to keep long-term
interest rates low. Reducing the federal budget deficit
is another critical ingredient to achieving low longterm interest rates. For that reason, the current focus
of fiscal policy on deficit reduction is a welcome
development. In combination, these policies—both
fiscal and monetary—will help to support expansion of
the economy while also supporting improved living
standards and low inflation over the long term.
•

Statements

Statement by Jerry L. Jordan, President, Federal
Reserve Bank of Cleveland, before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
March 10, 1993

I appreciate the opportunity to appear before you this
morning to discuss economic developments within the
Fourth District of the Federal Reserve System and to
offer my views on monetary policy. I find that approaching the issue of monetary policy from the perspective of economic conditions within our region is
particularly informative. I make this statement for two
reasons. First, the extensive restructuring within the
four states that make up the Fourth District—Ohio and
parts of Kentucky, Pennsylvania, and West Virginia—
provides important insights into the experience of the
national economy during the last several years. Second, the gains that this region achieved because of
these adjustments were aided to a large extent by the
stable-price policies of the Federal Reserve System
during that period. As I will discuss in my testimony,
these issues are important for understanding the current and future course of the national economy.
In many ways, the Fourth District's performance
during the past decade foreshadowed that of the national economy during the past several years. Although the national economy saw extraordinary
growth since 1980, the Midwest's expansion was much
more subdued. Employment within the Fourth District
states grew 9 percent from 1980 through 1992. During
the same period, employment in the national economy, driven by the bicoastal boom, expanded 21
percent. The nationwide increase was sufficient to
absorb both an enormous number of baby boomers
reaching working age and the steady rise in women's
participation in the work force.
While much of the rest of the nation expanded, the
Midwest was forced to focus on restructuring—a process that had been under way for some time. Although
restructuring was a painful experience for many people, businesses, and banks in the District, it was
necessary to restore the competitiveness of its industries. On the negative side, in 1980-82 we saw the
devastating results of the worst recession to hit this
region since the 1930s: basic industries scaling back or
shutting down, whole communities cut off from their
economic mainstay, workers displaced and discouraged. On the positive side and more recently, the
beneficial results of this ongoing process have become
more evident in the phoenix-like rise by some industries to become much more vibrant and competitive
forces in the local, national, and international economy. Newspapers and magazine articles have her-




to the Congress

405

alded this recent resurgence as the renaissance of
manufacturing. The Rust Belt has indeed begun to
regain some of its old luster.
Through improvements in productivity and a
more-balanced industrial mix, our region is now
poised for future growth. The growth will be uneven,
as some parts of the District are much stronger than
others. Clearly, restructuring will continue, both
within the Fourth District and across the United
States. But I have no doubts that a strong foundation
is in place for a healthy and sustainable expansion for
the foreseeable future. Our relatively buoyant regional economy during the past two years and our
increased presence in foreign markets attest to the
gains that we have made. The central questions will
be about the pace and durability of the expansion,
not about contraction. During the 1980s, the Midwest
faced a host of market imbalances, not unlike the
problems that confront other parts of the country
today. The region was able to work through these
problems, not because of government action, but
because market forces led inefficient industries to
invest in new technologies or simply to close down,
workers to invest in new skills, employees and
management to seek more flexible and innovative
relationships, and entrepreneurs to find and develop
promising new opportunities.
Government does have an important role, however.
It is to establish an environment of competition and
long-run stability so that markets can allocate resources to their most valued uses. The restructuring
that took place in the Fourth District was aided
immensely by the reduction in inflation and by the
acceptance that this vigilance would continue in the
future. Maintaining this commitment will facilitate the
restructuring that this and other regions of the country
are currently experiencing.
As I have stated on many occasions, monetary
policy can best promote sustainable long-run economic growth and rising standards of living by stabilizing the aggregate price level, by creating a climate of
confidence about the outlook for price stability, and by
avoiding being a source of economic disturbances
through unexpected changes in monetary policy. The
extent to which this current recovery is at risk depends
importantly on monetary policy. Deviating from a
steady and determined pursuit of our longer-run objectives in response to short-term events could jeopardize our progress.
My prepared comments discuss in some detail the
restructuring and current conditions of the Fourth
District and my views on the most effective monetary
policy for maximizing long-run output and raising the
standard of living of all of us.

406

Federal Reserve Bulletin • May 1993

FOURTH

DISTRICT

RESTRUCTURING

The byword for this region over the past decade has
been restructuring—replacement of old technologies
with new ones, innovation in business practices, scaling
back of less-efficient industries and expansion of morecompetitive ones, and absorption of excess commercial
real estate. The restructuring, although difficult and
painful, was necessary to improve efficiency and restore competitiveness. The success of these adjustments can be illustrated by comparing the employment
pattern during the past recession with that of previous
ones. In the six downturns before this most recent
contraction, the Fourth District states experienced employment declines two to four times as large as that of
the nation. In the past recession, the drop was less than
half as large as the national decline. Furthermore,
during the 1990s, the region's unemployment rate generally has been lower than the national rate.
The restructuring led to four basic changes, which
have strengthened this economy. First, companies,
particularly in the manufacturing sector, have improved productivity. For example, manufacturing output in Ohio has doubled since 1982, while the number
of factory jobs has remained roughly the same. With
each worker producing considerably more output, we
now have a leaner, more-competitive manufacturing
sector, but one that does not generate as many jobs as
it once did. If this trend continues, as I expect,
employment will move up as productivity levels increase, but in all probability, more slowly than past
experience would suggest.
Second, the industrial mix of the economy is more
balanced, relying less on the cyclically sensitive
durable-goods-producing sectors. Third, the region
has increased its participation in export markets.
Through greater competitiveness, improved product
quality, and a deliberate effort by businesses to meet
foreign specifications and to cater to foreign tastes,
local businesses have gained an increasing share of
many export markets. This is one reason the region
was more resilient in the early-1990s downturn.
Finally, the region has a strong banking sector.
Sound and efficient banks are better able to provide
financing to creditworthy borrowers, which bolsters
regional growth. Our banks are among the strongest in
the country. By implementing prudent management
strategies and avoiding the construction boom-andbust cycle of the past decade, Fourth District banks
have outperformed their national counterparts. In the
first nine months of 1992, return on assets of District
banks was higher than the national average (1.37
percent versus 0.95 percent) and net loan losses as a
share of total loans was lower (0.95 percent versus




1.15 percent). In addition, as of September 30, 1992,
noncurrent loans as a share of total loans of District
banks was lower (1.87 percent versus 3.34 percent),
and the ratio of book equity to total assets was
somewhat higher (7.77 percent versus 7.39 percent).
As a result of these developments, our region is now
in much better shape than previously. I am encouraged
by my conversations with business people and bankers
around the District, who tell me of significant improvements in some of our key industries. The view and the
attitude expressed are overwhelmingly forward looking, and this gives me reason to believe that the trend
will continue. Capital goods producers generally anticipate continued and broadening strength in orders
and production this quarter from last. Auto manufacturers tell us that they anticipate a healthy improvement in U.S. motor vehicle sales in early 1993. With
dealer inventories generally under control, increased
vehicle demand has led to rising factory orders. Steel
producers in the District report that the surge in new
orders since late last year, from auto and appliance
producers, continued in February and has led to rising
backlogs of unfilled orders and stretching out of deliveries. Some flat-rolled-steel producers report that their
order books for the first half of 1993 are virtually at
capacity.
Despite production gains, most of the people we
have talked to are very cautious about near-term hiring
plans. Employment gains simply have not matched
output growth in most industries. For example, while
manufacturers of industrial controls, truck components, and steel note a high level of operations in
recent months, they are resorting primarily to outsourcing, extra shifts, and overtime to accommodate
output growth instead of adding workers. In the auto
industry, however, most employees on temporary
layoff have been recalled, and some facilities are hiring
additional workers, as many assembly plants have
increased their production schedules. But we must not
forget that the U.S. auto industry is still adapting to
change and working through large excess capacity.
Service-sector employment growth also has been
relatively anemic. For instance, retailers report that
they, like manufacturers, are experiencing intense
competitive pressures to cut costs and have relied on
labor-saving technology and management techniques,
such as tighter inventory control, to accomplish that
goal. Employment growth has been steady in the
health care industry, which has emerged as one of the
largest sectors in both Cleveland and Pittsburgh—two
of the largest cities in our District.
Sluggish job growth in the Fourth District is part of
a national phenomenon. The interesting question is
whether employment will pick up enough to offset the

Statements

slow growth of the past few years or whether it will
remain moderate, growing along a permanently lower
trend. Certainly, last month's payroll employment
figures are encouraging.
In my mind, there are several reasons why employment has not been increasing faster in this expansion.
A large amount of sectoral reallocation of labor is
taking place, not just in my District, but across the
country. For example, displaced defense workers are
having to retrain for employment in other sectors. This
process is neither painless nor instantaneous, but as
workers become absorbed in new jobs, we expect
employment to return to previous trends. Productivity
is on the rise, some of which is due to new technologies. As workers are reabsorbed into more-competitive industries and these industries expand in domestic
and world markets, we might expect a return to normal
growth along a higher trend.
There may be some additional factors that discourage firms from hiring workers. One factor is the steady
rise in the cost of medical coverage for employees.
Firms often find it cheaper to pay overtime to existing
workers than to take on more workers. Another factor
is the mounting regulation facing businesses. Even
legislation designed to achieve useful purposes can
sometimes create unintended side effects. For instance, business people have viewed several pieces of
legislation enacted during the past several years as
adding significantly to payroll costs. While businesses
may not yet fully understand the actual costs of such
regulations, they may very well be reluctant to do any
significant hiring until these costs become more clear.
To the extent that recent slow employment growth is
due to permanently higher labor costs, we may not
recover all those jobs lost in the past few years.
While signs of a faster-paced and sustainable expansion are improving, I still have some concerns. Unless
monetary policy is conducted in a manner consistent
with price stability, the overall expansion could remain anemic.

MONETARY

POLICY

Monetary policy has played an important role in the
restructuring that is still going on in the nation and, to
a lesser—but still important—degree, in the Fourth
District. No doubt the need for some of this restructuring has its roots in mistakes that were made in the
1970s. One of the problems with inflation is that it
obscures price signals and causes both businesses and
households to make mistakes that can take years, even
decades, to remedy. Price-level uncertainty distorts
the economic information contained in market-




to the Congress

407

generated prices. It can induce people to save too
much or too little, to invest in the wrong assets, and to
be cynical about their government. And, when inflation surprises are curtailed, as the public inevitably
demands, the resource-allocation mistakes become
painfully apparent.
Unfortunately, the role of monetary policy in affecting output is often misunderstood. It is important to
remember what policy can and cannot do. It cannot
create capital stock, train workers, or improve technology. Nor can it produce real goods and services,
create employment, permanently lower the unemployment rate, or peg or permanently lower the real
interest rate. This is not to say that there is no role for
monetary policy. But instead of manipulating aggregate demand in a futile attempt to achieve an unattainable employment objective, monetary policy should
focus on providing the conditions that lead to maximum sustainable growth.
In the not-too-distant past, prices were destabilized
by policymakers who believed in a tradeoff between
price stability and full employment. That dichotomy
was false. Monetary policy affects only the efficiency
with which real productive resources are used. In the
past, monetary policy often kept the economy from
reaching its potential because the policy was not made
consistently from one year to the next. When shortrun attempts to stimulate the economy through monetary policy have led to inflation, the economy operated less efficiently and people ended up working just
as hard but producing less.
What monetary policy can do to promote long-run
economic efficiency is to stabilize the aggregate price
level and to create a climate of confidence about the
outlook for price stability. Confidence in price-level
stability would raise living standards because it would
enable business people, investors, workers, and consumers to make wiser plans for consuming, saving,
and investing. Plans made on the basis of inaccurate
assumptions about future prices are often inefficient.
Price-level stability would eliminate the incentives
people have to employ resources to hedge against
inflation. A firm commitment to price stability would
free these resources for more productive uses. Moreover, it would foster the stability of banks and the
financial system. When investments are made on the
basis of price projections that prove to be wrong, the
lenders that provided the funds for those projects are
often hurt along with the investors.
How can price stability best be achieved? There has
been some discussion about the need to go beyond
monetary targets in the Humphrey-Hawkins process.
I could not agree more. We need a commitment to an
explicit long-run price objective so that the Federal

408

Federal Reserve Bulletin • May 1993

Reserve can use annual monetary targets more effectively. The question is whether monetary targeting can
achieve price stability in the absence of an explicit
commitment to a price objective. Perhaps so, but not
as easily in my view, and at a considerably greater
cost. An explicit commitment to price stability is an
essential operational element that is missing from
today's policy process. Given the apparent inability of
policymakers to agree on an explicit price objective,
the next best thing the Federal Reserve can do is to
keep money supply growth within specified target
ranges that are consistent , over longer periods of time,
with price stability.
But which money supply: M2, or a narrow measure
like Ml? Ml, which includes currency and transactions balances, grew very rapidly last year. Households and businesses added considerably to such balances relative to their income and as a share of total
assets. In economists' jargon, the velocity—rate of
turnover—of such balances declined. At the same
time, the small time deposits included in the broad
measure of money, M2 (which includes Ml as well as
small time deposits and savings balances) fell sharply
and are continuing to decline. Households have reduced their holdings of these instruments in absolute
terms, as well as relative to their income and as a share
of their total assets. As a result, the velocity of this M2
component rose substantially and by a surprisingly
large amount relative to past experience.
For a policymaker, the challenge is to analyze these
conflicting signals and attempt to anticipate future
trends in order to conduct reserve-supplying operations that, over time, are consistent with achieving
maximum sustainable growth in a stable price environment. We have spent considerable time and resources
trying to understand the monetary data, and still we
are uncertain. While this is discouraging, it is not
unusual. We should not forget that all economic data
represent attempts to match aspects of the real world
with theoretical concepts. Just as there is a wide gap
between the theoretical concept of output and the
real-world measure of output, there is also a gap
between a theoretical concept of money and the targeted aggregates.
Nevertheless, in the real world, we must make
prudent judgments about how much weight to give to
various measures of money. In my opinion, the best
we can do today is to choose monetary targets that we
think are consistent with long-term price stability and
try to maintain them. When these targets need to be
adjusted in order to achieve and maintain price stability, we should adjust them. Such a strategy automatically avoids aggravating the fluctuations in economic
activity. Should the economy go into recession, the




money supply would tend to fall below target, unless
the Federal Reserve supplied additional reserves.
Conversely, should the economy expand very rapidly,
the money supply would tend to go above target unless
the growth of reserves is restrained. If the long-run
inflation objective is known, and credibility is maintained, then the adjustments necessary to achieve
price stability can be made much more effectively.
Of course, other factors affect the monetary aggregates, including interest rate differentials, the resolution of the savings and loan crisis, and the evolution of
liquid mutual funds. Although these factors have been
exerting an unusually large effect on money supply
growth, the announced target ranges for the broad
aggregate (M2) are wide enough to accommodate even
this extreme behavior.
What is the alternative? Some have argued that
policy judgments would be better made if the Federal
Reserve ignored monetary aggregates and instead
looked at the real economy. I cannot agree. In view of
the dramatic economic restructuring taking place today—technological developments, defense cuts, commercial real estate problems, to name just a few—we
cannot have any more confidence in our estimates of
potential output than we have in our estimates of
demand for a specific monetary aggregate.
Furthermore, we have no direct linkage between
monetary policy actions and either actual or potential
output. Let me say once again that although we may
be uncertain about how to interpret the disparate
behavior of the monetary aggregates today, this uncertainty is no greater than the uncertainty that always
exists about potential output.
What does all this mean for monetary policy? One of
the biggest obstacles to sustained economic growth
during the year or so has been the lack of credibility of
the long-run commitment to price stability. While
inflation has moved down, the public has persisted in
its belief that future inflation will be higher. Long-term
interest rates have declined but are still substantially
above the levels that would be consistent with price
stability. This belief is reflected in consumer surveys
and is manifested in the extraordinary steepness of the
yield curve and in such behavior as the record number
of homeowners who have refinanced mortgages. The
extensive business balance sheet restructuring, which
is still going on, also suggests expectations that future
borrowing costs will be higher as inflation accelerates.
The credibility of the Federal Reserve's goal to
achieve price stability has been undermined to some
extent by the belief of analysts and policymakers that
the Federal Reserve, through aggressive monetary
policy, could move the economy to a sustainable,
faster long-run growth trend. As Chairman Greenspan

Statements

to the Congress

409

indicated to you last month in his Humphrey-Hawkins
testimony, these mistaken beliefs have left us with an
economy in which private markets quickly embed even
the expectation of stimulative monetary policy into
higher-inflation expectations and nominal bond yields.
To lock in the hard-won gains made against inflation
in the 1980s and extend them well into the 1990s, the
challenge is to find a way for the Federal Reserve to

make a credible long-term commitment to an explicit
goal for price stability. Only by doing this can we
combat the 1970s legacy of heightened market sensitivity to short-run monetary policy actions, reduce
long-term nominal interest rates by another 2 or 3
percentage points, and create an environment in which
inflation fears no longer retard the efficient functioning
of the economy.
•

Statement by J. Alfred Broaddus, Jr., President, Federal Reserve Bank of Richmond, before the Committee
on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993

many community banks, and an unusually large number of strong colleges and universities.
Our Bank has identified three distinct regional economies in the District. One includes south central
Virginia, North Carolina, and South Carolina and is
characterized by substantial manufacturing activity.
North Carolina leads the nation in the proportion of
payroll employment in manufacturing, and South
Carolina is close behind. Textiles heads the list in
value of output among the manufacturing industries in
this region. The area's strong manufacturing base also
includes such other industries as chemicals, machinery, electronic equipment, tobacco products, and furniture.
The second regional economy consists of Maryland,
most of Virginia, and the District of Columbia. This
region is heavily dependent on federal government
activity, especially defense purchases. Employment
stemming from federal nondefense purchases is also
important in this area, as is federal government employment of civilian and military personnel.
The third region is West Virginia. West Virginia's
economy is based largely on coal, which explains the
state's comparative advantage in the production of
chemicals and primary metals. Lumber and wood
products are other West Virginia industries that have
enjoyed especially rapid growth in recent years.
The economies of these three regions have some
elements in common, such as their strong tourist
industries. The Fifth District is known for its many
scenic and historic areas and for its mountain and
seashore resorts. Tobacco is grown in many parts of
the District, as it has been since colonial times. Although domestic tobacco consumption has declined,
exports of both tobacco leaves and manufactured
tobacco products continue to rise. Other agricultural
products in the District range from peaches in South
Carolina, where the harvest often exceeds Georgia's,
to poultry production in North Carolina, Virginia, and
Maryland. The Chesapeake Bay usually produces a
plentiful harvest of fish, crabs, and oysters, although
the oyster harvest has been quite low in recent years.

I am pleased to be here today to discuss economic
activity in the Fifth Federal Reserve District—the
region served by the Federal Reserve Bank of Richmond—and to describe my views on monetary policy.
I will begin with some background information on the
District economy. Subsequently, I will review some
recent regional economic trends, summarize current
economic conditions in the District, and conclude with
a brief statement of my basic views on monetary
policy.

OVERVIEW

OF THE DISTRICT

ECONOMY

The Fifth District includes Maryland, the District of
Columbia, Virginia, North Carolina, South Carolina,
and all but the northwestern spur of West Virginia.
The Federal Reserve Bank of Richmond has branch
offices in Baltimore and Charlotte, regional check
processing centers in Charleston, West Virginia, and
Columbia, South Carolina, and a special facility in
Culpeper, Virginia.
The Fifth District is home for about 10 percent of the
U.S. population. The District's fine transportation
networks (including its three major seaports: Baltimore, Charleston, and Hampton Roads-Norfolk), favorable climate, and proximity to major domestic
markets combine to make the region especially attractive to business. The District is headquarters for
several major nonfinancial corporations and some of
the nation's largest and most rapidly growing banking
organizations. Collectively, the Fifth District ranks
fourth among Federal Reserve Districts in terms of
both the total assets and the market capitalization of
its banking organizations. The District is also the
location of thousands of farms and small businesses,




410

Federal Reserve Bulletin • May 1993

TRENDS

IN EMPLOYMENT

AND

INCOME

The table accompanying my testimony summarizes
the behavior of employment and real personal income
in Fifth District states since the early 1980s.1 The table
shows that the decade of the 1980s, after its early
recession, brought strong growth in both employment
and income to most of the District. This growth was
spurred in the northern part of the District by the
defense buildup and the concurrent real estate boom
and in the southern part by foreign and domestic
investment in manufacturing. West Virginia, however,
recorded a more modest increase in jobs and very little
increase in income during the 1980s, largely because of
job losses in the coal industry.
Employment and real personal income declined
throughout the District during the 1990-91 recession,
as they did in most of the country. Job market conditions have improved since the end of the recession,
although only North Carolina and West Virginia experienced significant employment growth through the
end of 1992. Employment actually continued to fall
sharply in Maryland in this period. Real personal
income grew moderately in the District from the
recession trough through the third quarter of 1992 (the
last quarter for which data are available), and here also
the performance of North Carolina and West Virginia
was strongest. In agriculture, data on cash receipts
suggest that real farm income in the District was
virtually unchanged in 1992 from 1991 but higher than
in earlier years.

CURRENT

ECONOMIC

CONDITIONS

The latest data and anecdotal economic information
available to us indicate that the pace of the recovery in
the Fifth District has quickened in recent months.
Consumer spending was strong during the Christmas
season, and more recent information suggests that
spending has held up well since then. The housing
industry has also been improving for many months,
and the decline in mortgage rates in recent weeks has
given home sales an added boost. Manufacturers responding to our regular mail survey report that District
factory activity improved during the first six weeks of
1993 after several months of little change.
Profits are up and nonperforming loans are down at
the District's banks. Our recent telephone survey of
financial institutions indicated that both business and
consumer loan activity increased during the first six

1. The attachment to this statement is available from the Federal
Reserve Bank of Philadelphia, Philadelphia, PA 19106-1574.




weeks of 1993, although half of the commercial loan
officers surveyed said that stiffer regulatory requirements were still limiting their lending activity. Small
business members of our Bank's Small Business and
Agricultural Advisory Council report that credit is still
tight despite ample opportunities, in their view, for
banks to make good start-up business loans. District
farmers are evidently finding adequate credit available
in federal programs.
Let me comment now on recent developments in
individual state economies. South Carolina has been
recovering at a moderate but steady pace. Retail
sales—including sales of new cars—have risen in
recent weeks, as have sales of new and existing
homes. Textile manufacturers are now operating at
capacity and exporting some of their production.
BMW's choice this past October of the GreenvilleSpartanburg area as the site for its new U.S. plant has
sparked increased business activity in that vicinity.
Along the seashore, tourism has revived somewhat,
and business is better. In Columbia, bankers report
increased commercial loan demand. On the negative
side, the air force base at Myrtle Beach has been
closed and parts of South Carolina are vulnerable to
possible further defense cuts.
Our contacts in North Carolina report improving
conditions and greater business and consumer optimism regarding the outlook. The improvement is especially evident in retailing, housing, and manufacturing but extends also to commercial construction. In
Charlotte, for example, one of our sources recently
complained that a scarcity of large blocks of vacant
office space was discouraging some businesses from
locating in the city, and he bemoaned the absence of
speculative builders of commercial real estate. In
Raleigh, office vacancy rates are among the lowest in
the nation. Furniture manufacturers in North Carolina
are enjoying their best year in many years, and increases in new orders point to continued good business in this industry in the months ahead.
Economic conditions in Virginia appear to be improving at a faster pace than earlier in the recovery.
The gains are reflected in a recent pickup in state
government revenues, which has permitted a modest
pay increase for state employees. Retail sales and the
construction of single-family homes in the state Eire
showing continued gains. The Northern Virginia and
Tidewater areas, which have been the hardest hit by
defense cuts, seem to be recovering despite continued
job losses due to reduced defense purchases. Vacancy
rates for office buildings in the state's urban areas have
declined somewhat, especially in the suburbs. Vacancy rates are still high, however, in central cities.
Economic activity in the District of Columbia,
which began to show some signs of turning up early

Statements

last year, continues to improve slowly. Much consolidation of Washington's financial institutions has taken
place, and their performance has improved considerably, although some problems remain. The local government continues to be mired in fiscal difficulties
brought on by population declines and by the movement of business and government activity to the suburbs. Even so, the mood among our business contacts
in Washington is positive. One favorable sign is a
pickup in tourist activity. Another is the relative
scarcity of office space in Washington, which has led
to plans for some new government and commercial
construction.
In Maryland, indications that the economy has
bottomed out are tempered by concern about shortfalls in state government revenues and by additional
layoffs at defense contracting plants such as those of
Westinghouse and Martin Marietta. On the positive
side, activity at the Port of Baltimore, which earned
its first profit in four years in 1992, is rising modestly.
Also, the residential real estate market finished
1992 with a good fourth-quarter performance, and
building permits in the state were up 26 percent in
1992 over 1991. One homebuilder who has not built
speculatively in two years now indicates that he is
planning to resume building without advance buyer
contracts.
Business activity in West Virginia has been improving steadily in recent weeks, and our business contacts
in the state are upbeat about prospects for the months
ahead. The state's lumber industry, which has benefited from strong export demand, is experiencing
record production. Production is also at capacity levels in some wood products industries. One hardwood
flooring plant operating with double shifts and with all
its production pledged was recently asked if it had
anything at all to sell. "Only rejects," the customer
was told. He bought them.
Until last month, West Virginia's coal production
was proceeding at a near-record pace, although employment in the industry was still declining because of
the continued shift to capital-intensive extraction.
From February 2 through March 2 a strike idled a
small but significant portion of the industry, and output was about 10 percent below the same period a year
earlier. Coal prices were not affected until the end of
February, however, when spot prices rose somewhat
as fear that the strike might spread prompted electric
power companies to add to their coal stockpiles. On
March 2, striking miners agreed to return to work
while talks continued.
To sum up, the Fifth District economy is on the
mend, apparently even in the northern part of the
District, which was hit hardest by overbuilding and
defense cuts. Conditions are better in retailing, hous


to the Congress

411

ing, and manufacturing. The improvement in the District economy has also benefited District banks, which
in the aggregate are in their best condition since before
the recession began.

MONETARY

POLICY

Turning to my views on monetary policy, I believe that
the primary goal of policy is to promote economic
growth and employment and that the Federal Reserve
can best pursue this goal by fostering a stable aggregate price level over time. Inflation constrains growth
by interfering with the market's ability to allocate
resources to their most productive uses. In addition,
inflation results in arbitrary and unfair redistributions
of income and wealth that cause social tensions and
weaken the fabric of our society. Moreover, rising
inflation is invariably followed by corrective policy
actions that depress economic activity, sometimes—as
in the early 1980s—severely. This stop-go pattern
retards technological progress and thereby slows the
longer-run rise in our standard of living.
Substantial progress has been made in reducing
inflation and interest rates since the early 1980s. The
inflation rate has declined from more than 10 percent
in 1980 to around 3 percent today, and the thirty-year
Treasury bond rate has fallen from above 14 percent to
below 7 percent. I believe that the large decline in
long-term rates over this period reflects at least in part
a significant increase in the credibility of the Federal
Reserve's disinflationary strategy. The current thirtyyear Treasury bond rate, however, remains well above
the 3 percent rate prevailing in the 1950s, when the
price level was reasonably stable, which suggests that
the public still fears that inflation will persist at 3
percent or 4 percent in the years ahead. In my estimation a fully credible policy to achieve price-level
stability would bring long-term rates down further and
provide an important additional stimulus to economic
activity. In this regard, I should note my belief that
passage of the Neal Amendment would strengthen
greatly the Federal Reserve's effort to achieve full
credibility for its longer-term objectives.
Against this background, I believe firmly that specific monetary policy actions taken in the short run
should be evaluated within the framework of our
long-run goal for price-level stability. In particular, the
annual targets for the monetary aggregates should be
seen as a means of helping the Federal Reserve attain
its longer-term objectives rather than as ends in themselves. The targets play a useful role in signaling our
long-run commitment to a stable price level, and we
should continue to lower the targets gradually until
they are fully consistent with this objective. In making

412

Federal Reserve Bulletin • May 1993

our short-run policy decisions, however, we should
not adhere slavishly to the targets, in my judgment,
when technical developments or institutional
changes appear clearly to be altering the relationship
between GDP growth and money growth—such as
occurred in 1992, when nominal GDP grew at a rate
of more than 5V2 percent while M2 grew at a rate of
only 2 percent.
In making our short-run policy decisions we also
need to be mindful that actions that weaken the
credibility of our commitment to price-level stability
can have perverse effects on interest rates and economic activity. The Federal Reserve directly influences only a small number of short-term interest rates.
As I mentioned earlier, long-term interest rates, which
have a greater influence on economic behavior, are
determined in large part by the public's inflation
expectations. If we want to foster low long-term rates,
with all their benefits to the economy, we must make
policy decisions that the public views as consistent
with longer-term price level stability.
I should note here that while I believe that the
System's short-run policy actions need to be conditioned at all times by our longer-term objectives, I also

recognize that these actions must be taken in the
context of current developments in the economy. If
market forces are putting downward pressure on
short-term interest rates, then we must allow shortterm rates to fall in reflection of those forces, as indeed
we have over the past several years. I think it is futile,
however, to base our policy actions on the notion that
monetary policy can eliminate or nearly eliminate
short-run fluctuations in economic activity, which
occur for a wide variety of reasons. Actual experience
over the past thirty years provides little, if any,
support for this idea. In particular, history suggests
that attempts to stimulate economic activity in the
short run without regard to the possible inflationary
consequences result eventually in higher inflation and
the depressing corrective actions that I mentioned
earlier.
To sum up, my view is that monetary policy should
seek to promote real economic growth and employment by achieving and maintaining price-level stability. The Federal Reserve's day-to-day policy actions
should be consistent with this goal, and the System
should do whatever it can to increase and enhance the
credibility of this strategy.
•

Statement by Robert P. Forrestal, President and Chief
Executive Officer, Federal Reserve Bank of Atlanta
before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate, March 10, 1993

were some of the most impoverished in the nation.
Even today, by many measures of social well-being,
Sixth District states continue to underperform the
nation. For example, the proportion of children
living below the poverty line exceeds the national
average in every District state and reaches about 30
percent in Mississippi. All the District states, with
the exception of Florida, have lower-than-nationalaverage per capita disposable personal income. And
Florida, Georgia, and Louisiana represent three of
the four states across the nation with the lowest high
school graduation rates. These few figures hint at my
views about macroeconomic policy. As I will share
with you, I favor a policy mix that fosters long-term
investment. Only through the creation of physical
and human capital can the poorer areas of the Sixth
District share in the successes of the more prosperous areas.

I am pleased to appear before this committee today to
discuss economic conditions in the Sixth Federal
Reserve District and to provide my views on appropriate monetary policy. I will first review current
economic conditions in the District and the prospects
for 1993. Then I will turn to the longer-term outlook
for the region and some challenges related to lingering
disparities in income growth in the southeastern
states. This perspective will bring me to my final
subject, monetary policy.
The issue of sustainable growth is of special concern
to me because of the uneven performance of the
Southeast. Over the past few decades we have experienced some relatively rapid growth, most notably,
perhaps, in the Atlanta environs. Middle Tennessee
has also performed relatively well, as have most of
Florida and sections of Alabama.
However, the Sixth Federal Reserve District is an
extremely diverse economy, encompassing Georgia,
Florida, Alabama, two-thirds of Tennessee, and the
southern halves of Mississippi and Louisiana. For
many decades the states that make up this District



CURRENT
OUTLOOK

ECONOMIC
FOR 1993

CONDITIONS

AND

Overview
As background to this view, let me begin with current
economic conditions in the Sixth District. After shar-

Statements

ing weak conditions with the rest of the nation, the
southeastern economy began improving in the middle
of last year. Regional nonfarm payroll employment
increased moderately through the end of 1992. From
January 1992 to January 1993, states in the Sixth
District reported more than 300,000 new jobs, a 2.2
percent growth rate. This compares with a 0.6 percent
increase in payroll employment for the nation over the
same period. Most of the increases were posted in
services, construction, wholesale trade, and durable
goods manufacturing. The District's seasonally
adjusted unemployment rate stood at 7.3 percent in
January of this year, fed by high jobless rates in
Alabama, Louisiana, and Florida that pulled the regional average above the nation's. However, Florida,
the only state with more recent employment statistics,
experienced a sharp decline in unemployment in February—to 6.7 percent.
After enjoying significant increases in holiday sales,
with many areas showing double-digit percentage
gains over year-ago levels, retailers saw sales holding
up fairly well in the first quarter. Realtors and homebuilders have been seeing ongoing improvements in
most single-family markets. Manufacturers are reporting modest increases in production. Bankers indicate
that consumer and business loan demand is picking up.
Except for some construction materials, wholesale
and retail prices have remained stable and wage gains
modest. Contacts across the District suggest that
consumer and business confidence has revived.
In 1993, growth in the Southeast should outpace the
nation. The region's concentration in household textiles, furniture, appliances, and lumber production will
be boosted by national strength in single-family construction, while new construction to replace losses
from Hurricane Andrew will add further to demand. In
addition to the housing rebound, the Southeast, which
has been treating timber as a cultivated crop for
decades, stands to benefit from environmental restrictions in the Northwest through the 1990s.
Drags from defense cutbacks and state government
fiscal problems are also likely to have relatively less
impact in the Southeast. Although defense contractors
in the region are suffering, the Sixth District is expected to be hurt relatively less by spending cutbacks
because defense production is a less important factor
than in other regions. In addition, the Southeast will
probably not be hit as hard as the rest of the nation by
the U.S. Defense Department's current base reduction
plans.
The Southeast is also comparatively less hampered
by state and local government budget problems. Although several states are currently considering some
form of revenue enhancement and budgets have certainly been tight, the problems generally have not been




to the Congress

413

as significant as those found elsewhere, nor are they
expected to be.
Of course, lingering problems will keep growth only
moderate. Several forces that limited employment
gains in 1992 are still in effect. Excess real estate
investment from the 1980s will continue to dampen
office, apartment, and condominium construction.
Employment in service industries should grow more
rapidly in 1993 as demand for business and personal
services picks up, but the possibility of further consolidation in several industries, including banking, airlines, and communications, will continue to restrain
total employment growth through 1993. On balance,
however, the Southeast's economy is likely to expand
more rapidly than the nation's in 1993.
Retail

Activity

According to the vast majority of our retail contacts,
after a strong holiday season with increased spending
noted across a wide range of goods from apparel and
household textiles to big-ticket items such as electronics, appliances, and furniture, year-over-year consumer spending growth continued in January and early
February. Most retailers are upbeat about near-term
prospects, and they are also generally happy with
current inventory levels. Auto sales growth, however,
has been less uniformly positive across the region.
Tourism continues to be a positive force in the
regional economy. Air passenger traffic, particularly
international arrivals, was significantly above year-ago
levels in December. Reports of convention attendance
in early 1993 show that it is exceeding year-ago levels;
industry contacts indicate that advance bookings
through at least midyear are strong.
Looking ahead, Hurricane Andrew will continue to
generate a spending surge on building materials and
related household goods in southern Florida and Louisiana through most of the year. Although localized,
the stimulus is likely to be large enough to boost
regional sales an additional 1.5 percentage points, to
well above 1992 levels and comfortably above the
expected national pace. In addition, previously postponed purchases of autos, household goods, and other
big-ticket items as well as increased home sales—new
and resales—will support purchases of appliances,
furnishings, and household textiles next year.
The stimulus from Hurricane Andrew will peak in
the second half of the year as insurance proceeds are
exhausted. When hurricane-related construction slows
after midyear, spending generated by rebuilding in
Florida and Louisiana will begin to fade, in turn
causing overall consumer spending gains in the region
to decelerate. Stimulus from moderate increases in
total employment and incomes will be left, but that

414

Federal Reserve Bulletin • May 1993

cannot sustain the current pace of consumption
growth in the Southeast. Nonetheless, the retail work
force is expected to expand somewhat faster than total
employment through 1993.

Manufacturing
Manufacturing in both the Southeast and the nation
currently employs between 16 percent and 17 percent
of the nonagricultural work force. However, the regional average does not accurately reflect the importance of manufacturing activity in the different District
states. Low manufacturing concentrations in Florida
and Louisiana veil the importance of factories as
employers in Georgia, Tennessee, Alabama, and Mississippi. The Southeast's considerably greater dependence on nondurables production—52 percent of total
factory employment versus 43 percent nationally—has
given the region an advantage since mid-1991.
District manufacturers reported moderate increases
in activity through February. Industry spokespersons
note that production and shipments continue to increase for textile and apparel plants. An improving
national housing market is supporting carpet production, although the glut of office space nationally is
depressing the outlook for commercial textile products.
Contacts also note improving conditions for electronic
equipment and rubber and plastic producers. According
to preliminary figures from the Atlanta Fed's monthly
survey of southeastern manufacturers, almost twofifths of responding plants indicated increased production during February, compared with 15 percent reporting declines. More than half of the respondents expect
production and shipments to increase over the next six
months. About half of the survey respondents think
that new orders will be greater six months from now. A
third of responding firms expect to increase investment
over the next six months.
Among specific industries within the manufacturing
sector, textile and apparel producers account for a large
proportion of regional employment. Textile and apparel
factories began adding jobs in mid-1991 as the national
housing recovery spurred orders for carpets and household textiles generally and rising apparel sales inspired
retailers to begin rebuilding inventories that had been
sliced to the bone during three tough years. The upward
tick in apparel demand through early 1992 provided
only temporary relief to an embattled industry, however. By the second half of the year, apparel employment was already beginning to look unsteady. The
long-term trend toward lower employment should
resume over the next year as apparel production continues to become more capital-intensive or is moved
offshore. Fortunately, gains in housing activity and




stability in the nonresidential sector should continue to
strengthen the demand for textiles.
The region also has a concentration of producers of
pulp and paper products and food processors. Production of pulp and paper products advanced convincingly
in 1992 as improved shipments and distribution activity
stirred demand for boxes and paperboard. Food processing also continued to expand at a steady pace last
year. The expansion nationally should continue to
boost demand for pulp and paper products through
1993, and steady growth in food processing should be
sustained.
Regional and national producers of machinery, fabricated metals, and electronics all suffered during the
past year. In general, however, their troubles struck the
Southeast less severely because these industries are not
as crucial to the region's total factory output as they are
in the nation in general. The expansion of auto production capacity in Tennessee provided a welcome respite
to an otherwise gloomy transportation equipment sector in the region. The national upturn in demand for
durable goods bodes well for these industries.
The main weakness—past, present, and future—in
durables production nationally revolves around defense, but regional declines in defense-related activity
should be comparatively less significant than in the
United States as a whole. The six-state region represents 13.5 percent of total U.S. employment but,
according to the U.S. Department of Defense, is home
to only 10.5 percent of the nation's defense-related
jobs. In a recently released Congressional Budget
Office ranking of states by projected effects of defense
employment declines through 1996, no southeastern
states appear in the top ten. Declines in the region's
defense-related production should also be mitigated
somewhat by a national recovery in demand for durable goods. All in all, manufacturing should lend
strength to the southeastern economy in 1993.
Construction
Construction in the Southeast reached a trough in late
1992 after four years of steady decline. Since its peak
in 1988, when the industry employed nearly 790,000
workers in the region (7 percent of the total job base),
125,000 jobs have been lost, paring construction employment to 4.5 percent of the work force—equal to
the current national average. Most of the job losses
occurred in Florida and Georgia, the Southeast's
boom states in the 1980s. Alabama and Tennessee
posted modest construction layoffs while Louisiana
and Mississippi registered offsetting gains.
After adjusting for seasonal variation, realtors reported that home sales continued to rise in most areas
of the Sixth District into the first quarter. They noted

Statements

increased traffic and interest in low- to mid-priced new
and existing homes. While most reported little change
in inventories, a growing minority have seen some
absorption of excess space in the resale market. Home
prices have remained mostly steady except for new
construction, where higher materials prices are reported to be pushing housing prices up. Realtors
attributed sales gains to low mortgage rates and increased consumer confidence. The majority are optimistic about sales prospects during 1993.
Looking at construction activity, single-family building continues to improve. Permits continued to edge
higher through the end of 1992, and most builders
contacted anticipate further sales gains in 1993. Multifamily development in the Southeast continues to be
plagued by relatively high vacancies, only moderate
economic growth, a demographic shift that has reduced
the traditional pool of young adult renters, and the
declining relative price of starter homes. Still, with a
virtual absence of new development in most markets
since 1991, occupancy rates are edging higher, effective
rental rates are firming, and bottom-fishing investors
are more active in buying up nonperforming properties.
While offering little sign of recovery, the supply imbalances are clearly abating, and the long slide in multifamily development appears to be over. Modest gains in
multifamily development could occur in 1993, but the
recent rebound in residential investment will probably
slow except for hurricane-initiated activity.
Commercial construction remains stagnant in most
markets in the District. Potential developers of speculative projects are still having a hard time finding
credit. Stagnant office development reflects developers' sober assessment of how slowly the growth in
white-collar employment is likely to absorb excess
office supply. Some positive signs are beginning to
appear, however. Large contiguous blocks of space
are becoming scarcer in major metropolitan areas, and
effective rental rates are inching upward. In some
areas, the lack of new product has resulted in lower
vacancy rates amid a slow recovery in net absorption.
The value of contracts for nonresidential private construction in the region appears to have hit bottom in
mid-1992. As net absorption slowly gains momentum
in 1993, it should set the stage for modest increases in
office development beginning late in 1993 or in early
1994.
In addition to these regionwide developments, Hurricane Andrew has ensured a temporary construction
boom in southern Florida and, to a lesser extent,
southern Louisiana. Repairing $15 billion to $20 billion
in damages to residential, commercial, and public
structures may require 20,000 to 30,000 additional
construction laborers at the work's peak in the second
half of 1993. However, by late 1994 the withdrawal of



to the Congress

415

these jobs and incomes will begin to exert a significant
drag on those local economies.
Service

Sector

Performance of the region's business and professional
service producers typically parallels the nation's. Although regional demand for transportation, telecommunications, and financial services is likely to rise in
1993, employment growth in these industries will be
constrained by continued restructuring. Major corporations continue to announce long-term commitments
to reducing staff levels. Telecommunications and software companies are facing intense competition. Airline bankruptcies have served a particularly hard blow
to the region in the past two years. While remaining
carriers have taken up most of the slack in service,
most of the laid-off employees have not been rehired
and remaining carriers are cutting jobs.
Business services employment, which rebounded in
1992 after declining in 1991, reflects broad efforts at
consolidation and cost reduction. Part of 1992's rebound can be attributed to temporary agencies, which
are defined as a business service. Increasingly, firms—
ranging from insurance agencies to hospitals—use
temporary agencies to meet fluctuations in demand for
services and to hold down costs, to limit long-term
commitments, and to screen prospective employees.
Employment gains in health services, which maintained rapid employment growth rates during the recession, have begun to slow, perhaps the victim of
excess capacity as competition among hospitals and
physicians is intensifying. While employment growth
in this sector will continue to advance more rapidly
than total employment in 1993, the rate should slow
significantly.
State legislatures in the District have reconvened.
Coincident with the pickup in regional economic activity, state and local tax revenues are generally improving. Nevertheless, Alabama, Florida, and Louisiana are all considering ways to increase revenues.
Tennessee legislators may make permanent a state
sales tax hike temporarily imposed last year. Georgia
is enjoying relatively vigorous growth in its tax receipts, and Mississippi is actually running a moderate
budget surplus.
Wages and

Prices

Upward wage pressures are virtually nonexistent in
the District at this time. Corporate restructuring and
downsizing continue to hold back wage increases and
new hiring. Most respondents to the previously mentioned manufacturers' survey reported no changes in
prices received for finished products or prices paid for

416

Federal Reserve Bulletin • May 1993

materials in February. Only one-fourth of surveyed
firms hope to raise finished-product prices in the next
six months. Discussions with other contacts reveal
some uncertainty about whether modest price increases will stick because of the competitive environment.
A Comparison

of District

States

Turning to the outlook for specific states, Georgia,
Tennessee, and Florida have more growth potential in
1993 than the other states of the region. By year's end
1992, both Georgia and Tennessee were exhibiting
well-entrenched and relatively balanced, moderate
economic recoveries. Georgia seems to be back on a
favorable track after having absorbed several significant negative economic shocks over the past four
years, but it faces some drag from the shrinkage in
airline and defense payrolls. Tennessee is experiencing employment gains in manufacturing, especially in
auto-related industries. Both states should grow moderately faster than the nation. Florida, the most populous state in the District, has lagged behind the region
in recovery. It began to show signs of doing better in
the latter part of 1992. Despite the effects of defense
cuts on Florida's manufacturers, improved tourism
and exports to Latin America will probably be enough
to put Florida's growth on par with the region's in
1993. Added to those forces, rebuilding after Hurricane Andrew will provide an additional boost for jobs
and incomes. Thus, Florida is also likely to grow at a
rate above the regional average, but this momentum
may begin to fade by year-end.
Mississippi and Alabama mostly steered clear of the
national recession during 1990 and 1991. However,
Mississippi's prospects in 1993 are dimmed by expected defense-related layoffs, and Alabama's modest
growth should not measure up to the regional average
because of deceleration in apparel, textiles, and public-sector employment. Louisiana's energy-based
economy may be running against the region's general
trend and faces the prospect of a continuation of the
state's current economic slump in 1993 even as the
moderate national expansion builds momentum.

LONG-TERM

GROWTH

CHALLENGES

The Southeast's generally positive short-term prospects are based mainly on temporary advantages. In
the longer term, sustaining and broadening the growth
that many parts of the Southeast are likely to experience in 1993 will depend upon the region's ability to
attract capital and labor and its response to underlying
structural changes in the domestic economy as well as



to international competition. Comparatively low
wages and taxes in the six southeastern states will
continue to draw relatively labor-intensive investment. Unfortunately, however, many areas of the
Southeast are not set to deliver the skilled, flexible
work force increasingly needed to use sophisticated
factory and office technology and to compete internationally.
Growth in the Sixth District over the past two
decades has been fed and sustained by attracting
capital, both physical and human, from other parts of
the country and overseas. The substantial rise in
incomes in middle Tennessee has sprung in large
measure from decentralization of manufacturing. Atlanta's growth has come from this trend, decentralization of corporate headquarters, and outsourcing of
business services, along with a spectacular rate of
successful small business start-ups. What all these
sources of jobs have in common is a long-term commitment of capital and skills to the region.
These commitments would not have been made
without the expectation of a long-run payoff to the
investments. The Ph.D.s, engineers, and highly skilled
workers who have relocated to the Southeast would
not have come were it not for their expectation of a
better standard of living as a result of their move. The
physical capital would not have been attracted to the
region if the investors did not think that the long-term
payoff would be higher here than elsewhere. In short,
our growth has been based on a variety of decisions
that are, in one form or another, motivated by relatively favorable long-term views of the Sixth District.
However, the region has not succeeded in economic
improvements to all localities or segments of the
population. The disparity in the 1993 outlook for the
six states as well as the statistics on educational
attainment and per capita personal income I provided
at the outset attest to this shortcoming. To overcome it
will require more long-run investment in both physical
and human capital. However, such a lasting commitment requires a hospitable economic environment that
people expect to be maintained over time. Moreover,
this stability cannot be maintained on a local or
regional level without the sustained presence of appropriate macroeconomic conditions, attendant with a
sound fiscal and monetary policy mix. This observation brings me to the third and final aspect of my
remarks, namely, monetary policy.

THE ROLE

OF MONETARY

POLICY

The most important role of monetary policy is to
provide an environment in which the most productive
outcomes will occur. Such an environment is one that

Statements

allows for a focus on the longer run; it is one in which
resources are not distracted or diverted to deal with
short-term distortions and temporary imbalances. In
such circumstances, resources, both physical and financial, can be used to their greatest efficiency and
yield their highest output and reward.
I am well aware of the loss, inefficiency, and waste
that is behind the human tragedy of unemployment,
and I am equally aware of the terrible cost of inflation.
The role of monetary policy is to put some credible
bounds on expectations about inflation and unemployment. Thus, the Federal Reserve not only must provide assurances that inflation, now or in the future,
will not be allowed to rise enough to become an
important consideration in private decisions but also
must support expectations that disruptions to the
economy in the presence of unforeseen and unwelcome shocks will be mitigated. In this sense, I see the
role of the Federal Reserve as promoting stability, not
just in prices but also in income and employment
growth as well. This setting is a critical ingredient in
the creation of sustainable growth because a stable
environment will support the long-term planning horizon necessary for the investment that will create jobs
and nurture high value-added firms.
Of course, the Federal Reserve must seek to create
and maintain these conditions in a world of uncertainty. We all know that history does not, in fact,
usually repeat itself. In addition, the Federal Reserve
must bring to bear on its decisions an understanding of
the social preferences of the American public. Given
the uncertainty inherent in policymaking and the difficulty of assessing risks, monetary policy may sometimes have to steer the economy gradually to the
desired conditions of price stability and output growth.
In most advanced economies, policy institutions
were created over the past century to mitigate the
transition costs of economic corrections. In the nineteenth century, business cycle fluctuations were much
sharper than they are today. Imbalances were corrected by sharp implosions in financial markets, severe
contractions in output and money wages, and costly
dislocations of resources. Prices also tended to fall
across the board, sometimes quite dramatically. Then
economic growth began afresh.
Although such swift and clean adjustments have a
certain theoretical attractiveness, these abrupt
changes were unnecessarily costly for those adversely
affected. Sometimes, in the rush of a collapse, sound
businesses, banks, and households were financially
ruined because their assets were not liquid and they
lacked the time to find the means to liquidate them.
Over time, a variety of economic policy institutions
and measures were established to mitigate and attenuate this process.




to the Congress

417

This broadly ameliorative aspect of macroeconomic
policy is still the Federal Reserve's mandate. I believe
that the Federal Reserve, like other policy institutions
that act on behalf of society, must keep public preferences in mind when pursuing social goals. As a practical matter, this social obligation means that none of
the transitions should be excessively traumatic.
To make monetary policy in a context of uncertainty, complexity, and trade-offs, the Federal Open
Market Committee (FOMC) seeks to reach decisions
by consensus, and this consensus is based not only on
economic statistics and forecasts but also on information gathered from Americans at work in the economy.
As a Reserve Bank president, I am able to share with
my Washington-based colleagues my interpretations
of the latest economic data and models as well as the
opinions and experiences of people in the Southeast. I
meet regularly with business executives, bankers,
farmers, labor leaders, educators, and others. These
people share with me, in confidence, current and
sensitive information about their firms, changes in the
size of the work force, early warning signals of inflation, credit availability, and what they believe should
be done about the way things are turning out. By
bringing together a broad range of information and
opinion, I believe the process of reaching a responsible
consensus is enhanced. I know that being a part of my
District has influenced my views on monetary policy.
Right now, I believe monetary policy is on target.
The economic situation is by no means ideal, given the
large number of unemployed. However, we must not
discount the important foundation for growth that has
been laid by the Federal Reserve in reducing inflation.
The current degree of price stability we have achieved
positions the United States to reap enormous and real,
not inflationary, gains in output and incomes.
In this vein I am very heartened that the burning
issue of the federal budget deficit has moved to the
forefront of the social agenda. I feel it would be
inappropriate to comment on specific elements of the
proposal because doing so would be inconsistent with
the independence of the central bank. Nonetheless, I
can emphatically say that a successful resolution of
this issue can ensure that we achieve conditions favorable to long-term investment and lasting growth, both
in the Southeast and the United States.

CONCLUSION

In conclusion, let me reiterate the motivations for my
stance on monetary policy. I bring to the FOMC the
views and experiences of people from a diverse Federal Reserve District. It is one that has not only
enjoyed rapid growth but also lingered in oppressive

418

Federal Reserve Bulletin • May 1993

poverty. To redress the latter condition, I believe we
need more investment, in both human and physical
capital—better schools, factories with high-skilled
jobs, and so forth.
To garner such investment regionally, we must
have as a national foundation an economic environment that promises some measure of stability over
time. Otherwise the Southeast will end up with more

short-term and short-sighted projects that create
low-wage jobs for a while until lower-cost alternatives can be found. Monetary policy thus is critical to
the Southeast's major challenge because it can help
create such an environment of stable prices and
steady gains in employment and output. By doing so,
we will achieve the ultimate goal—higher living standards for all.
•

Statement by Silas Keehn, President, Federal Reserve
Bank of Chicago, before the Committee on Banking,
Housing, and Urban Affairs, U.S. Senate, March 10,
1993

require contact with businesses and individuals and
cannot be derived solely from statistics and theory.
While our Bank follows the publicly released data very
carefully, we rely very heavily on information sources
and contacts within the District to determine current
and prospective conditions so important to the development of the appropriate monetary policy to deal
with changing economic circumstances. It was only by
maintaining close contact with our District that it has
been possible to go beyond the economic statistics to
an understanding of what has really been going on in
the District's economy and in the nation as a whole.
The Federal Reserve Bank of Chicago is deeply
involved in monitoring and analyzing economic developments in the District on an ongoing basis with a
variety of fact-finding initiatives. In addition to the
very valuable input from our boards of Directors in
Chicago and Detroit, we have set up a network of
advisory and contact groups. The Reserve Bank assembles regional data to provide a quantitative base
for regional analysis, drawing from government
sources and business in the District, and we have
developed our own measures, such as the Midwest
Manufacturing Index, to track District economic activity. Some years ago we formed Small Business and
Agricultural Advisory Councils to obtain continuing
and very important input from these large sectors of
our economy. In addition, the Bank has established a
network of Industrial Roundtables to provide information about emerging business conditions. Industrial
Roundtables now meet in Chicago, Detroit, Milwaukee, Grand Rapids, and Kalamazoo. The Detroit and
Chicago groups include corporate economists from
some of the largest companies in the District. The
Milwaukee and western Michigan groups include chief
financial officers and corporate planners from the
diverse and important companies located in these
areas. In addition, the roundtables include contacts
whose businesses are leading indicators of economic
activity throughout the District. These roundtables are
a direct link to about 100 companies and trade associations in the District and provide timely insight into
current conditions and emerging market trends. By

I am pleased to be here today to discuss economic
conditions in the Seventh Federal Reserve District and
to comment on my views on monetary policy. The
Seventh District, which includes all of the State of
Iowa and most of the States of Illinois, Indiana,
Michigan, and Wisconsin, is an economically large,
important, and diverse region, which both reflects and
drives a substantial portion of the U.S. economy.
By any measure, the District ranks as a major
economic force, and, therefore, conditions in the
District directly influence my views regarding monetary policy. And, in turn, monetary policy actions
have an important impact on economic activity in our
District.
The five District states account for about 14 percent
of the nation's GDP and 18 percent of U.S. manufacturing employment. The District produces 45 percent
of the nation's automobiles, 30 percent of the trucks,
38 percent of the nation's steel, and more than 40
percent of the country's farm machinery. Farmers in
the Seventh District account for nearly one-fifth of the
nation's annual sales of farm commodities and half of
the corn, soybeans, and pork produced nationwide.
The District is the headquarters of some of the largest
firms in the United States in manufacturing, retailing,
and financial services.
Given its size and diversity, it is not surprising that
the District mirrors the economic challenges and opportunities in the U.S. economy as a whole. Consequently the District, as the nation, has been experiencing significant difficulties in maintaining an
adequate rate of real growth. District performance has
improved, but the pace of improvement continues to
be impeded by further financial and industrial restructuring.
Monetary policy requires two things above all, a
solid assessment of where we are and a sure sense of
where we should be going. Both of these questions




Statements

integrating economic data with direct corporate and
small business contacts, we are able to make a comprehensive analysis of the economic trends and current conditions in the District and from that develop a
factual basis for my recommendations on monetary
policy.
In addition to our formal roundtables, the Bank
works together with those public sector and quasipublic groups that are struggling to revitalize the region's
economy. Collaborations with the Wisconsin Strategic
Development Commission, the Iowa Business Council, the Commercial Club of Chicago, and the Council
of Great Lakes Industries are examples of organizations working to rebuild the District economy. Such
efforts yield a lasting return to us. Through our personal participation, we establish a relationship of trust
and open important avenues of communication with
other analysts of areas within the region that enhances
our knowledge of issues important to our District.
The diversification of our sources of information in
the District helps to ensure that we do not overlook
any emerging sectors of economic activity and problems that broad national statistics can overlook.

DISTRICT

OVERVIEW

The Seventh Federal Reserve District is situated in the
heart of the Midwest, straddling the agricultural plains
toward the West and encompassing a large part of the
nation's heavy manufacturing belt, which begins further to the East. With a population that accounts for
13.6 percent of the nation, our District includes the
entire state of Iowa along with the most populous and
urbanized portions of Michigan, Illinois, Wisconsin,
and Indiana. Accordingly, while we are headquartered
in Chicago, we maintain a branch office in Detroit, and
regional offices in Des Moines, Indianapolis, and Milwaukee.
Many of the District's large urbanized areas now
specialize in the business of providing services—
business, personal, financial, and wholesale and retail
services. Over all, however, our part of the Midwest
currently and historically can be characterized as a
producer and mover of goods—both natural resource
oriented such as farm goods, as well as manufactured
goods. Nearly one-fifth of the nation's $170 billion in
annual sales of farm commodities is generated by
farmers in District states, mostly because of its dominant positions in corn, soybeans, dairy, and hogs. In
manufacturing, the District states account for more
than one-sixth of the nation's output. Land-based
transportation equipment, electrical equipment, primary metals, machinery, and food processing are the
mainstays of the economy.




to the Congress

419

However useful as an initial characterization, such
generalizations belie the very broad diversity of locales and industries in the Seventh District. Today, I
would like to share with you the diverse richness of
economic activity among subregions and industries
within the Seventh District by drawing not only on our
own analysis and public data sets but also from a wide
network of personal contacts with organizations in the
region.
The Seventh District economy emerged from the
decade of the 1980s in far better shape than most
analysts expected. Its image as part of the nation's
collapsing rust belt has been replaced by an emerging
image as the center of lean and agile manufacturing.
That is not to say that the District's economy has not
shared the frustration of a subpar recovery nationally
or that it has been immune from the economic hardships of the recession or the corporate restructurings
that have swept the nation. General Motor's (GM's)
announced plans to close twenty-eight plants over the
next three years—roughly half of them in the Seventh
District—is a key example; Sears, Ameritech, Dow
Chemical, and United Air Lines are among other
notable examples of Seventh District corporations
undergoing dramatic adjustments in the face of changing markets and competitive pressures.
In addition to upheaval among such corporate entities, there is a striking diversity of conditions among
towns and metropolitan areas within our Seventh
District. Locations such as Flint, Peoria, Rockford,
Detroit, and Chicago continue to search for answers
and solutions to disappearing jobs and income, even
while national attention focuses on the entire region's
turnaround.
In the early 1980s, firms such as Caterpillar, Cummins Engine, and Whirlpool faced formidable challenges. Many companies made the necessary adjustments in the 1980s, while others are still making these
adjustments.
But the success stories are far from universal.
Well-meaning and well-directed efforts to restructure
have been to no avail for many small businesses and
family farms and for many large corporations that have
gone out of existence. Similarly, there is parallel
diversity in locational well-being and revival for those
towns that have grown up around large specialized
industries. Some can succeed, such as Indianapolis
and Des Moines, by redefining and reinventing themselves (for example, Indianapolis as a center of sportsoriented tourism, business services, and retail trade).
Others however, despite their best efforts at "diversifying" (for example, Flint) have thus far made less
progress confronted by external forces and events. It
is an accurate statement that the Seventh District has
been through an enormous and very fundamental

420

Federal Reserve Bulletin • May 1993

change. And in this tremendous diversity of experience, not every region or industry has come through
intact.
The Seventh District is no stranger to adversity. In
particular, the region has long needed to adapt to the
cyclical nature of its economy. Moreover, even when
its industries are successful in becoming competitive,
the process itself leaves significant challenges and
opportunities in its wake. Goods-producing industries,
including farm and factory, have continually boosted
productivity by economizing on the number of jobs. In
the United States alone, manufacturing jobs as a share
of the total payroll labor force have declined from 30
percent to 17 percent from 1963 to 1992 even while the
sector's share of real national output has remained
roughly constant. Such labor dislocation is an amplified problem for regions that are concentrated in
manufacturing such as the Seventh District. The District's manufacturing share of total payroll jobs declined from 37 percent to 21 percent over the same
period. Recent management strategies by firms to
improve their competitiveness by labor-saving cost
attrition and mass layoffs have added to this problem.
The imbalances in the Seventh District's economic
base are also reflected in the response of local
institutions—banks and governments. Governments
have the task of making the investments in the future
of the region—infrastructure and education. However, weakness in the underlying economic base can
place a region in a vicious cycle. The vicious cycle of
economic shock, followed by inability to fund social
services and public reinvestment, is further aggravated. In recent years, weak growth in revenues,
coupled with fiscal strains from Medicaid and prison
expenditures, have squeezed out budget items such
as economic development and higher education in
District states. In the Seventh District, responsibilities for service provision fall to a much higher degree
at the local level of government. As a result, wide
disparities in economic conditions among local communities means that local plant closings, for example, will carry over strongly to the fiscal health of
local governments.
Lending institutions share a similar fate. In the early
1980s, the balance sheets of Seventh District banks
were weakened by the region's weakening economy.
Banks have been restructuring, although problems
remain. As in other areas of the country, bank lending
slowed sharply in the early 1990s. The safety and
soundness of Seventh District banks are being
strengthened by the ongoing process of consolidation
as earnings, capital ratios, and asset quality issues
have all shown important signs of improvement. The
impetus is not being undertaken by money center and
other larger banks in Chicago, however, but by large




regional banks headquartered outside Chicago and, in
some cases, outside the District.

THE 1980S—A

TIME OF DIFFICULT

TRANSITION

Much of the Seventh District was characterized as the
"rustbelt" of the nation in the early 1980s. Weak firms
either failed or relocated to lower cost regions, and
inefficient plants were closed or downsized. Indeed,
the District lost nearly 1.5 million jobs during the
recessionary period of 1980-82, mostly in its manufacturing sector, while the nation lost about 2 million
altogether. To be sure, many of these job losses were
from cyclically sensitive industries that were able to
recall workers during the vigorous recovery that followed. But, many jobs were also linked to structural
changes that had been adversely affecting the District
since at least the mid-1960s. Such jobs would never
return, creating a large pool of structurally unemployed workers and above-average unemployment
rates in many metropolitan areas of the District. The
region's standard of living, as reflected by per capita
income, declined in relation to the overall U.S. standard during this period.
Why was the District affected so heavily during the
1980s? Why did it need to restructure so profoundly?
The problems of the 1980s were to be found in both the
District's mix of industries and also its competitive
advantage. Unfavorable industry mix presented a formidable challenge to the District during this period.
Fortunately, because of changes in the external environment, the District's current industry mix has since
become more favorable than many other U.S. regions,
as the nation is winding down from its cold war
emphasis. The early 1980s favored regions that produced high tech defense and aerospace equipment. At
the same time, heavy U.S. investment in newly emerging high tech office equipment such as micro and
personal computers contributed to a shifting of demand away from the District's manufacturing sector.
Part of the problem of the 1980s was also the
external environment for exports, which was partly
due to the dollar's climb of 85 percent between 1980
and 1985. As illustrated by unit labor costs over this
period, the value of the dollar had the effect of raising
world prices of U.S. exports.
The unfavorable exchange rate environment for
exports aggravated an underlying competitive trade
problem for District industry. Many District firms
were disadvantaged in foreign markets by their use of
outmoded technologies. The competitive shocks of the
early 1980s jolted many District firms into recognizing
the need to reorganize, reinvest in new technologies,
and to restructure their operations.

Statements

The Auto

Industry

The auto industry is perhaps the most vivid example of
the combination of cyclical and structural forces that
were affecting the District in the early 1980s. Ford and
Chrysler were the first to begin the arduous process of
downsizing to adjust to changing market forces. In the
early 1980s, Chrysler was already in the midst of a
government-backed rescue effort. Four Chrysler facilities were closed, all within the Seventh District. Ford
closed another five plants, but these facilities were
outside the District. In the late 1980s, GM began
closing plants in Detroit, Pontiac, and Flint. In all, Big
Three auto producers cut assembly plant capacity by
about 2.5 million units (roughly 20 percent) between
1985 and 1992. To be sure, offsets occurred with the
building of transplants in the District, including Diamond-Star in Bloomington, Illinois, and Mazda's plant
in Flat Rock, Michigan. But in Michigan alone, an
estimated 70,000 jobs were lost as a result of auto plant
closings even before the 1990-91 recession (between
1987 and 1990), with another 40,000 to 50,000 job
eliminations to be realized as recently announced plant
closings take place.

PROFILES

IN

DIVERSITY

Although the Seventh District can be broadly characterized by its farming and manufacturing, the region
hosts a great diversity of industries and local economies. These places and industries are closely tied
together. Changing conditions in individual sectors
and geographic areas have rippled throughout the
Seventh District.
Diversity

Industry

The downturn of the 1980s began early in the decade
for agriculture and ended around 1986. Several developments during the first half of the 1980s caused
farm earnings and the income return on farm assets
to plummet. The combination of lower earnings,
higher long-term interest rates, and shrinking exports
of that time period contributed to a sharp decline in
farmland values and huge equity losses for owners of
farm real estate. Estimates by the U.S. Department
of Agriculture show that the peak-to-trough decline
in the average per acre value of farmland nationwide
was more than one-fourth in nominal dollar terms
and nearly 45 percent in real dollar terms. The
declines were especially steep in the Seventh Federal
Reserve District. Reflecting this, our land value
surveys showed the declines in farmland values in
Illinois, Indiana, and Iowa ranged from 50 percent to
60 percent in nominal dollar terms and 60 percent to
70 percent in real terms. With farmland accounting
for three-fourths of all assets in the farm sector, the
weakness in the land market translated into equity
losses of 30 percent in the balance sheet of the farm
sector nationwide and 50 percent to 60 percent
(nominal dollar terms) in Illinois, Indiana, and Iowa.
The combination of low earnings and sinking asset
values quickly extended the farm problems of the
early-to-mid-1980s to lenders and most of the agribusiness industries that support this nation's vast agricul


421

tural production plant. It has been estimated that
lenders wrote off some $20 billion in bad farm loans as
a result of the experiences of the 1980s. From 1984 to
1987 banks nationwide wrote off $4 billion in non-realestate farm loans. About $1.1 billion of that write-off
was by banks in states comprising the Seventh Federal
Reserve District. Further evidence of the spreading
problems of the 1980s is reflected in the cutback in
capital expenditures by farmers. At the trough in 1986,
capital expenditures in the farm sector fell to less than
$8.5 billion, down from the speculative excesses that
peaked at $20 billion in 1979.

Industrial
The Agricultural

to the Congress

Despite all the stress and strain on the Seventh
District's economy in the 1980s, the process of
adjustment has been slow. To be sure, the early
1980s were only part of a long-term readjustment of
the District's role in the national economy. From
1964 to 1991, the District's share of total U.S.
employment declined from 16 percent to 14 percent,
while manufacturing employment declined from 20
percent to 16 percent in 1982 before rising to 18
percent by the end of the decade. Still, the District's
share—one-sixth of the national economy—represents a sizable influence. And, despite a decline in
the role of the District's manufacturing sector in the
national economy, its manufacturing sector remains
the defining characteristic of the District's economy,
accounting for about 25 percent of District employment (down from 30 percent in 1980). The nation on
average devotes about 17 percent of its employment
to manufacturing (also down from 24 percent in
1980). And within manufacturing, it is the auto-steelmachine-tool nexus that dominates economic activity. In general terms, the District is responsible for
producing about 45 percent of the nation's cars, 30
percent of its trucks, and 38 percent of its steel
(including the bulk of the higher-quality specialty
steels). The Seventh District also supports a thriving
service sector primarily focused on the financial and
business needs of its manufacturing sector, while
Chicago's Board of Trade and Mercantile Exchange

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Federal Reserve Bulletin • May 1993

serve global commodity and financial markets. However, while the District's economy has been diversifying away from manufacturing, it is likely to remain
the core sector of the region's economy for some
time into the future.
Still, there is considerable diversity among the different subregions that comprise the Seventh District.
For example, Illinois is a major capital goods producer, particularly of farm and off-highway equipment. Deere & Company and Caterpillar are major
producers in these markets. Indiana is a center for
steel production and auto parts suppliers. Inland Steel
and Cummins Engine are world leaders in these markets. Wisconsin is another major supplier of auto parts
and particularly a supplier of machine tools for the
auto industry. Modine and Giddings & Lewis are
examples of these types of firms. Michigan is closely
linked to the auto industry and is the headquarters for
the Big Three.

Machine tool industry
The machine tool industry in the Seventh District is
heavily geared toward the auto industry, either directly for model design retooling of the auto industry
or indirectly for the supplier industries. The District
contains almost half (43 percent) of all metal cutting
machine tool producers and 35 percent of all metal
forming machine tool producers in the United States.
Michigan alone employs about 15 percent of all workers in the machine tool industry, second only to Ohio
(about 20 percent). Illinois employs slightly more than
25 percent of the workers in the metal forming machine tool industry. However, it should be noted that
employment in the industry has declined from a peak
of 108,000 in 1980 to 73,000 in 1989 and the number of
companies has declined, often through consolidation,
from more than 1,400 to 624. In terms of market, the
District constitutes about 22 percent of all machine
tools in use today, with the greater Chicago area
accounting for half of that market. In 1989, the United
States exported about $1 billion worth of machine
tools but imported nearly $2.5 billion (about half of
which came from Japan). Imports have risen from
about 20 percent of total U.S. machine tool consumption in 1979 to 50 percent of the market today. Finally,
between 1968 and 1989, productivity of machine tools
has more than doubled (using U.S. average annual
output per metal cutting machine tool in constant
dollars as the measure), greatly restricting the growth
in the market for these machines. After three years of
declining shipments, industry forecasts call for an 8
percent increase in 1993, with exports up 5 percent and
imports down 7 percent.



Construction machinery
Another key area of capital goods production in the
Seventh District is construction machinery. For example, Caterpillar, Deere, and Case (all headquartered in
the District) are the dominant producers in the United
States, with mainly Hitachi and Komatsu as major
competitors. Caterpillar alone accounts for 45 to 50
percent of the sales of crawler loaders and tractors in
the U.S. and Deere and Case add another 25 to 30
percent. In terms of markets, the Seventh District
represents about 10 to 15 percent of all purchases of
construction machinery. U.S. producers were particularly hurt during the early and mid-1980s, when a
weak domestic economy was augmented by a strong
dollar that severely hampered export sales of domestically produced construction equipment.
Steel industry
The steel industry in the Seventh District is concentrated in northern Indiana (about 25 percent of U.S.
production), serving appliance and auto plants in the
Midwest. Detroit, with about 8 percent of the nation's
production, also produces specialty steels for the auto
industry. The District is dominated by integrated mills,
with more than one-third of the nation's steel-making
capacity but only 15 percent to 20 percent of the
nation's minimill capacity. In 1991, total domestic
steel shipments were about 79 million tons, rising to 81
million tons in 1992. Some improvement is forecasted
for 1993 (with projections ranging between 83 million
and 86 million tons), and U.S. firms expect to pick up
a bigger share of its total shipments due to restrictions
on imports, which currently constitute about 20 percent of the domestic market.
Agriculture
Blessed with an abundance of rainfall and highly
productive land, the five states comprising the Seventh
Federal Reserve District account for a sizable portion
of the nation's agricultural output. Using only onetenth of the land in farms, District states generate
nearly one-fifth of the $170 billion in annual sales of
farm commodities. The District's share is concentrated in five major commodities. Anchored by Illinois, Indiana, and Iowa, farmers in District states
account for about one-half of the corn, soybeans, and
pork produced nationwide. Paced by Wisconsin's top
ranking, they also contribute about one-fourth of the
milk production. Those commodities, plus cattle account for more than 85 percent of the sales of all farm
commodities from District states.

Statements

Outside the five major commodities, the District's
agricultural plant produces a wide diversity of products. For example, the five-state region has a sizable
stake in fruit and vegetable production. Apples and
cherries dominate the fruit component, while potatoes
and dry beans account for a large share of the District's vegetable production. Within the broad-based
fruit and vegetable complex, Michigan has achieved
the top ranking in several components, such as tart
cherries, navy beans, and blueberries. Similarly, Wisconsin ranks first or second in the production of
cranberries and in the acreage devoted to sweet corn,
green peas, and snap beans used for processing. The
diversity of the District's agricultural production is
also apparent in Indiana's top ranking for eggs and in
Wisconsin's dominating share for mink pelts. In addition, the agricultural base of the five-state region
contains an extensive greenhouse and nursery component and several other commodities, including honey,
maple syrup, mint, mushrooms, sugar beets and tobacco.

Services
Service industries have naturally developed in our
District in support of its goods producing industries.
Increasingly, however, business services are being
sold to firms outside the District and the United States.
A strong tendency for producer service firms to
favor large metropolitan areas in our District areas is
evident. The largest metropolitan areas in the Seventh
District—Chicago, Detroit, Indianapolis, Des Moines,
and Milwaukee—display a tendency to export services, largely from urban centers to smaller towns and
rural locations within the region. However, less populous metropolitan areas specialize in important services as well. For example, although Milwaukee is
located only ninety miles from Chicago, a city with
more than three times as many people, Milwaukee
serves as an independent purveyor and specialist in
certain urban services such as advertising, consumer
credit reporting, and accounting. Moreover, many
small metropolitan areas rank close to or above the
larger areas in particular services: Peoria and Cedar
Rapids in advertising, Lansing and South Bend in
consumer credit reporting, Sheboygan in engineering
and architecture, Grand Rapids in accounting, and
Battle Creek in management and public relations.
Those smaller metropolitan areas hosting major state
universities such as Ann Arbor, Madison, and Champaign-Urbana figure prominently as service exporters.
Computer programming, engineering, research, and
testing labs draw heavily on university skilled labor
and institutional capital.



Regional

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423

Diversity

From the service sector alone, it is easy to see that a
diversity of economic activity also exists within states
that can affect individual perceptions of District economic performance. For example, Chicago is a world
center for derivative markets and serves as the midcontinental center of business services. While services
grew, manufacturing declined. Manufacturing employment in Chicago dropped sharply in the early 1980s.
The manufacturing sector lost 179,000 jobs between
1979 and 1983, and Chicago has shown little recovery
in its manufacturing sector since that time.
Chicago's service sector employment began to exceed its manufacturing employment in 1979, two years
earlier than the rest of the nation. Indianapolis and Des
Moines are prime examples of service-sector economies that have thrived on the economic transition from
manufacturing to services. For some types of firms
and activities, both have provided lower cost locations
for financial and business services than either New
York or Chicago.
While Michigan is most often identified as the birthplace of the modern auto industry, the northern and
western parts of the state are more diversified than the
auto-dominated southeastern portion of the state. Office furniture (Steelcase and Herman-Miller), chemicals (Upjohn and Dow), and auto suppliers (Guardsman and Donnelly) have provided the diversity to
make cities like Kalamazoo and Grand Rapids among
the fastest growing metropolitan areas in the state,
while the city of Detroit struggles with a shrinking job
base, declining population, and a host of urban problems.
While the recession was not easy for the District
economy, employment data seem to suggest that the
District has fared far better in the most recent recession than in previous ones—both in comparison to the
national experience and to its own past.
Payroll employment data indicate that District employment fell at about the same rate as that for the
nation during the recession and has recovered at a
slightly faster pace since the beginning of the employment recovery in April 1991. Household employment
data show a stronger recovery in Illinois and Michigan, with current levels in both states exceeding
previous peaks (while payroll employment data for
these states are still well below their previous peak
levels). Since unemployment data are derived from the
household survey, unemployment rates for the District
states have been showing substantial improvement
relative to the national experience in recent months.
For example, Illinois's unemployment rate of 6.5
percent in January of 1993 marked the longest period
of time (six months) that the state had been below the

424

Federal Reserve Bulletin • May 1993

nation's unemployment rate in fourteen years, before
jumping up to 7.9 percent in February. Michigan's
unemployment rate was 6.8 percent in February of this
year.

RESTRUCTURING

Productivity

and

PROGRESS

Competitiveness

Despite the hardships of the recessions in the early
1980s, Seventh District manufacturers maintained a
strong commitment to modernization. Indeed, despite
a shrinking manufacturing sector, District manufacturers invested on average 5 percent to 10 percent more
per production worker annually than the nation since
1984. Investment lagged only during recession years
and during the rest of the years of recovery when the
high value of the dollar severely depressed export
demand for manufactured goods in the Midwest. In the
District in the second half of the 1980s the combination
of closing inefficient plants and investing in new or
existing plants began to show dramatic gains in productivity. For example, estimates based on the relative improvement in District manufacturing output
using pre-1985 technology with post-1985 technology
suggest efficiency in the District improved about 20
percent more than for the rest of the nation.
Once the exchange value of the dollar began to fall
in the mid- to late-1980s, the revitalized manufacturers
in the District began to regain market share lost in the
1970s and early 1980s. The 1990-91 recession, in some
sense, became a testing ground for the ability of
District manufacturers to sustain their competitive
edge in an environment that required many to produce
well below their most profitable operating rates. Typically, the District economy had been hard hit by
national recessions, with employment tending to decline by as much as twice the national rate. If manufacturers in the District were truly becoming more
competitive, one would expect that they would
weather the recessionary storm more easily than in the
past.
While the nation lost more than 2 million jobs in the
1990-91 recession (about the same as in the 1980-82
period), the District lost only about 300,000jobs. Since
the onset of recovery, the nation has recorded an
increase of slightly more than 500,000 payroll jobs, an
increase of about 0.5 percent from the recession's
trough. The District has increased employment about
130,000, or about 0.8 percent from its trough. In other
words, the District has fared somewhat better than the
nation throughout the recession and recovery period,
in marked contrast to its more typical pattern of deep
recession and partial recovery.



Real estate activity in the District has been less
adversely affected than in much of the rest of the
nation. This difference can be explained by the District's relatively stronger economy in recent years than
that in other parts of the nation and by the relative lack
of speculative excesses in the 1980s. Still, vacancy
rates of commercial buildings in the major metropolitan areas of the District have been rising in recent
years and in some cases are higher than in the nation
as a whole. For example, downtown office vacancy
rates in both Detroit and Chicago have generally been
below national rates for many years. Chicago's office
vacancy rate rose to 17.7 percent in the third quarter of
1992, virtually equal to the nation, but much of that
increase was due to recent completion of major office
construction projects at a time when the commercial
real estate market was weak. Indianapolis has consistently had vacancy rates above the national average,
but this may reflect in part the fact that Indianapolis
has had a rapidly growing commercial sector. Rapid
expansion of office space may have fueled building
activity in anticipation of future needs, which may not
have been unrealistic given Indianapolis' growth in the
1980s. In contrast, Detroit's low office vacancy rate
reflects very little office construction for many years.
Residential real estate activity in the Seventh District has been another strong point in the comparisons
with the nation. By almost any measure—housing
starts, new home sales, or existing home sales—the
District has been outperforming the national housing
market in the early 1990s. For example, housing starts
for single-family homes in the Midwest portion of the
nation rose 25 percent in 1992, compared with 20
percent in the nation as a whole, and the region has
returned to previous peak levels of activity in 1986
while the nation is still about 33 percent below 1986
levels. The reasons for this are similar to the relative
strength in commercial activity. The District has experienced slow but steady income growth, and housing
values have been in line with this growth. As a result,
the District has avoided the speculative overbuilding
that has been haunting the eastern and western coasts.
Indeed, the District generally can be characterized as
having some of the most affordable housing in the
nation. When the housing market nationally was depressed in 1990 and 1991, District homeowners did not
experience the decline in home values that occurred in
other regions and in many cases were able to enjoy
some of the highest appreciation of housing stock in
the nation during the recent economic recovery.
Industrial

Restructuring

A close look behind the progress reveals the fact that
the challenges facing the District economy remain

Statements

formidable. The region's firms have begun to restructure in such a way as to be globally competitive. But
this process goes hand in hand with massive and
geographically concentrated layoffs of the region's
residents. For example, in recent years, restructuring
announcements in the auto industry are perhaps the
most traumatic. GM's restructuring plans call for
closing up to twenty-eight assembly and parts plants,
many of which are expected to be in the Midwest, and
to reduce its work force by roughly 85,000 white- and
blue-collar workers, with most of the white-collar job
losses concentrated in Michigan. According to recent
estimates, the need for the restructuring can be seen
from production cost comparisons between one or
more domestic producers with low-cost Japanese producers. The estimates show that cost differentials with
low-cost Japanese producers on small cars (assuming
full capacity) may have fallen from more than $2,000 in
1982 to less than $500 in 1991.
How have the District's key manufacturing industries fared during this recovery? The auto industry has
been improving since mid-1992, leading industrial production both in the nation and the District. If recently
announced production plans hold, autos will continue
to boost the District economy. Steel is another industry that has been improving recently, even though
profitability has been elusive. Recent adjustments in
trade restriction are likely to provide a significant
boost to District steel production in 1993. Finally,
demand for machine tools is being sustained by the
need for the auto industry to keep pace with model
changes of imports and transplants and by the need for
manufacturers to reduce cost and improve quality.
Plans for equipment spending appear to be strong and
should be a key source of strength in the District's
economy in 1993.
Exports have always been an important component
of the District's economy, one that has been increasing
over time but which was undermined in the mid-1980s,
when the dollar's exchange rate was high. Currently,
manufactured exports from the District amount to
about 12 percent (or $49 billion) of the nation's total. A
primary strength in exports has come from capital
equipment (particularly industrial and electrical
equipment) and scientific instruments. Growth in foreign demand for products of these industries during
1991-92 has helped hold up the District economy in an
otherwise sagging export market. In Wisconsin, for
example, nonelectrical machinery (mostly machine
tools) grew at an average annual rate of nearly 20
percent between 1987 and 1991, before slowing to
only 1 percent in 1991 as global markets weakened.
Chemical and transportation equipment industries
have also been important in the export mix but have
been harder hit by the recent slowdown in export



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425

growth (in part because of slower economic growth
overseas).
Because of the relative importance of this latter
group to total District exports, and because of the
special role of trade between Canada and Michigan,
the District's overall export growth has been held back
in recent years. For example, after outpacing the
nation in 1990 by a substantial margin, District exports
of manufactured goods expanded 8 percent in 1991 and
6 percent in 1992, while nationally exports increased
12 percent and 8 percent. However, if Michigan is
excluded (high volume trade occurs between Michigan
and Canada and, unless the auto industry is directly
involved, Michigan's volume does not respond to
changes in overseas demand), the comparisons look a
little better, with District exports outpacing the nation
in 1992 by roughly 2 percentage points.
External and global swings in the marketplace, such
as those influencing current demand for capital machinery and equipment will continue to lie beyond the
influence of either local policymakers, or national
policymakers for that matter. And because the industries involved are often those who are large employers
at individual locations, the local effects will be severe
for those regions affected.
Agricultural

Restructuring

The late 1980s brought substantial recovery to the
farm sector. Farm earnings improved considerably as
rebounding exports and altered farm support programs
trimmed the burdensome crop supplies of the mid1980s. The improved returns caused farm asset values
to turn upward. The downturn in farm debt that started
in 1984 continued through 1990, further strengthening
the farm sector balance sheet. Various measures of the
quality of farm debt have improved substantially from
the distressed levels of the mid-1980s and are more in
line with the levels that prevailed before the excesses
of the 1970s. Accordingly, the performance of commercial farm lenders has rebounded sharply.
While the financial condition of the farm sector
today is vastly improved from that of the mid-1980s, it
exhibits a cautious demeanor in spending and continues to go through considerable restructuring to
achieve greater production efficiencies. Reflecting the
cautious attitudes of farmers, capital expenditures in
the farm sector declined for the second consecutive
year in 1992 and, at $11.2 billion, were well below the
levels of most years over the past two decades. And
despite the relatively strong returns to assets in recent
years, the bidding in farmland transactions has been
lackluster. As a result, the trend in farmland values is
only modestly upward in nominal dollar terms and flat
to slightly downward in real terms.

426

Federal Reserve Bulletin • May 1993

The restructuring that still characterizes the farm
sector here and elsewhere is reflected in the continuing
decline in the number of farms. During the 1950s and
the 1960s, farm numbers declined at an annual rate of
3 percent. The rate of decline slowed considerably
during the "boom" times of the 1970s and from 1978 to
1981 farm numbers actually stabilized. But the downtrend has resumed since then, with the annual rate of
decline over the last eleven years approximating 1.5
percent.
The decline in farm numbers has been especially
apparent among pork producers, a commodity of
particular importance in states comprising the Seventh
Federal Reserve District. The 1987 Census of Agriculture found that the number of farms with hogs was
down 45 percent from nine years earlier nationwide
and down 37 percent in District states. (During the
same time period, the decline in all farm numbers was
closer to one-tenth). Updated information shows that
the number of operations with hogs has declined an
additional 25 percent nationwide since 1987 and about
14 percent in District states.
Several factors are behind the restructuring that
continues to result in shrinking farm numbers and a
greater degree of commodity specialization among
those that remain. But a major factor reflects the need
to achieve scale economies to reduce production costs
per unit of output. With the increasing globalization of
agricultural markets and the likelihood of a further
downscaling of federal government farm income and
price support programs, the focus on achieving scale
economies will no doubt continue in the future. These
restructurings that enhance the production efficiency
of U.S. agriculture may need to be complemented with
redefined rural development and infrastructure investment policies that, among other things, help to retrain
displaced farmers and provide better job opportunities
for all rural residents. Research on relocation of manufacturing activity shows that a number of nonmetropolitan counties in our District are achieving growth in
manufacturing employment. But many of these fortunate counties either border metropolitan areas or
enjoy the transportation advantages of an interstate
highway. Many other rural counties could benefit from
efforts to retrain workers and expand off-farm job
opportunities.
The farm sector restructuring has parallel trends
among agribusiness firms that process and distribute
agricultural commodities or manufacture the inputs
used by farmers. Consolidation has been vividly evident in recent years in the number of meat packers and
processors. Moreover, the emphasis on specialization
has led to a geographical shift of beef processors out of
the Midwest into more western states. Reflecting this,
the share of cattle processed by packing firms in the



five states of the Seventh Federal Reserve District has
declined from 23 percent to 14 percent over the past
two decades. This loss has been only partially offset by
the growing share—from 44 percent to 50 percent—of
the nation's hogs that are processed by commercial
packers in District states.
Mergers and acquisitions have also been widespread
in the fertilizer, pesticide, seed, and farm machinery
and equipment industries in recent years. The consolidation of the farm machinery and equipment industry
has had a sizable repercussion on the states of the
Seventh Federal Reserve District. As purchases of
farm machinery and equipment retreated during the
"credit crises" of the 1980s, U.S. payroll employment
among farm machinery and equipment manufacturers
retreated from a peak of 159,000 in 1979 to a low of
65,000 in 1986. The trend since then has been mixed;
recovering to about 79,000 in 1990 and then retreating
to just over 70,000 last year as the cautious spending
patterns of farmers triggered another slump in sales.
The consolidation suggested by these employment
numbers for farm equipment manufacturers was no
doubt just as extensive in the number of dealerships
and the network of suppliers, distributors, and haulers
that support the farm equipment industry.

