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Volume 90 □ Number 2 □ Spring 2004

Federal Reserve

BULLETIN

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



P u b l ic a tio n s C o m m it t e e
Lynn S. Fox, Chair □ Sandra Braunstein □ Marianne M. Emerson □ Jennifer J. Johnson
□ Karen H. Johnson □ Stephen R. Malphrus □ J. Virgil Mattingly, Jr. □ Vincent R. Reinhart
□ Louise L. Roseman □ Richard Spillenkothen □ David J. Stockton

The Federal Reserve Bulletin is issued quarterly 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 Publications Department under the direction of Lucretia M. Boyer.




Table of Contents
125 MONETARY PO LIC Y REPORT TO THE
C o n g r e ss
The economic expansion in the United States
gathered strength during 2003 while price
inflation remained quite low. At the beginning
of the year, uncertainties about the economic
outlook and about the prospects of war in Iraq
apparently weighed on spending decisions and
extended the period of subpar economic per­
formance that had begun more than two years
earlier. Over the second half of the year, in the
absence of new shocks to economic activity and
with gathering confidence in the durability of
the economic expansion, the stimulus from
monetary and fiscal policies showed through
more readily in an improvement in domestic
demand. Spurred by the global recovery in the
high-tech sector and by a pickup in economic
activity abroad, U.S. exports also posted solid
increases in the second half of the year.
Still, slack in resource utilization remained
substantial, unit labor costs continued to decline
as productivity surged, and core inflation moved
lower. The performance of the economy last
year further bolstered the case that the faster
rate of increase in productivity, which began to
emerge in the late 1990s, would persist. The
combination of that favorable productivity trend
and stimulative macroeconomic policies is likely
to sustain robust economic expansion and low
inflation in 2004.
153 S u m m a r y o f P a p e r s P r e s e n t e d
a t t h e Se c o n d C o n f e r e n c e
OF THE INTERNATIONAL RESEARCH
FORUM ON MONETARY PO LICY

The International Research Forum on Monetary
Policy held its second conference on Novem­
ber 14 and 15, 2003. The organization is spon­
sored by the European Central Bank, the Board
of Governors of the Federal Reserve System, the
Center for German and European Studies, and
the Center for Financial Studies. It was formed
to encourage research on monetary policy issues
that are relevant from a global perspective, and
it organizes conferences that are held alternately
in the euro area and the United States.



The 2003 conference, held in Washing­
ton, D.C., featured ten papers. Among the
topics examined were the Great Inflation of
the 1970s in the United States and the influence
of learning, or adjustment of expectations, on
policy outcomes; the tradeoffs between rulesbased and discretionary monetary policy; the
1999 formation of the European Economic and
Monetary Union and whether it altered the
degree of economic integration between the
United States and the euro area; the potential
benefits of greater competition in the euro area;
and optimal monetary policy in an international
setting.

162 PROFITS AND BALANCE SHEET
D e v e l o p m e n t s a t U.S. C o m m e r c ia l
BANKS IN 2003
Amid a strengthening economic expansion, U.S.
commercial banks remained highly profitable in
2003. Return on assets reached a record level for
the second year in a row, and return on equity
was near the top of its recent range. Banks’
profits were bolstered by decreased loan-loss
provisions as a rising economy and considerable
debt refinancing at very low interest rates led to
lower delinquency rates on business and house­
hold loans. Fees associated with record mort­
gage refinancing activity and robust corporate
bond issuance boosted non-interest income.
Increases in non-interest expense were generally
modest, although compensation-related costs
rose more briskly. Lower long-term interest rates
in the first part of the year allowed banks to
realize gains on the sale of some of their securi­
ties, but they also contributed to a further shrink­
ing of net interest margins. Banks’ balance
sheets expanded briskly, as the strong housing
market and heavy refinancing activity boosted
residential mortgages and mortgage-backed
securities. Business loans ran off for a third year,
albeit at a slower pace than in 2002 and 2003.
Banks’ regulatory capital positions strengthened
further, as the growth of assets with low regula­
tory risk weights outpaced that of assets with
higher risk weights.

Appointment of Dr. Janet L. Yellen as President,
Federal Reserve Bank of San Francisco

192 REPORT ON THE CONDITION
OF THE U.S. BANKING INDUSTRY:
FOURTH QUARTER, 2003

Agencies launch web site on Call Report mod­
ernization initiative

Assets of reporting bank holding companies
expanded $130 billion, or 1.6 percent, in the
fourth quarter of 2003. Asset quality showed
further improvement. Net income rose to
$28.3 billion for the fourth quarter and to more
than $100 billion for the year. Net interest
margins recovered slightly for the quarter, hav­
ing sustained steady contraction since late 2001.
All of the aggregate quarterly earnings gains
occurred at the “fifty large” bank holding com­
panies, while aggregate earnings at “all other”
bank holding companies declined slightly in the
fourth quarter as they had in the third quarter.