CONFRONTING

THE

CHALLENGES

After periods of economic shocks, a region's indigenous institutions, including its financial lenders and
state and local governments, must take up the challenges of redevelopment and rebuilding. However,
during such times, their resources are often stretched
thin.
State and Local

Government

In the 1990s the District's state and local governments
are being forced to make structural changes to their
revenue systems and cuts in their service programs
rather than relying on the usual temporary budget
maneuvers that are typical of cyclical downturns.
Despite profound shocks to its economy during the
1980s, Seventh District governments largely avoided
structural changes to revenue systems and services.
Following the weak 1980-82 period, District governments were able to restore fiscal solvency and repeal
the temporary surcharges that they had imposed to
shore up deficit positions. Today, however, the tepid
pace of economic growth, coupled with overlying
pressures from Medicaid and federal mandates, have
pushed state and local governments to enact tax hikes
and service cuts during the aftermath of the 1990-91

Statements

recession. This pressure has left fewer resources to
assist the region in reinvestment and redevelopment.
The 1980s
The back-to-back recessions of 1980 and 1981-82 were
particularly hard on the Seventh District as illustrated
by a nearly 25 percent drop in Seventh District manufacturing employment from the peak in the first
quarter of 1980 to the trough of the second recession in
the third quarter of 1982. At the same time and for
several years thereafter, the agriculture sector was
plagued by several droughts, debt carryover from the
1970s, and a rising value of the dollar.
The decline in these two key industry sectors had a
strong effect on the District's state and local fiscal
health. Still District governments managed to weather
the short-lived 1980 recession without having to turn
to major tax increases; they did so by drawing down
relatively healthy fund balances. The recession of
1981-82 proved harder to absorb. Still, District states
managed to forestall major spending cuts and tax
hikes, at least up until the second half of fiscal year
1983. At that time, deficits were so severe, and further
public service cuts so intolerable, that all of the five
states took the unpopular measure of increasing either
income or sales tax rates or both. Nonetheless, the
income tax changes came primarily in the form of
surtaxes that were repealed or expired when recovery
set in. For example, the long-awaited snapback in
consumer spending lifted the Michigan economy in
1983 and 1984, enabling Michigan to cut a temporary
income tax rate hike from 6.35 percent to 5.35 percent
by fall 1984. State and local balance sheets were
replenished so that fiscal conditions in all five states
were fairly strong by the first quarter of 1985.
Relative to East and West Coast states, Seventh
District states tended to increase expenditures at a
slower rate during this period. Also, District states
used this period of improved conditions to bolster their
fiscal structure against future downturns. Michigan
pioneered the creation of a budget stabilization fund,
and other District states began using a series of techniques all designed to put structures in place to cushion government from future economic downturns.
The 1990s
Fiscal prudence has generally allowed the Seventh
District states to avoid the high degree of fiscal
adjustment that has characterized the New England
states and California; however, it has not left the
states insulated from the fiscal stresses that now have
an estimated twenty-two states running structural
deficits.



to the Congress

427

As both self-initiated programs and federally mandated programs have grown, state revenue growth has
been unable to keep up. Mandated prison sentences
are swelling corrections expenditures as prisons must
be constructed to house the swelling inmate population. Medicaid, which requires states to match federal
contributions, has also been exploding in terms of
costs as the scope of services covered by Medicaid
have been regularly expanded and the eligible population has grown. These costs have shown little prospect
of abating.
Meanwhile the potential for huge additional costs to
be added through more stringent environmental compliance standards looms in the future. Additionally,
unlike the early 1980s, the cyclical strategy of using
surtaxes to cover budget problems in downturns may
need to be abandoned this time. Illinois, for example,
has extended its income tax surcharge through June of
1993 and is now considering making it permanent and
dedicating the proceeds to state government or to local
education rather than sharing the receipts with municipalities. Michigan voters have recently rejected a
proposal for local property tax relief in the belief that
the state would not have the resources to make up for
the accompanying revenue shortfalls.
State and local governments have also made painful
expenditure cuts. The structural nature of the adjustments now under way in District states is also illustrated by the fundamental service programs that have
been the target of cuts. Deep cuts have been made in
popular programs such as general assistance, higher
education, and economic development. For example,
among the first programs to fall under the budget axe
in Michigan was the state's General Assistance program, where 90,000 "able-bodied" recipients were cut
from the rolls. Similarly, state universities throughout
the Seventh District have seen only small increases in
their budgets. From fiscal year 1991 to fiscal year 1993,
the average annual increase in higher education appropriations ranged from a high of 3.5 percent in Wisconsin, to a decline of -0.5 percent in Illinois.
So far this year higher education expenditures in
Illinois are down 3 percent through the first half of
fiscal year 1993. At the same time, public universities
have had to raise tuition so as to limit the magnitude of
budget cuts. Similarly, economic development departments in Illinois and Michigan have been drastically
cut. The state-funded portion of the Illinois Department of Commerce and Community Affairs had its
budget cut nearly 80 percent between fiscal year 1991
and fiscal year 1993. Michigan's Department of Commerce saw a 70 percent budget reduction over the
same period.
Because of the uncontrolled growth in Medicaid and
corrections spending, these programs have had to

428

Federal Reserve Bulletin • May 1993

absorb greater reductions than would have been the
case in previous downturns.
At the present time, state governments have little
room to maneuver. Both Illinois and Michigan have
exhausted their budget reserves and have exhausted
the usual list of fiscal measures tried by the states to
avoid making more sweeping structural adjustments to
their budgets. Faced with a backlog of bills, both
states will still be in difficult shape even with a
sustained recovery. For example, in fiscal year 1992
Michigan used $150 million from its budget stabilization fund, leaving a balance of only $22 million. Even
so, to balance its books, the state had to accrue certain
taxes and delay school aid and revenue sharing payments to municipalities. In the coming year, without a
budget reserve and having exhausted other fiscal maneuvers, the state will have to make structural changes
in expenditures or revenues to cope with additional
fiscal stresses. In Indiana, Iowa, and Wisconsin potential fiscal maneuvers are also becoming limited. To
keep fiscally healthy, Indiana has been forced to use
more of its budget reserve than it would prefer.
Wisconsin, whose relatively strong economy has made
it better situated than most states, has still relied on
the active use of Governor Thompson's veto and has
shifted some responsibilities to the local level. Wisconsin's revenue department has been looking at the
expanded use of local sales taxes in the state and the
possibility of enabling a local option income tax. In
Iowa, two very austere budgets in 1990-91 and 199192, accompanied by employee reductions and some
limited tax increases, have enabled the state to cobble
together a precariously balanced budget, but the state
has no real reserves left to meet any unforeseen
downturns.
Pressures on state government have spilled over
and have been passed along to local governments.
Despite the fact that property taxes are among the
most unpopular of all state and local revenue sources,
the Seventh District tax structure is already more
reliant on property taxes than is the case nationally.
All of the District states, except for Indiana, rely on
property taxes for a larger share of the state and local
revenue mix than is the case nationally. As a result,
efforts to mitigate future increases in property taxes
have been proposed or enacted including property tax
caps in Illinois and Wisconsin. This past autumn,
Michigan failed to pass the "cut and cap" proposal on
the ballot when voters appeared to believe that it was
unrealistic to expect state reimbursement for lost
property tax revenues. In fact, voters were probably
correct in their assessment; state governments have
already passed along their own fiscal pressures to local
governments by delaying or trimming school and municipal aid payments. Such efforts to push programs



down to municipalities or to reduce state aid to towns
will further strain the property tax base and impede
efforts to reduce reliance on the property tax base.
Compounding the strain on the property tax base is
the slow growth in assessed values. More conservative
property revaluations and a lack of new construction
are limiting the automatic growth in local revenues,
which towns became accustomed to during the latter
1980s. With a distinct possibility that some state
responsibilities may be shifted to local governments,
proposals will probably emerge to permit towns to
impose new types of taxes to diversify their revenue
base and to avoid even greater reliance on property
taxes.
Rising Medicaid and health care costs will continue
to pressure the state and local sector even if the
current economic expansion accelerates. These costs
have provided the most powerful and persistent fiscal
strain on state governments. What in 1980 consumed 6
percent of state budgets is being projected to consume
28 percent by 1995. The growth rate for Medicaid
expenditures is running at nearly four times that of
revenues. Each year the states have underforecast the
rate of growth in this budget area. As states have had
to provide supplemental funds to cover unanticipated
Medicaid expenses, other budget areas have been
squeezed. For example, two District states, Wisconsin
and Indiana, had to supplement their fiscal year 1992
Medicaid budgets by $67 million and $42 million
respectively. These increases represented supplements of more than 40 percent over the original
Medicaid budgets in these states. Some pressure has
been eased by the enactment of Medicaid provider
taxes in Illinois, Michigan, and Wisconsin. These
taxes force providers to pay tax on the proceeds they
receive from providing Medicaid services and in most
cases have the side effect of increasing the federal
contribution to state Medicaid programs. In Illinois,
Medicaid expenditures twenty years ago were half of
state spending on primary and secondary education.
Today it slightly exceeds that spending.
Concerns for the Future
Longer term, there will be continuing pressures for
increased expenditures on education, infrastructure,
and the environment. These three areas will demand
more government resources in the future. In the case
of education, the District states' reliance on property
taxes to fund elementary and secondary education
presents two problems. First, property tax revenues
over the near term are unlikely to grow very fast
because of a lack of expansion in the property tax
base. Unless new efficiencies in providing education
are miraculously found and implemented, property tax

Statements

rates will be pressured upward. Given the taxpayer
sentiment against the property tax increases and the
popularity of tax caps in states such as Illinois, the
ability of this tax source to fund the larger educational
expenditures, which will be needed with a growing
school population, will be strained. Second, the reliance on the property tax also creates funding inequalities between school districts. District states have so
far been able to avoid judicial challenges that would
compel an equalization scheme. However, in last fall's
election, an Illinois referendum that would have required that the state pay "the majority" of school
funding was narrowly defeated despite receiving better
than 57 percent of the vote; 60 percent was required.
Moreover, court challenges will continue. The success
of any of these initiatives would be severe. To make
equalization schemes at all acceptable to the public,
spending will need to be "leveled up," thereby sharply
raising overall revenue requirements.
Infrastructure investments are also being called for,
mostly in the form of repair and replacement of
existing structures. For example, one-third of Chicago's sewer system is more than eighty years old. Given
that the sewer system was designed to have a total life
expectancy averaging ninety years, it is clear that
significant outlays will need to be made in the coming
years. Other basic infrastructure, such as roads and
bridges, are also in need of attention. Because the
District states do not carry heavy levels of indebtedness (measures of both bonded debt per capita and per
$1,000 of personal income are low in all District
states), states would ordinarily be in relatively good
shape to issue debt in the form of bonds. However, the
weak rates of revenue growth will make it costly to
issue additional debt because it is uncertain as to
whether future revenues will be sufficient to service
the debt.
Environmental concerns have been added to the list
of long-run concerns. Both states and municipalities
face staggering costs in implementing the environmental standards included in programs such as the Clean
Air Act Amendments of 1990. A detailed study by the
city of Columbus, Ohio, estimated that the city will
need slightly more than $1 billion to comply with
twenty-two state and federal environmental mandates
over the next ten years. The magnitude of that expenditure is best illustrated by the fact that the total city
budget in 1991 was $591 million. Similar compliance
costs can be expected at both the state and local level
in Seventh District states where the industrial and
agricultural heritage of the region will make environmental compliance costs steep. At the state level the
combination of Medicaid and health care costs and
environmental compliance costs has the potential of
consuming the bulk of state budgets. At the local level,



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429

education expenditures (when coupled with these environmental compliance costs) will have the same
effect—limiting the other program options of government.
There are also concerns that the pension systems of
many public employees may be underfunded. Three of
the District's five state employee pension funds are
severely underfunded, and this has the potential of
making worrisome claims on future revenues. Michigan's state pension fund has contributions equal to 66
percent of future liabilities, while Illinois and Indiana
have funding levels of 64 percent and 58 percent
respectively. These states can use a "pay as you go"
strategy to avoid having to make any drastic shortterm adjustments in their levels of contributions. However, such a policy has two negative repercussions. In
the near term, states have been increasing their immediate pension liabilities and outlays through early
retirement programs aimed at saving overall personnel
costs. But this policy puts immediate strains on current operating solvency. Second, state bond ratings
can be unfavorably affected by pay-as-you-go pension
funding, thereby raising borrowing costs because underfunded pensions are usually viewed by agencies as
an indicator of fiscal stress.
Recap
Because of both its own fiscal prudence during the
troubled 1980s and to the more favorable regional
conditions currently prevailing in many parts of the
District, state and local governments have passed
through these troubled times in better shape than
many other regions. Nonetheless, District governments are as widely diverse as the District's economy.
For example, state government in Michigan and many
of its local governments, in particular, are susceptible
to the upheavals in the economic base that accompany
plant closings and mass layoffs in the auto industry.
Moreover, District governments in general are far
from insulated from the pressures common to the
entire state and local sector nationally: rising Medicaid
and prison expenditures, federal mandates such as
compliance with environmental regulation, and slowly
growing revenues. As a result, structural changes and
fiscal crisis are evident throughout our District for
many governments that have made painful cuts in
public services and that have raised tax rates or
extended tax surcharges.
Financial Developments
Reserve
District

in the Seventh

Federal

Although the Seventh District did not escape unscathed the financial trauma that has afflicted the rest

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Federal Reserve Bulletin • May 1993

of the nation since the early 1980s, it has suffered less
than most other regions. Neither the number of failing
banks nor their assets have been as large, relative to
District totals, as in most other areas of the country.
For the entire Seventh District, only 72, or 2.6 percent,
of District banks failed between 1982 and 1992, as
opposed to 9.7 percent of the banks for the country as
a whole. The annual number of failures in the District
peaked at 14 in 1985, well before the 1989 peak of 206
failures for the entire United States. In large part, the
difference in timing of the District's banking problems
relative to the rest of the country reflected some previously noted characteristics of the behavior of the
broader economy. One was the fact, discussed in some
detail above, that the District economy was hit extremely hard by the 1981-82 downturn relative to other
regions of the country. District banking, in turn, was
strongly affected by the collapse in land prices and
agricultural loan quality problems that accompanied the
disinflationary period that followed. In more recent
years, in contrast, the District was largely spared the
problems experienced by the Southwest associated
with the sharp fall in oil prices beginning in 1986, and
the 1990-91 recession was not as severe in the District
as elsewhere. However, we also like to think that the
lower failure rate in the District over the entire decade
had something to do with the diligence, conservative
loan evaluations, and prompt supervisory intervention
that have characterized our field examiners and supervisors.
District banks continue to show improving earnings
and capital. In 1992, the average return on equity for
commercial banks in the Seventh District was 11.6
percent, up slightly from 11.3 percent in 1991 but
slightly below the national average of 12.1 percent,
while the average return on assets was 0.90 percent,
up from 0.83 percent in 1991 but also slightly below the
national average of 0.91. While the return on assets of
District banks with assets of less than $1 billion rose
sharply to 1.17 percent in 1992 from 0.98 in 1991, that
of District banks with assets of more than $1 billion
slipped slightly to 0.66 percent from 0.67 percent in the
previous year and remains well below what traditionally have been considered "normal" levels; the same
pattern holds for return on equity. The improving
health of District banks was further attested by the fact
that there has been a 70 percent decline in the number
of lower-rated banks in the District since the end of
1986.
Beset by the erosion of capital by loan losses of the
past decade and new regulatory pressures to increase
capital, District banks strived to increase their capital
ratios in several ways. They have added to retained
earnings by restricting dividends and have gone to
market with new issues of equity and subordinated



debt. To some degree they have adjusted to the tighter
capital constraints by cutting lending and asset
growth. The net effect of these adjustments was that
capital ratios rose for nearly all District banks, with
the average equity capital-to-assets ratio averaging 7.8
percent as of the end of 1992.
A key factor in the improving condition of banks in
the District has been the gradual winding down of their
asset quality problems. Nonperforming loans were
down from 2.1 percent of total loans in the fourth
quarter of 1991 to 1.7 percent of total loans as of the
fourth quarter of 1992, reflecting the improving economic conditions and further chargeoffs of the worst
loans. An equally encouraging sign was the sharp
increase in loan-loss reserve coverage at year-end 1992
to 105 percent of nonperforming loans, up from 96
percent in the preceding quarter and from 88 percent at
year-end 1991. In view of the fact that this coverage
ratio has averaged just over 100 percent for District
banks in the past, its current level suggests that most
of the negative effects on bank capital of facing up to
probable loan losses are behind us and will no longer
constitute a drag on new lending.
The ongoing process of consolidation that has characterized our region over the past two decades has
allowed Seventh District banks to become more diversified, in turn, increasing their safety and soundness.
This process was given added impetus by the decision
of District states to open themselves to regional and
nationwide banking. This process is dramatically altering the banking structures of states in the District,
which for many decades had some of the most restrictive branching and holding company laws in the nation. Because of the asset quality and earnings problems encountered by some of the money center and
other larger banks in the Seventh District's major
financial centers in the mid-1980s, those banks have
not been in a position to take the initiative in geographical expansion and acquisition activity. Consequently,
the vacuum has been filled by large regional banks
headquartered outside Chicago and, in some cases,
outside the District.
Thrift institutions in the Midwest are also showing
improvement but from a much lower base. Because of
their institutional design, thrift institutions were, of
course, much more vulnerable to the unprecedented
increases in interest rates at the beginning of the 1980s
than commercial banks. Of the District states, only
Illinois had a serious thrift problem, ranking fourth in
the number (forty-seven) of thrift institutions resolved
by the Resolution Trust Corporation between its establishment in 1989 and year-end 1992 and eighth in
terms of the total assets of resolved institutions ($7.7
billion). Although most of the terminally ill thrift
institutions in the Midwest have now been placed in

Statements

receivership, a formidable cleanup operation is still in
progress. Only four savings and loan associations in
the District remain in the conservatorship program,
and there are eight undercapitalized savings and loans
rated MACRO 5 that are candidates for conservatorship.
It should not be assumed that the health of depository institutions in the Seventh District has been fully
restored or that there is no possibility of further
setbacks. There is still general weakness in commercial real estate lending, reflecting the high vacancy
rates and reduced building activity that constitute the
hangover from the binge of the late 1980s. However,
because overbuilding in the 1980s never reached the
fever pitch in the District that it did in the Southwest
and New England, the correction has so far been much
more moderate. But while the vacancy rate in Chicago
remained lower throughout the mid-to-late 1980s than
in the nation, it has risen sharply over the past three
years as more space has come on the market—just as
Sears was relocating to the suburbs.
Credit

Availability

During the past three years, credit availability remained better in the Midwest than in many other parts
of the country. This was largely the result of the
relatively healthy condition of the District's banking
organizations. This health not only meant that fewer
banks were forced to reduce their lending, but it also
eased the adjustment for borrowers at banks that were
facing capital and asset quality problems. Indeed,
several of the better capitalized banks in the Seventh
District actively sought to bid away creditworthy
customers from the District's weaker banks.
In addition, the few midwestern banks that experienced significant asset quality problems had loans
outstanding to borrowers throughout the country. This
diversification had two consequences. First, the fate of
our troubled banks was generally tied to the prospects
for the national economy, not the fortunes of a single
region, as was the case in New England. Second, in
contrast to New England, the disruptions created by
the retrenchment of the troubled banks in our District
were spread across the entire country rather than
being concentrated on borrowers in the District.
But while the District's banking system remained
relatively healthy, midwestern borrowers could not
completely escape the changes sweeping through U.S.
credit markets. The net effect of these changes has
been to make bank lending more profitable, ending a
long-standing but unsustainable deterioration in the
compensation banks receive for bearing risk. Because
the new pricing structure reflects these risks more
accurately, the ultimate result will be a safer and more




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431

effective financial system. The banking industry's
transition toward this new, more realistic pricing
structure began to be apparent in spring 1990, accelerated dramatically during late 1990 and early 1991,
and was completed by 1992. Several forces, including
changes in bank regulation, drove the restructuring.
However, the three most important forces pushing the
industry down the road to restructuring were the
perceived increase in the risk of the industry's loan
portfolio, the concomitant increase in industry losses,
and the growing realization that lending could not be
profitable without substantially wider spreads.
As was the case across the nation, District banks
responded to these forces by reducing their exposure
to their largest borrowers and tightening the pricing of
loans and loan commitments to nearly every type of
borrower. Whether poorly capitalized or well-capitalized, large or small, urban or rural, virtually every
bank in the Seventh District participated in the shift to
a new, more realistic pricing structure for bank loans.
The upshot has been a slowdown in the growth of
assets held by District banks from 3 percent in 1990 to
1 percent in 1992.
The restructuring of credit markets during 1990 and
1991 was inevitable and, on balance, desirable. Nevertheless, because policymakers did have several tools
at their disposal to ease the transition process, the
Federal Reserve was continually checking for signs
that tight credit was creating significant barriers to the
growth of businesses, either in the District or nationally. However, our contacts with District businesses
and banks suggested that, outside the real estate
sector, District borrowers were still able to obtain
credit, albeit at a higher price. Indeed, the primary
concern of most of the businesses we contacted was
neither the availability nor the price of credit; it was
the economy's sluggish performance.
At recent meetings of our Small Business and Agricultural Advisory Councils, we have again carefully
reviewed the question of credit availability with the
council members. The view continues to be that banks
have become much more careful in the loan extension
process; credit standards have been raised, documentation requirements have been made more demanding,
and as noted above, spreads and fees have risen.
However, our council members almost universally felt
that adequate credit was generally available.
On the other hand, many council members were
concerned that environmental regulations are making
certain types of transactions unbankable. Leery of the
potential liability, some banks are shying away from a
credit whenever an environmental issue is even a
remote possibility. Those banks that are willing to
proceed are very demanding in their requirements for
complete but costly environmental studies. Both our

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Federal Reserve Bulletin • May 1993

Agricultural and Small Business Advisory Councils
feel strongly that this environmental matter is significantly impeding the extension of credit to these key
sectors of our District's economy.
From the perspective of the District's banks, the
restructuring of credit markets is now largely complete. Credit terms have ceased to tighten, asset quality is on the rebound, and most District banking
organizations have now built up a sufficient cushion of
excess capital that they can focus more of their attention exclusively on the business of lending. However,
this does not mean that District banks will soon again
begin growing at 7 percent or 8 percent a year. In all
likelihood, District borrowers are still adjusting to this
new more realistic pricing structure. As these borrowers find additional ways to economize on bank credit,
their borrowing needs will decrease. This process will
be accelerated by the fact that many businesses are
carrying debt burdens that are inappropriately high for
such a competitive and volatile economic environment. Until District businesses have fully adjusted to
the new credit market realities, we will continue to see
relatively modest rates of growth at District banks.

CURRENT

CONDITIONS

Entering 1993—A Current

Assessment

The same challenges and opportunities that have
transformed the District's economy over the past
fifteen to twenty years can be seen shaping its economic performance today. To be sure, the District's
economy is still doing better relative to the nation in
many sectors, but competitive pressures are continuing to force change. Moreover, the pace of our recovery is lackluster by past standards and concerns of
sustainability remain as much an issue for the District
as for the nation.
Agriculture
The 1992 crop season was characterized by a record
harvest nationwide despite some of the most unusual
weather patterns in memory. In our District, recordbreaking outcomes in Illinois, Indiana, and Iowa
pushed the five-state corn and soybean harvest about
28 percent above the low year-earlier level and 8
percent above the previous high set in 1985. But the
overall abundance was countered in many areas of the
District—especially in Michigan and Wisconsin—by
several problems that resulted in a very difficult harvest. Cool temperatures during the growing season, an
early frost, and a rainy fall season led to a late harvest,
costly drying charges, and extensive quality discounts




on much of the corn harvested in the northern portions
of our District.
The price implications of the larger harvest will be
only partially cushioned by increased consumption.
Domestic consumption of both corn and soybeans will
likely register further growth during the current marketing year. But compared with the 20 percent decline
in the combined tonnage of corn, soybeans, and soybean meal shipments abroad the past two years, export prospects for the District's crop farmers have
improved only marginally this year. This partially
reflects the delinquencies that have led to a suspension
since late November in new government credit guarantees to finance shipments to Russia. It also reflects
the evidence that the crops now growing in the Southern Hemisphere could produce a banner harvest and
add further to available world supplies.
It now seems clear that the record 1992 crop harvest
will contribute to a large buildup in carryover stocks.
As such, prices of major Seventh District crops have
hovered at fairly low levels. In particular, corn prices
since last September have averaged just over $2 a
bushel, down nearly one-fifth from a year ago and the
lowest in nearly five years. The lower prices will likely
outweigh an increase in government payments and
lead to a decline in earnings of District crop farmers
this year. This will be particularly true for those hit
hardest by the harvesting problems of last fall.
The District's livestock and dairy farmers are also
experiencing lower prices from expanding production.
The current cyclical upswing among hog farmers has
been under way since the fall of 1990. Per capita pork
production rose 7 percent last year and reached the
highest level since 1981. The latest U.S. Department
of Agriculture estimates show hog numbers nationwide are up 4 percent, assuring continued growth in
pork production well into this year. The inventory
estimates for Iowa—by far the largest pork producing
state—show a rise of 8 percent. Among the other
District states, hog numbers are little changed from a
year ago.
The implications of the expanded production on
livestock prices have been partially cushioned by the
improving trends in U.S. meat trade. U.S. pork exports have grown rapidly in recent years while pork
imports have declined. Nevertheless, hog prices for all
of 1992 averaged about 14 percent less than the year
before, and further slight declines are expected for this
year. Prices for many hog farmers may fall below the
cost of production. However, the more efficient producers will likely experience smaller but positive operating returns.
The District's dairy farmers have witnessed quite
volatile markets in recent years. Last year, milk production expanded a little more than 2 percent. Al-

Statements

though averaging 7 percent higher for all of last year,
milk prices weakened considerably during the latter
half of 1992. Prices are expected to lag year-earlier
levels for much of 1993 until production is pulled into
better balance with market needs. Earnings of dairy
farmers could turn down this year, reversing some of
the gains of last year.
The agricultural sector continues to operate with a
vivid awareness of the devastating setbacks suffered
by farmers and agribusiness firms as the "agricultural
credit crises" of the 1980s washed out the excesses
during the "boom" of the 1970s. The subsequent
improvement in farm earnings and in the level and
quality of farm debt has been substantial, placing the
industry on much more solid footings for the 1990s.
Yet the actions of farmers and agribusiness firms
reveal a mood of uncertainty and caution. This mood
is tied, in part, to the painful memories of the 1980s. It
also reflects the continuing focus on trimming the
federal budget deficit and the implications for the
safety net provided in farm income and price support
programs. The cautious mood of farmers is also related to concerns about the longer-run prospects for
export markets that are vital to U.S. agriculture.
These concerns mostly center on the General Agreement on Tariffs and Trade and North American Free
Trade Agreement negotiations and the changing economies of Eastern Europe and the former Union of
Soviet Socialist Republics.
The near-term prospects for Midwest farmers are
somewhat mixed. A record crop harvest last fall and
the ongoing expansion among livestock producers will
continue to weigh heavily on prices of major Midwest
farm commodities. Conversely, an expanded volume
of crop and livestock marketings and a sizable increase
in government payments to crop producers will hold
gross farm earnings close to last year's relatively high
level. Farm production costs will likely be flat again
this year due to moderating pressures on input prices
and a slight decline in crop acreage.
Industry
The District's economy in January and February of
this year has been leading the nation in many key
sectors, particularly manufacturing, retail trade, and
housing activity. For example, the recent gains in
District manufacturing have been broad based, with
producers of steel, appliances, autos, and heavy-duty
trucks all reporting improvements as they enter 1993.
Appliance producers, in fact, reported a surge in
production at the end of 1992, in part linked to
improving housing demand but also to an effort by
dealers to stock up on 1992 models before new energy
efficiency standards take effect on newer models. Steel



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433

producers are booking orders as far as two quarters
ahead because of the desire of some customers to
ensure deliveries. However, profit margins are depressed, and one producer has scheduled two price
increases on cold rolled steel for the first half of 1993 in
hopes of raising the price of a ton of steel above costs.
Class 8 heavy-duty truck producers report that public
freight carriers have been ordering trucks in large
quantities since July 1992, with the current order
intake rate running at an impressive 180,000 units
annually, triggered in part by pent-up demand but also
by higher fuel-efficiency standards on new models.
Sales of Class 8 trucks in 1992 were up sharply (20
percent) from a year earlier but only reached 119,000
units, a good improvement from last year but still well
under peak levels of former years. One producer is
expecting sales to reach as high as 160,000 units in
1993, which would be near the previous peak level in
1988.
Still, a key reason for the strength in manufacturing
activity has been the increase in car and light truck
assembly in the fourth quarter of 1992 and first quarter
of 1993. If assembly plans hold for the remainder of the
first quarter, the auto industry will have its highest
(seasonally adjusted) quarter of assemblies in four
years, benefiting not only District assembly plants but
also the steel, fabricating, and auto-supplier industries
located in the District.
The competitive strength and diversity of District
producers among sectors that are doing relatively well
is reflected not only in our direct talks with producers
but also in surveys that provide a broader scope to our
District coverage. For example, purchasing managers'
surveys from around the District are providing a direct
confirmation of what corporate executives are reporting. The production components of purchasing managers' surveys from around the District, including
Detroit, indicate moderately expanding production
activity in early 1993. In fact, the production component of the Chicago survey reached its highest level
since 1988. This continuing strength in the auto and
other manufacturing industries should help sustain the
District's relatively favorable showing for retail sales
and employment in recent months.
Reports on District retail sales in January and February are indicating continued strength in spending
after the strong Christmas selling season last year. For
example, a large department store in the District has
told us that year-over-year sales growth has continued, despite the fact that sales were quite strong at this
time last year and weather in February was unseasonably harsh. District gains were concentrated in seasonal merchandise, household goods, and big-ticket
items in general. Several retailers in Michigan, including the Detroit area, had better-than-expected sales

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Federal Reserve Bulletin • May 1993

gains in January and February. Such gains are in line
with government data on growth in personal income,
which showed District states on average doing slightly
better than the national average through the third
quarter of 1992 (most recent data available). Nevertheless, several established retail chains in the District
are facing stiff competition from new discount chains
that are aggressively moving into the District—in some
cases occupying buildings left behind by those retail
chains that are retrenching.
The strength in demand for home furnishings and
appliances indicated by District retailers is derived in
part from the continuing gains in the District's housing
sector. A major realtor in the Chicago area has told us
that single family home sales in January were the
second best January ever for the company, exceeded
only by last year, when warm weather combined with
a pickup in market share to produce a surge in sales.
February is running ahead of last year, however, so
that the year-to-date gap with last year is quickly
closing (again despite the occurrence of the coldest
weather of the winter in February). For the state of
Illinois as a whole, realtors were seeing accelerating
existing home sales through the fourth quarter of last
year. A building materials supplier in Michigan has
been experiencing double-digit sales growth in January
and reported that builders in the area expect housing
sales in the area to be at double digit rates for 1993.
Employment growth remains the primary concern
for the sustainability of the District's, as well as the
nation's, recovery. While employment gains in January and February of 1993 continue to be hard won,
various sources of information indicate employment in
the District has continued to increase. For example,
the employment component of the Chicago purchasing
managers' survey, after bottoming out in early 1991,
reached a five-year high in January and then backed off
in February. A January survey of metalworking firms
in the greater Chicago area showed that hiring activity
was strong and that some businesses were beginning to
find shortages of skilled workers. And, it should be
noted that the recent benchmark revisions for payroll
employment in Michigan showed an upward revision
of more than 70,000 jobs (which would mean that the
state's employment today is about half of the way back
to its prerecession peak rather than virtually flat over
the recovery as indicated by the original data). Finally,
Manpower Inc., which surveys businesses quarterly,
reported a net increase in the number of midwestern
firms expecting to hire workers in the second quarter
of 1993 of 18 percent, compared with 16 percent in the
nation as a whole. Most firms in the District were more
optimistic in the latest Manpower report, with even
Michigan firms expecting more hiring activity (with the
exception of those located in Detroit).



Despite these indicators of an employment pickup,
most large businesses in the District either have hiring
freezes in place or are actively downsizing their workforce. Overtime is running at high levels, and demand
for temporary help is strong. But the decisions to hire
permanent workers are being made sparingly and with
the greatest reluctance and will continue to be until the
recovery shows greater staying power than it has to
date. The recent announcement by Dow Chemical in
Midland, Michigan, of pending layoffs, however, still
illustrates the problem of job creation.
While the auto industry has been a boost to the
District's economy recently, it may also be a source of
instability because of the concern that car sales will
not match industry expectations of 13.5 to 14 million
units in 1993 (an increase of as much as a one million
in unit sales of cars and light trucks over 1992). Auto
production for the second quarter of 1993 is expected
to be above year-ago rates but could show a decline
from the seasonally adjusted annual rate in the first
quarter. One reason is that Ford and Chrysler will be
closing plants earlier than usual to make model changeovers.
How much of a cutback in auto production occurs in
the second quarter will ultimately be determined by
auto sales strength. In the first two months of 1993,
light truck sales have been quite strong, with midFebruary ten-day sales rates at more than 5.0 million
units (annual rates), compared with last quarter's nearrecord sales rate of 4.8 million units. However, car
sales have been a different story. Car sales have been
running at about 6.4 million units through mid-February (except for the first ten days of January), which is
about equal to the fourth-quarter rate and in the last
ten-day period, sales slumped to 5.5 million units for
cars and to 3.8 million units for light trucks, which
industry analysts attribute to consumer concerns
about higher taxes. Still, Big Three producers are
better positioned to increase their market share than in
the past, in part because imports have been increasing
prices at a faster pace than the Big Three and in part
because Big Three quality has generally improved.
Still, sales will have to increase in the second quarter
if the industry is to maintain second-quarter production schedules. While it is encouraging that retail sales
in general have not experienced a retrenchment on the
part of the consumer, one has to believe that new
sources of disposable income through employment
growth will be needed to sustain growth in consumer
spending.
In assessing the role of the Seventh District economy in the current environment, it must be remembered that the Seventh District's economy has been
playing an unaccustomed role in the national economy
in the early 1990s—that of a stabilizing force in eco-

Statements

nomic growth. In the past, the District has been highly
cyclical, accounting for much of the nation's job losses
in recession and much of the job gains in the early
stages of recovery. To be sure, the District's cyclicality was augmented by the long-term decline of its
manufacturing sector. The District's manufacturing
sector is no longer shrinking and may indeed be
regaining some of the market share lost in past years.
And, its improved competitiveness may also be making its cyclical industries less sensitive to cyclical
swings in the national economy. This is because the
District's cyclical industries are better able to hold on
to market share (because of their improved competitiveness) than in the past. Moreover, the District
should be less directly affected by the defense industry
cutbacks. However, because the District is vulnerable
to a sudden downturn, if the national economy weakens, I would be cautious about relying too much on the
District's economy to be an engine of economic expansion indefinitely.
Monetary

Policy: Meeting the

Challenges

Recognizing the problems confronting the District, I
have consistently favored monetary policy actions that
would foster financial conditions necessary for sustainable economic growth. It has been obvious from
our continuing and extensive contacts in the District
that the economy would need assistance to deal with
the significant structural drags on job creation and
growth. It has also been clear that the needed adjustments would be painful, but a vital, growing national
economy cannot be assured as long as there are
significant financial and industrial imbalances. Restructuring has resulted in major gains in productivity
for District firms. But as much as productivity gains
are needed to maintain competitiveness and promote
long-term economic growth in our District, there is a
continuing concern about what this means for job
creation and the income gains necessary to generate
improved standards of living.
In my view, the role of monetary policy in this
environment is to provide a financial environment that
will assist in correcting the financial imbalances and
restructuring issues discussed above. The basic goal of
monetary policy must be to maximize the economic
well-being of the nation as a whole. This means
promoting financial conditions consistent with maximum sustainable growth. Specifically, it is my view
that it is incumbent upon monetary policy to maintain
a level of sustainable growth in the economy accompanied by sufficient job creation to absorb new workers and sufficient investment to ensure our ability to
produce and compete in today's global economy. This
is not to say that we can or should ignore other aspects



to the Congress

435

of our environment such as inflation or other signals of
long term problems but that these conditions need to
be considered in light of the real performance of the
economy.
As you well know, our economy over the past few
years has been experiencing significant difficulties in
maintaining an adequate rate of real growth. Economic
progress has been uneven across both regions and
industries. Economic statistics during this period have
not always provided sufficient information to form an
adequate picture of the economy. In this environment
I have, consequently, tended to rely heavily on information from our Boards of Directors in Chicago and
Detroit, our Small Business and Agriculture Advisory
Councils, groups of industry observers meeting with
us, frequent individual contacts with District firms,
and continued participation in regional economic development groups in all of our District states, as well
as major contacts through the Council of Great Lakes
Governors and the Council of Great Lake Industries.
These types of contacts in the Seventh District and
elsewhere in the Federal Reserve System are extremely helpful in the formulation of monetary policy.
As I see it, examination of District conditions is an
important tool in keeping the monetary policy process
in touch with challenges faced by the economy.
The most recent economic downturn provides a
graphic illustration of exactly why it is so important to
keep policy firmly grounded to local business conditions. Given the low level of inventories, the quick
response by firms to the shortfall in demand, and
falling interest rates, both economic theory and most
forecasting models suggested that the recession should
have ended quickly and that without any additional
policy actions the economy should have experienced a
solid bounceback in jobs and growth.
It was our contact with local businesses, banks, and
other groups that suggested that the recovery was
much slower than usual getting started and was likely
to be fragile. The debt buildup of the 1980s and the
substantial requirements to restructure corporations
that had grown larger than their markets could sustain
were going to generate a significant drag on economic
activity. Interest rates were reduced well in advance of
the slowdown and continued to ease over this period
despite periodic indications that the economy was on
the verge of taking off.
Since mid-1989, the Federal Open Market Committe
has taken actions that resulted in the federal funds rate
falling from a high of 9% percent to 3 percent today, a
reduction of more than 675 basis points. The discount
rate and the three-month Treasury bill rates are at their
lowest levels since 1963 and the thirty-year bond,
which has a somewhat shorter history, is at its lowest
rate in history. I believe that without the types of

436

Federal Reserve Bulletin • May 1993

District concerns and contacts that keep the policy
process in tune with the underlying economy, far less
would have been done and the economy would have
faced a far harsher retrenchment. Remember that
economists basing their analysis entirely on economic
statistics would have us believe that the recovery
began in early 1991. While this time is correct in a
statistical sense, contact with the District suggested
that the recovery was much slower getting started than
usual and that continued policy actions were necessary.
Monetary policy needs to remain sensitive to current economic conditions and challenges. Policy must
take into account the whole range of economic experiences and special characteristics of each period.
Inflation posed major problems for long-term growth
in the early 1980s. Today, in my assessment, we are
operating in an economic environment that could be
described as approaching price stability. In the current
environment, job creation and balance sheet restructuring are the major challenges facing monetary policy. This is not a change in philosophy or goals but a

simple recognition of what today's problems are versus yesterday's. At today's 3 percent inflation rate,
inflation does not represent the same type of threat to
the economy that it did at 10 percent. But we should
not forget that this very significant improvement in
inflation was achieved at a very high cost in both
human and economic terms and that if growth were
allowed to exceed its long-run potential for an extended period of time that inflation would return.
Generating the maximum sustainable growth rate for
the economy must remain the primary and essential
mission of monetary policy.
In conclusion, I would like to reiterate that while I
am guardedly optimistic about the economy both in
my District and in the nation, it is the issues of
structural impediments to growth and job creation, in
terms of debt levels, international competition, and
other issues of restructuring that dominate the economic landscape. If we continue to make progress on
these fundamental issues and begin to see an increase
in employment levels, the economic outlook for the
next few years is quite positive.
•

Statement by Thomas C. Melzer, President, Federal
Reserve Bank of St. Louis, before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
March 10, 1993

Because of the lags in published data, we also
attempt to acquire more timely information through
informal means. By interacting regularly with District individuals—in 1992, Research Department
economists and I participated in approximately 150
programs in our District—we learn firsthand about
economic conditions. Through these programs as
well as our daily interaction with the District community, we gather information on economic conditions from consumers, labor leaders, homebuilders,
bankers, educators, and business people from both
small and large firms. Besides collecting information,
we solicit opinions and questions on banking and
monetary policies, as well as learn how they may be
affecting individuals in the District. Although frequently anecdotal, this information can sometimes
signal an important trend before it is apparent in the
published data.

I welcome the opportunity to discuss the economy of
the Eighth Federal Reserve District and my views on
monetary policy. As many of you know, one of my
responsibilities as a Reserve Bank president is to
gather information about the economy of my District
and report on it at Federal Open Market Committee
meetings. This information—along with similar information from the other Federal Reserve Districts—
serves as a backdrop to our discussion on monetary
policy.
At the Federal Reserve Bank of St. Louis, we
monitor economic conditions in both the nation and
the Eighth Federal Reserve District, which includes
the State of Arkansas and parts of Illinois, Indiana,
Kentucky, Mississippi, Missouri, and Tennessee. 1
Reserve Banks monitor the national and regional
economies in a variety of ways. For example, we
routinely collect economic information from various
official sources, both private and public.

1. The attachment to this statement is available from the Federal
Reserve Bank ofPhiladelphia,Philadelphia,PA19106-1574.




ECONOMIC

STRUCTURE

OF THE

DISTRICT

Let me note some facts about the Eighth District
economy. Based on the most recent county data, the
District share of personal income in the nation is 4.3
percent. If we include each of the seven District states
in its entirety, that share is 13.3 percent. Per capita
disposable personal income levels in District states are
below the national average.

Statements

The economies of the Eighth District and the nation
are very diverse and roughly similar in structure.
Some differences, however, are worth noting. Table 1
compares the composition of output for the Eighth
District and the entire United States. 2 The table shows
the following:
• The Eighth District tends to be more manufacturing-intensive in both durable and nondurable goods
than the United States. Nondurables sectors in the
District with comparatively high production include
rubber and plastic products, food, apparel, paper
products, and chemicals. Durables sectors with comparatively high output include transportation equipment—particularly motor vehicles—fabricated metals
and wood products.
• The District economy is a major agricultural producer, supplying significant portions of the national
output of corn, cotton, rice, and soybeans.
• Transportation services are a relatively important
contributor to the District economy, reflecting an
extensive network of navigable rivers, the strong
presence of railroads, and such airline transportation
companies as Federal Express and United Parcel
Service.

RECENT

ECONOMIC

EIGHTH

DISTRICT

PERFORMANCE

IN

THE

Although the 1990-91 recession and restructuring
have affected both the national and Eighth District
economies, the District has fared somewhat better
than the nation.
Pockets

of

Strength

One of the characteristics of a diverse economy is that,
even when an economy slows, some regions or sectors
may moderate the slowdown. This situation has been
observed in our area in recent years, as certain pockets within the District have grown rapidly, bolstering
the economic fortunes of our District. Examples follow:
• Northern Arkansas has experienced substantial
economic growth in the past few years. The northwestern part is home to some of the nation's fastestgrowing companies: Wal-Mart, Tyson Foods, and J.B.
Hunt Transport Services. Nucor, as well as several
2. For these purposes, the District's economic output is assumed to
be composed of the total output of the states of Arkansas, Kentucky,
Missouri, and Tennessee. This convention is used because the majority of economic activity in Indiana, Illinois, and Mississippi is not in
the Eighth District. Moreover, the absence of timely data at the
county level prevents the presentation of up-to-date data for only the
Eighth District.




to the Congress

437

small steel manufacturers, have located in northeastern Arkansas.
• Bowling Green, Kentucky, has attracted major
industrial plants, including International Paper and the
James River Corporation.
• Memphis, already a significant transportation and
distribution center, has exhibited substantial real
growth. In December, total payroll employment was
1.8 percent higher than year earlier, real retail sales
were up 31 percent, and the area unemployment rate
stood at 5.5 percent, well below the 7 percent national
average.
Employment,
Restructuring

Unemployment,

and

Payroll employment data provide a useful measure
with which to compare the Eighth District and the
nation during the recession and the recovery to date.
U.S. payroll employment fell at a 2.2 percent annual
rate during the recession from July 1990 to March
1991. District employment declined as well but at
one-half the national rate. In contrast to previous
recovery periods, U.S. payroll employment has essentially remained unchanged since the March 1991 recession trough, whereas Eighth District payroll employment has grown, although only at a 0.5 percent annual
rate.
The employment growth comparison for the District
and the United States is repeated in unemployment
data. The increase in the District unemployment rate
in the 1990-91 recession was only two-thirds that in
the nation. In the recovery, the unemployment rate for
the District fell to 5.8 percent by the end of 1992—its
prerecssion level—while the unemployment rate for
the United States remained well above its prerecession
level.
Increases in District service-sector employment in
the aftermath of the recent recession more than offset
the continued job losses in the goods-producing sector. District foods-producing employment, after decreasing at a 6.4 percent rate during the recession, has
continued to fall in the recovery, although at a significantly reduced annual rate of 0.1 percent. In contrast
to the District experience, national job growth in
services has not been enough to make up for job losses
in manufacturing.
The Eighth District has not escaped employment
restructuring. Substantial employment changes occurred in transportation equipment, including both
automobile and aerospace manufacturers. Many of the
changes in the District aerospace industry are directly
related to reductions in spending on national defense.
During the 1990-91 recession, employment in transportation equipment declined at an annual rate of 15.3

438

Federal Reserve Bulletin • May 1993

percent in the District and 8.9 percent nationally.
Since the March 1991 recession trough, employment in
this industrial classification has declined 3.4 percent in
the nation but increased 0.4 percent in the District, an
increase that is, nonetheless, below the norm for
previous recoveries. Since mid-1990, McDonnell Douglas, the nation's largest defense contractor, has cut
back employment in St. Louis by roughly 13,000.
While many of those laid off have found jobs in St.
Louis and elsewhere, manufacturing employment in
St. Louis in 1992 was 5,000 below its level for 1991 and
21,200 below its level for 1990.
Banking
The economic health of the Eighth District is also
reflected in the performance of its banks. Over the past
decade, Eighth District banks have generally outperformed banks of similar size in other parts of the
country. The somewhat better historical performance
of District banks reflects their comparatively low
ratios of overhead expenses to assets and ratios of loan
losses to assets.
This historical pattern is repeated in recent national
and District bank performance. In the third quarter of
1992, District banks recorded return on average assets—a measure of bank profitability—of 1.17 percent,
well above the industry benchmark of 1 percent and
the national average of 1.06 percent. District banks
also outperformed the banks in the nation in terms of
return on average equity, despite net interest margins
that closely matched the national pattern.
Recent improvements in the spread between rates
earned on loans and rates paid on deposits have
undoubtedly contributed to the current strength in
commercial bank earnings nationwide. Several other
factors, however, account for the comparatively
strong performance of District banks:
• Because the region's economy fared relatively well
during the 1990-91 recession, District banks recorded
lower levels of nonperforming loans as a percentage of
each loan category—consumer, commercial and real
estate—than did most of their national peers. Lower
ratios of nonperforming loans generally translate into
lower loan losses.
• The relatively small building boom, especially in
commercial real estate, in the Eighth District during
the mid- and late-1980s left District banks less subject
to loan losses from real estate suffered by banks in
other regions.
• The comparatively conservative composition of
District bank real estate loan portfolios is reflected in
relatively high proportions of first and second singlefamily mortgages in their real estate loan portfolios.
Such loans tend to have lower nonperforming and loss




rates than other types of real estate loans. Currently,
nonperforming ratios for all types of real estate loans
are lower at District banks than at national peer banks.
• Over the past five years, District banks have
consistently had capital ratios that exceed regulatory
minimums. At the end of the third quarter of 1992,
only one of the District's 1,200 failed to meet the
"adequately capitalized" requirement under the
prompt corrective action provisions of the Federal
Deposit Insurance Corporation Improvement Act of
1991 (FDICIA). Even more impressive is the fact that
only twelve District banks failed to meet the tougher
"well capitalized" standards under FDICIA. Because District banks generally have capital ratios that
exceeds regulatory minimums, they are well-positioned to meet demands for loans and other banking
services.
All in all, it is fair to say that the economy of the
Eighth District has been relatively stable in light of
national developments. The diverse nature of the
District economy has contributed to this stability, with
pockets of strength more than offsetting areas of
weakness. Such overall stability is backed by the
strength of the banking sector. This optimistic evaluation does not ignore the significant structural adjustments that are occurring in certain sectors and regions.
Nevertheless, in my judgment, were it not for these
unusually large structural adjustments, economic
growth in the District would be comparable with that
of earlier recoveries.

VIEWS ON MONETARY

POLICY

I would now like to turn to my views on monetary
policy. As I stated initially, the monitoring of regional
economic conditions provides useful insights that contribute to the monetary policymaking process. The
input of Reserve Bank presidents, who are briefed on
a broad range of economic viewpoints, enriches Federal Open Market Committee discussions of national
economic conditions. Such deliberations provide the
backdrop for formulating monetary policy. Nonetheless, monetary policy decisions necessarily must be
made for the nation as a whole, regardless of the
conditions in any one District.
In reaching judgments on policy, I try to keep
several factors in mind. They include the following:
the goals of economic policy, the role of monetary
policy in achieving such goals, the usefulness and
limitations of contercyclical monetary policy actions,
and the importance of an indicator to gauge the thrust
to monetary policy actions over time. I will discuss
each of these issues briefly.

Statements

439

GOALS

Monetary

The goals of economic policy include maximum sustainable growth of the economy, a high level of employment, and stability in the purchasing power of the
dollar. At one time there was thought to be a tradeoff
between policies pursuing growth and those aimed at
price stability. We now know that maximum sustainable economic growth is achieved when changes in the
price level cease to be a factor in economic decisionmaking. It is no accident that the most advanced
industrial countries and the newly industrialized and
fast-growing Asian economies have been comparatively successful in keeping price levels stable.
It cannot be emphasized too strongly that reasonably stable prices create an environment conducive to
long-range planning, as resources are used productively and not expended on inflation hedges. Removing
the distorting effects of inflation from real price signals
enhances market efficiency. Low and stable inflation
also helps to keep interest rates low by removing the
premium that investors require to compensate themselves both for expected losses due to rising prices and
for the risks of making long-term commitments in a
world with price-level uncertainty.

Finally, it is essential to have indicators of the thrust of
monetary policy actions to gauge whether monetary
policy has been excessively tight or easy. Such indicators should be tied closely to Federal Reserve
actions, which primarily involve adding or draining
reserves available to the banking system. This approach leads me to monitor the behavior of total
reserves, the monetary base, and the Ml monetary
aggregate. These variables, observed over relatively
long periods, provide a reasonable gauge of the stance
of monetary policy.
The behavior of broader monetary and credit aggregates, such as M2, can also be useful in formulating
and evaluating monetary policy. Averaged over threeto five-year intervals, M2 growth has been an indicator
of the growth of nominal spending, although this
relationship is now being reevaluated. But monetary
policy is too complex to be described solely by the
behavior of a single variable, especially one over
which the Federal Reserve has only limited control.
The portion of M2 that is most directly affected by
Federal Reserve actions, Ml, has risen at double-digit
rates during the past two years, as have total reserves
and the adjusted monetary base. The slow overall
growth of M2 has been due entirely to its non-Mi
components, which Federal Reserve actions affect
only indirectly. The growth of these components has
been affected by the very steep yield curve, the rise in
deposit insurance premiums, the need for higher capital ratios, increased regulatory oversight, weak credit
demand, and continuation of the longer-run trend
channeling credit away from depository intermediaries. Consequently, M2 growth has slowed despite the
Federal Reserve's considerable efforts to raise it.

ROLE

OF MONETARY

POLICY

In the long run, monetary policy only affects prices.
Stimulative monetary policy actions cannot increase
the economy's long-run growth. The potential for
economic growth is determined by real factors such as
the growth in the labor force, capital investment, and
increases in productivity. Accordingly, the role of
monetary policy in achieving our long-run economic
goals is limited.
Countercyclical

Policy

Countercyclical monetary policy, however, may be
appropriate in the short turn. Monetary policy actions
can lay the foundation for recovery by bolstering
sagging monetary growth rates during a recession and
can avoid an upward spiral in inflation and interest
rates by moderating excessive monetary growth during an economic expansion. But monetary policy is a
blunt tool. Both the magnitude and timing of the
effects of countercyclical monetary policy actions on
the real economy are uncertain. Excessive countercyclical monetary policy actions are destabilizing because they necessitate policy reversals down the road.
Consequently, one must avoid sowing the seeds for
the next inflation when fighting recession or sowing the
seeds for the next recession when fighting inflation.



Policy

to the Congress

Indicators

CONCLUSION

There is no simple rule for assessing the appropriateness of monetary policy at each point in time. Considerable judgment is required in setting policy. Thus, the
Federal Open Market Committee benefits greatly from
the diversity of views that are advanced under its
current structure. Ultimately, the effectiveness of
monetary policy must be evaluated based on results—
and the record of the past decade is reasonably good.
Despite unusually large federal budget deficits, complicated international developments, and significant
financial market restructuring and disruptions, monetary policy has been successful in reducing inflation
during a long period of moderate economic growth.
Although set back by the recession and a slow recovery, monetary policy has made substantial progress in

440

Federal Reserve Bulletin • May 1993

regaining credibility with respect to controlling inflation and has laid the foundation for a sustainable,
low-inflationary expansion in the 1990s. No one can

know what the future holds, but if accelerating inflation is behind us, the real economy will be on a firm
footing for genuine progress in the years ahead.
•

Statement by Gary H. Stern, President, Federal Reserve Bank of Minneapolis, before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
March 10, 1993

The defense expenditure buildup of the mid-1980s
and the commercial real estate expansion largely bypassed the Ninth District; therefore, when these industries suffered in the early 1990s, the region's performance did not deteriorate as much as the nation's.
The Ninth District's relative improvement, however, is more than the avoidance of the economic
swings that have occurred nationally (indeed, the
District has experienced its own cycles, particularly
within its natural resource-based industries). My travels across the Ninth District and visits with its leaders,
along with articles in the fedgazette, the Federal
Reserve Bank of Minneapolis' regional business and
economics newspaper, reveal considerable vitality and
adaptability. Increased exports, growing output from
industries created by new technologies, expanding
tourism, and Canadian cross-border shopping have
enabled the region to advance, despite persistent problems in its important natural resource-based industries.

I appreciate this opportunity to discuss with you
economic conditions in the Ninth Federal Reserve
District and my views on monetary policy. Largely by
avoiding the swings of the national economy, the
Ninth Federal Reserve District's economy has grown
steadily but unspectacularly since 1985. In 1985 the
nation was expanding, but the District was still affected by problems in its natural resource-based industries. Now, the District's economy is somewhat
stronger than the nation's. In recent years, while the
nation's economy was sluggish, the Ninth District's
economy—less affected by reductions in defense
spending and falling commercial real estate prices—
grew at a faster rate.

UNSPECTACULAR

BUT

STEADY
MANY

Close to three-fourths of Ninth District business leaders responding to a poll conducted by the Federal
Reserve Bank of Minneapolis last fall said their communities' economies were doing better than the nation's. Personal income growth since the trough of the
1990-91 recession supports their observations: Income in the District's four complete states grew faster
than in the nation. 1 And in 1992 the District's banks,
buoyed by favorable interest rate spreads and strong
demand for residential loans, had their best year in a
decade. This performance is in marked contrast to
March 1985, when the nation was in its ninth quarter of
recovery, but the District's states, except Minnesota,
were expanding more slowly than the nation. In fact,
between the fourth quarter of 1982 and the first quarter
of 1985, South Dakota, North Dakota, and Montana
ranked forty-fourth, forty-eighth, and forty-ninth respectively in annual growth. During this time the
District's banks mirrored the real economy, especially
in rural areas, and in 1986 banks had their worst
performance in years.

1. The attachment to this statement is available from the Federal
Reserve Bank of Minneapolis, Minneapolis, MN 55401.




ACRES,

MANY

RESOURCES,

FEW

PEOPLE

The Ninth District covers a big area but has a small
population. Montana, North Dakota, South Dakota,
Minnesota, the Upper Peninsula of Michigan, and
northwestern Wisconsin make up nearly 12 percent of
the total land area of the United States but contain
only 3 percent of its population.
Natural resource-based industries are important in
the District but are no longer the driving force they
once were. Still, these District industries produce
about 16 percent of the nation's agricultural output, 11
percent of mining, and 9 percent of forest products.
Such industries are especially important in the District's three western states, accounting for 26 percent
of North Dakota's total output, 22 percent of Montana's, and 20 percent of South Dakota's.
These sectors—agriculture, mining and energy, and
forestry—have long been important in the Ninth District, but, in general, they are no longer dynamic
engines of growth. Instead, these sectors struggle to
earn modest profits, maintain employment levels, and
replace obsolescent machinery. Agriculture, along
with mining and energy, went through a roughly
parallel cycle of a 1970s surge followed by a 1980s
slowdown and a weak recovery into the 1990s. The

Statements

forest products sector has followed a different pattern
but faces structural problems of its own.

AGRICULTURE'S

IMPACT

The rural financial crisis was at its height in 1985.
Concerns for the agricultural and rural economies
dominated board of directors and advisory council
sessions as well as many of my meetings across the
District throughout the late 1980s.
Agriculture experienced wrenching adjustments in
the 1980s. Good crop prices and low real interest rates
led to the quadrupling of land prices between 1970 and
1980. But these factors turned negative in the 1980s
and pushed agricultural profitability and land values
into a slump. From 1980 to 1987, Ninth District land
prices declined 35 percent to 60 percent, and foreclosures increased markedly.
Now the spate of bankruptcies is over. Farm incomes have climbed slowly from mid-1980s lows.
Total agricultural debt dropped 30 percent from 1984
to 1990 as lenders wrote off and farmers paid down
debt. Land prices stabilized and then rose; by 1992,
unadjusted for inflation, they roughly had regained
their 1984 levels.
But farm profitability remains tenuous and highly
influenced by exchange rates and government support
programs. At a recent meeting of our advisory council,
one member noted that farmers are broken into two
groups: well-capitalized and highly leveraged. Wellcapitalized farmers who have not become highly leveraged make reasonable profits, continue to invest in
new machinery and facilities, and service debt without
problems. But those farmers who were highly leveraged in the early 1980s, even if they escaped liquidation, still face high debt loads, earn only minimal
profits at current prices, and are unable to make
substantial new investments.
Moreover, small rural towns continue to lose businesses as retailing moves toward larger regional centers. Similarly, the number of farm implement dealers
and agricultural input suppliers shrank notably during
the 1980s, putting further pressure on the economies of
smaller towns.

PRESSURE ON PRICES AND
IN MINING AND
ENERGY

EMPLOYMENT

As in agriculture, the metal mining and energy industries in the Ninth District have experienced financial
pressures since the mid-1980s. Ninth District metal
mines extract iron ore on the fringes of Lake Superior,
copper in the same area and in Montana, and gold in



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441

South Dakota and Montana. Coal and oil production
are important in both North Dakota and Montana.
Iron ore is by far the District's most important
mining sector in terms of employment and value of
output. Output grew through the 1970s, declined in the
early 1980s, recovered somewhat by 1990, and is again
in a slump. Iron mining employment in Minnesota has
dropped about 20 percent since 1985. Our remaining
ores are low grade and require expensive processing,
making it hard for existing iron mines to compete with
more recently developed high-grade sources in Latin
America. The industry has cut costs, reduced staffing,
improved technical efficiencies, and undergone financial restructuring.
Copper and gold are also important mining products
in the Ninth District. These mines have important
local employment and spending impacts in northern
Wisconsin, the Upper Peninsula, western South Dakota, and Montana. Output and employment have
been essentially stable over the past eight years in
spite of fluctuating prices and limited profitability.
At present, both copper and gold prices are low;
copper and gold mine layoffs have occurred recently in
Michigan and South Dakota. Few new mines, which
are capital-intensive and involve long lead times, are
being developed because of current depressed prices.
Some officials are concerned that employment and
output may thus shrink as ore deposits in existing
mines are exhausted.
In the 1970s, coal and oil development apparently
faced a bright future in North Dakota and Montana.
But these hopes slumped with falling oil prices in the
1980s. While coal production has remained relatively
stable, oil output has declined, and both oil exploration and new coal mine development are at a virtual
standstill.

EXCESS

CAPACITY

PLAGUES

PAPER

INDUSTRY

Since the mid-1980s, the forest products industries
have faced problems somewhat different from those of
agriculture and mining and energy. The paper industry
in Minnesota, Wisconsin, and Michigan is an important source of employment and is value-added. In the
late 1980s, we heard reports of substantial new construction or renovation of paper mills. But now the
industry is in the middle of a long slump marked by
excess capacity nationwide, stagnant prices, and limited profitability. Industry officials do not expect
prices to recover for another three years, it was
reported at our most recent advisory council meeting.
Several mills have laid off workers and are running at
less than capacity.

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Federal Reserve Bulletin • May 1993

FORESTRY FACES SHRINKING
RESOURCES
AND TECHNOLOGICAL
CHANGE

In Montana and western South Dakota, the forest
products industry consists of traditional lumber production, with most timber cut from national forests. As in
the Pacific Northwest, available timber supplies are
shrinking because of depletion of stocks of mature trees
and somewhat tighter environmental regulations. Prices
bid for cutting rights are rising dramatically, and profits
are squeezed tightly, even at current high lumber
prices, according to directors' reports. This situation is
apparently a long-term one; output and employment
can be expected to continue to shrink. Although this
particular sector is not large relative to the entire Ninth
District economy, effects on employment and spending
may be painful to some communities.
But at the eastern end of the District a whole new
sector is emerging. The late 1980s saw substantial
construction of plants that use new technology to
produce plywood substitutes from what were considered low-value trees. Several such plants, built in
Minnesota, Wisconsin, and Michigan over the past
decade, are currently running at capacity.

DISTRICT

AVOIDS

DECLINE

IN

MANUFACTURING

While many natural resource-based industries were
struggling, other District industries escaped the vagaries of national economic swings. This is especially true
of defense spending and its effect on the District's
manufacturing employment. Although several Ninth
District communities were, and still are, vulnerable to
base closings, defense spending cutbacks were expected to hit the Pacific, New England, and South
Atlantic census regions the hardest. Likewise, Ninth
District manufacturing employment was essentially
unchanged over the past two years, while nationally it
dropped by about 3.5 percent.
While defense orders have been shrinking, manufacturing exports have been increasing for the nation, and
District manufacturers have been as successful as their
national counterparts when it comes to exporting.
Between 1987 and 1991 growth in manufactured exports totaled at least 55 percent in the District and
nation.
Avoiding defense cutbacks' full brunt and participating in the export surge have not kept the Ninth
District from plant closings and layoffs, but the region
has been able to offset many of them. Over the years,
Minneapolis-St. Paul has blossomed into a major
computer manufacturing center. However, the bloom
is now off; these firms have been laying off workers.
Nevertheless, the Twin Cities still generates high-tech



manufacturing jobs; during the last two years, the
increase in instrument manufacturing jobs, primarily
medical devices, offset the decrease in computer manufacturing jobs.
Outside Minneapolis-St. Paul, manufacturing is resilient as well. I periodically travel to Ninth District
communities as part of my District Dialogue program,
and in Aberdeen, South Dakota, and Eau Claire,
Wisconsin, business leaders report that they have
been able to attract firms to help compensate for major
plant closings.

DISTRICT CONSTRUCTION
AS NATION'S
DECLINES

EMPLOYMENT

RISES

Ninth District construction, like manufacturing, is also
resilient. Although Minneapolis-St. Paul's office vacancy rate rivals the nation's, commercial construction is expanding in Grand Forks, North Dakota,
Rochester, Minnesota, and Sioux Falls, South Dakota.
Moreover, some communities are experiencing a surge
in residential construction. Western Montana, for example, is benefiting from an in-migration of West
Coast residents. Thus, over the past two years Ninth
District overall construction employment has risen
about 1.5 percent, in contrast to its decline at the
national level.
In services, as in manufacturing and construction,
the Ninth District's performance recently surpassed
the nation's. During the past two years, employment
in services has increased about 4 percent in the region,
well above the increase in the nation as a whole.

TELECOMMUNICATIONS
TO THE REGION

BRINGS

JOBS

Service industries from outside the District are using
advances in telecommunications to access the region's
labor force. In the past twelve years, bank credit card
processors, notably Citibank, have become a major
South Dakota industry. They now account for about
5,000 jobs in Sioux Falls, 6 percent of the city's
employment. These jobs are not limited only to the
region's cities and towns; a Salt Lake City firm has
hired farmers and rural residents in northeastern Montana to work out of their homes.

MORE PEOPLE

TRAVEL

TO

DISTRICT

The Ninth District also has benefited from rising
tourism. Part of this increase comes from the region's
exposure in movies—Dances With Wolves and A River

Statements

Runs Through It, for example. New attractions, such
as the Twin Cities' Mall of America and casino gambling, are also pulling people into the region. Moreover, the dollar's decline has made U.S. travel attractive to foreigners.

CLOSER TIES TO CANADA
COMMUNITIES

HELPING

BORDER

The Ninth District's proximity to Canada has also
benefited the region. Although the impact of the U.S.Canada Free Trade Agreement cannot be easily sorted
out from exchange rates and other factors, a 1991
fedgazette poll revealed that Canadian business, particularly in border communities, had increased since the
agreement's implementation. Furthermore, in my Dialogue trips to Grand Forks and Minot, North Dakota,
and Great Falls, Montana, residents reported how
Canadian shoppers are buoying these communities.
Last year, however, the Canadian dollar fell relative
to the U.S. dollar, and at recent advisory council
meetings, a slowing of cross-border traffic into North
Dakota and Montana was reported. Moreover, the
Canadian government has recently taken measures,
such as tougher duty-free limits, to discourage crossborder shopping.

UNEMPLOYMENT

DECLINES

The region avoided the full effect of the economic
slowdown of the early 1990s, but the region's businesses have also taken advantage of the opportunities
offered by changes in the economy. Consequently, the
Ninth District has scored well on one important test for
a regional economy—keeping its unemployment low.
The United States essentially has the same unemployment rate today as it did in 1985, but unemployment
rates have declined in Ninth District states.
While District unemployment rates have been declining, prices and wages have not been increasing as
fast as they did nationally. Between 1985 and 1992,
the Minneapolis-St. Paul consumer price index rose
at a 3.3 percent annual rate, compared with about a 4
percent rate nationally. During the same period,
hourly manufacturing wages increased more slowly
in the District than they did nationally.

BANKING

INDUSTRY

IMPROVES

WITH

ECONOMY

As the District's economy improved, so did the banking industry. For example, the return on average
assets (ROAA) of Ninth District banks more than



to the Congress

443

doubled between 1986 and 1992. By 1986, the lagging
effects of the 1981-82 recession, the mid-1980s agricultural slump, and problems with loans to developing
countries had combined to weaken all types of banks,
but agricultural banks were particularly stressed.
However, by 1992, District banks reported their highest average ROAA in a decade.
In addition to the increased average ROAA for all
District banks between 1986 and 1992, another measure of the solid improvement is a reduction in the
number of banks reporting losses. Only seventeen
banks reported losses for the first three quarters of
1992, about 2 percent of the District total, compared
with 279 for 1986, or 20 percent of all banks.

RESIDENTIAL MORTGAGES
LENDING
GROWTH

DRIVE

CURRENT

As discussed earlier, 1986 was a year of retrenching for
many banks, so it is not surprising that loan volumes
were low. Loan growth then improved through 1988,
but in 1990 and 1991 credit quality problems surfaced
with commercial loans, in particular commercial real
estate and highly leveraged transactions.
By 1992, loan growth had improved again, but the
composition of loans changed and was more heavily
weighted toward residential mortgages. Favorable
long-term interest rates spurred a substantial volume
of mortgage refinancings as well as new loans for
purchases of new and existing residential real estate.
Moderate growth occurred in multifamily residential
lending and agricultural lending. Loans to businesses
and financial institutions and nonresidential loans to
individuals all declined in 1992. It is also interesting
to note that banks participating in our seasonal
borrowing program were more aggressive in making
agricultural and small business loans than were those
that did not participate. Also, despite recent concerns about banks investing in securities instead of
making loans, District banks' proportion of securities, as a percent of total assets, was unchanged in
1992 from 1986.

ASSET QUALITY, INTEREST
AND CAPITAL
IMPROVE

INCOME,

Concurrently with loan growth, asset quality has
improved. The ratio of noncurrent loans to total
equity peaked in 1986 and has been declining since
then; loan-loss reserve coverage ratios have also
improved since 1986; and net charge-offs to average
loans have declined significantly since 1986, mirror-

444

Federal Reserve Bulletin • May 1993

ing the trends of noncurrent loans to total loans and
provision expense to average assets.
But also noteworthy was the improvement in 1992
net interest income, which is the difference between
interest earnings and interest expense. Short-term
interest rates have declined from mid-1991 levels,
and banks substantially lowered rates paid on retail
deposits, thus reducing banks' funding costs.
Bank capital levels have been rising, in part, because
of stronger earnings performance and, in part, because
of tougher risk-based capital rules. Also, total equity to
assets has shown significant improvement since 1990.
BANKING

INDUSTRY

FACES

RESTRUCTURING

The number of Ninth District banks declined 17 percent
between the end of 1986 and the third quarter of 1992
(from 1,363 to 1,143). This reduction was caused by
consolidation through acquisitions, by bank failures, and
by changes in some states' laws that allowed affiliate
mergers.
There have been thirty-four bank failures in the District
since 1986, when problem bank numbers peaked, accounting for 14 percent of the reduction in banks.
VIEWS ON MONETARY

POLICY

In the broadest sense, and taking a long-run perspective, the object of monetary policy is, it seems to me,

Statement by Thomas M. Hoenig, President, Federal
Reserve Bank of Kansas City, before the Committee
on Banking, Housing, and Urban Affairs, U.S.
Senate, March 10, 1993

As President of the Federal Reserve Bank of Kansas
City, I am pleased to address this Senate committee.
The Kansas City Bank serves the Tenth Federal
Reserve District, which includes Colorado, Kansas,
Nebraska, Oklahoma, Wyoming, the northern half of
New Mexico, and the western third of Missouri. We
operate branches in Denver, Oklahoma City, and
Omaha.
Spanning the heartland, the Tenth District has traditionally relied on its natural resource industries. As a
share of total output, for example, agriculture and
energy are roughly twice as important to our economy
as to the national economy. However, after severe
farm and energy recessions in the 1980s, our economy
has become more diverse. The region's manufacturing
base is growing, a wide range of service firms is



to attain the highest possible living standards for our
citizens over time. In order to give this goal operational meaning, the Federal Reserve, in my view,
should seek to achieve, over time, maximum sustainable growth of real output.
My reading of the accumulated evidence on economic performance both here and abroad is that in the
long run the most significant contribution monetary
policy can make to achieving maximum sustainable
growth in real output is to foster price stability. That
is, I am convinced that in the long run, price stability
goes hand in hand with sustained economic prosperity.
The two goals are not antithetical, and, indeed, price
stability is best thought of as a means to the end of
sustained prosperity.
In the short run, we in the Federal Reserve may
indeed find it appropriate to respond to incoming
financial and economic information to keep the economy on, or to return it to, its potential growth path.
But, it seems to me, our short-run response should
in general be cautious because of uncertainty both
about the state of the economy and about the effects of policy on the economy. Moreover, we need
to avoid the problem of turning long-run policy
into a sequence of short-run decisions. If followed,
such an approach runs the risk of adopting a strategy that is persistently inflationary or contractionary, depending on conditions prevailing when it
is adopted.
•

flourishing, and tourism is anchoring growth in some
parts of the District.
Thanks, in part, to this more diverse economic base,
the District economy felt less sting from the national
recession of 1990-91 and has outpaced the nation
throughout the recovery. The recent experience of the
District is a sharp reversal from the 1980s, when our
region consistently trailed the national economy because of farm and energy recessions and a regional
downturn in real estate.
My testimony will discuss current economic conditions and prospects for growth in the Tenth Federal
Reserve District. I will also share my views of the
national economy and the role for monetary policy. In
brief, the District economy grew at a moderate pace in
1992 and will probably grow moderately again in 1993,
roughly matching the growth pace of the national
economy. I expect the nation's recovery to stay on
track, picking up momentum over the course of the
year, and my view regarding monetary policy is that it
should promote maximum sustainable growth within
an environment of price stability.

Statements

RECENT PEFORMANCE
ECONOMY

OF THE TENTH

DISTRICT

The economy of the Tenth Federal Reserve District
grew moderately in 1992. Contributing to growth were
the construction and retail sectors, which were generally strong across the seven-state region. Agriculture
also posted a good year, with bumper crops and solid
livestock profits. Energy activity remained sluggish,
but there was a spurt of new drilling in the fourth
quarter as exploration firms took advantage of expiring
tax credits for coal-seam gas. Manufacturing activity
slumped across the District, matching similar weakness nationwide.
The District economy grew faster than the national
economy in 1992, based on two broad economic
gauges. Real personal income in the District grew 2.3
percent from the third quarter of 1991 to the third
quarter of 1992 (the last period for which data are
available), compared with a 1.7 percent gain in the
nation. Employment in the District grew 1.2 percent
from the fourth quarter of 1991 to the fourth quarter of
1992, compared with 0.4 percent growth in the nation.
District Economy

Outpaces

the

Nation

The Tenth District economy has been outperforming
the nation throughout the recovery. Since the recession ended in March 1991, the District has added jobs
at an annual rate of 1.1 percent, while employment in
the nation has edged up at an annual rate of 0.2
percent. What accounts for the more buoyant economy in our region?
• Farm recovery. The farm economy, in contrast
with some other parts of the national economy, has
enjoyed a strong recovery. In the mid-1980s, agriculture suffered a severe downturn, as export markets
and farmland values both declined. Since then, farmers have posted record or near-record net cash incomes, allowing them to put their financial house in
order. Farmland values are still well below the peaks
of the early 1980s, but farmers and their lenders are in
solid financial condition. Strong farm income has also
helped buoy business conditions in many rural communities across the region.
• Stable energy industry. The District's energy
industry has stabilized after going through its own
recession in the 1980s. Energy-dependent areas of the
District, from Wyoming to Oklahoma, experienced
downturns after oil prices plummeted in 1986. In the
wake of lower oil prices, the energy industry downsized. Although painful, the correction was relatively
quick. More recently, the industry has steadied, being
neither a significant source of strength, as in the early
1980s, nor a drag, as in the late 1980s.



to the Congress

445

• Strong construction activity. Chiefly responsible
for maintaining the region's lead over the nation during
the recovery has been a booming construction sector.
Construction jobs in the District have grown at an
annual rate of 2.8 percent throughout the recovery,
compared with a decline at an annual rate of 1.8
percent in the nation. Construction activity has been
robust in virtually all categories. Residential building
in the region has surged, largely in response to lower
mortgage rates. Nonresidential and nonbuilding construction have benefited from a fairly large number of
public building projects under way in District states.
The best example of such activity is the new Denver
International Airport, which will be completed this
year. Commercial real estate has been stable, with
declining office vacancy rates and few new projects
under way.
• Strong financial institutions. The District's financial institutions are generally strong, having recovered
from the farm, energy, and real estate problems they
faced in the 1980s. Earnings, asset quality, reserve
coverage, and capital coverage are at their highest
levels since the early 1980s. Tenth District banks have
also outperformed banks in the rest of the nation in
1992 in all of these dimensions. Moreover, District
employment in financial services has continued to
grow during the recovery, in contrast to a decline in
the nation.
• Buoyant trade and services. Wholesale and retail
trade activity have grown steadily in the District
throughout the recovery. The region has continued to
attract wholesale firms due to its central location, and
retail activity has been solid because of the District's
overall growth in jobs and income. District employment in wholesale and retail trade has grown during
the recovery, while national employment in these
sectors has shrunk. Similarly, the District's service
sector has grown faster than the nation's because of
continued expansion in business services, health care,
and tourism. Tourism activity, despite a sluggish national economy, has been especially strong in the
Rocky Mountains and in the newly developed tourist
areas of southern Missouri.
While several sectors have helped buoy the Tenth
District economy, manufacturing activity in the District has been as weak as in the nation. Durable goods
production has been especially weak in the District,
and jobs in durables industries have fallen at an annual
rate of 2.5 percent during the recovery. Automobile
production, which is important to the District economy, posted a rise at District auto plants during the
1992 model year; however, jobs in the industry have
continued to drop. The general aviation industry,
which is concentrated in the Tenth District, is continuing to suffer from weak sales. The slump in commer-

446

Federal Reserve Bulletin • May 1993

cial aircraft is also hurting Wichita's economy, where
Boeing recently announced a layoff affecting 6,000
workers in 1993 and 1,000 in 1994. Defense cuts have
hurt in some areas and particularly in the State of
Missouri. Nondurable goods production has also been
weak in the District, where jobs in nondurables industries have grown at an annual rate of only 0.1 percent.
Mixed Performance

in District

States

In a District that spans seven states from the Ozarks to
the Rockies, it is not surprising that economic performance has varied by state. Overall, job growth in six
of the seven states has outpaced the nation. Employment growth in the recovery has been strong in Colorado and Kansas and weaker in Missouri and Oklahoma.
• Colorado. Colorado's economy has grown at a
robust pace throughout the recovery, with job growth
averaging 2.6 percent a year. Construction in the state
has boomed. Strong population growth and low mortgage rates have led to a spurt in housing starts and
rising home prices. The new Denver airport and highway improvements across the state have also bolstered construction activity. Services and tourism
have also been quite strong, helping to offset weakness
in mining and manufacturing.
• Kansas. The diverse Kansas economy has grown
solidly throughout the recovery, adding jobs at an
average rate of 1.6 percent a year. The state's service
sector has been strong, with steady gains in business
and personal services, particularly in the Kansas City
metropolitan area. Construction has been boosted by a
strong residential market and a pickup in public infrastructure projects. The state's important farm economy is prosperous due to high cattle prices and a large
wheat harvest. The general aviation, automobile, and
energy sectors remain weak, but they have only
slightly dampened what has been a healthy state
economy overall.
• New Mexico. The New Mexico economy has
grown steadily in the recovery. Employment in the
state has increased at an annual rate of 1.7 percent,
with services and government activity providing the
greatest strength. New Mexico's defense labs and
installations have benefited somewhat from defense
cuts elsewhere in the nation, and state and local
government employment has increased. Tourism has
also been a plus for the northern half of the state.
Partly offsetting the strength in these sectors, manufacturing and mining have been somewhat weaker than
in the two top states.
• Nebraska. Nebraska's economy has grown modestly during the recovery. The state's job rolls have
grown at an annual rate of 0.9 percent. Despite slug-




gish job growth, the state's unemployment rate is less
than 3 percent, one of the lowest in the nation. The
state's nondurable manufacturing, dominated by food
processing, has remained buoyant. Healthy wholesale
trade and service sectors have also helped bolster
Nebraska's economy. Most of the state's economic
gains, however, have been in metropolitan areas and
smaller cities that serve as trade centers for their
surrounding areas. Rural parts of the state continue to
languish.
• Wyoming. Wyoming's economy has posted modest growth during the recovery, adding jobs at an
annual rate of 0.8 percent. The state's energy-based
mining industry remains weak, although production of
soda ash—used in glassmaking—has benefited from
stronger construction activity across the nation. Service growth has been solid, mainly due to tourismrelated development. Tourist destinations have continued to grow faster than other parts of the state.
• Missouri. Throughout the recovery, Missouri's
economy has grown more slowly than most other
District states due to its heavy reliance on manufacturing. Kansas City, which depends less on manufacturing, has fared better than the eastern part of the
state. Overall, Missouri's job rolls have grown at an
annual rate of 0.4 percent throughout the recovery.
Employment in manufacturing has fallen at an annual
rate of 1.5 percent during the recovery. Durables industries, the backbone of the state's industrial base, have
been especially weak. The manufacturing slump has
been partly offset by healthy gains in service employment. A strong farm economy, meanwhile, has buoyed
local economies in rural parts of the state, and southwestern Missouri has been strong because of tourism.
• Oklahoma. Oklahoma has been the District's
weakest economy during the recovery. Employment
has declined at an annual rate of 0.1 percent since the
recovery began. The state's key energy sector remains
depressed, even after a mild upturn in drilling late last
year. Manufacturing has generally been weak, despite
improved auto production in the state during the 1992
model year. Trade and construction activity in the
state has sagged during the past two years.

OUTLOOK

FOR THE TENTH DISTRICT

ECONOMY

I expect the Tenth District economy to grow at a
moderate pace in 1993. Preliminary indicators suggest
the District economy is off to a good start this year.
Retailers report that consumer spending, which picked
up toward year-end, has continued to be relatively
strong in January and February. Moreover, banks in
the District report strengthening loan demand, and
farm income is rising slightly.

Statements

Survey of Economic

Advisory

Council

To provide current information on the District's economic prospects, it is useful to highlight a recent
survey we conducted of our Tenth District Economic
Advisory Council members and to report their expectations for 1993. With representatives from small business, agriculture, labor, and consumer interests, the
council serves as a valuable source of economic information throughout our region and provides useful
views on the overall stance of Federal Reserve monetary policy (council members are listed in the Appendix).1
Our District advisory council is optimistic about the
region's economy in 1993. They report improved sales
early in the year, both for their firms and in their
communities. The sales gains are reported from a
diverse mix of firms—from food processors to building
materials suppliers.
Most council members expect their profits to improve in 1993 because of both increased sales and
further cost cutting. A substantial majority of council
members also report a general air of economic optimism in their communities. In line with their expectations, a majority of council members plan to increase
capital spending in 1993. Nearly all of the council
members that plan to expand spending this year expect
credit to be readily available.
Council members also report that employment
growth is currently lagging behind other business
indicators. The number of firms adding workers so far
this year just about equals the number of firms not
adding workers. Similarly, council members are
evenly divided between those planning to increase
employment this year and those planning no new jobs.
Only one council member plans to cut jobs in 1993.
Outlook for District

447

therefore edge up, although there may be little improvement in the industry's already strong balance
sheet.
The expected conclusion of two important trade
pacts this year, the Uruguay Round of General Agreement on Tariffs and Trade negotiations and the North
American Free Trade Agreement, will have a critical
effect on the farm economy's long-term outlook. The
District farm economy stands to reap substantial benefits from freer agricultural trade.
• Energy. The energy industry will probably be
stable in 1993, with little change in overall activity.
Currently, drilling activity is edging down from the
spurt in the fourth quarter of 1992. With oil prices
likely to remain relatively flat, there is little prospect
for significant change in an industry that is operating at
a fraction of the activity reached a decade ago.
• Construction. Building activity may slow somewhat in our region in 1993. Large housing inventories
that accumulated across the region in 1992 will require
some time to be absorbed. Moreover, some big public
projects, such as the Denver airport, will wind down
this year.
• Manufacturing. Manufacturing will probably pick
up in 1993 as the national economy improves. Factory
production in the region will benefit from a likely
increase in consumer spending on durables. Defense
cutbacks will continue to hurt some parts of the
District.
Overall, I expect the Tenth District economy to
grow at a moderate pace in 1993, roughly equal to the
nation's pace. The nation's ongoing recovery will also
have an important bearing on the growth we achieve in
our District. Improvement in the national economy
will be a prerequisite to a rebound in District factory
production, much of which is sold in national and
international markets.

Industries

Additional information that points to moderate growth
in the District economy in 1993 is the outlook for key
District industries. We expect agriculture to remain
strong, energy to remain stable, construction to slow,
and manufacturing to improve.
• Agriculture. The District farm economy should
stay on its recovery course in 1993. Livestock producers' profits are expected to remain strong, but last
year's bumper harvest will hold down crop prices. The
effect of lower crop prices on farmers' incomes in 1993
will be cushioned by larger sales volumes and bigger
government payments to farmers. Farm income may

1. The attachment to this statement is available from the Federal
Reserve Bank of Kansas City, Kansas City, MO 64198-0001.




to the Congress

THE NATIONAL

OUTLOOK

AND

MONETARY

POLICY

Turning to the national outlook, I expect the national
economy to continue to grow moderately in 1993. Real
GDP growth should pick up over the year, averaging
about 3 percent from the fourth quarter of 1992 to the
fourth quarter of 1993. With continued moderate
growth, inflation will likely edge down to just below
3 percent.
The economy in 1993 will benefit from the effects of
past easings of monetary policy. The current low level
of interest rates will spur spending on consumer durable goods, business fixed investment, and housing. In
addition, the economy will gain momentum as busi-

448

Federal Reserve Bulletin • May 1993

nesses build inventories in anticipation of stronger
domestic demand.
Other sectors of the economy will contribute little to
economic growth in 1993. Net exports are likely to slip
as sluggish growth abroad limits U.S. export growth
and the expansion at home boosts U.S. imports. And
total government spending is not expected to change
substantially relative to a year ago.
Structural factors will also influence the pace of the
national expansion. Balance sheet improvements
among households, businesses, and financial institutions will lend support to the recovery. Although the
restructuring of balance sheets is still under way,
considerable progress has been made in reducing debt
burdens. Acting to dampen overall growth in 1993 will
be the continuing shift of resources from defense to
nondefense industries.
Inflation is likely to continue to decline in 1993. With
the unemployment rate expected to fall gradually
through the year—to 6.9 percent in the fourth quarter—wage pressures will remain modest. Wage moderation, therefore, should help dampen inflation further. I expect consumer price index inflation to decline
to about 2.8 percent in 1993 on a fourth-quarter over
fourth-quarter basis.
Given this economic outlook, I believe the current
stance of monetary policy is appropriate. Past monetary policy easings—which I supported last year as a
voting member of the Federal Open Market Committee—have contributed to the improvement we are

seeing in interest-sensitive sectors, such as housing
and investment.
I think we all agree that the goal of monetary policy
is to promote maximum sustainable growth over
time. In the near term, Federal Reserve policy
should be geared toward fostering a solid expansion,
thereby encouraging job growth and the investment
spending needed to spur the economy's potential
growth rate. But just as important, and consistent
with this goal, the Federal Reserve must work toward ensuring an environment of price stability. Low
inflation is a prerequisite to an efficiently operating
economy and to the achievement of maximum
growth over time.
For the foreseeable future, the Federal Reserve will
need to monitor a wide range of information in conducting monetary policy. As you have heard from
Chairman Greenspan, the monetary aggregates, in
particular, will probably not be as informative as in the
past. Relationships among the aggregates and the
economy are changing as more lending and borrowing
are taking place outside the depository sector. Indeed,
fundamental changes in credit markets are under way
worldwide. Thus, in assessing the state of the economy and the stance of monetary policy, we will
monitor a wide range of financial and economic indicators—in the Tenth District, nationally, and internationally. And monetary policy will be responsive and
flexible in the face of a rapidly changing and challenging economic environment.
•

Statement by Robert D. McTeer, Jr., President, Federal Reserve Bank of Dallas, before the Committee on
Banking, Housing, and Urban Affairs, U.S. Senate,
March 10, 1993

ment growth weakened, and unemployment began to
rise. Our employment growth slowed below trend, and
our unemployment rates increased to national levels,
especially in areas vulnerable to defense cuts. Even
with these weaknesses, however, employment in the
three states has grown by 194,000 since the trough in
the national economy.

I am pleased to respond to your request to share my
views on monetary policy and the state of the economy in the Eleventh Federal Reserve District. The
economy of the Eleventh District, which includes
Texas, southern New Mexico, and northern Louisiana, has fared somewhat better than the national
average during the past three years. 1 In part, we have
done better because the economy was rebounding
from the sharp contraction that took place after 1986.
Measured by employment, our region managed to
avoid recession but not sluggish recovery. After the
U.S. recovery began in April 1991, District employ-

1. The attachment to this statement is available from the Federal
Reserve Bank ofMinneapolis,Minneapolis,MN55401.




OVERVIEW

OF THE

ELEVENTH

DISTRICT

ECONOMY

The relative strength of our economy derives, in part,
from trade with Mexico. Exports from Texas to Mexico rose 16.5 percent in 1991 and jumped another 22
percent in 1992. Exports in 1992 amounted to $19
billion, which represented 4.7 percent of gross state
product. District industries benefiting most from increased Mexican trade include chemicals, food and
kindred products, transportation equipment, electric

Statements

and electronic equipment, furniture and fixtures, and
apparel.
Our border cities have shown the strongest growth,
both in terms of manufacturing employment and in
retail sales. Geographically, San Antonio and Austin
are doing better than Houston and Dallas-Fort Worth.
Fort Worth has been hardest hit by defense cuts, while
Houston has felt the brunt of energy cutbacks.
Restructuring away from energy continues to make
our economic profile more like the nation's, but that
restructuring, like similar adjustments across the nation, continues to exact a human toll. Within our
District, the performance of New Mexico is similar to
that of Texas, while that of Louisiana has been somewhat weaker.
Except for commercial real estate, construction has
been a recent source of strength and jobs in our region.
Residential permits last year were the highest since
1986, the year of the oil bust. Office vacancy rates,
however, have not recovered much. One lesson from
our District is that the overhang of commercial real
estate lasts a long time.
The financial condition of our banks has improved
over the past two years, and bank lending has stabilized for the first time since 1985. Nonetheless, the
credit crunch has been very real in the Southwest.
While it has eased somewhat during the past year, the
credit crunch continues to impede job growth in smalland medium-sized businesses that rely on banks for
credit.
A Stronger

Growth

Trend

With most sectors of the District's economy outperforming their national counterparts, a stronger longterm growth trend may be the principal factor contributing to employment growing faster in the District than
in the nation during the recovery. Since 1970, the trend
rate of growth in District employment has been 2.9
percent annually, while the trend rate of growth in
U.S. employment has been 2.1 percent annually. Since
the trough in March 1991, employment gains in both
the District and the United States have been about
equally below their long-term trends. In the District,
employment has grown at a 0.9 percent annual rate
since March 1991, while U.S. employment has grown
at a 0.3 percent annual rate.
Several factors contribute to the District's stronger
growth trend. First, the state and local fiscal policies in
the District have struck a favorable balance between
the provision of government services and the taxes
required to finance them. Second, political and social
factors in the District states are generally favorable to
economic growth. Third, the populations of New
Mexico and Texas are younger than the U.S. average.




A Growing Similarity

to the Congress

to the National

449

Economy

The changing composition of the District economy has
made it more like the rest of the United States. In
1982, the District had a more prominent energy sector
and less prominent service and manufacturing sectors.
Since that year, the District's energy sector has contracted, its service sector has grown in importance,
and its manufacturing sector has declined less than the
nation's manufacturing sector.
Late in the U.S. recession, the District economy
showed the effects of its growing similarity to the U.S.
economy. The influence of the national recession on
the District economy was most evident during the first
two quarters of 1991. The national economy experienced its sharpest contractions from November 1990
through March 1991.
During the recovery, the performance of the District
economy has remained similar to that of the nation's.
Since March 1991, District employment has grown at
an annual rate 2 percentage points below its long-term
trend rate of growth, while U.S. employment has
grown at an annual rate 1.8 percentage points below its
long-term trend rate of growth.
Business

Restructuring

As in much of the nation, one source of weakness in
the growth of District employment has been continued
structural change in the service sector. Although the
service sector has continued to add jobs, the rate of
growth has declined sharply over the past several
years. The employment weakness stems from both
technological change and increases in the costs of
nonwage benefits. For example, the demand for accounting services has declined as many small businesses have acquired software that allows them to
keep their own books. Many firms have also commented to us that the mandated nonwage costs of
hiring an employee have risen so sharply over the last
two or three years that it is now often cheaper to pay
overtime than to hire new workers.
Reduced

Defense

Spending

As is the case for many areas of the country, another
source of weakness in the District economy has been
cuts in defense spending. Overall, the District is about
as sensitive to cuts in defense spending as is the
national average. Two metropolitan areas in the region, Fort Worth in particular and Dallas to a lesser
extent, are more sensitive than the national average.
Nonetheless, the District remains vulnerable to defense cuts aimed at specific, locally produced weapons
systems.

450

Federal Reserve Bulletin • May 1993

Reduced U.S. spending on the A-12 attack plane,
B-2 bomber, F-16 fighter, V-22 Osprey, and other
defense contracts has rocked manufacturers in the
District, particularly those in the Dallas-Fort Worth
area. Since late 1990, employment at General Dynamics' Fort Worth facility has been reduced by more than
11,000 workers. Just last year, Bell Helicopter,
Vought Aircraft, and Texas Instruments laid off a total
of 9,400 workers in the Dallas-Fort Worth area who
previously were working on defense contracts. Other
defense contractors in the area also have made cuts.
Multiplier effects will contribute to further job losses
in the Dallas-Fort Worth area.
The District overall has been a net beneficiary of the
base realignment process thus far. While bases in
Austin (Bergstrom AFB), Fort Worth (Carswell AFB),
and Beeville (Chase Field Naval Air Station) are in the
process of closing and the Second Armored Division at
Fort Hood (near Killeen, Texas) has been deactivated,
the District has gained military jobs because 33,000
military personnel are being transferred to Fort Hood.
Additionally, civilian uses have been found for some
of the closed bases. A new round of base-closing
decisions begins this month, however, and the story
could change dramatically.
Oil and Gas
Declines in the oil and gas industry have been still
another source of regional weakness. In the District,
the concentration of employment in oil and gas extraction is seven times the national average. Although the
boom days of J.R. Ewing have long since left the oil
patch, oil and gas extraction is still a $40 billion
industry in the District (7.8 percent of the value of
output), and the industry's volatility still has considerable effects on the region's economy.
Before February 1991, higher oil prices brought
about by the Persian Gulf War encouraged a modest
expansion of the nation's oil and gas industry. As an
energy-exporting region, the District benefited from
higher energy prices, while much of the nation suffered.
After February 1991, lower oil prices and extremely
low wellhead prices for natural gas brought a sharp
contraction to the oil and gas extraction industry,
which was exacerbated by a long-term shift of exploration and development activity overseas. The Baker
Hughes rig count fell to a fifty-two-year low in April
1992. The fall resulted in major employment reductions by oil companies doing business in the District,
such as ARCO, Chevron, Mobil, Marathon, Phillips,
and Shell. Over the past two years, layoffs in the
energy industry directly accounted for the loss of
32,000 jobs in the District. Longer term, the District




has lost in excess of 200,000 jobs in oil and gas—more
than 50 percent of its peak employment. Both in
absolute numbers and in percentage terms, the District's job losses in energy exceed those of the auto
industry nationally.
Real Estate and

Construction

In the past few years, the growth of construction has
been a source of strength for the District economy.
Although construction jobs have declined by 196,000
nationally since March 1991, they have increased
slightly in the District. Although most major office
markets in the District remain overbuilt, residential
construction has shown marked improvement. Permits
issued for residential construction in 1992 were the
highest since 1986, the year in which the construction
sector began its massive decline.
Differences between District construction and real
estate and the corresponding national averages result
primarily from timing. The District's real estate market collapsed in 1986, the year in which oil prices
plummeted and the region's economy fell into recession. By the time national real estate property values
tumbled in 1990 and 1991, property values were stabilizing in the District.
During the District's recession, construction employment—which had been stimulated during the early
1980s by tax advantages, a booming regional economy, and speculative excesses—fell almost 30 percent
from its peak in 1984 to its trough in early 1989.
District construction then began to rise, spurred by
rising occupancy rates and stabilizing property values.
More recently, rising home values, lean home inventories, and low mortgage rates made 1992 the biggest
year for residential construction in the District since
1986. Weakness in office markets kept the growth of
commercial construction at a near standstill. Because
the District has already adjusted to the low levels of
commercial construction associated with weak office
markets, however, the commercial sector is not the
drag it is nationally.
Banking
The District banking industry is, on average, now
healthier than its national counterpart. In the District,
healthy banks hold 82 percent of total assets versus 65
percent nationwide. District banks are more profitable
and generally hold lower percentages of nonperforming loans than their national counterparts. District
banks show a lower propensity to lend than the
average U.S. bank, however, holding only 45 percent
of assets as loans versus 56 percent for all banks
nationwide. Lending by Eleventh District banks has

Statements

not been as strong as the banks' capacity to lend would
indicate, although recently, loans held at District
banks have increased marginally.
Banking institutions in our region have been through
very tough times. From 1982 through 1992, a total of
565 banks failed. A credit crunch and concerns about
capital constraints on lending began in the Dallas
District. The impact of the credit crunch on small
businesses was long-lasting and severe. The dependence of small businesses on bank credit and the
contraction of bank loans in recent years—partly as
the unintended consequence of stricter regulatory
oversight, increased deposit insurance premiums, and
higher capital standards—may well explain some of
the weak employment growth we have seen so far in
this recovery.
Banking conditions improved slowly as insolvent
institutions were closed, failing banks were resolved,
and recapitalization occurred. While many factors
have contributed to the credit crunch, it is clear that
restoring capital to healthy levels is a necessary condition for bank lending to resume.
Regional

Summary

Many of the same factors that are holding back employment growth in the nation during this recovery
have had a similar effect in the Eleventh District.
These factors include business restructuring and reduced defense spending. A stronger growth trend in
the District than in the nation accounts for much of the
region's stronger performance in creating jobs. For
now, the disadvantages of having a higher concentration in the oil and gas industry than the national
average are being partially offset by increasing trade
with Mexico and an expanding construction sector.
The District's banks are healthier than the national
average, but they have yet to become a factor contributing to stronger growth. Having sketched recent
events in my region, I turn to the national economy
and the appropriateness of monetary policy.

RECENT

MONETARY

POLICY

With regard to monetary policy, I believe that it has
been accommodative over the past four years. Certainly, by conventional measures, monetary policy
was not tight heading into the third quarter of 1990,
when the Iraqi invasion triggered a recession. The
federal funds rate had been declining for fifteen
months and was down more than 150 basis points from
its March 1989 peak. In mid-1990, the M2 money
supply was growing at an annual rate of more than 5
percent, near the center of its 3 percent to 7 percent



to the Congress

451

target range. Nominal aggregate demand was growing
even more strongly, at an annual rate of more than 6
percent. The interest rate yield curve had been positively sloped for six months, and both the Commerce
Department and National Bureau of Economic Research indexes of leading indicators were signaling
continued economic expansion. Indeed, contemporaneous real-time data did not clearly signal that a
recession had begun until the fourth quarter of 1990, at
which point the Federal Reserve promptly initiated a
new sequence of easing moves. In consequence, shortterm interest rates declined an additional 100 basis
points by the end of 1990, and monetary base growth
surged to double-digit rates.
The oft-heard charge that the Federal Reserve's
actions were "too little, too late" is not supported by
the evidence. We cut the federal funds rate much more
(17 percent) before the July 1990 business cycle peak
than before any of the five previous business cycle
peaks. Despite a pause in interest rate cuts during
early 1990, the decline in the federal funds rate from
April 1989 (when it began its descent) until March 1991
(at the business cycle trough) comes very close to the
average percentage decline in the federal funds rate
over comparable periods during other recent business
cycles. The decline in long-term interest rates that
accompanied the March 1989-March 1991 easing
moves was also well within the range of past experience.
The total decline in the federal funds rate and the
ten-year Treasury bond rate over this business cycle
has now reached 70 percent and 29 percent respectively, compared with average total declines of 55
percent and 9 percent over the other five most recent
cycles. Monetary policy was expansionary throughout
the recession.
Late in 1990, as soon as it became apparent that the
Gulf War, a spike in oil and gasoline prices, and a
sharp drop in consumer confidence were dragging the
economy down, the Federal Reserve took prompt
action to maintain spending growth. Unfortunately,
the lags between cuts in the federal funds rate and the
economy's response are such that our actions were
insufficient to prevent the economy from slipping into
a recession.

THE SHIFTING

COMPOSITION

OF

MONEY

In response to cuts in short-term interest rates, growth
in narrow measures of money has accelerated markedly over the past four years. Growth in the M2
monetary aggregate, in contrast, has slowed.
It is not surprising that growth in the narrow monetary aggregates sped up relative to growth in broader

452

Federal Reserve Bulletin • May 1993

measures of money. As short-term interest rates decline, the opportunity cost of holding funds in checking accounts or even in cash declines. The growth rate
of narrow monetary aggregates then accelerates. Because banks are required to hold reserves against Ml
deposits but not against M2 deposits that are not part
of Ml, the impact of lower interest rates on the growth
rates of reserves and the monetary base can be particularly striking.
The mystery is the magnitude of the absolute slowing of M2 growth. Historically, the velocity of M2 has
moved very closely with short-term interest rates.
However, this relationship began to deteriorate in
1990. The velocity of M2 has been substantially higher
than expected, given recent declines in short-term
interest rates. Indeed, the shortfalls in M2 and M3
growth from the midpoints of their ranges were more
than offset by the increase in their velocities. In other
words, hitting the midpoint of the target ranges with no
change in velocity would have resulted in slower
growth in spending and income than actually occurred.
The close historical relationship between interest
rates, M2 growth, and nominal gross domestic product
(GDP) growth, to some extent, is a product of hindsight. Before 1980, M2 as we now know it did not
exist. In 1980, the Federal Reserve redefined M2 to
include money products that were not previously
included in published money numbers. Most notable
among these were money market mutual funds, which
if they had remained excluded from M2, would have
lowered M2 growth by 2 to 4 percentage points during
the quarters just before M2's redefinition. If M2 had
not been redefined, the historical M2-GDP relationship would have appeared much looser.
Just as households in the late 1970s shifted their
money out of traditional bank deposits into money
market mutual funds, households today are shifting
out of M2 deposits at banks and thrift institutions and
into higher-yielding bond and equity mutual funds.
Mutual fund asset management accounts, such as
those offered by Merrill Lynch or Charles Schwab,
enable households readily to transfer assets from bond
and stock funds to checkable money market funds
when needed. While stock funds carry much investment risk, bond funds—particularly bond funds investing in government and high-rated corporate bonds—
are quite substitutable for M2 deposits and have grown
very rapidly the past two years.
Research at the Dallas Fed indicates that redefining
M2 to include bond funds held outside Individual
Retirement Accounts and Keogh accounts by households would result in a monetary aggregate more
closely related to its opportunity cost (that is, competitive interest rates) and nominal GDP than is M2 as
currently defined. Indeed, such an expanded aggregate




has grown about 2 percentage points faster than M2 in
recent years—very much in line with recent growth in
nominal GDP. Furthermore, the expanded aggregate
has stayed near the middle of the growth cones implied
by the Federal Reserve's M2 target growth ranges.
This research suggests, then, that current monetary
policy is appropriately expansionary.
For some time now, I have been warning that, in
today's financial environment, disintermediation from
the banking system is as likely to be caused by low
short-term interest rates as by high short-term interest
rates. In the past, a steepening of the yield curve
brought about by a decline in short-term interest rates
stimulated the growth of bank deposits—as bank deposit rates, tied to interest rates on relatively longterm loans, tended not to fall as much as the rates on
short-term marketable securities. Over the past two
and one-half years, however, households have responded to lower deposit rates and a steepening yield
curve not by shifting away from short-term securities
into bank deposits but by shifting away from shortterm securities and deposits into bond market mutual
funds and other investment vehicles, as well as by
reducing consumer debt. These effects have been so
strong that it is possible that further cuts in short-term
interest rates would actually shrink the M2 money
supply as that supply is currently measured.

FACTORS
OF THE

CONTRIBUTING
RECOVERY

TO THE

SLUGGISHNESS

Output growth during 1992 now appears to have been
stronger than had been anticipated, GDP having increased at better than 3 percent. Growth during the
second half of the year, at more than 4 percent, was
particulary strong. Continued healthy output growth
would be welcomed, particularly if accompanied by a
more rapid expansion of employment. Unfortunately,
as some members of this committee have noted, we
have been in an output recovery but a jobs recession.
My colleagues and I within the Federal Reserve System share your concern with this problem. Recent
declines in initial claims for unemployment insurance
and the lengthening average workweek provide reason
to hope that employment growth will accelerate soon,
and the unemployment rate will continue to fall.
The recovery was so slow to gain momentum, in
part, because of the unusual composition of the declines in output and employment during this past
recession. The overall percentage decreases in output
and employment during the 1990 recession roughly
match the average declines observed during other
post-World War II recessions. For the industrial sector, however, the 1990 recession was the mildest

454

Federal Reserve Bulletin • May 1993

loss of 124,000 jobs. Between January 1992 and January 1993, the decline in manufacturing employment
showed no sign of abating, as employment fell 3.2
percent; the decline in construction employment, however, slowed somewhat, to 3.0 percent.
Services and state and local government are the only
sectors to have reported steady job gains since January 1991. Between January 1991 and January 1993,
employment in those two sectors rose 3.0 percent
(159,000 jobs) and 6.0 percent (164,000 jobs) respectively. Growth in these sectors has slowed recently;
employment in January 1993 was up 2.2 percent in
services and 0.4 percent in state and local government
from the levels of a year earlier.
Most other sectors have shown weakness in the
District as a whole. The utilities and communications
sectors have been downsizing, resulting in considerable employment declines. The finance, insurance,
and real estate sector also has reported net job losses
over the past few years because of weakness in real
estate and the consolidation of the banking industry,
although this sector did show a modest gain over the
twelve months ending in January 1993. Trade employment also has been a major source of job losses as a
consequence of weak consumer spending and consolidation of the retail sector. Employment in trade
declined 0.2 percent in January from the level of a year
earlier, bringing the level of employment down 1.3
percent from the level in January 1991. Federal government employment also contributed to weakness in
the District, falling 1.9 percent between January 1992
and January 1993.
Weakness in the District was mitigated somewhat
by growth in activities related to foreign trade. For
example, total import and export traffic in California
rose to $192.5 billion in 1992, an increase of 10.1
percent over 1991 and an increase of 16.2 percent over
1990. Oregon and Washington also have seen growth
in import and export traffic, although not at the pace of
California.3
The performance of the banking industry in the
District has been mixed. Earnings ratios at California
and Arizona banks were below the national average
last year, while the other states in the District posted
very strong earnings. Banks in California, Nevada,
and to some extent Arizona, continued to have relatively high volumes of problem loans. Lending at
commercial banks in the District, which held up very
well in the recent recession, has deteriorated in the
past couple of years, though banks in a number of
states have continued to expand loans.

3. These data refer to customs districts.




Alaska
Alaska's dependence on oil, fisheries, and other natural resources makes its economy the most volatile of
the Twelfth District states; it is subject to large swings
in economic activity related to commodity prices but is
relatively unlinked to national business cycles. During
the 1989-92 period, employment growth was 4.5 percent in 1989, 6.1 percent in 1990, 2.1 percent in 1991,
and 0.5 percent in 1992. The unemployment rate in
January 1993 stood at 8.4 percent—below its yearearlier level of 9.5 percent. Some of Alaska's recent
volatility is attributable to the activity stimulated by
the 1989 oil spill and the associated clean-up and
payments. Thereafter, however, several basic industries were hampered, making economic activity more
sluggish.
In contrast to the weakness in 1992, employment
rose sharply in January 1993, to a level 2.1 percent
above a year earlier. Manufacturing employment rose
4.0 percent, reflecting strength in durable goods employment. Pulp and paper employment, however,
showed little change over the year, and seafood processing employment declined 8.5 percent after rapid
expansion in previous years. The fall-off in seafood
processing was due, in part, to lower-than-normal
catches of pink salmon.
A 5.9 percent decline in mining employment over
the year reflects the sluggish world demand for minerals, and energy exploration remains constrained by
environmental considerations. However, there are
some plans for energy development in 1993, including
construction of a gas reinjection facility on the North
Slope. A discovery in the Beaufort Sea is potentially
large enough to justify a sixty-mile connection to the
Alaska Pipeline.
Finally, sluggish construction employment reflects
the overall slow economy. A pickup in residential
building permits (26.5 percent) and nonresidential construction awards (414 percent) in January 1993 from a
year earlier, however, suggests that 1993 may see
some improvement in this sector.
Sectors showing job growth over the twelve months
ending January 1993 included transportation (1.6 percent), trade (1.5 percent), services (3.4 percent), and
federal employment (3.2 percent). With respect to
government employment, however, uncertainty exists
as to the impact of further defense cutbacks on military bases that have so far survived. Furthermore,
sluggish conditions in energy markets are restraining
the main source of state government financing—oil
revenues—and are constraining state government employment to zero growth.
Despite the sluggish economy, banking conditions in
Alaska are relatively good. The return on assets (1.61

Statements

percent) and return on equity (12.67 percent) were
above the national averages (0.93 percent and 12.24
percent respectively). 4 At the end of last year, problem loans at large commercial banks stood at 2.3
percent of total loans, compared with a national average of 5.1 percent, and are below the national average
in all major categories. 5 Bank lending in the state also
has held up in the past couple of years compared with
bank lending nationwide.
Arizona
Arizona's economy posted solid employment gains in
the past year, with employment in January up 2.6
percent from the level of a year earlier. The economy
has shown job growth in the services sector and in
construction, while manufacturing has continued to
slide. The unemployment rate for the state has risen in
recent months. In January, the unemployment rate
stood at 8.0 percent, having risen steadily from 6.5
percent in September 1992.
Construction activity has become a relative bright
spot in Arizona, with employment up 7.3 percent
between January 1992 and January 1993. Construction
employment is up to 83,000 workers, the highest level
since 1990. This increase represents a gain of 6,000
workers since the bottom of August 1991. Compared
with the peak reached in January 1986, however,
employment is down 29.5 percent (34,400 jobs).
The recent gains in construction employment in the
state are attributed to growing strength in the residential market, particularly in Tucson. It appears, therefore, that the long construction recession in Arizona
that followed the overbuilding in the mid-1980s may be
ending. During that period, residential and nonresidential construction fell sharply. Raw land prices fell as
much as 70 percent in some areas. The overbuilding
was largely the result of over-optimistic population
projections. Population in Arizona grew about 4 percent in the mid-1980s, but the pace was slower in 1990
(1.6 percent), 1991 (1.8 percent), and 1992 (2.6 percent, estimated). Downtown office vacancy rates remained high in Phoenix and Tucson at the end of 1992,
however, at 24.7 and 24.8 percent respectively, compared with an average national rate of 17.6 percent.
Manufacturing in Arizona has been suffering
through defense-related cuts, with employment falling 10.2 percent (19,000 jobs) since the peak in June
1988. Aerospace employment has been hit the hard-

4. The data on commercial banks for the fourth quarter of 1992 are
preliminary.
5. The data on problem loans are for banks with assets of more than
$300 million. "Problems loans" are defined here and throughout the
testimony as thirty days or more past due and as nonaccrual loans.




to the Congress

455

est, with employment down 17.1 percent since peaking in July 1990, but closure of other high-tech
facilities (including IBM) also has contributed to the
sector's weakness.
The Tucson area is expected to benefit (in a relative
sense) from further consolidation of the defense and
aerospace industries now located in California.
Hughes has announced plans to consolidate its missiles division in the Tucson area (largely transferring
weapons programs currently located in San Diego that
were acquired from General Dynamics), and it is
considering moving other units there as well.
In contrast to manufacturing, trade employment
rose 2.1 percent between January 1992 and January
1993, services employment rose 4.4 percent,.and state
and local government employment rose 3.3 percent.
The foreign trade picture also looks like a source of
new strength in the near term. Trade with Mexico has
been rising sharply in recent years, boosted during the
1980s by the growth of the maquiladora (or "twin
plant") program along the border. In 1992, trade with
Mexico reached $983 million, or 20 percent of Arizona's total exports. Most contacts from the region
report high expectations of further trade gains with
Mexico, particularly if the North American Free Trade
Agreement is ratified.
Part of the explanation for the weakness of some
sectors of Arizona's economy involves links to the
Southern California market. Southern California is
the largest market for goods and services from Arizona; many key firms operating in Arizona are headquartered in California, and California is the source
of many of Arizona's tourists. Thus, weakness in
California is having a direct impact on growth in
Arizona.
The banking sector is reflecting some of the changes
under way in the Arizona economy. Improving conditions in real estate can be seen in a decline in problem
loans in that sector. In the fourth quarter of 1992,
problem loans at large commercial banks equaled 4.7
percent of all loans, and 6.7 percent of real estate loans
were problem loans. This contrasts with the 5.0 percent and 9.1 percent ratios reported at the end of 1991.
Equity capital at Arizona banks rose in 1992, while
return on assets jumped to 0.33 percent, compared
with only 0.18 percent a year earlier. Total bank loans
were unusually strong in the early 1990s, boosted, in
part, by credit card operations as well as by bank
acquisitions of savings and loan associations. In 1992,
the disposition of assets in connection with bank
mergers appears to have contributed to a decline in the
reported volume of total loans in the first part of the
year. In the second half of the year, total bank loans
rose somewhat. The volume of business loans held by
commercial banks declined in the first three quarters

456

Federal Reserve Bulletin • May 1993

of 1992 but showed some signs of life in the last quarter
of the year.
According to the Arizona Blue Chip forecast, Arizona's economy is expected to pick up in 1993. The
consensus forecast predicts job growth of 2.4 percent
and real personal income growth of 3.3 percent,
boosted by continued strength in retailing and in the
housing sector.
California
California is in its longest and deepest recession since
World War II, and the first since 1970 in which its
performance has been worse than the nation's. The
state has lost more than 568,000 jobs since January
1991, a decline of 4.7 percent. 6 Although employment
nationally grew 0.9 percent between February 1992
and February 1993, California's employment declined
1.3 percent, a loss of 182,000 jobs. Even in the robust
job report of February, in which national employment
rose by 365,000, California's employment fell by
4,600. Moreover, the unemployment rate remains
stubbornly high, at 9.8 percent in February 1993.
Construction and aerospace have gotten much of the
blame for the state's economic troubles and with good
reason.
The defense sector has been hit hard by cutbacks.
Real defense spending in California has fallen 13
percent since its 1988 peak. Aerospace employment
has fallen 28.2 percent since the beginning of 1991—a
loss of 65,000 jobs. The role of defense cuts in this
recession brings to mind the cycle of 1970, when a
national recession was accompanied by the defense
cutbacks associated with winding down the Vietnam
War. In that episode, cutbacks in California's defense
spending continued until 1975; yet California began its
recovery in February 1971, just two months after the
U.S. economy began to expand in December 1970. At
that time, defense accounted for WVi percent of the
state's production, much more than the 7 percent
defense provides today. So, even without a pickup—or even a leveling off—in defense spending, California managed to stage a robust recovery. This
suggests that if defense cuts were the state's only
problem, then California's economy would be expected to recover along with the national economy.
But there are other problems as well. Construction
and real estate also have been hit hard this time
around. More than a quarter of the construction jobs
(31 percent) that existed in California in January 1991

6. This testimony compares California employment data between
January 1991 and February 1993. According to current official data,
California's employment peaked in May 1990. However, comparisons
with pre-1991 data should be viewed with caution (see note 2, p. 453).




are gone today. This amounts to 140,000 jobs lost.
Residential construction activity has fallen sharply. In
1992, the number of housing permits issued in California was just a little more than one-third of the 1986
peak, and the number of existing homes sold was well
below the 1989 peak. In addition, home prices have
fallen significantly in many parts of the state.
Commercial real estate is in even worse shape, with
high vacancy rates and low absorption in many markets. Property values in some cases are reported to
have fallen below replacement cost. Moreover, rents
for some office buildings are barely covering operating
costs. Consequently, very little commercial space is
being built at present.
California real estate and construction activity is
likely to remain weak during the next few years,
mainly because the commercial real estate sector
suffers from serious overbuilding. Nevertheless, an
increase in the number of large commercial sales in
recent months provides some encouragement that
conditions in some markets may be stabilizing.
There are some promising signs on the residential
side as well. Lower interest rates are strengthening
residential sales. The number of home sales in the
state is well above what it was a year ago. And some
improvement in residential construction is noted. Although the number of housing permits issued has been
declining more or less continuously since the beginning of 1990, the consensus forecast is that the number
will be almost 20 percent higher in 1993 than it was in
1992.
One consequence of the stress in California real
estate is the burgeoning number of problem loans for
banks in the state. For example, in the fourth quarter
of 1992, large California banks' problem loan ratio for
commercial real estate loans was 9.5 percent, much
higher than the national ratio of 6.7 percent. As a
result of the large volume of troubled loans, California
banks have had to set aside significant loan-loss reserves, which has affected earnings. The return on
assets (ROA) for all California banks was a modest
0.58 percent in 1992. That compares with a good ROA
of 0.93 percent for large banks nationally. Earnings
problems have been especially evident among community banks (assets less than $300 million) in Southern
California, which as a group posted a net loss for 1992.
Last year also marked the second year in a row that
loans at commercial banks in California contracted
more sharply than they did nationally. The decline
during the past two years offset the relatively high
lending activity at banks in the state during 1990.
A host of public sector issues has moved to center
stage as much of the state's economy has become
more and more troubled. Foremost among them are
budget problems for state and local governments.

Statements

Projections suggest that putting together a budget will
be as difficult this summer as it has been for the past
two years. In addition, concerns about the state's
business climate have increased in recent years. Critics cite a costly and inefficient workers' compensation
system as well as stringent environmental regulations
and bureaucratic "red tape."
While a few sectors have been cited as the major
sources of California's weak performance, the weakness in employment is actually quite broad-based,
extending to a wide range of service, manufacturing,
and financial industries. Wholesale and retail trade lost
132,000 jobs, a 4.5 percent decline since January 1991,
and non-aerospace manufacturing lost 172,000 jobs, a
9.3 percent decline.
One somewhat mitigating factor in the state has
been the expansion of international trade, thanks to
the importance of the state's ports in facilitating that
trade. In 1991, Los Angeles reported import-export
traffic of $121.8 billion, 12.4 percent of the nation's
total. San Diego reported another $10.2 billion (1 percent of the nation's total), while San Francisco handled $60.5 billion (6.2 percent of the total).7 In 1992,
the state as a whole saw an increase in import-export
traffic of 10.1 percent.
Most of the state's weakness has been relatively
concentrated in Southern California (Los Angeles,
Orange, Riverside, Ventura, San Diego, and San Bernardino counties). In Los Angeles County, where the
job losses have been greatest, the number of jobs is
now 7.2 percent lower than it was in January 1991. Job
losses are worse in Southern California, partly because construction and real estate problems have been
more severe in this region and partly because defense
is a much more important part of the economy in
Southern California than it is in most other parts of the
state. But as has been the case statewide, Southern
California has seen employment decline across a broad
range of industries, including services, retail trade,
financial services, and non-aerospace manufacturing.
Other parts of California have fared better than the
southern part of the state, but they are hardly immune
from stress. For example, the greater San Francisco
Bay Area continued to grow for a few months after
Southern California turned down. Since January 1991,
the Bay Area has lost about 4lA percent of its jobs; this
is still worse than the national economy, where employment growth has been flat since January 1991.
And in recent months, a larger share of the state's job
losses are outside Southern California. Southern California accounted for 84 percent of total job losses
from January 1991 to April 1992, but in the more

7. These data refer to customs districts.




to the Congress

457

recent period between April and December 1992, it
accounted for only 60 percent of the losses.
Downward adjustments in defense are likely to last
for a few more years, and problems in commercial real
estate are expected to last even longer. The state
government is going to face difficult choices, which
seem certain to complicate California's short-term
problems. The main positive factors for significant
improvement during the next couple of years are the
improved demand from the national economy and
expanding international trade that will continue to
boost trade-related business, particularly in Southern
California. Moreover, population growth in 1992 was
estimated to have been 2.2 percent, double the national rate.
Hawaii
The Hawaiian economy has been hit hard since the last
recession began. After registering year-over-year employment growth in the late 1980s in the range of
4 percent to 6 percent, employment has declined. In
January 1993, employment fell 1.4 percent below the
level of a year earlier.
Weakness in employment has raised the state's
January unemployment rate to 4.0 percent. While
unemployment is low relative to the levels of most
states, it is high relative to the 2.0 to 2.5 percent rates
registered before the recession began.
Weakness in the economy can be traced directly to
the factors that contributed to the recession in the rest
of the country. The onset of the Gulf War had an
immediate impact on tourism, leading to monthly
employment declines in February, March, and April
1991 at annualized rates of 5.6, 1.6, and 3.1 percent
respectively. Part of this effect can be traced to a sharp
reduction in visitors from Japan, where public policy
discouraged travel to Hawaii during the hostilities.
Growth in tourism resumed after April 1991 but at a
more subdued pace. Analysts in Hawaii attribute this
weakness to the national recession, which caused
travel plans to be curtailed. Especially important to
tourism trends was weakness in California, which
contributes as much as 30 percent of the mainland
visitors to the islands. Weakness in California and
slow growth in the rest of the country continued to
keep tourism down in Hawaii in 1992. As a result, the
state's overall employment declined in all but four
months during 1992.
Two additional factors adversely affected the state's
employment growth during the year. First, the "airfare wars" in the summer of 1992 did not include the
Hawaiian routes. Consequently, Hawaii suffered from
a relative price disadvantage that favored mainland
destinations. Second, Hurricane Iniki caused major

458

Federal Reserve Bulletin • May 1993

damage to Kauai, forcing a large number of cancellations. Partially as a result of these factors, nominal
personal income dropped at an annualized rate of
6.6 percent between the second and third quarters
of 1992.
Problems in Japan also have had widespread impacts on the Hawaiian economy. Japan's financial
market difficulties have had direct repercussions on
nonresidential construction activity in Hawaii. Construction employment fell 4.7 percent in January
1993 from the level of a year earlier, despite rebuilding efforts associated with Kauai. Housing prices
have remained high (the fourth quarter 1992 median
price of $352,000 in Honolulu remains by far the
highest in the country), but appreciation has slowed.
Moreover, although visitor counts from Japan have
generally held up (except during the Gulf War), there
is growing concern that, with rising job insecurity in
Japan, Japanese tourists may begin to grow more
cautious.
Some recent signs of improvement are noted in the
construction sector, however. During the twelvemonth period ending in January, the number of residential permits rose 49.8 percent. The value of nonresidential construction awards jumped sharply after
the hurricane, although the value of new awards has
returned to more normal levels since October. These
trends offer hope for renewed construction employment during 1993.
Employment declined in most major sectors between January 1992 and January 1993. Employment
fell 3.8 percent in the federal government sector
(which accounts for a relatively large 6.2 percent of the
total work force in Hawaii), 3.1 percent in trade, 2.0
percent in manufacturing, and 1.3 percent in services.
State and local government employment rose 1.6 percent during this period.
The ratio of problem loans has risen slightly at
Hawaiian banks, but conditions remain strong relative
to other states in the District. Data for large commercial banks in the state show the problem loan ratio for
all loans rising to 3.1 percent in 1992 from 1.7 percent
a year earlier. However, the return on assets in 1992,
1.13 percent, was about the same as in 1991. Lending
at commercial banks in Hawaii expanded much more
rapidly than it did nationwide during the past two
years, although loan growth in the state was below the
very rapid pace set in the late 1980s and in 1990.

Idaho
The Idaho economy has been one of the strongest
performers in the District—and in the nation—in recent years. The state has successfully attracted man-




ufacturing activity, and a growing influx of population
has created a construction boom.
Employment in Idaho grew 3.9 percent between
January 1992 and January 1993, continuing the strong
pace of growth reported in 1991 (3.4 percent), 1990 (4.6
percent), and 1989 (5.4 percent). Of particular note
were the 5.1 percent expansion in manufacturing jobs
and the 16.0 percent expansion in construction employment, which contrast strongly with negative
trends seen in these sectors in the District as a whole.
Reflecting the strong jobs performance, the Idaho
unemployment rate stood at 6.4 percent in January
1993.
Growth in Idaho manufacturing in 1992 occurred
principally in durable goods industries, which saw
employment expand 8.4 percent. Particularly strong
job growth was seen in industrial machinery (22.3
percent) and electronic equipment (6.4 percent). Nondurable goods industries registered 2.6 percent
growth, reflecting relatively weak conditions in food
processing and pulp and paper. Printing and publishing
employment rose only 0.2 percent over the year, while
food processing employment fell 0.6 percent. Contacts
report that the strength of Idaho manufacturing is due,
in part, to firms moving in from other states.
Relatively low housing and labor costs continue to
attract manufacturing firms to the state. Median house
prices are appreciating at a rapid rate but remain below
the national average. For example, the median home
price in Boise rose nearly 11 percent in 1992 but stands
at a moderate $87,300, compared with the national
median price of $103,900. Larger price increases,
however, are reported for other communities, especially in northern Idaho.
Other sectors showing growth in January 1993 from
the level of a year earlier include trade (4.0 percent)
and services (4.6 percent). The growth in services, in
part, reflects growing tourism. Sectors that are faring
less well include mining, timber, and food processing.
Employment in mining—chiefly silver, gold, and phosphates—has declined steadily since 1990, reflecting
weak mineral prices; in January 1993, employment
was down 4.0 percent from a year earlier. Employment in lumber and wood products rose 5.9 percent in
1992, but that level is down 9.7 percent from its peak
in March 1990.
Idaho's agricultural sector has performed reasonably well, especially considering the drought conditions that have affected several western states in
recent years. In the 1992 water year, Idaho received
only 29 percent of its normal precipitation, the lowest
on record. Reflecting reduced production, total farm
income in 1992 is expected to decline somewhat from
1991's level. Heavy precipitation in winter 1992-93,
however, has significantly alleviated the water short-

Statements

age and promises a favorable outlook for 1993. In
addition, rising potato prices are supporting the farm
sector.
The overall health of the Idaho economy is reflected
in favorable conditions in banking. At the end of 1992,
problem loans at large commercial banks stood at 2.1
percent of loans, compared with a national average of
5.1 percent. Bank profitability in the state also was
high last year, with a return on assets of 1.24 percent
compared with a national average 0.93 percent.
Growth in loans, including business loans, at Idaho's
commercial banks has been well above the average for
the nation in recent years.
Nevada
Economic activity in Nevada has grown throughout
the national recession and weak recovery period. In
January 1993, the Nevada economy posted a 4.4
percent employment gain from the level of a year
earlier, with strong gains registered in September,
November, and January.
Nevada's unemployment rate has tended to remain
below the national average in recent years. It rose to a
high of 7.5 percent in August 1992 but has subsequently fallen. In January, the unemployment rate
dropped to 6.8 percent.
Nevada's performance was strong, although highly
variable, in the late 1980s, as year-over-year employment gains ranged from 4 percent to 9 percent until the
end of 1989. Employment growth slowed during the
Gulf War and the national recession, dropping yearover-year growth for the state to a low of 0.6 percent
in January 1992. Since that time, employment growth
has picked up sharply.
The construction industry has had the most dramatic variations, reflecting the start-up and completion
of several major new casinos. Construction employment rose from about 25,000 in 1985 to more than
48,000 in early 1990. Employment dropped off" to
below 40,000 at the end of 1991 but climbed to more
than 44,000 in January 1993, an increase of 11.4
percent.
Trade and services are especially important sectors
in Nevada, accounting for 64 percent of total employment, compared with 50 percent of employment nationally. January 1993 data show trade employment up
2.7 percent over the levels of a year earlier. Services
employment was weak in the middle of 1992 but
increased sharply in January 1993, resulting in an
increase of 3.6 percent over the level of a year ago.
Strength was reported in the state and local government sector, where employment rose 4.3 percent
between January 1992 and January 1993. Employment
has risen nearly 50 percent in that sector since 1985,




to the Congress

459

with strong periods of gains mirroring the pattern of
total employment.
Manufacturing employment in Nevada was positive,
unlike most other parts of the District, rising 4.8
percent in January 1993 from the level of a year earlier.
Manufacturing accounts for only a small share of the
total economy in Nevada—4 percent of total employment—so the increase in employment translated into a
gain of 1,200 jobs.
Employment in Nevada's finance, insurance, and
real estate sector rose 5.2 percent between January
1992 and January 1993. The banking and finance sector
reported an employment increase of 5.8 percent, and
insurance and real estate posted a 4.8 percent gain.
Moreover, Nevada's commercial banks reported improving conditions, with the return on assets rising
from a strong 1.5 percent in 1991 to a very strong 2.9
percent in 1992, although the share of problem loans
rose from 5.5 percent in 1991 to 7.2 percent in 1992.
Loans at Nevada commercial banks have contracted
sharply during the past few years. The data on outstanding loans, however, significantly overstate the
weakness in lending activity. The level of total loans
was affected by sales of credit card loans in 1990 and
1991. In 1992, such loan sales also apparently depressed the level of total loans at commercial banks in
Nevada. In the case of business loans, loan reclassifications appear to account for much of the net decline
over the past few years. Taking these special factors
into account suggests that bank lending in Nevada in
recent years has been much closer to the pattern
observed nationally. More recent reports also suggest
that bank lending activity has begun to pick up in the
state.
Although Nevada's overall economy currently is
reporting healthy growth, there are concerns about its
near-term future. Construction activity has been very
brisk, particularly in the construction of very large
hotel-casinos. Construction employment accounts for
6.7 percent of the total work force. That compares
with an average of about 4 percent nationally. The
concern, therefore, is that some overbuilding may be
occurring in the hotel and casino sectors. Investors
appear to be looking for continued above-normal increases in population and tourism, which may or may
not materialize. (Population growth in 1992 was estimated to be 4.0 percent.)
Nevada has attempted to diversify its economy
away from gaming in recent years. The gaming industry accounts for 26 percent of all jobs in Nevada and
contributes 41 percent of the state's general fund
revenues. In fact, many of the new casinos are designed as theme parks targeted more at families.
Nevada also has encouraged the migration of serviceintensive firms, such as credit card processing and

460

Federal Reserve Bulletin • May 1993

telemarketing businesses. Nevada also hopes to expand its connections to Los Angeles, developing plans
for a high speed train between Los Angeles and
Las Vegas.
Oregon
Employment growth in Oregon was somewhat better
than the nation's, although conditions in the state
varied across regions and sectors. In general, service
and technology-oriented urban areas had gradual expansion. Smaller towns dependent on the traditional
lumber and wood-products industry, however, remained economically depressed.
Employment in Oregon rose 1.9 percent in January
1993 from the level of a year earlier, an improvement
over the 0.2 percent decline seen in 1991. The expansion, however, is modest, compared with the 2.7
percent rise in 1990 and the 4.0 percent growth rates
seen in the late 1980s. An influx of migrants from other
states—including job-seekers from neighboring California—continues to swell Oregon's population and
labor force. Reflecting both this immigration and the
generally slow economy, Oregon's unemployment rate
stood at 8.8 percent in January 1993.
The manufacturing sector was stagnant over the last
year, as manufacturing jobs fell 0.4 percent between
January 1992 and January 1993. Within manufacturing,
however, conditions were mixed. In 1992, employment fell in industrial machinery ( - 1 . 1 percent), instruments ( - 9 . 6 percent), primary metals ( - 9 . 2 percent) and food products (—4.4 percent), while it rose in
electronics (up 6.1 percent). 8
Of particular note is the continuing decline of lumber and wood products and other industries reliant on
timber supply. The sale of timber grown on public
lands has been dramatically curtailed because of courtordered environmental restrictions. Employment in
the lumber and wood-products industry fell 2.3 percent between January 1992 and January 1993 and has
declined 22 percent from its recent peak in mid-1989.
Pulp and paper employment declined 2.1 percent between January 1992 and January 1993. Contacts report
that small towns reliant on these industries are under
severe economic stress with no relief in sight because
of the continuing restricted supply of lumber.
Other sectors in Oregon are similarly mixed. Employment in January 1993 was down 3.6 percent in
construction and up 0.5 percent in transportation from
the level of a year earlier. Trade employment rose 2.5
percent, boosted by a 14 percent increase in the dollar
volume of exports from the state. Robust conditions

8. January 1993 data for these sectors are not yet available.




were recorded in finance, insurance, and real estate
(FIRE) (3.4 percent) and services (3.8 percent). Tourism is reported strong. The robust FIRE and service
job growth is centered in the larger urban areas. These
sectors—together with stronger manufacturing sectors—have led to stronger economies in the larger
cities relative to the small lumber-based towns. This
strength is reflected in house price appreciation of 14.9
percent in Eugene and 11.9 percent in Portland in
1992. Overall residential building permits, however,
were down 13.4 percent in 1992.
Despite the recent drought, agriculture in Oregon
performed well, with tree fruit crops benefiting from
extra sunshine. Reduced river flows, however, resulted in cutbacks in hydroelectric production; combined with a recent shutdown of a nuclear power plant,
this forced utilities to purchase power from other
states and raise electric rates. Heavy precipitation
during the 1992-93 winter should help alleviate these
conditions.
Also of concern for Oregon's immediate future are
the issues of state and local government financing.
Measure 5, a recently passed property tax limit, has
resulted in financial stresses at all levels of government, particularly in education. Although there are
efforts to find alternative funding sources, the process
remains gridlocked.
Banking conditions in Oregon are good, despite the
mixed economic picture. In 1992, the return on assets
was 1.27 percent (compared with the national average
of 0.93) and the return on equity was 13.44 percent
(compared with a national average of 12.24 percent).
Within loan categories, problem loans at Oregon commercial banks are below the national average in all
sectors but agriculture. Total loan growth at commercial banks in Oregon was above the national average in
1992, although business loans at banks in the state
contracted more sharply than they did nationwide.
In general, the outlook for Oregon's economy is
favorable. It is less reliant on aerospace and defenserelated industries than its neighbor states of Washington and California. Quality of life remains high, and
living costs remain relatively low, attracting both
workers and firms. Areas dependent on timber-related
industries, however, face continued hardship for the
foreseeable future.
Utah
Utah has enjoyed a period of prosperity during the
past two and a half years, despite the weakness seen
nationally. Utah's unemployment rate in January 1992
was relatively low, at 5.1 percent. Between July 1990
and January 1993, the number of jobs in Utah grew 7.9
percent, and during the past year, Utah employment

Statements

grew 3.4 percent. Perhaps even more impressive, 1992
was the fifth consecutive year during which employment in Utah grew 3 percent or more. That is the first
time in more than fifty years that Utah has seen such
an extended period of rapid growth.
The strength in Utah extends across most major
sectors of the state's economy. Since July 1990 the
number of jobs has grown 7.4 percent in wholesale and
retail trade; 11.1 percent in finance, insurance, and
real estate; and 13.6 percent in services. Growth has
been rapid in the information processing industry,
which includes catalog operations, credit card processing, and airline reservations. Software also has
contributed significantly to the strong growth. Both
WordPerfect and Novell are located in northern Utah,
as are many smaller software producers. Moreover,
software jobs pay about twice as much as the statewide average wage.
Tourism has provided an additional source of
growth in recent years. One study estimated that
tourism brought $2.9 billion into the state in 1991,
providing 8 percent of the state's total jobs. A huge
snowfall this winter should result in substantial increases in tourism this year, with skiers coming to the
state to enjoy the first deep snows in several years.
In recent years, migration patterns have changed in
Utah's favor. From 1984 to 1990, more people moved
out of Utah than moved in. In contrast, both 1991 and
1992 saw nearly 20,000 more people move into Utah
than move out. The net immigration accounted for
more than two-fifths of Utah's population growth,
boosting the total growth rate to more than 2Vi percent
in 1992.
Manufacturing activity has not fared as well as most
other industries in Utah; manufacturing employment
fell 1.7 percent in January 1993 from the level of a year
earlier. Cutbacks in defense spending explain a good
portion of the decline. Nevertheless, within the manufacturing sector—some industries showed gains—
especially growth industries, such as airbags.
Construction employment in Utah has been quite
strong, growing 36.2 percent since the middle of
1990. One reason for this performance is that Utah
suffered through major real estate problems during
the mid-1980s, which led to little building in the state
and falling values. The limited building activity in the
recent past and the population growth in Utah have
led to very strong residential construction activity.
Home values have risen about 10 percent in the Salt
Lake City area during each of the past two years.
Most of the construction has been single-family
homes. In contrast, multifamily markets are just now
reaching the point where the space built during the
early 1980s has been absorbed. Residential markets
still look solid. Vacancy rates are low, and credit



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461

quality in mortgage portfolios continues to be excellent.
In the nonresidential area, the past few years have
seen significant building activity as well. Fewer large
office buildings are likely to be built during the next
few years, but a major renovation at the Kennecott
Smelter near Salt Lake City is expected to pump
around $800 million in construction spending into the
economy during the next few years. In a state in which
the annual value of nonresidential construction awards
has totaled between $300 million and $400 million
since 1987, the Kennecott project represents a major
contribution to the state's economy.
One result of relatively strong construction activity
and solid real estate markets is that financial institutions report good credit quality and strong earnings. At
the end of 1992, large commercial banks in Utah had a
problem loan ratio of only 2.1 percent, compared with
5.1 percent nationally. Credit quality was strong
across a broad range of loan types. Moreover, profits
of Utah banks were significantly better than the national average in 1992. While the return on assets
(ROA) averaged a solid 0.93 percent nationally, ROA
for Utah banks was much higher, at 1.51 percent.
Lending activity at commercial banks in Utah over the
past few years generally has been stronger than nationally, though this was not the case in 1992.
Over all, the Utah economy is in excellent shape,
and the prospects for continued economic health during the next few years are good.
Washington
Washington's recent economic performance has
slowed from the robust growth seen in the late 1980s.
The state's economy—particularly in the Puget Sound
area—has been hit recently by weakness in aerospace.
Not all the reports are negative, however, as communities in eastern Washington are experiencing robust
growth.
The number of jobs in Washington grew 1.8 percent
between January 1992 and January 1993, reflecting a
strong increase in January employment. This performance follows the weak 0.8 percent growth reported in
1991. These rates are significantly below the pace of
1990 (2.7 percent) and 1989 (5.8 percent). Reflecting
this slower job growth, Washington's unemployment
rate rose to 7.8 percent in January 1993, up from 7.0
percent a year earlier and 5.9 percent at the end of
1990. Despite the slow job growth, population
growth—tied to continuing high levels of immigration—remains strong, with the labor force growing 2.5
percent in 1992. Population growth in 1992 is estimated
to have been 2.3 percent. Weakness in employment is
centered in western Washington, with employment in

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Federal Reserve Bulletin • May 1993

Seattle falling 0.7 percent in 1992. In contrast, cities in
eastern Washington are enjoying robust growth. The
number of jobs in Spokane, for example, grew 2.8
percent in 1992.
The drop-off in Washington's jobs performance last
year is largely attributable to a contraction in its
aerospace-based manufacturing sector. The number of
manufacturing jobs fell 1.9 percent in January 1993
from the level of a year earlier, after a 5.0 percent
decline in 1991. Since peaking in April 1990, Washington's manufacturing sector has lost 31,000 jobs. (Between April 1990 and December 1992, aerospace employment declined by 9,000 jobs.) The majority of
these jobs were linked to cutbacks at Boeing, where
employment has dropped roughly 8,000 since Boeing's
employment peaked in 1989. Furthermore, in midFebruary, Boeing confirmed that it would eliminate
23,000 jobs in 1993 and another 5,000 during the first
half of 1994. Of the total this year, 15,000 jobs will be
cut in Washington State. These job reductions were
widely expected after Boeing's announcement in late
January that it would reduce production. The Boeing
cutbacks are expected to have a negative impact on its
suppliers, with layoffs already announced by smaller
firms in Washington, Oregon, and Southern California.
Given the importance of Boeing for the Puget Sound
economy, where it employs almost 100,000 aerospace
workers, prospects for the company are watched
carefully by regional analysts. In the short run, continued losses in the U.S. airlines industry and competition from overseas producers are undermining the
$83 billion backlog of Boeing's "firm" orders. Several
carriers have canceled or postponed delivery of jets in
recent years. Responding to this slackening demand,
Boeing has slowed production or is slowing production
of all its airplane models, including the very profitable
747. Increased production in the near term is unlikely.
Longer-run prospects for the company, however, are
more favorable. Despite falling orders and competition
from overseas, Boeing has maintained its traditional
market share. In addition, the company is developing
new fuel-efficient product lines tailored to the AsianPacific market, which is expected to be a major source
of growth in air travel. The company also has begun
discussions with European companies for joint development of a super jumbo carrier. While these developments bode well for the long-run survival of the
company, current troubles in the airline industry suggest that cutbacks at Boeing will retard economic
activity in Washington for the foreseeable future.
Outside aerospace, Washington's manufacturing activity is mixed. Compared with levels of a year earlier,
employment rose 1.6 percent in industrial machinery
and fell 3.4 percent in primary metals, 3.5 percent in
instruments, and 2.7 percent in pulp and paper. Em


ployment in lumber and wood products rose in January to a level of 3.2 percent above a year earlier,
although employment was off 10.8 percent from the
level reported in December 1989. The declines in the
timber-related industries are linked to environmental
limitations on harvesting from public lands and sluggish national demand. Other manufacturing sectors
recording growth in the last year include electronics
(0.9 percent), food and kindred products (3.0 percent),
and fruits and vegetables (0.7 percent). Contacts report that prospects are good for high-tech sectors such
as biotechnology and computer software production.
Other sectors outside manufacturing also are registering mixed performance. As in other District states,
employment was down in mining ( - 3 . 1 percent) in
January, compared with that of a year earlier. Employment also contracted in finance, insurance, and real
estate (-0.7 percent). Job gains, however, were recorded in trade (2.5 percent), services (3.9 percent),
and state and local government (3.1 percent). The
agriculture sector in Washington has performed well in
recent years, despite the drought that affects several
western states. Recent precipitation has improved
prospects for next year.
Washington's construction and real estate markets
are mixed. Construction employment rose 2.4 percent
in January from the level of a year earlier, as strength
in residential construction offset continued weakness
in nonresidential real estate. The strength in residential construction—driven in part, by needs to house
Washington's growing population—is expected to continue into 1993. Residential permits at the end of 1992
were up 26 percent from their year-earlier level. In
contrast, nonresidential construction awards were
down 17.6 percent from a year earlier.
Much of the strength in Washington's construction
remains centered in the eastern part of the state, where
contacts report a construction boom in cities such as
Spokane. House prices in Spokane appreciated 18
percent in 1992—driven by demand from immigration—but the median home price remains at a relatively affordable $80,000. Residential median sales
prices in Seattle moved up slightly in the second half of
1992, after remaining flat for much of the previous two
years, and stand at $147,000. Contacts attribute the
relatively robust growth of central and eastern Washington to factors including affordable housing, immigration of firms from higher-cost states, and in the
tri-cities area (Richland, Pasco, and Kennewick), a
large multiyear clean-up project for the Hanford nuclear facility.
Washington's banking sector is performing well.
Commercial bank profits in the state were above the
national average in 1992, with a return on assets of
1.17 percent (versus 0.93 percent nationally) and a

Statements

return on equity of 13.16 percent (versus 12.24 percent
nationally). At the end of 1992, problem loans at large
commercial banks stood at 4.7 percent of assets,
below the national average of 5.1 percent and below
the national average in all sectors but construction and
farm loans. Problem construction loans—reflecting
weak conditions in nonresidential real estate—stood at
19.1 percent versus a national average of 16.5 percent
at the end of 1992. This ratio for banks in Washington
was higher than for all other District states except
California. Commercial bank loan growth has been
sluggish during the past two years but still has outpaced the growth in bank lending nationwide.

NATIONAL
ECONOMIC
DEVELOPMENTS
AND MONETARY
POLICY

Analyses of the various regions of the country that are
provided by all twelve of the District Bank presidents
play an important role in formulating monetary policy.
Taken together, these analyses help form an understanding of developments in the U.S. economy by
providing an up-to-date, detailed base of information
that supplements published national statistics. Because the tools of monetary policy—open market
operations, changes in the discount rate, and occasionally, changes in reserve requirements—affect the
economy broadly, the focus of policy must be on the
national economy as a whole. Policy actions are
transmitted to the economy through highly efficient
and integrated national financial markets. Credit is
allocated according to the private decisions of the
many lenders and borrowers in these markets. The
efficient allocation of credit in financial markets is an
important element determining the efficiency with
which our market economy operates.
Thus the Federal Reserve's actions in the markets
affect the overall level of interest rates and availability
of credit but are not aimed at how that credit is
allocated. While each region of the country is affected
by interest rates and the overall amount of credit
available in the national economy, the effects of policy
cannot be directed to particular geographical regions
or industries.
Current economic conditions in California provide a
good illustration of this point. As discussed above, the
recession in California is strongly related to a number of
"structural" problems, including the cutbacks in defense spending and the need in recent years to reduce
the large state budget deficit. These problems will be
helped by the national recovery that is under way.
Stronger national economic growth will create more
jobs to absorb displaced defense workers, and will
reduce the budget deficit by raising state tax receipts.



to the Congress

463

However, monetary policy is not an effective vehicle
for directing credit to these particular sectors. My
views on monetary policy must be based on an understanding of national economic conditions—an understanding that is enhanced by my regional perspective as
well as by those of the other Reserve Bank presidents.
With respect to current monetary policy, our goal as
always is to promote the maximum standard of living
attainable for our citizens over the long run. In recent
years, this has meant mitigating the size of the cyclical
downswing through reductions in interest rates. However, in the long run the most significant contribution
we can make to economic growth is by providing a
low-inflation environment, and we have made progress
in that area.
In formulating policy, we have faced several challenges recently, not the least of which has been the
deterioration in the relationship between the monetary
aggregates and spending on goods and services. Last
year, both M2 and M3 grew sluggishly; at the same
time, the pace of economic activity picked up, which
meant that the velocity (spending per dollar) of both
aggregates rose sharply, well above what historical
relationships would suggest. The misleading signals
provided by these aggregates mainly seem to reflect a
desire by the public to hold liquid funds in highyielding stock and bond mutual funds as well as to pay
down consumer and mortgage debt. More strict supervision and regulation of depository institutions, which
are essential to the long-run health of the industry, also
may have contributed to the slow growth in M2 and
M3. However, to a large extent, financial markets
have been able to direct credit through channels other
than the banking system so as to mitigate the effects of
restructuring on overall economic activity.
Last year, we had to look beyond the aggregates in
the formulation of monetary policy to a broad range of
economic and financial indicators. Had policy in 1992
been aimed at pushing M2 and M3 up into their ranges,
policy would have been so expansionary as to have
risked eliciting fears of higher inflation. The response
of financial markets to the possible inflationary consequences of overly expansionary monetary policies
puts a limitation on how much the Federal Reserve can
do to stimulate the economy. When it appears that the
Federal Reserve is going too far in easing short-term
interest rates, long-term rates rise, which is counterproductive to efforts to stimulate the pace of economic
activity.
Thus, the Federal Reserve has had to find a delicate
balance in recent years, allowing short-term interest
rates to fall enough to promote economic expansion
but not so much as to risk higher inflation. Developments in 1992 and thus far this year suggest that our
efforts are paying off. The U.S. economy moved into a

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Federal Reserve Bulletin • May 1993

phase of sustained expansion last year, after the period
of recession and slow growth in the preceding two
years. The 3 percent growth in real GDP for last year
as a whole was modest compared with what typically
occurs in the early stages of expansions; however, it
compares favorably with the 2 percent pace that
appears to be sustainable for the U.S. economy in the
long run and was well ahead of growth in most
industrialized economies abroad.
The expanding economy last year generated growth in
jobs, although at only a moderate pace, as the productivity of the work force registered large gains. However, the
strong surge in jobs in February is encouraging. Moreover, the civilian unemployment rate did peak in the
middle of 1992 and has been on a downward path since

then. These declines are in line with what would be
expected based upon historical relationships between real
GDP growth and changes in the unemployment rate,
suggesting that substantial further declines in that rate can
be expected as the expansion continues. Price developments last year were favorable. Excluding food and
energy, consumer prices rose at a 3 percent rate, the
lowest in twenty years.
I expect the patterns established in 1992 to continue
this year and beyond, with moderate growth in real
GDP accompanied by gradual declines in both unemployment and inflation. I believe that a major factor
behind these favorable developments is the prudent
easing of monetary policy that has been implemented
to date.
•

Statement by David W. Mullins, Jr., Vice Chairman,
Board of Governors of the Federal Reserve System,
before the Subcommittee on Telecommunications and
Finance of the Committee on Energy and Commerce,
U.S. House of Representatives, March 17, 1993

having consulted with the other agencies, the Treasury
implemented redesigned auction procedures and rules
to eliminate the possibility of a recurrence of the
abuses committed in the Salomon Brothers episode.
With the help of staff members at the New York Fed
and the Commodity Futures Trading Commission
(CFTC), the Board, the Treasury, and the SEC formed
an Interagency Working Group on Market Surveillance. As a result, enforcement responsibilities and
procedures have been clarified and intensified. After
careful study, the Treasury commenced a yearlong
experiment with auction technique, and the FRBNY
has made considerable progress in automating the
auction process. In addition, the New York Fed has
adopted changes in the administration of its relationship with primary dealers and is in the process of
revising the information that it collects from them.

I welcome this opportunity to discuss legislative initiatives concerning the government securities market.
By my count, this marks the ninth time since Salomon
Brothers' admission of wrongdoing that I have delivered testimony on this subject before a congressional
panel. In my view, enough is at stake, particularly in
terms of financing the federal deficit, to warrant this
close scrutiny. The interest cost of the federal debt
depends on the rates when securities are first auctioned, while this committee's mandate concerns secondary market trading in government securities. But
that is not a realistic distinction in practice because the
Treasury's ability to tap funding sources in the primary market depends critically on the assurance of
smooth trading in the secondary market.

DEVELOPMENTS

SINCE AUGUST

1991

Over the past one and one-half years, the Board of
Governors, the Federal Reserve Bank of New York
(FRBNY), the Treasury, and the Securities and Exchange Commission (SEC), among others, have devoted considerable attention to the government securities market. An important initial product of that work
was the Joint Report on the Government Securities
Market, which contained a comprehensive survey of
the market and a detailed plan for correcting the
problems that had been identified. Much of the plan
delineated in the report has been put in place. After



Meanwhile, staff members at the various agencies,
as well as academic researchers, have studied the
relationship between prices in the cash and financing
markets. This research has produced techniques to
identify rate anomalies that could be associated with
squeezes. And the Treasury has shown a willingness
to act through supply management when market prices
suggest a serious shortage. Last year, one issue, a
ten-year note, was reopened under the policy articulated in the Joint Report for addressing an "acute,
protracted" shortage. Under the threat of Treasury
reopenings, no market participant can be confident of
profiting by cornering the market in a Treasury issue.
Thus, the government securities market has already
been subject to substantial change and to intensified
scrutiny on an ongoing basis.
This extensive, in-depth analysis has increased my
respect and appreciation for this financial marketplace. In this regard, the U.S. government securities

Statements

market has no rival. This market is the deepest and
broadest of all securities markets, offering widespread
economic benefits by permitting transactions of enormous size to be conducted at razor-thin bid-ask
spreads. In general, the governmental initiatives undertaken to date with respect to this market have not
been intrusive or especially costly and thus have been
consistent with its continued efficiency.

WHAT IS

NEEDED

In weighing the need for additional legislation, the
Board of Governors believes that the best, most efficient, and equitable laws and regulations are drawn up
to address specific problems. This is why, in the
Board's view, the timely enactment of the legislative
agenda outlined in the Joint Report would serve the
nation's interest. This agenda—reestablishing the
Treasury's rulemaking authority for the government
securities market and perhaps eliminating the prohibition on the National Association of Securities Dealers
(NASD) to specify sales practice rules for members
participating in this market—would complement the
administrative actions that have already been put into
motion. Unfortunately, H.R.618 goes far beyond this
recommendation by introducing potentially confusing
and possibly overlapping lines of authority among the
agencies, by erecting a regulatory apparatus that is
more appropriate for equity markets, and by creating
the potential for bureaucratic judgment to substitute
for the market determination of the flow of pricing
information. These actions would raise the cost of
participating in the government securities market precisely when our federal finances are critically reliant
on worldwide market acceptance for the Treasury's
massive debt issuance.
The Board of Governors does not believe that the
evidence supports the case for the sweeping changes
in regulatory practices envisioned in this proposed
legislation. In our view, the record over the past Wi
years and a careful weighing of the costs versus
benefits would not warrant such steps. The incidents
that have come to light are apparently related to
individual ethical lapses that are unfortunately all too
common when money changes hands. From what is
known thus far, it appears that the existing body of
laws and regulations has proved sufficient to mete out
punishment to the guilty. While there are reports that
criminal investigations may have been made more
difficult by shoddy bookkeeping practices at some
government securities brokers and dealers, recordkeeping at most of those entities is already covered
under the existing regulatory umbrella. The measures
already implemented, including stricter enforcement



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465

and more uniformity in interpretation of the existing
rules by self-regulatory organizations and regulatory
authorities that administer the rules, should smooth
the way in investigating potential abuses. Of course,
such improvements within the current regulatory
framework would be made easier if the Congress acted
to restore the Treasury's rulemaking authority for
government securities brokers and dealers, which
lapsed in 1991.
The Board of Governors believes that a decisive
case has not yet been presented for adding statutory
requirements on sales practice rules. If the Congress
deems that a provision for sales practice rules is
necessary, this could be obtained by simply removing
the prohibition on the NASD from applying its sale
practice rules to government securities transactions.
This would bring NASD firms into line with procedures at New York Stock Exchange member firms,
extending sales practice rules to all nonbank brokers
and dealers.

WHAT IS NOT

NEEDED

Compared with H.R.618, the legislative agenda outlined above is narrower and, in our view, better
targeted. It appropriately recognizes the substantial
administrative changes already set in motion as well as
the unique nature of the government securities market.
In the view of the Board of Governors, more sweeping
and intrusive action does not stand the scrutiny of
rigorous cost-benefit analysis. This was our judgment
at the time of the writing of the Joint Report, and
events since then have only strengthened this conclusion.
There is no evidence of market failure that would
warrant the significant overhaul envisioned in
H.R.618. In a market in which so much money
changes hands so quickly, even the whiff of illicit
activity would inspire a chorus of complaints and
withdrawals from trading. In fact, bid-ask spreads
remain narrow, volume remains heavy, and there have
been no notable changes in the ranks of participation.
Even without evidence of spotty trading, thin markets,
or trading failures, if there were a convincing logical
chain to suggest that the government securities market
was now susceptible to wrongdoing, then prophylactic
action could well be justified. On this score, however,
the structure of the government securities market
would appear to offer little scope for large-scale mischief.
First, prices in the government securities market
appear mostly driven by macroeconomic fundamentals. Government securities are homogeneous, with
few of the idiosyncratic factors that push and pull the

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Federal Reserve Bulletin • May 1993

prices of private debt or equity instruments relative to
market averages.
Second, in a homogeneous, highly visible market
such as this one, the force of competition remains the
best protection from manipulation. With narrow bidask spreads and the quick dissemination of information, there is little room to hide collusive activity. Such
a market is inherently transparent.
Third, a trader who attempted to gain from market
manipulation now faces the prospect of aggressive
Treasury debt management that would reopen an issue
to shave any illicit gain. Against this backdrop, many
of the potentially costly provisions of H.R.618 guard
against an enemy that will never take the field.
In the Board's view, there is no compelling need to
grant new recordkeeping authority to the SEC, especially when existing authority can be used more effectively. Nor is there a need for large-position reporting,
given the substantial improvement in the agencies'
market surveillance efforts. The FRBNY's discussions
with market participants provide a wealth of detail to
inform the Treasury reopening decision and to alert
enforcement agencies of potential problems. These
sources are augmented by dealer report forms that soon
will routinely extract information on specific securities.
But at a more fundamental level, currently available
data on market prices provide a continuing stream of
data to mine for evidence of manipulative intent.
In our view, there is no demonstrated need to put
the SEC into the business of mandating what trading
screens look like and who gets the information feeds,
and such initiatives could impose significant costs on
the market. Transparency, or the ability to get timely

and reliable price quotes in the government securities
market, has improved markedly of late. GOVPX, for
example, has enhanced the information that it provides to the market. If private sector initiatives sire
allowed to run their course, this access should be
further widened. The threat of governmental interference may only prove counterproductive, as private
firms delay additional improvements for fear that
another format might be thrust upon them.
The Board accepts that the broad-based apparatus
of reporting requirements in this market that could be
implemented under H.R.618 might reduce the cost of
investigating abuses and facilitate enforcement. On the
other side of the ledger, such changes would boost the
cost of every trade and potentially reduce the ranks of
market participants. The Treasury's appetite for financing is too large to make purchasing its securities
more expensive or to discourage willing buyers with
administrative burdens motivated by the vague fear
that someone, somewhere out there, may be inclined
to cheat.
It is true that H.R.618 does not mandate these
increased reporting requirements but rather gives various agencies the authority to enact these changes
should they deem them fit. However, even backup
authority may send a chilling message about the U.S.
market to all participants choosing where to trade in
the global marketplace. Rather than risk slipping into a
fundamental change through backup authority, the
Board of Governors feels it would be a wiser course of
action to return to the Congress for enabling legislation
in the future should such authority appear necessary.
•

Statement by John P. LaWare, Member, Board of
Governors of the Federal Reserve System, and Chairman, Federal Financial Institutions Examination
Council, before the Subcommittee on Commerce,
Consumer, and Monetary Affairs of the Committee on
Government Operations, U.S. House of Representatives, March 17, 1993

handicap its banking institutions—and therefore the
individuals and businesses they serve—with stifling
and constantly changing rules and regulations. The
ever-increasing number and detail of regulatory requirements and restrictions have increased the costs
and reduced the availability of service from banking
institutions. Further, aggregate burden frustrates the
purpose of stability and safety regulations by driving
traditional banking functions toward alternative, lessregulated providers.
In an effort to counter the trend toward costly
overregulation, the banking agencies have worked
both individually and as a group to identify administratively imposed burden and, insofar as possible, to
reduce it. These efforts are represented in initiatives
such as the agencies' Regulatory Uniformity Project,
the Federal Financial Institutions Examination Council's (FFIEC) Study on Regulatory Burden, and, most

I am happy to be here to discuss the topic of regulatory
burden and particularly the efforts of the Federal
Reserve and the other regulatory agencies to reduce
burden administratively.
The issue of the appropriate level of regulation of
banking organizations, although not new, recently has
been a focus of concern. Banking institutions serve a
vital role in determining the growth of the economy.
Consequently, in an increasingly global and competitive financial market, the United States can ill afford to



Statements

recently, in last week's announcement by the President of an interagency program designed to reduce the
cost and burden of lending, particularly to small and
medium-sized businesses.

INTERAGENCY
POLICY STATEMENT
CREDIT
AVAILABILITY

ON

On March 10, the President announced that all of the
banking regulatory agencies will, over the next few
months, take actions in five areas to promote greater
availability of credit to creditworthy borrowers. The
actions to be taken in each of the areas are as follows:
1. Eliminate impediments to lending to small and
medium-sized businesses by permitting banks to make
and carry a basket of loans to such borrowers with
minimal documentation requirements. In addition,
guidance will be issued to make it clear that banks and
thrift institutions, in making loans to such borrowers,
particularly those loans to be placed in the basket, are
encouraged to give important consideration to character and general reputation in assessing a borrower's
creditworthiness.
2. Reduce appraisal burden and improve the climate
for real estate by altering existing rules so that institutions taking real estate as "additional" collateral for a
business loan that is not to acquire or refinance real
estate will not be required to have such property
appraised by a certified or licensed appraiser. In addition, the agencies will be reexamining their existing
rules to make sure that thresholds below which formal
appraisals are not needed are at reasonable levels.
3. Enhance and streamline arrangements by which
bankers can obtain a fair and speedy review of complaints about examiner decisions, while providing assurance that neither banker nor examiner will be
subject to retribution as a result of an appeal.
4. Improve all examination processes and procedures by eliminating unneeded duplication of examinations and increasing coordination of examination
activities, particularly centralizing and streamlining
examinations of multibank organizations. The agencies have also agreed to heighten emphasis in examinations on risks to the institution and on issues involving fair lending, as well as to reduce regulatory
uncertainty by eliminating ambiguous language in regulations and interpretations—and delays in publishing
regulations and interpretations.
5. Review all regulations and interpretations to find
ways to minimize paperwork and other regulatory
burden.
We certainly expect that these changes will affect
the willingness of the banking industry to lend to



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467

creditworthy borrowers, and we are working together
to implement them fully.

FEDERAL FINANCIAL
INSTITUTIONS
EXAMINATION
COUNCIL STUDY ON
REGULATORY
BURDEN

I have been asked by the subcommittee to describe the
agencies' recently completed Study on Regulatory
Burden. The study was mandated by the Congress in
section 221 of the Federal Deposit Insurance Corporation Improvement Act (FDICIA), which required
the FFIEC to review the regulatory policies and
procedures of the banking agencies and the Treasury
Department to determine whether they impose "unnecessary" burden on banking institutions and to
identify any revisions that might reduce burden without endangering safety and soundness or diminishing
compliance with or enforcement of consumer laws.
The FFIEC was directed to report its findings by
December 19, 1992.
During early 1992, the four federal banking agencies and the Department of the Treasury undertook
extensive internal reviews of their policies, procedures, recordkeeping, and documentation requirements. In addition, an interagency task force assembled and reviewed the public comments that the
Federal Deposit Insurance Corporation (FDIC), the
Office of the Comptroller of the Currency (OCC), and
the Office of Thrift Supervision (OTS) had received
in response to their spring 1992 requests for comments on regulatory burden. The FFIEC also requested and received public comments specifically
on ways that burden might be reduced and held
public hearings on this topic in Kansas City, San
Francisco, and Washington, D.C.
At the outset, the FFIEC stated its belief that the
goal of this process was not to examine and develop
proposed revisions to the overall statutory scheme
governing financial institutions. Rather, it appeared to
the council that the congressional intent was to accept
the statutory scheme as a given and instead to examine
the manner in which the federal banking agencies and
the Treasury Department have implemented that
scheme by means of regulations, policy statements,
procedures, and recordkeeping requirements.
Many commenters, as well as the agencies themselves, recommended changes that were within the
jurisdiction of the agencies. During the year, the agencies acted on many of these suggestions for regulatory
improvement, particularly those related to required
reports, examination procedures, and application processes. The study included a summary of those actions.

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Federal Reserve Bulletin • May 1993

Interagency working groups reviewed other specific recommendations for regulatory change and
divided them into three categories. The first category
included specific recommendations from the public
and areas of concern that the FFIEC agreed were
worthy of further consideration. In many cases, the
agencies agreed on the general approach and developed a consensus position that is described in the
study. In some cases, an agency supported a recommendation in part or preferred an alternative approach to meet the goal of the recommendation, and
in a few cases, the agencies felt that further consideration and possibly some compromise may be required to address the issues.
Suggestions from the public that, after careful
consideration, were found not to meet fully the
standards set forth in section 221 are discussed in the
study, while those that concerned agencies that are
not members of the FFIEC are simply listed. In
addition, an analysis of the public recommendations
concerning the rules implementing the Bank Secrecy
Act (BSA) was contributed by the Department of the
Treasury.
During the course of the study, the FFIEC also
reviewed the small number of existing studies of the
costs of regulation. Despite methodological and coverage differences, their findings are reasonably consistent that regulatory costs might be in the range of
6 percent to 14 percent of noninterest expenses. This
estimate includes the cost of deposit insurance premiums but does not include any measurement of the
opportunity cost of reserve requirements or prohibited activities. This range applied to the actual 1991
noninterest expenses for commercial banks of $214.6
billion suggests that regulatory costs could have been
between $7.5 billion and $17 billion in that year.
In the weeks since the study was submitted to the
Congress, the agencies have continued to consider
the suggestions, and I anticipate that further action
will be taken in the near term. However, many of the
public recommendations as well as the actions taken
by the regulatory agencies address problems that are
technical in nature and not highly significant in terms
of their impact on total regulatory burden. Indeed,
significant relief from regulatory burden will require
more substantial changes. Because legislation is often very detailed in its requirements and the regulations must track the statutory provisions, the agencies are limited in their ability to address many
provisions that impose substantial burdens.
Accordingly, the council's member agencies have
agreed to continue meeting to identify and recommend
possible statutory changes to reduce regulatory burden further. The council hopes to provide a separate
report to the Congress on those issues by late spring.



RECOMMENDATIONS

FOR THE

FUTURE

Banking institutions are regulated because of important
public policy considerations, and much of the regulation
arises ultimately from four fundamental public policy
concerns: bank safety and soundness, banking market
structure and competition, systemic stability, and consumer protection. The safety and stability of the banking
system are vital to the economy. Further, it is difficult to
quarrel with the purposes of individual consumer protections. Nevertheless, the aggregate effect of the implementation of a substantial number of desirable policies may
result in burdening individual banking transactions to an
unacceptable degree.
In the aggregate, this burden has become substantial, raising the costs of banking services and thus
encouraging bank customers to seek less costly loans
and services or higher-yielding investments from other
financial intermediaries that are not subject to the
same regulatory requirements and restrictions. The
movement of business from banking institutions to
other intermediaries and directly to money and capital
markets may frustrate the purposes for which banking
regulations were adopted. I believe this burden has
already begun to threaten the competitiveness of the
banking industry itself.
What is needed is fundamental review of approaches to
regulation in search of mechanisms that will achieve the
same goals but with less burden and without the problems
that accompany the current approach. New approaches
to regulation that are more sensitive to cost-benefit tradeoffs must be sought and considered. In particular, existing
market forces and incentives should be harnessed as
much as possible to achieve regulatory goals rather than
relying on microlevel regulations that eliminate the flexibility that is important in a dynamic industry. We should
consider, as well, changes that can reduce burden by
reducing regulatory prohibitions on banking activities. As
you know, the Federal Reserve Board has long supported
nationwide interstate banking, insurance sales, and full
investment banking powers to provide the public the
benefits of wider competition, and it supports the payment of interest on required reserves to reduce the costs
imposed on banking institutions as regulated entities.
To the greatest extent possible, banking regulation
should provide flexibility by tailoring requirements to
specific facts and circumstances and by distinguishing
among institutions according to meaningful criteria such
as condition, size, and management competence. Regulations that provide insufficient flexibility can cause unnecessary regulatory burden and create inefficiencies by
preventing depository institutions from finding the most
cost-effective means of complying with the law or regulation and by impairing the ability of banking institutions to
react to changing market conditions.

Statements

These approaches must be applied not only to future
regulatory actions but to existing regulations as well.
Efforts to substantially reduce regulatory burden will
undoubtedly raise difficult questions about the trade-offs
to be made between competing public policies, much like
the ongoing discussion of the federal budget. Because
achieving political consensus for change may be difficult,
in my judgment, an independent nonpolitical commission
charged with exploring possibilities for legislative change
would be useful. Such a commission could address a
broad range of banking issues such as regulatory burden
and the competitive position of U.S. banking organizations, offer suggestions and guidance for legislative and
regulatory changes, and assist the Congress in developing
a specific legislative agenda.
CONCLUSION

The regulatory burden on banking institutions is large
and growing. The cumulative regulatory burden on the

Statement by William J. McDonough, Executive Vice
President, Federal Reserve Bank of New York, before
the Subcommittee on Telecommunications and Finance of the Committee on Energy and Commerce,
U.S. House of Representatives, March 17, 1993
I am pleased to have the opportunity to appear before
you in my capacity as Executive Vice President of the
Federal Reserve Bank of New York responsible for
the Financial Markets Group. As such, I have responsibility for domestic and foreign operations of the
System Open Market Account and for the recently
formed Market Surveillance Function. My statement
this morning will discuss the market surveillance activities of the Federal Reserve Bank of New York and
the overall subject of the official oversight and regulation of the government securities market.
We all share a common goal regarding the government securities market. That is, we all want to ensure
that the integrity, health, and efficiency of the world's
largest and most liquid securities market is preserved.
Quite clearly, the American public and the world at
large share an enormous interest in the continued
vitality of the market for U.S. Treasury securities and
its ability to meet both public and private needs.
Against this background, the immediate question
before the subcommittee centers on how the legislative process can best support efforts to ensure that this
vital market retains its status as the most efficient
market in the world. As the subcommittee deliberates
this important topic, I think it necessary to consider




to the Congress

469

banking industry may well be more than the sum of its
parts. This burden has grown slowly but relentlessly
over the years, layer by layer by layer, and the pace of
additional regulation has increased sharply in recent
years. While there may be genuine public policy
benefits from any single regulatory proposal, it is
important to recognize that the banking regulations
and prohibitions, taken together, create a burden that
is substantial, if not approaching unmanageable, for
many institutions. When these burdens are aggregated, they affect the economy by reducing the efficiency and competitiveness of the banking industry.
Recent actions by the regulatory agencies and the
plan announced by the President represent important
steps in an ongoing process to address the problem of
regulatory burden on the banking industry, and I
look forward to working with this subcommittee and
others in considering additional proposals. Perhaps
regulatory relief, like regulatory burden, can be
cumulative.
•

the strides taken over the past year to improve the
monitoring of this market.
Salomon Brothers' admissions of deliberate and
repeated violations of Treasury auction rules could
well have damaged the public's confidence in the
overall soundness of the government securities market. Fortunately, this did not happen, as evidenced by
the efficiency with which the market has continued to
perform. Nonetheless, some important questions were
raised about the workings of that market and the
official oversight of the market.
After the events of August 1991, the Treasury, the
Securities and Exchange Commission (SEC), and the
Federal Reserve moved quickly to address the various
concerns that arose from the Salomon revelations. The
agencies have set up a working group on market
surveillance, with the Federal Reserve Bank of New
York accepting primary responsibility for collecting
and disseminating information. The Treasury facilitated broader auction participation, clarified and restated auction rules, and, with the Federal Reserve,
strengthened the procedures for enforcement of those
rules. Changes were made to the administration of the
primary dealer system to provide greater access to
participants who wished to service the central bank.
Ongoing automation initiatives will lend further support to ensuring that the primary and secondary markets are open and accessible. Our new system for
automated Treasury auctions is in the final stages of
testing, and its implementation is scheduled for next
month. This effort will speed and further systematize

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Federal Reserve Bulletin • May 1993

the auction review process and further allow for
broader bidder access. In addition, we have finalized
many of the business requirements for the automation
of our open market operations and have taken some
initial steps in development, with a view toward implementing several capabilities next year. This effort
will provide an efficient way of accommodating an
expansion in the number of our trading counterparties—should such occur.
Market participants themselves have reviewed and
improved internal compliance procedures and audits
after the revelations of wrongdoing in 1991. Finally, it
is important to restate that, in the face of apparent
irregularities in the marketplace, securities and bank
regulators already have access to individual dealer
firms' books, records, and trading systems. Having
said that, it should also be stressed that it is neither
possible nor desirable to have absolutely fail-safe
management and control systems or regulatory
schemes that can prevent or detect every problem or
potential problem. Nor is it desirable to discourage
innovation with overly restrictive and duplicative
rules. What is needed is an approach that strikes an
appropriate balance between the efficiency of the
market and adequate regulatory oversight.
Of the efforts taken to date, I should comment on
the significant progress made in improving communications among the agencies involved in the surveillance effort—the Bank, the Treasury, the SEC, the
Federal Reserve Board, and the Commodity Futures
Trading Commission. The entire working group holds
a biweekly conference call, and senior officials of the
working group meet quarterly. I can assure you that
the progress made in cooperation and information
sharing will certainly continue. And I can also assure
you that there has been no facet of the work of the
interagency group to date that has witnessed material
differences of opinion or judgment among the various
agencies.
In its effort to satisfy the needs of the working
group, the New York Fed's surveillance work has
focused on activity surrounding several specific Treasury securities as well as a variety of overall market
conditions. Additional attention was devoted to those
incidents that, based on comparisons with either historical experience or then-existing market conditions,
were a potential source of concern. Needless to say,
our methods are being refined as we gain more experience and receive input from the other agencies.
In the interest of time, I will not cover the full scope
of our efforts. However, allow me to mention briefly a
few of the specifics of market surveillance. We look at
price movements, yield spreads, and trading volume in
the cash market. In the financing market, we review
market quotes and trades for overnight contracts and




term maturities. From individual primary dealers, we
collect aggregate data on positions, transactions, financing, trade settlement, and when-issued activity in
specific securities. We also receive information on
individual securities when we undertake a formal
survey of primary dealers' activity.
More broadly, we have access to market opinion,
analytics, general economic data, and specific information on other, related markets. Finally, our daily
conversations with the market participants themselves
provide invaluable information on market developments and their own trading activity. This wealth of
information allows us to evaluate the current behavior
of specific securities of interest from the vantage point
of a comprehensive view of the market. We share with
the members of the interagency working group all
significant market information that we collect.
Our surveillance efforts over this past year focused
on apparent shortages of specific Treasury securities.
Time and again, we found that individual episodes of
"specials" trading represented the natural consequence of legitimate uses of the Treasury market,
especially in connection with risk-management strategies to facilitate the orderly underwriting, issuance,
and distribution of the full range of fixed-income
securities sold by corporations, state and local governments, and others. At times, these activities can
generate large amounts of short positions in Treasury
securities as underwriters hedge their exposures. As a
consequence, temporary shortages of certain issues
can, and will, develop even though a large amount of
securities is outstanding.
Despite the general thrust of our findings to date, we
recognize that we must continue to rigorously pursue
each incident of unusual market activity. To meet this
responsibility, we intend to build upon the strong start
we have made in tightening surveillance. We will
continue to improve our knowledge of market developments, our methods of review and analysis, and the
technical resources we need to operate efficiently and
effectively with a view to servicing the needs of the
other members of the interagency working group.
At the same time, I believe the Congress can provide some further support for our efforts by reauthorizing the Treasury's rulemaking authority under the
Government Securities Act of 1986 and explicitly
incorporating the making of misleading statements to
an issuer of government securities as a violation of the
Securities Exchange Act of 1934. In addition, the
Federal Reserve Bank of New York is sympathetic to
legislation that would give the Treasury backup authority to require holders of large positions in Treasury
securities to report this information. This measure will
further our efforts to develop a comprehensive view of
the market.

Statements

to the Congress

471

With these steps—and our continued surveillance
efforts—I think we come much closer to striking that
appropriate balance I spoke of earlier between providing effective oversight by the agencies and avoiding
the burdens of excessive regulation that can easily
stifle the efficiency and liquidity of the market, a
potentially significant cost that ultimately will be borne

by the American taxpayer. The progress we have
made so far and the outlook for our near-term initiatives make any additional measures seem clearly premature. The agencies have the ability to review,
analyze, and act appropriately—and in a timely fashion—when market developments raise issues of public
concern.
•

Statement by Alan Greenspan, Chairman, Board of
Governors of the Federal Reserve System, before the
Committee on Finance, U.S. Senate, March 24, 1993

Congress. I should like, nonetheless, to take the time
you have made available to outline my views on the
principles that should underlie current deliberations.
First, according to both the Office of Management
and Budget and the Congressional Budget Office,
deficits are likely to be held in check by relatively good
economic performance over the next few years. But
from 1997 on, budget outlays under existing law are
projected to rise appreciably faster than the tax base.
If such trends are not altered, stabilizing the deficitto-GDP ratio solely from the receipts side, not to
mention reducing it, will necessarily require everincreasing tax rates. This would surely undercut incentives for risktaking and inevitably damp the longterm growth and tax revenue potential of our
economy. The gap between spending and revenues
will not close under such conditions. Thus, there is no
alternative to achieving much slower growth of outlays
if deficit control is our objective. This implies the need
not only to make cuts now, but also to control the
growth of future spending so that it does not exceed,
and preferably is less than, the projected growth in the
tax base.
The thought expressed by some that we can inflate
our way out of the budget deficit is fanciful. Aside
from its serious debilitating effects on our economic
system, higher inflation, given the explicit and implicit
indexing of receipts and expenditures, would not reduce the deficit. As I indicated in testimony to the
Joint Economic Committee in January, there is a
possibility that productivity has moved into a significantly faster long-term growth channel, which would
boost real growth and tax revenues over time. But
even if that turns out to be the case, short of an
increase beyond anything that we can reasonably
anticipate at this time, productivity, in itself, would
not be enough to resolve the basic long-term imbalance in our budgetary accounts. Thus, while economic
growth is necessary to contain budget deficits, it
regrettably is not sufficient.
In deciding how to pare a structural budget deficit, it
is important to be clear on the different roles of
boosting taxes, on the one hand, and cutting spending
programs, on the other. All feasible taxes, by their

As I have indicated to other committees of the Congress in recent days, our burgeoning structural budget
deficit, unless addressed, will increasingly threaten the
stability of our economic system. Time is no longer on
our side. At 5 percent of gross domestic product
(GDP), the current deficit is very large by historical
standards. After declining through 1996, the current
services deficit starts on an inexorable upward path
again. On a cyclically adjusted or structural basis, the
deficit has hovered around 3 percent of potential GDP
for the past ten years, a phenomenon without precedent in our peacetime history.
I am encouraged that the President and the Congress
are making serious efforts to restore a measure of
balance to our fiscal affairs.
It is beguiling to contemplate the downtrend in
inflation in recent years in the context of very large
budget deficits and to conclude that the concerns
about their adverse effects on the economy have been
misplaced. Regrettably, this notion is dubious. The
deficit is a corrosive force that already has begun to eat
away at the foundations of our economic strength.
Financing of private capital investment has been
crowded out, and, not surprisingly, the United States
has experienced a lower level of net investment relative to GDP than any other of the Group of Seven
countries in the past decade.
To some degree, the impact of the federal budget
deficits over the past decade has been muted as we
imported resources to help finance them. This can be
seen in our large trade and current account deficits.
However, we should not—indeed, we probably cannot—rely on foreign sources of funds indefinitely. If
we do nothing, the markets will ultimately force an
adjustment; by acting now to redress our internal
imbalance, we can lower the risk of unpleasant
stresses down the road.
I shall eschew, as I have in previous testimonies,
comments on the specific elements of the deficitreduction proposals currently under review by the



472

Federal Reserve Bulletin • May 1993

very nature, restrain business activity. Hence, excluding so-called sin taxes and possibly environmental
taxes, increases in taxes can be justified only to
finance expenditures that are deemed essential. The
level and composition of outlays to be financed by
revenues is, in our society, a political matter, as is also
the degree of progressivity and incidence of taxation.
But over the long run, it is important to recognize that
trying to wholly, or substantially, address a structural
budget deficit by increasing revenues is fraught with
exceptional difficulties and is more likely to fail than
succeed.
All else equal, reducing the deficit would enlarge the
pool of savings available for private capital investment. But investment will not automatically occur
unless there are adequate incentives for risktaking.
A greater willingness of a society to consume less of
its current income should lower real interest rates and
spur such investment. But if risktaking is discouraged
through excessive taxation of capital or repressive
regulation, high levels of investment will not emerge
and the level of saving will fall as real incomes
stagnate.
The process by which government deficits divert
resources from private investment is part of the
broader process of redirecting the allocation of real
resources that inevitably accompanies the activities of
the federal government. The federal government can
preempt resources from the private sector or direct
their usage by several different means, the most important of which are (1) spending, financed by taxation; (2) spending, financed by borrowing, that is,
deficit spending; (3) regulation mandating private activities such as investment in pollution control or
safety equipment, which are likely to be financed
through the issuance of debt; and (4) government
guarantees of private borrowing.
What deficit spending and regulatory measures have
in common is that the preemption of resources, directly or indirectly, is not sensitive to the rate of
interest. The federal government, for example, will
finance its budget deficit in full, irrespective of the
interest rate it must pay to raise the funds. Borrowing
with government-guaranteed debt may be interest sensitive, but the guarantees have the effect of preempting
resources from those without access to riskless credit.
Government spending fully financed by taxation does,
of course, preempt real resources from the private
sector, but the process works through channels other
than through real interest rates.
Purely private activities, on the other hand, are, to a
greater or lesser extent, responsive to real interest
rates. The demand for housing, for example, falls off
dramatically as mortgage interest rates rise. Inventory
demand is clearly a function of short-term interest



rates, and the level of interest rates, as it is reflected in
the cost of capital, is a key element in the decision
about whether to expand or modernize productive
capacity. Hence, to the extent that the demand for
saving exceeds its supply, interest rates will rise until
sufficient excess demand is finally crowded out.
The crowded-out demand cannot, of course, be that
of the federal government, directly or indirectly, because federal government demand does not respond to
rising interest rates. Rather, real interest rates will rise
to the point that private borrowing is reduced sufficiently to allow the entire requirements of the federal
government, including its on- and off-budget deficits
and all its collateral guarantees and mandated activities, to be met.
In these circumstances, there is no alternative to
higher real interest rates diverting real resources from
the private to the public sector. In the short run,
nominal short-term interest rates may temporarily be
held down if the Federal Reserve accommodates the
excess demand for funds through a more expansionary
monetary policy. But this will only produce greater
inflation and, ultimately, have little, if any, effect on
the allocation of real resources between the private
and public sectors.
In such an environment, inflationary forces too
often lead to increased risk premiums, higher real
interest rates, and a higher cost of capital. This, in
turn, engenders a foreshortening of the time horizon of
investment decisions and a decreasing willingness to
commit to the long term, a commitment that is so
crucial to a modern technologically advanced economy. Structural budget deficits and excessive collateral credit preemptions are symptoms of a society
overconsuming, undersaving, and underinvesting.
While there is no substitute for political will in
reining in outsized structural budget deficits, there are
changes, I believe, that could make the budget process
more effective. In particular, it is worth reconsidering
sunset legislation, which would impose explicit termination dates on spending programs. Expiring programs
that still have merit should have no difficulty being
reauthorized, but programs whose justification has
become less compelling would not receive the necessary votes. Indeed, it is hard to imagine that sunset
legislation would not lead to at least some improvement over the current situation, quite possibly fostering nontrivial budget savings.
It also would be useful to take a look at the currentservices methodology for evaluating budget changes.
A baseline estimate obviously is a necessary ingredient in the budget process that helps inform policymakers about the impact of policy proposals. However,
the current-services concept assumes that no further
congressional, judicial, or bureaucratic actions will be

Statements

to the Congress

473

taken to alter existing programs. This is quite unrealistic, but it would be of no particular significance were it
not for the fact that the bias of such actions is patently
toward more spending rather than less. Hence, merely
owing to ongoing congressional deliberations, administrative rulings, and decisions, an add-on to the current
services outlay estimates is required to get a better view
of what might be termed the "expected" deficit of the
future. It is not possible to know in advance which
spending programs will be expanded, except that some
will. In recent years, congressional current services
outlay estimates have consistently been adjusted upward in response to such technical reestimations of
program costs. Indeed, technical reestimates explain a
significant part of the failure of the deficit to fall as
contemplated at the time of enactment of the Omnibus
Budget Reconciliation Act of 1990.
Finally, although I do not favor a balanced budget

amendment on the grounds that it might be impossible to enforce, I would support a constitutional
amendment, or even a legislative provision, that
stipulates that all revenue and expenditure initiatives
require supermajorities (for example, 60 percent) to
pass both houses of the Congress. Combined with
sunset legislation, such a procedure could probably
go far to neutralize the obvious propensity of our
political system toward structural deficits.
Let me conclude by reiterating my central message.
The deficit is a malignant force in our economy. How
the deficit is reduced is very important; that it be done
is crucial. Allowing it to fester would court a dangerous erosion of our economic strength and a potentially
significant deterioration in our real standard of living.
Fortunately, we have it in our power to reverse this
process. This committee has an important role in this
process. Speaking as a citizen, I wish you well.
•

Statement
Governors
Committee
sentatives,

The declines in business loans associated with balance sheet restructuring by the larger firms were
superimposed on a secular downtrend in business
credit flows by banks to large firms that have been
increasingly relying on nonbank finance. And overlaying the interest rate- and stock market-induced repayment of bank loans by large firms, and their secular
shift to nonbank credit, has been a normal cyclical
decline in the demand for credit during the recession
and modest recovery.
However, I do not believe that cycles, trends, and
refinancing are the sole explanations for the decline in
business loans. There has been a substantial tightening
of lending terms and standards, and it has affected
small businesses. This tightening of terms and standards has been clear in our periodic surveys of senior
loan officers at large banks since the start of the
decade, although this aspect of loan pricing seems to
have stabilized in 1992. Evidence from the National
Federation of Independent Business is also suggestive.
For example, owners of the larger small businesses
report greater difficulty obtaining credit than three
years ago. The period of credit stringency appears to
have lasted longer than in other recent downturns.
And, small business credit problems have been very
intense in some regions of the United States. Clearly,
New England has borne a disproportionately large
burden.
The sources of tighter credit availability are not hard
to find. A significant part of our current problems
reflects a too-expansive credit policy throughout most
of the 1980s. Large numbers of lenders mistakenly
perceived that financing real estate was very profit-

by Alan Greenspan, Chairman, Board of
of the Federal Reserve System, before the
on Small Business, U.S. House of RepreMarch 25, 1993

I am pleased to appear before this committee to
discuss the availability of bank credit to small businesses. It is clear that any assessment of the outlook
for the economy as a whole—especially employment—has to focus on the health of our small business
sector— including its ability to obtain finance. Indeed,
the importance of bank credit flows to small business
was highlighted by the President's recent announcement of joint actions by all the banking agencies to
facilitate such lending.
Given the importance of small businesses to the
economy and the clear dependence of such firms on
banks, the decline in overall business loans in the
1990s underlines the importance of understanding the
difficulties of bank credit availability. Even more important, it emphasizes the need to continue to do
whatever is possible to remove those sources of restriction that do not imperil the safety and soundness
of the banking system.
Assessing the true nature of small business bank
credit availability is especially complicated, in part
because it seems clear that a substantial share of the
decline in the 1990s of total business loans at banks
reflects significant balance sheet restructuring by large
firms. Many larger businesses have taken advantage of
the decline in interest rates and the increase in stock
prices to refinance their bank loans.



474

Federal Reserve Bulletin • May 1993

able, and virtually risk-free because of the near certainty of continued real estate inflation. But inflation in
real estate not only ended; it was in many cases
reversed, exposing the lax underwriting standards that
had evolved.
The resulting acceleration of nonperforming loans,
and associated reserving and write-offs, not only cut
sharply into capital—causing many banks to fail and
others to be greatly weakened—but also shook the
confidence of lending officers and management. Indeed, despite the low rate of failures of depository
institutions so far in 1993, we should not forget that the
past several years have seen many more failures of
depository institutions than all the other years since
World War II combined. The almost inevitable result
of these traumatic experiences has been that bank
lending policies have gone through a period of exaggeratedly high underwriting standards—the same error
as in the 1980s but in the opposite direction. Although
there appears to have been no further tightening in
recent months, the effect on banks of excess optimism
in real estate in the 1980s is not, I am afraid, as yet
behind us.
Commercial real estate prices have not stabilized
enough to allow most banks to feel confident that they
know what collateral is really worth. Thus, a kind of
traditional bank liquidity—a sense that real estate
collateral could be liquidated expeditiously within a
known price range—has not yet returned to bank
balance sheets. Although improving significantly from
the dark period of 1989-91, we do not yet have the
turnover and transactions required to instill adequate
confidence in most bankers about either their existing
or new loans secured by commercial property.
The real estate market plays an important role in
small business credit because a significant portion of
loans to small businesses involves some real estate
collateral. And, even though banks often do not look
to that real estate as the intended source of repayment,
I am still concerned that a real estate market that has
not found its feet is retarding the availability of small
business credit. This impact is both direct—in evaluating both the bank's own capital, as well as particular
loans—and indirect—by coloring bankers' sense of
general confidence.
As significant as the real estate contraction has been
on bankers' attitudes, it is clearly not the sole source
of trauma. The lax underwriting standards adopted by
many banks in the 1980s contributed to large losses
and write-offs—write-offs of almost $125 billion since
1988. Surviving banks not only have covered such
losses by earnings and capital issues but have increased their own minimum capital standards. This
increase in internal standards has resulted, in part,
from their own review of "policy," but in many cases



it is the direct result of market demands. Both capitalissuing banks and those without ready access to capital markets also improved capital ratios by growing
less rapidly or even shrinking. All of this, I suggest, is
not an unexpected reaction to difficult problems. Indeed, I would argue that it is not surprising that
underwriting standards have been reviewed and tightened.
Banks' own desire to rebuild a strong capital base
has played an important role in constraining the supply
of bank loans. Research at the Federal Reserve appears to have begun to pick up the importance of
internal capital targets. In saying this, I do not mean to
imply that either Basle or the prompt corrective action
capital rules are unimportant. They reinforced the
importance of capital both at banks and in the market.
But Basle and other capital standards imposed on a
less-traumatized banking system would have been
viewed by few observers as a major constraint on
banks' ability to make loans.
Indeed, the Federal Reserve Board supports both
the Basle standards and the prompt corrective action
zones of the Federal Deposit Insurance Corporation
Improvement Act of 1991 (FDICIA). The behavior of
the 1980s—and the associated losses—would surely
not have occurred to the same extent without a deposit
insurance system that permitted banks and thrift institutions to take major risks on a slender capital base
with only minimal market response. Political concerns
apparently made it impossible to directly lower the per
account level of deposit insurance. Hence, making the
moral hazard of deposit insurance moot through higher
capital standards was the most attractive option available. With larger amounts of stockholders' capital at
risk, banks will be encouraged to adopt more careful
and efficient loan policies. Moreover, simulating market responses, as is intended in the progressively
restrictive prompt corrective action zones, is helpful.
In the absence of deposit insurance, markets would
impose reduced dividends, a lower pace of expansion,
and other increasingly severe actions on firms becoming financially distressed.
Parenthetically, so far as we can tell, the risk
weights in the Basle standards have not played a
significant role in disrupting credit flows in general, or
to small businesses in particular. To be sure, the
intention of the risk weights was to make the capital
charge reflect differences in credit risk and to induce
banks at the margin to hold more liquidity in their
portfolios. Thus, if the weighting system had not
caused banks to lean somewhat more toward securities, it would have had to be counted as a failure.
Nonetheless, the weights were not designed to cause a
large shift from loans to securities. And there is simply
no real evidence that the weights have been a signifi-

Statements

cant factor causing the observed substantial shift in bank
credit from loans to government or mortgage-backed
securities. In addition, the banks that have accounted for
most of the increased holdings of Treasury securities are
those with the highest capital ratios, where the zero
weight could not have been particularly relevant to their
decision. Indeed, financial institutions not subject to riskbased capital or FDICIA, such as credit unions, have also
shifted strongly away from loans and toward securities in
the 1990s. In short, other factors—lower credit demands,
balance sheet restructuring, and tightened loan standards—are better explanations of portfolio shifts than the
Basle risk weights.
But Basle and prompt corrective action were not the
only external forces supplementing banks' and the
markets' responses to the residue of the 1980s. Examiners have been widely and severely criticized for
permitting banks to have made such bad credit decisions. That many examiners would respond by becoming unusually sensitive to credit-granting procedures
and—as professionals—reluctant to respond to pleas
for more flexibility cannot come as a surprise. At last
reading, the laws of human nature have not been
repealed. This tendency to respond in an overly cautious way is doubly unfortunate because if there were
ever a time that bankers would be careful without
examiner oversight it has been the early 1990s.
The other critical external force contributing to
reduced credit availability at small businesses is recent
banking legislation—Financial Institutions Reform,
Recovery, and Enforcement Act of 1989 (FIRREA)
and FDICIA. In understandable reaction to the huge
taxpayer costs of the failure of savings and loan
associations and the need to establish a taxpayer's
backup to the Federal Deposit Insurance Corporation—a backup, I note, that has not been used—the
Congress felt it necessary to place severe restrictions
on insured depository institutions. As I indicated a
moment ago, the Board supports the capital and
prompt corrective action provisions of FDICIA. But
the scale and sheer detail of other portions of recent
legislation have, I believe, played an important role in
constraining small business credit flows.
The scale has resulted in a drumbeat of mandated
regulatory announcements and—perhaps worse—anticipated actions. All have diverted management resources, increased burdens and costs, and created
uncertainties that could only make bankers more reluctant to take risks. As I have indicated over the past
year, I have been particularly concerned about provisions that require regulations to specify operational,
managerial, asset, and earnings standards and minimums, as well as detailed auditing requirements—
especially management reports and certification by
auditors. In addition to cost and burden, such micro


to the Congress

475

management has a chilling effect on bank lending
attitudes, imparting a high degree of management
uncertainty while the implementing rules are developed, debated, and adopted. It is not unreasonable
that banks expect the worst in rule changes before
they are promulgated.
Aside from the general impacts on bankers' attitudes
and risktaking, two regulatory factors have particularly
constrained small business credit availability at banks.
The first, I am sure, was unintended: The real estate
appraisal requirements of FIRREA were designed
mainly to eliminate excesses in development and commercial real estate loans. However, most small business loans involve some real estate collateral, even if
the purpose of the loan is not to purchase or refinance
real estate, and the bank does not look to the real estate
as the source of the repayment. Nonetheless, FIRREA
requires that banks either increase their risk by foregoing real estate collateral on such loans or impose
significant costs and delays on the credit-granting process by requiring certified appraisals on the real estate
collateral. Either way, the willingness and ability of
banks to make such loans are reduced and in some
cases may have been eliminated.
The second regulatory development that has affected the availability of small business credit at banks
is the huge increase in the amount of paperwork
resulting from heightened risk aversion by examiners
and the attitudes induced by the banking legislation.
Our research, and the conventional wisdom in banking, support the view that the least-risky small business loans of the 1980s often had no collateral at all.
Despite this evidence to the contrary, many bankers
now perceive that full documentation and collateral on
such loans are necessary to minimize the possibility
that examiners will classify them. As a result, the cost
of lower-risk loans to small business has risen by the
imposition of documentation and collateral requirements or—if the necessary documentation and collateral are not available—such loans are not being made.
In either event, the economy suffers.
Nonetheless, as I review the current banking situation, I find reasons for optimism, but not complacency. While not yet totally stabilized, some degree of
firmness is occurring in some commercial real estate
markets. Our surveys and other information indicate
that banks' attitudes toward loans and risktaking are
improving. Notwithstanding the almost $125 billion of
loans that have been charged off over the past five
years, loan-loss reserves are $5 billion higher. Earnings were at record levels in 1992, and banks have
been extremely successful in raising new equity. Indeed, equity capital in the industry has risen almost
$80 billion over the past five years; the resulting bank
capital ratios are at their highest levels in a quarter of

476

Federal Reserve Bulletin • May 1993

a century. On balance, while a segment of the industry
is still under stress, the banking industry as a whole
has made remarkable progress in working through
severe portfolio problems during a difficult economic
cycle. With an improving economy, I am hopeful that
the signs of some business loan growth this winter will
become more evident this spring. Banks are patently
in a strong position to meet such demand.
But the issues are too important to leave to chance.
There are steps we can and should take. As the President announced on March 10, the banking agencies are
working on ways—within the parameters of FDICIA
and FIRREA—to modify their policies and regulations
to encourage more small business credit availability. I
anticipate that the agencies will shortly promulgate
policies that will significantly ease documentation requirements for a portion of loans to small and mediumsized businesses and farmers by stronger banks and
thrift institutions. Although research suggests that loans
that likely will be made under this policy will be low
risk, the banks that will be permitted to extend such
credits are those most able to absorb some additional
risk without threat to their safety and soundness and,
by the record, are adept at credit underwriting. Loans
with limited documentation—often called "character"
loans—require the special expertise that is the hallmark
of the bank lending process and, I believe, is one of the
special ingredients that fuels small business—and hence
economic—expansion.




Consideration is also being given to easing formal
real estate appraisals for transactions that do not
present unusual risk to banks and to increasing
the current $100,000 exemption level for all loans.
In addition, the agencies have a long list of technical modifications in process, including revisions
to other real estate owned, in substance foreclosures,
and partially charged-oflf accounting and reporting
rules, as well as efforts to attempt to reduce examination duplication by function and agency. Finally, each agency will attempt—when necessary—
to streamline its examiner appeal and complaint
process.
These regulatory actions will be, I hope, quite
helpful, but legislative action is still required. The
Federal Financial Institutions Examination Council
will be making legislative proposals this spring, and I
urge the Congress to consider them seriously. But
perhaps most important is to learn from the experience of the 1990s. One key lesson surely is that each
new, proposed piece of detailed banking legislation
has to be evaluated in advance to determine what the
impacts are likely to be on the health, vigor, and
competitiveness of the banking system. It is even
more important to consider the potential implications
for the vitality and growth of the economy, especially
those sectors that create so much of our employment
and innovation. These sectors often have few credit
alternatives beyond their local banks.
•

477

Announcements
MEETING OF THE CONSUMER ADVISORY
COUNCIL
The Federal Reserve Board announced that the
Consumer Advisory Council met on Thursday,
March 25. The Council's function is to advise the
Board on the exercise of the Board's responsibilities under the Consumer Credit Protection Act and
on other matters on which the Board seeks its
advice.

NEW PROCEDURES FOR PROCESSING
APPLICATIONS FILED BY FOREIGN BANKS
The Federal Reserve Board announced on March 8,
1993, new procedures to be used in processing
applications filed by foreign banks under the Foreign Bank Supervision Enhancement Act of 1991
(FBSEA).
Under the FBSEA, a foreign bank may not establish a branch, agency, representative office, or commercial lending company without the previous
approval of the Board.
The Board has taken several steps that are
intended to expedite processing and reduce the
burden on applicants. These steps include procedures that accomplish the following:
• Require simultaneous review of applications
by the staffs of the Board and Reserve Banks
• Urge all foreign bank applicants to meet with
staff members of the Board and Reserve Bank
before filing applications
• Require adherence to time frames in requesting information during the acceptance process
• Establish new internal guidelines for processing applications after acceptance
• Inform the public about the information files
on home country supervision and bank secrecy
laws that are maintained and available in the
Board's Freedom of Information Office.




The FBSEA established uniform standards for
all foreign banks entering the United States and
requires foreign banks to meet financial, managerial, and operational standards equivalent to those
required of U S . banking organizations.

AMENDMENT TO REGULATION C
The Federal Reserve Board published on March 2,
1993, a final rule to amend Regulation C (Home
Mortgage Disclosure) to carry out provisions of the
Housing and Community Development Act of
1992. The revised rules will apply beginning with
loan and application data collected for calendar
year 1992. The new rule became effective March 1,
1993.
The Housing and Community Development Act
contains amendments to the Home Mortgage Disclosure Act that require financial institutions to
make their loan application register data available
to the public beginning March 31, 1993. This register must be modified in accordance with Board
regulations before release to the public.
The act also requires institutions to make their
disclosure statement available to the public within
three business days of receiving it from the Federal
Financial Institutions Examinations Council. Currently they have thirty days to do so.

AMENDMENT TO REGULATION

DD

The Federal R e s e r v e Board published on
March 16, 1993, a final rule amending Regulation
DD (Truth in Savings) to carry out recent changes
made to the Truth in Savings Act by the Housing
and Community Development Act of 1992.
The law extends the mandatory date for compliance with the requirements of the Truth in Savings
Act by three months, so that institutions must comply by June 21, 1993, rather than March 21, 1993.

478

Federal Reserve Bulletin • May 1993

The law also modifies the advertising rules relating
to signs on the premises of an institution and makes
a technical change to the provision dealing with
notices required to be given to existing account
holders.
The Board is also making two minor changes to
the regulation and providing guidance on several
issues that have been raised by institutions since
publication of the final regulation in September
1992. The Board is also issuing a technical amendment to Regulation Q (Interest on Deposits).

ANNUAL REPORT:

PUBLICATION

The 79th Annual Report, 1992, of the Board of
Governors of the Federal Reserve System, covering operations for the calendar year 1992, is available for distribution. Copies may be obtained on
request to Publications Services, mail stop 138,
Board of Governors of the Federal Reserve System, Washington, DC 20551. A separately printed
companion document, entitled Annual Report:
Budget Review, 1992-93, describes the budgeted
expenses of the Federal Reserve System for
1993 and compares them with expenses for 1991
and 1992; it is also available from Publications
Services.




CHANGES IN BOARD STAFF
The Board of Governors announced the appointment of Stephen M. Hoffman, Jr. to the position of
Assistant Director for International Supervision in
the Division of Banking Supervision and Regulation, effective March 29, 1993.
The Board of Governors also announced on
April 2, 1993, the promotions of Brian Madigan to
the position of Associate Director and Richard
Porter to Deputy Associate Director and the
appointment of Deborah Danker to the position of
Assistant Director in the Division of Monetary
Affairs.
Ms. Danker joined the Board's staff in 1984 with
more than four years' experience at the Federal
Reserve Bank of New York. She is currently on
detail to the Department of the Treasury, where she
is serving as Acting Assistant Secretary for Domestic Finance. Before her detail, she had been Chief
of the Banking and Money Market Analysis Section. She holds a Ph.D. from Yale University.
Mr. Hoffman will be transferring from the Federal Reserve Bank of Philadelphia where he is
currently Vice President in the Credit, Examination, Supervision and Regulation Department. He
holds a B.S. degree in Finance from LaSalle University, with graduate courses at Drexel University
and Widener University. He is a graduate of the
Bank Administration Institute's School of Banking
at the University of Wisconsin.
•

479

Minutes of
Federal Open Market Committee Meeting
A meeting of the Federal Open Market Committee
was held in the offices of the Board of Governors
of the Federal Reserve System in Washington,
D.C., on Tuesday, February 2, 1993, at 2:30 p.m.
and was continued on Wednesday, February 3,
1993, at 9:00 a.m.
Present:
Mr. Greenspan, Chairman
Mr. Conigan, Vice Chairman
Mr. Angell
Mr. Boehne
Mr. Keehn
Mr. Kelley
Mr. LaWare
Mr. Lindsey
Mr. McTeer
Mr. Mullins
Ms. Phillips
Mr. Stern
Messrs. Broaddus, Jordan, Forrestal, and Parry,
Alternate Members of the Federal Open
Market Committee
Messrs. Hoenig, Melzer, and Syron, Presidents
of the Federal Reserve Banks of Kansas City,
St. Louis, and Boston respectively
Mr. Kohn, Secretary and Economist
Mr. Bernard, Deputy Secretary
Mr. Coyne, Assistant Secretary
Mr. Gillum, Assistant Secretary
Mr. Mattingly, General Counsel
Mr. Patrikis,1 Deputy General Counsel
Mr. Prell, Economist
Mr. Truman, Economist
Messrs. R. Davis, Lang, Lindsey, Promisel,
Rosenblum, Scheld, Siegman, Simpson,
and Slifman, Associate Economists
Mr. McDonough, Manager of the System Open
Market Account

1. Attended Wednesday session only.




Ms. Greene, Deputy Manager for Foreign
Operations
Ms. Lovett,2 Deputy Manager for Domestic
Operations
Mr. Ettin, Deputy Director, Division of Research
and Statistics, Board of Governors
Mr. Stockton, Associate Director, Division of
Research and Statistics, Board of Governors
Mr. Madigan, Assistant Director, Division of
Monetary Affairs, Board of Governors
Mr. Brady,3 Section Chief, Division of Monetary
Affairs, Board of Governors
Mr. Rosine,3 Senior Economist, Division of
Research and Statistics, Board of Governors
Mr. Wiles,4 Secretary of the Board, Office of the
Secretary, Board of Governors
Mr. Winn, 4 Assistant to the Board, Office of Board
Members, Board of Governors
Ms. Werneke,4 Special Assistant to the Board,
Office of Board Members, Board of Governors
Mr. Siciliano,4 Special Assistant to the General
Counsel, Legal Division, Board of Governors
Ms. Low, Open Market Secretariat Assistant,
Division of Monetary Affairs, Board of
Governors
Messrs. Beebe, T. Davis, Dewald, Goodfriend, and
Ms. Tschinkel, Senior Vice Presidents,
Federal Reserve Banks of San Francisco,
Kansas City, St. Louis, Richmond, and
Atlanta respectively
Mr. McNees, Vice President, Federal Reserve Bank
of Boston
Mr. Gavin, Assistant Vice President, Federal
Reserve Bank of Cleveland
Mr. Weber, Senior Research Officer, Federal
Reserve Bank of Minneapolis
Ms. Meulendyke, Manager, Open Market
Operations, Federal Reserve Bank of
New York
Attended Tuesday session only.
3. Attended portion of meeting relating to the Committee's
discussion of the economic outlook and its longer-run objectives
for monetary and debt aggregates.
4. Attended portion of the meeting relating to the release of
FOMC information to the public.

Minutes of Federal Open Market Committee Meeting

2. Authority for the Chairman to appoint a Federal
Reserve Bank as agent to operate the System Account in
case the New York Bank is unable to function
3. Resolution of FOMC to provide for the continued
operation of the Committee during an emergency; Resolution of FOMC authorizing certain actions by Federal
Reserve Banks during an emergency
4. Resolution relating to examinations of the System
Open Market Account
5. Guidelines for the conduct of System operations in
federal agency issues
6. Regulation relating to Open Market Operations of
Federal Reserve Banks
7. Program for Security of FOMC Information
8. Federal Open Market Committee Rules.