Interagency guidance issued on unfair or decep­
tive acts or practices by state-chartered banks
Improvements to the Federal Reserve Board’s
web site
Federal agencies publish Spanish-language ver­
sion of consumer brochure on predatory lending
Release of minutes to discount rate meetings
Meeting of the Consumer Advisory Council
Enforcement actions
Changes in Board staff

197 ANNOUNCEMENTS

Revision to the money stock data

Federal Open Market Committee statements
Board agrees to seek comment on revisions to
Regulation BB
Agencies publish proposed rulemaking regard­
ing the Community Reinvestment Act and
Regulation BB
Approval of final rules to establish effective
dates for the FACT Act
Amendments to Regulation CC
Comments requested on proposed changes to
public disclosure tables
Revisions to Regulation Z
Proposed amendments to Regulation V
Establishment of a working group to implement
a dormant bank
Changes to policy statement on payments sys­
tem risk
Removal of all fifty-one stocks from List of
Margin Stocks
Public meeting held on proposed merger
between J.P Morgan Chase & Co. and Bank
One Corporation




212

Le g a l D e v e lo p m e n ts
Various bank holding company, bank service
corporation, and bank merger orders

249 M e m b e r s h ip o f t h e B o ar d o f
Go ve r n o r s o f th e Fe d e r a l Re se r v e
S y st e m , 1913-2003
252 board of
S taff

Governors

and

O f f ic ia l

254 F e d e r a l O p e n M a r k e t C o m m it t e e
S t a f f ; A d v is o r y C o u n c il s
256 F e d e r a l R e s e r v e

board

and

P u b l ic a t io n s

258 A n t ic ip a t e d S c h e d u l e o f R e l e a s e
DATES FOR PERIODIC RELEASES
260 M a p s

o f th e

Fe d e r al Re se r v e S ystem

262 FEDERAL RESERVE BANKS, BRANCHES,
a n d O f f ic e s

Monetary Policy Report to the Congress
Report submitted to the Congress on February 11,
2004, pursuant to section 2B o f the Federal Reserve
Act

M o n e t a r y P o l ic y a n d
E c o n o m ic O u t l o o k

th e

The economic expansion in the United States gath­
ered strength during 2003 while price inflation
remained quite low. At the beginning of the year,
uncertainties about the economic outlook and about
the prospects of war in Iraq apparently weighed on
spending decisions and extended the period of subpar
economic performance that had begun more than two
years earlier. However, with the support of stimula­
tive monetary and fiscal policies, the nation’s econ­
omy weathered that period of heightened uncertainty
to post a marked acceleration in economic activity
over the second half of 2003. Still, slack in resource
utilization remained substantial, unit labor costs con­
tinued to decline as productivity surged, and core
inflation moved lower. The performance of the econ­
omy last year further bolstered the case that the faster
rate of increase in productivity, which began to
emerge in the late 1990s, would persist. The combi­
nation of that favorable productivity trend and stimu­
lative macroeconomic policies is likely to sustain
robust economic expansion and low inflation in 2004.
At the time of our last Monetary Policy Report to
the Congress, in July, near-term prospects for U.S.
economic activity remained unclear. Although the
Federal Open Market Committee (FOMC) believed
that policy stimulus and rapid gains in productivity
would eventually lead to a pickup in the pace of the
expansion, the timing and extent of the improvement
were uncertain. During the spring, the rally that
occurred in equity markets when the war-related
uncertainties lifted suggested that market participants
viewed the economic outlook as generally positive.
By then, the restraints imparted by the earlier sharp
decline in equity prices, the retrenchment in capital
spending, and lapses in corporate governance were
receding. As the price of crude oil dropped back and
consumer confidence rebounded last spring, house­
hold spending seemed to be rising once again at a
moderate rate. Businesses, however, remained cau­