By unanimous vote, the Authorization for
Domestic Open Market Operations, as shown
below, was reaffirmed:
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, to
the extent necessary to carry out the most recent
domestic policy directive adopted at a meeting of the
Committee:
(a) To buy or sell U.S. Government securities,
including securities of the Federal Financing Bank, and
securities that are direct obligations of, or fully guaranteed as to principal and interest by, any agency of the
United States in the open market, from or to securities
dealers and foreign and international accounts maintained at the Federal Reserve Bank of New York, on a
cash, regular, or deferred delivery basis, for the System
Open Market Account at market prices, and, for such
Account, to exchange maturing U.S. Government and
Federal agency securities with the Treasury or the individual agencies or to allow them to mature without
replacement; provided that the aggregate amount of U.S.
Government and Federal agency securities held in such
Account (including forward commitments) at the close
of business on the day of a meeting of the Committee at
which action is taken with respect to a domestic policy
directive shall not be increased or decreased by more
than $8.0 billion during the period commencing with the
opening of business on the day following such meeting
and ending with the close of business on the day of the
next such meeting;
(b) When appropriate, to buy or sell in the open
market, from or to acceptance dealers and foreign
accounts maintained at the Federal Reserve Bank of
New York, on a cash, regular, or deferred delivery basis,
for the account of the Federal Reserve Bank of New
York at market discount rates, prime bankers acceptances with maturities of up to nine months at the time of
acceptance that (1) arise out of the current shipment of
goods between countries or within the United States,
or (2) arise out of the storage within the United States of




481

goods under contract of sale or expected to move into
the channels of trade within a reasonable time and that
are secured throughout their life by a warehouse receipt
or similar document conveying title to the underlying
goods; provided that the aggregate amount of bankers
acceptances held at any one time shall not exceed
$100 million;
(c) To buy U.S. Government securities, obligations
that are direct obligations of, or fully guaranteed as to
principal and interest by, any agency of the United
States, and prime bankers acceptances of the types
authorized for purchase under 1(b) above, from dealers
for the account of the Federal Reserve Bank of New
York under agreements for repurchase of such securities,
obligations, or acceptances in 15 calendar days or less, at
rates that, unless otherwise expressly authorized by the
Committee, shall be determined by competitive bidding,
after applying reasonable limitations on the volume of
agreements with individual dealers; provided that in the
event Government securities or agency issues covered
by any such agreement are not repurchased by the dealer
pursuant to the agreement or a renewal thereof, they
shall be sold in the market or transferred to the System
Open Market Account; and provided further that in the
event bankers acceptances covered by any such agreement are not repurchased by the seller, they shall continue to be held by the Federal Reserve Bank or shall be
sold in the open market.
2. In order to ensure the effective conduct of open
market operations, the Federal Open Market Committee
authorizes and directs the Federal Reserve Banks to lend
U.S. Government securities held in the System Open
Market Account to Government securities dealers and to
banks participating in Government securities clearing
arrangements conducted through a Federal Reserve
Bank, under such instructions as the Committee may
specify from time to time.
3. In order to ensure the effective conduct of open
market operations, while assisting in the provision of
short-term investments for foreign and international
accounts maintained at the Federal Reserve Bank of
New York, the Federal Open Market Committee authorizes and directs the Federal Reserve Bank of New York
(a) for System Open Market Account, to sell U.S. Government securities to such foreign and international
accounts on the bases set forth in paragraph 1(a) under
agreements providing for the resale by such accounts of
those securities within 15 calendar days on terms comparable to those available on such transactions in the
market; and (b) for New York Bank account, when
appropriate, to undertake with dealers, subject to the
conditions imposed on purchases and sales of securities
in paragraph 1(c), repurchase agreements in U.S. Government and agency securities, and to arrange corresponding sale and repurchase agreements between its own
account and foreign and international accounts maintained at the Bank. Transactions undertaken with such
accounts under the provisions of this paragraph may
provide for a service fee when appropriate.

482

Federal Reserve Bulletin • May 1993

By unanimous vote, the Authorization for Foreign Currency Operations was amended to update
the title of the Manager of the System Open Market
Account. The Authorization, as amended, is shown
below:
1. The Federal Open Market Committee authorizes
and directs the Federal Reserve Bank of New York, for
System Open Market Account, to the extent necessary to
carry out the Committee's foreign currency directive and
express authorizations by the Committee pursuant
thereto, and in conformity with such procedural instructions as the Committee may issue from time to time:
A. To purchase and sell the following foreign currencies in the form of cable transfers through spot or
forward transactions on the open market at home and
abroad, including transactions with the U.S. Treasury,
with the U.S. Exchange Stabilization Fund established
by Section 10 of the Gold Reserve Act of 1934, with
foreign monetary authorities, with the Bank for International Settlements, and with other international financial
institutions:
Austrian schillings
Belgian francs
Canadian dollars
Danish kroner
Pounds sterling
French francs
German marks

Italian lire
Japanese yen
Mexican pesos
Netherlands guilders
Norwegian kroner
Swedish kronor
Swiss francs

B. To hold balances of, and to have outstanding
forward contracts to receive or to deliver, the foreign
currencies listed in paragraph A above.
C. To draw foreign currencies and to permit foreign banks to draw dollars under the reciprocal currency
arrangements listed in paragraph 2 below, provided that
drawings by either party to any such arrangement shall
be fully liquidated within 12 months after any amount
outstanding at that time was first drawn, unless the
Committee, because of exceptional circumstances, specifically authorizes a delay.
D. To maintain an overall open position in all
foreign currencies not exceeding $25.0 billion. For this
purpose, the overall open position in all foreign currencies is defined as the sum (disregarding signs) of net
positions in individual currencies. The net position in a
single foreign currency is defined as holdings of balances in that currency, plus outstanding contracts for
future receipt, minus outstanding contracts for future
delivery of that currency, i.e., as the sum of these elements with due regard to sign.
2. The Federal Open Market Committee directs the
Federal Reserve Bank of New York to maintain reciprocal currency arrangements ("swap" arrangements) for
the System Open Market Account for periods up to a
maximum of 12 months with the following foreign
banks, which are among those designated by the Board
of Governors of the Federal Reserve System under Sec-




tion 214.5 of Regulation N, Relations with Foreign
Banks and Bankers, and with the approval of the Committee to renew such arrangements on maturity:

Foreign bank

Austrian National Bank
National Bank of Belgium
Bank of Canada
National Bank of Denmark
Bank of England
Bank of France
German Federal Bank
Bank of Italy
Bank of Japan
Bank of Mexico
Netherlands Bank
Bank of Norway
Bank of Sweden
Swiss National Bank
Bank for International

Amount of
arrangement
(millions of
dollars
equivalent)
250
1,000
2,000
250
3,000
2,000
6,000
3,000
5,000
700
500
250
300
4,000

Settlements

Dollars against Swiss francs
Dollars against authorized European
currencies other than Swiss francs

600
1,250

Any changes in the terms of existing swap arrangements, and the proposed terms of any new arrangements
that may be authorized, shall be referred for review and
approval to the Committee.
3. All transactions in foreign currencies undertaken
under paragraph 1(A) above shall, unless otherwise
expressly authorized by the Committee, be at prevailing
market rates. For the purpose of providing an investment
return on System holdings of foreign currencies, or for
the purpose of adjusting interest rates paid or received in
connection with swap drawings, transactions with foreign central banks may be undertaken at non-market
exchange rates.
4. It shall be the normal practice to arrange with
foreign central banks for the coordination of foreign
currency transactions. In making operating arrangements
with foreign central banks on System holdings of foreign
currencies, the Federal Reserve Bank of New York shall
not commit itself to maintain any specific balance, unless
authorized by the Federal Open Market Committee. Any
agreements or understandings concerning the administration of the accounts maintained by the Federal Reserve
Bank of New York with the foreign banks designated by
the Board of Governors under Section 214.5 of Regulation N shall be referred for review and approval to the
Committee.
5. Foreign currency holdings shall be invested insofar
as practicable, considering needs for minimum working
balances. Such investments shall be in liquid form, and
generally have no more than 12 months remaining to
maturity. When appropriate in connection with arrangements to provide investment facilities for foreign currency holdings, U.S. Government securities may be purchased from foreign central banks under agreements for
repurchase of such securities within 30 calendar days.

Minutes of Federal Open Market Committee Meeting

6. All operations undertaken pursuant to the preceding paragraphs shall be reported promptly to the Foreign
Currency Subcommittee and the Committee. The Foreign Currency Subcommittee consists of the Chairman
and Vice Chairman of the Committee, the Vice Chairman of the Board of Governors, and such other member
of the Board as the Chairman may designate (or in the
absence of members of the Board serving on the Subcommittee, other Board Members designated by the
Chairman as alternates, and in the absence of the Vice
Chairman of the Committee, his alternate). Meetings of
the Subcommittee shall be called at the request of any
member, or at the request of the Manager of the System
Open Market Account, for the purposes of reviewing
recent or contemplated operations and of consulting with
the Manager on other matters relating to his responsibilities. At the request of any member of the Subcommittee, questions arising from such reviews and consultations shall be referred for determination to the Federal
Open Market Committee.
7. The Chairman is authorized:
A. With the approval of the Committee, to enter
into any needed agreement or understanding with the
Secretary of the Treasury about the division of responsibility for foreign currency operations between the System and the Treasury;
B. To keep the Secretary of the Treasury fully
advised concerning System foreign currency operations,
and to consult with the Secretary on policy matters
relating to foreign currency operations;
C. From time to time, to transmit appropriate
reports and information to the National Advisory Council on International Monetary and Financial Policies.
8. Staff officers of the Committee are authorized to
transmit pertinent information on System foreign currency operations to appropriate officials of the Treasury
Department.
9. All Federal Reserve Banks shall participate in the
foreign currency operations for System Account in
accordance with paragraph 3 G(l) of the Board of Governors' Statement of Procedure with Respect to Foreign
Relationships of Federal Reserve Banks dated January 1, 1944.
By unanimous vote, the Foreign Currency Directive, as shown below, was reaffirmed:
1. System operations in foreign currencies shall generally be directed at countering disorderly market conditions, provided that market exchange rates for the U.S.
dollar reflect actions and behavior consistent with the
IMF Article IV, Section 1.
2. To achieve this end the System shall:
A. Undertake spot and forward purchases and sales
of foreign exchange.
B. Maintain reciprocal currency ("swap") arrangements with selected foreign central banks and with the
Bank for International Settlements.




483

C. Cooperate in other respects with central banks
of other countries and with international monetary
institutions.
3. Transactions may also be undertaken:
A. To adjust System balances in light of probable
future needs for currencies.
B. To provide means for meeting System and Treasury commitments in particular currencies, and to facilitate operations of the Exchange Stabilization Fund.
C. For such other purposes as may be expressly
authorized by the Committee.
4. System foreign currency operations shall be
conducted:
A. In close and continuous consultation and cooperation with the United States Treasury;
B. In cooperation, as appropriate, with foreign
monetary authorities; and
C. In a manner consistent with the obligations of
the United States in the International Monetary Fund
regarding exchange arrangements under the IMF
Article IV.
By unanimous vote, the Procedural Instructions
with respect to Foreign Currency Operations were
amended to update the title of the Manager of the
System Open Market Account. The Procedural
Instructions, as amended, are shown below:
In conducting operations pursuant to the authorization
and direction of the Federal Open Market Committee as
set forth in the Authorization for Foreign Currency Operations and the Foreign Currency Directive, the Federal
Reserve Bank of New York, through the Manager of the
System Open Market Account ("Manager"), shall be
guided by the following procedural understandings with
respect to consultations and clearance with the Committee, the Foreign Currency Subcommittee, and the Chairman of the Committee. All operations undertaken pursuant to such clearances shall be reported promptly to the
Committee.
1. The Manager shall clear with the Subcommittee
(or with the Chairman, if the Chairman believes that
consultation with the Subcommittee is not feasible in the
time available):
A. Any operation that would result in a change in
the System's overall open position in foreign currencies
exceeding $300 million on any day or $600 million since
the most recent regular meeting of the Committee.
B. Any operation that would result in a change on
any day in the System's net position in a single foreign
currency exceeding $150 million, or $300 million when
the operation is associated with repayment of swap
drawings.
C. Any operation that might generate a substantial
volume of trading in a particular currency by the System,
even though the change in the System's net position in
that currency might be less than the limits specified
in 1(B).

484

Federal Reserve Bulletin • May 1993

D. Any swap drawing proposed by a foreign
bank not exceeding the larger of (i) $200 million or
(ii) 15 percent of the size of the swap arrangement.
2. The Manager shall clear with the Committee (or
with the Subcommittee, if the Subcommittee believes
that consultation with the full Committee is not feasible
in the time available, or with the Chairman, if the Chairman believes that consultation with the Subcommittee is
not feasible in the time available):
A. Any operation that would result in a change in
the System's overall open position in foreign currencies
exceeding $1.5 billion since the most recent regular
meeting of the Committee.
B. Any swap drawing proposed by a foreign bank
exceeding the larger of (i) $200 million or (ii) 15 percent
of the size of the swap arrangement.
3. The Manager shall also consult with the Subcommittee or the Chairman about proposed swap drawings
by the System, and about any operations that are not of a
routine character.
The Report of Examination of the System Open
Market Account, conducted by the Board's Division of Reserve Bank Operations and Payment
Systems as of the close of business on July 31,
1992, was accepted.
By unanimous vote, the minutes of actions taken
at the meeting of the Federal Open Market Committee held on December 22, 1992, were approved.
The Deputy Manager for Foreign Operations
reported on developments in foreign exchange markets during the period December 22, 1992, through
February 2, 1993. There were no System open
market transactions in foreign currencies during
this period, and thus no vote was required of the
Committee.
The Manager of the System Open Market
Account reported on developments in domestic
financial markets and on System open market transactions in government securities and federal agency
obligations during the period December 22, 1992,
through February 2, 1993. By unanimous vote, the
Committee ratified these transactions.
The Committee then turned to a discussion of the
economic outlook, the ranges for the growth of
money and debt in 1993, and the implementation of
monetary policy over the intermeeting period
ahead. A summary of the economic and financial
information available at the time of the meeting
and of the Committee's discussion is provided
below, followed by the domestic policy directive
that was approved by the Committee and issued to
the Federal Reserve Bank of New York.




The information reviewed at this meeting indicated that economic activity rose appreciably further in the fourth quarter. Final demands were
buoyed by strength in consumption, business
spending for durable equipment, and residential
construction. Manufacturing activity also increased
considerably, and employment appeared to be on a
modest upward trajectory, despite a continuing
flow of announcements of layoffs by large corporations. Although recent data on wages and prices
had been mixed, on balance they suggested that
inflation was trending gradually lower.
Total nonfarm payroll employment registered a
small increase in December for the fourth consecutive month. Service industries, notably business
and health services, and retail trade accounted for
nearly all of the rise in jobs. Manufacturing and
construction payrolls changed little, and government employment fell as temporary election workers were dropped from payrolls. The civilian unemployment rate remained at 7.3 percent, almost
Vi percentage point below its midyear peak but
slightly above its level at the beginning of the
year.
Industrial production advanced further in
December and was up considerably over the fourth
quarter as a whole. Motor vehicle assemblies rose
sharply during the quarter; strong gains also were
registered in business equipment, partly reflecting a
further jump in output of computers, and in nondurable consumer goods. By contrast, the production of durable consumer goods other than motor
vehicles was lower on balance after changing little
over the third quarter, and the output of defense and
space equipment remained on a downward trend.
Total utilization of industrial capacity increased
significantly in the fourth quarter and for the year
as a whole.
Consumer spending was up substantially in the
fourth quarter. Retail sales, after rising sharply in
October and changing little in November, posted a
further sizable increase in December. The largest
sales gains in the fourth quarter were reported at
automotive dealers and at building material and
supply outlets, but most other types of retail stores
also recorded higher sales. By contrast, consumer
spending for services, as indicated by data on personal consumption expenditures, rose more slowly.
Housing starts surged in December, with single
family starts reaching their highest level in nearly

Minutes of Federal Open Market Committee Meeting

three years and multifamily starts picking up
slightly from the very low levels of October and
November. Sales of new and existing homes
remained on a strong upward trend in December.
Real outlays for business fixed investment apparently registered a notable gain in the fourth quarter,
particularly for producers' durable equipment.
Shipments of nondefense capital goods rose in
November and December after changing little in
October; for the quarter as a whole, shipments
advanced substantially, with increases widespread
by category. Business purchases of cars and trucks
were up sharply in the fourth quarter, while nonresidential construction activity retraced a small part
of a third-quarter decline.
Business inventories expanded moderately in
November as a sizable drop in manufacturing
inventories was more than offset by increases in
wholesale and retail inventories. At the manufacturing level, the drawdown of stocks was associated with strong shipments of durable goods, and
inventory-to-shipments ratios in most industries
were at or near the bottom of their recent ranges. In
the wholesale sector, sizable inventory increases
were reported in November for a second straight
month; most of the buildup was limited to machinery, motor vehicles, and miscellaneous nondurable
goods. With stocks rising in line with sales since
September, the stock-to-sales ratio in wholesaling
remained at the low end of its range over the past
year. Retail inventories increased moderately further in November; the inventory-to-sales ratio for
the sector was slightly below its average for previous months of the year.
The nominal U.S. merchandise trade deficit
widened slightly in November. For October and
November together, however, the deficit narrowed
a little from its average rate in the third quarter, as
the value of exports rose more than the value of
imports. Most of the increase in exports was in
capital goods, both machinery and aircraft, and in
consumer goods. Passenger cars accounted for a
considerable part of the rise in imports, while the
inflow of consumer goods eased from the very
strong pace of the third quarter. Recent indicators
suggested that economic activity had remained
weak in the major foreign industrial countries and
that unemployment rates had increased further in
most of those countries. The recovery in Canada
appeared to be continuing, but the downturn in




485

western Germany and Japan evidently had persisted into the fourth quarter.
A small November decline in producer prices of
finished goods was reversed in December, with a
rebound in prices of finished foods outweighing a
further drop in energy prices. For finished items
other than food and energy, producer prices rose in
December, but the advance followed six months of
no change on balance; for 1992 as a whole, this
measure of prices increased by a considerably
smaller amount than in 1991. At the consumer
level, the index for prices of nonfood, non-energy
items edged higher in December after somewhat
larger increases in the two preceding months. The
rise in this index in 1992 was the smallest for any
year since the early 1970s, when wage and price
controls were in effect. Hourly compensation of
private industry workers advanced a little more
rapidly in the fourth quarter than in the two previous quarters, but the rise in total compensation over
the year as a whole was considerably smaller than
in 1991. The slowing of labor cost increases last
year occurred in both the wages and benefits components.
At its meeting on December 22, the Committee
adopted a directive that called for maintaining the
existing degree of pressure on reserve positions and
that did not include a presumption about the likely
direction of any adjustments to policy during the
intermeeting period. Accordingly, the directive
indicated that in the context of the Committee's
long-run objectives for price stability and sustainable economic growth, and giving careful consideration to economic, financial, and monetary developments, slightly greater reserve restraint or
slightly lesser reserve restraint would be acceptable
during the intermeeting period. The reserve conditions associated with this directive were expected
to be consistent with expansion of M2 at an annual
rate of about IV2 percent and with M3 remaining
about unchanged on balance over the four-month
period from November through March.
Open market operations during the intermeeting
period were directed toward maintaining the existing degree of pressure on reserve positions. Adjustment plus seasonal borrowing was well above
expected levels in the first two full reserve maintenance periods in the intermeeting interval; borrowing was sizable over the long New Year's weekend
and also later when unusually heavy Treasury

486

Federal Reserve Bulletin • May 1993

tax receipts drained reserves from the banking system. The federal funds rate averaged close to expected levels over the intermeeting period. However, the rate was somewhat volatile in late
December as a result of sizable swings in market
factors affecting reserves and of shifting market
anticipations regarding year-end pressures.
Most other short-term interest rates declined
somewhat over the intermeeting period, in part
reflecting the passing of year-end pressures.
Intermediate- and long-term rates, including those
on fixed-rate mortgages, also moved somewhat
lower; the declines occurred in response to growing
indications that any proposed near-term fiscal stimulus would be quite moderate and that the new
Administration intended to recommend steps, possibly including new taxes, to lower the trajectory of
the fiscal deficit appreciably over time. Broad
indexes of stock prices exhibited mixed results
over the intermeeting period: Indexes giving heavy
weight to large companies changed little, while
those primarily reflecting smaller companies rose
significantly.
In foreign exchange markets, the trade-weighted
value of the dollar in terms of the other G-10
currencies rose on balance over the intermeeting
period. Through early January, the dollar appreciated against both the yen and the mark, especially
the latter, in response to actual and expected further
declines in interest rates in Japan and Germany.
Subsequently, the dollar's gains were partially
erased as the prospects for near-term easing in
Germany diminished somewhat and perceptions
grew that fiscal initiatives in the United States
would lower the deficit and reduce the chances that
monetary policy might be tightened in the months
ahead.
After expanding at a moderate pace over the
course of earlier months, M2 contracted in December and January. Some of the weakness reflected a
slowdown in Ml growth associated with lower
mortgage refinancing activity. Within M2's nontransactions component, the expansion of savings
and money market deposit accounts slowed
abruptly, perhaps owing in part to the wider spread
that had developed during the fall between market
rates and those paid on these accounts, as well as to
the use of monies in these accounts to fund a
step-up in consumer purchases and nonwithheld
tax payments. In addition, the continued attractive-




ness to investors of bond and stock mutual funds
might have contributed to a quickening of the
runoff of holdings of money market mutual funds
and to the persisting weakness in other M2
accounts. Appreciable declines in M3 in December
and January reflected both the contraction in M2
and reduced needs by banks for managed liabilities
at a time of weak overall credit demand. From the
fourth quarter of 1991 to the fourth quarter of 1992,
both M2 and M3 grew at rates somewhat below the
lower ends of the Committee's annual ranges. Total
domestic nonfinancial debt appeared to have
expanded at the lower end of the Committee's
monitoring range for 1992.
The staff projection prepared for this meeting
suggested that economic activity would expand
over the year ahead at a pace that would be sufficient to reduce gradually margins of unemployed
labor and capital. Recent declines in long-term
interest rates and more optimistic attitudes on the
part of businesses and households were expected to
support further solid gains in business fixed investment and in homebuying. Continuing progress in
reducing debt service burdens and a gradual lessening of concerns regarding job security were projected to foster an expansion of consumer spending
a shade faster than the growth in incomes. Export
demand would be damped for some period of time
by the appreciation of the dollar since mid-1992,
but an anticipated pickup in growth abroad later
this year would begin to counteract the effects of
the higher dollar. Against the background of considerable uncertainties associated with still unannounced fiscal policy initiatives, the staff retained
for this forecast the assumption contained in several previous forecasts that fiscal policy would
remain mildly restrictive, largely because of declining defense outlays. The persisting slack in
resource utilization over the forecast horizon was
expected to be associated with some additional
progress in reducing inflation.
In the Committee's discussion of current and
prospective economic developments, the members
were encouraged by the mounting evidence of
appreciable momentum in the economic expansion.
On the whole, recent developments tended to
reinforce their forecasts of continuing growth at a
moderate pace over the year ahead, especially in
light of the improvement in business and consumer
confidence. The impact of some retarding influ-

Minutes of Federal Open Market Committee Meeting

ences on the expansion, notably various balance
sheet adjustment activities, appeared to be waning.
In addition, while some major sectors of the economy such as defense spending and commercial
construction remained weak, the economy was
benefiting from considerable growth in consumer
spending, from rising business expenditures for
producer equipment, and from increasing outlays
for housing. In one view, the recent behavior of
commodity prices also tended to indicate some
strengthening in the economy's expansion. Despite
various indications of a more firmly established
expansion, however, the members felt that the
outlook remained subject to a good deal of uncertainty, and some commented that substantial
deviations—in either direction—from their current
forecasts could not be ruled out. It was noted in this
connection that the specifics of the President's fiscal policy proposals were still unknown, and their
reception by the public and the Congress would
have a major influence on confidence, interest rates,
and the performance of the economy. Other sources
of uncertainty related to the outlook for further
restructuring activities that involved cutbacks in
operations and employment by many firms, and the
prospective lending policies of banking institutions. With regard to the outlook for inflation, most
of the members believed that some further progress
toward stable prices was likely over the year ahead,
given an economic outcome about in line with their
forecasts of continued, albeit reduced, margins of
unutilized or underutilized productive resources.
Some members also referred to the extended period
of relatively sluggish growth in the broad measures
of money as a favorable indicator in the outlook for
inflation.
In keeping with the practice at meetings when
the Committee establishes its long-run ranges for
growth of the money and debt aggregates, the
Committee members and the Federal Reserve Bank
presidents not currently serving as members had
prepared projections of economic activity, the rate
of unemployment, and inflation for 1993. The central tendencies of the forecasts pointed to slightly
faster economic growth this year than currently
seemed to have occurred in 1992. The anticipated
rate of economic expansion would be at a pace that
was rapid enough to reduce the rate of unemployment a little further. Nonetheless, with some slack
in productive resources persisting, price and cost




487

pressures would remain subdued and modest additional moderation in inflation was expected by most
members. Measured from the fourth quarter of
1992 to the fourth quarter of 1993, the forecasts for
growth of real GDP had a central tendency of 3 to
3% percent within a full range of 2Vz to 4 percent.
Projections of the civilian rate of unemployment in
the fourth quarter of 1993 were concentrated in the
upper half of a 6V2 to 7 percent range. For the CPI,
the central tendency of the forecasts for the period
from the fourth quarter of 1992 to the fourth quarter of 1993 was centered on increases in a range of
2Vz to 23A percent, and for nominal GDP the forecasts were clustered in a range of 5¥z to 6 percent
for the year.
In the course of the Committee's discussion of
various factors underlying the outlook for economic activity, the members observed that on the
whole the effects of a number of structural impediments to the expansion seemed to be diminishing
as the financial condition of households, business
firms, and financial institutions continued to
improve. Household and business debt-service burdens had eased substantially, but it remained difficult to predict to what extent and for how long the
ongoing balance sheet adjustments would continue to divert an unusual proportion of cash flows
from spending to balance sheet repair. Improved
profitability and new capital-market issuance had
strengthened the capital positions of banking institutions, and in general they were now in a much
better position to augment their lending activities.
However, there were few indications thus far of
any easing in terms or standards on business loans,
and the depressed and uncertain values of commercial mortgages and real estate held in bank portfolios might continue to exert an inhibiting effect
on the willingness of banks to lend. Another negative factor was the persistence of downsizing and
other restructuring activities by numerous firms,
notably large businesses. Such restructuring activities had not fully run their course as many firms
continued to pare excess production capacity and to
modernize production facilities to meet strong competition in domestic and foreign markets. The
resulting layoffs had damped overall job growth.
Despite tepid job growth, retail sales had
strengthened markedly during the closing months
of 1992, and several members commented that
such sales had continued to display surprising vigor

488

Federal Reserve Bulletin • May 1993

in some parts of the country during the early weeks
of 1993. Apart from the improvement in consumer
sentiment, other favorable factors cited with regard
to the outlook for consumer spending included
lower debt-service burdens and the capital gains or
enhanced cash flows now being realized as sales of
homes picked up and mortgage refinancings again
strengthened. Some members nonetheless expressed a degree of concern about the sustainability
of the gains in consumer spending unless there
were faster growth in employment and income to
support such spending. Announcements by prominent firms of cutbacks in their workforces had
continued into the new year, and while job gains at
other firms, especially smaller ones, were contributing to modest net growth in overall employment,
the publicity surrounding the persisting job cutbacks and a tendency for many new jobs to be
lower-paying added an element of caution to the
outlook for consumer expenditures. On balance,
with the measured saving rate already at a low
level, though an argument could be made that the
actual rate was somewhat higher than indicated by
the currently published data, consumer spending
seemed likely to expand about in line with the
growth in consumer incomes over the coming year.
The growth in consumer incomes in turn was
likely to depend importantly on the expansion in
business investment spending, and members cited a
number of factors that were expected to provide a
favorable setting for sustained momentum in such
spending over the year ahead. These included the
strengthening of final demands, the recent declines
in intermediate- and long-term interest rates, the
greater leeway for financial intermediaries to
increase their lending to businesses, and a continuing desire by business firms to improve their operating efficiencies. Commercial construction activity, however, was likely to remain quite sluggish.
There were indications that commercial real estate
values had stabilized in a number of areas, but at
low levels, and given the persistence of marked
imbalances in numerous real estate markets that
were the result of several years of overbuilding, a
significant rebound in commercial building activity
for the nation as a whole might well be several
years away. The outlook for housing construction
was much more promising. Against the background
of a general upswing in consumer confidence and
the improved balance sheets of many households,




the declines that had occurred in mortgage interest
rates had fostered a marked strengthening in the
demand for single-family housing as evidenced by
reports from many parts of the country as well as
the overall statistics on housing. On the basis of
these developments, the members anticipated a
continuing impetus to the economic expansion
from housing construction and from related industries over the year ahead. In addition, the current
indications of generally lean business inventories,
associated in part with strong final demands over
the past several months, suggested that the prospects for further gains in overall spending were
likely to stimulate efforts by business firms to build
up inventories over the quarters ahead.
The increasing signs of slow growth or recession
in a number of foreign nations represented a greater
downside risk to the demand for U.S. exports than
had been apparent earlier. It was noted, for example, that firms engaged in business activities abroad
were reporting substantial deterioration in markets
for U.S. goods in many foreign countries. Growth
in U.S. exports might remain positive over the year
ahead, but against the background of a relatively
expansive U.S. economy and the dollar's recent
appreciation, the value of exports might well fall
increasingly short of that of imports with adverse
effects on the growth of U.S. economic activity.
Turning to the outlook for fiscal policy, members
were encouraged by the prospect that the President
would soon propose a program that would produce
substantial reductions in the federal deficit over the
years ahead. Such a deficit-reduction program,
if deemed credible, could result in lower
intermediate- and long-term interest rates than
would otherwise prevail—even before the program
was enacted—with very positive implications for
interest-sensitive expenditures. For the nearer term,
the President was expected to announce some modest fiscal stimulus relative to what was currently in
train. However, the specifics of the President's
proposals were not yet known and there was little
current basis on which to judge prospective public
and congressional reactions. Members emphasized
the critical need for long-term deficit reduction,
and some expressed concern about the adverse
effects on financial markets if fiscal stimulus measures were to be enacted for the short run without
the assurance of further legislation to cut federal
deficits over time.

Minutes of Federal Open Market Committee Meeting

With regard to the outlook for inflation, most of
the members anticipated that the trend toward
lower price and wage inflation would be sustained
over the year ahead, and one member observed that
the disinflationary momentum in the economy
might well be underestimated. Favorable developments relating to the outlook for inflation included
evidence of slowing increases in labor costs and
continued aggressive efforts by many business
firms to improve productivity and reduce costs in
the face of intense competition from domestic and
foreign producers. Indeed, anecdotal reports from
around the country continued to suggest little or no
upward pressure on prices in many regions. In
addition, the behavior of interest rates in longerterm debt markets was consistent with spreading
expectations of gradually diminishing inflation.
Some members believed, however, that little or no
further progress in reducing inflation was a more
likely outcome in the year ahead, though none
anticipated higher inflation. Some commodity price
indexes had edged higher recently, apparently in
response to growing demands related to strengthening activity in several sectors of the economy.
Lumber prices in particular had risen considerably
in conjunction with the uptrend in single-family
housing construction and various constraints on
lumber supplies. Some business contacts reported
for the first time in a long while that they were
experiencing or anticipated some upward pressure
on their raw materials prices. Further, while most
business contacts saw or anticipated little or no
upward pressure on prices in their own industries,
many continued to expect rising inflation more
generally. The still relatively steep slope of the
yield curve and its implications with regard to
expectations of future increases in interest rates
also suggested that investors remained concerned
about the possibility of higher inflation over the
longer run, even though such concerns might have
abated somewhat recently and did not appear to
extend to the next year or two. In general, however,
the members viewed the inflation outlook with
considerable optimism on the presumption of
favorable fiscal and monetary policy developments.
In keeping with the requirements of the Full
Employment and Balanced Growth Act of 1978
(the Humphrey-Hawkins Act), the Committee at
this meeting reviewed the ranges for growth of the
monetary and debt aggregates in 1993 that it had




489

established on a tentative basis at its meeting on
June 30-July 1, 1992. The tentative ranges
included expansion of 2XA to 6V2 percent for M2
and 1 to 5 percent for M3, measured from the
fourth quarter of 1992 to the fourth quarter of 1993.
The monitoring range for growth of total domestic
nonfinancial debt had been set provisionally at AV2
to 8V2 percent for 1993. All of these ranges were
unchanged from those that the Committee had set
for 1992 at its meeting in February of last year and
had reaffirmed at midyear. When the provisional
ranges for money growth were established, the
Committee had noted that they were especially
tentative and subject to revision in the latter part of
1992 or early 1993 owing to the considerable
uncertainty about the evolving relationship of
money to income.
In the event, the velocities of M2 and M3 had
increased appreciably in the second half of 1992
and analysis of the factors behind this development
suggested further increases in the year ahead. Consequently, in the Committee's discussion, which
tended to focus on M2, all the members indicated
that they could support a proposal to lower the
tentative ranges for growth of the broad monetary
aggregates by V2 percentage point for 1993. At the
same time, a number of members indicated that
they preferred somewhat different ranges including
the retention of the tentative ranges, lowering the
ranges by more than the proposal, and widening or
narrowing them. All the members were in firm
agreement that the purpose of the proposed reductions was not to signal or implement any change in
monetary policy or to convey any intention to
move away from the Committee's commitment to
maximum sustainable economic expansion. Rather,
the reductions were motivated by the persistence of
marked shortfalls in the growth of M2 and M3
from their historical relationships with various
measures of aggregate economic performance;
those shortfalls appeared to be the technical result
of forces that are altering the relationship between
money and income. Members of the Committee
urged that the Board's report to the Congress and
the Chairman's accompanying testimony make
clear the reasons for the unusual behavior of money
and its consequences for the Committee's choice of
ranges.
The deviations in monetary growth from historical norms reflected a number of developments

490

Federal Reserve Bulletin • May 1993

whose relative importance and intensity had shifted
to some extent over the course of recent years, but
in general they had served to rechannel funds away
from depository institutions, and the associated
weakness in deposit growth had raised velocity—
the ratio of nominal GDP to money. The result was
the need for lower money growth than in the past to
support a given rate of income growth. Among the
developments that had tended to retard the relative
growth of M2 and M3 was the unprecedented
steepness of the yield curve that had prompted
large shifts of funds by savers from M2 accounts to
higher-yielding intermediate- and long-term assets.
At the same time, credit growth at bank and thrift
depository institutions had been weak, partly as a
result of efforts by these institutions to improve
capital and liquidity positions, and partly owing to
weak demand. As a consequence, they also had
maintained relatively low offering rates on deposits
that had provided consumers with an incentive to
reduce or hold down their deposit holdings in order
to pay down relatively high-cost mortgages and
other debts. In 1992, sluggish growth of M2 and
M3 had been associated with a considerable acceleration in nominal spending. Indeed, despite
growth of both M2 and M3 at rates below the
Committee's ranges, the expansion of the economy
had exceeded most forecasts.
The members generally anticipated that the
intensity of these forces might diminish in 1993 as
borrowers and lending institutions achieved more
comfortable balance sheet positions. Nonetheless,
the relative weakness in money growth was seen as
likely to persist to a marked extent. The yield
curve, while it had flattened a bit recently, was still
expected to provide a considerable incentive for
many savers to shift funds out of M2 assets, especially as relatively high-yielding time deposits continued to mature. In addition, banks were likely to
remain generally unaggressive in bidding for
deposits, in part because their substantial earlier
acquisitions of securities would permit them to
accommodate some of the anticipated growth in
loan demand by selling securities or limiting purchases. In these circumstances, restrained money
growth seemed likely to remain consistent with
relative strength in the economic expansion.

was still subject to considerable uncertainty, and
this implied the need for flexibility in assessing the
implications of money growth relative to the Committee's ranges. Should the factors influencing the
behavior of the broad aggregates persist in holding
down money growth to the extent seen in 1992,
expansion of M2 and M3 in the lower portion of
their reduced ranges would be consistent with considerable further growth in nominal spending.
Indeed, a shortfall from the reduced ranges could
not be ruled out, and one member felt that the
potential for such a development warranted consideration of a somewhat larger reduction in the M2
range; such a reduction also would signal more
clearly the Committee's commitment to price stability. On the other hand, the upper portions of the
reduced ranges would still accommodate an ample
provision of liquidity to support further economic
expansion even if the growth of money and of
income were to move toward a historically more
normal alignment and velocity were to slow from
its high rate of increase. In one view, widening the
tentative M2 range by reducing its lower limit
while retaining its upper limit would help the Committee to convey its views regarding the potential
for a continuing but acceptable sluggishness in M2
growth while leaving room for the possibility of
faster M2 expansion should changing circumstances foster diminishing strength in velocity.
Another member expressed a preference for narrowing the tentative range by lowering only its
upper limit as a means of signaling the Committee's intent to resist both inflationary and recessionary developments. In light of the uncertainties that
were involved, the informational content of the
aggregates probably had diminished and in any
event the Committee would need to continue to
evaluate monetary growth developments in the context of a careful assessment of a wide variety of
other financial, economic, and price developments.
In this connection, one member observed that the
uncertainties were of such a magnitude that, while
plausible arguments could be made for a number of
different ranges, retention of the tentative ranges
would be appropriate in light of the Committee's
willingness to review the ranges in the event that
unanticipated developments were to unfold.

The members recognized that the strength of the
factors that were expected to continue to depress
broad money growth in relation to income in 1993

All of the members agreed that it would be
desirable to retain the monitoring range of 4V2 to
8V2 percent that the Committee had established on




Minutes of Federal Open Market Committee Meeting

a provisional basis for the growth of total domestic
nonfinancial debt in 1993. The expansion in such
debt had not been damped by special forces to the
same extent as the broad monetary aggregates in
1992. Over the year ahead, growth in the federal
debt was likely to remain substantial, and the
expansion of debt in the nonfederal sectors was
projected to accelerate somewhat given the continued improvement in borrower balance sheets and
an anticipated increase in the willingness of financial institutions to lend as the economy continued
to expand. Nonetheless, in the context of still cautious attitudes on the part of both borrowers and
lenders, the growth of nonfederal debt probably
would remain below that of nominal GDP in the
year ahead.
At the conclusion of the Committee's discussion,
all of the members indicated that they favored or
could accept a technical downward adjustment of
Vi percentage point in the tentative ranges for the
broader monetary aggregates for 1993 to rates of 2
to 6 percent for M2 and Vi to 4V2 percent for M3. It
was agreed that there should be no change from the
tentative range for total domestic nonfinancial debt.
In keeping with the Committee's usual procedures
under the Humphrey-Hawkins Act, the ranges
would be reviewed at midyear, or sooner if deemed
necessary, in light of the growth and velocity behavior of the aggregates and ongoing economic and
financial developments. Accordingly, by unanimous vote, the following longer-run policy for
1993 was approved by the Committee for inclusion
in the domestic policy directive:
The Federal Open Market Committee seeks monetary
and financial conditions that will foster price stability
and promote sustainable growth in output. In furtherance
of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 2 to 6 percent
and V2 to 41/2 percent respectively, measured from the
fourth quarter of 1992 to the fourth quarter of 1993. The
Committee expects that developments contributing to
unusual velocity increases are likely to persist during the
year. The monitoring range for growth of total domestic
nonfinancial debt was set at AVi to %Vi percent for the
year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price
level stability, movements in their velocities, and developments in the economy and financial markets.
Turning to policy for the intermeeting period
ahead, all of the members endorsed a proposal to




491

maintain unchanged conditions in reserve markets,
and all indicated that they could accept a directive
that did not incorporate any presumption with
regard to the likely direction of possible intermeeting adjustments to policy. While there was concern
about the weakness in the monetary aggregates, the
members generally agreed that recent economic
developments tended to reinforce the view that
monetary policy was on an appropriate course.
The economy seemed to be on a stronger growth
track than earlier in the expansion, and inflation
remained quite subdued—only a bit above some
estimates of price stability—and likely to moderate
further in coming quarters in the view of most
members. Some commented that a further easing
move at this juncture might well have adverse
effects on inflation sentiment and on interest rates
in intermediate- and long-term debt markets. A few
referred to the recent firming in some commodity
prices and the consensus among private forecasters
that inflation could drift higher over the next few
years. In the view of one member, these developments might argue for a tilt in the directive toward
possible restraint, but they did not call for an immediate tightening in reserve conditions.
A staff analysis prepared for this meeting suggested a resumption of some growth in the broad
measures of money later in the first quarter but a
decline in both M2 and M3 for the quarter as a
whole. While part of the declines appeared to
reflect difficulties with seasonal adjustments and
the ebbing of special factors that previously had
boosted growth, the uncertainties surrounding the
behavior of these aggregates tended to reduce their
role in current monetary policy. Nevertheless, there
was concern about the persisting weakness in the
broad aggregates, including the likelihood that they
would fall well short of the Committee's new
ranges over the first part of the year. Some members also noted that the growth of M l , while still
fairly robust in December and January, was markedly below its pace over most of 1992. On the
other hand, bank loans had increased in recent
months, and the weakness in the monetary aggregates did not appear to reflect underlying softness
in the economy. In these circumstances, a number
of members believed that any effort to stimulate
monetary growth under immediately prevailing
economic conditions and market expectations
might well prove to be counterproductive. An

492

Federal Reserve Bulletin • May 1993

easing at this time could accelerate outflows from
interest-sensitive M2 assets if the easing were
seen as signaling a weakening of the System's
anti-inflationary resolve and were to result in
higher rates on intermediate- and long-term debt
securities.
At the conclusion of the Committee's discussion,
all of the members indicated that they favored a
directive that called for maintaining the existing
degree of pressure on reserve positions. They also
noted their preference for, or acceptance of, a directive that did not include a presumption about the
likely direction of any adjustment to policy over
the intermeeting period. Accordingly, in the context of the Committee's long-run objectives for
price stability and sustainable economic growth,
and giving careful consideration to economic,
financial, and monetary developments, the Committee decided that slightly greater or slightly lesser
reserve restraint would be acceptable during the
intermeeting period. The reserve conditions contemplated at this meeting were expected to be
consistent with little change in the levels of M2
and M3 over the two-month period from January
through March.
By unanimous vote, the Federal Reserve Bank of
New York was authorized and directed, until otherwise directed by the Committee, to execute transactions in the System Account in accordance with the
following domestic policy directive:
The information reviewed at this meeting indicates
that economic activity rose appreciably further in the
fourth quarter. Total nonfarm payroll employment registered another small increase in December, and the civilian unemployment rate remained at 7.3 percent. Industrial production posted solid gains over the closing
months of the year. Retail sales were up substantially in
the fourth quarter, and residential construction activity
increased sharply. Indicators of business fixed investment suggest a notable gain in recent months, particularly for producers' durable equipment. The nominal
U.S. merchandise trade deficit narrowed slightly in
October-November from its average rate in the third
quarter. Recent data on wages and prices have been
mixed but they continue to suggest on balance a trend
toward lower inflation.
Interest rates have declined somewhat since the Committee meeting on December 22. In foreign exchange
markets, the trade-weighted value of the dollar in terms
of the other G-10 currencies rose on balance over the
intermeeting period.
M2 appears to have contracted in December and January, after expanding at a moderate pace over the course




of previous months; M3 is estimated to have declined
appreciably in both months. From the fourth quarter of
1991 to the fourth quarter of 1992, both M2 and M3
grew at rates somewhat below the lower ends of the
Committee's annual ranges for 1992. Total domestic
nonfinancial debt appears to have expanded at the lower
end of the Committee's monitoring range for the year.
The Federal Open Market Committee seeks monetary
and financial conditions that will foster price stability
and promote sustainable growth in output. In furtherance
of these objectives, the Committee at this meeting established ranges for growth of M2 and M3 of 2 to 6 percent
and Vi to AV2 percent respectively, measured from the
fourth quarter of 1992 to the fourth quarter of 1993. The
Committee expects that developments contributing to
unusual velocity increases are likely to persist during the
year. The monitoring range for growth of total domestic
nonfinancial debt was set at AV2 to 8V2 percent for the
year. The behavior of the monetary aggregates will continue to be evaluated in the light of progress toward price
level stability, movements in their velocities, and developments in the economy and financial markets.
In the implementation of policy for the immediate
future, the Committee seeks to maintain the existing
degree of pressure on reserve positions. In the context of
the Committee's long-run objectives for price stability
and sustainable economic growth, and giving careful
consideration to economic, financial, and monetary developments, slightly greater reserve restraint or slightly
lesser reserve restraint would be acceptable in the intermeeting period. The contemplated reserve conditions are
expected to be consistent with little change in M2 and
M3 over the period from January to March.
At this meeting the Committee discussed a preliminary report of a subcommittee that had been
established to examine various issues relating to
the release of information about Committee meetings and decisions. All of the members agreed that
the Committee should keep the public as fully
informed as possible about its monetary policy
decisions and their rationale. Such information
could reduce uncertainty about the stance of policy
and about the factors the Committee takes into
account in reaching its decisions. However, release
of information should not be allowed to compromise the overriding objective of making and implementing the best possible decisions. In that regard,
the Committee noted that its deliberative process
requires a free flow of ideas, including the ability to
advance or question hypotheses, to speculate on
alternative outcomes, and to change opinions in
response to the views expressed by other members.
The members also needed to feel at liberty during
meetings to use a wide array of information that is
obtained on a confidential basis; at least some of

Minutes of Federal Open Market Committee Meeting

that information would no longer be provided to
the Committee if there were a risk of public disclosure. Moreover, the Committee wanted to give
further consideration to the risk that the adoption of
a different schedule for releasing information about
policy decisions might have the effect, in difficult
circumstances, of reducing its willingness to make
needed policy adjustments promptly. No decisions
were made at this meeting concerning various




493

options for apprising the public more fully or
promptly of the Committee's actions, and it was
understood that the subcommittee would continue
to study the matter.
It was agreed that the next meeting of the Committee would be held on Tuesday, March 23, 1993.
The meeting adjourned.
Donald L. Kohn
Secretary

495

Legal Developments
FINAL

RULE—AMENDMENT

TO REGULATION

C

The Board of Governors is amending 12 C.F.R. Part
203, its Regulation C (Home Mortgage Disclosure Act
("HMDA")), to incorporate new statutory provisions.
The Housing and Community Development Act of 1992
contains amendments to HMDA that require financial
institutions to make their loan application register data
available to the public beginning March 31, 1993; the
register must be modified in accordance with Board
regulations before release to the public. The act also
requires institutions to make their disclosure statement—as compiled by the Federal Financial Institutions Examination Council later in the year—available
to the public within three business days of receiving it
from the Examination Council; they currently have 30
days to do so.
Effective March 1, 1993, 12 C.F.R. Part 203 is
amended as follows:
Part 203—Home

Mortgage

Disclosure

1. The authority citation for part 203 continues to read
as follows:
Authority: 12 U.S.C. 2801-2810.
2. Section 203.5 is amended by redesignating paragraphs (c) and (d) as (d) and (e), by adding a new
paragraph (c), and by revising paragraphs (a) through
(e) to read as follows:

Section 203.5—Disclosure and reporting.
(a) Reporting to agency. By March 1 following the
calendar year for which the loan data are compiled, a
financial institution shall send two copies of its
complete loan application register (if submitted in
paper form) to the agency office specified in appendix
A of this regulation, and shall retain a copy for its
records for a period of not less than three years. A
financial institution need only submit one copy when
the submission is on computer tape or diskette.
(b) Public disclosure of statement. A financial institution shall make its mortgage loan disclosure statement
(to be prepared by the Federal Financial Institutions




Examination Council) available to the public at its
home office no later than three business days after
receiving it from the Examination Council. A financial
institution shall also make its disclosure statement
available to the public within ten business days in at
least one branch office in each additional MSA where
it has offices. The disclosure statement at a branch
office need only contain data relating to properties in
the MSA where the branch office is located.
(c) Public disclosure of loan application register. A
financial institution shall make its loan application
register available to the public after modifying it in
accordance with appendix A. An institution shall
make its modified register available following the
calendar year for which the data are compiled, by
March 31 for a request received on or before March
1, and within 30 days for a request received after
March 1. The modified register made available at a
branch office need only contain data relating to
properties in the MSA where the branch office is
located.
(d) Availability of data. A financial institution shall
make its modified register available to the public for a
period of three years and its disclosure statement
available for a period of five years. An institution shall
make the data available for inspection and copying
during the hours the office is normally open to the
public for business. It may impose a reasonable fee for
any cost incurred in providing or reproducing the data.
(e) Notice of availability. A financial institution shall
post a general notice about the availability of its
disclosure statement in the lobbies of its home office
and any physical branch offices located in an MSA.
Upon request, it shall promptly provide the location of
the institution's offices where the statement is available. At its option, an institution may include the
location in its notice.
3. Appendix A to part 203 is amended by revising the
heading of section III., by revising section III.D., and
by adding new sections III.E., F., and G., to read as
follows:
APPENDIX A TO PART 203—FORM
INSTRUCTIONS FOR COMPLETION
LOAN/APPLICATION
REGISTER

AND
OF
HMDA

496

Federal Reserve Bulletin • May 1993

III. Submission of HMDA-LAR
Release of Data

and Public

D. Availability of disclosure statement. The Federal
Financial Institutions Examination Council (FFIEC)
will prepare a disclosure statement from the data you
submit. Your disclosure statement will be returned to
the name and address indicated on the transmittal
sheet. Within three business days of receiving the
disclosure statement, you must make a copy available
at your home office for inspection by the public. You
also must make the disclosure statement available,
within ten business days after receiving it from the
FFIEC, in at least one branch office in each additional
MSA where you have physical offices. For these
purposes, a business day is any calendar day other
than a Saturday, Sunday, or legal public holiday.
E. Availability of modified loan application register.
1. To protect the privacy of applicants and borrowers, an institution must modify its loan application
register by removing the following information before releasing it to the public: the application or loan
number, date application received, and date of action taken.
2. A financial institution must make its modified
register available following the calendar year for
which the data are compiled, by March 31 for a
request received on or before March 1, and within
30 days for a request received after March 1.
F. Location and format of disclosed data. A financial
institution must make a complete copy of its disclosure
statement and modified register available to the public
at its home office. Institutions may make these data
available in hard copy or in automated form (such as
by floppy disk or computer tape). Although you are
not required to make the modified loan application
register available in census-tract order, you are
strongly encouraged to do so in order to enhance its
utility to users. If you have physical branch offices in
other MSAs, you must make available, in at least one
branch office in each of those MSAs, either a complete
copy of the disclosure statement or the portion of it
that relates to properties in that MSA. Similarly, a
modified register at a branch office need only reflect
data concerning properties within the MSA where the
branch is located.
You are not required to prepare a modified loan
application register in advance of receiving a request
from the public for this information, but must be able
to respond to a request within 30 days.
G. Posters. Your agency can provide you with HMD A
posters that you can use to inform the public of the
availability of your disclosure statement, or you may
print your own posters.



FINAL

RULE—AMENDMENT

TO REGULATION

Y

The Board of Governors is amending 12 C.F.R. Part
225, its Real Estate Appraisal Regulations to reflect
that the Board's Guidelines for Real Estate Appraisal
Policies and Review Procedures have been superseded
by the Guidelines for Real Estate Appraisal and Evaluation Programs.
Effective March 19, 1993, 12 C.F.R. Part 225 is
amended as follows:
Part 225—Bank Holding Companies
Change in Bank Control

and

1. The authority citation for part 225 continues to read
as follows:
Authority:
12 U.S.C. 1817(j)(13), 1818, 1831(i),
1843(c)(8), 1844(b), 3106, 3108, 3907, 3909, 3310, and
3331-3351, and sec. 306 of the Federal Deposit Insurance Corporation Improvement Act of 1991 (Pub. L.
102-242, 105 Stat. 2236 (1991).
Subpart

G—Appraisals

2. In section 225.63, the concluding text in paragraph
(a) is revised to read as follows:
Section 225.63—Appraisals not required;
transactions requiring a State certified or
licensed appraiser.
(a) * * * Any transaction for which a State certified or
licensed appraiser is not required nevertheless must
have an appropriate evaluation of real property collateral that is consistent with the Board's Guidelines for
Real Estate Appraisal and Evaluation Programs.

FINAL

RULE—AMENDMENT

TO REGULATION

Z

The Board of Governors is amending 12 C.F.R. Part
226, the official staff commentary to Regulation Z
(Truth in Lending). The commentary applies and interprets the requirements of Regulation Z. The revisions are limited, and address regulatory provisions
needing clarification or issues for which there may be
a general need for more guidance. The revisions
address the interplay between the Truth in Lending
rules on demand features and other federal rules
dealing with credit extended to executive officers of
depository institutions. They provide greater flexibility in complying with the disclosure requirements
under Regulation Z in these transactions. The disclosure rules for security interests (particularly those in

Legal Developments

rescindable transactions) are also clarified. The commentary offers creditors alternative methods of disclosing security interests in rescindable transactions.
Effective April 1, 1993; but compliance is option
until October 1, 1993, 12 C.F.R. Part 226 is amended
as follows:
Part

226—{Amended]

1. The authority citation for part 226 continues to read
as follows:
Authority: 12 U.S.C. 3806, 15 U.S.C.,
1637(c)(5); sec. 1204(c).
Supplement

I to Part

1604 and

497

5b(d)(4)(iii)-l is amended by revising the fourth sentence and adding a sentence after the fourth sentence
to read as follows:
Paragraph 5b(d)(4)(iii).
1. Disclosure of conditions. * * * As an alternative to
disclosing the conditions in this manner, the creditor
may simply describe the conditions using the language
in sections 226.5b(f)(2)(i)-(iii), 226.5b(f)(3)(i) (regarding
freezing the line when the maximum annual percentage rate is reached), and 226.5b(f)(3)(vi) or language
that is substantially similar. The condition contained in
section 226.5b(f)(2)(iv) need not be stated. * * *

226—[Amended]

2. In Supplement I to part 226, under the heading "2(a)
Definitions," comment 2(a)(25)-6 is amended by adding five new sentences at the end to read as follows:

Supplement

2(a)(25) Security interest.

4. In Supplement I to part 226, under the heading
"5b(f) Limitations on Home Equity Plans," comment
5b(f)(2)-l is amended by revising the second sentence
to read as follows:

6. Specificity of disclosure. * * * In disclosing the fact
that the transaction is secured by the collateral, the
creditor also need not disclose how the security interest arose. For example, in a closed-end credit transaction, a rescission notice need not specifically state
that a new security interest is "acquired" or an
existing security interest is "retained" in the transaction. The acquisition or retention of a security interest
in the consumer's principal dwelling instead may be
disclosed in a rescission notice with a general statement such as the following: "Your home is the security for the new transaction." A statement such as this
may be used, for example, instead of the second
sentence in model form H-9 and could apply both to a
refinancing in which a new security interest is taken by
the original creditor to replace a preexisting security
interest and one in which an existing security interest
is maintained. Of course, because model form H-9
adequately discloses the fact that the home is security
for the transaction, it may be used without modification in both a refinancing in which a new security
interest is taken by the original creditor to replace a
preexisting security interest and one in which an
existing security interest is retained by that creditor.

I to Part

226—[Amended]

3. In Supplement I to part 226, under the heading
"5b(d)
Content
of
Disclosures,"
comment



226—[Amended]

Paragraph 5b(f)(2).
1. Limitations on termination and acceleration. * * *
However, creditors may take these actions in the four
circumstances specified in section 226.5b(f)(2). * * *

Supplement

I to Part

226—[Amended]

5. In Supplement I to part 226, under the heading "6(e)
Home Equity Plan Information," comment 6(e)-1 is
amended by adding a parenthetical at the end to read
as follows:
1. Additional disclosures required. * * * Creditors also
must disclose a list of the conditions that permit the
creditor to terminate the plan, freeze or reduce the
credit limit, and implement specified modifications to
the original terms. (See comment 5b(d)(4)(iii)-l.)

Supplement
Supplement

I to Part

I to Part

226—[Amended]

6. In Supplement I to part 226, under the heading
"Appendix G—Open-end model forms and clauses,"
comment 4 to Appendix G is amended by adding a new
sentence at the end to read as follows:

498

Federal Reserve Bulletin • May 1993

4. Models G-5 through G-9. * * * See the commentary
to section 226.2(a)(25) regarding the specificity of the
security interest disclosure for model form G-7.

Supplement

I to Part

226—{Amended]

7. In Supplement I to part 226, under the heading
"18(i) Demand feature," comment 18(i)-2 is amended
by adding a new sentence at the end to read as follows:
2. Covered demand features. * * * A creditor may, but
need not, treat its contractual right to demand payment of a loan made to its executive officers as a
demand feature to the extent that the contractual right
is required by Regulation O (12 C.F.R. 215.5) or other
federal law.

Supplement

I to Part

226—{Amended]

8. In Supplement I to part 226, under the heading
"19(b) Certain variable-rate transactions," comment
19(b)(2)(xi)-l is amended by revising the first sentence
to read as follows:
Paragraph 19(b)(2)(xi).

I to Part

226—{Amended]

8. In Supplement I to part 226, under the heading
"Appendix G—Open-end model forms and clauses,"
comment 4 to Appendix G is amended by adding a new
sentence at the end to read as follows:
4. Models G-5 through G-9. * * * See the commentary
to section 226.2(a)(25) regarding the specificity of the
security interest disclosure for model form G-7.

Supplement

I to Part

226—{Amended]

9. In Supplement I to part 226, under the heading
"Appendix H— Closed-end model forms and clauses,"
comment 11 to Appendix H is amended by adding a
new sentence at the end to read as follows:



FINAL RULE—AMENDMENT
REGULATION
DD

TO

The Board of Governors is amending 12 C.F.R. Part
230, its Regulation DD (Truth in Savings), to implement recent changes made to the Truth in Savings Act
by the Housing and Community Development Act of
1992. The law extends the mandatory date for compliance with the requirements of the Truth in Savings Act
by three months, so that institutions must comply by
June 21, 1993, rather than March 21, 1993. The law
also modifies the advertising rules relating to signs on
the premises of an institution, and makes a technical
change to the provision dealing with notices required
to be given to existing account holders. In addition,
the Board is making two minor changes to the regulation and providing guidance on several issues that
have been raised by institutions since publication of
the final regulation in September 1992.
Effective March 21, 1993, 12 C.F.R. Part 230 is
amended as follows:
Part 230—Truth in Savings

1. Demand feature. If a variable-rate loan subject to
section 226.19(b) requirements contains a demand
feature as discussed in the commentary to section
226.18(i), this fact must be disclosed. * * *

Supplement

11. Models H-8 through H-9. * * * See the commentary to section 226.2(a)(25) regarding the specificity of
the security interest disclosure for model form H-9.

1. The authority citation for part 230 continues to read
as follows:
Authority: 12 U.S.C. 4301.
2. Section 230.2 is amended by revising the second
sentence in paragraph (a) to read as follows:
Section 230.2—Definitions

(a) * * * The term does not include an existing account
held by an unincorporated nonbusiness association of
natural persons prior to June 21, 1993, unless the
association notifies the institution that it meets the
definition of "consumer."

3. Section 230.4 is amended by revising the first and
second sentences in paragraph (c)(1) to read as follows:
Section 230.4—Account disclosures.

Legal Developments

(c) * * * Depository institutions shall provide a notice
to consumers who receive periodic statements and
who hold existing accounts of the type offered by the
institution on June 21, 1993. The notice shall be
included on or with the first periodic statement sent on
or after June 21, 1993 (or on or with the first periodic
statement for a statement cycle beginning on or after
that date). * * *

4. Section 230.5 is amended by revising paragraph
(a)(2)(ii) to read as follows:

499

6. In Appendix A to Part 230, Part II is amended by
revising the first paragraph following the introductory
text, by adding a heading for a new section A after the
first paragraph following the introductory text, and by
adding a new section B after Example (3) to read as
follows:

APPENDIX A To PART
PERCENTAGE
YIELD

230—ANNUAL
CALCULATION

Section 230.5—Subsequent disclosures.
(2) * * *
(ii) Check printing fees. Changes in fees assessed
for check printing.

5. Section 230.8 is amended by revising paragraph (e)
to read as follows:
Section 230.8—Advertising.

(e) Exemption for certain advertisements.
(1) Certain media. If an advertisement is made
through one of the following media, it need not
contain the information in paragraphs (c)(1), (c)(2),
(c)(4), (c)(5), (c)(6)(ii), (d)(4), and (d)(5) of this
section:
(i) Broadcast or electronic media, such as television or radio;
(ii) Outdoor media, such as billboards; or
(iii) Telephone response machines.
(2) Indoor Signs.
(i) Signs inside the premises of a depository institution (or the premises of a deposit broker) are not
subject to paragraphs (b), (c), (d) or (e)(1) of this
section unless they face outside the premises and
can reasonably be viewed by a consumer only
from outside the premises.
(ii) If a sign exempt by this paragraph states a rate
of return, it shall:
(A) State the rate as an "annual percentage
yield," using that term or the term "APY." The
sign shall not state any other rate, except that
the interest rate may be stated in conjunction
with the annual percentage yield to which it
relates.
(B) Contain a statement advising consumers to
contact an employee for further information
about applicable fees and terms.



Part II. Annual percentage yield earned for
periodic statements

The annual percentage yield earned shall be calculated
by using the following formulas ("APY Earned" is
used for convenience in the formulas):
A. General formula * * *
B. Special formula for use where periodic statement is
sent more often than the period for which interest is
compounded
Institutions that use the daily balance method to
accrue interest and that issue periodic statements
more often than the period for which interest is compounded shall use the following special formula:
APY Earned =100 {[1 +
(Interest earned/Balance) (Compounding)](365/Compoundin8) - 1}
Days in period
The following definition applies for use in this formula (all other terms are defined under Part II):
"Compounding" is the number of days in each
compounding period.
Assume an institution calculates interest for the
statement period using the daily balance method, pays
a 5.00% interest rate, compounded annually, and
provides periodic statements for each monthly cycle.
The account has a daily balance of $1,000 for a 30-day
statement period. The interest earned is $4.11 for the
period, and the annual percentage yield earned (using
the special formula above) is 5.00%:
APY Earned = 100 {[1 + (4.11/1,000)(365)](365/365) - 1}
30
APY Earned = 5.00%

500

Federal Reserve Bulletin • May 1993

FINAL

RULE—AMENDMENT

TO REGULATION

Q

The Board of Governors is amending 12 C.F.R. Part
217, its Regulation Q (Prohibition Against the Payment
of Interest on Demand), in conjunction with its amendments to Regulation DD, which implements the Truth
in Savings Act. Deletion of the advertising rules in
Regulation Q is delayed by three months until June 21,
1993. Regulation Q retains provisions prohibiting the
payment of interest on demand deposits.
Effective June 21, 1993, Regulation Q sets forth
disclosure and advertising rules for interest on deposits by member banks and certain other institutions.
Institutions that begin compliance with Regulation DD
prior to the mandatory compliance date may comply
solely with the advertising provisions of Regulation
DD, and not the advertising and disclosure provisions
in Regulation Q.

ORDERS
COMPANY

ISSUED

UNDER

BANK

HOLDING

Notice of the applications, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 58,022 (1992)). The
time for filing comments has expired, and the Board
has considered the applications and all comments
received in light of the factors set forth in section 3(c)
of the BHC Act.
Comerica, with approximately $27.8 billion in consolidated assets, controls seven banks and one thrift
located in Michigan, California, Florida, Illinois, Ohio,
Delaware, and Texas. 2 Comerica is the ninth largest
commercial banking organization in Texas, controlling
deposits of approximately $2.0 billion, representing
1.4 percent of total deposits in commercial banks in
the state. Nasher is the 18th largest commercial banking organization in Texas, controlling deposits of approximately $633 million, representing less than 1 percent of total deposits in commercial banks in the state.
Upon consummation of the proposed transaction, Comerica would remain the ninth largest commercial
banking organization in Texas, controlling deposits of
$2.6 billion, representing 1.8 percent of total deposits
in commercial banks in the state. 3

ACT

Orders Issued Under Section 3 of the Bank
Holding Company Act
Comerica Incorporated
Detroit, Michigan
Order Approving Acquisition of a Bank Holding
Company
Comerica Incorporated ("Comerica"), a bank holding
company within the meaning of the Bank Holding
Company Act ("BHC Act"), and Comerica Texas
Incorporated ("Comerica-Texas"), both of Detroit,
Michigan, have applied under section 3 of the BHC
Act (12 U.S.C. § 1842) to acquire Nasher Financial
Corporation ("Nasher"), and its wholly owned subsidiary NorthPark National Corporation ("NNC"),
both of Dallas, Texas, and thereby indirectly acquire
NorthPark National Bank of Dallas, Dallas, Texas
("NorthPark Bank"). In connection with this application, Comerica-Texas also has applied to become a
bank holding company by merging with Nasher and
NNC. Upon consummation of the proposal, Comerica
proposes to merge NorthPark Bank into Comerica's
subsidiary bank, Comerica Bank-Texas, Dallas, Texas
("Comerica Bank"). 1

1. This merger is subject to review under the Bank Merger Act by
the Federal Deposit Insurance Corporation ("FDIC"), Comerica
Bank's primary federal regulator.




Competitive, Financial, Managerial and Supervisory
Considerations
Comerica and Nasher compete directly in the Dallas
banking market. 4 Upon consummation of this proposal, Comerica would become the fourth largest
commercial bank or thrift organization ("depository
institution") in the Dallas banking market, controlling
deposits of $2.3 billion, representing approximately
7.4 percent of total deposits in the depository institutions in the market ("market deposits"). 5 After con-

2. Asset and deposit data are as of June 30, 1992 and includes
Comerica's acquisitions approved by the Board as of January 31,
1993. These data do not include Comerica's credit card bank in Ohio
which has received approval to operate as a full-service bank.
3. Deposit and market data are as of December 31, 1991.
4. The Dallas banking market is approximated by Dallas County;
the southwest quadrant of Denton County (including Denton and
Lewisville); the southwest quadrant of Collin County (including
McKinney and Piano); the northern half of Rockwall County; the
communities of Forney and Terrel in Kaufman County; Midlothian,
Waxahachie and Ferris in Ellis County; and Grapevine and Arlington
in Tarrant County, Texas.
5. Market deposit data are as of June 30,1991. Market share data are
based on calculations in which the deposits of thrift institutions are
included at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors of commercial banks. See Midwest Financial Group, 75
Federal
Federal

Reserve
Reserve

Bulletin 386 (1989); National
Bulletin 743 (1984).

City Corporation,

70

Currently, Comerica Bank is the fifth largest depository institution
in the Dallas banking market, controlling $1.7 billion in deposits,
representing 5.4 percent of market deposits. NorthPark Bank is the
10th largest depository institution in the market, controlling $627
million in deposits, representing 2.0 percent of market deposits.

Legal Developments

sidering Comerica's resulting market share, the number of competitors remaining in the market, the
relatively small increase in concentration as measured
by the Herfindahl-Hirschman Index ("HHI"), 6 and all
other facts of record, the Board concludes that consummation of the proposal would not result in a
significantly adverse effect on competition in the Dallas banking market or any other relevant banking
market.
The Board also concludes that the financial and
managerial resources and future prospects of Comerica and Nasher, and their respective subsidiaries, and
the other supervisory factors that the Board must
consider under section 3 of the BHC Act, are consistent with approval.

501

estant also alleges that the banks illegally discriminate
against ethnic minorities in making lending decisions
by citing data for the banks that has been filed under
the Home Mortgage Disclosure Act ("HMDA"). 9 The
Board has carefully reviewed the CRA performance
records of Comerica, Nasher, and their subsidiary
banks, as well as all comments received, and all the
other relevant facts of record, in light of the Statement
of the Federal Financial Supervisory Agencies regarding the Community Reinvestment Act ("Agency CRA
statement"). 10 The Board also notes that similar allegations by the Protestant relating to Comerica's record
of performance under the CRA in Texas were extensively reviewed in connection with the Board's recent
approval of Comerica's application to acquire Hibernia National Bank in Texas, Dallas, Texas. 11

Convenience and Needs Considerations
Record of Performance
In considering the application under section 3 of the
BHC Act, the Board must consider the convenience
and needs of the communities to be served and take
into account the records of the relevant depository
institutions under the Community Reinvestment Act
(12 U.S.C. § 2901 et. seq.) ("CRA"). The CRA requires the federal financial supervisory agencies to
encourage financial institutions to help meet the credit
needs of the local communities in which they operate
consistent with the safe and sound operation of such
institutions. To accomplish this end, the CRA requires
the appropriate federal supervisory authority to "assess the institution's record of meeting the credit
needs of its entire community, including low- and
moderate-income neighborhoods, consistent with the
safe and sound operations of such institution," and to
take that record into account in its evaluation of bank
holding company applications.7
In connection with this application, the Board has
received comments from an organization ("Protestant") alleging that Comerica Bank and NorthPark
Bank have not reinvested into the communities that
they serve, and have failed to meet the credit and
needs of low- and moderate-income residents. 8 Prot-

6. The HHI in the Dallas banking market would increase 22 points
to 1402. Under the revised Department of Justice Merger Guidelines
(49 Federal Register 26,823 (June 29, 1984)), a market in which the
post-merger HHI is between 1000 and 1800 is considered moderately
concentrated. The Justice Department has informed the Board that a
bank merger or acquisition generally will not be challenged (in the
absence of other factors indicating anti-competitive effects) unless the
post-merger HHI is at least 1800 and the merger increases the HHI by
200 points. The Justice Department has stated that the higher than
normal HHI thresholds for screening bank mergers for anti-competitive effects implicitly recognize the competitive effect of limitedpurpose lenders and other non-depository financial entities.
7. 12 U.S.C. § 2903.
8. The Board received another protest raising similar allegations
regarding NorthPark Bank's record under the CRA. After meeting




Under the CRA

A. CRA Performance Examinations
The Agency CRA Statement provides that a CRA
examination is an important, and often controlling,
factor in the consideration of an institution's CRA
record and that these reports will be given great weight
in the applications process. 12 Comerica Bank received
an overall "outstanding" rating in the examination of
its CRA performance conducted by the FDIC as of
October 18, 1991. In addition, Comerica's other six
subsidiary banks have received either "satisfactory"
or "outstanding" ratings from their primary supervisors in the most recent examinations of their CRA
performance. 13 NorthPark Bank received a "satisfac-

with staff from Comerica Bank and NorthPark Bank, this protest was
withdrawn.
9. Protestant also raised concerns about the minority employment
and outreach practices of Comerica Bank. Comerica disputes these
allegations, and maintains that it actively promotes employment
opportunities for minorities. Although the Board fully supports affirmative programs designed to promote equal opportunity in every
aspect of a bank's personnel policies and practices in the employment,
development, advancement, and treatment of employees, the Board
believes that the alleged deficiencies in Comerica Bank's general
personnel and employment practices are beyond the scope of the
factors that the Board may properly consider under the CRA or the
convenience and needs factor of the BHC Act.
10. 54 Federal Register 13,742 (1989).
11. Comerica

Incorporated,

79 Federal

Reserve

Bulletin

31 (1993)

(the "Hibernia Order").
12. Id.
13. Comerica's thrift subsidiary, Comerica Bank-Florida, Federal
Savings Bank, Clearwater, Florida ("Comerica-Florida"), representing less than 1 percent of Comerica's consolidated assets, received a
"needs to improve" rating from the Office of Thrift Supervision
("OTS") at its most recent CRA performance examination as of
February 1992. As discussed in the Hibernia Order, Comerica immediately initiated a number of steps to address areas for improvement
that were identified in the examination. In addition, Comerica will
open an office of its mortgage company subsidiary in Florida, and will
offer special mortgage and home improvement products to low- and

502

Federal Reserve Bulletin • May 1993

tory" rating for CRA performance in its most recent
examination from the Office of the Comptroller of the
Currency ("OCC") in December 1991.
B. Corporate Policies
As determined in the Hibernia Order, Comerica Bank
has in place the types of policies outlined in the
Agency CRA Statement that contribute to an effective
CRA program, and these policies and programs will be
implemented following NorthPark Bank's merger with
Comerica Bank. For example, the board of directors
of Comerica has adopted a written CRA plan for
1991-1993, which includes goals, objectives, and a
methodology for self-assessment. The Comerica board
also has established a CRA Committee, and a Public
Responsibility Committee, to compile and issue status
reports, review technical CRA compliance, conduct
annual reviews of the distribution of credit products,
submit annual CRA statements to the board for review, and provide the board with a summary of CRA
activities. Comerica Bank also conducts regular CRA
self-assessments, and the bank's board of directors
actively supports CRA training for all bank personnel
in the form of workshops, seminars, in-house training,
and a periodic CRA newsletter.
C. Ascertainment and Marketing
As discussed in the Hibernia Order, Comerica Bank
ascertains community credit needs through a multilayered approach to community outreach. For example, the bank's management has ongoing, substantive
contacts with numerous civic, religious, neighborhood, minority, and small business organizations. Comerica Bank also has an extensive officer call program
at each branch. Approximately 25 percent of all calls
are made by officers from the four branches located in
low- and moderate-income areas of the bank's delineated market. In addition, the bank has developed,
and will soon distribute, a credit needs survey.
Comerica Bank markets its products and services
through a variety of advertising activities, including
neighborhood and regional newspapers, local radio
stations, billboards, statement stuffers, and lobby
signs. All of the bank's marketing and advertising
programs are reviewed, approved, and monitored by
the board and senior management of the bank. For
example, home improvement loans, budget checking

moderate-income customers. These loan products feature more flexible underwriting standards than existing credit products offered by
Comerica-Florida. The OTS has reviewed this plan and informed the
Board that Comerica-Florida is making satisfactory progress in improving its CRA performance record.




accounts, and small business loans are regularly advertised in minority publications and on billboards
located in low- and moderate-income areas. In addition, the bank plans to offer both English and Spanish
language versions of support materials such as brochures and rate sheets. Comerica Bank also has established a Speakers Bureau as a further means to provide
credit and banking information to individuals and
community groups. Comerica Bank also proposes that
its Community Development Lending Group will meet
with various neighborhood groups to promote economic and community development.
In addition, Comerica Bank has contracted with a
minority-owned firm to advise the bank on marketing
its services and to implement a comprehensive marketing plan for low- and moderate-income areas. This
marketing plan will focus on mortgage lending, lending
to small businesses, and improving community awareness of the bank's services. A substantial portion of
Comerica Bank's marketing budget for 1993 will be
dedicated to low- and moderate-income areas in southern Dallas, and represents a significant increase over
the amount spent in these areas in 1992.
Comerica Bank also has developed a Community
Outreach Plan to improve relationships with community and government organizations and has already
held meetings with a number of community organizations. Comerica Bank also plans to create a CRA
status report that will report on the bank's CRA efforts
and shared with community groups.
D. Lending and Other Activities
In the Hibernia Order, the Board found that Comerica
Bank supports a number of governmental programs
designed to help meet the housing-related credit needs
of low- and moderate-income borrowers, including the
Dallas Affordable Housing Partnership, ("DAHP")
which provides low-interest mortgages to low-income
first-time homebuyers.
In addition, Comerica Bank has provided over
$1 million to Common Ground Community Economic
Development Corporation to provide financing for
single-family residences. Comerica Bank has supported this organization since its inception over ten
years ago. Comerica Bank also supports the Southern
Dallas Development Corporation both financially and
through service on its board of directors, and has
recently committed to assist the Corporation in the
funding of development loans over a four-year period.
Comerica Bank continues to participate in the U.S.
Department of Housing and Urban Development's
203K Program, through which it has funded loans for
the rehabilitation of properties. In South Dallas and
West Dallas, Comerica Bank has provided financing

Legal Developments

for more than 60 houses owned by a neighborhoodbased, non-profit organization, and rented to lowincome residents. Since the Hibernia Order, the bank
has received approval to become a lender under the
Title I program for home improvement loans, and
product development and training for this program are
underway. The bank's new Affordable Housing Mortgage Program, which began in August of 1992 and
operates in the Wynnewood branch of South Dallas,
has provided a significant number of mortgages since
its implementation, and Comerica estimates the
82 percent of the mortgages originated under this
program were provided to minorities. In addition, the
bank has participated in various other programs directed at economic revitalization of various low- and
moderate-income areas of the Dallas metropolitan
area. Comerica Bank also has begun to implement an
Auto Improvement Loan Program that is being tested
in certain low-income branches to provide loans for
auto repairs.
With respect to small business lending, Comerica
Bank participates in a number of Small Business Administration loan programs. Comerica Bank also has
sponsored numerous business conferences and seminars for individuals interested in starting small businesses. The bank uses these occasions to discuss credit
requirements and standards for small- to medium-sized
companies in need of bank financing.
To strengthen its CRA performance, especially in
low- and moderate-income areas, Comerica Bank has
developed a marketing plan that will include community participation and an officer calling program. In
this regard, the bank has made a number of calls in
low- and moderate-income areas through its General
Banking Calling Program and Small Business Lenders
Program. Comerica Bank has also established focus
groups to evaluate small business lending needs and
consumer loan needs within the bank's delineated
service community.
E. HMDA Data and Lending Practices

503

ethnic group in certain areas of Dallas. The Protestant
has alleged illegal discriminatory lending practices on
the basis of these data.
Because all banks are obligated to ensure that their
lending practices are based on criteria that ensure not
only safe and sound lending, but also ensure equal
access to credit by creditworthy applicants regardless
of race, the Board is concerned when the record of an
institution indicates disparities in lending to minority
applicants. The Board recognizes, however, that
HMDA data alone provide only a limited measure of
any given institution's lending in the communities that
the institution serves. The Board also recognizes that
HMDA data have limitations that make the data an
inadequate basis, absent other information, for conclusively determining whether an institution has engaged in illegal discrimination on the basis of race or
ethnicity in making lending decisions.
The most recent examinations for CRA compliance
and performance conducted by bank supervisory
agencies found no evidence of illegal discrimination or
other illegal credit practices at Comerica Bank or
NorthPark Bank. 15 In the case of Comerica Bank, the
examination specifically considered the results of the
1990 HMDA data and the loan policies and procedures
which governed the loan applications that were the
source for the 1991 data.
Comerica Bank also has taken steps designed to
improve its lending to minority and low- and moderateincome neighborhoods in Dallas. For example, Comerica Bank's management determined that the bank
should review its minority mortgage lending practices,
and established a task force to review the bank's
mortgage products and recommend additional credit
products, if needed, to facilitate lending to low- and
moderate-income customers. To help improve its mortgage lending program, Comerica Bank has also adopted
a mortgage program to promote affordable housing in
low- and moderate-income areas in Dallas. Since September, Comerica Bank has closed 16 loans under the
program and a number of other loans are in process.

In the Hibernia Order, the Board reviewed the 1990
and 1991 HMDA data reported by Comerica Bank and
has reviewed the data for NorthPark Bank as part of
its review of this proposal. 14 The HMDA data show
disparities in the rates for housing-related loan applications, approvals, and denials that vary by racial or

The Board has carefully considered the entire record,
including the comment filed in this case, in reviewing
the convenience and needs factor under the BHC Act.

14. Banks are required under the HMDA to report certain information regarding loan applications, approvals, and denials to the various
banking agencies and the public. This information includes data on the
race, gender, and income of individual loan applicants, as well as the
location of the property securing the potential loan, and a description
of the application.

15. Both NorthPark Bank and Comerica Bank were cited for
technical noncompliance with the Equal Credit Opportunity Act
("ECOA") and the Fair Housing Home Loan Data System regulations. The primary regulators for each bank found that NorthPark
Bank and Comerica Bank have adequate policies and procedures in
place to ensure compliance and there was no evidence of prohibited
discriminatory or other illegal credit practices.




F. Conclusion Regarding Convenience and
Needs Factors

504

Federal Reserve Bulletin • May 1993

Based on a review of the entire record of performance,
including information provided by the Protestant and
by the banks' primary regulators, the Board believes
that the efforts of Comerica Bank and NorthPark Bank
to help meet the credit needs of all segments of the
communities served by the banks, including low- and
moderate-income neighborhoods, are consistent with
approval.
The Board recognizes that the record compiled in
this application points to areas for improvement, especially in housing-related lending to minority and
low- and moderate-income borrowers. Comerica has
already initiated steps, since the Board's earlier decision, to strengthen the CRA performance of the insured institutions. Comerica's recent actions as well as
the outstanding CRA performance rating received by
Comerica Bank reflects Comerica's willingness to address promptly areas where the improvements can be
made to help meet community credit needs. The Board
believes that this record, and the initiatives proposed
by Comerica, will help the resulting organization improve its CRA performance and address weaknesses
identified by Protestant.
In this light, and on the basis of all of the facts of
record, including the Board's determinations in the
Hibernia Order, the Board concludes that the convenience and needs considerations, including the CRA
performance records of Comerica Bank and NorthPark Bank, are consistent with approval of this application. The Board expects Comerica Bank to implement fully the CRA initiatives discussed in this Order,
and contained in this application. Comerica Bank's
progress in implementing these initiatives will be monitored by the Federal Reserve Bank of Chicago, and in
future applications by Comerica to expand its deposittaking facilities. 16
Based on the foregoing, including the conditions and
commitments described in this Order and those made
in this application, and all of the facts of record, the
Board has determined that this application should be,

16. Protestant requested that the Board hold a public meeting or
hearing on this application. The Board is not required under section
3(b) of the BHC Act to hold a hearing on an application unless the
appropriate banking authority for the bank to be acquired makes a
timely written recommendation of denial of the application. In this
case, the OCC has not recommended denial of the proposal.
Generally, under the Board's rules, the Board may, in its discretion,
hold a public hearing or meeting on an application to clarify factual
issues related to the application and to provide an opportunity for
testimony, if appropriate. 12 U.S.C. §§ 262.3(e) and 262.25(d). The
Board has carefully considered this request. In the Board's view,
interested parties have had a sufficient opportunity to present written
submissions, and have submitted substantial written comments that
have been considered by the Board. On the basis of all the facts of
record, the Board has determined that a public meeting or hearing is
not necessary to clarify the factual record in these applications, or
otherwise warranted in this case. Accordingly, the request for a public
meeting or hearing on this application is hereby denied.




and hereby is, approved. The Board's approval is
specifically conditioned upon compliance by Comerica
with all the commitments made in connection with this
application. The commitments and conditions relied
on by the Board in reaching this decision are both
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. This
approval is also conditioned upon Comerica receiving
all necessary Federal and state approvals.
This transaction should not be consummated before
the thirtieth calendar day following 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
March 1, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, La Ware, Lindsey, and Phillips.
JENNIFER J . JOHNSON

Associate

Secretary of the Board

E v a Bancshares, Inc.
Eva, Alabama
Order Approving Formation of a Bank Holding
Company
Eva Bancshares, Inc., Eva, Alabama ("Applicant"),
has applied, under section 3(a)(1) of the Bank Holding
Company Act ( " B H C Act") (12 U.S.C. § 1842(a)(1)),
to become a bank holding company by acquiring all the
voting shares of First Bank of Eva, Eva, Alabama
("Bank").
Notice of the application, affording interested persons an opportunity to submit comments, has been
duly published (57 Federal Register 54,792 (1992)).
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(c) of the BHC Act.
Applicant is a non-operating company formed for
the purpose of acquiring Bank in order to restructure
Bank's existing individual ownership into corporate
form. Bank is the 122nd largest banking organization
in Alabama, controlling approximately $13 million in
deposits, representing less than 1 percent of total
deposits in commercial banks in the state. 1 Based on

1. State banking data are as of December 31, 1991.

Legal Developments

all the facts of record, the Board has concluded that
consummation of this proposal would not result in a
significantly adverse effect on competition in any
relevant banking market.
In connection with this proposal, the Board has
received comments from a shareholder of Bank
("Protestant") objecting to the transaction on several
grounds, including:
(1) That the proposal would violate relevant Alabama corporate statutes and federal banking regulations; 2
(2) That Applicant lacks the financial resources
necessary to consummate the transaction, and will
not be able to repay indebtedness incurred in connection with the proposal; and
(3) That the competence and integrity of Applicant's
and Bank's management are inconsistent with approval.
Protestant also maintains that the transaction provides
inadequate benefits to Bank and its shareholders, and
is less advantageous than alternative means of raising
capital for Bank.
Alabama law provides that corporate transactions
involving banks are governed by the general business
corporation law unless otherwise provided in the
banking statute. 3 The business corporation law provides that a share exchange must be approved by
shareholders as though it were a merger.4 Although
corporate mergers in Alabama generally require approval by a two-thirds vote of the shareholders, the
banking statute provides that bank mergers require
only a majority shareholder vote for approval. 5 On the
basis of these provisions, the Alabama Banking Department has concluded that an Alabama-chartered
bank and another corporation may engage in a share
exchange upon approval by a majority vote of the
Bank's stock. 6

2. Specifically, Protestant alleges that:
(i) Alabama law requires a two-thirds vote of the shareholders to
approve the transaction, while the proposal calls for a majority
vote;
(ii) The proposed purchase of new common stock by directors
abridges the preemptive rights granted to Bank's shareholders
under Alabama law; and
(iii) The transaction constitutes an evasion of federal regulatory
restrictions against a bank's purchase of its own stock.
3. Ala. Code § 5-1A-6. See also Ala. Code § 10-2A-336.
4. Ala. Code § 10-2A-171.
5. Ala. Code § § 10-2A-142 and 5-7A-2.
6. The Board has received an opinion to this effect from the Deputy
Superintendent of the Alabama Banking Department. The Deputy
Superintendent is authorized by statute to issue such interpretations.
See Ala. Code §§ 5-2A-8 and 5-2A-15(b) (providing that the superintendent, and in his absence the deputy superintendent, shall issue
written interpretations of banking laws, and that banks and their
officers and directors relying on such an interpretation shall be fully
protected even if a court later rules that the interpretation is invalid).




505

Alabama law also expressly provides that shareholders do not have preemptive rights if a corporation's charter denies such rights, 7 and Applicant's
articles of incorporation specifically deny preemptive
rights to its shareholders. Because Bank is not issuing
any stock in connection with this proposal, any preemptive rights held by its shareholders would not be
activated by the proposed transactions. Protestant's
argument based upon federal banking regulations also
is inapplicable to this proposal because there is no
proposed redemption or purchase by Bank of its own
stock.
The Board notes that Bank currently is in satisfactory financial condition, and Applicant's debt service
projections and pro forma debt-to-equity ratio are
reasonable and consistent with the Board's guidelines.
In addition, Applicant's financing sources appear to be
adequate to meet Applicant's cash needs in connection
with this proposal. In light of the foregoing considerations and all the other facts of record, the Board has
concluded that the financial resources and future prospects of Applicant and Bank are consistent with approval of this proposal. 8
The Board has carefully reviewed Protestant's allegations with respect to management, including allegations pertaining to improper insider loan transactions
involving directors, in light of recent examinations
conducted by Bank's primary regulators, the Alabama
Banking Department and the Federal Deposit Insurance Corporation. On the basis of this review and all
the other facts of record, the Board has concluded that
Protestant's comments regarding management do not
raise issues that warrant denial of the application, 9 and

7. Ala. Code § 10-2A-44.
8. The Board also has carefully considered Protestant's comments
with respect to the benefits to be conferred upon Bank and its
shareholders as a result of this proposal, and possible alternative
methods of raising capital. Protestant has not suggested that the price
or other terms of Applicant's proposed stock offering are inadequate
or otherwise unfair to Applicant or Bank. Rather, Protestant believes
that Bank should issue additional common stock to its current
shareholders. Applicant has stated that its proposal will raise capital
on terms highly favorable to Applicant, Bank, and their shareholders,
and that the proposed holding company structure will facilitate more
flexible capital-raising capabilities, the creation of a limited market for
shareholders wishing to dispose of their stock, and the organization's
possible entrance into permissible nonbanking activities. In light of
these circumstances and other facts of record, the Board has concluded that Protestant's comments in this regard do not reflect
adversely on the factors the Board must consider under section 3(c) of
t h e B H C A c t . See Western

Bancshares,

Inc. v. Board

of

Governors,

480 F.2d 749 (10th Cir. 1973).
9. Some of Protestant's allegations, including allegations with
respect to improper insider loan transactions and stock repurchases
by Bank, are not supported by the record of this application. Protestant also objects to increased voting control by the board of directors
and the exclusion of a dissenting Bank director from membership on
Applicant's board. These actions do not raise a legal bar to this
transaction, and the proposed management and directors of Applicant
and Bank appear to be satisfactory. Other matters raised by Protes-

506

Federal Reserve Bulletin • May 1993

that managerial considerations are consistent with
approval of this proposal. In addition, the Board has
concluded that convenience and needs considerations,
as well as all other supervisory factors the Board must
consider under section 3(c) of the BHC Act, also are
consistent with approval.
Based on the foregoing and other facts of record,
and subject to and in reliance upon representations
and commitments made by Applicant, the Board has
determined that the application should be, and hereby
is, approved. The Board's approval is specifically
conditioned upon compliance by Applicant with all the
commitments made in connection with this application
and with the conditions referenced in this Order. For
purposes of this action, the commitments and conditions relied on in reaching this decision shall be
deemed to be conditions imposed in writing by the
Board and, as such, may be enforced in proceedings
under applicable law.
The proposal shall not be consummated before the
thirtieth calendar day following the effective date of
this Order, or later than three months after the effective date of this Order, unless such period is extended
for good cause by the Board or by the Federal Reserve
Bank of Atlanta, acting pursuant to delegated authority.
By order of the Board of Governors, effective
March 1, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.
J E N N I F E R J . JOHNSON

Associate Secretary of the Board
First Commercial Corporation
Little Rock, Arkansas
Order Approving Acquisition of a Bank Holding
Company
First Commercial Corporation, Little Rock, Arkansas
( " F C C " ) , a bank holding company within the meaning
of the Bank Holding Company Act ( " B H C Act"), has
applied pursuant to section 3(a)(3) of the BHC Act
(12 U.S.C. § 1842(a)(3)) to acquire all of the voting
shares of First City, Inc. ("First City"), and thereby
indirectly acquire First City National Bank ("First
Bank"), both of Memphis, Tennessee.

tant, including allegations with respect to shareholder communications and asset quality, do not reflect so adversely on the factors the
Board is required to consider under the BHC Act as to warrant denial
of this proposal. The remaining managerial issue raised by Protestant
concerns a director whose service on the boards of Bank and
Applicant has been suspended in a manner satisfactory to the Board.




Notice of the application, affording interested parties an opportunity to submit comments, has been
published (57 Federal Register 43,458 (1992)). 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(c) of
the BHC Act.
FCC, with approximately $3 billion in consolidated
assets, controls twelve banking subsidiaries in Arkansas, Oklahoma, Tennessee, and Texas. 1 In Tennessee,
FCC is the 56th largest commercial banking organization, controlling deposits of $88.9 million, representing
less than 1 percent of the total deposits in commercial
banking organizations in the state. 2 First City is the
136th largest commercial banking organization in Tennessee, controlling deposits of $41.1 million, representing less than 1 percent of the total deposits in
commercial banking organizations in the state. Upon
consummation of the proposed transaction, FCC
would become the 38th largest commercial banking
organization in the state, controlling $130 million in
deposits, representing less than 1 percent of total
deposits in commercial banking organizations in the
state.
Douglas

Amendment

Section 3(d) of the BHC Act, the Douglas Amendment, prohibits the Board from approving an application by a bank holding company to acquire any bank
located outside of the bank holding company's home
state, unless such acquisition is "specifically authorized by the statute laws of the State in which such
bank is located, by language to that effect and not
merely by implication." 3 FCC, whose home state is
Arkansas, 4 seeks to acquire a bank in Tennessee.
Tennessee has enacted a reciprocal interstate banking
statute that permits an out-of-state bank holding company to acquire a bank in Tennessee if certain conditions are satisfied. 5 Arkansas has a comparable inter-

1. The banking subsidiaries of FCC include Security National Bank
and Trust Company, Norman, Oklahoma, of which FCC owns 50
percent and another bank holding company owns 50 percent.
2. State and market deposit data are as of June 30, 1991.
3. 12 U.S.C. § 1842(d).
4. A bank holding company's home state is that state in which the
operations of the bank holding company's subsidiaries were principally conducted on July 1, 1966, or the date on which the company
became a bank holding company, whichever is later.
5. Under Tennessee's interstate banking statute, an out-of-state
bank holding company may acquire a Tennessee bank or bank holding
company if the laws of the state in which the acquiring bank holding
company is located allow Tennessee bank holding companies to
acquire banks and bank holding companies in that state, subject to any
conditions, restrictions, requirements, or other limitations that would
apply to such acquisitions but would not apply to an in-state acquisition in that state. Tenn. Code Ann. §§ 45-12-102, -103. The Tennessee
statute also conditions entry on the requirement that the out-of-state

Legal Developments

state banking statute. 6 After careful review of the
relevant statutes, and in light of the facts of record, the
Board conludes that FCC's acquisition of First City
complies with the Tennessee interstate banking statute, and that Board approval of this proposal is not
prohibited by the Douglas Amendment. Approval of
this proposal is conditioned upon FCC receiving all
required state regulatory approvals.
Competitive, Financial, Managerial, and
Supervisory Considerations
FCC and First City compete directly in the Memphis,
Tennessee, banking market. 7 Based on all of the facts
of record in this case, the Board concludes that
consummation of this proposal would not have a
significantly adverse effect on competition or the concentration of banking resources in any relevant banking market. 8 Considerations relating to the financial
and managerial resources and future prospects of
FCC, its subsidiary banks, and First Bank, and other
supervisory factors that the Board is required to
consider under section 3 of the BHC Act, also are
consistent with approval of this application.

507

twelve subsidiary banks, including its lead bank, representing approximately 96.5 percent of FCC's assets,
have received ratings of "outstanding" or "satisfactory" from their primary regulators in their most recent
examinations for CRA performance. 10 However, one
of FCC's subsidiary banks, First Commercial Bank,
N.A., Memphis, Tennessee ("FCBM"), which controls approximately 3.5 percent of FCC's assets, received two consecutive less than satisfactory examination ratings for CRA performance in 1991 and 1992
from its primary regulator, the Office of the Comptroller of the Currency ("OCC"). 11
The Board has carefully reviewed these examinations and the CRA performance of FCC and its subsidiary banks, as well as First Bank, in light of the
CRA, the Board's regulations, and the jointly issued
Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act
("Agency CRA Statement"). 12 The Board previously
has stated that applicants should address their CRA
responsibilities and have the necessary policies in
place and working well before they file an application. 13 In this regard, actions taken by FCC and FCBM
to improve the CRA performance of FCBM have been
carefully considered in this application. 14

Convenience and Needs Considerations
In reviewing this application, the Board also is required to consider the convenience and needs of the
community to be served and take into account the
records of performance of FCC and its subsidiary
banks, as well as First City, under the Community
Reinvestment Act (12 U.S.C. § 2901 et. seq.)
("CRA"). 9 The Board notes that eleven of FCC's
bank holding company not hold more than I6V2 percent of the total
deposits held by all federally-insured financial institutions located in
Tennessee. Tenn. Code Ann. § 45-2-1405. Under this proposal, FCC
would hold less than 1 percent of the federally-insured deposits in
Tennessee.
6. Ark. Code Ann. §§ 23-32-1802, -1804.
7. The Memphis, Tennessee, banking market is approximated by
Shelby and Tipton Counties in Tennessee, De Soto and Tate Counties
in Mississippi, and Crittenden County in Arkansas.
8. In the Memphis, Tennessee, banking market, FCC would become
the tenth largest commercial banking organization, and the Herfindahl-Hirschman Index ( " H H I " ) would increase by 1 point to 1005.
Under the revised Department of Justice Merger Guidelines, 49
Federal Register 26,823 (June 29, 1984), a market in which the
post-merger HHI is between 1000 and 1800 is considered moderately
concentrated. The Justice Department 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 HHI by
more than 200 points.
9. The CRA requires the appropriate federal supervisory authority
to "assess the institution's record of meeting the credit needs of its
entire community, including low- and moderate-income neighborhoods, consistent with the safe and sound operation of such institution," and to take this record into account in its evaluation of bank
holding company applications. 12 U.S.C. § 2903.