tious; although the deterioration in the labor market
showed signs of abating, private payroll employment
was still declining, and capital spending continued
to be weak. In addition, economic activity abroad
gave few signs of bouncing back, even though long­
term interest rates in major foreign economies had
declined sharply. At its June meeting, the FOMC
provided additional policy accommodation, given
that, as yet, it had seen no clear evidence of an
acceleration of U.S. economic activity and faced the
possibility that inflation might fall further from an
already low level.
During the next several months, evidence was
accumulating that the economy was strengthening.
The improvement was initially most apparent in
financial markets, where prospects for stronger eco­
nomic activity and corporate earnings gave a further
lift to equity prices. Interest rates rose as well, but
financial conditions appeared to remain, on net,
stimulative to spending, and additional impetus from
the midyear changes in federal taxes was in train.
Over the remainder of the year, in the absence of new
shocks to economic activity and with gathering confi­
dence in the durability of the economic expansion,
the stimulus from monetary and fiscal policies
showed through more readily in an improvement in
domestic demand. Consumer spending and residen­
tial construction, which had provided solid support
for the expansion over the preceding two years, rose
more rapidly, and business investment revived.
Spurred by the global recovery in the high-tech sector
and by a pickup in economic activity abroad, U.S.
exports also posted solid increases in the second half
of the year. Businesses began to add to their payrolls,
but only at a modest pace that implied additional
sizable gains in productivity.
The fundamental factors underlying the strengthen­
ing of economic activity during the second half
of 2003 should continue to promote brisk expansion
in 2004. Monetary policy remains accommodative.
Financial conditions for businesses are quite favor­
able: Profits have been rising rapidly, and corporate
borrowing costs are at low levels. In the household
sector, last year’s rise in the value of equities and real
estate exceeded the further accumulation of debt
by enough to raise the ratio of household net worth
to disposable income after three consecutive years of

126

Federal Reserve Bulletin □ Spring 2004

decline. In addition, federal spending and tax policies
are slated to remain stimulative during the current
fiscal year, while the restraint from the state and local
sector should diminish. Lastly, the lower foreign
exchange value of the dollar and a sustained eco­
nomic expansion among our trading partners are
likely to boost the demand for U.S. production. Con­
siderable uncertainty, of course, still attends the eco­
nomic outlook despite these generally favorable fun­
damentals. In particular, questions remain as to how
willing businesses will be to spend and hire and how
durable will be the pickup in economic growth among
our trading partners. At its meeting on January 2728, 2004, the Committee perceived that upside and
downside risks to the attainment of sustainable
growth for the next few quarters are roughly equal.
Prospects for sustained high rates of increase in
productivity are quite favorable. Businesses are likely
to retain their focus on controlling costs and boosting
efficiency by making organizational improvements
and exploiting investments in new equipment. With
the ongoing gains in productivity, the existing mar­
gins of slack in resource utilization should recede
gradually, and any upward pressure on prices should
remain well contained. The FOMC indicated at its
January meeting that, with inflation low and resource
use still slack, it can be patient in removing its policy
accommodation.

M onetary Policy, Financial Markets, and
the Economy over 2003 and Early 2004
During the opening months of 2003, the softness in
economic conditions was exacerbated by the substan­
tial uncertainty surrounding the onset of war in Iraq.
Private nonfarm businesses began again to cut pay­
rolls substantially, consumer spending slowed, and
business investment was muted. Although the jump
in energy prices pushed up overall inflation, slack in
resource utilization and the rapid rise in labor produc­
tivity pushed core inflation down. In financial mar­
kets, the heightened sense of caution among investors
generated safe-haven demands for Treasury and other
fixed-income securities, and equity prices declined.
At its meeting on March 18, the FOMC maintained
its VA percent target for the federal funds rate to
provide support for a stronger economic expansion
that appeared likely to materialize. The Committee
noted that the prevailing high degree of geopolitical
uncertainty complicated any assessment of prospects
for the economy, and members refrained from mak­
ing a determination about the balance of risks with
regard to its goals of maximum employment and