10. First Commercial Bank, N.A., Little Rock, Arkansas, received
a "satisfactory" performance rating from the OCC on July 6, 1992;
First National Bank of Russellville, Russellville, Arkansas, received
an "outstanding" rating from the OCC on July 6, 1992; Morrilton
Security Bank, N.A., Morrilton, Arkansas, received a "satisfactory"
rating from the OCC on July 6, 1992; First National Bank of Conway,
Conway, Arkansas, received a "satisfactory" rating from the OCC on
May 4, 1992; Benton State Bank, Benton, Arkansas, received an
"outstanding" rating from the FDIC on December 30, 1990; Arkansas
Bank and Trust Company, Hot Springs, Arkansas, received a "satisfactory" rating from the FDIC on January 13, 1987; Security Bank,
Harrison, Arkansas, received an "outstanding" rating from the FDIC
on June 5, 1991; and Farmers and Merchants Bank and Trust
Company, Rogers, Arkansas, received a "satisfactory" rating from
the FDIC on November 23, 1990; Citizens First National Bank of
Tyler, Tyler, Texas, received a "satisfactory" rating from the OCC on
February 7, 1991; Lufkin National Bank, Lufkin, Texas, received a
"satisfactory" rating from the OCC on February 28, 1991; Security
National Bank and Trust Company, Norman, Oklahoma, received a
"satisfactory" rating from the OCC on June 26, 1990.
11. FCBM received a "needs to improve" rating in its first
examination in August 1991. At its next examination, in May 1992,
FCBM showed improvement in several categories, including ascertainment of community credit needs, geographic distribution and
record of opening and closing offices, and discrimination and other
illegal credit practices, but still received a "needs to improve" rating
overall.
12. 54 Federal Register 13,742 (1989).
13. First

Interstate

BancSystem

of Montana,

Inc.,

77

Federal

Reserve Bulletin 1007 (1991); Agency CRA Statement, 54 Federal
Register at 13,743.
14. The Board also has received a comment from the Mid-South
Peace and Justice Center ("Protestant") criticizing the efforts of
FCBM to market its credit products to low- and moderate-income
neighborhoods and the disparities in the rates of housing-related loan
applications, and approvals and denials thereof, among residents of
low- and moderate-income neighborhoods and other neighborhoods.
In support of its criticisms, Protestant cited HMDA data for 1990 and

508

Federal Reserve Bulletin • May 1993

The record in this case indicates that FCBM was
chartered in June 1990 when FCC acquired the main
office and three branches of a failed thrift institution,
and that substantial efforts were required of the board
of directors and management of FCBM during its first
months of operation to accomplish the transition from
receivership. In April 1991, the FCC compliance management department began working with the FCBM
board of directors concerning CRA compliance matters. The FCC director of loan review and compliance
management met with the FCBM board of directors
and conducted a training session concerning CRA and
the roles of directors, officers, and employees in
achieving compliance. The board of directors appointed itself to be the CRA compliance committee of
the bank, adopted a ten-point plan developed by FCC
for implementing an effective CRA program, and appointed a CRA compliance officer. In August 1991, in
connection with the application of FCBM to relocate
its main office, the OCC conducted its initial examination of FCBM for CRA performance.
In response to the 1991 examination, the board of
directors of FCBM requested the further assistance of
FCC to develop a written action plan addressing the
major areas of criticism. The action plan included
specific performance goals and target dates, and FCC
required FCBM to submit quarterly reports concerning its compliance with the action plan. In addition, the
FCC compliance management department conducted
an on-site review of FCBM's CRA compliance program in November 1991 and March 1992, and provided
additional training in March 1992. Examiners found in

1991. The HMDA data cited by Protestant, however, actually represents first mortgage home lending in the Memphis, Tennessee, banking market by First Commercial Mortgage Company ("FCMC"), the
mortgage lending subsidiary of FCC's lead bank, First Commercial
Bank, N.A., Little Rock, Arkansas. The HMDA data for FCMC
indicate disparities in rates of housing-related loan applications, and in
approvals and denials, that vary by racial and economic group in the
areas served by FCMC. These disparities appear to be less than those
of other lenders in the Memphis area.
Because all banks are obligated to ensure that their lending practices are based on criteria that ensure not only safe and sound lending,
but also ensure equal access to credit by creditworthy applicants
regardless of race, the Board is concerned when the record of an
institution indicates disparities in lending to minority applicants. The
Board recognizes, however, that HMDA data alone provide only a
limited measure of any given institution's lending in the communities
that the institution serves. The Board also recognizes that HMDA data
have limitations that make the data an inadequate basis, absent other
information, for conclusively demonstrating whether an institution
has engaged in illegal discrimination on the basis of race or ethnicity
in making lending decisions. FCMC was the subject of a special
examination by the OCC in 1992 based on the discrepancy in its 1990
HMDA data between its minority and non-minority applicant denial
rates, and the OCC found no policies, procedures, or practices that
indicated that illegal discrimination was occurring. Moreover, to
address the low levels of loan applications from minorities, FCBM has
recently instituted enhanced marketing and ascertainment efforts
described in this Order in minority and low- and moderate-income
neighborhoods.




the 1992 examination that these steps had resulted in
an improvement in FCBM's CRA program, and upgraded FCBM's rating to satisfactory in three of five
categories of CRA performance. This second examination occurred in conjunction with the CRA examination of all national bank subsidiaries of FCC. In this
regard, the record in this case indicates that substantial improvement in FCBM's CRA performance was
accomplished in the nine months that elapsed between
the two examinations.
In response to the 1992 examination, FCBM has
implemented, and has committed to implement, various measures to address the identified weaknesses in
its CRA program. The board of directors, with the
assistance of the FCC compliance department,
adopted a new action plan. At the suggestion of the
OCC, a new, smaller community delineation was
adopted, which includes all neighborhoods, including
low- and moderate-income neighborhoods, within a
3Vi mile radius of the main office and each branch
office, within which approximately 70 percent of all its
current loans were made. Banking hours have been
extended, and the bank plans to convert a branch
serving a large area of low- to moderate-income neighborhoods into a full-service facility by hiring a lending
officer for the location. FCBM's officer call program
has been modified to place greater emphasis on marketing efforts, and the bank's general advertising,
which formerly was limited to a certificate of deposit
campaign, now also features general deposit and credit
services. The marketing budget for 1993 includes
increased funds for CRA-related marketing, which will
include newspapers, including a minority-oriented
weekly, radio, and direct mail. Home equity credit
lines and a home improvement loan product oriented
to low- and moderate-income borrowers will be featured. 15 In response to mail survey results, a low cost
checking account and student loans have been added.
In addition, a new chief lending officer, with extensive
experience in commercial lending, has been hired to
replace an officer whose experience was in indirect
consumer automobile lending.
FCBM also has made efforts since the 1992 examination to improve its involvement in community
development. The bank has increased its contacts
among government programs and local organizations, including the Multi-Bank Community Development Corporation, the Greater Memphis Redevel-

15. In this regard, FCBM has introduced the LMI Home Improvement Loan, which features no origination fees or points, an interest
rate below the average rate for home improvement loans, and a
minimum loan amount of $500. This product was developed in
response to mail survey results. It will be featured in the bank's
sponsor identification messages during a home improvement program
broadcast on local television.

Legal Developments

opment Authority, the Memphis Housing and
Development Association, St. Mary's Manassas Alabama Revitalization Team ( " S M A R T " ) , and Habitat for Humanity. FCBM participates with Neighborhood Christian Center and the Center for
Neighborhoods in providing credit counseling, and
works with SMART and Habitat for Humanity in
providing credit counseling and reconstruction financing as well as participating in rehabilitation
projects. The bank has agreed to participate with the
Tennessee Housing Development Agency in a model
program to increase the availability of home improvement loans to low-income borrowers. The bank
is planning to be both a sponsor and participant in
Neighborfest, an annual neighborhood festival, and
is planning to conduct educational seminars directed
mainly to children. FCBM also holds $815,000 in
local municipal bonds.
FCBM's primary regulator has advised the Board
that the actions proposed by FCBM to continue to
improve its CRA performance, together with the commitment of FCC to support those actions, should be
sufficient when effectively implemented to improve
FCBM's overall CRA performance rating. In this
regard, the Board notes that another subsidiary bank
of FCC, Benton State Bank, Benton, Arkansas, received a composite "needs to improve" rating from
the FDIC in December 1990 for compliance with
consumer banking laws, and that corrective measures
were implemented there rapidly enough for the FDIC
to find that the bank was in substantial compliance by
June 1991. The Board concludes, in view of all the
facts of record, including the significant progress made
by FCBM in addressing the deficiencies in its record of
CRA performance during the interval between its 1991
and 1992 CRA examinations, the record in this case of
CRA compliance among FCC's other subsidiary
banks, the additional initiatives implemented by
FCBM, and the further steps that FCC and FCBM
have committed to take since the 1992 CRA examination, that, on balance, the CRA performance record of
FCBM is consistent with approval under the convenience and needs factor. The Board recognizes that
the record compiled in this application points to areas
that continue to require improvement in the CRA
performance of FCBM. FCC has implemented effective CRA programs at its other subsidiary banks, as
reflected in the CRA examination reports of these
institutions, and the Board believes that FCC and
FCBM have taken strong steps to ensure that the
deficiencies in FCBM's record of CRA performance
will be redressed. The Board expects FCC and FCBM
to implement fully the CRA initiatives and commitments discussed in this order and contained in its
application.



509

Based on all of the facts of record, including the
representations and commitments made by FCC and
FCBM in this case, the Board concludes that convenience and needs considerations, including the CRA
performance records of FCC and its subsidiary banks
and First Bank, are consistent with approval of this
application. FCC's progress in implementing these
initiatives and commitments will be monitored by the
Federal Reserve Bank of St. Louis and in connection
with future applications to expand its deposit-taking
facilities.
Based on the foregoing and other facts of record, the
Board has determined that the application should be,
and hereby is, approved. The Board's approval of this
transaction is specifically conditioned upon compliance with the representations and commitments made
by FCC and FCBM in connection with this application, including their continued compliance with their
commitments and initiatives relating to FCBM's CRA
performance. For purposes of this action, the representations and commitments relied on in reaching this
decision are both considered commitments imposed in
writing by the Board in connection with its findings
and decision and, as such, may be enforced in proceedings under applicable laws. The transaction approved in this order shall not be consummated before
the thirtieth calendar day following the effective date
of this Order, unless such period is extended for good
cause by the Board or the Federal Reserve Bank of
St. Louis, pursuant to delegated authority.
By order of the Board of Governors, effective
March 10, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, LaWare, and Phillips. Absent and not voting: Governors Kelley and Lindsey.
JENNIFER J . JOHNSON

Associate Secretary of the Board
First Independence Bancshares, Inc.
Independence, Kansas
Order Denying Formation of a Bank Holding
Company
First Independence Bancshares, Inc., Independence,
Kansas ("Applicant"), has applied under section
3(a)(1) of the Bank Holding Company Act ( " B H C
Act") (12 U.S.C. § 1842(a)(1)) to acquire at least
80 percent of the voting shares of First National Bank,
Independence, Kansas ("Bank"), and thereby become a bank holding company within the meaning of
the BHC Act.

510

Federal Reserve Bulletin • May 1993

Notice of the application, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 43,458 (1992)). 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(c) of
the BHC Act.
Applicant is a nonoperating corporation formed for
the purpose of becoming a bank holding company
through the acquisition of Bank. 1 Bank is the 443d
largest commercial banking organization in Kansas,
controlling deposits of $8.7 million, representing less
than 1 percent of the total deposits in commercial
banks in the state. 2
In reviewing an application under section 3(c) of the
BHC Act, the Board must consider several factors,
including the financial and managerial resources and
future prospects of the company or companies and the
banks involved in the proposal. 3 In considering the
managerial resources of a bank holding company, the
Board shall consider the competence, experience, and
integrity of the officers, directors, and principal shareholders of a bank holding company, including their
record of compliance with applicable laws and regulations. 4 The Board's regulations also provide that the
Board will consider a bank holding company's ability
to serve as a source of financial and managerial
strength to its subsidiary banks. 5
As required by the BHC Act, the Board has reviewed the experience, competence, and integrity of
the officers, directors, and principal shareholders of
Applicant. Based on this review, including review of
relevant examination reports, information obtained
from other federal and state banking authorities, and
information provided by the management and principal shareholder in this case, the Board believes managerial factors are not consistent with approval of this
application. In reaching this conclusion, the Board has
considered that Applicant and certain shareholders of
Applicant have provided inaccurate responses to re-

1. The proposal primarily represents a reorganization of existing
ownership interests.
2. State deposit data are as of December 31, 1991.
3. 12 U.S.C. § 1842(c). In interpreting the Board's authority under
section 3 of the BHC Act, the Supreme Court has stated that the
Board is authorized to disapprove a formation of a bank holding
company solely on the grounds of financial or managerial unsoundness, and that the authority of the Board is not limited to instances in
which the financial or managerial unsoundness would be caused or
exacerbated by the proposed transaction. Board of Governors v. First

quests for information by the Board, and, in one
instance, information that conflicted with representations made to another federal banking regulator on
financial and managerial matters material to the
Board's evaluation under the BHC Act.
Considerations relating to competitive factors, financial resources and future prospects, and the convenience and needs of the community do not lend
sufficient weight to warrant approval of this application.
Accordingly, for these reasons and based on all the
facts of record, it is the Board's judgment that approval of this application is not warranted and that the
application should be, and hereby is, denied.
By order of the Board of Governors, effective
March 15, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, LaWare, Lindsey, and Phillips. Absent and
not voting: Governor Kelley.
WILLIAM W . WILES

Secretary of the Board
Westamerica Bancorporation
San Rafael, California
Order Approving Merger of Bank Holding
Companies
Westamerica Bancorporation, San Rafael, California
("Westamerica"), a bank holding company within the
meaning of the Bank Holding Company Act ( " B H C
Act"), has applied pursuant to section 3 of the BHC
Act (12 U.S.C. § 1842) to merge with Napa Valley
Bancorp, Napa, California ( " N a p a " ) , and thereby
acquire indirectly Napa Valley Bank, Napa, California
("Napa Bank"), Bank of Lake County, N.A., Lakeport, California ("Lake Bank"), Sonoma Valley Bank,
Sonoma, California ("Sonoma Bank"), and Suisun
Valley Bank, Fairfield, California ("Suisun Bank"). 1
Notice of the application, affording interested persons an opportunity to submit comments, has been
duly published (57 Federal Register 55,257 (1992)).
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(c) of the BHC Act.
Westamerica is the 14th largest commercial banking
organization in California, controlling deposits of

Lincolnwood
Corp., 546 F . 2 d 718 (7th Cir. 1976), modified, 560 F.2d
258 (7th Cir. 1977), rev'd on other grounds, 439 U . S . 234 (1978).

4. See 12 U.S.C. § 1842(c)(5), amended by section 210 of the
Federal Deposit Insurance Corporation Improvement Act of 1991,
Pub. L. No. 102-242, § 210, 105 Stat. 2236, 2298; 12 C.F.R.
225.13(b)(2).
5. 12 C.F.R. 225.4(a).




1. Upon consummation of this proposal, Westamerica would control all the voting shares of Napa Bank, 88 percent of the voting shares
of Lake Bank, 50.1 percent of the voting shares of Sonoma Bank, and
all the voting shares of Suisun Bank.

Legal Developments

$1.2 billion, representing less than 1 percent of total
deposits in commercial banks in the state. 2 Napa is the
37th largest commercial banking organization in California, controlling deposits of $519 million, representing less than 1 percent of total deposits in commercial
banks in the state. Upon consummation of the proposed transaction, Westamerica would become the
13th largest commercial banking organization in California, controlling deposits of $1.7 billion, representing less than 1 percent of total deposits in commercial
banks in the state.
Westamerica and Napa compete directly in the San
Francisco-Oakland and Fairfield banking markets in
California.3 Upon consummation of this proposal,
Westamerica would remain the fifteenth largest commercial banking or thrift organization in the San Francisco-Oakland banking market, controlling less than
1 percent of the total deposits in depository institutions in the market ("market deposits"). 4 Westamerica would become the third largest depository institution in the Fairfield banking market, controlling
approximately 13.7 percent of market deposits. After
considering the number of competitors remaining in
each of these markets, the relatively small increase in
concentration as measured by the Herfindahl-Hirschman Index ("HHI"), 5 and other facts of record,
the Board concludes that consummation of this proposal would not have a significantly adverse effect on
competition in the San Francisco-Oakland banking
market, the Fairfield banking market, or any other
relevant banking market.
Considerations relating to the financial and managerial resources and future prospects of Westamerica,
Napa, and their respective subsidiaries, and other
supervisory factors the Board is required to consider
2. Deposit data are as of June 30, 1991.
3. The San Francisco-Oakland banking market is approximated by
the San Francisco-Oakland, California RMA. The Fairfield banking
market is approximated by the Fairfield, California RMA.
4. The Board previously has indicated that thrift institutions have
become, or have the potential to become, major competitors of
c o m m e r c i a l b a n k s . See Midwest Financial Group, 75 Federal
Bulletin 386 (1989); National
City Corporation,
70 Federal

Reserve
Reserve

Bulletin 743 (1984). Thus, for purposes of this analysis, deposits of
thrift institutions are included at 50 percent.
5. Under the revised Department of Justice Merger Guidelines, 49
Federal Register 26,823 (1984), a market in which the post-merger
HHI is between 1000 and 1800 is considered to be moderately
concentrated. The Justice Department has informed the Board that a
bank merger or acquisition generally will not be challenged (in the
absence of other factors indicating anticompetitive effects) unless the
post-merger HHI is at least 1800 and the merger increases the HHI by
200 points. The Justice Department has stated that the higher than
normal HHI thresholds for screening bank mergers for anticompetitive effects implicitly recognize the competitive effect of limitedpurpose lenders and other non-depository financial entities.
Upon consummation of this proposal, the HHI in the San Francisco-Oakland banking market would increase by less than 1 point to
1377. The HHI in the Fairfield banking market would increase by
93 points to 1515.




511

under section 3 of the BHC Act, also are consistent
with approval of this proposal.
Convenience and Needs Considerations
In considering the convenience and needs of the
communities to be served, the Board has taken into
account the records of the subsidiary banks of Westamerica and Napa under the Community Reinvestment Act (12 U.S.C. § 2901 et. seq. ) ("CRA"). The
CRA requires the federal financial supervisory agencies to encourage financial institutions to help meet the
credit needs of the local communities in which they
operate consistently with the safe and sound operation
of such institutions. To accomplish this end, the CRA
requires the appropriate federal supervisory authority
to "assess the institution's record of meeting the credit
needs of its entire community, including low- and
moderate-income neighborhoods, consistent with the
safe and sound operation of such institution," and to
take that record into account in its consideration of
applications.6
In this regard, the Board has received comments in
support of Westamerica's CRA record from approximately 18 individuals, small businesses, and religious,
cultural, and community groups. These commenters
have praised Westamerica's CRA efforts in such areas
as low-income housing, attentiveness to the needs of
minorities, and community investments and activities.
The Board also has received comments from several
organizations ("Protestants") criticizing the CRA performance of Westamerica's only subsidiary bank,
Westamerica Bank, N.A. ("Westamerica Bank"). 7
Protestants' comments focus upon Westamerica
Bank's record in meeting the credit needs of low- and
moderate-income and minority communities, and specifically allege that the bank's performance is inadequate in the following areas:
(1) Outreach efforts, particularly in minority communities;
(2) Marketing and services provided to minority
communities, especially the African-American community;
(3) The amount of lending to low- and moderateincome households and minority businesses, consumers, and homeowners; and
(4) Philanthropic contributions to underserved communities.8

6. See 12 U.S.C. § 2903.
7. Protestants include The Greenlining Coalition, the West Coast
Black Publishers Association, The Observer Newspapers, and the
National Association for the Advancement of Colored People, Western Region.
8. Some of the Protestants also believe that Westamerica's and
Napa's board of directors and senior management include an inade-

512

Federal Reserve Bulletin • May 1993

Some of the Protestants also have criticized the CRA
record of Napa and its subsidiary banks, particularly
its lead bank, Napa Bank, with respect to outreach
efforts, the involvement of the board of directors in
CRA-related matters, and housing-related lending to
minorities and to low- and moderate-income families.9
The Board has carefully reviewed the CRA performance records of Westamerica Bank and Napa's subsidiary banks, as well as all comments received, 10
Westamerica's responses to those comments, and all
of the other relevant facts of record in light of the
CRA, the Board's regulations, and the Statement of
the Federal Financial Supervisory Agencies Regarding
the Community Reinvestment Act ("Agency CRA
Statement"). 11
Record of Performance

Under the CRA

A. CRA Performance Examinations
The Agency CRA Statement provides that a CRA
examination is an important and often controlling
factor in the consideration of an institution's CRA
record and that these reports will be given great weight

quate number of minorities, and that Westamerica has failed to award
a sufficient number of contracts to minority-owned businesses. While
the Board fully supports affirmative programs designed to promote
equal opportunity in every aspect of a bank's personnel policies and
practices, the Board believes that the alleged deficiencies in the banks'
general personnel practices, including third-party contracting matters,
are beyond the scope of factors that may be assessed under the CRA
or the BHC Act's convenience and needs factor.
9. Several Protestants have requested the Board to delay the
processing of this application pending an audit by the Board of the
CRA activities of Westamerica and Napa on the basis of 1990 census
data, and anticipated changes in CRA and other policies relevant to
the application by new Administration officials. For the reasons
discussed in this Order, the Board believes that there is a sufficient
record to permit an assessment of all the statutory factors, including
considerations relating to the convenience and needs of the communities to be served, required to be considered under the BHC Act, and
therefore that delay in processing this application is unwarranted.
Protestants also believe that notice of this application should have
been published in minority, including Spanish-language, media. The
Board's rules require that notice of an application and a public
comment period be published in a newspaper of general circulation in
the communities in which the head offices of the applicant (or its
largest subsidiary bank) and the banks to be acquired are located, as
well as publication in the Federal Register. 12 C.F.R. 225.14(b)(2) and
262.3(b). These publication requirements ensure that interested members of the community are afforded an adequate opportunity to
present their views to the Board.
10. The Board notes that it has considered all comments submitted
in this case that were received on or before February 26, 1993.
11. 54 Federal Register 13,742 (1989).
In connection with its review of the convenience and needs factor
under the BHC Act, the Board also has taken into account the
financial condition of Westamerica, Napa, and their respective subsidiary banks, including matters relating to federal regulatory actions
issued with respect to the Napa organization in 1992. These regulatory
actions restrict the operations of the Napa organization in various
respects, including prohibiting the payment of dividends by Napa and
placing restrictions on dividend payments by Napa Bank.




in the applications process. 12 The Board notes that
Westamerica Bank received a "satisfactory" rating at
the examination for CRA performance conducted by
the Office of the Comptroller of the Currency
("OCC") as of June 30, 1992 ("1992 Examination").
The Board also notes that each of Napa's subsidiary
banks, including Napa Bank, received a "satisfactory" CRA performance rating in 1992 at its most recent
examination by its primary regulator. 13
B. Corporate Policies
Westamerica Bank has in place the types of policies
and programs that the Board and other federal bank
supervisory agencies have indicated contribute to an
effective CRA program, and Westamerica has stated
that it will implement these policies and programs at all
the banks to be acquired from Napa. Westamerica
Bank's board of directors has adopted a formal CRA
policy, and annually approves an official CRA statement for the institution. Westamerica Bank also has in
place a comprehensive CRA program, with responsibilities specifically assigned and involving all levels of
the bank's management. This CRA program includes a
detailed timetable outlining Westamerica Bank's conduct of CRA-related activities. Annually, the board of
directors also approves the bank's CRA and marketing
plans, which include CRA-related objectives, responsibilities, and employee training schedules. 14 The
Community Needs Assessment Committee of senior
management and the Loan and Investment Committee
of the board of directors convene monthly to develop
strategies to address identified banking needs and to
perform monitoring of CRA ascertainment and outreach efforts and other activities. Westamerica Bank's
compliance manager regularly performs an assessment
of CRA activities which includes geographic distribution studies and analyses of the disposition of credit
applications. In addition to general bankwide policies
and programs, the institution prepares a Regional
Community Relations Plan for each of the bank's
service areas. 15
At the 1992 Examination, the OCC concluded that
the board of directors of Westamerica Bank provided
adequate policy oversight and monitoring for the

12. 54 Federal

Register

at 13,745.

13. These examinations were conducted as follows:
(1) Napa Bank (FDIC as of June 15, 1992);
(2) Lake Bank (OCC as of May 31, 1992) ;
(3) Sonoma Bank (FDIC as of August 5, 1992); and
(4) Suisun Bank (FDIC as of April 30, 1992).
14. The CRA plan is disseminated to all branches through the bank's
Community Banking CRA Resource Handbook.
15. The only exceptions are in San Francisco, where the bank has a
limited presence, and in Marin County, where Westamerica's familiarity with the area does not require regional planning.

Legal Developments

bank's CRA activities. 16 In general, the OCC indicated
that senior management is committed to the bank's
CRA responsibilities. The 1992 Examination also indicated that the board of directors and employees of
Westamerica Bank are actively involved with local
community organizations, including groups with direct
relevance to CRA activities through a focus on development and redevelopment efforts.
C. Ascertainment and Marketing Efforts
The 1992 Examination concluded that Westamerica
Bank has made strong efforts to ascertain the credit
needs of the bank's delineated communities. Senior
management has instituted a formal community outreach program, 17 and is actively involved in outreach
efforts. Branch employees are required to have ongoing, meaningful contact with civic, minority, religious,
and small business groups, and at least regular contact
with nonprofit and governmental housing organizations. 18 These contacts are documented by the bank's
Community Relations Officer and compliance department, and form the basis for Westamerica Bank's
comprehensive list of outreach sources, which is centered in the areas of affordable housing and redevelopment. Branch employees document and report perceived credit needs ascertained through this program
pursuant to instructions from senior management.
These community outreach efforts are supplemented by the bank's Regional Community Advisory
Boards, which are comprised of various community
members who are able to advise the bank on its image
and marketing and outreach programs throughout its
delineated communities. Community Roundtable
meetings sponsored by Westamerica Bank provide
another forum for open discussion of community
banking needs between representatives from the bank
and community organizations. In addition to these
direct community contacts, bank management uses
various statistical and other objective means to ascertain local credit needs, including Comprehensive
Housing Affordability Strategy reports, coded census
tract maps, and analyses of regional demographic data

513

and deposit and loan penetration prepared by a consulting firm engaged by the bank.
The 1992 Examination commended the marketing
aspects of the bank's extensive outreach program. In
particular, the examination concluded that Westamerica Bank has made reasonable marketing efforts to
ensure that all segments of its delineated communities,
including low- and moderate-income areas, are informed of the bank's products and services, and noted
that the Community Needs Assessment Committee
provides for sound consideration of CRA-related concerns in marketing efforts.
Westamerica Bank markets its products and services in a wide variety of newspaper publications
evenly distributed throughout its service areas, including bilingual and local neighborhood media. The 1992
Examination noted that the bank's advertising copy
reflects a concentration on business, mortgage, and
consumer loan products, including flexible loan products targeted to low- and moderate-income households. After concluding that certain loan products
designed to meet the credit needs of low- and moderate-income households were not efficiently marketed
through traditional media advertising and direct mail
campaigns, the bank began utilizing its contacts with
local community groups to help identify and educate
the target market with respect to the bank's products.
Further targeted marketing efforts take the form of
focus groups and banking clinics for low-income individuals as well as Spanish-language advertising, brochures, and seminars. 19
Napa's subsidiary banks also were found to have
made adequate ascertainment and marketing efforts by
their respective primary regulators. In this regard, the
Board notes that the FDIC commended Napa Bank's
programs for the initiation and reporting of community
contacts, and concluded that these programs assisted
the bank in responding to local needs for affordable
housing. In addition, Westamerica has stated that it
will expand its CRA program, including specific aspects of its outreach efforts, to its new service communities.
D. Lending and Other Activities

16. In this regard, the OCC noted that the board of directors
receives quarterly summaries of CRA activities as well as monthly
compliance reports that include specific CRA-related information.
17. The Board notes that the bank recently amended its community
outreach program and related internal reports in order to emphasize
that minority and low-income individuals and related groups are
considered high priorities in the bank's CRA calling program.
18. In addition, Westamerica Bank employees, including its chief
credit officer and credit administrator, its chief financial officer, and its
marketing and public relations managers, meet with leaders of organizations who represent low-income populations within the bank's
delineated communities.




The 1992 Examination indicated that Westamerica
Bank has made positive efforts in the areas of product
development and loan originations. In this regard, the
OCC noted that the bank offers a variety of credit
products that reasonably address identified credit
needs, and that management has demonstrated flexi19. The Board notes that all branches in Hispanic areas of Westamerica Bank's service communities, including all branches in
Sonoma County, employ at least one Spanish-speaking banker.

514

Federal Reserve Bulletin • May 1993

bility in modifying products and underwriting criteria
to make the institution's services more widely available throughout its delineated communities. The 1992
Examination also concluded that loan activity is consistent with the organization's resources and the identified credit needs of its communities, and that the
bank's loan portfolio contains a reasonable volume of
various types of loans, including small business, consumer, and mortgage loans.
In the area of family housing loans, Westamerica
Bank offers, in addition to traditional construction and
mortgage loans, assistance in meeting special credit
needs through its Community Access Loan ("CAL")
Program. This program addresses the needs of lowerincome credit applicants through more flexible underwriting standards, fixed interest rates, and lower
monthly payment terms. 20 Westamerica Bank also
participates in government-sponsored housing loan
programs, including the Community Home Buyers
Program and the First Time Home Buyers Program,
each of which is supported by the Federal National
Mortgage Association ("FNMA"). 2 1 The bank also
has extended a small volume of loans supported by the
Federal Housing Administration and the Veterans
Administration.
In the area of commercial loans, Westamerica Bank
offers several specialized loan products targeted to
small businesses, as well as more traditional types of
business credits. 22 The 1992 Examination concluded
that since the commencement of its Small Business
Administration ("SBA") loan program in 1991, the
bank has generated a favorable volume of loans supported by this agency. The record of this application
indicates that the bank has approximately $12.7 million in loans outstanding under the SBA 504 and 7(a)
programs. Since mid-1992, Westamerica Bank also has
offered long-term small business loans through two
Small Business and Microbusiness programs sponsored by the State of California, and the bank currently has approximately $700,000 in loans outstanding
under those programs.
The 1992 Examination also concluded that Westamerica Bank's senior management is well-informed
20. The CAL Program is available for home equity, home improvement, and consumer loans. This program is designed to meet the credit
needs of customers who do not qualify for standard loans because of
their income levels.
21. Westamerica Bank has executed an agreement with FNMA
providing for the delivery of $2 million in loans under the Community
Home Buyers Program, and has committed $500,000 under this
program for low interest rate mortgages for a project in Petaluma,
California.
22. The Board notes that these specialized lending programs are
available for all small businesses, including small, minority-owned
businesses.




regarding community development and redevelopment
opportunities within its delineated service areas, and
that the bank's participation in projects and programs
promoting economic revitalization and growth is appropriate and consistent with its size and capacities. In
this regard, the OCC commended the bank's initiative
in establishing low-income housing fund consortia.
Westamerica Bank is the lead institution in one of
these consortia, and participates in other private and
public housing programs throughout its service communities. In addition, Westamerica Bank has made
significant investments in the municipal bonds of its
local communities, and also has invested in the California Equity Fund, which raises capital for lowincome housing projects in the state. 23 The bank also is
active in underwriting municipal bond offerings, many
of which are targeted for housing projects, educational
enhancement, or other community development purposes, and contributes to affordable housing and economic and community development through loans to
and investments in related social service agencies in its
delineated communities.
Napa's subsidiary banks also were found by their
respective primary regulators to have adequate records of marketing and originating loans to address
identified community credit needs, including residential mortgage loans, home improvement loans, small
business loans, and agricultural loans. In this regard,
the Board notes that the FDIC concluded that Napa
Bank's loan volume was adequate in relation to the
bank's resources and its communities' credit needs,
and also notes that the bank participates in various
government-sponsored loan programs, including programs supported by the SBA, the Federal Housing
Administration, and the Veterans Administration.
E. HMDA Data and Lending Practices
The Board has carefully reviewed the 1991 data
required to be reported under the HMDA for Westamerica Bank and Napa Bank, as well as Napa's
other subsidiary banks, in light of the comments
submitted by Protestants. 24 These data show some
disparities for certain communities in rates for hous-

23. The record of this application indicates that Westamerica Bank
has committed $1 million to this low-income housing fund, and has
made other substantial commitments to similar low-income housing
programs, as well as to the rehabilitation of low-income housing,
several affordable housing projects, and other projects targeted to the
housing needs of the elderly and the disabled.
24. HMDA reports based on 1990 census data will not be available
until the 1992 HMDA reports are released in the fall of 1993.

Legal Developments

ing loan applications, approvals, and denials that
vary by racial or ethnic group. 25
Because 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 race or
ethnicity, the Board is concerned when the record of
an institution indicates disparities in lending to minority applicants. The Board recognizes, however, that
HMDA data alone provide only a limited measure of
any given institution's lending in the communities it
serves. The Board also recognizes that HMDA data
have limitations that make the data an inadequate
basis, absent other information, for conclusively determining whether an institution has engaged in illegal
discrimination on the basis of race or ethnicity in
making lending decisions.
The 1992 Examination found no evidence of illegal
discrimination or other illegal credit practices at Westamerica Bank or Napa's subsidiary banks. In this
regard, the Board notes that the OCC reviewed geographic distribution analyses of Westamerica Bank's
credit applications and denials, and concluded that
these analyses disclosed a reasonable penetration of
the bank's communities.
Westamerica has taken steps to improve its lending
record in low- and moderate-income and minority
areas. For example, Westamerica Bank has increased
marketing of special credit products, and the bank's
substantial outreach programs also represent an effort
to improve this aspect of its CRA performance record.
In addition, Westamerica Bank recently created a new
employee position in its residential real estate lending
group whose duties will be to focus exclusively on
low-income and minority housing loans, including
related outreach efforts.

515

low- and moderate-income neighborhoods, as well as
all other convenience and needs considerations, are
consistent with approval of this application. 26
The Board expects the Westamerica banking organization to continue its progress in addressing the
credit needs of low- and moderate-income and minority neighborhoods in its service communities, and to
implement fully the CRA program discussed in this
Order. Westamerica's progress in these areas will be
considered in future applications by Westamerica to
expand its deposit-taking facilities.
Based on the foregoing and other facts of record, the
Board has determined that the application should be,
and hereby is, approved. This approval is specifically
conditioned upon compliance by Westamerica with all
of the commitments made in connection with this
application and with the conditions referenced in this
Order. For purposes of this action, the commitments
and conditions relied on in reaching this decision shall
be deemed to be conditions imposed in writing by the
Board and, as such, may be enforced in proceedings
under applicable law.
The transaction shall not be consummated before
the thirtieth calendar day after the effective date of this
Order, or later than three months after the effective
date of this Order, unless such period is extended for
good cause by the Board or by the Federal Reserve
Bank of San Francisco, acting pursuant to delegated
authority.
By order of the Board of Governors, effective
March 1, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.
JENNIFER J . JOHNSON

Associate

Secretary of the Board

F. Conclusion on Convenience and N e e d s
Factor
The Board has carefully considered all the facts of
record, including the comments filed in this case, in
reviewing the convenience and needs factor under the
BHC Act. Based on a review of the entire record,
including information provided by commenters opposing this proposal and the results of CRA performance
examinations conducted by the respective primary
regulators of Westamerica's and Napa's subsidiary
banks, the Board believes that the efforts of these
subsidiary banks to help meet the credit needs of all
segments of the communities they serve, including

25. These data also disclosed lower application rates in low- and
moderate-income areas than in other areas of the banks' delineated
communities.




26. Several Protestants have requested that the Board hold a public
meeting or hearing with respect to this application. The Board is not
required under section 3 of the BHC Act to hold a public hearing
unless the primary supervisor for the bank to be acquired disapproves
the proposal. In this case, the primary supervisors for the institutions
to be acquired have not objected to Westamerica's application.
Under its rules, the Board may, in its discretion, hold a public
meeting or hearing on an application to clarify factual issues related to
the application and to provide an opportunity for testimony, if
appropriate. 12 C.F.R. 262.3(e) and 262.25(d). The Board has carefully considered Protestants' requests for such a meeting or hearing,
and the written comments submitted by Protestants. In the Board's
view, interested parties have had ample opportunity to submit and
have submitted substantial written comments that have been considered by the Board. Moreover, Protestants have indicated general
disagreement regarding the appropriate conclusions to be drawn from
the facts of record, but have not identified facts that are in dispute and
material to the Board's decision. In light of these considerations, the
Board has determined that a public meeting or hearing is not necessary
to clarify the factual record in this application, or otherwise warranted
in this case. Accordingly, the requests for a public meeting or hearing
on this application are hereby denied.

516

Federal Reserve Bulletin • May 1993

Worthen Banking Corporation
Little Rock, Arkansas

13.6 percent of total deposits in commercial banking
organizations in the state. 3

Worthen Financial Corporation
Little Rock, Arkansas

Competitive Considerations

Order Approving Formation of Bank Holding
Company and Acquisition of Banks
Worthen Banking Corporation, Little Rock, Arkansas
("Worthen"), a bank holding company within the
meaning of the Bank Holding Company Act ("BHC
Act"), and Worthen Financial Corporation ("Worthen
Financial"), a wholly owned de novo subsidiary of
Worthen, have applied under section 3 of the BHC Act
(12 U.S.C. § 1842) to acquire The Union of Arkansas
Corporation, Little Rock, Arkansas ("Union"), and
its two bank subsidiaries, Union National Bank of
Arkansas, Little Rock, Arkansas ("Union Arkansas"), and Union National Bank of Texas, Austin,
Texas ("Union Texas"). 1
Notice of the applications, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 46,171 (1992)). 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(c) of the BHC
Act.
Worthen is the largest commercial banking organization in Arkansas, controlling 10 subsidiary banks
with total deposits of $2.2 billion, representing
11.1 percent of total deposits in commercial banking
organizations in the state. 2 Union is the seventh largest commercial banking organization in Arkansas,
controlling deposits of $498.2 million within the state,
representing 2.5 percent of total deposits in commercial banking organizations in the state. Upon consummation of this proposal, Worthen would remain the
largest commercial banking organization in Arkansas,
controlling deposits of $2.7 billion, representing

Worthen and Union compete directly in three banking
markets in the state of Arkansas: Little Rock, Faulkner
County, and Russellville. In the Little Rock banking
market,4 Worthen is the second largest depository
institution, controlling deposits of $812.2 million, representing approximately 18.1 percent of total deposits
in depository institutions in the market ("market deposits"). 5 Union is the fourth largest depository institution in the market, controlling deposits of
$482.1 million, representing 10.8 percent of market
deposits. Upon consummation of the proposal,
Worthen would become the largest depository institution in the market, controlling 28.9 percent of market
deposits, and the Herfindahl-Hirschman Index
("HHI") would increase 391 points to a level of 1971.6
The three-firm concentration ratio in the market would
increase to 72.7 percent.
Seventeen commercial banking organizations and
one thrift institution would continue to operate in the
Little Rock banking market after consummation of the
proposal. In addition, the Little Rock banking market
has certain features that make it attractive to potential
3. Union is the 216th largest commercial banking organization in
Texas, controlling deposits of $83.9 million within the state, representing less than 1 percent of total deposits in commercial banking
organizations in the state. Worthen does not control any deposits in
any banking market in Texas. Upon consummation of this proposal,
Worthen would become the 216th largest commercial banking organization within the state.
4. The Little Rock banking market is approximated by Pulaski and
Saline Counties; Butler, Caroline, Magness, Oak Grove, Ward, and
York townships in Lonoke County; and El Paso, Royal, and Union
townships in White County.
5. Market data are as of March 31, 1992. In this context, depository
institutions include commercial banks and savings banks. The Board
previously has indicated that thrift institutions have become, or have
the potential to become, major competitors of commercial banks. See
Midwest
National

1. Worthen will acquire Union indirectly through a merger of Union
with Worthen Financial, with Worthen Financial to be the surviving
entity. Following this acquisition, Worthen will merge Union Arkansas into Worthen's lead banking subsidiary, Worthen National Bank
of Arkansas, Little Rock, Arkansas ("Worthen Little Rock"). In
addition, Worthen National Bank of Conway, Conway, Arkansas, will
purchase certain assets and assume certain liabilities of the Conway,
Arkansas, branch of Union Arkansas, and Worthen National Bank of
Russellville, Russellville, Arkansas, will purchase certain assets and
assume certain liabilities of the Russellville, Arkansas, branch of
Union Arkansas. Worthen will seek the necessary regulatory approvals for these transactions. Following these transactions, Worthen
Financial will retain ownership of Union Texas, and will remain in
existence as an intermediate bank holding company.
2. State banking data are as of June 30, 1991.




Financial Group,
City Corporation,

75 Federal Reserve Bulletin 386 (1989);
70 Federal Reserve Bulletin 743 (1984). I n

considering the competition offered by thrifts in the Little Rock
banking market, market share data are based on calculations in which
the deposits of two thrift institutions that are controlled by bank
holding companies are included at 100 percent, and the deposits of the
one other thrift institution in the market, which is not controlled by a
bank holding company, is included at 50 percent.
6. Under the revised Department of Justice Merger Guidelines, 49
Federal Register 26,823 (June 29, 1984), a market in which the
post-merger HHI is above 1800 is considered to be highly concentrated. In such markets, the Justice Department is likely to challenge
a merger that increases the HHI by more than 50 points. The
Department of Justice has informed the Board that, as a general
matter, a bank merger or acquisition will not be challenged, in the
absence of other factors indicating anticompetitive effects, unless the
post-merger HHI is at least 1800 and the merger increases the HHI by
more than 200 points. The Justice Department has stated that the
higher-than-normal HHI thresholds for screening bank mergers for
anticompetitive effects implicitly recognize the competitive effect of
limited-purpose lenders and other non-depository financial entities.

Legal Developments

entrants. The Little Rock banking market is the largest
banking market in Arkansas and is growing in population more than twice as fast as the state as a whole.7
Pulaski County, which is a part of the Little Rock
banking market, ranks first in population and total
deposits among all counties in Arkansas, and has total
deposits nearly three times greater than the next largest
county. In addition, the rate of employment and per
capita income is higher in the Little Rock banking
market than in the state as a whole, and employment
and per capita personal income in the Little Rock
banking market grew at a faster rate between 1980 and
1990 than in the state as a whole. Four banks have been
chartered de novo in the market since 1987.8
In the Faulkner County banking market, 9 Worthen
is the second largest of six depository organizations,
controlling deposits of $177.4 million, representing
39.1 percent of market deposits. Union is the sixth
largest depository organization, controlling deposits of
$6.1 million, representing 1.4 percent of market deposits. Upon consummation of this proposal, Worthen
would remain the second largest depository organization
in the market, controlling deposits of $183.5 million, representing 40.5 percent of market deposits. The HHI for
this market would increase by 106 points to 3562.
The rapid growth of the Faulkner County banking
market is a substantial mitigating factor when considering the effect of this proposal on competition
in this market. 10 In addition, this banking market
appears to be attractive to potential entrants. 11
In light of the number of competitors remaining in
these markets, the attractiveness of these markets to
potential entrants, and other facts of record in this
case, the Board concludes that consummation of this
proposal would not have a significantly adverse effect
on competition or the concentration of banking resources in the Little Rock, Faulkner County, or Rus-

517

sellville banking markets, or in any other relevant
banking market. 12
Financial, Managerial, and Other Considerations
The Board concludes that the financial and managerial
resources and future prospects of Worthen, Union,
and their subsidiary banks are consistent with approval of this proposal. Considerations relating to the
convenience and needs of the communities to be
served and other factors the Board is required to
consider under section 3 of the BHC Act also are
consistent with approval.
Based on the foregoing and other facts of record, the
Board has determined that the applications should be,
and hereby are, approved. The Board's approval of
this transaction is specifically conditioned upon compliance with all the commitments given in connection
with these applications. For the purposes of this
action, these commitments are considered to be conditions imposed in writing in connection with the
approval of these applications, and, as such, may be
enforced in proceedings under the Federal Deposit
Insurance Act. The transactions approved in this
Order shall not be consummated before the thirtieth
calendar day following the effective date of this Order,
or later than three months after the effective date of
this Order, unless such period is extended for good
cause by the Board or by the Federal Reserve Bank of
St. Louis, acting pursuant to delegated authority.
By order of the Board of Governors, effective
March 30, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.
JENNIFER J . JOHNSON

Associate Secretary of the Board
Orders Issued Under Section 4 of the Bank
Holding Company Act

7. The Little Rock banking market grew 5.8 percent in population
between 1980 and 1990, compared to 2.8 percent for the state as a
whole.
8. A major regional bank holding company entered the market in
1992 by the acquisition of a thrift institution, and after the consummation of this proposal would be the fourth largest depository
institution in the market.
9. The Faulkner County banking market is approximated by
Faulkner County.
10. The population in the Faulkner County banking market grew
32.5 percent between 1980 and 1990, the fastest rate of growth of any
county in Arkansas, and population per banking office and total
deposits per banking office exceed the averages for the state. Market
deposits grew 9.5 percent between 1988 and 1991, compared to
3.2 percent for the state.
11. A de novo commercial bank entered the market in 1991, and
controls 2.9 percent of market deposits. In addition, a regional bank
holding company entered the market in 1992, and controls 6.2 percent
of market deposits.




Norwest Corporation
Minneapolis, Minnesota
Order Approving the Acquisition of a Title Insurance
Agency
Norwest Corporation, Minneapolis, Minnesota ("Norwest"), a bank holding company within the meaning of
the Bank Holding Company Act ("BHC Act"), has
applied under section 4(c)(8) of the BHC Act
12. In the Russellville banking market, Worthen would remain the
second largest depository institution, and the HHI would increase by
105 points to 1756. The Russellville banking market comprises Pope
and YelfCounties.

518

Federal Reserve Bulletin • May 1993

(12 U.S.C. § 1843(c)(8)) and section 225.23(a) of the
Board's Regulation Y (12 C.F.R. 225.23(a)) to acquire
through its indirect subsidiary, American Land Title
Co., Inc., Omaha, Nebraska ("American Land Title"), substantially all of the assets of Community Title
Guaranty Company, Lombard, Illinois ("Community
Guaranty"), and thereby engage in title insurance
agency and real estate settlement activities. These
activities will be performed in five offices in Illinois.1
Notice of the application, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 61,601 (1992)). The
time for filing comments has expired, and the Board
has considered the applications and all comments
received in light of the factors set forth in section
4(c)(8) of the BHC Act.
Norwest, with total consolidated assets of $35.3 billion, is the largest commercial banking organization in
Minnesota. 2 Norwest controls 79 banking subsidiaries
that operate in 12 states and owns a number of
subsidiaries engaged in nonbanking activities.
The Board previously has determined that title
insurance agency activities are permissible under section 4(c)(8)(G) of the BHC Act ("exemption G"),
which authorizes bank holding companies that engaged in insurance agency activities, with Board approval, prior to 1971, to engage, or control a company
engaged, in general insurance agency activities.3 Norwest qualifies for exemption G rights.4
Real estate settlement services include activities
associated with the closing of a real estate purchase
transaction, 5 and the Board previously has determined

1. Community Guaranty also performs title abstracting activities,
including title searches of real estate. The Board believes that title
abstracting is incidental to conducting title insurance agency activities, because it provides necessary information needed to authorize
the sale of a title insurance policy.
2. Data are as of June 30, 1992.
3. Norwest
Corporation,
76 Federal Reserve Bulletin 1058 (1990)
("Norwest/American
Land Title")', see First Wisconsin
Corporation,
75 Federal Reserve Bulletin 31 (1989), a f f d sub nom. American
Land
Title Association
v. Board of Governors,
892 F . 2 d 1059 ( D . C . Cir.

1989).
4. In 1959, Norwest received Board approval to retain its general
insurance agency subsidiaries and, accordingly, is a grandfathered
bank holding company for purposes of exemption G. Northwest
Bancorporation,
45 Federal Reserve
Bulletin 963 (1959);
Corporation,
70 Federal Reserve Bulletin 235, 470 (1984);
American Land Title,
supra.

Norwest
Norwest/

5. Specifically Community Guaranty will:
(1) Review the status of the title in the title commitment, resolve any
exceptions to the title, and review the purchase agreement to
identify any requirements in it in order to ensure compliance with
them;
(2) Verify the payment of existing loans secured by the real estate
and verify the amount of and then calculate the prorating of special
assessments and taxes on the property;
(3) Obtain an updated title insurance commitment to the date of
closing, prepare the required checks, deeds, affidavits, and obtain
any authorization letter needed;




that these activities are closely related to banking. 6
The proposed activities of Community Guaranty are
identical to those activities previously approved by the
Board, and Norwest has proposed to conduct the
settlement activities under the same terms and subject
to the same conditions as in the earlier Board Order
regarding this activity.7 Thus, the Board concludes
that Norwest's proposal to engage in real estate settlement services is closely related to banking for
purposes of section 4(c)(8) of the BHC Act.
The Board is also required to determine whether the
performance of the proposed activity by Norwest is a
proper incident to banking—that is, whether the proposed activity "can reasonably be expected to produce benefits, such as greater convenience, increased
competition, or gains in efficiency, that outweigh possible adverse effects, such as undue concentration of
resources, decreased or unfair competition, conflicts
of interests, or unsound banking practices."
12 U.S.C. § 1843(c)(8).
Consummation of this proposal can reasonably be
expected to result in public benefits by providing added
convenience to Norwest's customers. In addition, the
activities of Community Guaranty represent a small share
of the total market of these services, and there are
numerous competitors that provide title insurance agency
and real estate settlement services. Accordingly, the
Board concludes that the proposal would not have any
significantly adverse effect on competition in the provision of these services in any relevant market.
There is no evidence in the record to indicate that
consummation of these proposals is likely to result in
any significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practices that are not outweighed by the public benefits in
this case. The financial and managerial resources of
Norwest and its subsidiaries are also consistent with
approval. Accordingly, on the basis of all of the facts
of record and commitments made by Norwest, the

(4) Establish a time and place for the closing, and ensure that all
parties properly execute all appropriate documents and meet all
commitments;
(5) Collect and disburse funds for the parties, hold funds in escrow
pending satisfaction of certain commitments, prepare the HUD
settlement statement, the deed of trust, mortgage notes, the Truthin-Lending statement, and purchaser's affidavits; and
(6) Record the appropriate documents as required under law.
6. Norwest/American

Land

Title,

supra.

7. Id. Norwest has committed to advise its customers that they are
not required to purchase its real estate settlement services in connection with the purchase of title insurance in a real estate transaction.
Norwest has further committed that it will not require its customers to
purchase its real estate settlement services in connection with a loan
origination. In addition, section 106 of the Bank Holding Company
Act Amendments of 1970 generally would prohibit Norwest from tying
extensions of credit to the purchase of services from American Land
Title or Community Guaranty.

Legal Developments

Board concludes that the public benefits that would
result from approval of these applications outweigh
the potential adverse effects, and that the public interest factors it must consider under section 4(c)(8) of the
BHC Act are consistent with approval.
Based on the foregoing and all the other facts of
record, the Board has determined to, and hereby does,
approve the application subject to all of the terms and
conditions set forth in this order, and in the above
noted Board Orders that relate to these activities. The
Board's decision is specifically conditioned on compliance with all of the commitments made in this application, including the commitments discussed in this
Order and the conditions set forth in NorwestlAmerican Land Title. For the purpose of this action, all of
these commitments and conditions will be considered
conditions imposed in writing by the Board and, as
such, may be enforced in proceedings under applicable
law. The Board's determination is also subject to all of
the terms and conditions set forth in the Board's
Regulation Y, including those in sections 225.4(d) and
225.23(b), and to the Board's authority to require
modification or termination of the activities of a bank
holding company or any of its subsidiaries as the
Board finds necessary to assure compliance with, and
to prevent evasion of, the provisions of the BHC Act,
and the Board's regulations and orders issued thereunder.
This transaction shall not be consummated later
than three months after the effective date of this
Order, unless such period is extended for good cause
by the Board or by the Federal Reserve Bank of
Minneapolis, pursuant to delegated authority.
By order of the Board of Governors, effective
March 8, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Kelley, LaWare, and Lindsey. Absent and not
voting: Governors Angell and Phillips.
J E N N I F E R J . JOHNSON

Associate Secretary of the Board

ORDERS

ISSUED

THE BANK

UNDER

HOLDING

SECTIONS

COMPANY

3 AND

4 OF

ACT

Banc One Corporation
Columbus, Ohio
Order Approving the Acquisition of Bank Holding
Companies
Banc One Corporation, Columbus, Ohio ("Banc
One"), and its wholly owned subsidiary, Banc One



519

Illinois Corporation, Springfield, Illinois, bank holding
companies within the meaning of the Bank Holding
Company Act ( " B H C Act"), have applied for the
Board's approval under section 3 of the BHC Act
(12 U.S.C. § 1842) to acquire First Community Bancorp, Inc., Rockford, Illinois ("First Community"),
and thereby indirectly acquire First Community's subsidiary banks, First National Bank and Trust Company of Rockford, Rockford, Illinois ("First National"), First Bank of Roscoe, Roscoe, Illinois, and First
Bank of Loves Park, Loves Park, Illinois. Banc One
also has applied for the Board's approval under section 3 of the BHC Act to acquire Key Centurion
Bancshares, Inc., Charleston, West Virginia ( " K e y
Centurion"), 1 and thereby indirectly acquire Key Centurion's subsidiary banks. 2
Banc One also has applied under section 4(c)(8) of
the BHC Act (12 U.S.C. § 1843(c)(8)) to acquire First
Bancorp Credit Life Insurance Company, Rockford,
Illinois ("First Bancorp"), and thereby engage in the
sale of credit-related insurance pursuant to section
225.25(b)(8) of the Board's Regulation Y (12 C.F.R.
225.25(b)(8)), and to acquire Reliable Mortgage Company, Charleston, West Virginia ("Reliable"), and
thereby engage in mortgage banking activities pursuant to section 225.25(b)(1) of Regulation Y (12 C.F.R.
225.25(b)(1)).
Notice of the applications, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 55,533, 61,600 (1992)).
The time for filing comments has expired, and the
Board has considered the applications and all com-

1. Banc One has established a de novo subsidiary holding company,
Banc One West Virginia Corporation, for the purpose of facilitating
this acquisition by merging with and into Key Centurion.
2. By acquiring Key Centurion, Banc One will acquire the following
banks: Charleston National Bank, Charleston, West Virginia; Citizens
National Bank of St. Albans, St. Albans, West Virginia; Beckley
National Bank, Beckley, West Virginia; The National Bank of Logan,
Logan, West Virginia; The National Bank of Commerce of Williamson, Williamson, West Virginia; Boone National Bank, Madison,
West Virginia; Nicholas County Bank, Summersville, West Virginia;
The Central National Bank of Buckhannon, Buckhannon, West Virginia; The Lincoln National Bank of Hamlin, Hamlin, West Virginia;
Security National Bank & Trust Co., Wheeling, West Virginia; The
First National Bank of New Martinsville, New Martinsville, West
Virginia; The First Huntington National Bank, Huntington, West
Virginia; and Peoples Bank of Charles Town, Charles Town, West
Virginia.
Banc One's acquisition of Key Centurion's remaining subsidiary
banks will be accomplished by acquiring the following wholly owned
bank holding company subsidiaries of Key Centurion:
(1) Union Bancorp of West Virginia, Inc., Charleston, West Virginia (parent of Union National Bank of West Virginia, Clarksburg,
West Virginia, and First National Bank in Philippi, Philippi, West
Virginia);
(2) Wayne Bancorp, Inc., Charleston, West Virginia (parent of
Wayne County Bank, Inc., Wayne, West Virginia); and First
National Company, Pikeville, Kentucky (parent of The First National Bank of Pikeville, Pikeville, Kentucky).

520

Federal Reserve Bulletin • May 1993

ments received in light of the factors set forth in
sections 3(c) and 4(c)(8) of the BHC Act.
Banc One, with total deposits of $39.6 billion, controls banking subsidiaries in Ohio, Indiana, Michigan,
Wisconsin, Illinois, Texas, Colorado, and Kentucky. 3
By acquiring First Community and Key Centurion,
Banc One proposes to acquire additional banks in
Illinois and Kentucky, and to make an initial entry into
West Virginia.
Banc One is the eighth largest commercial banking
organization in Illinois, controlling $2.4 billion in deposits, representing 1.8 percent of total deposits in
commercial banks in Illinois. First Community is the
26th largest commercial banking organization in Illinois, controlling $680 million in deposits, representing
less than one percent of total deposits in commercial
banks in the state. Upon consummation of Banc One's
acquisition of First Community, Banc One would
become the seventh largest commercial banking organization in the state, controlling $3.1 billion in deposits, representing 2.3 percent of the total deposits in
commercial banks in Illinois.
Banc One is the fourth largest commercial banking
organization in Kentucky, controlling $1.4 billion in
deposits, representing 4.2 percent of total deposits in
commercial banks in Kentucky. Key Centurion is the
24th largest commercial banking organization in Kentucky, controlling $201.8 million in deposits, representing less than one percent of total deposits in
commercial banks in Kentucky. Upon consummation
of Banc One's acquisition of Key Centurion, 4 Banc
One would remain the fourth largest commercial banking organization in Kentucky, controlling $1.6 billion
in deposits, representing 4.8 percent of total deposits
in commercial banks in Kentucky.
Douglas Amendment
Section 3(d) of the BHC Act, the Douglas Amendment, prohibits the Board from approving an application by a bank holding company to acquire control of
any bank located outside of the bank holding company's home state, unless such acquisition is "specifically authorized by the statute laws of the State in
which such bank is located, by language to that effect
and not merely by implication." 5 For purposes of the
Douglas Amendment, the home state of Banc One is

3. State deposit data are as of September 30, 1992, and includes
acquisitions approved by the Board as of January 31, 1992.
4. Banc One would become the largest commercial banking organization in West Virginia, controlling $2.8 billion in deposits, representing 14.3 percent of total deposits in commercial banks in West
Virginia.
5. 12 U.S.C. § 1842(d).




Ohio.6 In considering this proposal, the Board has
analyzed the interstate banking statutes of Ohio, Illinois, West Virginia, and Kentucky, and has concluded
that Banc One is authorized under those statutes to
acquire the banking subsidiaries of First Community in
Illinois, and the banking subsidiaries of Key Centurion
in West Virginia and Kentucky. 7 In addition, the
Illinois Commissioner of Banks and Trust Companies
has approved the acquisition of First Community's
bank subsidiaries in Illinois, and the West Virginia
Commissioner of Banking has approved the acquisition of Key Centurion's bank subsidiaries in West
Virginia.8 Accordingly, Board approval of this proposal is not prohibited by the Douglas Amendment.
Competitive, Financial, Managerial and Supervisory
Considerations
Banc One and First Community do not compete directly in any relevant banking markets. Based on all
the facts of record, the Board concludes that Banc
One's acquisition of First Community would not have
significantly adverse effects on competition in any
relevant banking market.
Banc One and Key Centurion compete directly in the
Wheeling, West Virginia, banking market. 9 Based on all
of the facts of record, including the characteristics of
the Wheeling banking market and the effects this proposal would have on competition in this market, the
Board concludes that consummation of Banc One's
acquisition of Key Centurion would not have significantly adverse effects on competition in the Wheeling
banking market10 or any relevant banking market.

6. A bank holding company's home state is that state in which the
operations of the bank holding company's banking subsidiaries were
principally conducted on July 1, i966, or the date on which the
company became a bank holding company, whichever is later.
7. Ohio's interstate banking statute permits banks from Illinois and
West Virginia to acquire banks in Ohio. See Ohio Rev. Code Ann. §
1101.05; 111. Rev. Stat. ch. 17 para. 2510.01; W. Va. Code § 31A-8A-7;
Ky. Rev. Stat. Ann. § 287.900.
8. The Kentucky Commissioner of the Department of Financial
Institutions has indicated that no application is necessary in order for
Banc One to acquire Key Centurion's one subsidiary bank in Kentucky.
9. The Wheeling banking market is approximated by Marshall
County and Ohio County in West Virginia, and Colerain, Pease,
Pultney, Mead and York Townships and the eastern two-thirds of
Richland Township in Belmont County, Ohio.
10. Under the revised Department of Justice Merger Guidelines, 49
Federal Register 26,823 (June 29, 1984), a market in which the
post-merger Herfindahl-Hirschman Index ( " H H I " ) is below 1000 is
considered unconcentrated and a market in which the post-merger
HHI is between 1000 and 1800 is moderately concentrated. The
Justice Department has informed the Board that a bank merger or
acquisition generally will not be challenged (in the absence of other
factors indicating anti-competitive effects) unless the post-merger
HHI is at least 1800 and the merger increases the HHI by 200 points.
The Justice Department has stated that the higher than normal HHI
thresholds for screening bank mergers for anti-competitive effects

Legal Developments

The financial and managerial resources and future
prospects of Banc One, First Community, Key Centurion, and their respective subsidiaries, and other
supervisory factors the Board must consider under
section 3 of the BHC Act, are consistent with approval
of this proposal.
Convenience and Needs Considerations
In acting upon an application to acquire a depository
institution under the BHC Act, the Board must consider the convenience and needs of the communities to
be served, and take into account the records of the
relevant depository institutions under the Community
Reinvestment Act (12 U.S.C § 2901 et. seq.)
("CRA"). The CRA requires the federal financial
supervisory agencies to encourage financial institutions to help meet the credit needs of the local communities in which they operate, consistent with the
safe and sound operation of such institutions. To
accomplish this end, the CRA requires the appropriate
federal supervisory authority to "assess the institution's record of meeting the credit needs of its entire
community, including low- and moderate-income
neighborhoods, consistent with the safe and sound
operation of such institution," and to take that record
into account in its evaluation of bank holding company
applications.11
In this regard, the Board has received comments
from various organizations ("Protestants") that raise
issues regarding the efforts by Banc One, First Community and Key Centurion to meet the credit needs of
their entire communities, including low- and moderate-income neighborhoods. 12 In addition to the comments made regarding the CRA performance of Banc
One and its subsidiary banks, 13 Protestants allege that
First Community has not sufficiently met its responsibility to invest in the development of Southwest Rockimplicitly recognize the competitive effect of limited purpose lenders
and other non-depository financial entities.
Upon consummation of this proposal, the H H I for the Wheeling
banking market would increase 79 points to 1104.
11. 12 U.S.C. § 2903.
12. The Board has received comments regarding the CRA performance record of First Community from the Progressive West Rockford Community Development Corporation ("Progressive"), and the
CRA performance record of Banc One from the United Paperworkers
International Union ( " U P I U " ) and The Main Street Business Association ( " M S B A " ) . The Protestants submitted no adverse comments
regarding the CRA performance of Key Centurion or its subsidiary
banks.
13. The comments submitted by the UPIU and the MSBA in the
context of these applications were also filed in connection with Banc
One's application to acquire Valley National Corporation, Phoenix,
Arizona ("Valley National"). For the reasons set forth more fully in
the Board's Order in the Valley National application (Banc One
Corporation,

79 Federal

Reserve

Bulletin

524 (1993) ( " B a n c

Onel

Valley National")), these comments by the UPIU and the MSBA do
not warrant denial of this application.




521

ford, especially commercial and industrial development for low-income individuals and minorities. 14
The Board has carefully reviewed the CRA performance records of Banc One, First Community, Key
Centurion, and their respective subsidiary banks, as
well as all comments received regarding these applications, Banc One's responses to those comments,
and all other relevant facts of record in light of the
CRA, the Board's regulations, and the Statement of
the Federal Financial Supervisory Agencies Regarding
the Community Reinvestment Act ("Agency CRA
Statement"). 15
Record of Performance

Under the CRA

A. CRA Performance Examinations
The Agency CRA Statement provides that a CRA
examination is an important and often controlling
factor in the consideration of an institution's CRA
record and that these reports will be given great weight
in the applications process. 16 The Board notes that
Banc One's lead subsidiary bank in Ohio, Bank One,
Columbus, N.A., Columbus, Ohio, received an "outstanding" rating from the Office of the Comptroller of
the Currency ("OCC") at its most recent examination
for CRA performance in May, 1991. In addition, Banc
One's remaining 61 subsidiary banks received either
"outstanding" or "satisfactory" ratings from their
primary regulators in the most recent examinations of
their CRA performance. The Board also notes that
First National, First Community's lead bank, received
a "satisfactory" rating from its primary regulator at its
most recent examination for CRA performance. 17 Additionally, sixteen of Key Centurion's seventeen subsidiary banks have received either a "satisfactory" or
"outstanding" rating from their primary regulator
examiner in the most recent examinations of their
CRA performance. 18

14. Progressive alleges that First National failed to provide conventional financing for the development of a supermarket and pharmacy
to be located in a low-income area of southwest Rockford. In response
to Progressive's allegations, First National has submitted its credit
analysis of this project. The Board has previously determined that the
failure of a financial institution to fund Progressive's proposed development project did not warrant a denial of the application. AMCORE
Financial,

Inc., 78 Federal

Reserve

Bulletin

929 (1992). I n light of all

of the facts of record, the Board believes that First National's decision
to not participate in funding the supermarket and pharmacy project
identified by Progressive does not indicate that First National has
failed to meet the credit needs of its community.
15. 54 Federal Register 13,742 (1989).
16. Id. at 13,745 (1989).
17. First National received a satisfactory rating from the OCC in
December, 1990.
18. Nicholas County Bank received a "less than satisfactory"
performance rating from the Federal Deposit Insurance Corporation
( " F D I C " ) in December, 1991. In July, 1992, the FDIC noted signifi-

522

Federal Reserve Bulletin • May 1993

The OCC has recently concluded a CRA performance examination of Bank One, Cleveland, N.A.,
Cleveland, Ohio ("Bank One Cleveland"), and the
Board has been advised that the preliminary examination rating assigned to this institution is "needs to
improve". As explained more fully below, Bank One
Cleveland constitutes a small part of the overall organization, and the Board expects Banc One to address
the areas of weakness identified by the OCC.
B. Other Aspects of CRA Performance
The Board has carefully considered the CRA performance record of Banc One in connection with these
applications and the Banc One/Valley National application. For the reasons set forth more fully in Banc
One/Valley National, the Board believes that Banc
One has in place the types of policies and procedures
that the Board and other Federal bank supervisory
agencies have indicated contribute to an effective CRA
program, and Banc One has committed to implement
these policies and programs at all the newly acquired
banks. 19 In addition, Banc One will implement its
ascertainment and marketing programs at First National,20 and intends to establish a Community Advisory Council at First National made up of target populations in the Rockford area. This Council will enhance
existing CRA ascertainment efforts, institutionalize
the dialogue between the bank and its community, and
provide a means by which to identify opportunities for
use of the Banc One Community Development Corporation ("CDC").
Banc One has instituted or participates in a number
of programs designed to provide a variety of credit
products to low- and moderate-income and minority
borrowers. At the corporate level, Banc One has
established a system-wide CDC with the resources to
assist all bank affiliates in financing projects designed
to promote community welfare, housing availability
and economic development. Banc One also has a
mortgage subsidiary, Banc One Mortgage Corporation, that assists affiliates by offering specialized mortgage products designed for low- and moderate-income
applicants.
Banc One also requires all affiliate banks to participate in federal, state and local lending programs which
cant improvement in the Nicholas County Bank CRA program and
discontinued its periodic on-site reviews.
19. Banc One/Valley

National,

supra

n o t e 13.

20. Subsequent to Banc One's acquisition of First Community, First
National proposes to merge with First Bank of Loves Park and First
Bank of Roscoe, with First National as the surviving entity, pursuant
to section 18(c) of the Federal Deposit Insurance Act (12 U.S.C.
§ 1828). In this regard, Banc One represents that the CRA policies and
programs that Banc One proposes to implement at First National will
be implemented at the resultant institution.




are designed to assist disadvantaged populations such
as the poor, disabled, elderly and minorities, including
programs sponsored by the Small Business Administration ("SBA"), the Department of Housing and
Urban Development and the Federal Housing Administration. Banc One subsidiaries are certified SBA
lenders and have made millions of dollars of loans
through this program. Banc One subsidiaries also
provide funding for programs designed to help finance
small businesses, including the Minority Enterprise
Small Business Investment Corporation.
First National also participates with city and state
governments in various lending programs, including:
(1) The First Time Home Buyers Program;
(2) Tri-Way Rehabilitation Program, a program to
provide home improvement loans in low- and moderate-income areas; 21
(3) In-Fill Project, a project designed to provide
affordable housing in low- and moderate-income
areas; and
(4) A student loan program.
Commercial loans at First National also cover all types
and sizes of businesses including small businesses. 22
C. Recent CRA Examination of Bank One
Cleveland
In connection with its recent CRA examination of
Bank One Cleveland, the OCC has preliminarily rated
the CRA performance of this institution as "needs to
improve." The Board notes that Bank One Cleveland
represents less than 5 percent of Banc One's total
consolidated assets. As previously discussed in this
Order and in Banc One/Valley National, the Banc One
organization has a demonstrated history of compliance
with the CRA, and the remaining banking assets of the
Banc One organization are in institutions rated "satisfactory" or "outstanding" for CRA performance.
In this regard, the Board notes that Bank One
Cleveland's preliminary rating of "needs to improve"
represents a recent downgrading from the current
rating of "satisfactory" for this institution. The Board
expects Banc One to take steps that will address the
areas of weakness identified in the OCC's most recent
examination. In addition, Banc One must submit to the

21. During 1992, First National originated $100,000 in second
mortgage loans through Tri-Way Rehabilitation Program.
22. First National provides financial and management support to the
Rockford Small Business Loan Program, as well as participating in the
Small Business Loan Program. First National is the area's only
certified SBA lender, and as of November, 1992, First National
recorded $3.25 million in outstanding SBA loans. Five of the six SBA
504 loans made in the Rockford market in 1992 were made by First
National.

Legal Developments

Board, when delivered to the OCC, a copy of the plan
to address the weaknesses in the CRA performance
record of Bank One Cleveland identified by the OCC.
Banc One also must report to the Federal Reserve
Bank of Cleveland, on a quarterly basis commencing
June 30, 1993, as to its progress in remedying these
problems and implementing the plan for improvement.
Banc One's progress in remedying these deficiencies
will be taken into account in connection with future
applications by Banc One. 23
D. Conclusion Regarding Convenience and
Needs Factors
The Board has carefully considered all of the facts of
record, including the comments filed in this case, in
reviewing the convenience and needs factors under the
BHC Act. Based on a review of the entire record of
performance, including information provided by commenters opposing the proposal, the CRA performance
examinations by the banks' primary regulators, and
the Board's consideration of Banc One's CRA record
of performance as determined in Banc One/Valley
National, the Board believes that the efforts of Banc
One, First Community, and Key Centurion to help
meet the credit needs of all segments of the communities served by their subsidiary banks, including lowand moderate-income neighborhoods, are consistent
with approval. For these reasons, and based on all the
facts of record, the Board concludes that convenience
and needs considerations, including the CRA performance records of the companies and banks involved in
these proposals, are consistent with approval of these
applications. 24

23. F o r t h e r e a s o n s d i s c u s s e d in Banc

One/Valley

National,

the

Board has taken into account the preliminary CRA exam rating of
Bank One Cleveland rather than delay consideration of these applications.
24. Protestants have requested a public hearing or meeting to collect
information about the mortgage, consumer, and commercial lending
practices of Banc One. Section 3(b) of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. In this
case, the Illinois State Banking Commissioner has not recommended
denial of the proposal.
Generally, under the Board's rules, the Board may, in its discretion,
hold a public hearing or meeting on an application to clarify factual
issues related to the application and to provide an opportunity for
testimony, if appropriate. 12 C.F.R. 262.3(e) and 262.25(d). The
Board has carefully considered this request. In the Board's view,
Protestants have had ample opportunity to present written submissions, and Protestants have submitted written comments that have not
identified facts that are material to the Board's decision and that are in
dispute. Therefore, the Board has determined that a public meeting or
hearing is not necessary to clarify the factual record in this application, or otherwise warranted in this case, and the request for a public
meeting or hearing on this application is denied.




523

Nonbanking Activities
The Board has previously determined that the activities that Banc One proposes to conduct through First
Bancorp and Reliable are closely related to banking
and a proper incident thereto within the meaning of
section 4 of the BHC Act. 25 Banc One has committed
to conduct these activities in accordance with the
Board's regulations. 26 Furthermore, there is no evidence in the record to indicate that Banc One's acquisition of First Bancorp or Reliable is likely to result in
any significantly adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of interest, or unsound banking practice.
Accordingly, the Board has determined that the balance of public interest factors it must consider under
section 4(c)(8) of the BHC Act is favorable and consistent with approval of Banc One's application to
acquire these companies.
Conclusion
Based on the foregoing, including the commitments
made to the Board by Banc One in these applications
and in related correspondence, and in light of all the
facts of record, the Board has determined that these
applications should be, and hereby are, approved. The
Board's approval is specifically conditioned upon
compliance by Banc One with all commitments made
in connection with these applications as well as the
conditions discussed in this order. The commitments
and conditions relied on by the Board in reaching this
decision 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. This approval is also conditioned upon Banc One receiving all necessary Federal and state approvals.
The Board's determinations as to the nonbanking
activities to be conducted by Banc One are subject to
all of the conditions contained in the Board's Regulation Y, including those in sections 225.4(d) and
225.23(b)(3) (12 C.F.R. 225.4(d) and 225.23(b)(3)), and
to the Board's authority to require such modification
or termination of the activities of a holding company or
any of its subsidiaries as the Board finds necessary to
assure compliance with, or to prevent evasions of, the
provisions and purposes of the BHC Act and the
Board's regulations and orders issued thereunder.
The banking acquisitions should not be consummated before the thirtieth calendar day following the

25. See 12 C.F.R. 225.25(b)(8) and (b)(1).
26. See id.

524

Federal Reserve Bulletin • May 1993

effective date of this Order, or later than three months
following the effective date of this Order, unless such
period is extended for good cause by the Board or the
Federal Reserve Bank of Cleveland, acting pursuant to
delegated authority.
By order of the Board of Governors, effective
March 1, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.

received in light of the factors set forth in sections 3(c)
and 4(c)(8) of the BHC Act.
Banc One, with $51.2 billion in total consolidated
assets, is the ninth largest commercial banking organization in the United States, controlling $39.6 billion
in deposits. 2 Banc One operates 61 subsidiary banks in
Ohio, Indiana, Michigan, Wisconsin, Illinois, Texas,
Colorado, and Kentucky. Valley National, with
$10.9 billion in total consolidated assets, is the largest
commercial banking organization in Arizona, controlling approximately $9 billion in deposits in the state.

J E N N I F E R J . JOHNSON

Associate Secretary of the Board
Banc One Corporation
Columbus, Ohio
Order Approving Acquisition of Banks and Certain
Nonbanking Companies
Banc One Corporation, Columbus, Ohio ("Banc
One"), a bank holding company within the meaning of
the Bank Holding Company Act ( " B H C Act"), has
applied for the Board's approval under section 3 of the
BHC Act (12 U.S.C. § 1842) to acquire Valley National Corporation, Phoenix, Arizona ("Valley National"), and thereby indirectly acquire Valley National's subsidiary banks, The Valley National Bank of
Arizona, Phoenix, Arizona ("Valley National Bank"),
Valley Bank & Trust Company, N.A., Salt Lake City,
Utah, Valley Central Bank, Richfield, Utah, and California Valley Bank, N.A., Fresno, California. 1
Banc One also has applied under section 4(c)(8) of
the BHC Act (12 U.S.C. § 1843(c)(8)) to acquire
Concho Insurance Agency, Inc. ("Concho Insurance") and VNC Investment Corporation ( " V N C
Investment"), both of Phoenix, Arizona, and thereby
engage in the sale of credit-related insurance pursuant
to 12 C.F.R. 225.25(b)(8)(i), and in the making and
arranging of commercial loans pursuant to 12 C.F.R.
225.25(b)(1).
Notice of the applications, affording interested persons an opportunity to submit comments, has been
published (57 Federal Register 46,170 (1992)). The
time for filing comments has expired, and the Board
has considered the applications and all comments

1. The proposal is structured as a merger of Banc One's wholly
owned subsidiary, Banc One Alpha Corporation, Columbus, Ohio
("Banc One Alpha"), with and into Valley National. Pursuant to the
merger, the shares of Valley National will be converted into shares of
Banc One, and the shares of Banc One Alpha will be converted into
shares of Valley National as the surviving corporation. Banc One
Alpha has no assets or operations, and was formed for the purpose of
consummating this transaction.




Douglas

Amendment

Section 3(d) of the BHC Act, the Douglas Amendment, prohibits the Board from approving an application by a bank holding company to acquire control of
any bank located outside of the bank holding company's home state, unless such acquisition is "specifically authorized by the statute laws of the State in
which such bank is located, by language to that effect
and not merely by implication." 3 Banc One proposes
to acquire banks in Arizona, Utah, and California. For
purposes of the Douglas Amendment, the home state
of Banc One is Ohio. 4
The interstate banking statutes of Arizona and Utah
permit out-of-state bank holding companies to acquire
banks located in those states, subject only to the
approval of state banking officials. 5 The banking authorities of Arizona and Utah have indicated that the
proposed transaction is authorized under their respective state laws. Under California law, a foreign bank
holding company may acquire a bank located in California, if the Superintendent determines that substantial reciprocity exists between California and the state
in which the foreign bank holding company's operations are principally conducted, which in this case is
Ohio. 6 Ohio law imposes a similar substantial reci-

2. Asset and deposit data are as of September 30, 1992.
3. 12 U.S.C. § 1842(d).
4. A bank holding company's home state is that state in which the
operations of the bank holding company's banking subsidiaries were
principally conducted on July 1, 1966, or the date on which the
company became a bank holding company, whichever is later. See
12 U.S.C. § 1842(d).
5. See Ariz. Rev. Stat. Ann. § 6-322(A); Utah Code Ann. § 7-1702(2).
6. See Cal. Fin. Code § 3751 et seq. (West 1993). Substantial
reciprocity exists between California and a second state if the laws of
the second state:
(i) Authorize a California bank holding company to acquire banks
in that state on substantially the same terms and conditions as
would be applicable to an acquisition by an in-state bank holding
company, and
(ii) Grant to a bank owned by a California bank holding company
substantially the same rights and powers as would be granted to
a bank owned by an in-state bank holding company. Cal. Fin.
Code § 3751(1) (West 1993).

Legal Developments

procity requirement. 7 The California Superintendent
of Banks has determined that the interstate banking
provisions of Ohio law meet the California requirement of substantial reciprocity, and has approved this
proposal.
For these reasons, the Board has concluded that
Banc One is authorized under the statute laws of
Arizona, Utah, and California to acquire the banking
subsidiaries of Valley National. Accordingly, Board
approval of this proposal is not prohibited by the
Douglas Amendment. Approval of this proposal is
conditioned, however, upon the receipt by Banc One
of all required state regulatory approvals.
Public Comments on Convenience and Needs
Considerations
In acting upon an application to acquire a depository
institution under the BHC Act, the Board must consider the convenience and needs of the communities to
be served, and take into account the records of the
relevant depository institutions under the Community
Reinvestment Act (12 U.S.C. § 2901 et seq.)
("CRA"). The CRA requires the federal financial
supervisory agencies to encourage financial institutions to help meet the credit needs of the local communities in which they operate, consistently with the
safe and sound operation of such institutions. To
accomplish this end, the CRA requires the appropriate
federal supervisory authority to "assess the institution's record of meeting the credit needs of its entire
community, including low- and moderate-income
neighborhoods, consistent with the safe and sound
operation of such institution," and to take that record
into account in its evaluation of applications.8
In connection with these applications, the Board has
received comments from approximately 60 organizations and individuals who have expressed their views
as to the merits of Banc One's proposal. Of these
commenters, approximately half submitted statements
supporting the proposal, primarily on the basis of the
CRA record of the Banc One organization. These

commenters generally praised the CRA efforts of Banc
One and its subsidiaries. For example, some of these
commenters—focusing on Banc One's efforts in Middletown, Cleveland, Columbus, and Cincinnati, all in
Ohio—commended Banc One's minority outreach
programs, activities to assist low- and moderate-income residents, financing to small and minority businesses, and lending for low-income housing, among
other areas of CRA performance.
Other favorable commenters, including public officials, religious and minority groups, business and
social service organizations, community development
corporations, and members of the public, commended
Banc One's CRA record in Dayton, Ohio. Their comments noted with approval Banc One's efforts in such
areas as technical assistance for and investments in
community development initiatives; lending programs,
including flexible loan products designed to meet the
credit needs of low- and moderate-income borrowers;
support for small minority businesses; and funding for
first-time home buyers. Favorable comments also
have been received on various aspects of Banc One's
CRA efforts elsewhere in Ohio or in Texas, or with
respect to the CRA record of Valley National Bank in
Arizona.
Commenters opposing the proposal ("Protestants")
have objected on the basis of the CRA performance
records of Banc One's and Valley National's subsidiary banks, and have criticized the efforts of Banc One
and Valley National to meet the credit needs of their
entire communities, including low- and moderate-income neighborhoods. 9 Protestants believe that Valley
National Bank has insufficient outreach and marketing
programs for low- and moderate-income families and

9. The Board has received a number of comments from individuals
and businesses alleging that the denial of their loan applications by
subsidiaries of Banc One or Valley National evidenced a failure to
comply with the CRA or fair lending laws. Financial information has
been provided regarding some of these transactions. The Board
believes that the decision whether to grant credit in an individual case
rests with the lending institution. In making this decision, the Board
expects the institution to abide by safe and sound banking practices
a n d to provide

See also Cal. Fin. Code § 3752(a)(4) (West 1993) (providing that the
state in which the operations of a U.S. bank holding company are
principally conducted is the state in which the total deposits of its
subsidiary banks are largest).
7. See Ohio Rev. Code Ann. § 1101.05 (Anderson 1988) (permitting
interstate acquisitions if the acquiring company's home state would
permit acquisitions of banks in such state by an Ohio-based bank
holding company on terms that are substantially no more restrictive
than those established for out-of-state bank holding companies under
Ohio law). Ohio law also prohibits an acquiring out-of-state institution
from controlling more than 20 percent of all financial institution
deposits in Ohio upon consummation of the transaction, and requires
the bank commissioner to review the financial, managerial, and
convenience and needs considerations of the proposed acquisition. Id.
8. See 12 U.S.C. § 2903.




525

e q u a l opportunity

for credit

to all applicants.

After

careful consideration of the comments and all the evidence in the
record, including relevant examination reports and responses to those
comments, the Board has concluded that the comments regarding
individual loan denials do not indicate that Banc One or Valley
National has engaged in any unsafe or unsound lending practices or
has refused to extend credit in violation of the Equal Credit Opportunity Act or other relevant statutes.
The Board also has reviewed comments from parties currently or
previously involved in litigation or other disputes with Banc One or
Valley National, or one of their respective subsidiaries, in connection
with bankruptcy or foreclosure proceedings or other matters relating
to outstanding loans. In light of all the facts of record, including
relevant examination reports, the Board does not believe that these
comments warrant denial of these applications. The Board also notes
that these commenters will be able to obtain any appropriate relief to
their grievances under applicable principles of law.

526

Federal Reserve Bulletin • May 1993

for minorities, particularly Hispanics and African- and
Native-Americans, and insufficient involvement by its
board of directors in CRA-related matters and oversight. Protestants also have specifically criticized Valley National Bank's record regarding:
(1) Lending to minority businesses, homeowners,
and consumers and to low- and moderate-income
neighborhoods and persons in its service communities;
(2) Lending to small businesses, particularly with
respect to loan programs supported by the Small
Business Administration ("SBA");
(3) Disproportionate rates of denying applications
submitted by minority and low- and moderate-income credit applicants as reflected in data reported
under the Home Mortgage Disclosure Act
("HMDA"); and
(4) Support for community development projects
and programs, and philanthropic contributions relating to the economic and housing needs of inner-city
and minority communities. 10
These criticisms also were reflected in Protestants'
comments relating to the CRA performance records of
Banc One's subsidiary banks, particularly banks located in Cleveland, Columbus, and Cincinnati, all in
Ohio. Several Protestants also criticized the geographic distribution of Banc One's branch offices in
Cleveland, and the overall commitment of Banc One's
boards of directors and senior management to CRArelated objectives, particularly in the development of
special credit products to assist in meeting the credit
needs of low- and moderate-income individuals. One
Protestant, while acknowledging positive CRA efforts
of Banc One in Ohio, expressed concern that this
transaction would result in adverse impacts upon, or
insufficient benefits for, minority and low- and moderate-income communities similar to deficiencies alleged
by this Protestant in connection with Banc One's
previous expansion into Texas. 11

Some Protestants have requested that the Board
delay the processing of these applications so that the
Board may receive additional information and comment, including loan information from Banc One. 12
Several Protestants also have urged the Board not to
act until the results of a pending CRA performance
examination of Valley National Bank by the Office of
the Comptroller of the Currency ("OCC") have been
made available for public comment. Other commenters have requested that the Board conduct audits of
the lending records and practices of both the Banc One
and the Valley National organizations.
The Board has invited public comment over an
extended period of time in this case and, as noted
above, has received substantial submissions regarding
the CRA performance of Banc One's and Valley
National's subsidiary banks. In addition, the Federal
Reserve Bank of Cleveland ("Reserve Bank") conducted an inspection of Valley National Bank's CRA
performance as of November 1992 ("November Inspection") in conjunction with the OCC's examination
of that institution. The results of this inspection were
made available to Valley National, Banc One and the
Protestants, and their comments in response to the
inspection have been carefully considered by the
Board.
As discussed in this Order, the record of these
applications contains substantial information regarding the issues raised by the Protestants. In the Board's
view, the record as it currently stands permits a fair
evaluation of the CRA performance records of the
Banc One and Valley National organizations and the
convenience and needs factor of the BHC Act with
respect to this proposal.
In this regard, the Board has carefully reviewed the
CRA performance records of Banc One and Valley
National and their respective subsidiary banks, the
comments presented in written submissions and Banc
One's and Valley National's responses to those com-

10. Protestants also have suggested that approval of this proposal
should be conditioned upon Banc One's agreement to CRA-related
commitments; upon the sale of Valley National's operations in California to an institution that would be more committed than Banc One
to CRA-related objectives; or upon Banc One's presentation of a
specific plan to improve the CRA performance record of Valley
National Bank.
11. The Board notes that it recently examined the CRA performance
record of Banc One's subsidiary in Texas, and concluded that this
record was consistent with approval of a proposal by Banc One to
expand its banking operations in that state. See Banc One Corpora-

the employment, development, advancement, and treatment of employees and applicants for employment, the Board believes that the
alleged deficiencies in the organizations' general personnel and employment practices, including third-party contracting matters, are
beyond the scope of the factors that may be assessed under the CRA
or the convenience and needs factor of the BHC Act.
12. Several Protestants believe that notice of these applications
should be republished in Spanish-language media. The Board's rules
require, in addition to publication in the Federal Register, that notice
of an application and a public comment period be published in a
newspaper of general circulation in the communities in which the head
offices of the applicant (or its largest subsidiary bank) and the banks to
be acquired are located. 12 C.F.R. 225.14(b)(2) and 262.3(b). These
publication requirements ensure that interested members of the public
are afforded an adequate opportunity to present their views to the
Board.
Other Protestants believe that a delay is warranted until anticipated
changes in CRA and other policies relevant to the application can be
implemented by the new Administration.

tion, 78 Federal

Reserve

Bulletin

932 (1992).

Protestants also have raised issues that are not related to the record
of performance by Banc One and Valley National under the CRA,
including matters relating to third-party minority contracts, ethnic
diversity within senior management and boards of directors, and equal
employment opportunity throughout the work force. While the Board
fully supports affirmative programs designed to promote equal opportunity in every aspect of a bank's personnel policies and practices in




Legal Developments

ments, and the November Inspection and comments
related to that inspection, as well as all other relevant
facts of record, in light of the CRA, the Board's
regulations, and the Statement of the Federal Financial Supervisory Agencies Regarding the Community
Reinvestment Act ("Agency CRA Statement"). 13
Record of Performance

Under the CRA

A. Evaluations of CRA Performance
The Agency CRA Statement provides that a CRA
examination is an important and often controlling
factor in the consideration of an institution's CRA
record and that these reports will be given great weight
in the applications process. 14 In this regard, Banc
One's lead subsidiary bank in Ohio, Bank One, Columbus, N.A., Columbus, Ohio ("Bank One Columbus"), received an "outstanding" rating at its most
recent examination for CRA performance conducted
by the OCC as of May 13, 1991. Among Banc One's
other large subsidiaries in Ohio, the banks in Akron
and Dayton also received "outstanding" ratings, and
the banks in Cincinnati and Cleveland received "satisfactory" ratings, at their most recent examinations
for CRA performance conducted by the OCC.15 Overall, the most recent CRA performance examinations
for Banc One's subsidiary banks show 19 "outstanding" ratings and 41 "satisfactory" ratings. Banc One
has committed to integrate its CRA policies and programs at all the banks to be acquired from Valley
National and, where appropriate, to supplement or
replace Valley National's programs with its own.
The OCC has recently concluded a CRA performance examination of Bank One, Cleveland, N.A.,
Cleveland, Ohio ("Bank One Cleveland"), and the
Board has been advised that the preliminary examination rating assigned to this institution is "needs to
improve." As explained more fully below, Bank One
Cleveland constitutes a small part of the overall Banc
One organization, and the Board expects Banc One to
address the areas of weakness identified by the OCC.
With respect to Valley National's examination
record, all of Valley National's subsidiary banks for
which public examination data are available have been
rated "satisfactory" in their most recent examinations
for CRA performance by their primary regulators.16 In

13. 54 Federal Register 13,742 (1989).
14. Id. at 13,745.
15. Each of these examinations was conducted during 1991.
16. These examinations were conducted as follows:
(1) Valley Bank & Trust Company, N.A., Salt Lake City, Utah
(OCC as of February 1992);
(2) Valley Central Bank, Richfield, Utah (Federal Deposit Insurance
Corporation as of June 1991); and




527

addition, the Board has been advised that the OCC
recently concluded its CRA examination of Valley
National Bank, and assigned the bank a CRA rating of
"satisfactory." The OCC's CRA examination report
has been forwarded to Valley National Bank, but has
not yet become publicly available. The Board also has
carefully reviewed the information collected in the
November Inspection, as well as the responses to that
inspection submitted by Protestants and other facts of
record, regarding the CRA performance of Valley
National Bank. In this regard, the November Inspection noted areas in which Valley National Bank's CRA
performance record could be strengthened. For example, the inspection concluded that the CRA selfassessment measures adopted at Valley National Bank
were somewhat limited, and involved no direct assessment performed by the board. In addition, the November Inspection indicated that ascertainment activities
largely are not the result of an established, boarddirected effort, but instead include a variety of formal
and informal means utilized to ascertain local credit
needs, including an officer calling program, customer
surveys, contacts with public officials and neighborhood organizations, and focus group meetings with
consumers and small businesses. 17 As discussed below, Banc One intends to address these areas of
weakness by integrating its CRA policies and programs at Valley National.
B. Corporate Policies
Banc One has in place the types of policies and
procedures that the Board and the other Federal bank
supervisory agencies have indicated contribute to an
effective CRA program. In this regard, Banc One
monitors subsidiary bank CRA performance at both
the corporate level and the state holding company
level. At the corporate level, a corporate CRA committee, composed of the CRA officers of several state
holding companies and senior corporate mortgage
representatives, monitors community reinvestment
performance of all Banc One affiliates and reports on
this performance directly to the board of directors of
Banc One. The CRA committee requires quarterly
reports from all affiliate banks describing their CRA
efforts. The CRA committee also reviews and updates
corporate-wide CRA policy, monitors local issues to
detect possible matters of concern, and conducts

(3) California Valley Bank, N.A., Fresno, California (OCC as of
July 1990).
17. Generally, the November Inspection found that the center of
Valley National Bank's ascertainment efforts had recently been redirected toward external discussions with local groups and organizations as opposed to internal analysis of community credit needs.

528

Federal Reserve Bulletin • May 1993

extensive CRA training programs. Company-wide
training programs are held annually for bank CRA
officers serving medium- and large-sized communities.
In addition, the CRA committee has produced a CRA
training video designed to instruct every Banc One
employee on CRA policy, CRA reporting requirements, and CRA performance expectations. Banc
One's corporate CRA Research Division assists Banc
One's subsidiary banks in collecting and analyzing
lending data to monitor the distribution of loan products throughout their delineated market areas. 18
At the bank level, subsidiary banks file quarterly
reports to their state holding company CRA Officer
detailing the banks' CRA performance. The CRA
officers also work together with internal bank CRA
committees comprised of senior managers representing different areas of the bank such as marketing, retail
lending and mortgage functions. Banc One requires
that CRA officers be personally involved in reporting
bank CRA performance to their local boards of directors to ensure that the directors maintain a comprehensive understanding of the bank's CRA efforts and
performance. Each Banc One subsidiary bank utilizes
Banc One's CRA Policy and Procedure Manual, which
is updated to address changes in regulatory requirements or Banc One's policies. The manual sets forth
the 12 assessment factors examined by federal regulators and includes Banc One's principles for subsidiary
bank programs.
Banc One also requires each subsidiary bank to
submit a strategic plan identifying local banking needs.
Once these needs are identified, Banc One subsidiaries
attempt to meet these needs through product development and modification, marketing initiatives, and community outreach programs.
Banc One's subsidiary banks also are encouraged to
establish Community Advisory Councils to institutionalize the process of communication between the bank
and its market. The banks utilize this resource to open
avenues for enhanced market penetration and to foster
a better understanding between the bank and the
community. In addition to Banc One's company-wide
CRA training program, state holding company CRA
officers also hold monthly or quarterly information and
training sessions for all bank CRA officers in their
state.
Valley National Bank's board of directors and senior management also provide oversight and direction
of CRA activities through three standing committees,

18. Banc One's CRA Research Division has provided training in
understanding HMDA aggregation tables and ensures that all affiliates
file complete and accurate reports of residential lending activity. This
has enabled affiliate banks to identify areas of opportunity or concern
and to target initiatives so as to address perceived needs.




the CRA Policy Committee, the CRA Public Policy
Committee, and the CRA Implementation Committee.
As previously noted, Banc One has stated that it will
integrate Valley National into its own CRA program.
Specific elements of the Banc One program to be
incorporated include: detailed quarterly reporting on
CRA matters, which will be furnished to the boards of
directors and senior management of the institutions to
be acquired; direct contact between Valley National
Bank's CRA Officer and its board of directors; and the
review of quarterly CRA reports at board meetings. In
addition, Banc One intends to enhance other elements
of the Valley National Bank CRA program, as discussed in this Order and in Banc One's response to the
November Inspection.
C. Ascertainment and Marketing
Banc One affiliates actively assess the credit and
banking needs of their local service areas. Each affiliate bank is responsible for formulating and submitting
to its board of directors a strategic plan for identifying
local banking needs. Each bank engages in direct
communication with its service communities through
interviews with community leaders, the creation of
community advisory councils, and bank participation
in community organizations.
With respect to ongoing marketing efforts, Banc
One has distributed a CRA Marketing and Advertising
Guide to all affiliate banks which instructs subsidiary
banks on such matters as the relationship between
CRA goals and general marketing objectives, the characteristics of populations with special credit needs,
and creative requirements and advertising copy points
to be considered in penetrating particular markets. 19
Banc One also markets specific banking products by
advertising on television and radio and in print media.
In specific markets, corporate marketing materials are
supplemented where deemed appropriate. 20 With respect to its marketing efforts in the Hispanic community, certain Banc One subsidiaries provide Spanishlanguage home buyer counseling, bilingual ATM
service, and Spanish-language brochures on basic
banking products. Banc One's subsidiary banks also
employ bilingual mortgage originators in communities
where such expertise is warranted. In addition, Bank
One, Texas, N.A., Dallas, Texas, has developed numerous Spanish-language print advertisements which

19. This guide also includes a selection of product-specific advertisements that can be customized for particular markets where government programs are available.
20. For example, Banc One runs a national television media
campaign. In addition, the Banc One organization advertises on a
Spanish-language television station in the Milwaukee, Wisconsin area
and on the Black Entertainment Network in the Lima, Ohio area.

Legal Developments

it has made available to other Banc One subsidiaries
that might benefit from their use.
Valley National Bank's ascertainment activities are
administered by its board of directors and senior
management, which provide direction through the
formulation of the bank's CRA Mission Statement and
CRA Strategic Action Plan, as well as oversight and
monitoring of these efforts. The Strategic Action Plan
details the process that the bank has established to
identify community credit needs, to research how the
bank might respond to those needs, and to develop or
enhance products and services designed to meet those
needs. Valley National Bank also has designed a
comprehensive marketing plan which articulates the
various methods to be used for promoting the bank's
credit products and services throughout its delineated
communities, including low- and moderate-income
areas.
Banc One has indicated that it intends to continue
Valley National Bank's recent orientation toward ascertainment activities that are based upon direct contact with community representatives as opposed to
institutional reflection regarding community credit
needs. Banc One also intends to review the community delineations of Valley National Bank, and has
indicated that the institution should have at least four
regional markets in the State of Arizona, each with a
full-time CRA Officer dedicated to understanding community credit needs and evaluating the extent to which
the bank is successful in meeting such needs. Evaluations of CRA performance also will be conducted on a
market-by-market basis as opposed to the current
state-wide system of review. In addition, the ascertainment methods currently employed by Valley National Bank will be supplemented by locally-appointed
Community Advisory Councils and geodemographic
reports compiled by Banc One's CRA Research Division. With respect to CRA-related marketing, Banc
One will require that the bank's CRA Officer attend
and participate in meetings of marketing personnel.
Banc One expects that the continuing and active
participation of the CRA Officer in all activities of the
marketing department will be effective to ensure that
all marketing initiatives are sensitive to the institution's CRA-related objectives.
D. Banc One's Lending and Other Activities
Banc One has instituted or participates in a number of
programs designed to provide a variety of credit
products to low- and moderate-income and minority
persons. At the corporate level, Banc One has established a system-wide Community Development Corporation ("CDC") with resources to assist all bank
affiliates in financing projects designed to promote



529

community welfare, housing availability and economic
development. As of December 1992, the CDC had
provided $20 million in equity for low-income housing
projects utilizing low-income housing tax credits.
Banc One also has a mortgage subsidiary, Banc One
Mortgage Corporation, which assists affiliates by offering specialized mortgage products designed for lowand moderate-income applicants. In addition, the
mortgage subsidiary has created and sponsors an
affordable housing lender program, through which
affiliates with sufficient customer demand for affordable housing have employed mortgage originators specialized in affordable housing loans and low-income
mortgage products.
Banc One requires all affiliate banks to participate in
federal, state, and local lending programs which are
designed to assist disadvantaged populations such as
racial and ethnic minorities and the poor, disabled, or
elderly, including particularly those programs sponsored by the Small Business Administration, the Department of Housing and Urban Development, and the
Federal Housing Administration. Banc One subsidiaries are certified SBA lenders and have made millions
of dollars of loans through this program. Banc One
subsidiaries also provide funding for other programs
designed to help finance small businesses, including
the Minority Enterprise Small Business Investment
Corporation and the Cleveland Micro Loan Program.
Banc One subsidiaries also have made investments
in numerous programs designed to help provide housing for low-income families, including the Cincinnati
Equity Fund, the Cleveland Housing Network, and
the Cleveland Neighborhood Equity Fund. Banc One
also holds an annual Retail Lending Conference,
which focuses on such matters as the collection and
use of geocoded information for market delineation
and understanding bank performance with respect to
the equitable distribution of credit.
Banc One affiliate banks may design and promote
special lending programs which, by their interest rates,
amortization schedules, and collateral requirements,
target particular types of credit needs. Banc One also
encourages its subsidiary banks to be flexible in the
application of lending criteria to low-income populations. Examples of such flexibility include the financing of points and closing costs in mortgage loans, and
the use of a 95 percent loan-to-value ratio for loans
with mortgage insurance.
The Board also has reviewed Banc One's loan
products and community development activities in
light of Protestants' comments on a city-by-city basis.
In each of the principal cities in which it operates,
Banc One has put in place a number of programs
designed to help meet the credit needs of its service
communities, including the following:

530

Federal Reserve Bulletin • May 1993

Cincinnati. In Cincinnati, Banc One has hired an
affordable housing lender and offers products targeted
to low- and moderate-income home buyers such as the
Community Homebuyer Vi mortgage and a loan product with flexible underwriting guidelines. Banc One
also supplements the efforts of its affordable housing
originator with targeted marketing strategies such as
outdoor advertising, minority-audience media, and
advertisements on bus benches in target neighborhoods. The Cincinnati bank also uses the services of a
minority appraiser and participates in numerous home
buying seminars. The bank recently hired a research
manager to develop a more comprehensive system to
analyze the geographic distribution of loans.
In 1989, Banc One began offering in Cincinnati both
FHA and Ohio Housing Finance Agency ("OHFA")
First Time Homebuyer loans, which feature belowmarket interest rates and reduced down payments. In
1990, 21 percent of the bank's home purchase loans in
the Cincinnati area were FHA loans. The bank also
introduced in 1990 a new home equity loan product
which allows individuals to borrow up to 100 percent
of the equity in their homes.
Banc One also has committed $250,000 through its
CDC to a low-income housing tax credit investment in
the Cincinnati Equity Fund to rehabilitate housing in
low- and moderate-income neighborhoods, and has
invested $1 million in the Ohio Equity Fund in connection with low-income housing. Banc One has recently established a Cincinnati/Hamilton County Community Advisory Council as part of its effort to serve
the Cincinnati market.
Banc One has focused on improving originations of
its home improvement loan products in the Cincinnati
market. 21 Banc One's lending under this program has
increased from only 8 minority borrowers in 1990 to 82
borrowers in 1991 and 130 borrowers through the third
quarter of 1992. In addition, in its most recent examination, the OCC stated that the bank's loan volume
was adequate in relation to the institution's resources
and community credit needs. 22
The majority of the bank's commercial loans are to
small businesses. In June 1992, Banc One established
a Business Banking Division in Cincinnati and hired

21. In this regard, the bank recently implemented improved procedures to ensure that all home equity loans used for home improvement
purposes are reported on the HMDA loan register.
22. The bank's loan mix has a larger concentration of 1-4 family
residential loans, home equity loans, loans to individuals, and municipal loans, and a smaller concentration of commercial and industrial
loans, than banks with similar asset sizes and branching structures.
The institution's loan mix at the end of 1990 included 48 percent real
estate loans, 31 percent loans to individuals, 13 percent commercial
and industrial loans, and 3 percent municipal loans. Of the real estate
loans, 31 percent were for 1-4 family residential homes and 14 percent
were for home equity loans.




six commercial lenders to assist the bank in accommodating the credit needs of small and minority
businesses. Banc One representatives also serve on
committees and projects that help fund small businesses.
Columbus. Bank One Columbus offers loans
through FHA, VA, and OHFA loan programs. In
1990, the bank closed 85 housing loans through these
programs in the aggregate amount of $4.5 million. In
addition, in 1990 the bank generated 570 home mortgage loans totalling $31.5 million and 1871 home
improvement loans totalling $19 million within its
market area. The bank also has adopted real estate
loan programs with flexible underwriting standards
and expanded consumer education in an effort to help
address the affordable housing needs of the community.
In the Columbus market, Banc One approved 529
loans to small businesses through the first three quarters of 1992 in the aggregate amount of $27.3 million.23
Banc One conducts its small business lending in Columbus through the Business Banking Group, which
has a target market that includes businesses owned by
women and minorities. Outreach activities include
media advertising, direct mailings, telemarketing,
newsletters, direct calling, and special promotions.
The bank also provides special educational and informational services to businesses, and works with community and government groups to enhance lending
opportunities to targeted businesses.
Banc One is involved in community development
activities throughout the Columbus market. The bank
committed $3.5 million to the Columbus Housing
Partnership for affordable housing projects. The bank
also participated in funding the Urban Land Institute's
recent study of the Columbus area's housing needs,
and now is addressing the study's results. In addition,
the bank utilizes the corporate CDC in addressing
community needs. On behalf of the bank, the CDC
invested $1.3 million in two Franklin County projects
sponsored by the Columbus Housing Partnership and
Urban Rental Housing Development.
Dayton. Banc One has taken steps to improve
significantly its lending to low- and moderate-income
individuals in the Dayton area. In response to ascertained credit needs, Banc One has developed in Dayton a purchase-rehabilitation loan program, and has
added FHA and VA mortgage products. The bank also
has developed mortgage products which offer flexible
lending criteria and lower down payments. An example of this is the Community Home Buyers Program,
23. Through the third quarter of 1992, the regional office of the SBA
reported that no other lender in the fifty-two county region had
extended more SBA loans.

Legal Developments

where down payment and other underwriting requirements are reduced for low- and moderate-income
individuals. Other housing-related loan programs are
offered in conjunction with the bank's Historic Restoration Mortgage and the Sponsored Purchase Mortgage program, under which a non-profit organization
can participate in creating affordable housing for lowand moderate-income individuals. The bank also regularly extends loans through the Vision Loan program,
which is designed to provide affordable housing for
low- and moderate-income home buyers in the area,
and through the City of Dayton's Neighborhood Lending Program. The bank is the leading lender in the
Neighborhood Lending Program's home purchase and
purchase-rehab program, which provides an interest
buy-down feature by the City of Dayton during the
first three years of the mortgage loan. The bank also
participates in the OHFA First Time Homebuyer
Program, which offers below-market interest rates and
reduced down payment requirements.
Through the Banc One CDC, the bank is an equity
participant in County Corp's Homestart II Program,
which is designed to develop affordable housing. The
bank also is involved through the CDC in the McPherson Town neighborhood renovation program, to
which Banc One has provided funding for the acquisition, renovation, and resale of residential properties.
In 1990, the bank closed 110 FHA and VA loans,
representing approximately 29 percent of the bank's
home purchase and refinancing loans during the period. In addition, the bank made 57 residential mortgage loans in low- and moderate-income census tracts
in 1990.
In 1992, Banc One in Dayton introduced a small
business revolving line of credit offered to businesses
with less than $2 million in annual sales. The bank has
approved over 100 applications for this product representing over $2 million in credit commitments. Banc
One also has committed $200,000 in loans to the
Dayton-Montgomery MicroEnterprise Fund, and has
recently agreed to invest an additional $90,000 in the
Minority Enterprise Small Business Investment Corporation, which would raise the bank's total investment in this corporation to $175,000 and make it the
largest investor in this fund.
The Dayton bank is a certified SBA lender and has
made nearly 60 SBA-guaranteed loans totalling
$14 million in the past four years. Through September,
Banc One had extended 11 SBA loans for a total of
$2 million in 1992. In 1990, the Dayton bank made
63 loans totalling $7.7 million to small businesses
located in areas with a minority population of at least
20 percent. This figure increased to 69 loans totalling
$8.4 million in 1991.



531

E. Valley National B a n k ' s Lending and Other
Activities
Banc One has indicated that it intends to enhance
Valley National Bank's lending programs upon consummation of this proposal. For example, Banc One
intends to incorporate the bank's Low/Moderate Income Mortgage Lending Program into Banc One's
affordable housing lender program, which includes
review of all denied loan applications and specialized
underwriting personnel. Banc One also will expect
Valley National Bank to employ the resources of the
Banc One CDC as well as government programs for
community or economic development.
Banc One has noted, however, that Valley National
Bank has developed a number of programs designed to
meet the credit needs of low- and moderate-income
populations in Arizona. Banc One expects this bank
following consummation to continue these products
and programs to the extent they are effective in
meeting local credit needs. Banc One expects that
Valley National Bank will continue to be an active
participant in government-sponsored loan programs,
and that CRA officers will work with local government
officials to modify or develop programs in response to
the changing needs of their respective service communities.
The November Inspection indicated that Valley
National Bank offers a wide range of loan products
throughout its delineated communities. In the area of
single-family housing loans, the bank offers, in addition to an array of traditional mortgage products,
various loan programs targeted to the credit needs of
low- and moderate-income households. For example,
Valley National Bank's Express Mortgage Program
was developed to enable lower-income families to
obtain, through a simple application process, longterm fixed-rate mortgages in amounts from $10,000
with no mortgage points. In the first two months after
its introduction, the bank approved over 1,000 loans
under the Express Mortgage Program for a total of
approximately $33.5 million. The bank also has introduced a Low/Moderate Income Mortgage Lending
Program under which low- and moderate-income applicants may obtain long-term fixed-rate mortgages for
the purchase of affordable housing. The program provides for flexible underwriting criteria and down payment requirements. Valley National Bank has established a fund of $10 million to fund these loans for the
first year of the program, and has hired three loan
officers to manage the product from designated lowand moderate-income branches.
Valley National Bank also helps to meet the credit
needs of low- and moderate-income home owners
through joint efforts with such organizations as Hous-

532

Federal Reserve Bulletin • May 1993

ing for Mesa, Catholic Social Services of Tucson,
Comite De Bienestar, and the Tucson Urban League.
In addition to these private efforts and the programs
designed by the bank itself, Valley National Bank also
participates in various government-sponsored loan
programs targeted to the needs of lower-income
households, including the FNMA Community Home
Buyers Program and Neighbors Mortgage Loan Program, the Veterans Administration No Down Payment
Loan Program, and the HUD 203(k) and 221(d)(2)
programs.
The bank also offers home equity loans on both
fixed- and variable-rate terms for up to 100 percent of
the borrower's home equity, as well as FHA- and
HUD-sponsored home improvement loan programs,
and participates to a significant extent in the City of
Phoenix Home Improvement Loan program.24
To improve credit services to small businesses,
Valley National Bank opened its Small Business Loan
Center in April 1991, and in January 1992 organized
the Small Business Banking Division. These groups
were established to work with businesses with annual
sales of not more than $1 million and aggregate credit
needs of $250,000 or less. The bank is a significant
lender to small businesses, with $142 million in its
small business loan portfolio as of September 1992.25
Valley National Bank also participates in a SBAsponsored lending program for small businesses, and
has begun to increase the number and amount of loans
made under this program.
The bank also participates to a significant extent in
community development and redevelopment projects.
In addition to significant purchases of municipal bonds
issued by its local communities, the bank is receptive
to meeting articulated financial needs on both an
individual and joint-efforts basis. In this regard, the
November Inspection concluded that the bank appears
to be committed to investing in development and
redevelopment projects. For example, Valley National
Bank provided $3 million of the initial $10 million of
funding for the Arizona Multibank Community Development Corporation, which was established by the
Arizona Bankers Association to provide financial and
technical assistance for the advancement of small
business, low- and moderate-income housing, and
economic development. The bank also has joined with
a non-profit organization to provide credit to small,
family-owned businesses, and provides funding to

24. Valley National Bank has approved loan requests totalling
approximately $3.75 million under this program, which provides for
subsidized interest rates and a maximum loan amount of $15,000.
25. The Board notes that 14 percent of the bank's small business
borrowers are located in minority census tracts.




various business development and housing rehabilitation programs.
F. HMDA Data and Lending Practices
The Board has reviewed the HMDA data reported by
subsidiary banks of Banc One and Valley National in
light of Protestants' comments. Data cited by Protestants indicate some disparities in approvals and denials
of loan applications according to racial and ethnic
group and income status in the areas served by these
organizations. Because all banks are obligated to
adopt and implement lending practices that ensure not
only safe and sound lending but also equal access to
credit by creditworthy applicants regardless of race,
the Board is concerned when the record of an institution indicates disparities in lending to minority credit
applicants. The Board recognizes, however, that
HMDA data alone provide only a limited measure of
any given institution's lending in its community. The
Board also recognizes that HMDA data have limitations that make the data an inadequate basis, absent
other information, for conclusively determining
whether an institution has engaged in illegal discrimination on the basis of race or ethnicity in making
lending decisions.
The most recent examinations for CRA compliance
and performance conducted by bank supervisory
agencies found no evidence of illegal discrimination or
other illegal credit practices at any subsidiary bank of
Banc One or Valley National. In addition, the November Inspection found no illegal credit practices or
discrimination at Valley National Bank.
HMDA data also show some improvement in certain
areas of lending to minorities and to low- and moderate-income credit applicants by the Banc One organization. These improvements appear to have resulted
from steps taken by the organization to improve its
lending record, such as the affordable housing lender
program and the activities of the CRA Research Division discussed above.
G. Recent CRA Examination of Bank One
Cleveland
In connection with its recent CRA examination of
Bank One Cleveland, the OCC has preliminarily rated
the CRA performance of this institution as "needs to
improve." The Board notes that Bank One Cleveland
represents less than 5 percent of Banc One's total
consolidated assets. As previously discussed in this
Order, the Banc One organization has a demonstrated
history of compliance with the CRA, and the remaining banking assets of the Banc One organization are in

Legal Developments

institutions rated "satisfactory" or "outstanding" for
CRA performance.
In this regard, the Board notes that Bank One
Cleveland's preliminary rating of "needs to improve"
represents a recent downgrading from the current
rating of "satisfactory" for this institution. The Board
expects Banc One to take steps that will address the
areas of weakness identified in the OCC's most recent
examination. In addition, Banc One must submit to the
Board, when delivered to the OCC, a copy of the plan
to address the weaknesses in the CRA performance
record of Bank One Cleveland identified by the OCC.
Banc One also must report to the Reserve Bank, on a
quarterly basis commencing June 30, 1993, as to its
progress in remedying these problems and implementing the plan for improvement. Banc One's progress in
remedying these deficiencies will be taken into account in connection with future applications by Banc
One. 26
H. Conclusion Regarding Convenience and
Needs Factor
The Board has carefully considered all of the facts of
record, including the comments filed in this case, in
reviewing the convenience and needs factor under the
BHC Act. Based on a review of the entire record,
including the findings of the November Inspection,
information provided by commenters supporting and
opposing this proposal, and the results of CRA performance examinations conducted by the respective primary regulators of the subsidiary banks of Banc One
and Valley National, the Board believes that the
efforts of Banc One and Valley National to help meet
the credit needs of all segments of the communities
served by their subsidiary banks, including low- and
moderate-income neighborhoods, as well as all other
convenience and needs considerations, are consistent
with approval of this proposal. 27

26. One Protestant has requested that the Board delay consideration
of these applications to permit consideration of the OCC's pending
CRA performance examination of Bank One Cleveland. As discussed
in this Order, the Board has taken into account the preliminary
examination rating assigned to Bank One Cleveland by the OCC
rather than delay consideration of these applications.
27. Certain of the Protestants have requested that the Board hold
a public meeting or hearing with respect to this application. The
Board is not required under section 3 of the BHC Act to hold a
public hearing unless the primary supervisor for the bank to be
acquired disapproves the proposal. In this case, the primary supervisors for the institutions to be acquired have not objected to Banc
One's application.
Under its rules, the Board may, in its discretion, hold a public
meeting or hearing on an application to clarify factual issues related to
the application and to provide an opportunity for testimony, if
appropriate. 12 C.F.R. 262.3(e) and 262.25(d). The Board has carefully considered Protestants' requests for such a meeting or hearing,
and the written comments submitted by Protestants. In the Board's




533

Other Considerations
Banc One and Valley National do not compete in any
banking market. Hence, the Board has concluded that
the proposed acquisition would not adversely aflfect
competition in any relevant banking market. 28 The
Board also has concluded that the financial and managerial resources 29 and future prospects of Banc One,
Valley National, and their respective subsidiaries, and
all other supervisory factors the Board must consider
under section 3 of the BHC Act, are consistent with
approval of this proposal.
Banc One also has applied, pursuant to section
4(c)(8) of the BHC Act, to acquire Concho Insurance, a company that provides credit-related life and
disability insurance issued in connection with extensions of credit by Valley National Bank, and VNC
Investment, a company that engages in the making
and arranging of commercial loans. 30 These activities
are permissible for bank holding companies under the
Board's Regulation Y, 31 and Banc One proposes to
conduct these activities in accordance with the
Board's regulations.
In order to approve this application, the Board also
must find that the performance of the proposed activities by Concho Insurance and VNC Investment "can

view, interested parties have had ample opportunity to submit and
have submitted substantial written comments that have been considered by the Board. Moreover, Protestants have indicated general
disagreement regarding the appropriate conclusions to be drawn from
the facts of record, but have not identified facts that are in dispute and
material to the Board's decision. In light of these considerations, the
Board has determined that a public meeting or hearing is not necessary
to clarify the factual record in this application, or otherwise warranted
in this case. Accordingly, the requests for a public meeting or hearing
on this application are hereby denied.
28. In this regard, one commenter has maintained that the proposal
would result in a undue concentration of banking resources in Banc
One.
29. In addressing the managerial considerations of this proposal,
the Board has carefully considered several comments that related to
the operations of the subsidiary banks of Banc One and Valley
National. Some comments related to particular consumer and business dealings, including loan transactions and payroll processing
matters, involving certain of these institutions. Other commenters
have alleged, without providing any supporting facts or documentation, that management officials of the Banc One and Valley
National organizations have engaged in improper, and in some cases
criminal, activity and conduct. The Board has reviewed these
comments in light of all of the facts of record in this case, including
information responding to these comments provided by Banc One
and Valley National, relevant examination reports, and information
provided by other federal regulatory agencies. Based on this review,
the Board has concluded that these comments do not reflect so
adversely upon the managerial resources of these organizations as to
warrant denial of this proposal.
30. VNC Investment also is an investment company which invests
in debt and equity securities which do not comprise more than
5 percent of the voting securities of any issuer. This is an activity
permitted to bank holding company subsidiaries without the Board's
prior approval under section 4(c)(7) of the BHC Act and section
225.22(c)(6) of the Board's Regulation Y.
31. See 12 C.F.R. 225.25(b)(8)(i) and 225.25(b)(1).

534

Federal Reserve Bulletin • May 1993

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." 12 U.S.C. § 1843(c)(8). The Board
expects that the continuance of these activities by
these nonbanking subsidiaries would maintain the
level of competition among providers of these services. In addition, there is no evidence in the record
that consummation of this proposal would result in any
significantly adverse effects, such as undue concentration of resources, decreased or unfair competition,
conflicts of interests, or unsound banking practices.
Accordingly, the Board concludes that the balance of
the public interest factors that it is required to consider
under section 4(c)(8) of the BHC Act is favorable, and
consistent with approval of Banc One's section 4
application.
Based on the foregoing and other facts of record,
the Board has determined that the application should
be, and hereby is, approved. This approval is specifically conditioned upon compliance by Banc One
with all of the commitments made in connection with
this application and with the conditions referenced in
this Order. The Board's determination with respect
to its nonbanking activities also is subject to all of the
conditions set forth in Regulation Y, including those
in sections 225.4(d) and 225.23(b), and to the Board's
authority to require such modification or termination
of the activities of a bank holding company or any of
its subsidiaries as the Board finds necessary to assure
compliance with, and to prevent evasion of, the
provisions of the BHC Act and the Board's regulations and orders issued thereunder. For purposes of
this action, the commitments and conditions relied
on in reaching this decision shall be deemed to be
conditions imposed in writing by the Board and, as
such, may be enforced in proceedings under applicable law.
The banking acquisitions shall not be consummated
before the thirtieth calendar day after the effective
date of this Order, and the proposal shall not be
consummated later than three months after the effective date of this Order, unless such period is extended
for good cause by the Board or by the Federal Reserve
Bank of Cleveland, acting pursuant to delegated authority.
By order of the Board of Governors, effective
March 1, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.




J E N N I F E R J . JOHNSON

Associate

Secretary of the Board

First Bank S y s t e m , Inc.
Minneapolis, Minnesota
Order Approving the Acquisition of a Bank Holding
Company
First Bank System, Inc., Minneapolis, Minnesota, and
its wholly owned subsidiary, Central Bancorporation,
Inc., Denver, Colorado (together, " F B S " ) , both bank
holding companies within the meaning of the Bank
Holding Company Act ( " B H C Act"), have applied
under sections 3(a)(3) and 3(a)(5) of the BHC Act
(12 U.S.C. § 1842(a)(3) and (a)(5)), to acquire all of the
voting shares of Colorado National Bankshares, Inc.,
Denver, Colorado ( " C N B " ) , 1 and thereby indirectly
acquire CNB's eight subsidiary banks: Colorado National Bank, Denver, Colorado; Colorado National
Bank-Belmont, Pueblo, Colorado; Colorado National
Bank-Pueblo, Pueblo, Colorado; Colorado National
Bank-Glenwood,
Glenwood
Springs,
Colorado
("CNB-Glenwood"); Colorado National Bank-Grand
Junction, Grand Junction, Colorado ("CNB-Grand
Junction"); Colorado National Bank-Longmont,
Longmont, Colorado; Colorado National Bank-Fort
Collins, Fort Collins, Colorado; and Colorado National Bank-Exchange, Colorado Springs, Colorado. 2
FBS also has applied under section 4(c)(8) of the
BHC Act to engage in nonbanking activities through
the acquisition of the following CNB subsidiaries
pursuant to section 225.25(b)(8)(i) of the Board's Regulation Y (12 C.F.R. 225.25(b)(8)(i)):
(1) Colorado National Insurance Agency, Inc., Denver, Colorado, and thereby engage in selling credit
life, and accident and disability insurance; and
(2) Colorado National Life Insurance Company,
Inc., Denver, Colorado, and thereby engage in
reinsuring credit life, and accident and disability
insurance.
Notice of the applications, affording interested persons an opportunity to submit comments, has been
published (58 Federal Register 4,436 (1993)). The time
for filing has expired, and the Board has considered
the application and all comments received in light of
the factors set forth in sections 3 and 4 of the BHC
Act.
FBS, with total consolidated assets of approximately $23.4 billion, controls 21 subsidiary banks and

1. CNB will merge into Central Bancorporation, Inc. and the
resulting entity will operate in Colorado using the CNB name.
2. In connection with FBS's proposed acquisition of CNB, FBS has
requested Board approval under section 3 of the BHC Act to acquire
an option to purchase up to 20.6 percent of the voting shares of CNB.
This option will become moot upon consummation of FBS's application to acquire CNB.

Legal Developments

one thrift organization in Colorado, Minnesota, Montana, North Dakota, South Dakota, Washington and
Wisconsin.3 FBS is the second largest commercial
banking organization in Colorado, controlling deposits
of approximately $4.3 billion, representing 14.3 percent of total deposits in commercial banking organizations in the state. 4 CNB is the third largest commercial
banking organization in Colorado, controlling deposits
of approximately $2.7 billion, representing 8.9 percent
of total deposits in commercial banking organizations
in the state. Upon consummation of this proposal,
FBS would become the largest commercial banking
organization in Colorado, controlling deposits of approximately $6.9 billion, representing 22.9 percent of
total deposits in commercial banking organizations in
the state.
Competitive

Considerations

FBS and CNB compete directly in six banking markets
in Colorado: Pueblo, Garfield County, Mesa County,
Denver-Boulder, Colorado Springs, and Fort Collins.
In the Pueblo banking market, 5 FBS is the sixth largest
banking or thrift organization ("depository institution"), controlling deposits of $109.1 million, representing 12.5 percent of total deposits in depository
institutions in the market ("market deposits"). 6 CNB
is the largest depository institution in the market,
controlling deposits of $202.4 million, representing
23.2 percent of market deposits. Upon consummation
of this proposal, FBS would become the largest depository institution in the Pueblo banking market,
controlling deposits of $311.5 million, representing
35.7 percent of market deposits. The HerfindahlHirschman Index ("HHI") would increase by 580
points to 2055.7

3. Asset data are as of December 31, 1992.
4. State deposit data are as of December 31, 1991.
5. The Pueblo banking market is defined as the Pueblo Ranally
Market Area ("RMA").
6. Market data are as of June 30, 1991. Market share data are based
on calculations in which the deposits of thrift institutions are included
at 50 percent. The Board previously has indicated that thrift institutions have become, or have the potential to become, major competit o r s of c o m m e r c i a l b a n k s . See Midwest Financial Group, 75
Reserve Bulletin 386 (1989); National
City Corporation,
70

Federal
Federal

Reserve Bulletin 743 (1984). Thus, the Board has regularly included
thrift deposits in the calculation of market share on a 50 percent
w e i g h t e d b a s i s . See,

e.g.,

First Hawaiian

Inc.,

11 Federal

Reserve

Bulletin 52 (1991).
7. Under the revised Department of Justice Merger Guidelines, 49
Federal Register 26,823 (June 29, 1984), a market in which the
post-merger HHI is above 1800 is considered to be highly concentrated. In such markets, the Justice Department is likely to challenge
a merger that increases the HHI by more than 50 points. The Justice
Department has informed the Board that a bank merger or acquisition
generally will not be challenged (in the absence of other factors
indicating anti-competitive effects) unless the post-merger HHI is at
least 1800 and the merger or acquisition increases the HHI by at least




535

The Board believes that a number of factors indicate
that this increased level of concentration in the Pueblo
banking market, as measured by the HHI, overstates
the competitive effects of this proposal. For example,
six commercial banks and two thrift institutions with a
total of $560.8 million in deposits, representing
64.3 percent of market deposits, would remain in the
market. Among these remaining institutions are four
depository institutions with market shares of approximately 14 percent, including one large bank holding
company, two local banking organizations, and one
thrift institution. These remaining competitors will
provide local consumers and small businesses with a
number of large local lending alternatives. Twelve
credit unions also have a significant competitive presence in this market, controlling approximately 16 percent of market deposits as compared with an average
of approximately five percent nationwide. Although
these credit unions do not have open membership, the
membership requirements and the number of alternative credit unions are sufficiently broad to ensure that
most consumers in the market would be eligible to join
one or more of the credit unions. In addition, a large
bank holding company recently entered the Pueblo
banking market with a small market share, and its
competitive presence may be understated by its current small market share. In light of these and other
facts of record, the Board does not believe that this
proposal would have a significantly adverse effect on
competition in the Pueblo banking market.
In order to mitigate the potential anti-competitive
effects in the Garfield County 8 and Mesa County 9
banking markets, FBS has committed to divest the
banks acquired from CNB in these markets (CNBGlenwood in Garfield County, and CNB-Grand Junction in Mesa County). FBS also has committed that
consummation of these divestitures will not exceed the
Department of Justice Merger Guidelines. 10

200 points. The Justice Department has stated that the higher than
normal threshold for an increase in the HHI when screening bank
mergers and acquisitions for anti-competitive effects implicitly recognizes the competitive effect of limited-purpose lenders and other
non-depository financial entities.
8. The Garfield County banking market comprises Garfield County.
Upon consummation of this proposal, FBS would remain the largest
depository institution in the Garfield County banking market, controlling total deposits of $144.8 million, representing 46.1 percent of
market deposits. The HHI would increase by 1157 points to 3265.
9. The Mesa County banking market comprises Mesa County. Upon
consummation of this proposal, FBS would become the largest
depository institution in the Mesa County banking market, controlling
total deposits of $224.4 million, representing 30.5 percent of market
deposits. The HHI would increase by 346 points to 2085.
10. CNB-Glenwood and CNB-Grand Junction have deposits of
$44.7 million and $55.4 million, respectively. FBS has executed final
sales agreements effecting these divestitures within 180 days of
consummation of the acquisition of CNB. FBS also has committed
that, in the event it is unsuccessful in completing the divestiture within

536

Federal Reserve Bulletin • May 1993

Consummation of the proposal in the remaining
banking markets of Colorado Springs,11 DenverBoulder, 12 and Fort Collins13 also would not exceed
the Department of Justice Merger Guidelines. The
Colorado Springs and Denver-Boulder banking markets would both remain moderately concentrated upon
consummation of this proposal, with 24 and 92 depository institutions remaining in the respective markets. 14 The Fort Collins banking market would remain
highly concentrated but the level of concentration, as
measured by the market HHI, would increase less
than 100 points. 15 Eleven depository institutions
would continue to compete in this market. Based on
these and other facts of record, the Board concludes
that this proposal would not have a significantly adverse effect in these markets.
The Board also sought comments from the United
States Attorney General, the Office of the Comptroller
of the Currency ("OCC"), and the Federal Deposit
Insurance Corporation ("FDIC") on the competitive
effects of this proposal. The Attorney General has
indicated that, subject to FBS's divestitures in Garfield and Mesa counties, there would be no significantly adverse effects on competition in any relevant
banking market. Neither the OCC nor the FDIC has
provided any objection to consummation of the proposal or indicated that the proposal would have any
significantly adverse competitive effects.
In light of all of the facts of record, including the
divestitures FBS has proposed in this case in various
markets, the resulting market concentration measures,
competition offered by thrifts and credit unions, the
number of competitors remaining in the markets, and

180 days of consummation of the proposal, FBS will transfer the
relevant office or offices to an independent trustee that has been
instructed to sell the office or offices promptly. See, e.g., BankAmerica Corporation,
78 Federal Reserve
New Mexico Financial Corporation,

Convenience and Needs Consideration
In acting upon an application to acquire a depository
institution under the BHC Act, the Board must consider the convenience and needs of the communities to
be served, and take into account the records of the
relevant depository institutions under the Community
Reinvestment Act (12 U.S.C. § 2901 et seq.)
("CRA"). The CRA requires the federal financial
supervisory agencies to encourage financial institutions to help meet the credit needs of the local communities in which they operate, consistent with the
safe and sound operation of such institutions. To
accomplish this end, the CRA requires the appropriate
federal supervisory authority to "assess the institution's record of meeting the credit needs of its entire
community, including low- and moderate-income
neighborhoods, consistent with the safe and sound
operation of such institution," and to take that record
into account in its evaluation of bank holding company
applications.17
The Board has received comments from the DenverCommunity Reinvestment Alliance ("Protestant")
criticizing the efforts made by FBS and CNB to meet
the credit needs of their communities, including lowand moderate-income neighborhoods. In particular,
Protestant alleges that FBS and CNB illegally discriminate against ethnic minorities in making lending decisions, citing data for 1990 and 1991 filed under the
Home Mortgage Disclosure Act ("HMDA"). 1 8 Protestant also alleges that FBS has failed to implement its

Bulletin 338, 340 (1992); United
11 Federal Reserve Bulletin 484,

485 (1991).
11. The Colorado Springs banking market is defined as the Colorado
Springs RMA.
12. The Denver-Boulder banking market is defined as the Denver
RMA and Boulder County (including the Boulder RMA), and the town
of Parker in Douglas County.
13. The Fort Collins banking market is defined as the Fort Collins
RMA.
14. FBS would become the largest depository institution in
the Colorado Springs banking market, controlling deposits of
$584.7 million, representing 27.7 percent of market deposits, and the
HHI would increase by 382 points to 1500. In the Denver-Boulder
banking market, FBS would become the largest depository institution,
controlling deposits of $4.6 billion, representing 26.2 percent of
market deposits, and the HHI would increase by 335 points to 1157.
Under the Department of Justice Merger Guidelines, a post-merger
market concentration of between 1000 and 1800 points is considered
moderately concentrated.
15. Upon consummation of this proposal, FBS would become the
third largest depository institution in the Fort Collins banking market,
controlling deposits of $117.8 million, representing 14.6 percent of
market deposits, and the HHI would increase by 96 points to 2037.




the substantial mitigating factors in the Pueblo banking
market discussed above, the Board has concluded that
the proposal would not result in a significantly adverse
effect on competition in any relevant banking market. 16

16. In reaching this conclusion, the Board has carefully reviewed
comments maintaining that the consummation of this proposal would
result in significantly adverse competitive effects. For the reasons
discussed above, the Board does not believe that these comments
warrant denial of the proposal.
17. 12 U.S.C. § 2903.
18. Protestant also alleges discriminatory practices because:
(1) Minority and non-minority "testers" were subjected to disparate
treatment by personnel of FBS's savings association subsidiary,
Bank Western, Denver, Colorado ("Bank Western"), when seeking
loan information on two separate occasions; and
(2) Bank Western delayed the processing of a loan to a bi-racial
couple purchasing real property in a predominantly minority neighborhood.
FBS responds that Bank Western personnel receive training to
prevent discriminatory practices on a continuous basis and that a
further response will require Protestant to identify when and where
these events occurred. FBS also states that the loan referenced in
Protestant's comments was closed in a period slightly longer than the
average of 60 days because of difficulties in obtaining documentation
and verification required for marketing the mortgage on the secondary
market.

Legal Developments

537

Community Action Plan into its banking and nonbanking subsidiaries in Colorado. 19 Another commenter
representing minority business professionals in Colorado has commended FBS's lending practices and
affirmative steps to address discriminatory practices in
Colorado.
The Board has carefully reviewed the CRA performance records of FBS and CNB, and their respective
subsidiary banks, as well as all comments received
regarding this application, FBS's responses to those
comments, and all of the other relevant facts of record
in light of the CRA, the Board's regulations, and the
Statement of the Federal Financial Supervisory Agencies Regarding the Community Reinvestment Act
("Agency CRA Statement"). 20 The Board also notes
that similar allegations by Protestant relating to FBS's
record of performance under the CRA in Colorado
were extensively reviewed in connection with the
Board's recent approval of FBS's application to acquire Western Capital Investment Corporation, Denver, Colorado ("Western Capital"), and its savings
association subsidiary, Bank Western. 21

In particular, FBS's lead subsidiary bank, First Bank,
N.A., Minneapolis, Minnesota, received a "satisfactory" rating for CRA performance from its primary
regulator, the OCC, in January 1991, and FBS's lead
bank in Colorado, Central Bank, N.A., Denver, Colorado ("Central Bank-Denver"), received a "satisfactory" rating from the OCC in May 1991.
Bank Western, FBS's savings association subsidiary acquired last November, received a "needs to
improve" CRA rating in its most recent examination
by its primary regulator, the Office of Thrift Supervision ("OTS") in May 1992. As a condition to the
Board's approval of FBS's acquisition of Western
Capital, FBS committed to immediately institute CRA
training programs for Bank Western staff and to institute its CRA policies, discussed below, at Bank Western. 24 In addition, all of CNB's subsidiary banks have
received "outstanding" or "satisfactory" ratings during their most recent examinations for CRA performance.

Record of Performance

The Board recently has concluded that FBS's corporate CRA policies and procedures contribute to an
effective CRA program, 25 and FBS has committed that
these policies and programs will be implemented into
all CNB subsidiary banks following FBS's acquisition
of CNB. FBS has a Vice-President for Community
Relations that coordinates and provides support to all
community reinvestment efforts within FBS. In addition, FBS has a nine-member Senior CRA Policy
Committee which is charged with overseeing the overall CRA performance of FBS's subsidiary banks and
resolving any CRA issues that arise. In Colorado, FBS
has its own full-time Community Relations Department to oversee FBS's CRA activities in local markets
and to provide technical assistance on CRA matters.

Under the CRA

A. CRA Performance Examination
The Agency CRA Statement provides that a CRA
examination is an important, and often controlling,
factor in the consideration of an institution's CRA
record and that these reports will be given great weight
in the applications process. 22 The Board notes that all
but one of FBS's subsidiary banks have received
"outstanding" or "satisfactory" ratings during the
most recent examinations of their CRA performance. 23
19. Several individual commenters raise concerns that a large
out-of-state bank would eliminate local lending decisions by bank
personnel who understand the special circumstances and credit needs
of the relevant Colorado communities. FBS states that final decisions
whether to approve or deny a loan application will be made by the
FBS bank entity on the local level under criteria used throughout the
FBS corporate structure.
20. 54 Federal Register 13,742 (1989).
21. First Bank System,

Inc., 78 Federal

Reserve

Bulletin

948 (1992)

(Order dated October 29, 1992, the "Bank Western Order").
22. See 54 Federal

Register

at 13,745.

23. As noted in the Bank Western Order, which constitutes less than
1 percent of FBS's consolidated assets, received a "needs to improve" CRA performance rating from the OCC as of June 1991.
Following this examination, Central Bank-GJ promptly undertook a
number of steps to address identified areas of weakness in CRA
performance. For example, the bank has improved its efforts to
ascertain community credit needs through a demographic analysis and
community contacts. Central Bank-GJ also increased its marketing
efforts, including to low- and moderate-income communities, through
media advertisements, direct mail, product brochures, tele-marketing
and realtor calls, and is working directly with community groups
involved in building low-income housing. In addition, Central
Bank-GJ is participating in new lending programs to meet the needs of
its community, such as the Community Enterprise Loan Initiative




B. Corporate Policies

("CELI"), a microlending program. On the basis of these and other
facts of record, the Board believed that these initiatives sufficiently
addressed relevant areas of weakness in Central Bank-GJ's record of
performance under the CRA.
24. As part of its application to acquire Bank Western, FBS
committed to provide CRA training to all Bank Western employees
within 45 days of consummation. FBS has fulfilled this commitment
and has conducted 21 CRA training sessions with Bank Western
employees. In addition, all branch members and employees involved
with credit products were trained on the requirements of the Fair
Housing Act ( " F H A " ) and the Equal Credit Opportunity Act
("ECOA"). FBS has committed to monitor the performance of all its
branches, particularly Bank Western branches, for compliance with
the CRA, the FHA, and the ECOA, and provide additional training as
needed. In this regard, follow-up training already has been conducted
by retail district managers and branch managers.
25. First Bank System,

Inc., 78 Federal

Reserve

Bulletin

a t 950. I n

the Bank Western Order, the Board considered the combined records
of FBS's subsidiary banks in Colorado (collectively, the "Central
Banks") and FBS Mortgage Corporation ("FBS Mortgage"), a mortgage company subsidiary of FBS, in serving the Denver community.

538

Federal Reserve Bulletin • May 1993

FBS also has formed a Senior CRA Policy Committee
for Colorado, composed of senior managing officers,
to review overall CRA performance and planning in
Colorado to ensure that community credit needs are
met. 26
C. Ascertainment and Marketing
FBS ascertains community credit needs through various community outreach programs as previously described in the Bank Western Order. 27 For example,
each of the subsidiary banks of FBS has a market
manager whose primary responsibility is developing
and implementing the local community reinvestment
efforts. To assist these market managers, FBS has
developed a Community Reinvestment Evaluation and
Planning Handbook ("CRA Handbook"). The CRA
Handbook requires each of FBS's subsidiary banks to
annually complete a six-step CRA planning process
which includes: delineating the bank's community;
evaluating the bank's CRA performance for the prior
year; assessing community needs through community
involvement and analyzing pertinent economic and
demographic information; identifying specific community credit needs, including for low- and moderateincome individuals; developing specific plans for meeting these credit needs, including the development of
products and outreach mechanisms to targeted borrowers; and involving the bank's board of directors in
CRA planning.
Following the Bank Western Order, Central BankDenver established a Community Advisory Board
("CAB"), and FBS Mortgage established a Community Advisory Committee to assist in understanding
community credit needs, evaluating progress against
plans, and marketing products and programs to the
community. The CAB is comprised of representatives
of community-based organizations (including four individuals who are affiliated with Protestant), consumers, and small business owners. The CAB reports
semi-annually to the Central Bank board and has the
opportunity to review the Community Action Plan of
the Central Banks and FBS Mortgage (the "Plan"). 28
As part of its commitments in the Bank Western
Order, FBS has developed a marketing support program as part of the Plan to communicate available
services and credit opportunities to the public.29 FBS

26. FBS's Senior CRA Policy Committee for Colorado includes
senior managers from Bank Western.
27. First Bank System,

Inc.,

78 Federal

Reserve

Bulletin

a t 951.

28. The plan was distributed to members of the CAB on January 11,
1993 and will be considered by CAB in the near future.
29. Under the Plan, the Central Banks, Bank Western, and FBS
work in partnership with many community organizations, including
Protestant, to address identified community needs. These organiza-




and its affiliates make direct mail inquiries and needs
ascertainment calls on community groups to ascertain
the credit needs of the communities, including low- and
moderate-income neighborhoods. In conjunction with
FBS's CRA planning process, all branch managers
identify key community contacts and prepare written
plans for ascertaining community credit needs. FBS
and its affiliates also conduct seminars for community
groups to introduce members to available credit products and provide education in the basics of banking.
In addition, FBS Mortgage has taken a number of
steps designed to improve its record of ascertainment,
marketing and lending to minority and low- and moderate-income communities in Denver. For example,
FBS Mortgage has hired a new Community Lending
Manager who is responsible for community outreach
and marketing of affordable mortgage programs. FBS
Mortgage also hired two additional mortgage originators assigned exclusively to mortgage programs for
low- and moderate-income borrowers. In addition,
FBS Mortgage and the Central Banks will convene at
least four focus group meetings in the Denver metropolitan area in 1993 to ascertain community awareness
of credit products and services offered by both the
Central Banks and FBS Mortgage, and to solicit feedback on performance. 30
D. Lending and Other Activities
In the Bank Western Order, the Board identified numerous FBS programs that are designed to provide a
variety of credit products to low- and moderate-income
borrowers.31 In late 1991, FBS Mortgage developed the
FBS Mortgage affordable housing program, called
"L.O.A.N. Resource," or Lending Options for All
Neighborhoods. This program offers standard products
and processes that are customized to meet the credit
needs of particular communities, and includes the availability of secondary market affordable housing programs, such as the Colorado Housing Finance Authority ("CHFA") bond programs, FNMA's Community
Homebuyer's Program, FHA 203K, and FHA 203B
mortgages. L.O.A.N. Resource also provides financial
assistance for downpayment and closing costs, and
initiates credit and property counseling through community organizations.
tions include community-based developers, neighborhood associations, church representatives, local Chambers of Commerce, merchant associations, and government agencies.
30. FBS has begun to survey all available publications, including
neighborhood newspapers and newspapers directed to specific ethnic
populations, to determine appropriate vehicles for FBS Mortgage and
the Central Banks to reach minority and low- and moderate-income
communities in Colorado. As a result of this survey, FBS has targeted
several publications in which FBS will advertise its services in 1993.
31. First Bank System,

Inc.,

78 Federal

Reserve

Bulletin

a t 951.

Legal Developments

As of February 1993, the L.O.A.N. Resource program, which combines flexible underwriting standards
with loan counseling, has closed seventeen loans and
three are in the process of closing. The Central Banks
also have recently introduced the CELI to provide
technical assistance and credit to small and emerging
businesses. A CELI Advisory Council, formed to
discuss the needs of small and emerging businesses
and to assess the effectiveness of the CELI program,
includes several key organizations that represent minority communities. Since November 1992, five new
CELI loans totaling $49,000 have been originated.
The Central Banks offer SBA lending and provide
small business loans through their Mainstreet Credit
program. Mainstreet Credit uses simplified application
forms and guarantees a 48-hour response after receiving a completed loan application. In December 1992,
Central Bank-Denver became a certified SBA lender,
and since then it has originated $467,000 in SBA loans.
In addition 117 Mainstreet loans, totaling $2.3 million
have been approved. Fifty-six percent of these loans
have been in census tracts 100 percent or less than
median income.
E. HMDA Data and Lending Practices
The Board has reviewed the 1990 and 1991 HMDA
data 32 reported by FBS, Bank Western, and CNB, as
well as Protestant's comments regarding this data. The
HMDA data shows disparities in the rates for housingrelated loan applications, approvals, and denials that
vary by racial or ethnic groups in Denver. Protestant
has alleged illegal discriminatory lending practices on
the basis of this data.
Because all banks are obligated to ensure that their
lending practices are based on criteria that ensure not
only safe and sound lending, but also ensure equal
access to credit by creditworthy applicants regardless
of race, the Board is concerned when the record of an
institution indicates disparities in lending to minority
applicants. The Board recognizes, however, that
HMDA data alone provides only a limited measure of
any given institution's lending in the communities that
the institution serves. The Board also recognizes that
HMDA data have limitations that make the data an
inadequate basis, absent other information, for conclusively determining whether an institution has en-

539

gaged in illegal discrimination on the basis of race or
ethnicity in making lending decisions.
The Board notes that the OTS found no evidence of
illegal discrimination in its CRA examination of Bank
Western, nor have any instances of illegal discrimination been found in any regulatory examinations of FBS
banks or CNB banks, or their subsidiaries. The Board
also has previously discussed a number of steps FBS
has taken to improve its lending record in Colorado. 33
For example, the Central Banks provide a number
credit products and services to residents and businesses located in low- and moderate-income and minority communities in Denver. As of year-end 1991,
the Central Banks originated $7.3 million in consumer
loans to consumers from low- and moderate-income
zip codes in the Denver Metropolitan Statistical Area
("MSA"). Central Bank-Denver also has approximately $11.4 million in outstanding loans to minorityowned businesses and approximately $4.4 million in
outstanding loans to businesses owned by women. In
addition, Central Bank-Denver has committed to provide $300,000 over a three-year period to the Cole
Coalition, a community development partnership initiated to help strengthen a low-income neighborhood
in Denver. 34 The Central Banks also have extended
$500,000 in credit to support the construction of housing for persons with disabilities in the Denver MSA.
Following the Bank Western Order, FBS Mortgage
implemented a new procedure for bank officer referrals, along with a new referral form. These changes are
designed to establish consistency among all FBS locations and to ensure that all prospective applicants for
home mortgages are asked for the same information
when they meet with bank employees. In addition,
FBS Mortgage instituted a second level of review for
all rejected loan applications. A committee consisting
of the head underwriter, underwriting supervisor,
chief appraiser, closing manager, and operations manager meet daily to review all rejected applications.
Also, as stated above, a Senior CRA Policy Committee was established for Colorado to review overall
CRA performance and planning in Colorado to ensure
that FBS is meeting community credit needs.
F. Conclusion Regarding Convenience and
Needs Factors
The Board has carefully considered the entire record,
including the comments filed in this case, in reviewing

32. Banks are required under the HMDA to report certain information regarding loan applications, approvals, and denials to the various
banking agencies and the public. This information includes data on the
race, gender and income of individual loan applicants, as well as the
location of the property securing the potential loan, and a description
of the application.




33. See First Bank System,

Inc., 78 Federal

Reserve

Bulletin

a t 950.

34. Senior officers and board members of Central Bank-Denver
serve on the board of directors of several organizations related to
community development and affordable housing, including the Capital
Hill Community Center and the Cole Neighborhood Project.

540

Federal Reserve Bulletin • May 1993

the convenience and needs factor under the BHC Act.
Based on a review of the entire record of performance,
including information provided by the Protestant and
by the bank's primary regulators, and the commitments made by FBS, the Board believes that the
efforts of FBS to help meet the credit needs of all
segments of the communities served by FBS, including low- and moderate-income neighborhoods, are
consistent with approval. In this light, and on the basis
of all of the facts of record, the Board concludes that
the convenience and needs considerations, including
the CRA performance of all bank subsidiaries, are
consistent with approval of this application. 35

concludes that FBS's acquisition of CNB's nonbanking subsidiaries would not significantly affect competition in any relevant market. Furthermore, there is no
evidence in the record to indicate that consummation
of this proposal is likely to result in any significantly
adverse effects, such as undue concentration of resources, decreased or unfair competition, conflicts of
interests, or unsound banking practice. Accordingly,
the Board has determined that the balance of public
interest factors it must consider under section 4(c)(8)
of the BHC Act is favorable and consistent with
approval of FBS's application to acquire CNB's nonbanking subsidiaries.

Other

Conclusion

Considerations

The Board also concludes that the financial and managerial and future prospects of FBS and CNB, and
their respective subsidiaries, and the other supervisory factors that the Board must consider under section 3 of the BHC Act are consistent with approval. 36
FBS also has applied, pursuant to section 4 of the
BHC Act, to engage in selling and reinsuring credit life,
and accident and disability insurance. As noted above,
the Board has previously determined that these activities are closely related to banking and generally permissible for bank holding companies under section 4(c)(8)
of the BHC Act. FBS proposes to conduct these
activities in accordance with the Board's Regulation Y.
In considering FBS's acquisition of the nonbanking
activities of CNB, the Board notes that these subsidiaries compete in geographic markets that are regional
and national in scope. These markets are served by
numerous competitors, and FBS does not have a
significant market share in any of these markets.
Accordingly, in light of the facts of record, the Board

35. Protestant has requested that the Board hold a public meeting or
hearing on these applications. The Board is not required under section
3(b) of the BHC Act to hold a hearing on an application unless the
appropriate banking authority for the bank to be acquired makes a
timely written recommendation of denial of the application. In this
case, the OCC has not recommended denial of the proposal.
Generally, under the Board's rules, the Board may, in its discretion,
hold a public hearing or meeting on an application to clarify factual
issues related to the application, and to provide an opportunity for
testimony, if appropriate. 12 C.F.R. 262.3(e) and 262.25(d). The
Board has carefully considered this request. In the Board's view,
interested parties have had a sufficient opportunity to present written
submissions, and have submitted substantial written comments that
have been considered by the Board. On the basis of all of the facts of
record, the Board has determined that a public meeting or hearing is
not necessary to clarify the factual record in these applications, or
otherwise warranted in this case. Accordingly, the request for a public
meeting or hearing on these applications is hereby denied.
36. In light of all the facts of record, including financial information
contained in reports of examination by bank regulatory agencies and
these applications, the Board does not believe that comments relating
to whether the Board could adequately assess the financial condition
of the resulting institution warrant denial of the proposal.




Based on the foregoing, including the conditions and
commitments described in this Order and those made
in these applications, and all of the facts of record, the
Board has determined that these applications should
be, and hereby are, approved. The Board's approval is
specifically conditioned upon compliance by FBS with
all the commitments made in connection with these
applications.
The determinations as to the nonbanking activities
are subject to all of the conditions contained in the
Board's Regulation Y, including those in sections
225.4(d) and 225.23(b)(3) (12 C.F.R. 225.4(d) and
225.23(b)(3)), and to the Board's authority to require
such modification or termination of the activities of a
holding company or any of its subsidiaries as the Board
finds necessary to assure compliance with, or to prevent evasions of, the provisions and purposes of the
BHC Act and the Board's regulations and orders issued
thereunder. The commitments and conditions relied on
by the Board in reaching this decision are both deemed
to be conditions imposed in writing by the Board in
connection with its findings and decision, and as such
may be enforced in proceedings under applicable law.
The banking acquisitions shall not be consummated
before the thirtieth calendar day following the effective
date of this Order, and the banking and nonbanking
acquisitions shall not be consummated later than three
months after the effective date of this Order, unless
such period is extended for good cause by the Board or
the Federal Reserve Bank of Minneapolis, acting
pursuant to delegated authority.
By order of the Board of Governors, effective
March 29, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, Lindsey, and Phillips.
JENNIFER J . JOHNSON

Associate

Secretary of the Board

Legal Developments

Orders Issued Under International

Banking

Act

Bank of Taiwan
Taipei, Taiwan
Order Approving Establishment of a Branch
Bank of Taiwan, Taipei, Taiwan ("Bank"), a foreign
bank within the meaning of the International Banking
Act ("IBA"), has applied under section 7(d) of the
IB A (12 U.S.C. § 3105(d)) to establish a state-licensed
branch in Los Angeles, California. A foreign bank
must obtain the approval of the Board to establish a
branch, agency, commercial lending company, or representative office in the United States under the Foreign Bank Supervision Enhancement Act of 1991
("FBSEA"), which amended the IBA.
Notice of the application, affording interested persons an opportunity to submit comments, has been
published in a newspaper of general circulation in Los
Angeles, California (Los Angeles Times, April 23,
1992). The time for filing comments has expired and no
public comments were received.
Bank became the first commercial bank in Taiwan in
1946 through the reorganization of a predecessor that
had operated since 1899. Bank is wholly-owned by the
Provincial Government of Taiwan ("Provincial Government"). Bank also is the second largest bank in
Taiwan in terms of total assets, which at year-end 1992
were $42.2 billion.
Bank operates an agency in New York City, a
representative office in London, an offshore banking
unit in Taiwan, and over 125 offices in Taiwan. Bank
also owns ten subsidiaries, nine incorporated in Taiwan and one incorporated in Belgium. Three of these
subsidiaries are banks; one subsidiary, the Hua Nan
Bank, operates a branch in California and an agency in
New York. Bank does not engage, directly or indirectly, in any nonbanking activities in the United
States. Bank will remain a qualifying foreign banking
organization under Regulation K after establishing the
proposed branch (12 C.F.R. 211.23(b)).
Under the IBA, in order to approve an application
by a foreign bank to establish a branch in the United
States, the Board must determine that the foreign
bank:
(1) Engages directly in the business of banking
outside of the United States;
(2) Has furnished to the Board the information it
needs to assess adequately the application; and
(3) Is subject to comprehensive supervision or regulation on a consolidated basis by its home country
supervisor (12 U.S.C. § 3105(d)(2)).



541

The Board may also take into account additional
standards as set forth in the IBA (12 U.S.C.
§ 3105(d)(3)-(4)) and Regulation K (12 C.F.R.
211.24(c)).
Bank engages directly in the business of banking
outside of the United States through its extensive
commercial banking operations in Taiwan. Bank also
has provided the Board with the information necessary
to assess the application through submissions that
address the relevant issues.
Bank is supervised and regulated by the Ministry of
Finance of Taiwan ("Ministry") and the Central Bank
of China ("Central Bank"), which share responsibility
for the supervision of Taiwanese banks. The Banking
Law of Taiwan grants the Ministry overall authority
for the regulation and supervision of Taiwanese banks,
including commercial banks, such as Bank. 1 The Ministry has delegated the authority to the Central Bank to
act as the primary examiner of banks in Taiwan, in
which capacity the Central Bank conducts mandatory
annual examinations. 2
Regulation K provides that a foreign bank will be
considered to be subject to comprehensive supervision
or regulation on a consolidated basis if the Board
determines that the foreign bank is supervised and
regulated in such a manner that its home country
supervisor receives sufficient information on the
worldwide operations of the bank, including the relationship of the bank to any affiliate, to assess the
overall financial condition of the foreign bank and its
compliance with law and regulation (12 C.F.R.
211.24(c)(1)).3 In making its determination under this
standard on this application by Bank, the Board considered the following information.

1. This authority permits the Ministry to, among other things, issue
licenses, limit activities and expansion, conduct examinations, set
minimum capital and liquidity ratios, limit credit extensions, restrict
director interlocks, define qualifications for management, and take
enforcement actions.
2. Bank receives additional oversight by its owner, the Provincial
Government, and by the Ministry of Audit of the Control Yuan, an
auditor of government agencies and government-owned enterprises.
3. In assessing this standard, the Board considers, among other
factors, the extent to which the home country supervisor:
(i) Ensures that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) Obtains information on the condition of the bank and its
subsidiaries and offices through regular examination reports,
audit reports, or otherwise;
(iii) Obtains information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) Receives from the bank financial reports that are consolidated
on a worldwide basis, or comparable information that permits
analysis of the bank's financial condition on a worldwide consolidated basis;
(v) Evaluates prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis.
These are indicia of comprehensive, consolidated supervision. No
single factor is essential and other elements may inform the Board's
determination.

542

Federal Reserve Bulletin • May 1993

The Ministry and the Central Bank obtain information on the condition of Bank, its subsidiaries, and its
foreign offices through regular examinations. Bank
also submits periodic financial reports to the Central
Bank that reflect the financial condition of Bank and its
offices.
The Central Bank performs mandatory annual onsite head office examinations, bi-annual office examinations, and, if warranted, targeted examinations of
Bank. The Ministry coordinates examinations and
takes corrective measures based on the examination
reports. The annual examination of the head office of
Bank specifically includes a review of Bank's international department, foreign operations, and offices. The
Ministry has also implemented annual on-site examinations of Bank's foreign offices to supplement this
review. The review of the activities of Bank's foreign
offices includes scrutiny of host country examination
reports, internal control and audit reports, and annual
outside audit reports. Examiners also review the corporate records of Bank's subsidiaries; such records
contain financial information and other corporate information.
With respect to monitoring and oversight of foreign
offices, the Ministry must approve the establishment
of such offices by Bank. The Ministry and the Central
Bank have also required Bank to establish procedures
under which a foreign office must obtain head office
approval of certain transactions, undergo an annual
internal audit, and document its transactions. Bank
has established procedures that conform to these
requirements for the proposed office. The Central
Bank evaluates the adequacy of the required procedures and the records of approved transactions during
the annual examination of Bank's head office. The
Ministry also requires Bank's overseas offices to submit host-country examination reports.
The Ministry and Central Bank obtain information
on the dealings and relationship between Bank and its
subsidiaries through certain regulatory requirements.
Such requirements include mandatory Ministry approval of investments by Bank, Central Bank examinations, and the prohibition on certain unsecured
lending to companies in which Bank holds certain
investments. Actual control over Bank's subsidiaries
rests with the Provincial Government. Nonetheless,
the Ministry must approve any investment by Bank in
a company, and the Ministry or Central Bank may
review the corporate records of such companies. The
Ministry or Central Bank also may require Bank to
divest its interest in a subsidiary, if the subsidiary is
found to pose an undue risk to Bank or is engaging in
unsafe or improper activities.
The Ministry and the Central Bank evaluate prudential standards, such as capital adequacy and risk asset



exposure, for Bank on a worldwide basis. The government of Taiwan incorporated the risk-based capital
standards of the Basle Accord into its Banking Law in
1989, with variations that conform to local accounting
practices and that apply to government-controlled
banks. 4 The Ministry implemented these standards to
restrict all dividend and other distributions by any
Taiwanese bank that has a risk-weighted capital ratio
of less than 8 percent.
Based on all the facts of record, which include the
information described above, the Board concludes
that Bank is subject to comprehensive supervision and
regulation on a consolidated basis by its home country
supervisors.
In considering this application, the Board has also
taken into account the additional standards set forth in
section 7 of the IBA (12 U.S.C. § 3105(d)(3)-(4)). As
noted above, Bank has received the consent of its
home country authorities to establish the proposed
branch. In addition, the Ministry may share information on Bank's operations with other supervisors,
including the Board.
As noted, under local regulation, Bank must comply
with the capital standards of the Basle Accord, as
implemented by Taiwan. Bank's capital exceeds these
minimum standards and can be considered equivalent
to capital that would be required of a U.S. banking
organization. Managerial and other financial resources
of Bank are also considered consistent with approval.
The proposed branch will be Bank's second office in
the United States, and Bank appears to have the
experience and capacity to support this additional
office. In addition, Bank has established controls and
procedures for its U.S. offices to ensure compliance
with U.S. law. Under the IBA, the proposed statelicensed branch may not engage in any type of activity
that is not permissible for a federally-licensed branch
without the Board's approval.
Finally, Bank has committed that it will make available to the Board such information on the operations
of Bank and any affiliate of Bank that the Board deems
necessary to determine and enforce compliance with
the IBA, the Bank Holding Company Act of 1956, as
amended, and other applicable Federal law, to the
extent permitted by law. The Board has reviewed
relevant provisions of Taiwanese law and has communicated with the appropriate government authorities
concerning access to information. Bank also has committed to cooperate with the Board to obtain any

4. The Ministry has issued regulations that implement these standards. Generally, these regulations fall within the parameters of the
Basle Accord, with the exception of one equity adjustment item that
applies only to government-owned banks. This factor is not significant
in this case.

Legal Developments

approvals or consents that may be needed to gain
access to information that may be requested by the
Board. In light of these commitments and other facts
of record, and subject to the condition described
below, the Board concludes that Bank has provided
adequate assurances of access to any necessary information the Board may request.
On the basis of all of the facts of record, and subject
to the commitments made by Bank, as well as the
terms and conditions set forth in this Order, the Board
has determined that Bank's application to establish a
branch should be, and hereby is, approved. If any
restrictions on access to information on the operations
or activities of Bank and any of its affiliates subsequently interfere with the Board's ability to determine
the safety and soundness of Bank's U.S. operations or
the compliance by Bank or its affiliates with applicable
Federal statutes, the Board may require termination of
any of the Bank's direct or indirect activities in the
United States. Approval of this application is also
specifically conditioned on compliance by Bank with
the commitments made in connection with this application, and with the conditions contained in this Order. 5 The commitments and conditions referred to
above are conditions imposed in writing by the Board
in connection with its decision, and may be enforced in
proceedings under 12 U.S.C. § 1818 or 12 U.S.C.
§ 1847 against Bank, its office and its affiliates.
By order of the Board of Governors, effective
March 18, 1993.
Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, and Lindsey. Absent and
not voting: Governor Phillips.
WILLIAM W . WILES

Secretary of the Board
Chiao Tung Bank
Taipei, Taiwan
Order Approving Establishment

of an Agency

Chiao Tung Bank, Taipei, Taiwan ("Bank"), a foreign
bank within the meaning of the International Banking
Act ( " I B A " ) , has applied under section 7(d) of the
IB A (12 U.S.C. § 3105(d)) to establish a state-licensed
agency in New York, New York. A foreign bank must

5. The Board's authority to approve the establishment of the
proposed branch parallels the continuing authority of the State of
California to license offices of a foreign bank. The Board's approval of
this application does not supplant the authority of the State of
California, and its agent, the California State Banking Department, to
license the proposed branch of Bank in accordance with any terms or
conditions that the California State Banking Department may impose.




543

obtain the approval of the Board to establish a branch,
agency, commercial lending company, or representative office in the United States under the Foreign Bank
Supervision Enhancement Act of 1991 ( " F B S E A " ) ,
which amended the IBA.
Notice of the application, affording interested persons an opportunity to submit comments, has been
published in a newspaper of general circulation in New
York, New York (New York Times, June 5, 1992). The
time for filing comments has expired and no public
comments were received.
Bank was founded in 1907 as the Bank of Communications. In 1928, the Bank of Communications Act
("BOC Act") gave Bank a new charter as a development bank that must promote emerging and infrastructure industries. Since 1975 Bank also has operated as
Taiwan's only "Industrial B a n k " under the Banking
Law of Taiwan. The Ministry of Finance of Taiwan, an
agency of the central government, owns 97.6 percent
of Bank's stock. The remaining 2.4 percent of Bank's
shares are widely held.
As an Industrial Bank and a development bank,
Bank provides medium- and long-term development
credits, equity and venture capital investments, 1 and
advice to industrial, mining, transportation, and other
public enterprises.
Bank held total assets of $11.0 billion as of June 30,
1992. Bank directly conducts international operations
through its Foreign and Business Departments, an
offshore banking unit, 2 a state-licensed branch in San
Jose, California, a branch in Singapore, and through
certain of its 22 domestic branches. These international operations include trade finance, issuance of
debentures and guarantees, remittance, lending, foreign exchange, and correspondent banking activities.
Bank's also owns a banking subsidiary, Chiao Tung
Bank Europe, N.V., the Netherlands, and holds investments in several nonbanking companies.
Because it operates a branch in the United States,
Bank is subject to the nonbanking restrictions of
section 4 of the Bank Holding Company Act of 1956,
as amended ( " B H C " ) , and conducts its U.S. activities
subject to the requirements of the BHC Act. 3 Bank
will remain a qualifying foreign banking organization

1. Bank invests capital in "strategic industrial enterprises" and
government policy projects such as financial institutions and leasing
companies.
2. Offshore banking units in Taiwan generally offer foreign currency
deposits and loans to non-residents and financial institutions, and
conduct securities, interbank deposit and placement, and foreign
exchange activities.
3. Bank engages indirectly in nonbanking activities in the United
States through two investments: Universal Venture Capital Investment Corp., Taiwan, and Twin Head International Corp., Taiwan.
The U.S. activities of these companies are subject to continuing
review under Regulation K.

544

Federal Reserve Bulletin • May 1993

under Regulation K after establishing the proposed
agency (12 C.F.R. 211.23(b)).
Under the IB A, in order to approve an application
by a foreign bank to establish an agency in the United
States, the Board must determine that the foreign
bank:
(1) Engages directly in the business of banking
outside of the United States;
(2) Has furnished to the Board the information it
needs to assess adequately the application; and
(3) Is subject to comprehensive supervision or regulation on a consolidated basis by its home country
supervisor (12 U.S.C. § 3105(d)(2)).
The Board may also take into account additional
standards as set forth in the IB A (12 U.S.C.
§ 3105(d)(3)-(4)) and Regulation K (12 C.F.R.
211.24(c)).
Bank engages directly in the business of banking
outside of the United States through its extensive
banking operations in Taiwan. Bank also has provided
the Board with the information necessary to assess the
application through submissions that address the relevant issues.
Bank is supervised and regulated by both the Ministry of Finance of Taiwan ("Ministry") and the Central Bank of China ("Central Bank"), which share
responsibility for the supervision of Taiwanese banks.
The Banking Law of Taiwan authorizes the Ministry to
regulate and supervise industrial banks in Taiwan,
including Bank. 4 The Ministry has delegated the authority to the Central Bank to act as the primary
examiner of banks in Taiwan, in which capacity the
Central Bank conducts mandatory annual examinations. 5
Regulation K provides that a foreign bank will be
considered to be subject to comprehensive supervision
or regulation on a consolidated basis if the Board
determines that the foreign bank is supervised and
regulated in such a manner that its home country
supervisor receives sufficient information on the
worldwide operations of the bank, including the relationship of the bank to any affiliate, to assess the
overall financial condition of the bank and its compliance with law and regulation (12 C.F.R. 211.24(c)(1)).6

4. With respect to banks, this authority permits the Ministry to,
among other things, issue licenses, limit activities and expansion,
conduct examinations, set minimum capital and liquidity ratios, limit
credit extensions, restrict director interlocks, define qualifications for
management, and take enforcement actions.
5. Bank receives additional oversight by the Ministry of Audit of the
Control Yuan, an auditor of government agencies and governmentowned enterprises.
6. In assessing this standard, the Board considers, among other
factors, the extent to which the home country supervisor:




In making its determination under this standard on this
application by Bank, the Board considered the following information.
The Ministry and the Central Bank obtain information on the condition of Bank, its subsidiaries, and its
foreign office through regular examinations and periodic financial reports. The Central Bank examines
Bank's head office on-site each year and its branches
more frequently, if warranted. The Ministry has implemented annual on-site examinations of a Taiwanese
bank's foreign offices to supplement this review. The
Ministry also coordinates examinations and takes corrective measures based on the examination reports.
In its examinations, the Central Bank reviews,
among other things, Bank's financial condition, legal
compliance, managerial goals and performance, conformance with the government's economic development guidelines, and audit control system. The documents that may be examined include host country
examination reports, transaction documentation, internal control and audit reports, and, for overseas
branches, annual external audit reports.
The Ministry and Central Bank obtain information
on the dealings and relationship between Bank and its
subsidiaries through reports to and examinations by
the Central Bank and through the requirement that the
Ministry approve investments in other companies. The
Banking Law of Taiwan also imposes a prohibition on
certain unsecured lending to companies in which Bank
holds certain investments. Finally, if the Ministry or
Central Bank determines that a subsidiary poses an
undue risk to Bank or is engaging in unsafe or improper activities, the Ministry may require Bank to
divest its interest in the subsidiary. Bank has no parent
or sister affiliates.
With respect to foreign offices, the Ministry must
approve the establishment of such offices by Bank.
Bank also has internal controls in its foreign office that
require head office pre-screening of loan proposals and
approval of certain transactions, apply loan policies
and procedures, and provide for monitoring by an

(i) Ensures that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) Obtains information on the condition of the bank and its
subsidiaries and offices through regular examination reports,
audit reports, or otherwise;
(iii) Obtains information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) Receives from the bank financial reports that are consolidated
on a worldwide basis, or comparable information that permits
analysis of the bank's financial condition on a worldwide consolidated basis;
(v) Evaluates prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis.
These are indicia of comprehensive, consolidated supervision. No
single factor is essential and other elements may inform the Board's
determination.

Legal Developments

internal audit department. Bank's head office also evaluates the performance of its branches and majorityowned subsidiaries and reviews the financial condition
of its investments and other subsidiaries. Controls in
the proposed agency will include requiring submission
of a monthly internal audit report to the head office. The
Central Bank evaluates the adequacy of these procedures and the records of approved transactions during
the annual examination of Bank's head office.
Taiwanese law requires Bank to obtain Ministry
approval for investments above a de minimis size and
for expansion into certain new activities. The Ministry
and Central Bank also require Taiwanese banks to
make financial statements and corporate records of its
subsidiaries available to the supervisors upon request.
The BOC Act requires that Bank monitor and oversee its worldwide operations through additional measures that are particular to Bank. One such measure
created a Board of Supervisors of Bank that consists
of 5 members appointed by the Ministry, and that
exercises oversight over Bank's operations. Another
requires Bank to divest any investment once the
company is "properly operating in accordance with its
business purposes."
The Ministry and the Central Bank evaluate prudential standards, such as capital adequacy and risk asset
exposure, for Bank on a worldwide basis. The government of Taiwan incorporated the risk-based capital
standards of the Basle Accord into its Banking Law in
1989, with variations that conform to local accounting
practices and that apply to government-controlled
banks. 7 The Ministry implemented these standards to
restrict all dividend and other distributions by any
Taiwanese bank that has a risk-weighted capital ratio
of less than 8 percent.
Based on all the facts of record, which include the
information described above, the Board concludes that
Bank is subject to comprehensive supervision and
regulation on a consolidated basis by its home country
supervisors.
In considering this application, the Board has also
taken into account the additional standards set forth in
section 7 of the IBA (12 U.S.C. § 3105(d)(3)-(4)). As
noted above, Bank has received the consent of its home
country authorities to establish the proposed agency. In
addition, the Ministry may share information on Bank's
operations with other supervisors, including the Board.
Also as noted above, Bank must comply with the
capital standards of the Basle Accord, as implemented

7. The Ministry has issued regulations that implement these standards. Generally, these regulations fall within the parameters of the
Basle Accord, with the exception of one equity adjustment item that
applies only to government-owned banks. This factor is not significant
in this case.




545

by Taiwan. Bank's capital exceeds the minimum standards and is equivalent to capital that would be required of a U.S. banking organization. Managerial and
other financial resources of Bank are also considered
consistent with approval. The proposed agency will be
Bank's second office in the United States, and Bank
appears to have the experience and capacity to support this additional office. In addition, Bank has established controls and procedures for its U.S. offices to
ensure compliance with U.S. law. Under the IBA, the
proposed state-licensed agency may not engage in any
type of activity that is not permissible for a federallylicensed branch without the Board's approval.
Finally, Bank has committed that it will make available to the Board such information on the operations
of Bank and any affiliate of Bank that the Board deems
necessary to determine and enforce compliance with
the IBA, the BHC Act, and other applicable Federal
law, to the extent permitted by law. The Board has
reviewed relevant provisions of Taiwanese law and
has communicated with the appropriate government
authorities concerning access to information. Bank
also has committed to cooperate with the Board to
obtain any approvals or consents that may be needed
to gain access to information that may be requested by
the Board. In light of these commitments and other
facts of record, and subject to the condition described
below, the Board concludes that Bank has provided
adequate assurances of access to any necessary information the Board may request.
On the basis of all of the facts of record, and subject
to the commitments made by Bank, as well as the
terms and conditions set forth in this Order, the Board
has determined that Bank's application to establish an
agency should be, and hereby is, approved. If any
restrictions on access to information on the operations
or activities of Bank or any of its affiliates subsequently interfere with the Board's ability to determine
the safety and soundness of Bank's U.S. operations or
the compliance by Bank or its affiliates with applicable
Federal statutes, the Board may require termination of
any of Bank's direct or indirect activities in the United
States. Approval of this application is also specifically
conditioned on compliance by Bank with the commitments made in connection with this application, and
with the conditions contained in this Order. 8 The
commitments and conditions referred to above are
conditions imposed in writing by the Board in connec-

8. The Board's authority to approve the establishment of the
proposed agency parallels the continuing authority of the State of New
York to license offices of a foreign bank. The Board's approval of this
application does not supplant the authority of the State of New York,
and its agent, the New York State Banking Department, to license the
proposed agency of Bank in accordance with any terms or conditions
that the New York State Banking Department may impose.

546

Federal Reserve Bulletin • May 1993

tion with its decision, and may be enforced in proceedings under 12 U.S.C. § 1818 or 12 U.S.C. § 1847
against Bank, its office, and its affiliates.
By order of the Board of Governors, effective
March 18, 1993.

ACTIONS
1991

TAKEN

By the Director
the Board

UNDER

THE FEDERAL

of the Division

DEPOSIT

of Banking

Voting for this action: Chairman Greenspan and Governors
Mullins, Angell, Kelley, LaWare, and Lindsey. Absent and
not voting: Governor Phillips.
WILLIAM W . WILES

Secretary of the Board

INSURANCE

Supervision

CORPORATION

and Regulation

IMPROVEMENT

and the General

ACT

Counsel

OF

of

Copies are available upon request to the Freedom of Information Office, Office of the Secretary, Board of
Governors of the Federal Reserve System, Washington, D.C. 20551.

Bank Holding Company

Acquired
Thrift

Central Bancshares of the South,
Inc.,
Birmingham, Alabama

Altus Federal Savings
Bank,
Mobile, Alabama

Evergreen Bancshares, Inc.,
Tallahassee, Florida

Anchor Savings Bank,
F.S.B.,
Hewlett, New York

Mid Am, Inc.,
Bowling Green, Ohio

Home Savings of
America, F.S.B.,
Irwindale, California

Wes-Tenn Bancorp, Inc.,
Covington, Tennessee

Tri-County Federal
Savings Bank,
Covington, Tennessee




Surviving
Bank(s)
Central Bank of the
South,
Birmingham,
Alabama
Guaranty National
Bank of
Tallahassee,
Tallahassee,
Florida
Mid American
National Bank &
Trust Company,
Bowling Green,
Ohio
American Community
Bank, N.A.,
Lima, Ohio
Tipton County Bank,
Covington,
Tennessee

Approval
Date
March 22, 1993

March 10, 1993

March 5, 1993

March 3, 1993

Legal Developments

APPLICATIONS

APPROVED

By the Secretary

UNDER BANK

HOLDING

COMPANY

547

ACT

of the Board

Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon
request to the Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve
System, Washington, D.C. 20551.
Section 4
Nonbanking
Activity/Company

Applicant(s)
Bay Banks, Inc.,
Boston, Massachusetts
Chemical Banking Corporation,
New York, New York
Fleet Financial Group,
Providence, Rhode Island
National Westminster Bank PLC,
London, Great Britain
The Bank of New York
Company, Inc.,
New York, New York
The Chase Manhattan
Corporation,
New York, New York
HSBC Holdings PLC,
London, Great Britain
HSBC Holdings BV,
Amsterdam, the Netherlands

APPLICATIONS

APPROVED

By the Secretary

UNDER BANK

to engage in the
expansion of certain
data processing
activities, including the
ownership, installation,
operation and
maintenance of
automated teller
machines and scrip
terminals at
supermarket and other
merchant locations in
the states of
Connecticut and
Vermont

MERGER

Effective
Date
March 4, 1993

ACT

of the Board

Recent applications have been approved by the Secretary of the Board as listed below. Copies are available upon
request to the Freedom of Information Office, Office of the Secretary, Board of Governors of the Federal Reserve
System, Washington, D.C. 20551.

Applicant(s)
SouthTrust Bank of West Florida,
St. Petersburg, Florida




Bank(s)
Gulf Bank of Dunedin,
Dunedin, Florida

^^Date^
March 10, 1993

548

Federal Reserve Bulletin • May 1993

APPLICATIONS

APPROVED

By Federal Reserve

UNDER BANK

HOLDING

COMPANY

ACT

Banks

Recent applications have been approved by the Federal Reserve Banks as listed below. Copies are available upon
request to the Reserve Banks.
Section 3

Applicant(s)
ABC Employee Stock Ownership
Plan,
Anchor, Illinois
Alpha-Omega Holding Company,
Victor, Montana
Archer, Inc.,
Palmer, Nebraska
Osceola Insurance, Inc.,
Osceola, Nebraska
Area Bancshares Corporation,
Owensboro, Kentucky
BBS Corp.,
Socorro, New Mexico
Century Bancorp, Inc,
Milledgeville, Georgia
Clear Creek Bank Corp.,
Idaho Springs, Colorado
Commerce Bancshares, Inc.,
Kansas City, Missouri
CBI Security Corporation,
Kansas City, Missouri
Community Bank Group, Inc.,
Eden Prairie, Minnesota
Craco, Inc.,
Vinita, Oklahoma
Dickinson Financial Corporation,
Kansas City, Missouri
Early Bancshares, Inc.,
Blakely, Georgia
Exchange National Bancshares,
Inc.,
Jefferson City, Missouri




Reserve
Bank

Bank(s)

Effective
Date

Anchor Bancorporation,
Farmer City, Illinois

Chicago

February 26, 1993

Farmers State Bank,
Victor, Montana
Guaranty Corporation,
Denver, Colorado

Minneapolis

March 3, 1993

Kansas City

March 5, 1993

St. Louis

March 2, 1993

Dallas

March 1, 1993

Atlanta

March 2, 1993

Kansas City

March 25, 1993

Kansas City

March 11, 1993

Minneapolis

March 10, 1993

Kansas City

March 16, 1993

Kansas City

March 8, 1993

Atlanta

March 5, 1993

St. Louis

March 3, 1993

Commonwealth Bancorp,
Glasgow, Kentucky
First State Bank,
Socorro, New Mexico
Century Bank and Trust,
Milledgeville, Georgia
First State Bank,
Idaho Springs,
Colorado
Republic Bancshares,
Inc.,
Neosho, Missouri
Cleveland Bancshares,
Inc.,
Cleveland, Minnesota
The First National Bank
and Trust Company,
Vinita, Oklahoma
Army National
Bancshares, Inc.,
Kansas City, Missouri
Bank of Early,
Blakely, Georgia
Exchange National Bank
of Jefferson City,
Jefferson City, Missouri
Exchange National
Interim Bank,
Jefferson City, Missouri

Legal Developments

549

Section 3—Continued

Applicant(s)
Farmers & Merchants
Bancshares, Inc.,
Burlington, Iowa
Fourth Financial Corporation,
Wichita, Kansas
F.S.B., Inc.,
Superior, Nebraska

Green-Top, Inc.,
Central City, Nebraska

Hawkeye Bancorporation,
Des Moines, Iowa
ISB Bancshares, Inc.,
Ipava, Illinois
Jewell County Bank,
Mankato, Kansas

Midstate Bancorp, Inc.,
Hinton, Oklahoma
Midwest National Bancshares,
Inc.,
Midwest City, Oklahoma
NationsBank Corporation,
Charlotte, North Carolina
Charter Bancshares, Inc.,
Houston, Texas




Bank(s)
Farmers & Merchants
Bank & Trust,
Burlington, Iowa
Guaranty Bancorporation,
Tulsa, Oklahoma
Tipton Insurance Agency,
Inc.,
Tipton, Kansas
Glen Elder Agency, Inc.,
Glen Elder, Kansas
Anmer Corporation,
Neligh, Nebraska
Dawson Corporation,
Lexington, Nebraska
Heartland
Bancorporation,
Aurora, Nebraska
North Platte Corporation,
Torrington, Wyoming
Pinnacle Bancorp,
Abilene, Kansas
Pinnacle Bancorp, Inc.,
Papillion, Nebraska
Pinnacle Bancorp, Inc.,
Newcastle, Wyoming
Pinnacle Bancorp, Inc.,
Ft. Lupton, Colorado
Shelby Insurance, Inc.,
Shelby, Nebraska
First Dubuque Corp.,
Dubuque, Iowa
Ipava State Bank,
Ipava, Illinois
Tipton State Bank,
Tipton, Kansas
Traders State Bank,
Glen Elder, Kansas
First Community Bank,
Blanchard, Oklahoma
Harrah National
Bancshares, Inc.,
Harrah, Oklahoma
University National Bank,
Galveston, Texas

Reserve
Bank

Effective
Date

Chicago

March 1, 1993

Kansas City

March 17, 1993

Kansas City

February 26, 1993

Kansas City

March 5, 1993

Chicago

March 12, 1993

Chicago

March 11, 1993

Kansas City

February 26, 1993

Kansas City

March 15, 1993

Kansas City

March 4, 1993

Richmond

March 11, 1993

550

Federal Reserve Bulletin • May 1993

Section 3—Continued

Applicant(s)
Peotone Bancorp, Inc.,
Peotone, Illinois
Southwest Bancorp, Inc.,
Worth, Illinois
SC Bancorp, Inc.,
Worth, Illinois
The Sumitomo Bank, Limited,
Chuo-ku, Osaka, Japan

Bank(s)

Reserve
Bank

Effective
Date

The Sun City Bank,
Sun City, Arizona

Chicago

March 1, 1993

CPB, Inc.,
Honolulu, Hawaii

San Francisco

March 2, 1993

Section 4

Applicant(s)
American Bancorp of Edmond,
Inc.,
Edmond, Oklahoma
Green-Top, Inc.,
Central City, Nebraska
Lincolnshire Bancshares, Inc.,
Lincolnshire, Illinois
Newberry Bancorp, Inc.,
Sault Ste. Marie, Michigan

Otto Bremer Foundation,
St. Paul, Minnesota
Bremer Financial Corporation,
St. Paul, Minnesota

Nonbanking
Activity/Company
American Capital
Mortgage Company,
Inc.,
Edmond, Oklahoma
to engage de novo in
making loans
Success National Bank,
Lincolnshire, Illinois
Northern Michigan
BIDCO, Inc.,
Sault Ste. Marie,
Michigan
First American Insurance
Agencies, Inc.,
St. Paul, Minnesota

Reserve
Bank

Effective
Date

Kansas City

March 18, 1993

Kansas City

March 5, 1993

Chicago

March 19, 1993

Minneapolis

March 3, 1993

Minneapolis

March 8, 1993

Sections 3 and 4
.

..

(

.

Bank of Montana System,
Great Falls, Montana




Nonbanking
Activity/Company
Montana Bancsystem,
Inc.,
Billings, Montana

Reserve
Bank
Minneapolis

Effective
Date
March 1, 1993

Legal Developments

PENDING CASES INVOLVING
GOVERNORS

THE BOARD

OF

This list of pending cases does not include suits
against the Federal Reserve Banks in which the Board
of Governors is not named a party.
Adams v. Greenspan, No. 93-0167 (D. D.C., filed
January 27, 1993). Action by former employee under
the Civil Rights Act of 1964 concerning termination
of employment.
Sisti v. Board of Governors, No. 93-0033 (D.D.C.,
filed January 6, 1993). Challenge to Board staff
interpretation with respect to margin accounts.
U.S. Check v. Board of Governors, No. 92-2892
(D.D.C., filed December 30, 1992). Challenge to
partial denial of request for information under the
Freedom of Information Act.
CBC, Inc. v. Board of Governors, No. 92-9572 (10th
Cir., filed December 2, 1992). Petition for review of
civil money penalty assessment against a bank holding company and three of its officers and directors
for failure to comply with reporting requirements.
The Board's brief was filed on March 19, 1993.
DLG Financial Corporation v. Board of Governors,
No. 392 Civ. 2086-G (N.D. Texas, filed October 9,
1992). Action to enjoin the Board and the Federal
Reserve Bank of Dallas from taking certain enforcement actions, and seeking money damages on
a variety of tort and contract theories. On October
9, 1992, the court denied plaintiffs' motion for a
temporary restraining order. On November 20,
1992, the Board filed a motion to dismiss. On
December 17, 1992, plaintiffs filed an amended
complaint.
Zemel v. Board of Governors, No. 92-1056 (D. District
of Columbia, filed May 4, 1992). Age Discrimination
in Employment Act case.
State of Idaho, Department of Finance v. Board of
Governors, No. 92-70107 (9th Cir., filed February
24, 1992). Petition for review of Board order returning without action a bank holding company application to relocate its subsidiary bank from Washington
to Idaho. The Board's brief was filed on June 29,
1992. Oral argument was held October 6, 1992.
In re Subpoena Served on the Board of Governors,
91-5427, 91-5428 (D.C. Cir., filed December 27,
1991). Appeal of order of district court, dated
December 3, 1991, requiring the Board and the
Office of the Comptroller of the Currency to produce confidential examination material to a private
litigant. On June 26, 1992, the court of appeals
affirmed the district court order in part, but held
that the bank examination privilege was not



551

waived by the agencies' provision of examination
materials to the examined institution, and remanded for further consideration of the privilege
issue. On August 6, 1992, the district court ordered
the matter held in abeyance pending settlement of
the underlying action.
Board of Governors v. Kemal Shoaib, No. CV 91-5152
(C.D. California, filed September 24, 1991). Action
to freeze assets of individual pending administrative
adjudication of civil money penalty assessment by
the Board. On October 15, 1991, the court issued a
preliminary injunction restraining the transfer or
disposition of the individual's assets.
Board of Governors v. Ghaith R. Pharaon, No.
91-CIV-6250 (S.D. New York, filed September 17,
1991). Action to freeze assets of individual pending
administrative adjudication of civil money penalty
assessment by the Board. On September 17, 1991,
the court issued an order temporarily restraining
the transfer or disposition of the individual's
assets.

FINAL ENFORCEMENT
ORDERS
BOARD OF
GOVERNORS

ISSUED

BY

THE

Arthur T. Ciccarello
Eleanor, West Virginia
The Federal Reserve Board announced on March 3,
1993, the issuance of an Order of Assessment of a Civil
Money Penalty against Arthur T. Ciccarello, an institution-affiliated party of The Buffalo Bank, Eleanor,
West Virginia.
The Guardian Bank
Los Angeles, California
The Federal Reserve Board announced on March 26,
1993, the issuance of an Order of Assessment of a Civil
Money Penalty against The Guardian Bank, Los Angeles, California.
Sayed Jawhary
Luxembourg, Luxembourg
The Federal Reserve Board announced on March 25,
1993, the issuance of a combined Order of Prohibition,
Order to Cease and Desist, and Assessment of Civil
Money Penalty against Sayed Jawhary, an institutionaffiliated party of BCCI. The Order settles the Federal
Reserve's charges against Jawhary that were made in
its July 29, 1991, notice against BCCI, Jawhary and
several other individuals associated with BCCI.

552

Federal Reserve Bulletin • May 1993

Randolph S. Miles and Cynthia Stout
Antioch, Illinois

the Federal Reserve Bank of San Francisco and Marin
National Bancorp, San Rafael, California.

The Federal Reserve Board announced on March 25,
1993, the issuance of Orders of Assessment of a Civil
Money Penalty against Randolph S. Miles and Cynthia
Stout, institution-affiliated parties of Antioch Holding
Company, Antioch, Illinois.

N e w East Bancorp
Selma, North Carolina

WRITTEN
RESERVE

AGREEMENTS
BANKS

APPROVED

BY

FEDERAL

Marin National Bancorp
San Rafael, California
The Federal Reserve Board announced on March 31,
1993, the execution of a Written Agreement between




The Federal Reserve Board announced on March 31,
1993, the execution of a Written Agreement among the
Federal Reserve Bank of Richmond, the Commissioner of Banks of the State of North Carolina and
New East Bancorp, Selma, North Carolina.

553

Directors of
Federal Reserve Banks and Branches
Regional decentralization and a combination of
governmental and private characteristics are important hallmarks of the uniqueness of the Federal
Reserve System. Under the Federal Reserve Act,
decentralization was achieved by division of the
country into twelve regions called Federal Reserve
Districts, and the establishment in each District of a
separately incorporated Federal Reserve Bank with
its own board of directors. The blending of governmental and private characteristics is provided
through ownership of the stock of the Reserve
Bank by member banks in its District who also
elect the majority of the board of directors, and by
the general supervision of the Reserve Banks by
the Board of Governors, an agency of the federal
government. The Board also appoints a minority of
each board of directors. Thus, there are essential
elements of regional participation and counsel in
the conduct of the System's affairs for which the
Federal Reserve relies importantly on the contributions of the directors of the Federal Reserve Banks
and Branches.
The following list of directors of Federal
Reserve Banks and Branches shows for each director the class of directorship, the principal business
affiliation, and the date the current term expires.
Each Federal Reserve Bank has nine members on
its board of directors: the member banks elect the
three Class A and three Class B directors, and the
Board of Governors appoints the three directors in

DISTRICT

Class C. Directors are chosen without discrimination as to race, creed, color, sex, or national origin.
Class A directors of each Reserve Bank represent the stockholding member banks of the Federal
Reserve District. Class B and Class C directors
represent the public and are chosen with due, but
not exclusive, consideration to the interests of agriculture, commerce, industry, services, labor, and
consumers; they may not be officers, directors, or
employees of any bank. In addition, Class C directors may not be stockholders of any bank. The
Board of Governors designates annually one Class
C director as chairman of the board of directors of
each District Bank, and designates another Class C
director as deputy chairman.
Each of the twenty-five Branches of Federal
Reserve Banks has a board of either seven or five
directors, a majority of whom are appointed by the
parent Federal Reserve Bank; the others are appointed by the Board of Governors. One of the
Board's appointees is designated annually as chairman of the board of that Branch in a manner
prescribed by the parent Federal Reserve Bank.
The names of the chairman and deputy chairman
of the board of directors of each Reserve Bank and
of the chairman of each Branch are published
monthly in the Federal Reserve Bulletin.1

1. The current list appears on page A94 of this Bulletin.

Term expires
December 31

1—BOSTON

Class A
David A. Page
Robert M. Silva
Ira Stepanian




President and Chief Executive Officer, Ocean National Bank of
Kennebunk, Kennebunk, Maine
President, Chief Executive Officer, and Director, The Citizens
National Bank, Putnam, Connecticut
Chairman and Chief Executive Officer, The Bank of Boston
Corporation, Boston, Massachusetts

1993
1994
1995

554

Federal Reserve Bulletin • May 1993

DISTRICT

Term expires
December 31

1—Continued

Class B
Stephen R. Levy
Edward H. Ladd
Joan T. Bok

Chairman of the Board and Chief Executive Officer, Bolt Beranek and
Newman, Inc., Cambridge, Massachusetts
Chairman and Chief Executive Officer, Standish, Ayer and Wood,
Inc., Boston, Massachusetts
Chairman of the Board, New England Electric System, Westborough,
Massachusetts

1993

Executive Director, The Quality Connection, East Dennis,
Massachusetts
Chairman of the Board and Chief Executive Officer, New England
Medical Center, Inc., Boston, Massachusetts
Sheehan, Phinney, Bass, and Green, Manchester, New Hampshire

1993

1994
1995

Class C
John E. Flynn
Jerome H. Grossman
Warren B. Rudman, Esq.

1994
1995

DISTRICT 2—NEW YORK

Class A
Barbara Harding
Thomas G. Labrecque
Robert G. Wilmers

Chairman of the Board and Chief Executive Officer, Phillipsburg
National Bank and Trust Company, Phillipsburg, New Jersey
Chairman and Chief Executive Officer, The Chase Manhattan Bank,
N.A., New York, New York
Chairman, President, and Chief Executive Officer, Manufacturers and
Traders Trust Company, Buffalo, New York

1993
1994
1995

Class B
Rand V. Araskog
Robert E. Allen
William C. Steere, Jr.

Chairman, President, and Chief Executive Officer, ITT Corporation,
New York, New York
Chairman and Chief Executive Officer, American Telephone and
Telegraph Company, Basking Ridge, New Jersey
Chairman of the Board and Chief Executive Officer, PFIZER Inc.,
New York, New York

1993
1994
1995

Class C
Ellen V. Futter
Maurice R. Greenberg
Cyrus R. Vance

President, Barnard College, New York, New York
Chairman and Chief Executive Officer, American International Group,
Inc., New York, New York
Presiding Partner, Simpson Thacher & Bartlett,
New York, New York

1993
1994
1995

BUFFALO BRANCH
Appointed by the Federal Reserve Bank
Susan A. McLaughlin
General Credit Manager, Eastman Kodak Company,
Rochester, New York
Charles M. Mitschow
Senior Executive Vice President, Regional Banking, Marine Midland
Bank, N.A., Buffalo, New York
Richard H. Popp
Operating Partner, South view Farm, Castile, New York
George W. Hamlin IV
President and Chief Executive Officer, The Canandaigua National
Bank and Trust Company, Canandaigua, New York




1993
1994
1994
1995

Directors of Federal Reserve Banks and Branches

555

Term expires
DISTRICT 2—Continued
Buffalo

December 31

Branch—Continued

Appointed by the Board of Governors
Joseph J. Castiglia
President and Chief Executive Officer, Pratt & Lambert, Inc.,
Buffalo, New York
Donald L. Rust
Plant Manager, General Motors Powertrain Division, Tonawanda
Engine Plant, Buffalo, New York
Herbert L. Washington
HLW Fast Track, Inc., Rochester, New York
DISTRICT

1993
1994
1995

3—PHILADELPHIA

Class A
Gary F. Simmerman
H. Bernard Lynch
Carl L. Campbell

President and Chief Executive Officer, United Jersey Bank/South,
N.A., Cherry Hill, New Jersey
President and Chief Executive Officer, The First National Bank of
Wyoming, Wyoming, Delaware
President and Chief Executive Officer, Keystone Financial, Inc.,
Harrisburg, Pennsylvania

1993
1994
1995

Class B
J. Richard Jones
James A. Hagen
David W. Huggins

President and Chief Executive Officer, Jackson-Cross Company,
Philadelphia, Pennsylvania
Chairman, President, and Chief Executive Officer, Consolidated Rail
Corporation, Philadelphia, Pennsylvania
President and Chief Executive Officer, R M S Technologies, Inc.,
Marlton, New Jersey

1993
1994
1995

Class C
Jane G. Pepper
Donald J. Kennedy
James M. Mead
DISTRICT

President, The Pennsylvania Horticultural Society,
Philadelphia, Pennsylvania
Business Manager, International Brotherhood of Electrical Workers,
Local Union No. 269, Trenton, New Jersey
President, Capital Blue Cross, Harrisburg, Pennsylvania

1993
1994
1995

4—CLEVELAND

Class A
Alfred C. Leist
William T. McConnell
Edward B. Brandon

Chairman, President and Chief Executive Officer, Apple Creek
Banking Company, Apple Creek, Ohio
President, The Park National Bank, Newark, Ohio
Chairman and Chief Executive Officer, National City Corporation,
Cleveland, Ohio

1993
1994
1995

Class B
Verna K. Gibson
Douglas E. Olesen
I.N. Rendall Harper, Jr.




Business Consultant, Columbus, Ohio
President and Chief Executive Officer, Battelle Memorial Institute,
Columbus, Ohio
President and Chief Executive Officer, American Micrographics
Company, Inc., Monroeville, Pennsylvania

1993
1994
1995

556

Federal Reserve Bulletin • May 1993

DISTRICT

Term expires
December 31

4—Continued

Class C
John R. Hodges
G. Watts Humphrey
A. William Reynolds

President, Ohio AFL-CIO, Columbus, Ohio
President, GWH Holdings, Inc., Pittsburgh, Pennsylvania
Chairman and Chief Executive Officer, GenCorp, Fairlawn, Ohio

1993
1994
1995

CINCINNATI BRANCH
Appointed by the Federal Reserve Bank
Jack W. Buchanan
President, Sphar & Company, Inc., Winchester, Kentucky
John N. Taylor, Jr.
Chairman and Chief Executive Officer, Kurz-Kasch, Inc.,
Dayton, Ohio
Marvin J. Stammen
President and Chief Executive Officer, Second National Bank,
Greenville, Ohio
Jerry W. Carey
President and Chief Executive Officer, Union National Bank and Trust
Company, Barbourville, Kentucky
Appointed by the Board of Governors
Marvin Rosenberg
Partner, Towne Properties, Ltd., Cincinnati, Ohio
Raymond A. Bradbury
Chairman, Martin County Coal Corporation, Inez, Kentucky
Eleanor Hicks
Hicks & Kinley, International Access Marketing, Cincinnati, Ohio

1993
1993
1994
1995

1993
1994
1995

PITTSBURGH BRANCH
Appointed by the Federal Reserve Bank
George A. Davidson, Jr.
Chairman and Chief Executive Officer, Consolidated Natural Gas
Company, Pittsburgh, Pennsylvania
Randall L.C. Russell
President and Chief Executive Officer, Ranbar Technology, Inc.,
Glenshaw, Pennsylvania
David S. Dahlmann
President and Chief Executive Officer, Southwest National
Corporation, Greensburg, Pennsylvania
Frank V. Cahouet
Chairman, President, and Chief Executive Officer, Mellon Bank, N.A.,
Pittsburgh, Pennsylvania
Appointed by the Board of Governors
Sandra L. Phillips
Executive Director, Pittsburgh Partnership for Neighborhood
Development, Pittsburgh, Pennsylvania
Jack B. Piatt
Chairman of the Board and President, Millcraft Industries, Inc.,
Washington, Pennsylvania
Robert P. Bozzone
President and Chief Executive Officer, Allegheny Ludlum
Corporation, Pittsburgh, Pennsylvania

DISTRICT

1993
1993
1994
1995

1993
1994
1995

5—RICHMOND

Class A
James G. Lindley
Webb C. Hayes IV
Charles E. Weller




Chairman, President, and Chief Executive Officer, South Carolina
National Bank, Columbia, South Carolina
President, The Palmer National Bank, Washington, D.C.
President, Elkridge National Bank and ENB Financial Corporation,
Elkridge, Maryland

1993
1994
1995

Directors of Federal Reserve Banks and Branches

557

Term expires
DISTRICT 5—Continued

Class B
Paul A. DelaCourt
L. Newton Thomas, Jr.

December 31
Chairman, The North Carolina Enterprise Corporation,
Raleigh, North Carolina
Retired Senior Vice President, ITT/Carbon Industries, Inc.,
Charleston, West Virginia
Chairman, Dilmar Oil Company, Inc., Florence, South Carolina

1993
1994
1995

R.E. Atkinson, Jr.

Class C

Stephen Brobeck
Anne Marie Whittemore
Henry J. Faison

Executive Director, Consumer Federation of America,
Washington, D.C.
Partner, McGuire, Woods, Battle & Boothe, Richmond, Virginia
President, Faison Associates, Charlotte, North Carolina

1993
1994
1995

BALTIMORE BRANCH
Appointed by the Federal Reserve Bank
Vacancy
Thomas J. Hughes
President, Navy Federal Credit Union, Vienna, Virginia
Chairman of the Board and President, The National Bank of
F. Levi Ruark
Cambridge, Cambridge, Maryland
Richard M. Adams
Chairman and Chief Executive Officer, United Bankshares, Inc.,
Parkersburg, West Virginia
Appointed by the Board of Governors
Michael R. Watson
President, Association of Maryland Pilots, Annapolis, Maryland
Rebecca Hahn Windsor
Chairman and Chief Executive Officer, Hahn Transportation, Inc.,
New Market, Maryland
Vacancy

1993
1994
1994
1995

1993
1994
1995

CHARLOTTE BRANCH
Appointed by the Federal Reserve Bank
President and Chief Executive Officer, Williamsburg First National
Jim M. Cherry, Jr.
Bank, Kingstree, South Carolina
President, Dohara Associates, Inc., Hilton Head Island,
Dorothy H. Aranda
South Carolina
Chairman, President, and Chief Executive Officer, Southern National
L. Glenn Orr, Jr.
Corporation, Lumberton, North Carolina
Vice Chairman, Chief Executive Officer, and Director, Security
David B. Jordan
Capital Bancorp, Salisbury, North Carolina
Appointed by the Board of Governors
William E. Masters
President, Perception, Inc., Easley, South Carolina
Harold D. Kingsmore
President and Chief Operating Officer, Graniteville Company,
Graniteville, South Carolina
Anne M. Allen
President, Anne Allen & Associates, Inc.,
Greensboro, North Carolina




1993
1994
1994
1995

1993
1994
1995

558

Federal Reserve Bulletin • May 1993

Term expires
December 31

DISTRICT 6—ATLANTA

Class A
James B. Williams
Simpson Russell
W.H. Swain

Class B

Andre M. Rubenstein
Victoria B. Jackson
J. Thomas Holton

Chairman and Chief Executive Officer, SunTrust Banks, Inc.,
Atlanta, Georgia
Chairman and Chief Executive Officer, The First National Bank of
Florence, Florence, Alabama
Chairman of the Board, First National Bank, Oneida, Tennessee

1993

Chairman of the Board and Chief Executive Officer, Rubenstein
Brothers, Inc., New Orleans, Louisiana
President, DSS/ProDiesel, Nashville, Tennessee
Chairman and President, Sherman International Corporation,
Birmingham, Alabama

1993

1994
1995

1994
1995

Class C
Edwin A. Huston
Hugh M. Brown
Leo Benatar

Senior Executive Vice President-Finance, Ryder System, Inc.,
Miami, Florida
President and Chief Executive Officer, BAMSI, Inc.,
Titusville, Florida
Chairman of the Board and President, Engraph, Inc.,
Atlanta, Georgia

1993
1994
1995

BIRMINGHAM BRANCH
Appointed by the Federal Reserve Bank
Julian W. Banton
Chairman, President, and Chief Executive Officer, SouthTrust Bank of
Alabama, N.A., Birmingham, Alabama
Marlin D. Moore, Jr.
Chairman, Pritchett-Moore, Inc., Tuscaloosa, Alabama
Columbus Sanders
President, Consolidated Industries, Inc., Huntsville, Alabama
J. Stephen Nelson
President and Chief Executive Officer, First National Bank,
Brewton, Alabama
Appointed by the Board of Governors
President, Better Business Bureau of Central Alabama, Inc.,
Donald E. Boomershine
Birmingham, Alabama
Chairman of the Board, President, and Chief Executive Officer,
Shelton E. Allred
Frit Incorporated, Ozark, Alabama
President, Patco, Inc., Georgiana, Alabama
Patricia B. Compton

1993
1994
1994
1995

1993
1994
1995

JACKSONVILLE BRANCH
Appointed by the Federal Reserve Bank
Hugh H. Jones, Jr.
Chairman of the Board, Barnett Bank of Jacksonville, N.A.,
Jacksonville, Florida
Perry M. Dawson
President and Chief Executive Officer, Suncoast Schools Federal
Credit Union, Tampa, Florida
Arnold A. Heggestad
William H. Dial Professor and Director, College of Business
Administration, University of Florida, Gainesville, Florida
Merle L. Graser
Chairman and Chief Executive Officer, First National Bank of Venice,
Venice, Florida




1993
1994
1994
1995

Directors of Federal Reserve Banks and Branches

DISTRICT 6—Continued
Jacksonville

Term expires
December 31

Branch—Continued

Appointed by the Board of Governors
Joan Dial Ruffier
General Partner, Sunshine Cafes, Orlando, Florida
Samuel H. Vickers
Chairman, President, and Chief Executive Officer, Design Containers,
Inc., Jacksonville, Florida
Lana Jane Lewis-Brent
President, Paul Brent Designer, Inc., Panama City, Florida

MIAMI

559

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Steven C. Shimp
President, O-A-K/Florida, Inc., Fort Myers, Florida
Pat L. Tornillo, Jr.
Executive Vice President, United Teachers of Dade,
Miami, Florida
Roberto G. Blanco
Vice Chairman and Chief Financial Officer, Republic National
Bank of Miami, Miami, Florida
E. Anthony Newton
President, Island National Bank of Palm Beach,
Palm Beach, Florida
Appointed by the Board of Governors
President, Vinegar Bend Farms, Inc., Belle Glade, Florida
Michael T. Wilson
Executive Vice President, Intercap Investments, Inc.,
Dorothy C. Weaver
Coral Gables, Florida
R. Kirk Landon
Chairman and Chief Executive Officer, American Bankers
Insurance Group, Miami, Florida

NASHVILLE

1993
1993
1994
1995

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Williams E. Arant, Jr.
President and Chief Executive Officer, First National Bank of
Knoxville, Knoxville, Tennessee
William Baxter Lee III
Chairman and President, Southeast Services Corporation,
Knoxville, Tennessee
Marguerite W. Sallee
President and Chief Executive Officer, Corporate Child Care
Management Services, Nashville, Tennessee
James D. Harris
President and Chief Executive Officer, Brentwood National Bank,
Brentwood, Tennessee
Appointed by the Board of Governors
William C. Wallace
Vice President-Central Division, American Airlines,
Nashville, Tennessee
James R. Tuerff
President and Chief Executive Officer, American General Life and
Accident Insurance Company, Nashville, Tennessee
Harold A. Black
James F. Smith, Jr., Professor of Financial Institutions,
College of Business Administration, University of Tennessee,
Knoxville, Tennessee




1993
1994
1994
1995

1993
1994
1995

560

Federal Reserve Bulletin • May 1993

DISTRICT

Term expires
December 31

6—Continued

NEW ORLEANS BRANCH
Appointed by the Federal Reserve Bank
Chairman and Chief Executive Officer, First National Bank of
Howard C. Gaines
Commerce, New Orleans, Louisiana
Chairman and Chief Executive Officer, Cooper/T. Smith Corporation,
Angus R. Cooper II
Mobile, Alabama
Managing Director, Nelson Capital Corporation,
Kay L. Nelson
New Orleans, Louisiana
President and Chief Executive Officer, Bank of Forest,
Thomas E. Walker
Forest, Mississippi
Appointed by the Board of Governors
President, Louisiana AFL-CIO, Baton Rouge, Louisiana
Victor Bussie
President, Slaydon Consultants and Insight Productions and
Jo Ann Slaydon
Advertising, Baton Rouge, Louisiana
Lucimarian Tolliver Roberts
President, Mississippi Coast Coliseum Commission,
Pass Christian, Mississippi

DISTRICT

1993
1994
1994
1995

1993
1994
1995

7—CHICAGO

Class A
David W. Fox

Stefan S. Anderson

Arnold C. Schultz

Chairman, President, and Chief Executive Officer, The Northern Trust
Corporation and The Northern Trust Company,
Chicago, Illinois
Chairman, President, and Chief Executive Officer,
First Merchants Bank, N.A., and First Merchants Corporation,
Muncie, Indiana
Chairman, President, and Chief Executive Officer, Grundy National
Bank, Grundy Center, Iowa

1993

1994

1995

Class B
A. Charlene Sullivan
Thomas C. Dorr
Donald J. Schneider

Associate Professor of Management, Krannert Graduate School of
Management, Purdue University, West Lafayette, Indiana
President and Chief Executive Officer, Dorr's Pine Grove Farm Co.,
Marcus, Iowa
President, Schneider National, Inc., Green Bay, Wisconsin

1993
1994
1995

Class C
Robert M. Healey
Duane L. Burnham
Richard G. Cline




President, Chicago Federation of Labor and Industrial Union Council,
AFL-CIO, Chicago, Illinois
Chairman and Chief Executive Officer, Abbott Laboratories,
Abbott Park, Illinois
Chairman, President, and Chief Executive Officer, NICOR, Inc.,
Naperville, Illinois

1993
1994
1995

Directors of Federal Reserve Banks and Branches

561

Term expires
DISTRICT 7—Continued

December 31

DETROIT BRANCH
Appointed by the Federal Reserve Bank
Charles E. Allen
President and Chief Executive Officer, Graimark Realty Advisors,
Inc., Detroit, Michigan
William E. Odom
Chairman, Ford Motor Credit Company, Dearborn, Michigan
Daniel R. Smith
Chairman and Chief Executive Officer, First of America Bank
Corporation, Kalamazoo, Michigan
Norman F. Rodgers
President and Chief Executive Officer, Hillsdale County National
Bank, Hillsdale, Michigan
Appointed by the Board of Governors
Beverly A. Beltaire
President, P R Associates, Inc., Detroit, Michigan
John D. Forsyth
Executive Director, University of Michigan Hospitals,
Ann Arbor, Michigan
J. Michael Moore
Chairman and Chief Executive Officer, Invetech Company,
Detroit, Michigan

1993
1993
1994
1995

1993
1994
1995

DISTRICT 8—ST. LOUIS
Class A
Ray U. Tanner
Henry G. River, Jr.
Douglas M. Lester
Class B
Warren R. Lee
Sandra B. Sanderson-Chesnut
Richard E. Bell
Class C
Janet McAfee Weakley
Robert H. Quenon
John F. McDonnell

Chairman, Director, and Chief Executive Officer, Volunteer Bank,
Jackson, Tennessee
President and Chief Executive Officer, First National Bank in
Pinckneyville, Pinckneyville, Illinois
Chairman and President, Trans Financial Bancorp, Inc.,
Bowling Green, Kentucky
President, W. R. Lee & Associates, Inc., Louisville, Kentucky
President and Chief Executive Officer, Sanderson Plumbing Products,
Inc., Columbus, Mississippi
President and Chief Executive Officer, Riceland Foods, Inc.,
Stuttgart, Arkansas
President, Janet McAfee, Inc., St. Louis, Missouri
Mining Consultant, St. Louis, Missouri
Chairman and Chief Executive Officer, McDonnell Douglas
Corporation, St. Louis, Missouri

1993
1994
1995

1993
1994
1995

1993
1994
1995

LITTLE ROCK BRANCH
Appointed by the Federal Reserve Bank
James V. Kelley
Chairman, President, and Chief Executive Officer, First United
Bancshares, Inc., El Dorado, Arkansas
Mahlon A. Martin
President, Winthrop Rockefeller Foundation, Little Rock, Arkansas
Barnett Grace
Chairman and Chief Executive Officer, First Commercial Bank, N.A.,
Little Rock, Arkansas
Mark A. Shelton III
President, M.A. Shelton Farming Company, Altheimer, Arkansas




1993
1993
1994
1995

562

Federal Reserve Bulletin • May 1993

DISTRICT 8—Continued
Little Rock

Branch—Continued

Appointed by the Board of Governors
L. Dickson Rake
President, Barnes, Quinn, Flake & Anderson, Inc.,
Little Rock, Arkansas
Robert Daniel Natholz, Jr.
Chief Executive Officer, Nabholz Construction Corporation,
Conway, Arkansas
Betta Carney
President and Chief Executive Officer, World Wide Travel
Service, Inc., Little Rock, Arkansas

LOUISVILLE

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Owner, Mike Hall Farm, Seymour, Indiana
Robert M. Hall
President and Chief Executive Officer, Red Spot Paint and Varnish
Charles D. Storms
Company, Inc., Evansville, Indiana
President, The Farmers National Bank of Lebanon,
Thomas E. Sprage is, Jr.
Lebanon, Kentucky
Chairman and Chief Executive Officer, Liberty National Bank,
Malcolm B. Chancey, Jr.
Louisville, Kentucky
Appointed by the Board of Governors
Chairman and Chief Executive Officer, Computer Services, Inc.
John A. Williams
Paducah, Kentucky
Legal Director, Metropolitan Sewer District,
Laura M. Douglas
Louisville, Kentucky
Consultant, Louisville Energy and Environment Corporation,
Daniel L. Ash
Louisville, Kentucky

MEMPHIS

Term expires
December 31

1993
1993
1994
1995

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
President and Chief Operating Officer, National Bank
Thomas M. Garrott
of Commerce and National Commerce Bancorporation,
Memphis, Tennessee
Chairman of the Board and President, Liberty Federal
Larry A. Watson
Savings Bank, Paris, Tennessee
President and Chief Executive Officer, National Bank
Lewis F. Mallory, Jr.
of Commerce of Mississippi, Starkville, Mississippi
Anthony M. Ramp ley
President, Chief Executive Officer, and Director, Arkansas Glass
Container Corporation, Jonesboro, Arkansas
Appointed by the Board of Governors
Seymour B. Johnson
Owner, Kay Planting Company, Indianola, Mississippi
Sidney Wilson
Owner, Wilson Automotive Group Inc., Jackson, Tennessee
M. Rita Schroeder
President, St. Francis Hospital, Memphis, Tennessee



1993

1993
1994
1995

1993
1994
1995

Directors of Federal Reserve Banks and Branches

DISTRICT

563

Term expires
December 31

9—MINNEAPOLIS

Class A
President and Chief Executive Officer, First State Bank of Warner,
Warner, South Dakota
Chairman and Chief Executive Officer, First Bank Montana, N.A.,
and General Manager, First Bank-Regional Banking Group,
Billings, Montana
President and Chief Executive Officer, Houghton National Bank,
Houghton, Michigan

Charles L. Seaman
William W. Strausburg
Susanne V. Boxer

1993
1994

1995

Class B
Earl R. St. John, Jr.
Duane E. Dingmann
Dennis W. Johnson

President, St. John Forest Products, Inc., Spalding, Michigan
President, Trubilt Auto Body, Inc., Eau Claire, Wisconsin
President, TMI Systems Design Corporation/TMI Transport
Corporation, Dickinson, North Dakota

1993
1994
1995

President and Chief Executive Officer, Pioneer Metal Finishing,
Minneapolis, Minnesota
Professor, Consumption and Consumer Economics, Department of
Agricultural and Applied Economics, University of Minnesota,
St. Paul, Minnesota
Chairman of the Board and Chief Executive Officer, Opus
Corporation, Minneapolis, Minnesota

1993

Class C
Delbert W. Johnson
Jean D. Kinsey
Gerald A. Rauenhorst

HELENA

1994

1995

BRANCH

Appointed by the Federal Reserve Bank
Beverly D. Harris
President, Empire Federal Savings and Loan Association,
Livingston, Montana
Donald E. Olsson, Jr.
Executive Vice President, Ronan State Bank, Ronan, Montana
Nancy M. Stephenson
Executive Director, Neighborhood Housing Services,
Great Falls, Montana
Appointed by the Board of Governors
James E. Jenks
Jenks Farms, Hogeland, Montana
Lane W. Basso
President, Deaconess Medical Center of Billings, Inc.,
Billings, Montana

DISTRICT 10—KANSAS

1993
1994
1994

1993
1994

CITY

Class A
Roger L. Reisher
Charles I. Moyer
William L. McQuillan




Co-Chairman of the Board, FirstBank Holding Company of Colorado,
Lakewood, Colorado
Chairman and Chief Executive Officer, The First National Bank of
Phillipsburg, Phillipsburg, Kansas
President and Chief Executive Officer, City National Bank,
Greeley, Nebraska

1993
1994
1995

564

Federal Reserve Bulletin • May 1993

DISTRICT

Term expires
December 31

10—Continued

Class B
Don E. Adams
Frank J. Yaklich, Jr.
WW. Allen

Buffalo, Oklahoma
President and Chief Executive Officer, CF & I Steel Corporation,
Pueblo, Colorado
President and Chief Operating Officer, Phillips Petroleum Company,
Bartlesville, Oklahoma

1993
1994

President and General Manager, Thomas E. Rodriguez & Associates,
P.C., Aurora, Colorado
Chairman of the Board and President, Puritan-Bennett Corporation,
Overland Park, Kansas
President and Chief Executive Officer, Godfather's Pizza, Inc.,
Omaha, Nebraska

1993

1995

Class C
Thomas E. Rodriguez
Burton A. Dole, Jr.
Herman Cain

1994
1995

DENVER BRANCH
Appointed by th ? Federal Reserve Bank
Peter R. Decker
President, Decker & Associates, Denver, Colorado
Clifford E. Kirk
President, First National Bank of Gillette, Gillette, Wyoming
Richard I. Ledbet er
President and Chief Executive Officer, First National Bank of
Farmington, Farmington, New Mexico
Peter I. Wold
Partner, Wold Oil and Gas Company, Casper, Wyoming
Appointed by th e Board of Governors
Gilbert Sanchez
President, New Mexico Highlands University,
Las Vegas, New Mexico
Barbara B. Grogan
President, Western Industrial Contractors, Inc., Denver, Colorado
Sandra K. Woods
Vice President, Adolph Coors Company, Corporate Real Estate,
Golden, Colorado

1993
1994
1994
1995

1993
1994
1995

OKLAHOMA CITY BRANCH
Appointed by th e Federal Reserve Bank
Gordona Duca
President and Owner, Gordona Duca, Inc., Realtors,
Tulsa, Oklahoma
C. Kendric Fergeson
Chairman of the Board and Chief Executive Officer, The National
Bank of Commerce, Altus, Oklahoma
John Wm. Laisle
President and Chief Executive Officer, MidFirst Bank, SSB,
Oklahoma City, Oklahoma
Dennis M. Mitchell

President, Citizens Bank of Ardmore, Ardmore, Oklahoma

Appointed by the Board of Governors
Ernest L. Holloway
President, Langston University, Langston, Oklahoma
Victor R. Schock
President and Chief Executive Officer, Credit Counseling Services of
Oklahoma, Inc., Tulsa, Oklahoma
Barry L. Eller
Sr. Vice President and General Manager, MerCruiser, Mercury Marine
Business Unit, Division of Brunswick Corp.,
Stillwater, Oklahoma



1993
1993
1994

1995

1993
1994
1995

Directors of Federal Reserve Banks and Branches

565

Term expires
DISTRICT 10— Continued

December 31

OMAHA BRANCH
Appointed by the Federal Reserve Bank
Bruce R. Lauritzen
President, First National Bank of Omaha, Omaha, Nebraska
Donald A. Leu
President and Chief Executive Officer, Consumer Credit Counseling
Service, Omaha, Nebraska
Thomas H. Olson
President and Chief Executive Officer, Lisco State Bank,
Lisco, Nebraska
Robert L. Peterson
Chairman, President, and Chief Executive Officer, IBP, Inc.,
Dakota City, Nebraska
Appointed by the Board of Governors
LeRoy W. Thom
President, T-L Irrigation Company, Hastings, Nebraska
Arthur L. Shoener
Executive Vice President-Operations, Union Pacific Railroad,
Omaha, Nebraska
Sheila Griffin
Special Advisor to the Governor of the State of Nebraska for
International Trade, Lincoln, Nebraska

1993
1993
1993
1995

1993
1994
1995

DISTRICT 11—DALLAS

Class A
T.C. Frost
Eugene M. Phillips
Jeff Austin, Jr.

Chairman of the Board, Frost National Bank, San Antonio, Texas
Chairman of the Board and President, The First National Bank of
Panhandle, Panhandle, Texas
Chairman of the Board, Texas National Bank, Longview, Texas

1993
1994
1995

Class B
J.B. Cooper, Jr.
Peyton Yates
Milton Carroll

Farmer, Roscoe, Texas
President, Yates Drilling Company and Executive Vice President,
Yates Petroleum Corporation, Artesia, New Mexico
Chairman of the Board and Chief Executive Officer, Instrument
Products, Inc., Houston, Texas

1993
1994
1995

Class C
James A. Martin
Cece Smith
Leo E. Linbeck, Jr.

Third General Vice President, International Association of Bridge,
Structural and Ornamental Iron Workers, Austin, Texas
General Partner, Phillips-Smith Specialty Retail Group,
Dallas, Texas
Chairman of the Board and Chief Executive Officer, Linbeck
Construction Corporation, Houston, Texas

1993
1994
1995

EL PASO BRANCH
Appointed by the Federal Reserve Bank
Veronica K. Callaghan
Vice President and Principal, KASCO Ventures, Inc., El Paso, Texas
Ben H. Haines, Jr.
President and Chief Operating Officer, First National Bank of Dona
Ana County, Las Cruces, New Mexico
Owner and Chief Executive Officer, ProntoLube, El Paso, Texas
Hugo Bustamante, Jr.
Wayne Merritt
Chairman of the Board and President, Texas National Bank of
Midland, Midland, Texas




1993
1993
1994
1995

566

Federal Reserve Bulletin • May 1993

Term expires
December 31

DISTRICT 11—Continued
El Paso

Branch—Continued

Appointed by the Board of Governors
Diana S. Natalicio
President, The University of Texas at El Paso, El Paso, Texas
Alvin T. Johnson
President, Management Assistance Corporation of America,
El Paso, Texas
W. Thomas Beard III
President, Leoncita Cattle Company, Alpine, Texas
HOUSTON

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Walter E. Johnson
President and Chief Executive Officer, Southwest Bank of Texas,
Houston, Texas
Clive Runnells
President and Director, Runnells Cattle Company, Bay City, Texas
Tieman H. Dippel, Jr.
Chairman of the Board and President, Brenham Bancshares, Inc.,
Brenham, Texas
J. Michael Solar
Principal Attorney, Solar & Ellis L.L.P., Houston, Texas
Appointed by the Board of Governors
Robert C. McNair
Chairman and Chief Executive Officer, Cogen Technologies, Inc.,
Houston, Texas
Isaac H. Kempner III
Chairman of the Board, Imperial Holly Corporation,
Sugar Land, Texas
Judy Ley Allen
Partner and Administrator, Allen Investments, Houston, Texas
SAN ANTONIO

1993
1993
1994
1995
1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Javier Garza
Executive Vice President, The Laredo National Bank, Laredo, Texas
Sam R. Sparks
President, Sam R. Sparks, Inc., Progreso, Texas
T. Jack Moore III
Owner and Manager, T.J. Moore Lumber Inc., Ingram, Texas
Gregory W. Crane
President and Chief Executive Officer, Broadway National Bank,
San Antonio, Texas
Appointed by the Board of Governors
Erich Wendl
President and Chief Executive Officer, Maverick Markets, Inc.,
Corpus Christi, Texas
Roger R. Hemminghaus
Chairman, President, and Chief Executive Officer, Diamond
Shamrock, Inc., San Antonio, Texas
Carol L. Thompson
Vice President, Computerland, Austin, Texas

DISTRICT 12—SAN

1993
1993
1994
1995

1993
1994
1995

FRANCISCO

Class A
Richard L. Mount
William E.B. Siart
Carl J. Schmitt




Chairman, President, and Chief Executive Officer, Saratoga Bancorp,
Saratoga, California
President, First Interstate Bancorp, Los Angeles, California
Chairman of the Board and Chief Executive Officer, University
National Bank & Trust Company, Palo Alto, California

1993
1994
1995

Directors of Federal Reserve Banks and Branches

DISTRICT

567

Term expires
December 31

12—Continued

Class B
John N. Nordstrom
William L. Tooley
E. Kay Stepp

Co-Chairman of the Board, Nordstrom, Inc., Seattle, Washington
Chairman, Tooley & Company, Investment Builders,
Los Angeles, California
Former President and Chief Operating Officer, Portland General
Electric Company, Portland, Oregon

1993
1994
1995

Class C
James A. Vohs

Judith M. Runstad
Cynthia A. Parker

LOS ANGELES

Chairman and Chief Executive Officer (Retired), Kaiser Foundation
Health Plan, Inc., and Kaiser Foundation Hospitals,
Oakland, California
Partner and Managing Director, Foster Pepper and Shefelman,
Seattle, Washington
Executive Director, Anchorage Neighborhood Housing Services, Inc.,
Anchorage, Alaska

1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Anita Landecker
Regional Vice President, Local Initiatives Support Corporation,
Los Angeles, California
President and General Counsel, Mexican American Legal Defense and
Antonia Hernandez
Educational Fund, Los Angeles, California
William S. Randall
Chief Executive Officer, Southwest Region, First Interstate Bank,
Phoenix, Arizona
Steven R. Sensenbach
President and Chief Executive Officer, Vineyard National Bank,
Rancho Cucamonga, California
Appointed by the Board of Governors
Donald G. Phelps
Chancellor, Los Angeles Community College District,
Los Angeles, California
David L. Moore
President, Western Growers Association, Newport Beach, California
Anne L. Evans
Chairman, Evans Hotels, San Diego, California

PORTLAND

1993

1993
1994
1994
1995

1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
Cecil W. Drinkward
President, Hoffman Construction Company, Portland, Oregon
Stephen G. Kimball
Chairman, President, and Chief Executive Officer, Baker Boyer
Bancorp, Walla Walla, Washington
Stuart H. Compton
Chairman, Pioneer Trust Bank, N.A., Salem, Oregon
Elizabeth K. Johnson
President, TransWestern Helicopters, Inc., Scappoose, Oregon

1994
1995

Appointed by the Board of Governors
Ross R. Runkel
Professor of Law, Willamette University, Salem, Oregon
William A. Hilliard
Editor, The Oregonian, Portland, Oregon
Carol A. Whipple
Owner/Manager, Rocking C Ranch, Elkton, Oregon

1993
1994
1995




1993
1993

568

Federal Reserve Bulletin • May 1993

DISTRICT 12—Continued
SALT LAKE CITY

Term expires
December 31

BRANCH

Appointed by the Federal Reserve Bank
Curtis H. Eaton
Vice President; Manager, Community Banking Area; and Member
of the Board of Directors, First Security Bank of Idaho, N.A.,
Twin Falls, Idaho
Virginia P. Kelson
Partner, Ralston Consulting Group, Salt Lake City, Utah
Gerald R. Sherratt
President, Southern Utah University, Cedar City, Utah
Roy C. Nelson
President, Bank of Utah, Ogden, Utah
Appointed by the Board of Governors
Constance G. Hogland
Executive Director, Boise Neighborhood Housing Services, Inc.,
Boise, Idaho
H. Roger Boyer
Chairman of the Board, The Boyer Company, Salt Lake City, Utah
Gary G. Michael
Chairman and Chief Executive Officer, Albertson's, Inc.,
Boise, Idaho
SEATTLE

1993

1993
1994
1995
1993
1994
1995

BRANCH

Appointed by the Federal Reserve Bank
B.R. Beeksma
Chairman of the Board, InterWest Savings Bank,
Oak Harbor, Washington
Gerry B. Cameron
Vice Chairman, U.S. Bancorp, Seattle, Washington
Thomas E. Cleveland
Chairman of the Board and Chief Executive Officer, Enterprise Bank
of Bellevue, N.A., Bellevue, Washington
Constance L. Proctor
Partner, Alston, Courtnage, MacAulay & Proctor,
Seattle, Washington
Appointed by the Board of Governors
George F. Russell, Jr.
Chairman, Frank Russell Company, Tacoma, Washington
William R. Wiley
Senior Vice President, Battelle Memorial Institute; Director,
Battelle/Pacific Northwest Division; and Director, U.S. Department
of Energy, Pacific Northwest Laboratory, Richland, Washington
Emilie A. Adams
President and Chief Executive Officer, Better Business Bureau,
Seattle, Washington




1993
1993
1994
1995

1993
1994

1995

A1

Financial and Business Statistics
CONTENTS
A3

WEEKLY REPORTING

Guide to Tabular

Domestic Financial

Presentation

Statistics

MONEY STOCK AND BANK

A4
A5
A6
A7

CREDIT

Reserves, money stock, liquid assets, and debt
measures
Reserves of depository institutions, Reserve Bank
credit
Reserves and borrowings—Depository
institutions
Selected borrowings in immediately available
funds—Large member banks

POLICY

INSTRUMENTS

FEDERAL RESERVE

BANKS

A l l Condition and Federal Reserve note statements
A12 Maturity distribution of loan and security
holdings

MONETARY

AND CREDIT

BANKING

INSTITUTIONS

A18 Major nondeposit funds
A19 Assets and liabilities, last-Wednesday-of-month
series




FINANCIAL

MARKETS

A24 Commercial paper and bankers dollar
acceptances outstanding
A24 Prime rate charged by banks on short-term
business loans
A25 Interest rates—money and capital markets
A26 Stock market—Selected statistics
A27 Selected financial institutions—Selected assets
and liabilities

FINANCE

All
A28
A29
A29

Federal fiscal and financing operations
U.S. budget receipts and outlays
Federal debt subject to statutory limitation
Gross public debt of U.S. Treasury—Types
and ownership
A30 U.S. government securities
dealers—Transactions
A31 U.S. government securities dealers—Positions
and financing
A32 Federal and federally sponsored credit
agencies—Debt outstanding

AGGREGATES

A13 Aggregate reserves of depository institutions
and monetary base
A14 Money stock, liquid assets, and debt measures
A16 Bank debits and deposit turnover
A17 Loans and securities—All commercial banks

COMMERCIAL

BANKS

Assets and liabilities
A21 All reporting banks
A23 Branches and agencies of foreign banks

FEDERAL

A8 Federal Reserve Bank interest rates
A9 Reserve requirements of depository institutions
A10 Federal Reserve open market transactions

COMMERCIAL

SECURITIES MARKETS
CORPORATE

AND

FINANCE

A33 New security issues—State and local
governments and corporations
A34 Open-end investment companies—Net sales
and asset position
A34 Corporate profits and their distribution
A34 Nonfarm business expenditures on new
plant and equipment
A35 Domestic finance companies—Assets and
liabilities and business credit

2

Federal Reserve Bulletin • May 1993

Domestic Financial
REAL

Statistics—Continued

ESTATE

A36 Mortgage markets
A37 Mortgage debt outstanding
CONSUMER

INSTALLMENT

CREDIT

A3 8 Total outstanding and net change
A3 8 Terms
FLOW OF

A39
A41
A42
A43

A57 Selected U.S. liabilities to foreign official
institutions

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 Nonfinancial
SELECTED

Statistics

MEASURES

A44 Nonfinancial business activity—Selected
measures
A45 Labor force, employment, and unemployment
A46 Output, capacity, and capacity utilization
A47 Industrial production—Indexes and gross value
A49 Housing and construction
A50 Consumer and producer prices
A51 Gross domestic product and income
A52 Personal income and saving

International
SUMMARY

Statistics

REPORTED

BY BANKS

IN THE UNITED

STATES

A57
A58
A60
A61

Liabilities to and claims on foreigners
Liabilities to foreigners
Banks' own claims on foreigners
Banks' own and domestic customers' claims on
foreigners
A61 Banks' own claims on unaffiliated foreigners
A62 Claims on foreign countries—Combined
domestic offices and foreign branches
REPORTED

BY NONBANKING

ENTERPRISES

BUSINESS

IN THE UNITED

STATES

A63 Liabilities to unaffiliated foreigners
A64 Claims on unaffiliated foreigners
SECURITIES

HOLDINGS

AND

TRANSACTIONS

A65 Foreign transactions in securities
A66 Marketable U.S. Treasury bonds and
notes—Foreign transactions
INTEREST AND EXCHANGE

RATES

A67 Discount rates of foreign central banks
A67 Foreign short-term interest rates
A68 Foreign exchange rates
A69 Guide to Statistical Releases and
Special Tables

STATISTICS
SPECIAL

A53
A54
A54
A54

U.S. international transactions—Summary
U.S. foreign trade
U.S. reserve assets
Foreign official assets held at Federal Reserve
Banks
A55 Foreign branches of U.S. banks—Balance
sheet data




TABLES

A70 Assets and liabilities of commercial banks,
December 31, 1992
A76 Terms of lending at commercial banks,
February 1-5, 1993
A80 Assets and liabilities of U.S. branches and
agencies of foreign banks, December 31, 1992

A3

Guide to Tabular Presentation
SYMBOLS AND

c
e
n.a.
n.e.c.
P
r
*

0
ATS
CD
CMO
FFB
FHA
FHLBB
FHLMC
FmHA
FNMA
FSLIC
G-7
G-10

GENERAL

ABBREVIATIONS

Corrected
Estimated
Not available
Not elsewhere classified
Preliminary
Revised (Notation appears on column heading
when about half of the figures in that column
are changed.)
Amounts insignificant in terms of the last decimal
place shown in the table (for example, less than
500,000 when the smallest unit given is millions)
Calculated to be zero
Cell not applicable
Automatic transfer service
Certificate of deposit
Collateralized mortgage obligation
Federal Financing Bank
Federal Housing Administration
Federal Home Loan Bank Board
Federal Home Loan Mortgage Corporation
Farmers Home Administration
Federal National Mortgage Association
Federal Savings and Loan Insurance Corporation
Group of Seven
Group of Ten

GNMA
GDP
HUD
IMF
IO
IPCs
IRA
MMDA
NOW
OCD
OPEC
OTS
PO
REIT
REMIC
RP
RTC
SAIF
SCO
SDR
SIC
SMSA
VA

Government National Mortgage Association
Gross domestic product
Department of Housing and Urban
Development
International Monetary Fund
Interest only
Individuals, partnerships, and corporations
Individual retirement account
Money market deposit account
Negotiable order of withdrawal
Other checkable deposit
Organization of Petroleum Exporting Countries
Office of Thrift Supervision
Principal only
Real estate investment trust
Real estate mortgage investment conduit
Repurchase agreement
Resolution Trust Corporation
Savings Association Insurance Fund
Securitized credit obligation
Special drawing right
Standard Industrial Classification
Standard metropolitan statistical area
Veterans Administration

INFORMATION

In many of the tables, components do not sum to totals because
of rounding.
Minus signs are used to indicate (1) a decrease, (2) a negative
figure, or (3) an outflow.
"U.S. government securities" may include guaranteed issues
of U.S. government agencies (the flow of funds figures also




include not fully guaranteed issues) as well as direct obligations of the Treasury. "State and local government" also includes municipalities, special districts, and other political
subdivisions.

A4

D o m e s t i cNonfinancialStatistics • M a y 1993

1.10 RESERVES, MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES
Percent annual rate of change, seasonally adjusted 1
1992

1992

1993

Monetary and credit aggregate

1
2
3
4

Reserves of depository
Total
Required
Nonborrowed
Monetary base

Q2

Q3

Q4r

25.2
25.3
25.8
9.3

14.8r
15.3r
14.6r
7.8

9.3
9.9
8.4
10.5

25.8
25.3
27.1
12.6

36.6
35.4
40.2
11.5

22.2
23.4
23.2
10.4

12.0
9.6
11.6
10.2

6.9
4.7
6.0
8.3

5.6
9.3
8.3
8.6

15.4
3.2
1.9
1.3
4.2

10.6
.3r
-.6r
1.3r
5.7r

11.7
.8
.1
1.1
4.9

16.8
2.7
-.2
2.0
4.4

19.1
3.9
-.9
1.3
2.8

15.7
2.3
-.4
3.1
5.7

8.8
-.3
-3.3
-.9
6.2

7.7
-3.1
-7.1
-2.4
3.2

-.5
-4.2
-2.3
n.a.
n.a.

-1.1
-4.2

-3.4r
-4.9

-3.2
-3.6

-2.8
-14.3

-2.2
-24.4

-3.2
-13.8

-4.0
-18.7

-7.6
-27.8

-5.7
8.1

18.8
-19.6
-15.2

12.6
-13.4
-13.3

10.9
-17.4
-18.6

12.9
-17.1
-18.4

14.5
-17.3
-26.5

10.3
-18.5
-16.2

5.7
-11.5
-10.7

-3.2
-10.4
-26.9

2.5
2.1
-6.3

20.2
-24.0
-26.8

18.1
-29.8
-31.9

9.2
-18.6
-14.9

8.7
-21.6
-11.3

7.7
-26.8
.0

9.9
-21.0
-29.1

5.6
-21.1
-21.0

1.1
-15.5
-3.6

-10.0
-24.1
-28.6

-3.0
33.0

-6.6r
23.9

-7.4r
32.9

-4.2
-19.4

8.4
-53.3

-9.0
-9.7

-4.9
-39.6

-8.1
-27.3

-20.5
25.5

10.0
2.3

14.4
2.8r

10.7r
1.9

6.0
3.8

-1.1
4.2

10.5
4.0

16.3
2.7

2.9
3.3

institutions2

Concepts of money, liquid assets, and debt4
5 Ml
6 M2
7 M3
8 L
9 Debt
Nontrqnsaction
10 In M2
11 In M3 only 6

Qlr

components

Time and savings deposits
Commercial banks
Savings, including MMDAs
Small time
Large time •
Thrift institutions
15
Savings, including MMDAs
16 Small time
17 Large time '
12
13
14

Money market mutual funds
18 General purpose and broker-dealer
19 Institution-only

Oct/

Nov.

r

Dec/

Jan/

Feb.

4

Debt components
20 Federal
21 Nonfederal

1. Unless otherwise noted, rates of change are calculated from average
amounts outstanding during preceding month or quarter.
2. Figures incorporate adjustments for discontinuities, or "breaks," associated with regulatory changes in reserve requirements. (See also table 1.20.)
3. Seasonally adjusted, break-adjusted monetary base consists of (1) seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally
adjusted currency component of the money stock, plus (3) (for all quarterly
reporters on the "Report of Transaction Accounts, Other Deposits, and Vault
Cash" and for all weekly reporters whose vault cash exceeds their required
reserves) the seasonally adjusted, break-adjusted difference between current vault
cash and the amount applied to satisfy current reserve requirements.
4. Composition of the money stock measures and debt is as follows:
Ml: (1) currency outside the Treasury, Federal Reserve Banks, and the vaults
of depository institutions; (2) travelers checks of nonbank issuers; (3) demand
deposits at all commercial banks other than those due to depository institutions,
the U.S. government, and foreign banks and official institutions, less cash items in
the process of collection and Federal Reserve float; and (4) other checkable
deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and
automatic transfer service (ATS) accounts at depository institutions, credit union
share draft accounts, and demand deposits at thrift institutions. Seasonally
adjusted Ml is computed by summing currency, travelers checks, demand
deposits, and OCDs, each seasonally adjusted separately.
M2: Ml plus (1) overnight (and continuing-contract) repurchase agreements
(RPs) issued by all depository institutions and overnight Eurodollars issued to
U.S. residents by foreign branches of U.S. banks worldwide, (2) savings (including MMDAs) and small time deposits (time deposits—including retail repurchase
agreements (RPs)—in amounts of less than $100,000), and (3) balances in both
taxable and tax-exempt general-purpose and broker-dealer money market funds.
Excludes individual retirement accounts (IRAs) and Keogh balances at depository
institutions and money market funds. Also excludes all balances held by U.S.
commercial banks, money market funds (general purpose and broker-dealer),
foreign governments and commercial banks, and the U.S. government. Seasonally adjusted M2 is computed by adjusting its non-Mi component as a whole and
then adding this result to seasonally adjusted M l .
M3: M2 plus (1) large time deposits and term RP liabilities (in amounts of
$100,000 or more) issued by all depository institutions, (2) term Eurodollars held
by U.S. residents at foreign branches of U.S. banks worldwide and at all banking




n.a.
n.a.

offices in the United Kingdom and Canada, and (3) balances in both taxable and
tax-exempt, institution-only money market funds. Excludes amounts held by
depository institutions, the U.S. government, money market funds, and foreign
banks and official institutions. Also excluded is the estimated amount of overnight
RPs and Eurodollars held by institution-only money market funds. Seasonally
adjusted M3 is computed by adjusting its non-M2 component as a whole and then
adding this result to seasonally adjusted M2.
L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term
Treasury securities, commercial paper, and bankers acceptances, net of money
market fund holdings of these assets. Seasonally adjusted L is computed by
summing U.S. savings bonds, short-term Treasury securities, commercial paper,
and bankers acceptances, each seasonally adjusted separately, and then adding
this result to M3.
Debt: Debt of domestic nonfinancial sectors consists of outstanding creditmarket debt of the U.S. government, state and local governments, and private
nonfinancial sectors. Private debt consists of corporate bonds, mortgages, consumer credit (including bank loans), other bank loans, commercial paper, bankers
acceptances, and other debt instruments. Data are derived from the Federal
Reserve Board's flow of funds accounts. Data on debt of domestic nonfinancial
sectors are monthly averages, derived by averaging adjacent month-end levels.
Growth rates for debt reflect adjustments for discontinuities over time in the levels
of debt presented in other tables.
5. Sum of (1) overnight RPs and Eurodollars, (2) money market fund balances
(general purpose and broker-dealer), (3) MMDAs, and (4) savings and small time
deposits.
6. Sum of (1) large time deposits, (2) term RPs, (3) term Eurodollars of U.S.
residents, and (4) money market fund balances (institution-only), less (5) a
consolidation adjustment that represents the estimated amount of overnight RPs
and Eurodollars held by institution-only money market funds. This sum is
seasonally adjusted as a whole.
7. Small time deposits—including retail RPs—are those issued in amounts of
less than $100,000. All IRA and Keogh account balances at commercial banks and
thrift institutions are subtracted from small time deposits.
8. Large time deposits are those issued in amounts of $100,000 or more,
excluding those booked at international banking facilities.
9. Large time deposits at commercial banks less those held by money market
funds, depository institutions, and foreign banks and official institutions.

Money

Stock

and Bank Credit

A5

1.11 RESERVES OF DEPOSITORY INSTITUTIONS AND RESERVE BANK CREDIT 1
Millions of dollars
Average of
daily figures
Factor

1992
Dec.

Average of daily figures for week ending on date indicated

1993

1993
Jan.

Feb.

Jan. 13

Jan. 20

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

SUPPLYING RESERVE F U N D S

1 Reserve Bank credit outstanding
U.S. government securities 2
2
Bought outright—System account
3
Held under repurchase agreements . . .
Federal agency obligations
4
Bought outright
5
Held under repurchase agreements . . .
Acceptances
6
Loans to depository institutions
7
Adjustment credit
8
Seasonal credit
9
Extended credit
10 Float
11 Other Federal Reserve assets
12 Gold stock
13 Special drawing rights certificate account .
14 Treasury currency outstanding

335,874

336,822r

334,937

336,140

337,363

332,695r

336,314

332,443

334,964

333,564

295,258
3,780

297,541
2,582

297,289
1,358

299,052
864

298,631
2,290

296,880
0

297,221
2,863

296,017
0

297,127
1,008

298,136
0

5,477
174
0

5,379
189
0

5,271
73
0

5,413
32
0

5,403
168
0

5,331
0
0

5,310
72
0

5,302
0
0

5,260
64
0

5,260
0
0

62
18
1
1,310
29,795

182
10
1
1,025r
29,913

22
18
0
763
30,143

40
6
0
1,132
29,601

341
15
1
741
29,773

71
10
3
520r
29,879

30
11
2
-27
30,833

15
17
0
491
30,600

14
19
0
1,110
30,362

24
22
0
999
29,123

11,057
8,663
21,432r

11,055
8,018
21,470r

11,055
8,018
21,519

11,056
8,018
21,461r

11,055
8,018
21,471r

11,055
8,018
21,480"

11,055
8,018
21,490

11,055
8,018
21,504

11,055
8,018
21,518

11,055
8,018
21,532

330,548r
515

330,334r
505

329,479
467

331,876r
505

329,742r
502

327,913r
502

326,928
502

328,530
466

330,488
464

330,230
463

6,011
201

7,693
215

6,018
243

5,492
196

6,988
212

8,761
215

11,447
255

5,391
222

4,791
240

4,967
237

5,953
295

6,426r
285

6,304
302

6,539
255

6,969
282

6,224r
276

6,004
284

6,595
298

6,197
305

6,184
306

ABSORBING RESERVE F U N D S

15 Currency in circulation
16 Treasury cash holdings
Deposits, other than reserve balances, with
Federal Reserve Banks
17 Treasury
18 Foreign
19 Service-related balances and
adjustments
20
Other
21 Other Federal Reserve liabilities and
capital
22 Reserve balances with Federal
Reserve Banks 3

8,109

8,523

9,006

8,262

8,692

8,739

9,076

9,050

8,925

8,928

25,394

23,386r

23,709

23,550

24,520

20,618r

22,382

22,467

24,144

22,853

Wednesday figures

End-of-month figures
Dec.

Feb.

Jan.

Jan. 13

Jan. 20

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

SUPPLYING RESERVE F U N D S

1 Reserve Bank credit outstanding
U.S. government securities
2
Bought outright—System account —
3
Held under repurchase agreements . . .
Federal agency obligations
4
Bought outright
5
Held under repurchase agreements . . .
Acceptances
6
Loans to depository institutions
7
Adjustment credit
8
Seasonal credit
9
Extended credit
10
Float
11 Other Federal Reserve assets
12 Gold stock
13 Special drawing rights certificate account .
14 Treasury currency outstanding

342,512

333,077r

337,550

334,532

348,010

332,644r

338,816

330,218

336,621

335,258

295,011
7,463

296,977
0

298,835
2,655

296,764
0

296,550
10,128

297,426
0

297,820
5,838

293,932
0

297,025
2,831

299,778
0

5,413
631
0

5,310
0
0

5,225
275
0

5,413
0
0

5,348
1,027
0

5,310
0
0

5,310
0
0

5,260
0
0

5,260
150
0

5,260
0
0

671
4
0
3,253
30,067

21
10
4
226r
30,529

40
17
•0
663
29,841

36
4
0
2,558
29,757

2,233
5
2
2,1%
30,521

251
15
4
-343 r
29,982

82
11
0
-1,263
31,018

16
19
0
179
30,812

17
22
0
1,887
29,430

27
22
0
930
29,241

11,056
8,018
21,452r

11,055
8,018
21,490r

11,055
8,018
21,546

11,056
8,018
21,461r

11,055
8,018
21,471r

11,055
8,018
21,480"

11,055
8,018
21,490

11,055
8,018
21,504

11,055
8,018
21,518

11,055
8,018
21,532

334,706r
508

326,573r
508

329,638
463

330,837r
502

329,312r
501

327,140"
508

327,659
466

329,467
466

330,993
463

329,937
463

7,492
206

9,572
244

5,350
296

5,080
203

17,577
226

10,750
274

7,284
284

4,980
200

4,869
256

4,973
232

6,179
372

6,004r
282

6,420
302

6,539
282

6,969
279

6,224r
273

6,004
302

6,595
291

6,197
324

6,184
282

7,984

9,141

9,180

8,360

8,649

8,624

8,954

8,683

8,773

8,817

26,519

23,265

25,042

19,404"

28,425

20,112

25,338

24,974

ABSORBING RESERVE F U N D S

15 Currency in circulation
16 Treasury cash holdings
Deposits, other than reserve balances, with
Federal Reserve Banks
17 Treasury
18 Foreign
19 Service-related balances and
adjustments
20
Other
21 Other Federal Reserve liabilities and
capital
22 Reserve balances with Federal
Reserve Banks 3

25,592

21,315

r

1. For amounts of cash held as reserves, see table 1.12.
2. Includes securities loaned—fully guaranteed by U.S. government securities
pledged with Federal Reserve Banks—and excludes any securities sold and
scheduled to be bought back under matched sale-purchase transactions.




3. Excludes required clearing balances and adjustments to compensate for
float,

A6

D o m e s t i cNonfinancialStatistics • M a y 1993

1.12 RESERVES AND BORROWINGS
Millions of dollars

Depository Institutions1

Prorated monthly averages of biweekly averages
Reserve classification

1
2
3
4
5
6
7
8
9
10

Reserve balances with Reserve Banks 2
Total vault cash 3
Applied vault cash ,
Surplus vault cash
Total reserves 6
Required reserves
Excess reserve balances at Resenre Banks
Total borrowings at Reserve Banks
Seasonal borrowings
Extended credit 9

1990

1991

1992

Dec.

Dec.

Dec.

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

30,237
31,786
28,884
2,903
59,120
57,456
1,664
326
76
23

26,659
32,510
28,872
3,638
55,532
54,553
979
192
38
1

25,368
34,535
31,172
3,364
56,540
55,385
1,155
124
18
1

21,272
32,458
28,890
3,568
50,162
49,227
935
251
223
0

22,627
32,342
28,894
3,448
51,521
50,527
994
287
193
0

23,626
32,987
29,510
3,477
53,136
52,062
1,074
143
114
0

25,462
32,457
29,205
3,252
54,666
53,624
1,043
104
40
0

25,368
34,535
31,172
3,364
56,540
55,385
1,155
124
18
1

23,636
35,991
32,368r
3,624
56,004r
54,744r
l,260 r
165
11
1

23,515
33,915
30,368
3,547
53,882
52,778
1,104
45
18
0

1992

1993

Biweekly averages of daily figures for weeks ending
1992

1
2
3
4
5
6
7
8
9
10

Reserve balances with Reserve Banks
Total vault cash 3 .
Applied vault cash4
Surplus vault cash
Total reserves 6
Required reserves
Excess reserve balances at Resei^e Banks
Total borrowings at Reserve Banks
Seasonal borrowings
Extended credit 9

...

Nov. 11

Nov. 25

Dec. 9

Dec. 23

Jan. 6

Jan. 20

Feb. 3 r

Feb. 17

Mar. 3

25,535
31,688
28,539
3,150
54,074
53,346
728
66
53

25,730
32,398
29,117
3,281
54,846
53,485
1,361
138
37

24,548
34,315
30,918
3,397
55,466
54,625
841
95
22

25,209
34,770
31,373
3,397
56,582
55,357
1,225
60
19
2

26,569
34,374
31,105
3,269
57,674
56,289
1,385
269
12

24,057
36,389
32,829
3,560
56,886
55,657
1,229
202
11

21,500
36,369
32,470
3,899
53,970
52,740
1,230
64
11
3

23,301
34,765
31,069
3,696
54,370
52,875
1,495
33
18

24,335
32,164
28,902
3,262
53,237
52,666
571
56
20

0

1. Data in this table also appear in the Board's H.3 (502) weekly statistical
release. For ordering address, see inside front cover.
2. Excludes required clearing balances and adjustments to compensate for float
and includes other off-balance-sheet " a s - o f ' adjustments.
3. Total "lagged" vault cash held by depository institutions subject to reserve
requirements. Dates refer to the maintenance periods during which the vault cash
can be used to satisfy reserve requirements. Under contemporaneous reserve
requirements, maintenance periods end thirty days after the lagged computation
periods during which the balances are held.
4. All vault cash held during the lagged computation period by "bound"
institutions (that is, those whose required reserves exceed their vault cash) plus
the amount of vault cash applied during the maintenance period by "nonbound"
institutions (that is, those whose vault cash exceeds their required reserves) to
satisfy current reserve requirements.




1993

0

0

0

1

0

0

5. Total vault cash (line 2) less applied vault cash (line 3).
6. Reserve balances with Federal Reserve Banks (line 1) plus applied vault cash
(line 3).
7. Total reserves (line 5) less required reserves (line 6).
8. Also includes adjustment credit.
9. Consists of borrowing at the discount window under the terms and conditions established for the extended credit program to help depository institutions
deal with sustained liquidity pressures. Because there is not the same need to
repay such borrowing promptly as there is with traditional short-term adjustment
credit, the money market impact of extended credit is similar to that of
nonborrowed reserves.

Money
1.13 SELECTED BORROWINGS IN IMMEDIATELY AVAILABLE FUNDS

Stock

and Bank Credit

A7

Large Banks1

Millions of dollars, averages of daily figures
1992, week ending Monday

1993, week ending Monday

Source and maturity

1
2
3
4

5
6
7
8

Federal funds purchased, repurchase agreements, and
other selected borrowings
From commercial banks in the United States
For one day or under continuing contract
For all other maturities
From other depository institutions, foreign banks and
official institutions, and U.S. government agencies
For one day or under continuing contract
For all other maturities
Repurchase agreements on U.S. government and federal
agency securities
Brokers and nonbank dealers in securities
For one day or under continuing contract
For all other maturities
All other customers
For one day or under continuing contract
For all other maturities

Nov. 30

Dec. 7

Dec. 14

Dec. 21

Dec. 28

Jan. 4

Jan. 11

Jan. 18

Jan. 25

73,294
16,355

78,107
15,108

79,155
14,754

74,281
14,242

71,828
13,825

74,139
14,747

75,338
13,384

71,955
13,895

66,880
13,456

17,881
19,369

16,203
18,294

18,475
19,201

19,157
19,013

20,597
18,783

19,060
16,955

20,531
17,419

20,277
17,441

19,871
17,469

L

11,784
20,397

12,150
20,577

11,568
22,850

11,118
18,899

10,237
18,183

9,686
18,317

11,114
18,434

8,554
18,775

10,218
18,836

20,912
15,722

23,747
13,102

23,883
13,173

23,265
12,897

22,808
14,151

23,609
13,594

23,604
13,567

23,692
13,755

24,415
13,344

36,849
20,546

40,002
22,053

38,196
22,097

38,439
20,570

37,991
18,270

41,221
20,750

37,458
18,322

37,316
22,669

37,614
19,362

MEMO

Federal funds loans and resale agreements in
immediately available funds in maturities of one day or
under continuing contract
9 To commercial banks in the United States
10 To all other specified customers

1. Banks with assets of $4 billion or more as of Dec. 31, 1988.
Data in this table also appear in the Board's H.5 (507) weekly statistical release.
For ordering address, see inside front cover.




2. Brokers and nonbank dealers in securities, other depository institutions,
foreign banks and official institutions, and U.S. government agencies.

A8
1.14

DomesticNonfinancialStatistics • May 1993
F E D E R A L RESERVE B A N K INTEREST RATES
Percent per year
Current and previous levels
Adjustment credit 1

Federal Reserve
Bank

On
4/2/93

Effective date

Seasonal credit 2
On
4/2/93

Previous rate

Effective date

Boston
New York . . .
Philadelphia..
Cleveland
Richmond
Atlanta

7/2/92
7/2/92
7/2/92
7/6/92
7/2/92
7/2/92

4/1/93
4/1/93
4/1/93
4/1/93
4/1/93
4/1/93

Chicago
St. Louis
Minneapolis..
Kansas C i t y . .
Dallas
San Francisco

7/2/92
7/7/92
7/2/92
7/2/92
7/2/92
7/2/92

4/1/93
4/1/93
4/1/93
4/1/93
4/1/93
4/1/93

3.5

Extended credit 3

Previous rate

On
4/2/93

Effective date

3.60

4/1/93
4/1/93
4/1/93
4/1/93
4/1/93
4/1/93

Previous rate

4/1/93
4/1/93
4/1/93
4/1/93
4/1/93
4/1/93

3.55

Range of rates for adjustment credit in recent years 4

Effective date

In effect Dec. 31, 1977
1978—Jan.
May
July
Aug.
Sept.
Oct.
Nov.

9
20
11
12
3
10
21
22
16
20
1
3

Range (or
level)—
All F.R.
Banks
6
6-6.5
6.5
6.5-7
7
7-7.25
7.25
7.75
8
8-8.5
8.5
8.5-9.5
9.5

1979—July 20
Aug. 17
20
Sept. 19
21
Oct. 8
10

10
10-10.5
10.5
10.5-11
11
11-12
12

1980—Feb. 15
19
May 29
30
June 13
16
29
July 28
Sept. 26
Nov. 17
Dec. 5

12-13
13
12-13
12
11-12
11
10
10-11
11
12
12-13

F.R.
Bank
of
N.Y.
6
6.5
6.5
7
7
7.25
7.25
7.75
8
8.5
8.5
9.5
9.5
10
10.5
10.5
11
11
12
12
13
13
13
12
11
11
10
10
11
12
13

Effective

1981-—May

5

Nov.

?
6
4

Dec.
1982--July

70
73
7
3
16
77
30
Oct. 17
n
Nov. ??
76
Dec. 14
IS
17

13-14
14
13-14
13
12

F.R.
Bank
of
N.Y.
14
14
13
13
12

11.5-12
11.5
11-11.5
11
10.5
10-10.5
10
9.5-10
9.5
9-9.5
9
8.5-9
8.5-9
8.5

11.5
11.5
11
11
10.5
10
10
9.5
9.5
9
9
9
8.5
8.5

9
13
Nov. 71
76
Dec. 74

8.5-9
9
8.5-9
8.5
8

9
9
8.5
8.5
8

1985-—May
—May 70
74

7.5-8
7.5

7.5
7.5

1986-—Mar. 7
10
Apr. 21
July 11

7-7.5
7
6.5-7
6

7
7
6.5
6

Aug.

1984-—Apr.
—Apr.

Range (or
level)—
All F.R.
Banks

F.R.
Bank
of
N.Y.

1986—Aug. 21
22

5.5-6
5.5

5.5
5.5

1987—Sept. 4
11

5.5-6
6

6
6

1988—Aug. 9
11

6-6.5

6.5

1989—Feb. 24
27

6.5-7
7

7
7

Effective date

1990—Dec. 19
1991—Feb.
Apr.
May
Sept.
Sept.
Nov.
Dec.
1992—July

6.5

6.5

1
4
30
2
13
17
6
7
20
24

6-6.5
6
5.5-6
5.5
5-5.5
5
4.5-5
4.5
3.5-4.5
3.5

6
6
5.5
5.5
5
5
4.5
4.5
3.5
3.5

2
7

3-3.5
3

3
3

3

3

In effect Apr. 2, 1993

1. Available on a short-term basis to help depository institutions meet temporary needs for funds that cannot be met through reasonable alternative sources.
The highest rate established for loans to depository institutions may be charged on
adjustment-credit loans of unusual size that result from a major operating problem
at the borrower's facility.
2. Available to help relatively small depository institutions meet regular
seasonal needs for funds that arise from a clear pattern of intrayearly movements
in their deposits and loans and that cannot be met through special industry
lenders. The discount rate on seasonal credit takes into account rates on market
sources of funds and ordinarily is reestablished on the first business day of each
two-week reserve maintenance period; however, it is never less than the discount
rate applicable to adjustment credit.
3. May be made available to depository institutions when similar assistance is
not reasonably available from other sources, including special industry lenders.
Such credit may be provided when exceptional circumstances (including sustained deposit drains, impaired access to money market funds, or sudden
deterioration in loan repayment performance) or practices involve only a particular institution, or to meet the needs of institutions experiencing difficulties
adjusting to changing market conditions over a longer period (particularly at times
of deposit disintermediation). The discount rate applicable to adjustment credit




Range (or
level)—
All F.R.
Banks

ordinarily is charged on extended-credit loans outstanding less than thirty days;
however, at the discretion of the Federal Reserve Bank, this time period may be
shortened. Beyond this initial period, a flexible rate somewhat above rates on
market sources of funds is charged. The rate ordinarily is reestablished on the first
business day of each two-week reserve maintenance period, but it is never less
than the discount rate applicable to adjustment credit plus 50 basis points.
4. For earlier data, see the following publications of the Board of Governors:
Banking and Monetary Statistics, 1914-1941, and 1941-1970; and the Annual
Statistical Digest, 1970-1979.
In 1980 and 1981, the Federal Reserve applied a surcharge to short-term
adjustment-credit borrowings by institutions with deposits of $500 million or more
that had borrowed in successive weeks or in more than four weeks in a calendar
quarter. A 3 percent surcharge was in effect from Mar. 17, 1980, through May 7,
1980. A surcharge of 2 percent was reimposed on Nov. 17, 1980; the surcharge
was subsequently raised to 3 percent on Dec. 5, 1980, and to 4 percent on May 5,
1981. The surcharge was reduced to 3 percent effective Sept. 22, 1981, and to 2
percent effective Oct. 12, 1981. As of Oct. 1, 1981, the formula for applying the
surcharge was changed from a calendar quarter to a moving thirteen-week period.
The surcharge was eliminated on Nov. 17, 1981.

Policy Instruments
1.15

A9

RESERVE REQUIREMENTS OF DEPOSITORY INSTITUTIONS1
Requirements
Type of deposit 2

Net transaction

Percent of
deposits

Effective date

3
10

12/15/92
12/15/92

0

12/27/90

0

12/27/90

accounts3

1. Required reserves must be held in the form of deposits with Federal Reserve
Banks or vault cash. Nonmember institutions may maintain reserve balances with
a Federal Reserve Bank indirectly on a pass-through basis with certain approved
institutions. For previous reserve requirements, see earlier editions of the Annual
Report or the Federal Reserve Bulletin. Under provisions of the Monetary
Control Act, depository institutions include commercial banks, mutual savings
banks, savings and loan associations, credit unions, agencies and branches of
foreign banks, and Edge corporations.
2. The Garn-St Germain Depository Institutions Act of 1982 (Public Law
97-320) requires that $2 million of reservable liabilities of each depository
institution be subject to a zero percent reserve requirement. The Board is to adjust
the amount of reservable liabilities subject to this zero percent reserve requirement each year for the succeeding calendar year by 80 percent of the percentage
increase in the total reservable liabilities of all depository institutions, measured
on an annual basis as of June 30. No corresponding adjustment is to be made in
the event of a decrease. On Dec. 15, 1992, the exemption was raised from $3.6
million to $3.8 million. The exemption applies in the following order: (1) net
negotiable order of withdrawal (NOW) accounts (NOW accounts less allowable
deductions); and (2) net other transaction accounts. The exemption applies only to
accounts that would be subject to a 3 percent reserve requirement.
3. Include all deposits against which the account holder is permitted to make
withdrawals by negotiable or transferable instruments, payment orders of withdrawal, and telephone and preauthorized transfers in excess of three per month
for the purpose of making payments to third persons or others. However, money
market deposit accounts (MMDAs) and similar accounts subject to the rules that




permit no more than six preauthorized, automatic, or other transfers per month,
of which no more than three may be checks, are not transaction accounts (such
accounts are savings deposits).
The Monetary Control Act of 1980 requires that the amount of transaction
accounts against which the 3 percent reserve requirement applies be modified
annually by 80 percent of the percentage change in transaction accounts held by
all depository institutions, determined as of June 30 each year. Effective Dec. 15,
1992, for institutions reporting quarterly, and Dec. 24, 1992, for institutions
reporting weekly, the amount was increased from $42.2 million to $46.8 million.
4. The reserve requirement was reduced from 12 percent to 10 percent on Apr.
2, 1992, for institutions that report weekly, and on Apr. 16, 1992, for institutions
that report quarterly.
5. For institutions that report weekly, the reserve requirement on nonpersonal
time deposits with an original maturity of less than 1 Vi years was reduced from 3
percent to IVi percent for the maintenance period that began Dec. 13, 1990, and
to zero for the maintenance period that began Dec. 27, 1990. The reserve
requirement on nonpersonal time deposits with an original maturity of 1V5 years
or more has been zero since Oct. 6, 1983.
For institutions that report quarterly, the reserve requirement on nonpersonal
time deposits with an original maturity of less than 1 Vi years was reduced from 3
percent to zero on Jan. 17, 1991.
6. The reserve requirement on Eurocurrency liabilities was reduced from 3
percent to zero in the same manner and on the same dates as were the reserve
requirement on nonpersonal time deposits with an original maturity of less than
1 Vi years (see note 4).

A10
1.17

DomesticNonfinancialStatistics • May 1993
FEDERAL RESERVE OPEN MARKET TRANSACTIONS1
Millions of dollars
1993

1992
Type of transaction

1990

1991

1992
July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

U . S . TREASURY SECURITIES

Outright transactions (excluding
transactions)

matched

1
2
3
4

Treasury bills
Gross purchases
Gross sales
Exchanges
Redemptions

24,739
7,291
241,086
4,400

20,158
120
277,314
1,000

14,714
1,628
308,699
1,600

0
0
30,755
0

271
0
25,041
0

595
0
22,277
0

4,072
0
28,907
0

1,064
0
25,468
0

3,669
0
29,562
0

0
0
24,542
0

5
6
7
8
9

Others within one year
Gross purchases
Gross sales
Maturity shifts
Exchanges
Redemptions

425
0
25,638
-27,424
0

3,043
0
24,454
-28,090
1,000

1,096
0
36,662
-30,543
0

0
0
985
-1,669
0

0
0
4,448
-4,617
0

350
0
2,753
-1,905
0

0
0
2,010
-982
0

461
0
7,160
-4,615
0

0
0
2,777
-1,570
0

0
0
561
-1,202
0

10
11
12
13

One to five years
Gross purchases
Gross sales
Maturity shifts
Exchanges

250
200
-21,770
25,410

6,583
0
-21,211
24,594

13,118
0
-34,478
25,811

0
0
-514
1,478

400
0
-4,036
3,567

3,500
0
-2,753
1,905

200
0
-1,762
884

4,172
0
-6,800
3,415

200
0
-2,777
1,570

0
0
-64
882

14
15
16
17

Five to ten years
Gross purchases
Gross sales
Maturity shifts
Exchanges

0
100
-2,186
789

1,280
0
-2,037
2,894

2,818
0
-1,915
3,532

0
0
-471
191

195
0
-412
700

750
0
0
0

0
0
-248
97

1,176
0
-187
800

100
0
0
0

0
0
-497
0

18
19
20
21

More than ten years
Gross purchases
Gross sales
Maturity shifts
Exchanges

0
0
-1,681
1,226

375
0
-1,209
600

2,333
0
-269
1,200

0
0
0
0

0
0
0
350

731
0
0
0

0
0
0
0

947
0
-173
400

0
0
0
0

0
0
0
0

22
23
24

All maturities
Gross purchases
Gross sales
Redemptions

25,414
7,591
4,400

31,439
120
1,000

34,079
1,628
1,600

0
0
0

866
0
0

5,927
0
0

4,272
0
0

7,820
0
0

3,969
0
0

0
0
0

1,369,052
1,363,434

1,570,456
1,571,534

1,482,467
1,480,140

127,051
126,137

103,708
101,410

116,331
115,579

116,024
114,917

115,020
117,020

144,232
142,578

114,543
116,510

219,632
202,551

310,084
311,752

378,374
386,257

12,224
12,224

39,484
31,868

68,697
59,628

18,698
35,383

42,373
39,117

48,904
44,697

34,768
42,231

24,886

29,729

20,642

-914

6,184

14,244

-13,520

13,075

6,521

-5,497

0
0
183

0
5
292

0
0
632

0
0
85

0
0
54

0
0
37

0
0
0

0
0
0

0
0
121

0
0
103

41,836
40,461

22,807
23,595

14,565
14,486

94
94

601
548

3,222
1,800

1,778
3,253

2,760
2,506

1,601
1,224

2,237
2,868

35 Net change in federal agency obligations

1,192

-1,085

-554

-85

-1

1,385

-1,475

254

256

-734

36 Total net change in System Open Market
Account

26,078

28,644

20,089

-1,000

6,183

15,629

-14,995

13,329

6,777

-6,231

Matched transactions
25 Gross sales
26 Gross purchases
2

Repurchase
agreements
27 Gross purchases
28 Gross sales

29 Net change in U.S. government securities
FEDERAL AGENCY OBLIGATIONS

Outright transactions
30 Gross purchases
31 Gross sales
32 Redemptions
Repurchase
agreements2
33 Gross purchases
34 Gross sales

1. Sales, redemptions, and negative figures reduce holdings of the System Open
Market Account; all other figures increase such holdings.




2. In July 1984 the Open Market Trading Desk discontinued accepting bankers
acceptances in repurchase agreements.

Federal
1.18 FEDERAL RESERVE BANKS

Reserve

Banks

All

Condition and Federal Reserve Note Statements1

Millions of dollars
End of month

Wednesday

Jan. 27

Feb. 3

1993

1992

1993

Account

Feb. 10

Feb. 17

Feb. 24

Dec. 31

Jan. 31

Feb. 28

Consolidated condition statement
ASSETS

1 Gold certificate account
2 Special drawing rights certificate account
3 Coin
Loans
4 To depository institutions
5 Other
6 Acceptances held under repurchase agreements .
Federal agency obligations
7 Bought outright
8 Held under repurchase agreements

11,055
8,018
508

11,055
8,018
528

11,055
8,018
542

11,055
8,018
540

11,055
8,018
531

11,056
8,018
446

11,055
8,018
519

11,055
8,018
525

269
0
0

94
0
0

35
0
0

39
0
0

49
0
0

675
0
0

35
0
0

57
0
0

5,310
0

5,310
0

5,260
0

5,260
150

5,260
0

5,413
631

5,310
0

5,225
275

297,426

303,658

293,932

299,856

299,778

302,474

296,977

301,490

10 Bought outright
11
Bills
12 Notes
13 Bonds
14 Held under repurchase agreements

297,426
144,210
118,179
35,037
0

297,820
144,604
118,179
35,037
5,838

293,932
140,715
118,179
35,037
0

297,025
143,809
117,955
35,261
2,831

299,778
146,562
117,955
35,261
0

295,011
141,794
118,179
35,037
7,463

2%,977
143,761
118,179
35,037
0

298,835
145,618
117,955
35,261
2,655

15 Total loans and securities

303,005

309,062

299,226

305,305

305,087

309,192

302,321

307,046

5,337
1,026

5,796
1,029

5,277
1,025

10,475
1,025

5,131
1,026

8,378
1,026

4,565
1,026

4,937
1,026

21,609
7,373

21,990
8,005

22,010
7,717

22,032
6,428

22,062
6,168

21,514
7,738

21,980
7,572

22,263
6,577

357,932

365,482

354,870

364,879

359,077

367,368

357,057

361,446

9 Total U.S. Treasury securities.
2

16 Items in process of collection
17 Bank premises
Other assets
18 Denominated in foreign currencies 3
19 All other
20 Total assets
LIABILITIES

306,675

307,163

308,972

310,479

309,399

314,208

306,110

309,080

22 Total deposits

38,052

43,912

32,477

37,591

36,403

40,148

37,632

39,034

23
24
25
26

26,753
10,750
274
273

36,041
7,284
284
302

27,007
4,980
200
291

32,142
4,869
256
324

30,916
4,973
232
282

32,079
7,492
206
372

27,533
9,572
244
282

33,085
5,350
296
302

4,580
2,281

5,453
2,254

4,738
2,213

8,036
2,307

4,458
2,304

5,028
1,876

4,174
2,288

4,152
2,323

351,589

358,782

348,400

358,413

352,565

361,260

350,204

354,589

3,069
2,967
307

3,074
3,027
599

3,078
3,037
356

3,084
3,048
334

3,110
3,054
349

3,054
3,054
0

3,074
2,974
806

3,116
3,054
687

357,932

365,482

354,870

364,879

359,077

367,368

357,057

361,446

300,586

301,377

305,792

303,503

301,356

291,393

297,501

306,378

21 Federal Reserve notes

Depository institutions
U.S. Treasury—General account
Foreign—Official accounts
Other

27 Deferred credit items
28 Other liabilities and accrued dividends 5
29 Total liabilities.
CAPITAL ACCOUNTS

30 Capital paid in
31 Surplus
32 Other capital accounts.
33 Total liabilities and capital accounts
MEMO

34 Marketable U.S. Treasury securities held in custody
for foreign and international accounts

Federal Reserve note statement
35 Federal Reserve notes outstanding (issued to Bank)
36
LESS: Held by Federal Reserve Bank
37
Federal Reserve notes, net
38
39
40
41

Collateral held against notes, net:
Gold certificate account
Special drawing rights certificate account.
Other eligible assets
U.S. Treasury and agency securities

42 Total collateral.

366,095
59,420
306,675

366,998
59,835
307,163

368,277
59,305
308,972

369,273
58,795
310,479

370,402
61,003
309,399

363,479
49,271
314,208

366,486
60,376
306,110

370,756
61,676
309,080

11,055
8,018
0
287,602

11,055
8,018
0
288,090

11,055
8,018
0
289,899

11,055
8,018
0
291,405

11,055
8,018
0
290,326

11,056
8,018
0
295,134

11,055
8,018
0
287,037

11,055
8,018
0
290,007

306,675

307,163

308,972

310,479

309,399

314,208

306,110

309,080

1. Some of the data in this table also appear in the Board's H.4.1 (503) weekly
statistical release. For ordering address, see inside front cover.
2. Includes securities loaned—fully guaranteed by U.S. Treasury securities
pledged with Federal Reserve Banks—and excludes securities sold and scheduled
to be bought back under matched sale-purchase transactions.




3. Valued monthly at market exchange rates.
4. Includes special investment account at the Federal Reserve Bank of Chicago
in Treasury bills maturing within ninety days.
5. Includes exchange-translation account reflecting the monthly revaluation at
market exchange rates of foreign exchange commitments.

A12

D o m e s t i cNonfinancialStatistics • M a y 1993

1.19 FEDERAL RESERVE BANKS Maturity Distribution of Loan and Security Holding 1
Millions of dollars
Wednesday

End of month

1993

Type and maturity grouping

Dec. 31

Jan. 31

Feb. 28

49

675

35

57

48
1
0

673
1
0

33
1
0

54
3
0

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

1 Total loans

269

94

35

39

2
3
4

268
1
0

89
5
0

28
7
0

39
1
0

Within fifteen days
Sixteen days to ninety days
Ninety-one days to one year

1993

1992

5 Total acceptances

0

0

0

0

0

0

0

0

6
7
8

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

Within fifteen days
Sixteen days to ninety days
Ninety-one days to one year

297,426

303,658

293,931

299,856

299,778

302,474

296,977

301,490

Within fifteen days 2
Sixteen days to ninety days
Ninety-one days to one year
One year to five years
Five years to ten years
More than ten years

14,844
68,910
98,456
68,686
18,726
27,805

25,456
64,593
98,149
68,930
18,726
27,805

17,168
66,747
94,556
68,930
18,726
27,805

14,651
69,642
97,536
70,291
19,628
28,108

17,416
66,774
97,561
70,291
19,628
28,108

12,824
70,610
103,582
68,750
18,903
27,805

9,160
74,289
98,311
68,686
18,726
27,805

13,331
72,699
97,433
70,291
19,628
28,108

16 Total federal agency obligations

5,310

5,310

5,260

5,410

5,260

6,044

5,310

5,500

183
840
1,023
2,426
6%
142

75
955
1,016
2,426
6%
142

35
920
1,016
2,436
711
142

523
582
1,016
2,436
711
142

483
513
975
2,436
711
142

821
810
1,064
2,511
6%
142

183
840
1,023
2,426
696
142

723
513
1,022
2,389
711
142

9 Total U.S. Treasury securities
10
11
12
n
14
15

17
18
19
20
21
22

2

Within fifteen days
Sixteen days to ninety days
Ninety-one days to one year
One year to five years
Five years to ten years
More than ten years

t. Holdings under repurchase agreements are classified as maturing within
fifteen days in accordance with maximum maturity of the agreements.




Monetary

and Credit

Aggregates

A13

1.20 AGGREGATE RESERVES OF DEPOSITORY INSTITUTIONS AND MONETARY BASE1
Billions of dollars, averages of daily figures
1992r
Item

1989
Dec.

1990
Dec.

1991
Dec.

July

Total reserves 3
Nonborrowed reserves
Nonborrowed reserves plus extended credit 5
Required reserves
Monetary base 6

Aug.

Sept.

Dec.

Jan.

Oct.

Nov.

Feb.

52.84
52.69
52.69
51.76
344.85

53.82
53.71
53.71
52.77
347.83

54.35
54.67r
54.23 54.50r
54.23 54.50r
53.20
53.41r
350.80 353.22r

54.92
54.88
54.88
53.82
355.74

Seasonally adjusted

ADJUSTED FOR
CHANGES IN RESERVE REQUIREMENTS 2

1
2
3
4
5

1993

1992
Dec. r

40.56
40.29
40.31
39.64
267.77

41.83 45.53r
41.51 45.34r
41.53 45.34r
40.17 44.56r
293.29 317.17r

54.35
54.23
54.23
53.20
350.80

49.63
49.35
49.35
48.66
333.18

50.34
50.09
50.09
49.41
336.84

51.27
50.99
50.99
50.28
341.59

Not seasonally adjusted
6
7
8
9
10

Total reserves
Nonborrowed reserves
^
Nonborrowed reserves plus extended credit
Required reserves
Monetary base 9

41.77
41.51
41.53
40.85
271.18

43.07
42.74
42.77
41.40
296.68

46.98
46.78
46.78
46.00
321.07

56.06
55.93
55.93
54.90
354.55

49.49
49.21
49.21
48.53
334.08

49.78
49.53
49.53
48.84
336.57

51.07
50.78
50.78
50.08
340.08

52.62
52.47
52.47
51.54
343.63

54.08
53.97
53.97
53.04
347.89

55.97
56.06
55.93 55.80
55.93 55.80
54.90 54.71
354.55 354.41r

53.81
53.77
53.77
52.71
353.19

62.81
62.54
62.56
61.89
292.55
.92
.27

59.12
58.80
58.82
57.46
313.70
1.66
.33

55.53
55.34
55.34
54.55
333.61
.98
.19

56.54
56.42
56.42
55.39
360.90
1.16
.12

49.82
49.54
49.54
48.86
339.87
.97
.28

50.16
49.91
49.91
49.23
342.49
.94
.25

51.52
51.23
51.23
50.53
346.21
.99
.29

53.14
52.99
52.99
52.06
349.81
1.07
.14

54.67
54.56
54.56
53.62
354.25
1.04
.10

56.54 56.00
55.84
56.42
56.42 55.84
55.39 54.74r
360.90 360.88r
1.26
1.16
.17
.12

53.88
53.84
53.84
52.78
359.57
1.10
.05

N O T ADJUSTED FOR
CHANGES IN RESERVE REQUIREMENTS 1 0

11
12
13
14
15
16
17

Total reserves 11
Nonborrowed reserves
Nonborrowed reserves plus extended credit
Required reserves
Monetary base 12
Excess reserves 13
Borrowings from the Federal Reserve

1. Latest monthly and biweekly figures are available from the Board's H.3 (502)
weekly statistical release. Historical data and estimates of the impact on required
reserves of changes in reserve requirements are available from the Monetary and
Reserves Projections Section, Division of Monetary Affairs, Board of Governors
of the Federal Reserve System, Washington, DC 20551.
2. Figures reflect adjustments for discontinuities, or "breaks," associated with
regulatory changes in reserve requirements. (See also table 1.10)
3. Seasonally adjusted, break-adjusted total reserves equal seasonally
adjusted, break-adjusted required reserves (line 4) plus excess reserves (line 16).
4. Seasonally adjusted, break-adjusted nonborrowed reserves equal seasonally
adjusted, break-adjusted total reserves (line 1) less total borrowings of depository
institutions from the Federal Reserve (line 17).
5. Extended credit consists of borrowing at the discount window under
the terms and conditions established for the extended credit program to help
depository institutions deal with sustained liquidity pressures. Because there is
not the same need to repay such borrowing promptly as there is with traditional
short-term adjustment credit, the money market impact of extended credit is
similar to that of nonborrowed reserves.
6. The seasonally adjusted, break-adjusted monetary base consists of (1)
seasonally adjusted, break-adjusted total reserves (line 1), plus (2) the seasonally
adjusted currency component of the money stock, plus (3) (for all quarterly
reporters on the "Report of Transaction Accounts, Other Deposits and Vault
Cash" and for all those weekly reporters whose vault cash exceeds their required
reserves) the seasonally adjusted, break-adjusted difference between current vault
cash and the amount applied to satisfy current reserve requirements.
7. Break-adjusted total reserves equal break-adjusted required reserves (line 9)
plus excess reserves (line 16).
8. To adjust required reserves for discontinuities that are due to regulatory
changes in reserve requirements, a multiplicative procedure is used to estimate




what required reserves would have been in past periods had current reserve
requirements been in effect. Break-adjusted required reserves include required
reserves against transactions deposits and nonpersonal time and savings deposits
(but not reservable nondeposit liabilities).
9. The break-adjusted monetary base equals (1) break-adjusted total reserves
(line 6), plus (2) the (unadjusted) currency component of the money stock, plus (3)
(for all quarterly reporters on the "Report of Transaction Accounts, Other
Deposits and Vault Cash" and for all weekly reporters whose vault cash exceeds
their required reserves) the break-adjusted difference between current vault cash
and the amount applied to satisfy current reserve requirements.
10. Reflects actual reserve requirements, including those on nondeposit liabilities, with no adjustments to eliminate the effects of discontinuities associated
with changes in reserve requirements.
11. Reserve balances with Federal Reserve Banks plus vault cash used to
satisfy reserve requirements.
12. The monetary base, not break-adjusted and not seasonally adjusted,
consists of (1) total reserves (line 11), plus (2) required clearing balances and
adjustments to compensate for float at Federal Reserve Banks, plus (3) the
currency component of the money stock, plus (4) (for all quarterly reporters on
the "Report of Transaction Accounts, Other Deposits and Vault Cash" and for all
those weekly reporters whose vault cash exceeds their required reserves) the
difference between current vault cash and the amount applied to satisfy current
reserve requirements. Since the introduction of changes in reserve requirements
(CRR), currency and vault cash figures have been measured over the computation
periods ending on Mondays.
13. Unadjusted total reserves (line 11) less unadjusted required reserves (line 14).

A14

DomesticNonfinancialStatistics • May 1993

1.21 MONEY STOCK, LIQUID ASSETS, AND DEBT MEASURES1
Billions of dollars, averages of daily figures
1992
1989
Dec.

Item

1990
Dec.

1991
Dec.

1993

1992
Dec."
Nov.

Dec."

Jan."

Feb.

1,026.6
3,497.3
4,167.1
5,051.3
11,768.2

1,033.2
3,488.2
4,142.6
5,041.1
11,799.7

1,032.8
3,476.1
4,134.8
n.a.
n.a.

292.3
8.1
340.9
385.2

294.8
8.0
342.0
388.5

296.9
8.0
341.9
386.1

2,470.7
669.8

2,455.0
654.3

2,443.3
658.7

Seasonally adjusted

1
2
3
4
5

Measured
Ml
M2
M3
L
Debt

6
7
8
9

Ml
components
Currency 3
Travelers checks
Demand deposits
Other checkable deposits

794.1
3,227.3
4,059.8
4,890.6
10,076.7

826.1
3,339.0
4,114.6
4,965.2
10,751.3

222.6
7.4
279.0
285.1

246.8
8.3
277.1
293.9

267.2
7.8
290.5
333.8

292.3
8.1
340.9
385.2

2,433.2
832.5

2,512.9
775.6

2,546.6
722.3

2,470.7
669.8

Commercial
banks
12 Savings deposits, including MMDAs
13 Small time deposits
14 Large time deposits •

541.5
531.0
398.2

581.9
606.4
374.0

666.2
601.5
341.3

756.1
507.0
290.2

752.5
511.9
292.8

756.1
507.0
290.2

754.1
502.6
283.7

755.7
503.5
282.2

Thrift institutions
15 Savings deposits, iiuluding MMDAs
16 Small time deposits®
17 Large time deposits 1 0

349.7
617.5
161.1

338.8
562.3
120.9

376.3
463.2
83.4

429.9
363.5
67.3

427.9
370.0
68.5

429.9
363.5
67.3

430.3
358.8
67.1

426.7
351.6
65.5

Money market mutual funds
18 General purpose and broker-dealer
19 Institution-only

316.3
107.2

348.9
133.7

363.9
182.1

342.3
202.3

343.7"
209.2

342.3
202.3

340.0
197.7

334.2
201.9

2,249.5
7,827.2

2,493.4
8,258.0

3,068.8
8,699.4

3,027.6"
8,679.9"

3,068.8
8,699.4

3,076.3
8,723.5

Nontrqnsaction
10 In M 2 j
11 In M3

899.3
3,445.8
4,168.1
4,982.2
11,192.7"

1,026.6
3,497.3
4,167.1
5,051.3
11,768.2

1,019.1
3,498.1"
4,178.5"
5,055.0"
11,707.6"
289.8
8.2
339.5
381.6

components

Debt
components
20 Federal debt
21 Nonfederal debt

2,764.8
8,428.0"

2,479.0"
680.4"

n.a.
n.a.

Not seasonally adjusted

22
23
24
25
26

Measures
Ml
M2
M3
L
Debt

27
28
29
30

Ml
components
Currency 3
Travelers checks 4
Demand deposits
Other checkable deposits

811.9
3,240.0
4,070.3
4,909.9
10,063.6

844.1
3,351.9
4,124.7
4,984.9
10,739.9

916.4
3,457.9
4.178.1
5.004.2
ll,182.8 r

1,045.7
3,511.5
4,179.2
5,076.1
11,760.6

225.3
6.9
291.5
288.1

249.5
7.8
289.9
296.9

269.9
7.4
302.9
336.3

295.0
7.8
355.3
387.6

2,428.1
830.3

2,507.8
772.8

2,541.5
720.1

2,465.8
667.7

543.0
529.5
397.1

580.0
606.3
373.0

663.3
602.0
340.1

752.3
507.8
289.1

347.6
616.0
162.0

337.7
562.2
120.6

374.7
463.6
83.1

Money market mutual funds
39 General purpose and broker-dealer
40 Institution-only

314.6
107.8

346.8
134.4

Repurchase
41 Overnight
42 Term

77.5
178.5

74.7
158.3

2,247.5
7,816.2

2,491.3
8,248.6

Nontrqnsaction
31 In M2;
32 In M3 8

components

Commercial banks
33 Savings deposits, iiuluding MMDAs
34 Small time deposits
35 Large time deposits 1 0 , "
Thrift institutions
36 Savings deposits, including MMDAs
37 Small time deposits®.
38 Large time deposits

agreements

and

Debt
components
43 Federal debt
44 Nonfederal debt
For notes see following page.




eurodollars

1,045.7
3,511.5
4,179.2
5,076.1
11,760.6

1.040.1
3.494.0
4.145.2
5.058.1
11,787.0

1,022.0
3.470.1
4.132.2
n.a.
n.a.

295.0
7.8
355.3
387.6

293.6
7.8
346.2
392.6

295.3
7.7
334.3
384.6

2,465.8
667.7

2,453.9
651.2

2,448.1
662.1

751.9
512.5
292.7

752.3
507.8
289.1

749.5
504.3
281.7

753.1
504.2

427.8
364.1
67.1

427.5
370.5
68.5

427.8
364.1
67.1

427.6
360.1
66.6

425.2
352.1
65.4

361.5
182.4

340.0
202.4

341.9"
209.5

340.0
202.4

339.5
202.3

340.4
210.3

76.3
130.1

73.9
126.5

75.1"
128.5"

73.9
126.5

72.8
123.7

73.2
128.4

3,069.8
8,690.8

3,028.3
8,661.7"

3,069.8
8,690.8

3,076.2
8,710.8

2,765.0
8,417.9"

1,021.5

3,500.9"

4,183.8 r
5,068.0"
11,689.9"
290.0
7.9
343.9
379.7

2,479.4"
682.8"

281.8

n.a.
n.a.

Monetary and Credit Aggregates

NOTES TO TABLE 1.21
1. Latest monthly and weekly figures are available from the Board's H.6 (508)
weekly statistical release. Historical data are available from the Money and
Reserves Projection Section, Division of Monetary Affairs, Board of Governors of
the Federal Reserve System, Washington, DC 20551.
2. Composition of the money stock measures and debt is as follows:
Ml: (1) currency outside the Treasury, Federal Reserve Banks, and the vaults
of depository institutions; (2) travelers checks of nonbank issuers; (3) demand
deposits at all commercial banks other than those due to depository institutions,
the U.S. government, and foreign banks and official institutions, less cash items in
the process of collection and Federal Reserve float; and (4), other checkable
deposits (OCDs), consisting of negotiable order of withdrawal (NOW) and
automatic transfer service (ATS) accounts at depository institutions, credit union
share draft accounts, and demand deposits at thrift institutions. Seasonally
adjusted Ml is computed by summing currency, travelers checks, demand
deposits, and OCDs, each seasonally adjusted separately.
M2: Ml plus (1) overnight (and continuing-contract) repurchase agreements
(RPs) issued by all depository institutions and overnight Eurodollars issued to
U.S. residents by foreign branches of U.S. banks worldwide, (2) savings (including MMDAs) and small time deposits (time deposits—including retail RPs—in
amounts of less than $100,000), and (3) balances in both taxable and tax-exempt
general purpose and broker-dealer money market funds. Excludes individual
retirement accounts (IRAs) and Keogh balances at depository institutions and
money market funds. Also excludes all balances held by U.S. commercial banks,
money market funds (general purpose and broker-dealer), foreign governments
and commercial banks, and the U.S. government. Seasonally adjusted M2 is
computed by adjusting its non-Mi component as a whole and then adding this
result to seasonally adjusted M l .
M3: M2 plus (1) large time deposits and term RP liabilities (in amounts of
$100,000 or more) issued by all depository institutions, (2) term Eurodollars held
by U.S. residents at foreign branches of U.S. banks worldwide and at all banking
offices in the United Kingdom and Canada, and (3) balances in both taxable and
tax-exempt, institution-only money market funds. Excludes amounts held by
depository institutions, the U.S. government, money market funds, and foreign
banks and official institutions. Also excluded is the estimated amount of overnight
RPs and Eurodollars held by institution-only money market funds. Seasonally
adjusted M3 is computed by adjusting its non-M2 component as a whole and then
adding this result to seasonally adjusted M2.
L: M3 plus the nonbank public holdings of U.S. savings bonds, short-term
Treasury securities, commercial paper, and bankers acceptances, net of money




A15

market fund holdings of these assets. Seasonally adjusted L is computed by
summing U.S. savings bonds, short-term Treasury securities, commercial paper,
and bankers acceptances, each seasonally adjusted separately, and then adding
this result to M3.
Debt: Debt of domestic nonfinancial sectors consists of outstanding credit
market debt of the U.S. government, state and local governments, and private
nonfinancial sectors. Private debt consists of corporate bonds, mortgages, consumer credit (including bank loans), other bank loans, commercial paper, bankers
acceptances, and other debt instruments. Data are derived from the Federal
Reserve Board's flow of funds accounts. Debt data are based on monthly
averages. This sum is seasonally adjusted as a whole.
3. Currency outside the U.S. Treasury, Federal Reserve Banks, and vaults of
depository institutions.
4. Outstanding amount of U.S. dollar-denominated travelers checks of nonbank issuers. Travelers checks issued by depository institutions are included in
demand deposits.
5. Demand deposits at commercial banks and foreign-related institutions other
than those owed to depository institutions, the U.S. government, and foreign
banks and official institutions, less cash items in the process of collection and
Federal Reserve float.
6. Consists of NOW and ATS account balances at all depository institutions,
credit union share draft account balances, and demand deposits at thrift institutions.
7. Sum of (1) overnight RPs and overnight Eurodollars, (2) money market fund
balances (general purpose and broker-dealer), (3) MMDAs, and (4) savings and
small time deposits.
8. Sum of (1) large time deposits, (2) term RPs, (3) term Eurodollars of U.S.
residents, and (4) money market fund balances (institution-only), less a consolidation adjustment that represents the estimated amount of overnight RPs and
Eurodollars held by institution-only money market funds.
9. Small time deposits—including retail RPs—are those issued in amounts of
less than $100,000. All IRAs and Keogh accounts at commercial banks and thrift
institutions are subtracted from small time deposits.
10. Large time deposits are those issued in amounts of $100,000 or more,
excluding those booked at international banking facilities.
11. Large time deposits at commercial banks less those held by money market
funds, depository institutions, and foreign banks and official institutions.

A16

DomesticNonfinancialStatistics • May 1993

1.22 BANK DEBITS AND DEPOSIT TURNOVER1
Debits are in billions of dollars; turnover is ratio of debits to deposits; monthly data are at annual rates
1992
Bank group, or type of customer

1990 2

19912

19922
Aug.

July

Sept.

Oct. r

Nov/

Dec.

Seasonally adjusted

DEBITS TO

Demand deposits
1 All insured banks
2 Major New York City banks
3 Other banks
4 Other checkable deposits 4
5 Savings deposits including MMDAs

277,157.5
131,699.1
145,458.4

277,758.0
137,352.3
140,405.7

315,807.0
165,572.7
150,234.3

339,216.4
177,296.3
161,920.1

306.923.0
157.221.1
149,702.0

346.658.3
184,740.9
161.917.4

326,893.0
176,372.6
150,520.4

322,187.1
173,393.4
148,793.7

331,048.7
176,089.1
154,959.6

3,349.0
3,483.3

3,645.5
3,266.1

3,788.1
3,330.7

4,078.7
3,513.7

3,763.9
3,139.8

3,942.1
3,559.1

3,700.5
3,465.7

3,610.0
3,496.7

3,683.9
3,402.8

797.8
3,819.8
464.9

803.5
4,270.8
447.9

832.4
4,797.9
435.9

916.6
5,349.6
480.6

800.0
4,550.9
428.8

892.4
5,254.5
458.3

818.9
4,855.5
414.8

796.1
4,624.0
405.2

830.7
4,693.3
429.2

16.5
6.2

16.2
5.3

14.4
4.7

15.6
4.9

14.2
4.4

14.7
4.9

13.5
4.7

12.9
4.7

13.1
4.6

DEPOSIT TURNOVER

6
7
8
9
10

Demand deposits3
All insured banks
Major New York City banks
Other banks
Other checkable deposits 4
^
Savings deposits including MMDAs

Not seasonally adjusted
Demand deposits
11 All insured banks
12 Major New York City banks
13 Other banks
14 Other checkable deposits 4

.

15 Savings deposits including MMDAs

277,290.5
131.784.7
145.505.8

277,715.4
137.307.2
140.408.3

315,809.1
165.595.0
150.214.1

341,278.3
178.555.6
162.722.7

315,724.4
162,973.3
152,751.0

334,831.5
178,998.2
155,833.4

335,289.0
182,584.2
152,704.8

308,015.6
167,578.4
140,437.2

340,992.3
179,987.6
161,004.6

3,346.7
3,483.0

3.645.6
3.267.7

3,788.1
3,328.3

3,987.9
3,523.9

3,696.9
3,173.5

3,945.7
3,374.3

3.689.7
3.400.8

3,351.3
3,239.9

3,849.3
3,583.3

798.2
3,825.9
465.0

803.4
4,274.3
447.9

832.5
4,803.5
436.0

916.2
5,317.6
480.2

836.5
4,870.2
444.1

864.2
5,180.1
441.6

839.2
5,025.6
420.5

754.3
4,494.4
378.5

815.4
4,418.1
426.5

16.4
6.2

16.2
5.3

14.4
4.7

15.4
4.9

14.1
4.4

14.9
4.6

13.7
4.6

12.1
4.4

13.5
4.8

DEPOSIT TURNOVER

16
17
18
19
20

Demand deposits3
All insured banks
Major New York City banks
Other banks
Other checkable deposits 4
.
Savings deposits including MMDAs

1. Historical tables containing revised data for earlier periods can be obtained
from the Banking and Money Market Statistics Section, Division of Monetary
Affairs, Board of Governors of the Federal Reserve System, Washington, DC
20551.
Data in this table also appear on the Board's G.6 (406) monthly statistical
release. For ordering address, see inside front cover.




2. Annual averages of monthly figures.
3. Represents accounts of individuals, partnerships, and corporations and of
states and political subdivisions.
4. Accounts authorized for negotiable orders of withdrawal (NOWs) and
accounts authorized for automatic transfer to demand deposits (ATSs).
5. Money market deposit accounts.

Commercial

Banking

Institutions

A17

1.23 LOANS AND SECURITIES All Commercial Banks1
Billions of dollars, averages of Wednesday figures
1992
Mar.

Apr.

May

June

July

1993
Aug.

Sept. r

Nov.

Oct.

Dec.

Jan. r

Feb.

Seasonally adjusted
1 Total loans and securities1
2 U.S. government securities
3 Other securities
4 Total loans and leases 1
5
Commercial and industrial . . . . .
6
Bankers acceptances held . . .
7
Other commercial and
industrial
8
U.S. addressees 3
9
Non-U.S. addressees 3
10 Real estate
11 Individual
12 Security
13 Nonbank financial
institutions
14 Agricultural
15 State and political
subdivisions
16 Foreign banks
17 Foreign official institutions
18 Lease-financing receivables
19 All other loans

2,862.7

2,875.3

2,882.8

2,925.6r

2,938.7r

r

1

2,934.9

2,940.1

590.8
178.5
2,104.9
609.0
6.5

600.2
176.9
2,098.2
607.6
6.7

610.7
175.8
2,096.2
604.6
6.3

619.2
177.9
2,089.8
602.5
6.5

632.6
178.2
2,091.4
601.4
6.5

640.5
178.4
2,098.3
601.0
6.3

647.3
179.3r
2,099.0"
600.5r
7.3

652.0
177.5r
2,103.3r
600.9
7.5

658.2r
176. l r
2,104.4r
598.6r
7.1

658.2
174.1
2,102.7
599.9
6.9

667.1
175.9
2,097.1
598.2
8.2

604.0
594.9
9.1
879.1
362.3
60.7

602.6
593.2
9.4
881.8
360.8
63.4

600.9
590.8
10.1
883.3
359.2
60.9

598.4
588.3
10.1
881.8
359.0
63.3

596.0
585.3
10.7
881.5
358.6
60.5

594.9
584.3
10.6
883.1
357.4
61.6

594.7
583.4
11.3
886.7
357.0
64.0

593.2r
582.1
11.1
890.6
64.7

593.4
582.1
11.3
892.3r
355.2r
64.3

591.5r
580.4r
11.1
892.1
355.2r
64.9

593.0
581.6
11.4
888.8
357.8
63.2

590.1
578.5
11.6
887.5
360.8
62.0

43.6
34.3

43.2
34.3

43.3
34.3

42.4
34.6

41.5
34.9

42.0
35.3

44.0
35.2

43.9
35.1

44.7r
35.1

43.7
34.9

45.2
34.4

45.1
34.4

28.0
6.6
2.1
31.4
45.5

27.6
6.7
2.0
31.1
45.1

27.3
7.0
2.0
30.9
42.4

26.8
7.5
2.0
31.0
43.3

26.2
7.7
2.2
30.8
43.2

25.9
7.2
2.3
30.8
44.3

25.8
7.9
2.5
31.0
43.1

25.4r
7.3
2.4
30.7r
42.8

25. l r
7.0
2.8
30.6r
45.3

24.8 r
7.0
2.9
30.6
49.9

24.2
6.8
2.9
30.0
49.7

23.8
7.6
3.1
30.0
n.a.

2,886.9

2,902.2

2,917.2

579.6
178.5
2,104.5
610.8
6.8

2,874.3

355.7

2,932.8

Not seasonally adjusted
20 Total loans and securities1
21 U.S. government securities
22 Other securities
23 Total loans and leases 1
Commercial and industrial . . . . .
24
25
Bankers acceptances h e l d 2 . . .
26
Other commercial and
industrial
27
U.S. addressees 3
28
Non-U.S. addressees
29
Real estate
30
Individual
31
Security
Nonbank financial
32
institutions
33
Agricultural
34
State and political
subdivisions
35
Foreign banks
Foreign official institutions
36
37
Lease-financing receivables . . . .
All other loans
38

2,864.9

2,937.0

2,943.0

608.9
175.4
2,098.7
606.5
6.2

615.3
176.8
2,084.0
601.5
6.3

631.3
178.1
2,085.0
597.6
6.3

638.6
178.1
2,098.0
597.4
6.2

645.l
179.7r
2,100. f
598.2
7.2

654.6
178.6r
2,106.1r
601.2
7.8

656.9"
176.4r
2,115.3r
601.6r
7.4

658.6
174.7
2,103.8
598.3
7.1

670.7
176.1
2,096.2
597.4
8.5

607.2
598.2
9.0
876.7
359.8
62.6

605.8
596.3
9.5
880.7
358.1
66.9

602.7
592.7
10.0
883.4
357.4
58.4

600.3
589.5
10.8
882.0
357.2
63.5

595.2
584.2
11.0
881.6
356.4
58.0

591.4
580.5
10.8
883.7
356.9
59.4

591.2
580.1
11.1
887.5
358.6
62.5

591.0
580.2r
10.8
891.4
356. l r
64.2

593.4
582.7
10.7
893.7r
356.0r
63.6

594.3r
583.3r
11.0
893.4
359.6r
65.7

591.3
579.9
11.4
888.5
361.9
64.7

588.9
577.2
11.7
885.8
360.9
64.9

43.2
33.0

42.6
33.5

42.8
34.0

42.9
35.1

41.3
35.8

41.8
36.5

43.5
36.6

43.5

45.1
35. l r

45.7
34.7

45.4
33.6

45.0
33.0

24.0
6.9
2.9
30.3
47.5

23.7
7.4
3.1
30.3
n.a.

27.3
6.8
2.0
30.9
42.5

1. Adjusted to exclude loans to commercial banks in the United States.
2. Includes nonfinancial commercial paper held.




2,948.5r

599.4
176.5
2,094.8
609.4
6.6

27.6
6.4
2.0
31.2
44.1

2,882.9

r

592.6
178.0
2,105.2
612.1
6.3

28.0
6.4
2.1
31.6
45.2

2,870.7

r

584.0
178.2
2,102.6
614.0
6.9

2,875.8

26.8
7.3
2.0
31.0
44.4

2,876.1

26.1
7.8
2.2
30.6
42.6

2,894.5

25.9
7.0
2.3
30.6
43.2

2,914.7

25.9
8.0
2.5
30.8
44.5

2,924.9

2,939.4

36.(f
r

25.5
7.6
2.4
30.6 r
44.6

25.2
7.3
2.8
30.5
45.7

r

24.8
7.4
2.9
30.5
49.1

r

3. United States includes the fifty states and the District of Columbia.

A18
1.24

DomesticNonfinancialStatistics • May 1993
MAJOR NONDEPOSIT FUNDS OF COMMERCIAL BANKS1
Billions of dollars, monthly averages
1992

1993

Source of funds
Mar.

Apr.

May

June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Seasonally adjusted
1 Total nondeposit funds 2
2 Net balances due to related foreign offices 3 . . .
3 Borrowings from other than commercial banks
in United States 4
4
Domestically chartered banks
5
Foreign-related banks

287.2
44.8

291.9
50.9

292.4
53.7

295.9
61.2

297.0
61.7

302.4
61.4

309.4r
64.0

305.6r
64.4r

310.0"
68.8 r

312.9
71.1

313.0
74. l r

312.2
73.3

242.4
157.3
85.0

241.0
154.6
86.5

238.7
151.8
86.9

234.7
147.6
87.2

235.3
147.2
88.1

241.1
151.5
89.6

245.4r
153.4
92. l r

241.1
154.5
86.6

241.2
153.7
87.5

241.8r
154.3
87.4

238.8
155.1
83.7

238.9
155.9
82.9

Not seasonally adjusted
6 Total nondeposit funds 2
7 Net balances due to related foreign offices 3 . . .
8 Domestically chartered banks
9
Foreign-related banks
10 Borrowings from other than commercial banks
in United States 4
11 Domestically chartered banks
12
Federal funds and security RP
borrowings
13
Other 6
14 Foreign-related banks

292.2
45.6
.2
45.4

288.4
47.9
-4.6
52.6

297.1
55.9
-4.5
60.4

295.2
59.2
-6.3
65.6

291.5
58.4
-7.0
65.4

297.5
57.6
-9.3
66.9

304.0"
61.6
-11.0
72.6

307.8"
65.6"
-12.8
78.3"

315.2"
70.5"
-11.7
82.1"

312.7
75.2
-15.1
90.3

311.8
76.7
-15.9
92.6

316.5
75.1
-10.6
85.7

246.6
160.2

240.5
152.7

241.2
153.3

236.0
147.4

233.1
144.1

239.9
150.4

242.3r
152.2

242.3
155.7

244.8
158.1

237.5
153.4

235.1
152.1

241.4
157.7

156.9
3.3
86.4

149.2
3.4
87.8

149.4
3.9
87.9

143.3
4.1
88.6

139.9
4.2
89.0

146.5
3.9
89.5

148.4
3.8
90.1r

152.1
3.6
86.6

154.0
4.1
86.6

149.4
4.0
84.1

148.4
3.6
83.0

154.5
3.2
83.7

407.2
408.1

401.5
400.5

397.5
399.4

393.3
394.9

387.7
387.4

385.8
387.1

383.2
383.6

375.7
374.9

371.3
371.1

366.6
365.5

359.9"
358.0"

358.4
357.9

21.9
20.1

20.8
17.7

19.2
21.0

24.7
25.2

23.1
19.6

28.0
22.4

24.1
28.6

21.5
21.9

20.7
16.5

20.4
19.5

25.6
33.1"

23.6
29.5

MEMO

Gross large time deposits7
15 Seasonally adjusted
16 Not seasonally adjusted
U.S. Treasury demand balances at
commercial banks
17 Seasonally adjusted
18 Not seasonally adjusted

1. Commercial banks are nationally and state-chartered banks in the fifty states
and the District of Columbia, agencies and branches of foreign banks, New York
investment companies majority owned by foreign banks, and Edge Act corporations owned by domestically chartered and foreign banks.
Data in this table also appear in the Board's G.10 (411) release. For ordering
address, see inside front cover.
2. Includes federal funds, repurchase agreements (RPs), and other borrowing
from nonbanks and net balances due to related foreign offices.
3. Reflects net positions of U.S. chartered banks, Edge Act corporations, and
U.S. branches and agencies of foreign banks with related foreign offices plus net
positions with own International Banking Facilities (IBFs).
4. Borrowings through any instrument, such as a promissory note or due bill,
given for the purpose of borrowing money for the banking business. This includes




borrowings from Federal Reserve Banks and from foreign banks, term federal
funds, loan RPs, and sales of participations in pooled loans.
5. Figures are based on averages of daily data reported weekly by approximately 120 large banks and quarterly or annual data reported by other banks.
6. Figures are partly averages of daily data and partly averages of Wednesday
data.
7. Time deposits in denominations of $100,000 or more. Estimated averages of
daily data.
8. U.S. Treasury demand deposits and Treasury tax and loan notes at commercial banks. Averages of daily data.

Commercial
1.25 ASSETS AND LIABILITIES OF COMMERCIAL BANKS1
Millions of dollars

Banking

Institutions

A19

Wednesday figures

1992
Dec. 2 r

Dec. 9

Dec. 16r

Dec. 23 r

Dec. 30'

Jan. 6

Jan. 13

Jan. 20

Assets
1 Loans and securities
2
Investment securities
3
U.S. government securities
4
Other
5
Trading account assets
6
U.S. government securities
7
Other securities
8
Other trading account assets
9
Total loans
10
Interbank loans
11
Loans excluding interbank
12
Commercial and industrial
13
Real estate
14
Revolving home equity
15
Other
16
Individual
17
All other
18 Total cash assets
19
Balances with Federal Reserve Banks
20
Cash in vault
21
Demand balances at U.S. depository institutions
22
Cash items
23
Other cash assets
24 Other assets

3,121,974
796,035
633,704
162,331
42,665
27,832
2,969
11,864
2,283,274
172.020
2,111,254
602,531
892,449
73,403
819,046
357.021
259,253
223,842
28,460
33,225
31,733
85,881
44,643
296,598

3,127,535
794,499
632,519
161,979
39,995
25,930
2,949
11,115
2,293,042
179,588
2,113,45 5
599,002
894,770
73,448
821,323
357,071
262,612
204,843
25,614
32,613
30,289
72,575
43,851
295,191

3,125,019
793,052
631,237
161,815
38,146
24,576
2,958
2,293,821
179,598
2,114,224
601,669
894,630
73,386
821,244
358,059
259,866
219,833
26,535
32,529
32,010
87,121
41,738
302,200

3,114,488
795,473
633,168
162,304
36,014
21,569
3,285
11,160
2,283,001
169,284
2,113,717
601,941
892,089
73,143
818,946
360,711
258,975
234,179
35,183
31,445
34,729
91,864
41,058
297,291

3,115,506
798,542
635,246
163,296
35,612
21,030
3,029
11,554
2,281,352
160,909
2,120,444
604,287
891,816
73,246
818,570
361,929
262,412
236,533
29,199
36,439
35,730
93,335
41,930
300,678

3,123,753
797.211
635,703
161,507
35,901
20,619
2,870
12,411
2,290,642
178,271
2,112,371
599,719
890,071
73,386
816,685
362,679
259,901
226.212
36,922
34,755
32,662
82,686
39,287
295,722

3,105,158
798,865
637,834
161,031
33,519
19,881
2,496
11,141
2,272,774
163,713
2,109,061
597,593
891,464
73,309
818,155
361,565
258,439
209,488
26,325
34,227
30,134
78,784
40,104
287,150

3,099,118
793,944
633,085
160,859
37,291
23,947
2,596
10,748
2,267,883
163,870
2,104,013
599,585
887,915
73,305
814,611
361,322
255,191
233,235
28,090
33,376
35,307
94,736
41,812
288,191

25 Total assets

3,642,414

3,627,570

3,647,052

3,645,958

3,652,717

3,645,686

3,601,795

3,620,545

Liabilities
26 Total deposits
27
Transaction accounts
28
Demand, U.S. government
29
Demand, depository institutions
30
Other demand and all checkable deposits
31
Savings deposits (excluding checkable)
32
Small time deposits
33
Time deposits over $100,000
34 Borrowings
35
Treasury tax and loan notes
36
Other
37 Other liabilities

2,530,396
768,816
3,520
41,123
724,174
748,886
638,246
374,449
501,004
13,481
487,523
342,475

2,512,986
748,012
2,922
38,467
706,622
753,091
637.441
374.442
506,242
6,016
500,226
339,156

2,537,670
776,197
5,910
41,979
728,308
753,416
637,619
370,438
497,161
23,348
473,813
344,414

2,528,716
780,351
5,217
43,211
731,923
742,933
636,105
369,327
498,297
18,020
480,277
351,293

2,542,338
799,456
5,926
43,530
750,001
742,140
634,767
365,975
495,834
29,773
466,061
343,378

2,532,159
783,345
4,663
40,915
737,767
750,756
636,765
361,294
498,810
14,886
483,924
343,282

2,510,487
759,838
3,287
38,516
718,036
750,603
634,436
365,610
477,939
22,771
455,168
341,819

2,504,461
763,116
5,582
45,833
711,700
741.100
635.101
365,145
506,598
34,561
472,037
339,151

38 Total liabilities

3,373,875

3,358,384

3,379,245

3,378,306

3,381,549

3,374,251

3,330,245

3,350,211

268,539

269,186

267,807

267,652

271,168

271,436

271,550

270,334

A L L COMMERCIAL BANKING INSTITUTIONS 2

39 Residual (assets less liabilities)

3

Footnotes appear on the following page.




10,612

Jan. 27

A20

D o m e s t i cNonfinancialStatistics • M a y 1993

1.25 ASSETS AND LIABILITIES OF COMMERCIAL BANKS1

Wednesday figures—Continued

Millions of dollars
1992

1993

Account
Dec.

2R

Dec. 9

Dec.

16R

Dec.

23 R

Dec.

30"

Jan.

6

Jan.

13

Jan.

20

Jan.

27

DOMESTICALLY CHARTERED COMMERCIAL BANKS 4

40
41
42
43
44
45
46
47
48
49
50
51
5?
53
54
55
56
57
58
59
60
61
67
63
64

65
66
67
68
69
70
71
72
73
74
75
76
77
78

Assets
Loans and securities
Investment securities
U.S. government securities
Other
Trading account assets
U.S. government securities
Other securities
Other trading account assets
Total loans
Interbank loans
Loans excluding interbank
Commercial and industrial
Real estate
Revolving home equity
Other
Individual
All other
Total cash assets
Balances with Federal Reserve Banks
Cash in vault
Demand balances at U.S. depository institutions .
Cash items
Other cash assets
Other assets

2,763,847
731,295
590,850
140,445
42,665
27,832
2,969
11,864
1,989,888
144,237
1,845,651
440,366
839,661
73,403
766,258
357,021
208,602
196,159
27,886
33,190
30,203
83,676
21,303
176,534

2,762,841
730,287
590,227
140,059
39,995
25,930
2,949
11,115
1,992,559
147,785
1,844,774
437,044
841,847
73,448
768,400
357,071
208,812
177,948
24,783
32,579
28,758
70,430
21,498
177,529

2,762,668
727,870
587,789
140,081
38,146
24,576
2,958
10,612
1,996,652
151,120
1,845,532
438,214
841,532
73,386
768,147
358,059
207,727
193,109
25,973
32,490
30,382
84,750
19,614
180,152

2,745,952
730,402
590,205
140,197
36,014
21,569
3,285
11,160
1,979,536
138,961
1,840,575
437,045
839,030
73,143
765,887
360,711
203,789
207,160
34,235
31,407
32,975
89,700
18,943
175,738

2,749,785
731,627
591,313
140,314
35,612
21,030
3,029
11,554
1,982,545
137,720
1,844,826
438,683
839,129
73,246
765,883
361,929
205,085
210,163
28,649
36,402
34,023
91,131
20,058
178,449

2,754,991
731,221
592,364
138,857
35,901
20,619
2,870
12,411
1,987,870
148,030
1,839,840
436,652
838,160
73,386
764,774
362,679
202,348
200,082
35,944
34,717
30,989
80,292
18,240
182,942

2,739,722
732,672
593,701
138,971
33,519
19,881
2,4%
11,141
1,973,531
137,989
1,835,542
433,961
839,238
73,309
765,928
361,565
200,778
182,905
25,783
34,191
28,527
75,891
18,597
178,496

2,736,266
728,036
589,198
138,838
37,291
23,947
2,5%
10,748
1,970,940
136,799
1,834,141
436,562
835,966
73,305
762,662
361,322
200,291
205,660
27,025
33,336
33,578
92,193
19,614
176,140

2,717,220
727,449
587,891
139,558
36,8%
23,233
2,472
11,192
1,952,874
130,445
1,822,430
435,601
832,482
73,2%
759,186
361,345
193,001
170,438
23,574
32,514
28,319
67,610
18,422
171,179

Total assets

3,136,540

3,118,318

3,135,930

3,128,850

3,138,397

3,138,015

3,101,122

3,118,067

3,058,838

Borrowings
Treasury tax and loan notes
Other
Other liabilities

2,370,795
758,901
3,520
38,751
716,630
744,149
635,748
231,998
365,810
13,481
352,329
135,004

2,351,994
738,514
2,922
36,225
699,367
748,217
634,919
230,344
369,110
6,016
363,094
131,636

2,376,536
765,699
5,900
39,635
720,164
748,643
635,111
227,082
363,760
23,348
340,412
131,435

2,367,287
770,342
5,216
40,821
724,306
738,352
633,618
224,975
366,232
18,020
348,212
131,288

2,381,434
789,040
5,925
41,139
741,976
737,581
632,289
222,524
361,745
29,773
331,972
127,657

2,375,352
773,036
4,662
38,483
729,891
746,211
634,284
221,821
365,144
14,886
350,258
129,692

2,352,008
749,448
3,287
36,099
710,063
746,062
631,958
224,540
349,393
22,771
326,622
131,779

2,345,104
752,419
5,582
43,112
703,726
736,514
632,627
223,543
375,989
34,561
341,428
130,248

2,294,577
708,083
3,202
35,394
669,487
733,203
630,820
222,472
365,173
34,921
330,252
131,673

Total liabilities

2,871,609

2,852,740

2,871,731

2,864,807

2,870,837

2,870,188

2,833,180

2,851,341

2,791,424

264,931

265,578

264,199

264,044

267,560

267,828

267,942

266,726

267,414

Liabilities
Total deposits
Transaction accounts
Demand, U.S. government
Demand, depository institutions
Other demand and all checkable deposits
Savings deposits (excluding checkable)
Small time deposits
T i m e deposits over $100,000

Residual (assets less liabilities)3

1. Excludes assets and liabilities of International Banking Facilities.
2. Includes insured domestically chartered commercial banks, agencies and
branches of foreign banks, Edge Act and Agreement corporations, and New York
State foreign investment corporations. Data are estimates for the last Wednesday
of the month based on a sample of weekly reporting foreign-related and domestic
institutions and quarter-end condition reports.




3. This balancing item is not intended as a measure of equity capital for use in
capital adequacy analysis.
4. Includes all member banks and insured nonmember banks. Loans and
securities data are estimates for the last Wednesday of the month based on a
sample of weekly reporting banks and quarter-end condition reports.

Weekly Reporting

Commercial

Banks

A21

1.26 ASSETS AND LIABILITIES OF LARGE WEEKLY REPORTING COMMERCIAL BANKS
Millions of dollars, Wednesday figures
1992

1993
Feb. 10

Feb. 17

Feb. 24

Jan. 6

Jan. 13

Jan. 20

Jan. 27

Feb. 3

126,237
266,081
18,471
247,610
80,693

119,0%
270,738
18,036
252,702
82,515r

109,305
269,585
17,404
252,181
81,704"

124,065
269,192
21,290
247,902
77,886"

99,378
269,307
20,575
248,732
78,949"

108,828
276,421
21,617
254,804
80,501

97,411
274,%7
20,504
254,463
80,204

120,597
277,181
23,109
254,071
80,371

100,834
275,657
20,506
255,151
81,550

31,017
74,835
61,066
56,059
2,875
53,184
20,398
3,258
17,139
32,787
11,280

33,958r
75,817"
60,411"
55,926
2,720
53,206
20,443
3,249
17,194
32,763
12,166

35,639"
73,948"
60,891"
55,209
2,345
52,864
20,344
3,211
17,133
32,520
10,895

34,999"
74,646"
60,370"
55,176
2,445
52,731
20,343
3,201
17,142
32,389
10,501

34,080"
74,788"
60,916"
55,172
2,321
52,851
20,320
3,253
17,067
32,531
10,935

36,566
76,343
61,395
55,707
2,207
53,500
20,226
3,299
16,927
33,274
11,109

36,852
75,166
62,241
55,862
2,357
53,505
20,262
3,327
16,935
33,243
10,845

36,698
75,459
61,543
56,042
2,009
54,032
20,135
3,250
16,884
33,898
11,839

37,071
75,092
61,438
55,908
1,767
54,141
20,124
3,406
16,718
34,016
11,557

80,050
54,569
20,781
4,701
986,467
277,878
2,046
275,832
274,210
1,623
399,152
42,793
356,359
182,603
38,679
14,540
2,159
21,979
15,607
5,961
14,620
1,384
26,141
24,441
2,290
36,494
947,683
162,310

84,647"
58,658"
21,693
4,2%
990,519"
277,408"
1,885
275,524"
273,892"
1,632
403,217"
43,384"
359,833"
185,907"
38,555"
14,447"
2,210
21,897"
14,947"
5,875
14,522
1,451
23,844"
24,793
2,289
36,462
951,768"
170,206

82,741"
54,208"
23,487"
5,046
985,657"
274,524"
1,859
272,665"
271,013"
1,652
404,442"
43,326"
361,116"
185,427"
36,440"
13,884"
1,930
20,627"
15,383"
5,733
14,458
1,353
23,226"
24,671
2,293
36,594
946,770"
166,716

80,000"
55,411"
20,024
4,566
988,954"
277,013"
2,190
274,824"
273,078"
1,745
401,720"
43,351"
358,369"
185,144"
36,954"
13,7%"
2,225
20,932"
16,606"
5,690
14,443
1,408
25,546"
24,430
2,282
36,534
950,138"
162,553

75,852"
52,329"
19,694
3,829
980,409"
276,518"
2,372
274,146"
272,467"
1,679
398,382"
43,308"
355,075"
185,174"
36,374"
14,032r
2,016
20,325"
14,482"
5,661
14,402
1,518
23,629"
24,270
2,272
36,323
941,814"
158,831

89,607
61,918
22,634
5,055
982,808
278,%3
2,421
276,542
274,702
1,840
398,511
43,187
355,325
185,073
35,382
13,637
1,912
19,833
15,363
5,524
14,303
1,508
23,912
24,269
2,247
36,758
943,803
163,006

78,600
51,875
22,732
3,993
980,124
276,956
3,030
273,925
272,083
1,842
399,358
43,166
356,192
184,680
34,643
13,222
2,082
19,339
16,023
5,485
14,299
1,394
22,867
24,418
2,245
36,866
941,012
164,630

83,946
57,113
22,637
4,1%
981,936
278,227
3,029
275,198
273,379
1,819
397,378
43,150
354,227
184,439
35,816
13,761
2,930
19,126
15,199
5,513
14,229
1,556
24,934
24,645
2,271
36,780
942,885
160,047

75,422
48,697
23,229
3,4%
974,476
276,763
2,780
273,983
272,145
1,839
394,554
43,058
351,4%
183,894
33,268
12,845
2,284
18,139
17,160
5,522
14,258
1,486
22,939
24,632
2,253
36,756
935,466
158,5%

1,648,482

1,623,327

1,652,536

1,613,441

Dec. 30"
ASSETS

1 Cash and balances due from depository institutions
2 U.S. Treasury and government securities
3 Trading account
Investment account
4
5
Mortgage-backed securities'
All others, by maturity
6
One year or less
7
One year through five years
8
More than five years
9 Other securities
10 Trading account
11 Investment account
12
State and political subdivisions, by maturity .
13
One year or less
14
More than one year
15
Other bonds, corporate stocks, and securities 16 Other trading account assets
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44

Federal funds sold 2
To commercial banks in the United States
To nonbank brokers and dealers
To others 3
Other loans and leases, gross
Commercial and industrial
Bankers acceptances and commercial paper ..
All other
U.S. addressees
Non-U.S. addressees
Real estate loans
Revolving, home equity
All other
To individuals for personal expenditures
To financial institutions
Commercial banks in the United States
Banks in foreign countries
Nonbank financial institutions
For purchasing and carrying securities
To finance agricultural production
To states and political subdivisions
To foreign governments and official institutions
All other loans 4
Lease-financing receivables
LESS: Unearned income
Loan and lease reserve
Other loans and leases, net
Other assets

45 Total assets

Footnotes appear on the following page.




1,649,701

1,664,547

1,641,222

1,651,626

1,611,290

A22

D o m e s t i cNonfinancialStatistics • M a y 1993

1.26 ASSETS AND LIABILITIES OF LARGE WEEKLY REPORTING COMMERCIAL BANKS—Continued
Millions of dollars, Wednesday figures
1992

1993

Account
Dec. 30"

Jan. 6

Jan. 13

Jan. 20

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

1,108,340
261,106
209,964
51,141
9,728
2,824
22,325
5,377
564
10,322
118,995
728,240
702,932
25,307
20,827
2,070
2,086
324

1,103,346
256,903
206,151
50,752
8,859
1,945
20,839
5,555
618
12,936
116,336
730,106
703,945
26,161
21,440
2,152
2,243
327

1,124,498
278,322
221,986
56,335
9,363
2,073
26,678
6,832
524
10,866
116,376
729,800
703,604
26,196
21,502
2,129
2,241
323

1,091,103
252,959
204,906
48,053
8,936
2,388
21,349
5,243
664
9,473
114,435
723,710
697,882
25,828
21,422
2,051
2,030
325

297,760
65
31,934
265,761

277,765
0
27,029
250,736

285,886
0
18,101
267,784

277,617
0
12,932
264,685

LIABILITIES

1,142,776
46 Deposits
299,997
Demand deposits
47
241,266
48
Individuals, partnerships, and corporations
58,732
Other holders
49
9,847
50
States and political subdivisions
3,817
51
U.S. government
25,720
5?
Depository institutions in the United States
6,036
53
Banks in foreign countries
558
54
Foreign governments and official institutions
12,754
55
Certified and officers' checks
119,558
56
Transaction balances other than demand deposits . . . .
723,221
Nontransaction balances
57
699,178
58
Individuals, partnerships, and corporations
24,043
59
Other holders
20,610
60
States and political subdivisions
1,247
61
U.S. government
1,873
6?
Depository institutions in the United States
312
Foreign governments, official institutions, and banks
63
64 Liabilities for borrowed money 5
65
Borrowings from Federal Reserve Banks
66
Treasury tax and loan notes
,
67
Other liabilities for borrowed money
68 Other liabilities (including subordinated notes and
debentures)

1,142,823 1,132,291 l,123,956 r 1,091,588
281,350
273,228
276,674r
253,220
221,337r
218,167r
227,793r
203,691r
r
51,890"
58,508"
53,557
49,529"
10,740
9,138
10,572
9,487
2,874
2,263
4,307
2,077
r
22,404
23,885
27,015
22,118
5,628
5,348
6,090
5,194
483
765
495
579
12,255r
9,944 r
9,935 r
9,887 r
125,013r
121,01^
118,080r
113,938r
736,461r
738,044r
729,202r
724,430"
712,952r
699,644"
713,179"
704,573r
25,092r
23,281r
24,629
24,786
20,499
20,825
20,413
20,394
690
2,031
1,980
1,989
1,772r
1,910"
1,908
2,075
320
326
328
327

272,397
0
24,934
247,462

281,775r
40
12,129r
269,606r

266,714r
0
18,783
247,93LR

286,97 l r
2,100
29,047r
255,824r

97,171

100,01 R

101,676r

100,321r

101,4%

100,426

99,531

102,576

1,512,344

1,524,610

1,500,682

1,511,247

1,470,729

1,507,596

1,481,536

1,509,914

1,471,295

137,357

139,937

140,540

140,379

140,561

140,886

141,791

142,623

142,145

Total loans and leases, gross, adjusted, plus securities . . 1,330,828
113,791
Time deposits in amounts of $100,000 or more
954
Loans sold outright to affiliates
452
Commercial and industrial
502
Other
24,318
Foreign branch credit extended to U.S. residents
-17,685
Net due to related institutions abroad

1,340,891
113,972
921
454
467
24,534
-19,937

l,335,996 r
116,737
929
454
474
24,627
-19,467

1,334,617
115,814r
926
453
473
24,640
-16,439

1,325,315
114,532
917
453
464
24,327
-10,010

1,340,098
115,165
916
452
464
24,324
-12,273

1,335,301
114,902
922
452
470
23,892
-14,758

1,340,069
114,874
910
452
458
23,807
-13,640

1,331,478
113,962
909
452
458
23,756
-10,309

69 Total liabilities
70 Residual (total assets less total liabilities) 7
MEMO

71
77.
73
74
75
76
77

277,738"
200
29,923
247,614"

1. Includes certificates of participation, issued or guaranteed by agencies of the
U.S. government, in pools of residential mortgages.
2. Includes securities purchased under agreements to resell.
3. Includes allocated transfer risk reserve.
4. Includes negotiable order of withdrawal accounts (NOWs), automatic transfer service (ATS), and telephone and preauthorized transfers of savings deposits.
5. Includes borrowings only from other than directly related institutions.
6. Includes federal funds purchased and securities sold under agreements to
repurchase.
7. This balancing item is not intended as a measure of equity capital for use in
capital-adequacy analysis.
8. Excludes loans to and federal funds transactions with commercial banks in
the United States.




101,403"

9. Affiliates include a bank's own foreign branches, nonconsolidated nonbank
affiliates of the bank, the bank's holding company (if not a bank), and nonconsolidated nonbank subsidiaries of the holding company.
10. Credit extended by foreign branches of domestically chartered weekly
reporting banks to nonbank U.S. residents. Consists mainly of commercial and
industrial loans, but includes an unknown amount of credit extended to other than
nonfinancial businesses.
NOTE. Data that formerly appeared in table 1.28, Assets and Liabilities of Large
Weekly Reporting Commercial Banks in New York City, can be obtained from the
Board's H.4.2 (504) weekly statistical release. For ordering address, see inside
front cover.

Weekly

Reporting

Commercial

Banks

A23

1.30 LARGE WEEKLY REPORTING U.S. BRANCHES AND AGENCIES OF FOREIGN BANKS Assets and
Liabilities1
Millions of dollars, Wednesday figures

Account
Dec. 30"
1 Cash and balances due from depository
institutions
2 U.S. Treasury and government agency
securities
3 Other securities.
4 Federal funds sold
5
To commercial banks in the United States ..
6
To others 2
7 Other loans and leases, gross
8
Commercial and industrial
—
9
Bankers acceptances and commercial
paper
10
All other
11
U.S. addressees
12
Non-U.S. addressees
13
Loans secured by real estate
14
To financial institutions
15
Commercial banks in the United States,
16
Banks in foreign countries
17
Nonbank financial institutions
18
For purchasing and carrying securities . .
19
To foreign governments and official
institutions
20
All other
21 Other assets (claims on nonrelated parties) .
22 Total assets3
23 Deposits or credit balances due to other
than directly related institutions
24 Demand deposits
25
Individuals, partnerships, and
corporations
26
Other
27 Nontransaction accounts
28
Individuals, partnerships, and
corporations
29
Other
30 Borrowings from other than directly
related institutions . ,
31 Federal funds purchased
32
From commercial banks in the
United States
33
From others
34 Other liabilities for borrowed money
35
To commercial banks in the
United States
36
To others
37 Other liabilities to nonrelated parties
38 Total liabilities6
MEMO

39 Total loans (gross) and securities, adjusted
40 Net due to related institutions abroad

.

Jan. 6 r

Jan. 13

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

17,329

17,330

17,586

18,356

18,209

17,543

18,122

17,657

17,493

27,064
8,636
22,331
4,940
17,391
168,912
100,386

26,759
8,601
27,446
7,860
19,586
165,759
99,178

27,159
8,322
27,398
6,392
21,007
163,689"
99,028 r

27,121
8,342
24,642
7,046
17,596
164,832"
99,140"

26,598
8,193
23,692
6,062
17,630
164,162"
99,818"

27,157
8,246
23,360
4,706
18,654
163,546
98,916

26,206
8,269
22,514
5,264
17,250
163,674
97,744

27,199
8,317
20,171
5,394
14.777
164,639
97,737

28,054
8,365
18,346
3,784
14,562
163,246
96,579

2,449
97,937
94,863
3,074
34,017
26,343
6,164
2,119
18,061
5,299

2,589
96,589
93,563
3,026
33,562
25,524
6,269
2,105
17,149
4,879

2,367
96,661 r
93,487"
3,174"
33,666"
24,174
5,586
1,834
16,754
4,224"

2,528
96,612"
93,457"
3,155"
33,810"
25,101
5,502
1,959
17,639
4,198"

2,499"
97,320"
93,928"
3,392"
33,876"
24,070"
5,048
1,854
17,168"
3,887"

2,571
96,345
93,254
3,090
33,758
23,980
5.357
1,919
16,704
4,201

2,546
95,197
92,152
3,046
33,801
25,493
5,582
2,004
17,907
3,902

2,776
94,961
91,653
3,307
33.778
26,449
5,814
2,014
18,621
4,069

2,768
93,811
90,507
3,304
33,415
26,446
5,608
1,999
18,840
4,371

364
2,503
31,004

354
2,261

31,352

356
2,242
31,232"

360
2,223
30,177

352
2,159
30,716

333
2.358
31,916

407
2,327
31,916

412
2,194
31,117

395
2,040
31,714

318,301

314,509

310,047"

311,122"

307,625"

307,487

304,749

302,625

302,014

104,948
4,044

102,353
4,035

103,137"
3,831"

103,617
4,224

103,426
3,569

102,342
4,365

101,909
4,551

100,305
3,775

103,096
3,998

3,217
827
100,904

3,214
821
98,318

2,976
855"
99,306

3,189
1,036
99,393

2,792
777
99,857

2,653
1,712
97,977

2,868
1,683
97,357

2,888
887
96,530

2,952
1,046
99,098

71,003
29,901

69,679
28,638

71,363"
27,942"

71,034"
28,358"

70,915"
28,942"

69,466
28,511

68,244
29,113

66,900
29,630

69,106
29,992

92,318
49,349

92,368
48,858

88,813
45,482

90,684
50,730

83,756
45,776

87,797
47,476

88,234
45,592

88,469
45,320

83,919
41,104

14,736
34,613
42,969

15,033
33,825
43,510

12,185
33,297
43,331

14,764
35,966
39,954

12,134
33,642
37,980

14,970
32,506
40,321

11,836
33,757
42,641

14,851
30,469
43,149

10,863
30,242
42,815

10,357
32,611
31,769

10,054
33,456
30,151

10,345
32,986
30,645"

9,191
30,763
30,533

9,319
28,661

31,193

8,733
31,588
31,127

9,331
33,310
31,938

9,458
33,691
30,994

8,544
34,271
31,276

318,301

314,509

310,047"

311,122"

307,625"

307,487

304,749

302,625

302,014

215,839
46,241

214,435
52,374

214,590"
52,790"

212,388"
48,637"

211,535"
53,195"

212,246
50,502

209,817
48,620

209,118
49,332

208,619
48,926

1. Includes securities purchased under agreements to resell.
2. Includes transactions with nonbank brokers and dealers in securities.
3. Includes net due from related institutions abroad for U.S. branches and
agencies of foreign banks having a net " d u e f r o m " position.
4. Includes other transaction deposits.




Jan. 20

5. Includes securities sold under agreements to repurchase.
6. Includes net to related institutions abroad for U.S. branches and agencies of
foreign banks having a net " d u e t o " position.
7. Excludes loans to and federal funds transactions with commercial banks in
the United States.

A24

D o m e s t i cNonfinancialStatistics • M a y 1993

1.32 COMMERCIAL PAPER AND BANKERS DOLLAR ACCEPTANCES OUTSTANDING
Millions of dollars, end of period
1992

Year ending December

1993

Item
1988

1989

1990

1991

1992

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Commercial paper (seasonally adjusted unless noted otherwise)
1 AU issuers

2
3
4
5

458,464

525,831

562,656

531,724

549,433

547,234

550,727

557,915

558,414

549,433

542,438

159,777

183,622

214,706

213,823

228,260

233,045

234,242

231,751

230,966

228,260

215,126

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

210,930

200,036

183,379

172,813

173,859

178,184

181,388

179,279

172,813

181,264

Financial companies'
Dealer-placed paper
Total
Bank-related (not seasonally
adjusted)
Directly placed paper*
Total
Bank-related (not seasonally
adjusted)

1,248
194,931

6 Nonfinancial companies 5

43,155

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

n.a.

103,756

131,279

147,914

134,522

148,360

140,330

138,301

144,776

148,169

148,360

146,048

Bankers dollar acceptances (not seasonally adjusted) 6
7 Total
8
9
10
11
12

Holder
Accepting banks
Own bills
Bills bought from other banks
Federal Reserve Banks
Foreign correspondents
Others

Basis
13 Imports into United States
14 Exports from United States
15 All other

66,631

62,972

54,771

43,770

38,194

37,090

37,814

37,599

37,651

38,194

35,945

9,086
8,022
1,064

9,433
8,510
924

9,017
7,930
1,087

11,017
9,347
1,670

10,555
9,097
1,458

9,372
7,927
1,446

10,436
9,073
1,363

10,236
8,764
1,472

10,301
9,156
1,145

10,555
9,097
1,458

8,819
7,625
1,193

1,493
56,052

1,066
52,473

918
44,836

1,739
31,014

1,276
26,364

1,851
25,866

1,803
25,575

1,204
26,159

1,289
26,061

1,276
26,364

1,317
25,810

14,984
14,410
37,237

15,651
13,683
33,638

13,095
12,703
28,973

12,843
10,351
20,577

12,209
8,096
17,890

11,600
7,861
17,628

12,227
8,051
17,536

12,116
7,849
17,633

12,133
7,673
17,846

12,209
8,0%
17,890

11,146
7,690
17,109

1. Institutions engaged primarily in commercial, savings, and mortgage banking; sales, personal, and mortgage financing; factoring, finance leasing, and other
business lending; insurance underwriting; and other investment activities.
2. Includes all financial-company paper sold by dealers in the open market.
3. Bank-related series were discontinued in January 1989.
4. As reported by financial companies that place their paper directly with
investors.

5. Includes public utilities and firms engaged primarily in such activities as
communications, construction, manufacturing, mining, wholesale and retail trade,
transportation, and services.
6. Data on bankers acceptances are gathered from approximately 100 institutions. The reporting group is revised every January.
7. In 1977 the Federal Reserve discontinued operations in bankers acceptances
for its own account.

1.33 PRIME RATE CHARGED BY BANKS on Short-Term Business Loans1
Percent per year
Average
rate

Rate

10.50
10.00
9.50
9.00
8.50
8.00
7.50
6.50
6.00

10.01
8.46
6.25

1990
1991
1992
1990Feb.
Mar.
Apr.
May
June
July .
Aug.
Sept.
Oct.
Nov.
Dec.

10.11
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00
10.00

1. Data in this table also appear in the Board's H.15 (519) weekly and G.13
(415) monthly statistical releases. For ordering address, see inside front cover.




Period

1991—Jan. ...
Feb. ..
Mar. ..
Apr. ..
May ..
June ..
July ...
Aug. ..
Sept. .
Oct. ..
Nov. .
Dec. ..

Average
rate

9.52
9.05
9.00
9.00
8.50
8.50
8.50
8.50
8.20
8.00
7.58
7.21

1992—Jan. ...
Feb. ..
Mar. ..
Apr. ..
May ..
June ..
July ...
Aug. ..
Sept. .
Oct. ..
Nov. .
Dec.
1993—Jan. .
Feb.
Mar.

Financial

Markets

A25

1.35 INTEREST RATES Money and Capital Markets
Averages, percent per year; weekly, monthly, and annual figures are averages of business day data unless otherwise noted

1991

1993, week ending

1993

1992
1990

Item

1992
Nov.

Dec.

Jan.

Feb.

Jan. 29

Feb. 5

Feb.12

Feb. 19

Feb. 26

MONEY MARKET INSTRUMENTS

paper3,5,6

Commercial

placed3,5,1

Finance paper, directly

9

Bankers acceptances3,5'*
3-month
Certificates qf deposit,
marker9

8.10
6.98

5.69
5.45

3.52
3.25

3.09
3.00

2.92
3.00

3.02
3.00

3.03
3.00

2.94
3.00

3.15
3.00

2.92
3.00

3.06
3.00

2.91
3.00

8.15
8.06
7.95

5.89
5.87
5.85

3.71
3.75
3.80

3.25
3.66
3.67

3.71
3.67
3.70

3.21
3.25
3.35

3.14
3.18
3.27

3.14
3.18
3.29

3.16
3.21
3.31

3.14
3.18
3.27

3.16
3.18
3.26

3.11
3.15
3.23

8.00
7.87
7.53

5.73
5.71
5.60

3.62
3.65
3.63

3.20
3.59
3.56

3.68
3.58
3.52

3.25
3.32
3.29

3.18
3.27
3.21

3.18
3.27
3.23

3.20
3.29
3.22

3.18
3.28
3.22

3.20
3.27
3.22

3.17
3.26
3.20

7.93
7.80

5.70
5.67

3.62
3.67

3.51
3.51

3.44
3.47

3.14
3.23

3.06
3.15

3.08
3.15

3.09
3.18

3.06
3.17

3.05
3.14

3.05
3.10

8.15
8.15
8.17

5.82
5.83
5.91

3.64
3.68
3.76

3.23
3.58
3.60

3.57
3.48
3.55

3.14
3.19
3.33

3.08
3.12
3.22

3.08
3.13
3.26

3.08
3.14
3.26

3.08
3.12
3.24

3.08
3.11
3.21

3.06
3.10
3.18

8.16

5.86

3.70

3.67

3.50

3.22

3.12

3.18

3.18

3.13

3.10

3.08

7.50
7.46
7.35

5.38
5.44
5.52

3.43
3.54
3.71

3.13
3.34
3.52

3.22
3.36
3.55

3.00
3.14
3.35

2.93
3.07
3.25

2.92
3.07
3.26

2.92
3.10
3.26

2.93
3.10
3.32

2.92
3.04
3.22

2.95
3.04
3.17

7.51
7.47
7.36

5.42
5.49
5.54

3.45
3.57
3.75

3.14
3.35
3.61

3.25
3.39
3.57

3.06
3.17
3.52

2.95
3.08
3.32

2.98
3.09
n.a.

2.97
3.10
n.a.

2.94
3.09
3.32

2.93
3.08
n.a.

2.96
3.06
n.a.

7.89
8.16
8.26
8.37
8.52
8.55
8.61

5.86
6.49
6.82
7.37
7.68
7.86
8.14

3.89
4.77
5.30
6.19
6.63
7.01
7.67

3.68
4.58
5.14
6.04
6.49
6.87
7.61

3.71
4.67
5.21
6.08
6.46
6.77
7.44

3.50
4.39
4.93
5.83
6.26
6.60
7.34

3.39
4.10
4.58
5.43
5.87
6.26
7.09

3.41
4.24
4.78
5.66
6.08
6.46
7.23

3.41
4.19
4.70
5.55
5.98
6.40
7.21

3.45
4.21
4.71
5.56
6.00
6.38
7.18

3.36
4.04
4.51
5.39
5.85
6.24
7.07

3.31
3.95
4.38
5.21
5.64
6.02
6.89

8.74

8.16

7.52

7.43

7.30

7.17

6.89

7.03

6.98

6.97

6.90

6.70

6.96
7.29
7.27

6.56
6.99
6.92

6.09
6.48
6.44

6.05
6.46
6.36

5.91
6.27
6.22

5.91
6.28
6.16

5.61
5.98
5.87

5.89
6.28
6.10

5.79
6.17
6.04

5.65
6.01
5.97

5.51
5.88
5.85

5.47
5.84
5.60

9.77

9.23

8.55

8.51

8.35

8.24

8.01

8.14

8.09

8.07

7.99

7.88

9.32
9.56
9.82
10.36

8.77
9.05
9.30
9.80

8.14
8.46
8.62
8.98

8.10
8.40
8.58
8.96

7.98
8.24
8.37
8.81

7.91
8.11
8.26
8.67

7.71
7.90
8.03
8.39

7.84
8.02
8.15
8.55

7.78
7.98
8.11
8.50

7.75
7.97
8.09
8.49

7.69
7.88
8.02
8.37

7.61
7.77
7.90
8.22

10.01

9.32

8.52

8.51

8.27

8.13

7.80

7.95

7.88

7.85

7.73

7.63

8.96
3.61

8.17
3.25

7.46
2.99

7.43
2.98

7.45
2.90

7.25
2.88

7.37
2.81

7.39
2.83

7.40
2.77

7.37
2.78

7.43
2.86

7.29
2.82

secondary

U.S. Treasury bills
Secondary market •

Auction average ' 5 ' u

U . S . TREASURY NOTES AND BONDS

Constant

25
27

maturities12

7-year
30-year
Composite
STATE AND LOCAL NOTES AND BONDS

Moody's
29 Aaa
30 Baa

series13

CORPORATE BONDS

33
34
35
36

Rating group
Aaa
Aa
A
Baa

37 A-rated, recently offered utility bonds16
MEMO

Dividend-price

ratio

1. The daily effective federal funds rate is a weighted average of rates on
trades through New York brokers.
2. Weekly figures are averages of seven calendar days ending on Wednesday
of the current week; monthly figures include each calendar day in the month.
3. Annualized using a 36fl-day year or bank interest.
4. Rate for the Federal Reserve Bank of New York.
5. Quoted on a discount basis.
6. An average of offering rates on commercial paper placed by several leading
dealers for firms whose bond rating is AA or the equivalent.
7. An average of offering rates on paper directly placed by finance companies.
8. Representative closing yields for acceptances of the highest-rated money
center banks.
9. An average of dealer offering rates on nationally traded certificates of
deposit.
10. Bid rates for Eurodollar deposits at II a.m. London time. Data are for
indication purposes only.
11. Auction date for daily data; weekly and monthly averages computed on an
issue-date basis.




12. Yields on actively traded issues adjusted to constant maturities. Source:
U.S. Treasury.
13. GeneraJ obligations based on Thursday figures; Moody's Investors Service.
14. General obligations only, with twenty years to maturity, issued by twenty
state and local governmental units of mixed quality. Based on figures for
Thursday.
15. Daily figures from Moody's Investors Service. Based on yields to maturity
on selected long-term bonds.
16. Compilation of the Federal Reserve. This series is an estimate of the yield
on recently offered, A-rated utility bonds with a thirty-year maturity and five
years of call protection. Weekly data are based on Friday quotations.
17. Standard and Poor's corporate series. Preferred stock ratio based on a
sample of ten issues: four public utilities, four industrials, one financial, and one
transportation. Common stock ratios on the 500 stocks in the price index.
NOTE. These data also appear in the Board's H. 15 (519) and G. 13 (415) releases.
For ordering address, see inside front cover.

A26

DomesticNonfinancialStatistics • May 1993

1.36 STOCK MARKET

Selected Statistics
1992

Indicator

1990

1991

1993

1992
June

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

Prices and trading volume (averages of daily figures)
Common stock prices (indexes)
1 New York Stock Exchange
(Dec. 31, 1965 = 50)

183.66
226.06
158.80
90.72
133.21

206.35
258.16
173.97
92.64
150.84

229.00
284.26
201.02
99.48
179.29

224.68
279.54
202.02
97.23
174.82

228.17
281.90
198.36
101.18
180.%

230.07
284.44
191.31
103.41
180.47

230.13
285.76
191.61
102.26
178.27

226.97
279.70
192.30
101.62
181.36

232.84
287.80
204.63
101.13
189.27

239.47
290.77
212.35
103.85
196.87

239.75r
292.11
221.00
105.52
203.38

243.41
294.40
226.%
109.45
209.93

6 Standard & Poor's Corporation
(1941-43 = 10)1

335.01

376.20

415.75

408.27

415.05

417.93

418.48

412.50

422.84

435.64

435.40"

441.76

7 American Stock Exchange
(Aug. 31, 1973 = 50?

338.32

360.32

391.28

385.56

384.07

385.80

382.67

371.27

387.75

392.69

402.75r

409.39

156,359
13,155

179,411
12,486

202,558
14,171

195,089
11,216

194,138
10,722

174,003
11,875

191,774
11,198

204,787
11,966

208,221
14,925

222,736
16,523

266,011
17,184

288,540
18,154

4

Utility

Volume of trading (thousands of shares)

Customer financing (millions of dollars, end-of-period balances)
10 Margin credit at broker-dealers3

28,210

36,660

43,990

39,690

39,640

39,940

41,250

41,590

43,630

43,990

44,020

44,290

Free credit balances at brokers4
11 Margin accounts
12 Cash accounts

8,050
19,285

8,290
19,255

8,970
22,510

7,780
19,610

7,920
18,775

8,060
18,305

8,060
19,650

8,355
18,700

8,500
19,310

8,970
22,510

8,980
20,360

9,790
22,190

Margin requirements (percent of market value and effective date) 6

13 Margin stocks
14 Convertible bonds
15 Short sales

Mar. 11, 1%8

June 8, 1968

May 6, 1970

Dec. 6, 1971

Nov. 24, 1972

Jan. 3, 1974

70
50
70

80
60
80

65
50
65

55
50
55

65
50
65

50
50
50

1. Effective July 1976, includes a new financial group, banks and insurance
companies. With this change the index includes 400 industrial stocks (formerly
425), 20 transportation (formerly 15 rail), 40 public utility (formerly 60), and 40
financial.
2. On July 5, 1983, the American Stock Exchange rebased its index, effectively
cutting previous readings in half.
3. Since July 1983, under the revised Regulation T, margin credit at brokerdealers has included credit extended against stocks, convertible bonds, stocks
acquired through the exercise of subscription rights, corporate bonds, and
government securities. Separate reporting of data for margin stocks, convertible
bonds, and subscription issues was discontinued in April 1984.
4. Free credit balances are amounts in accounts with no unfulfilled commitments to brokers and are subject to withdrawal by customers on demand.
5. New series since June 1984.
6. These requirements, stated in regulations adopted by the Board of Governors pursuant to the Securities Exchange Act of 1934, limit the amount of credit
that can be used to purchase and carry "margin securities" (as defined in the
regulations) when such credit is collateralized by securities. Margin requirements




on securities other than options are the difference between the market value (100
percent) and the maximum loan value of collateral as prescribed by the Board.
Regulation T was adopted effective Oct. 15, 1934; Regulation U, effective May 1,
1936; Regulation G, effective Mar. 11, 1968; and Regulation X, effective Nov. 1,
1971.
On Jan. 1, 1977, the Board of Governors for the first time established in
Regulation T the initial margin required for writing options on securities, setting
it at 30 percent of the current market value of the stock underlying the option. On
Sept. 30, 1985, the Board changed the required initial margin, allowing it to be the
same as the option maintenance margin required by the appropriate exchange or
self-regulatory organization; such maintenance margin rules must be approved by
the Securities and Exchange Commission. Effective Jan. 31, 1986, the SEC
approved new maintenance margin rules, permitting margins to be the price of the
option plus 15 percent of the market value of the stock underlying the option.
Effective June 8, 1988, margins were set to be the price of the option plus 20
percent of the market value of the stock underlying the option (or 15 percent in the
case of stock-index options).

Financial Markets
1.37 SELECTED FINANCIAL INSTITUTIONS

All

Selected Assets and Liabilities

Millions of dollars, end of period
1992
Apr.

June

May

Aug.

July

Sept.

SAIF-insured institutions
1 Assets

1,084,821

919,979

883,407

872,026

870,334

861,517

856,390

856,165

847,235

846,730

840,605

502,863

496,974

2 Mortgages
3 Mortgage-backed
securities
4
Contra-assets to
mortgage assets'
5 Commercial loans
6 Consumer loans
Contra-assets to non7
mortgage loans .
8 Cash and investment
securities
9 Other

633,385

551,322

529,158

524,954

521,911

516,654

512,264

512,077

508,815

155,228

129,461

125,272

124,763

124,225

123,282

122,385

120,438

119,715

120,715

120,292

11,164
13,525
37,123

11,073
13,419
36,732

11,207
13,630
35,938

10,509
13,180
36,019

932

982

931

845

124,140
60,958

120,684
59,925

126,719
59,002

127,893
57,600

10 Liabilities and net worth

1,084,821

919,979

883,407

872,026

870,334

861,517

856,390

856,165

847,235

846,730

840,605

835,496
197,353
100,391
96,962
21,332
30,640

731,937
121,923
65,842
56,081
17,560
48,559

703,811
110,031
62,628
47,403
18,295
51,271

689,777
111,262
62,268
48,994
18,883
52,103

688,199
110,126
61,439
48,687
19,626
52,383

682,535
108,943
62,760
46,183
17,740
52,299

676,141
109,036
62,359
46,677
18,570
52,642

672,354
110,109
62,225
47,884
20,523
53,178

667,027
110,022
64,105
45,917
18,017
52,169

660,906
114,123
63,065
51,058
19,853
51,846

654,047
114,354
64,742
49,612
20,406
51,798

11
12
13
14
15
16

16,897
24,125
48,753

12,307
17,139
41,775

10,979
15,400
38,717

10,959
15,075
37,999

11,120
14,607
37,868

11,282
14,020
37,403

11,044
13,929
37,230

1,939

1,239

-1,008

980

949

944

910

146,644
95,522

Deposits
Borrowed money
FHLBB
Other
Other
Net worth

120,077
73,751

119,543
67,387

116,462
64,711

120,763
63,030

1. Contra-assets are credit-balance accounts that must be subtracted from the
corresponding gross asset categories to yield net asset levels. Contra-assets to
mortgage assets, mortgage loans, contracts, and pass-through securities—include
loans in process, unearned discounts and deferred loan fees, valuation allowances
for mortgages "held for sale," and specific reserves and other valuation allowances. Contra-assets to nonmortgage loans include loans in process, unearned
discounts and deferred loan fees, and specific reserves and valuation allowances.
2. Includes holding of stock in Federal Home Loan Bank and finance leases
plus interest.

119,539
62,844

120,220
62,317

NOTE. Components do not sum to totals because of rounding. Data for credit
unions and life insurance companies have been deleted from this table. Starting in
the December 1991 issue, data for life insurance companies are shown in a special
table of quarterly data.
SOURCE. Office of Thrift Supevision (OTS), insured by the Savings Association
Insurance Fund (SAIF) and regulated by the OTS.

1.38 FEDERAL FISCAL AND FINANCING OPERATIONS
Millions of dollars
Calendar year

Fiscal year

1990

U.S. budget
1 Receipts, total
2
On-budget
3
Off-budget
4 Outlays, total
5
On-budget
6
Off-budget
7 Surplus or deficit ( - ) , total
8
On-budget
9
Off-budget
Source of financing (total)
10 Borrowing from the public
11 Operating cash (decrease, or increase ( - ) ) .
12 Other 2

1993

1992

Type of account or operation
1991

1992
Sept.

Oct.

Nov.

Dec.

Jan.

Feb.

1,031,308
749,654
281,654
1,251,766
1,026,701
225,064
-220,458
-277,047
56,590

1,054,265
760,382
293,883
1,323,757
1,082,072
241,685
-269,492
-321,690
52,198

1,091,200
788,774
302,426
1,381,404
1,129,044
252,316
-290,160
-340,270
50,110

118,338
92,807
25,531
112,918
86,703
26,235
5,400
6,104
-704

76,832
55,056
21,776
125,620
103,780
21,841
-48,788
-48,724
-65

74,633
51,219
23,414
107,363
83,444
23,919
-32,730
-32,225
-505

113,756
89,660
24,096
152,701
116,640
36,061
-38,945
-26,980
-11,965

112,809
90,220
22,589
82,996
85,022
-2,025
29,812
5,198r
24,614

66,194
41,094
25,100
113,788
89,333
24,456
-47,594
-48,239
644

220,101
818
-461

276,802
-1,329
-5,981

310,918
-17,305
-3,453

9,853
-22,807
7,554

-1,552
39,420
10,920

61,969
-7,346
-21,893

21,078
-3,175
21,042

-8,355
-16,436
-5,021

30,689
27,227
-10,322

40,155
7,638
32,517

41,484
7,928
33,556

58,789
24,586
34,203

58,789
24,586
34,203

19,369
4,413
14,956

26,715
6,985
19,729

29,890
7,492
22,399

46,326
9,572
36,754

19,099
5,350
13,749

MEMO

13 Treasury operating balance (level, end of
period)
14
Federal Reserve Banks
15 Tax and loan accounts

1. In accordance with the Balanced Budget and Emergency Deficit Control Act
of 1985, all former off-budget entries are now presented on-budget. Federal
Financing Bank (FFB) activities are now shown as separate accounts under the
agencies that use the FFB to finance their programs. The act also moved two
social security trust funds (federal old-age survivors insurance and federal
disability insurance) off budget. The Postal Service is included as an off-budget
item in the Monthly Treasury Statement beginning in 1990.
2. Includes special drawing rights (SDRs); reserve position on the U.S. quota
in the International Monetary Fund (IMF); loans to the IMF; other cash and




monetary assets; accrued interest payable to the public; allocations of SDRs;
deposit funds; miscellaneous liability (including checks outstanding) and asset
accounts; seigniorage; increment on gold; net gain or loss for U.S. currency
valuation adjustment; net gain or loss for IMF loan-valuation adjustment; and
profit on sale of gold.
SOURCES. Monthly Treasury Statement of Receipts and Outlays of the U.S.
Government (MTS) and the Budget of the U.S. Government.

A28

Domestic Financial Statistics • May 1993

1.39 U.S. BUDGET RECEIPTS AND OUTLAYS1
Millions of dollars
Fiscal year

Calendar year

Source or type

1991
1991

1992

1992

1993

1992
HI

H2

Hlr

H2

Dec.

Jan.

Feb.

RECEIPTS

1 All sources
7 Individual income taxes, net
3
Withheld
4
Presidential Election Campaign Fund
Nonwithheld
Refunds
6
Corporation income taxes
7
Gross receipts
8
Refunds
9 Social insurance taxes and contributions,
net
10 Employment taxes and
contributions
11
Self-employment taxes and
contributions
1?
Unemployment insurance
13 Other net receipts
14
15
16
17

Excise taxes
Customs deposits
Estate and gift taxes
Miscellaneous receipts

1,054,265

1,091,200

540,504

519,293

560,647

540,849

113,756

112,809

66,194

467,827
404,152
32
142,693
79,050

476,465
408,352
30
149,342
81,259

232,389
193,440
31
109,405
70,487

234,949
210,552
1
33,2%
8,900

236,888
198,868
19
111,855
73,853

246,% 1
215,591
10
39,371
8,011

51,171
48,189
0
3,665
683

73,704
36,255
0
38,452
1,003

23,947
33,652
4
%7
10,677

113,599
15,513

117,951
17,680

58,903
7,904

54,016
8,649

61,682
9,403

58,022
7,219

23,721
772

3,%9
758

2,510
1,719

3%, 011

413,689

214,303

186,839

224,569

192,599

31,918

29,416

34,251

370,526

385,491

199,727

175,802

208,110

180,758

31,252

28,209

31,623

25,457
20,922
4,563

24,421
23,410
4,788

22,150
12,2%
2,279

3,306
8,721
2,317

20,433
14,070
2,389

3,988
9,397
2,445

0
245
421

-3,032
844
363

1,487
2,259
369

42,430
15,921
11,138
22,852

45,570
17,359
11,143
27,195

20,703
7,488
5,631
8,991

24,429
8,694
5,507
13,508

22,389
8,145
5,701
10,992

23,456
9,497
5,733
11,815

4,014
1,539
959
1,206

3,307
1,310
888
971

3,342
1,347
822
1,695

1,323,757

1,381,404

632,153

694,474

704,591

723,760

152,701

82,996

113,788

272,514
16,167
15,946
2,511
18,708
14,864

298,361
16,106
16,409
4,509
20,017
14,997

122,089
7,592
7,4%
1,235
8,324
7,684

147,669
7,691
8,472
1,698
11,130
7,418

147,066
8,538
7,952
1,442
8,607
7,527

155,501
9,911
8,521
3,109
11,617
8,881

30,010
1,170
1,571
525
1,540
3,428

19,683
1,161
1,395
15
1,372
1,206

22,903
1,253
1,325
399
1,282
1,145

75,639
31,531
7,432

9,514
33,337
7,411

17,992
14,748
3,552

36,534
17,093
3,783

15,566
15,679
3,902

-7,843
18,477
4,540

-1,874
2,983
774

-1,832
2,363
650

-3,532
2,093
690

OUTLAYS

18 All types
19
20
21
7?
73
24

National defense
International affairs
General science, space, and technology
Energy
Natural resources and environment
Agriculture

7.5
76
27
28

Commerce and housing credit
Transportation
Community and regional development
Education, training, employment, and
social services

41,479

45,248

21,234

21,114

23,224

20,922

4,393

4,360

4,068

79 Health
30 Social security and medicare
31 Income security

71,183
373,495
171,618

89,570
406,569"
198,073

35,608
190,247
88,778

41,459
193,098
87,805

43,864
205,500
105,744

47,223
232,109
99,272

8,191
59,837
18,689

7,828
10,376
16,225

8,053
35,005
21,317

3?
33
34
35
36

31,344
12,295
11,358
195,012
-39,356

34,133
14,450
12,939
199,429
-39,280

14,326
6,187
5,212
98,556
-18,702

17,425
6,574
6,794
99,149
-20,436

15,5%
7,433
5,052
100,444
-18,229

18,561
7,283
8,138
98,549
-20,914

4,148
1,236
2,306
16,559
-2,783

1,641
1,222
133
17,858
-2,660

2,649
1,060
994
15,893
-2,809

Veterans benefits and services
Administration of justice
General government
Net interest 6
Undistributed offsetting receipts

1. Functional details do not sum to total outlays for calendar year data because
revisions to monthly totals have not been distributed among functions. Fiscal year
total for outlays does not correspond to calendar year data because revisions from
the Budget have not been fully distributed across months.
2. Old-age, disability, and hospital insurance, and railroad retirement accounts.
3. Old-age, disability, and hospital insurance.
4. Federal employee retirement contributions and civil service retirement and
disability fund.




5. Deposits of earnings by Federal Reserve Banks and other miscellaneous receipts.
6. Includes interest received by trust funds.
7. Consists of rents and royalties for the outer continental shelf and U.S.
government contributions for employee retirement.
SOURCES. U.S. Department of the Treasury, Monthly Treasury Statement of
Receipts and Outlays of the U.S. Government, and the U.S. Office of Management and Budget, Budget of the U.S. Government, Fiscal Year 1994.

Federal Finance

A29

1.40 FEDERAL DEBT SUBJECT TO STATUTORY LIMITATION
Billions of dollars, end of month
1991

1990

1992

Item
Dec. 31

Mar. 31

June 30

Sept. 30

Dec. 31

Mar. 31

June 30

Sept. 30

Dec. 31

1 Federal debt outstanding

3,397

3,492

3,563

3,683

3,820

3,897

4,001

4,083

n.a.

2 Public debt securities
3 Held by public
4
Held by agencies

3,365
2,537
828

3,465
2,598
867

3,538
2,643
895

3,665
2,746
920

3,802
2,833
969

3,881
2,918
964

3,985
2,977
1,008

4,065
3,048
1,016

4,177
n.a.
n.a.

33
32
0

27
26
0

25
25
0

18
18
0

19
19
0

16
16
0

16
16
0

18
18
0

3,282

3,377

3,450

3,569

3,707

3,784

3,891

3,973

4,086

3,281
0

3,377
0

3,450
0

3,569
0

3,706
0

3,783
0

3,890
0

3,972
0

4,085
0

4,145

4,145

4,145

4,145

4,145

4,145

4,145

4,145

4,145

5 Agency securities
6
Held by public
7
Held by agencies
8 Debt subject to statutory limit
9 Public debt securities
10 Other debt 1
MEMO

11 Statutory debt limit

1. Consists of guaranteed debt of Treasury and other federal agencies, specified
participation certificates, notes to international lending organizations, and District
of Columbia stadium bonds.

1.41 GROSS PUBLIC DEBT OF U.S. TREASURY

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

SOURCES. U.S. Treasury Department, Monthly Statement of the Public Debt of
the United States and Treasury Bulletin.

Types and Ownership

Billions of dollars, end of period
1992
Type and holder

1 Total gross public debt
2
3
4
5
6
7
8
9
10
11
12
13
14

By type
Interest-bearing
Marketable
Bills
Notes
Bonds
Nonmarketable 1
State and local government series
Foreign issues
Government
Public
Savings bonds and n o t e s . . .
Government account series 3
Non-interest-bearing

By holder4
15 U.S. Treasury and other federal agencies and trust funds,
16 Federal Reserve Banks
17 Private investors
18 Commercial banks
19 Money market funds
20
Insurance companies
21
Other companies
22
State and local treasuries
Individuals
23
Savings bonds
24
Other securities
25
Foreign and international
26
Other miscellaneous investors 6

1989

1991

1992

Q1

Q2

Q3

Q4

2,953.0

3,364.8

3,801.7

4,177.0

3,881.3

3,984.7

4,064.6

4,177.0

2,931.8
1,945.4
430.6
1,151.5
348.2
986.4
163.3
6.8
6.8
.0
115.7
695.6
21.2

3,362.0
2,195.8
527.4
1,265.2
388.2
1,166.2
160.8
43.5
43.5
.0
124.1
813.8
2.8

3,798.9
2,471.6
590.4
1,430.8
435.5
1,327.2
159.7
41.9
41.9
.0
135.9
959.2
2.8

4,173.9
2,754.1
657.7
1,608.9
472.5
1,419.8
153.5
37.4
37.4
.0
155.0
1,043.5
3.1

3,878.5
2,552.3
615.8
1,477.7
443.8
1,326.2
157.8
42.0
42.0
.0
139.9
956.1
2.8

3,981.8
2,605.1
618.2
1,517.6
454.3
1,376.7
161.9
38.7
38.7
.0
143.2
1,002.5
2.9

4,061.8
2,677.5
634.3
1,566.4
461.8
1,384.3
157.6
37.0
37.0
.0
148.3
1,011.0
2.8

4,173.9
2,754.1
657.7
1,608.9
472.5
1,419.8
153.5
37.4
37.4
.0
155.0
1,043.5
3.1

707.8
228.4
2,015.8
164.9
14.9
125.1
93.4
487.5

828.3
259.8
2,288.3
171.5
45.4
142.0
108.9
490.4

968.7
281.8
2,563.2
233.4
80.0
168.7
150.8
520.3

963.7
267.6
2,664.0
256.6
84.0
176.9
166.0
521.8

1,007.9
276.9
2,712.4
267.2
79.4
181.3
175.0
528.5

1,016.3
296.4
2,765.5
270.0
79.4
185.0
180.8
530.0

117.7
98.7
392.9
520.7

126.2
107.6
421.7
674.5

138.1
125.8
455.0
691.1

142.0
126.1
471.2
719.5

145.4
129.7
492.9
713.1

150.3
130.9
499.0
740.0

1. Includes (not shown separately) securities issued to the Rural Electrification
Administration, depository bonds, retirement plan bonds, and individual retirement bonds.
2. Nonmarketable series denominated in dollars, and series denominated in
foreign currency held by foreigners.
3. Held almost entirely by U.S. Treasury and other federal agencies and trust
funds.
4. Data for Federal Reserve Banks and U.S. government agencies and trust
funds are actual holdings; data for other groups are Treasury estimates.




1990

n. a.

n.a.

5. Consists of investments of foreign balances and international accounts in the
United States.
6. Includes savings and loan associations, nonprofit institutions, credit unions,
mutual savings banks, corporate pension trust funds, dealers and brokers, certain
U.S. Treasury deposit accounts, and federally sponsored agencies.
SOURCES. U.S. Treasury Department, data by type of security, Monthly
Statement of the Public Debt of the United States; data by holder, the Treasury
Bulletin.

A30

DomesticNonfinancialStatistics • May 1993

1.42 U.S. GOVERNMENT SECURITIES DEALERS

Transactions1

Millions of dollars, daily averages

1992

1993

1992,
week
ending

Jan.

Dec. 30

Jan. 6

Item
Nov.

Dec.

1993, week ending

Jan. 13

Jan. 20

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Feb. 24

IMMEDIATE TRANSACTIONS 2

1
2
3
4
5
6
7
8
9
10

11
12
13
14
15
16

By type of security
U.S. Treasury securities
Bills
Coupon securities, by maturity
Less than 3.5 years
3.5 to 7.5 years
7.5 to 15 years
15 years or more
Federal agency securities
Debt, by maturity
Less than 3.5 years
3.5 to 7.5 years
7.5 years or more
Mortgage-backed
Pass-throughs
All others
By type of counterparty
Primary dealers and brokers
U.S. Treasury securities
Federal agency securities
Debt
Mortgage-backed
Customers
U.S. Treasury securities
Federal agency securities
Debt
Mortgage-backed

233

239

240

38,654

48,188

52,807

50,836

42,636

42,512

46,358

43,801

45,439

288
205
101
189

291
212
104
197

292
221
106
203

21,267
15,626
7,503
8,143

32,120
29,778
13,123
11,132

45,550
49,463
19,853
15,387

51,024
45,958
20,257
19,152

58,100
56,318
21,395
18,220

50,106
46,365
21,061
16,349

58,885
44,155
30,741
18,095

55,363
42,127
27,176
26,574

63,656
60,642
33,253
25,249

423r
388r
208,221

436
393r
222,736

435r
403r
266,01 l r

5,229
345
932

6,883
888
1,034

5,018
792
1,224

6,526
873
1,230

7,082
877
1,046

7,228
955
1,350

6,727
715
1,157

6,213
880
1,186

14,925
43,630

16,523
43,990

17,184
44,020

8,435
3,007

14,506
2,201

26,941
3,150

22,744
4,680

16,675
4,211

15,083
4,909

29,594
3,406

24,153
3,413

20,093
5,772

78,175

115,030

115,525

122,359

108,449

124,847

119,783

141,507

1,795
13,082

1,523
12,034

1,869
9,111

2,051
8,613

2,052
15,762

1,957
12,384

1,787
10,043

5,820"
696r
1,252

8,500

8,970

8,980

54,359

19,310"
9,765

22,510r
7,917

20,360"
10,457

805
4,532

61,832

50,898

68,131

36,833

56,166

68,028

71,701

74,310

67,945

73,387

75,258

86,733

5,482r
11,040

5,737r
9,413

6,384r
13,296

5,700
6,910

5,938r
8,898

7,011
17,009

5,510
15,390

6,760
11,775

6,954
11,379

7,481
17,238

6,642
15,182

6,493
15,821

3,242

2,464

2,584

1,087

3,189

2,856

2,345

1,860

3,106

2,280

1,800

3,029

2,221
1,969
3,548
8,782

1,637
1,179
2,336
6,427

2,155
1,486
2,668
9,140

1,219
480
1,028
3,928

1,290
903
1,369
5,653

2,036
1,475
3,060
9,391

2,600
1,758
2,745
11,224

2,540
1,614
3,059
9,673

2,104
1,675
3,114
8,940

2,560
1,396
3,985
10,777

2,420
1,562
3,900
13,241

3,230
2,624
3,803
13,161

161
117
16

97
48
18

45
114
78r

20
5
12

15
160
58

109
138
192

28
91
62

53
216
16

63
196
92

73
46
45

108
46
19

15,801
1,132

11,895
829

16,656
1,276

3,811
365

15,297
562

18,847
638

17,297
1,767

15,700
2,181

14,680
810

20,912
987

18,287
2,173

13,656
1,734

1,663
824
817
1,607

1,401
378
341
820

1,537
782
573
1,233

478
72
227
253

1,058
1,194
672
876

1,735
732
676
846

1,628
836
441
1,431

1,817
545
5%
1,890

1,077
538
385
775

1,300
318
586
1,217

2,218
339
431
1,236

2,025
712
1,020
1,881

344

338

563

173

617

472

577

644

448

472

580

781

1,830"
7,809

FUTURES AND FORWARD
TRANSACTIONS 4

By type of deliverable security
U.S. Treasury securities
17 Bills
Coupon securities, by maturity
18 Less than 3.5 years
19 3.5 to 7.5 years
20 7.5 to 15 years
21
15 years or more
Federal agency securities
Debt, by maturity
Less than 3.5 years
22
23
3.5 to 7.5 years
24
7.5 years or more
Mortgage-backed
25
Pass-tlyoughs
Others 3
26

86
n.a
7

OPTIONS TRANSACTIONS 5

27
28
29
30
31

By type of underlying security
U.S. Treasury, coupon
securities, by maturity
Less than 3.5 years
3.5 to 7.5 years
7.5 to 15 years
15 years or more
Federal agency, mortgagebacked securities
Pass-throughs

1. Transactions are market purchases and sales of securities as reported to the
Federal Reserve Bank of New York by the U.S. government securities dealers on
its published list of primary dealers. Averages are based on the number of trading
days in the period. Immediate, forward, and futures transactions are reported at
principal value, which does not include accrued interest; options transactions are
reported at the face value of the underlying securities.
Dealers report cumulative transactions for each week ending Wednesday.
2. Transactions for immediate delivery include purchases or sales of securities
(other than mortgage-backed agency securities) for which delivery is scheduled in
five business days or less and "when-issued" securities that settle on the issue
date of offering. Transactions for immediate delivery of mortgage-backed agency
securities include purchases and sales for which delivery is scheduled in thirty days or
less. Stripped securities are reported at market value by maturity of coupon or corpus.
3. Includes such securities as collateralized mortgage obligations (CMOs), real
estate mortgage investment conduits (REMICs), interest-only securities (IOs),
and principal-only securities (POs).




4. Futures transactions are standardized agreements arranged on an exchange.
Forward transactions are agreements made in the over-the-counter market that
specify delayed delivery. All futures transactions are included regardless of time
to delivery. Forward contracts for U.S. Treasury securities and federal agency
debt securities are included when the time to delivery is more than five business
days. Forward contracts for mortgage-backed agency securities are included
when the time to delivery is more than thirty days.
5. Options transactions are purchases or sales of put-and-call options, whether
arranged on an organized exchange or in the over-the-counter market, and include
options on futures contracts on U.S. Treasury and federal agency securities.
NOTE. In tables 1.42 and 1.43, " n . a . " indicates that data are not published
because of insufficient activity.
Data for several types of options transactions—U.S. Treasury securities, bills;
Federal agency securities, debt; and mortgage-backed securities, other than
pass-throughs—are no longer available because activity is insufficient.

Federal
1.43 U.S. GOVERNMENT SECURITIES DEALERS

Finance

A31

Positions and Financing1

Millions of dollars

1992

1993

1992,
week
ending

Jan.

Dec. 30

Item
Nov.

Dec.

1993, week ending

Jan. 6

Jan. 13

Jan. 20

Jan. 27

Feb. 3

Feb. 10

Feb. 17

Positions 2
N E T IMMEDIATE POSITIONS 3

1

2
3
4

5
6
7
8
9
10
11
12
13

By type of security
U.S. Treasury securities
Bills
Coupon securities, by maturity
Less than 3.5 years
3.5 to 7.5 years
7.5 to 15 years
15 years or more
Federal agency securities
Debt, by maturity
Less than 3.5 years
3.5 to 7.5 years
7.5 years or more
Mortgage-backed
Pass-throughs
All others
Other money market instruments
Certificates of deposit
Commercial paper
Bankers acceptances

233

239

240

5,897

9,069

12,746

7,028

253

1

3,812

6,383

288
205
101
189

291
212
104
197

292
221
106
203

-2,284
-5,630
-10,760
7,390

-2,385
-7,193
-12,355
7,216

-4,343
-8,986
-14,007
5,863

-9,699
-8,902
-14,080
8,024

-3,252
-6,680
-14,357
7,567

-1,172
-7,477
-12,296
6,194

1,001
-11,500
-7,470
6,230

-3,186
-14,471
-9,376
8,957

423
388
208,221

436r
393
222,736

435r
403r
266,01LR

3,078r
3,166
3,682

4,750
2,924
3,681

3,210
2,779
3,803

6,191
2,538
3,701

5,217
2,515
4,034

8,112
2,188
3,750

7,881
2,545
3,440

7,125
2,169
3,424

14,925
43,630

16,523
43,990

17,184
44,020

17,272
25,783

23,951
24,367

39,588
24,215

39,619
25,127

37,368
24,844

32,976
23,742

40,227
23,289

35,792
24,701

8,500
19,310
864

8,970
22,510
758

8,980
20,360
672

3,249
6,459
921

2,563
8,198
766

2,372
5,310
505

2,978
6,836
638

3,258
6,960
710

3,623
8,109
814

3,035
7,338
811

3,463
7,348
1,222

2,797

-1,820

-4,355

-1,060

-2,120

-4,844

-5,943

-4,156

-4,422

-4,800

-5,672

2,105
1,206
2,614
-5,164

612
609
2,138
-7,258

1,488
2,352
3,002
-6,174

509
1,953
3,217
-6,180

630
2,593
3,700
-6,670

1,998
3,153
4,124
-4,733

1,109
2,394
2,503
-7,642

2,089
2,165
1,891
-6,312

1,495
844
2,811
-5,142

1,558
2,467
1,747
-3,844

1,455
3,008
1,428
-5,207

1
91
-6

-123
-115
-16

-37
-11
20r

-378
-177
-51

-18
-42
-42

-1
31
-60

-85
109
113

-62
-93
103

-1
-108
-55

38
2
117

46
29
-24

-7,047
1,911
-125,734

-1,280
366
-71,895

-12,104
1,450
-66,597

6,223
37
-59,719

-909
257
-60,181

-14,631
1,025
-66,521

-16,701
1,964
-65,954

-14,887
2,124
-70,855

-11,557
1,908
-70,026

-20,522
2,810
-99,094

-14,965
4,003
-112,864

FUTURES AND FORWARD POSITIONS 5

By type of deliverable security
U.S. Treasury securities
14 Bills
Coupon securities, by maturity
15 Less than 3.5 years
16 3.5 to 7.5 years
17 7.5 to 15 years
15 years or more
18
Federal agency securities
Debt, by maturity
Less than 3.5 years
19
3.5 to 7.5 years
20
7.5 years or more
21
Mortgage-backed
Pass-throughs
22
All others
23
24 Certificates of deposit

Financing6
Reverse repurchase agreements
25 Overnight and continuing
26 Term

211,724r
335,267r

208,607 r
332,244r

230,268r
345,609r

208,723r
321,229r

233,609
300,889

225,894
346,233

232,086
340,499

228,676
372,269

232,519
373,888

219,987
398,647

247,572
339,373

Repurchase agreements
27 Overnight and continuing
28 Term

361,802r
329,223r

357,335r
326,258 r

387,462r
328,043r

336,394r
311,581r

379,844
281,026

373,483
321,951

399,987
325,068

389,140
363,563

398,496
352,277

393,011
382,749

413,785
335,085

Securities borrowed
29 Overnight and continuing
30 Term

104,281
44,258r

99,894 r
46,975 r

102, N O 1
52,374r

92,681r
47,883r

97,859
49,658

98,375
52,757

101,843
51,219

106,205
55,641

108,787
52,082

108,642
56,900

112,995
52,575

Securities loaned
31 Overnight and continuing
32 Term

4,103r
314

3,999r
601r

3,724r
351

3,937r
1,677r

3,721
211

3,418
200

4,725
359

3,071
495

3,654
560

3,312
226

4,105
221

Collateralized loans
33 Overnight and continuing

15,142

16,800

16,882

15,998

17,896

16,345

17,015

0

0

0

0

MEMO: Matched book 7
Reverse repurchase agreements
34 Overnight and continuing
35 Term

153,286r
286,925r

157,110*
289,659r

167,088r
304,231r

154,174r
279,545r

173,326
269,132

163,717
306,055

167,152
297,762

163,818
326,507

169,239
326,022

154,952
349,876

171,838
294,472

Repurchase agreements
36 Overnight and continuing
37 Term

188,547r
244,395r

191,958r
243,209r

218,787r
253,776r

189,412r
232,348r

211,401
214,045

217,569
248,412

225,937
247,377

214,644
285,202

226,737
278,965

224,321
300,353

222,536
256,312

1. Data for positions and financing are obtained from reports submitted to the
Federal Reserve Bank of New York by the U.S. government securities dealers on
its published list of primary dealers. Weekly figures are close-of-business Wednesday data; monthly figures are averages of weekly data.
2. Securities positions are reported at market value.
3. Net immediate positions include securities purchased or sold (other than
mortgage-backed agency securities) that have been delivered or are scheduled to
be delivered in five business days or less and "when-issued" securities that settle
on the issue date of offering. Net immediate positions of mortgage-backed agency
securities include securities purchased or sold that have been delivered or are
scheduled to be delivered in thirty days or less.
4. Includes such securities as collateralized mortgage obligations (CMOs), real
estate mortgage investment conduits (REMICs), interest-only securities (IOs),
and principal-only securities (POs).
5. Futures positions reflect standardized agreements arranged on an exchange.

Forward positions reflect agreements made in the over-the-counter market that
specify delayed delivery. All futures positions are included regardless of time to
http://fraser.stlouisfed.org/

Federal Reserve Bank of St. Louis

delivery. Forward contracts for U.S. Treasury securities and federal agency debt
securities are included when the time to delivery is more than five business days.
Forward contracts for mortgage-backed agency securities are included when the
time to delivery is more than thirty days.
6. Overnight financing refers to agreements made on one business day that
mature on the next business day; continuing contracts are agreements that remain
in effect for more than one business day but have no specific maturity and can be
terminated without advance notice by either party; term agreements have a fixed
maturity of more than one business day .
7. Matched-book data reflect financial intermediation activity in which the
borrowing and lending transactions are matched. Matched-book data are included
in the financing breakdowns given above. The reverse repurchase and repurchase
numbers are not always equal because of the "matching" of securities of different
values or different types of collateralization.
NOTE. Data for futures and forward commercial paper and bankers acceptances and
for term financing of collateralized loans are no longer available because of insufficient
activity.

A32

D o m e s t i cNonfinancialStatistics • M a y 1993

1.44 FEDERAL AND FEDERALLY SPONSORED CREDIT AGENCIES

Debt Outstanding

Millions of dollars, end of period
1992

1 Federal and federally sponsored agencies
2 Federal agencies
3 Defense Department
4
Export-Import Bank 2,3
5
Federal Housing Administration
6
Government National Mortgage Association certificates of
participation
7
Postal Service 6
8 Tennessee Valley Authority
9
United States Railway Association
10 Federally sponsored agencies 7
11 Federal Home Loan Banks
12 Federal Home Loan Mortgage Corporation
13 Federal National Mortgage Association
14 Farm Credit Banks 8
15 Student Loan Marketing Association
16 Financing Corporation 10
17 Farm Credit Financial Assistance Corporation
18 Resolution Funding Corporation
MEMO

19 Federal Financing Bank debt
20
21
22
23
24

3

Lending to federal and federally sponsored
Export-Import Bank
Postal Service 6
Student Loan Marketing Association
Tennessee Valley Authority
United States Railway Association 6

Other lending14
25 Farmers Home Administration
26 Rural Electrification Administration
27

1989

1988

Agency

1991
Aug.

Sept.

Oct.

Nov.

Dec.

381,498

411,805

434,668

442,772

464,773

475,606

479,978

481,050

483,970

35,668
8
11,033
150

35,668
8
10,985
328

42,159
7
11,376
393

41,035
7
9,809
397

40,034
7
8,156
229

41,319
7
7,698
301

41,470
7
7,698
309

42,081
7
7,698
344

41,829
7
7,208
374

0
6,142
18,335
0

0
6,445
17,899
0

0
6,948
23,435
0

0
8,421
22,401
0

0
10,123
21,519
0

0
10,123
23,190
0

0
10,123
23,333
0

0
10,660
23,372
0

0
10,660
23,580
0

345,832
135,836
22,797
105,459
53,127
22,073
5,850
690
0

375,428
136,108
26,148
116,064
54,864
28,705
8,170
847
4,522

392,509
117,895
30,941
123,403
53,590
34,194
8,170
1,261
23,055

401,737
107,543
30,262
133,937
52,199
38,319
8,170
1,261
29,9%

424,739
108,564
34,295
150,280
52,137
39,552
8,170
1,261
29,996

434,287
110,830
36,750
155,232
52,734
38,830
8,170
1,261
29,9%

438,508
112,436
34,108
159,764
52,510
39,766
8,170
1,261
29,9%

438,%9
114,364
30,914
161,308
52,728
39,737
8,170
1,261
29,9%

442,141
114,733
29,631
166,300
51,910
39,650
8,170
1,261
29,9%

142,850

134,873

179,083

185,576

174,003

164,422

159,899

156,579

154,994

11,027
5,892
4,910
16,955
0

10,979
6,195
4,880
14,055
0

11,370
6,698
4,850
10,725
0

9,803
8,201
4,820
7,275
0

8,150
9,903
4,820
7,175
0

7,692
9,903
4,820
7,175
0

7,692
9,903
4,790
6,975
0

7,692
10,440
4,790
6,975
0

7,202
10,440
4,790

58,496
19,246
26,324

53,311
19,265
23,724

52,324
18,890
70,896

48,534
18,562
84,931

43,009
18,238
82,608

42,979
18,143
73,710

42,979
18,172
69,188

42,979
18,172
65,531

42,979
18,172
64,436

agencies

1. Consists of mortgages assumed by the Defense Department between 1957
and 1963 under family housing and homeowners assistance programs.
2. Includes participation certificates reclassified as debt beginning Oct. 1,1976.
3. On-budget since Sept. 30, 1976.
4. Consists of debentures issued in payment of Federal Housing Administration
insurance claims. Once issued, these securities may be sold privately on the
securities market.
5. Certificates of participation issued before fiscal year 1969 by the Government
National Mortgage Association acting as trustee for the Farmers Home Administration, the Department of Health, Education, and Welfare, the Department of
Housing and Urban Development, the Small Business Administration, and the
Veterans' Administration.
6. Off-budget.
7. Includes outstanding noncontingent liabilities: notes, bonds, and debentures. Some data are estimated.
8. Excludes borrowing by the Farm Credit Financial Assistance Corporation,
shown on line 17.
9. Before late 1982, the Association obtained financing through the Federal
Financing Bank (FFB). Borrowing excludes that obtained from the FFB, which is
shown on line 22.




1990

0

10. The Financing Corporation, established in August 1987 to recapitalize the
Federal Savings and Loan Insurance Corporation, undertook its first borrowing in
October 1987.
11. The Farm Credit Financial Assistance Corporation, established in January
1988 to provide assistance to the Farm Credit System, undertook its first
borrowing in July 1988.
12. The Resolution Funding Corporation, established by the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, undertook its first
borrowing in October 1989.
13. The FFB, which began operations in 1974, is authorized to purchase or sell
obligations issued, sold, or guaranteed by other federal agencies. Because FFB
incurs debt solely for the purpose of lending to other agencies, its debt is not
included in the main portion of the table in order to avoid double counting.
14. Includes FFB purchases of agency assets and guaranteed loans; the latter
are loans guaranteed by numerous agencies, with the amounts guaranteed by any
one agency generally being small. The Farmers Home Administration entry
consists exclusively of agency assets, while the Rural Electrification Administration entry consists of both agency assets and guaranteed loans.

Securities

Market

and Corporate

Finance

A33

1.45 NEW SECURITY ISSUES Tax-Exempt State and Local Governments
Millions of dollars
1993

1992
Type of issue or issuer,
or use

1990

1 AU issues, new and refunding1

1992

1991

July

Aug.

Sept.

Oct.

Nov.

Dec.

Jan.

Feb.
16,125

120,339

154,402

215,191

17,386

19,774

18,698

21,092

14,133

19,577

17,580"

By type of issue
2 General obligation
3 Revenue

39,610
81,295

55,100
99,302

78,611
136,580

7,136
10,250

7,005
12,769

7,461
11,237

7,733
13,359

5,203
8,930

6,024
13,553

4,650"
12,930"

By type of issuer
4 State
5 Special district or statutory authority2
6 Municipality, county, or township

15,149
72,661
32,510

24,939
80,614
48,849

25,295
127,618
60,210

2,836
10,040
4,510

2,933
11,203
5,638

1,710
11,054
5,934

2,742
13,113
5,237

1,688
8,197
4,248

2,339
11,159
6,079

1,339
12,556
3,685

103,235

116,953

120,272

7,565

11,993

10,496

13,760

8,028

8,010

4,878

4,878

17,042
11,650
11,739
23,099
6,117
34,607

21,121
13,395
21,039
25,648
8,376
30,275

22,071
17,334
20,058
21,796
5,424
33,589

1,747
571
629
887
91
3,640

1,737
2,130
2,604
767
503
4,252

1,237
1,977
2,265
1,869
1,176
1,972

2,083
1,364
3,340
2,365
367
4,241

1,800
531
960
1,070
581
3,086

1,658
831
1,258
1,121
339
2,803

1,005"
848"
891"
540
178
1,416

n.a.

7 Issues for new capital
8
9
10
11
12
13

By use of proceeds
Education
Transportation
Utilities and conservation
Social welfare
Industrial aid
Other purposes

SOURCES. Securities Data Company beginning January 1993.
Dealer's Digest for earlier data.

1. Par amounts of long-term issues based on date of sale.
2. Includes school districts.

I
1
n.a.

1
1

T
1
1

T

Investment

1.46 NEW SECURITY ISSUES U.S. Corporations
Millions of dollars
1993

1992
Type of issue, offering,
or issuer

1990

1991

1992
July

Aug.

Sept.

Oct.

Nov.

Dec.

1 AU issues

340,049

465,483

n.a.

48,136

46,235

37,091

42,849

39,123

35,679

39,272

46,042

2 Bonds2

299,884

390,018

404,992

39,113

39,758

31,815

37,539

32,157

31,180

33,223

40,808

By type of offering
3 Public, domestic
4 Private placement, domestic .
5 Sold abroad

188,848
86,982
23,054

287,125
74,930
27,962

377,453
n.a.
27,539

36,085
n.a.
3,027

37,833
n.a.
1,924

28,561
n.a.
3,254

36,185
n.a.
1,355

30,249
n.a.
1,909

28,771r
n.a.
2,409

31,683
n.a.
1,540

37,879
n.a.
2,929

By industry group
Manufacturing
Commercial and miscellaneous
Transportation
Public utility
Communication
Real estate and financial

51,779
40,733
12,776
17,621
6,687
170,288

86,628
36,666
13,598
23,945
9,431
219,750

69,538
30,049
6,497
44,643
13,073
241,192

7,338
1,665
899
4,266

5,509
3,488
766
6,902

2,081
21,011

5,974
2,374
677
5,230
1,191
22,093

7,975
2,813
290
3,700
427
16,953

3,467
2,393

23,916

4,720
2,159
393
4,509
1,053
18,982

1,289
374
23,656

4,219
2,226
611
2,867
516
22,785

8,850
2,690
316
3,421
2,915
22,616

12 Stocks2

40,165

75,467

n.a.

9,023

6,477

5,276

5,310

4,499

6,049

5,234

By type of offering
13 Public preferred
14 Common
15 Private placement

n.a.
n.a.
16,736

17,408
47,860
10,109

21,332
57,099
n.a.

2,933
6,090
n.a.

2,413
4,064
n.a.

1,148
4,129
n.a.

1,233
4,077
n.a.

2,901
4,065
n.a.

1,540
2,958
n.a.

1,608
4,441
n.a.

1,112
4,122
n.a.

5,649
10,171
369
416
3,822
19,738

24,154
19,418
2,439
3,474
475
25,507

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

3,000
1,079
1,064
610
n.a.
3,271

857
1,599
n.a.
564
n.a.
3,457

713
1,315
n.a.
921
n.a.
2,327

307
602
59
595
1,051
2,695

1,779
940
53
359
99
3,735

288
1,366
304
150
22
2,369

1,468
2,226
118
92
126
2,019

722
1,688
65
310

6
7
8
9
10
11

16
17
18
19
20
21

By industry group
Manufacturing
Commercial and miscellaneous
Transportation
Public utility
Communication
Real estate and financial

1. Figures represent gross proceeds of issues maturing in more than one year;
they are the principal amount or number of units calculated by multiplying by the
offering price. Figures exclude secondary offerings, employee stock plans,
investment companies other than closed-end, intracorporate transactions, equities sold abroad, and Yankee bonds. Stock data include ownership securities
issued by limited partnerships.




1,028

0

0

2,438

2. Monthly data cover only public offerings.
3. Monthly data are not available.
SOURCES. IDD Information Services, Inc., the Board of Governors of the
Federal Reserve System, and, before 1989, the U.S. Securities and Exchange
Commission.

A34

D o m e s t i cNonfinancialStatistics • M a y 1993

1.47 OPEN-END INVESTMENT COMPANIES

Net Sales and Assets

Millions of dollars
1992
Item1

1991r

1993

1992
June

July

Aug.

Sept.

Oct.

Nov.

Dec/

Jan.

1 Sales of own shares2

463,645

647,055

51,457

54,915

50,627

50,039

52,214

52,019

70,618

71,607

2 Redemptions of own shares
3 Net sales

342,547
121,098

447,140
199,915

37,457
14,000

34,384
20,703

35,223
15,404

37,862
12,177

37,134
15,080

34,126
17,893

51,993
18,625

46,545
25,062

4 Assets4

808,582

1,056,310

911,218

951,806

957,145

978,507

983,151

1,019,618

1,056,310

1,082,653

69,508
841,710

72,732
879,074

77,245
879,900

75,808
907,343

80,247
939,371

73,999
982,311

76,764
1,005,889

5

5 Cash
6 Other

60,292
748,290

73,999
982,311

76,498
902,009

4. Market value at end of period, less current liabilities.
5. Includes all U.S. Treasury securities and other short-term debt securities.
SOURCE. Investment Company Institute. Data based on reports of membership,
which comprises substantially all open-end investment companies registered with
the Securities and Exchange Commission. Data reflect underwritings of new
companies.

1. Data on sales and redemptions exclude money market mutual funds but
include limited-maturity municipal bond funds. Data on assets exclude both
money market mutual funds and limited-maturity municipal bond funds.
2. Includes reinvestment of dividends. Excludes reinvestment of capital gains
distributions.
3. Excludes sales and redemptions resulting from transfers of shares into or out
of money market mutual funds within the same fund family.

1.48 CORPORATE PROFITS AND