stable prices. At the same time, the Committee agreed
to step up its surveillance of the economy, which took
the form of a series of conference calls in late March
and early April to consult about developments. When
military action in Iraq became a certainty, financial
markets began to rally, with risk spreads on corporate
debt securities narrowing and broad equity indexes
registering notable gains. Economic news, however,
remained mixed.
Indicators of the economy at the time of the
May 6 FOMC meeting continued to suggest only
tepid growth. Uncertainty in financial markets had
declined, and rising consumer confidence and a wave
of mortgage refinancing appeared to be supporting
consumer spending. However, persistent excess
capacity evident in labor and product markets pointed
to possible further disinflation. The lifting of some
of the uncertainty clouding the economic outlook
allowed the Committee to make the determination
that the risks to economic growth were balanced but
that the probability of an unwelcome substantial fall
in inflation exceeded that of a pickup in inflation. The
FOMC judged that, taken together, the balance of
risks was weighted toward weakness. The Committee
left the federal funds rate target at VA percent, but
the Committee’s announcement prompted a rally in
the Treasury market, and coupon yields fell substan­
tially as market participants marked down their
expectations for the path of the federal funds rate.
By the time of the June 24-25 FOMC meeting, risk
spreads had narrowed further and equity prices had
extended their rise, but the prospects for sustained
economic expansion still seemed tentative. Although
Committee members referred to signs of improve­
ment in some sectors of the economy, they saw no
concrete evidence of an appreciable overall strength­
ening in the economic expansion and viewed the
excess capacity in the economy as likely to keep
inflation in check. The Committee lowered the target
for the federal funds rate lA percentage point, to
1 percent, to add further support to the economic
expansion and as a form of insurance against a fur­
ther substantial drop in inflation, however unlikely.
The members saw no serious obstacles to further
conventional policy ease down to the zero lower
bound on nominal interest rates should that prove to
be necessary. The Committee also discussed alterna­
tive means of providing monetary stimulus should
the target federal funds rate be reduced to a point at
which they would have little or no latitude for addi­
tional easing through this traditional channel.
Longer-term interest rates backed up following the
meeting, as investors had apparently placed substan­
tial odds on a policy move larger than 25 basis points

Monetary Policy Report to the Congress

127

Selected interest rates
Percent

Ten-year Treasury

Two-year Treasury

Intended federal funds rate

N ote. The data are daily and extend through February 4, 2004. The dates on the horizontal axis are those of scheduled FOMC meetings.

and may have been disappointed that the announce­
ment failed to mention any potential “unconven­
tional” monetary policy options. Ten-year Treasury
yields rose sharply during the following weeks in
reaction to interpretations of the Chairman’s congres­
sional testimony, the release of Committee members’
economic projections, and positive incoming news
about the economy and corporate profits. A substan­
tial unwinding of hedging positions related to mort­
gage investments may well have amplified the
upswing in market yields. Over the intermeeting
period, labor markets continued to be soft, but indus­
trial production, personal consumption expenditures,
and business outlays all strengthened, and the hous­
ing market remained robust. By the time of the
August 12 FOMC meeting, members generally per­
ceived a firming in the economy, most encouragingly
in business investment spending, and believed that,
even after the rise in longer-term rates, financial
conditions were still supportive of vigorous eco­
nomic growth. Given the continued slack in resource
use across the economy, however, members saw little
risk of inducing higher inflation by leaving the fed­
eral funds rate at its accommodative level. On the
basis of the economic outlook, and to reassure market
participants that policy would not reverse course
soon, Committee members decided to include in the
announcement a reference to their judgment that
under the anticipated circumstances, policy accom­
modation could be maintained for a “considerable
period.”
Through the September 16 and October 28 FOMC
meetings, the brightening prospects for future growth
put upward pressure on equity prices and longerterm interest rates. The Committee’s retention of the
phrase “considerable period” in the announcements



following each of these meetings apparently provided
an anchor for near-term interest rates. The Commit­
tee’s discussion at these two meetings focused on the
increased evidence of a broadly based acceleration in
economic activity and on the continued weakness in
labor markets. Rising industrial production, increased
personal consumption and business investment
spending, higher profits, receptive financial markets,
and a lower foreign exchange value of the dollar all
suggested that sustained and robust economic growth
was in train. The Committee’s decision to leave the
stance of monetary policy unchanged over this period
reflected, in part, a continuing confidence that gains
in productivity would support economic growth and
suppress inflationary pressures. In fact, the Commit­
tee generally viewed its goal of price stability as
essentially having been achieved.
By the time of the December 9 FOMC meeting, the
economic expansion appeared likely to continue at
a rate sufficient to begin to reduce slack in labor
and product markets. Equity markets continued to
rally, and risk spreads, particularly on the debt of
speculative-grade firms, narrowed further. The labor
market was finally showing some signs of improve­
ment, and spending by households remained strong
even as the impetus from earlier mortgage refinanc­
ings and tax cuts began to wane. The acceleration in
capital spending and evidence that some firms were
beginning to accumulate inventories seemed to signal
that business confidence was on the mend. However,
twelve-month core consumer price inflation was
noticeably lower than in the previous year. Even
though the unemployment rate was expected to move
down gradually, continued slack in labor and product
markets over the near term was viewed as sufficient
to keep any nascent inflation subdued. Uncertainty

128

Federal Reserve Bulletin □ Spring 2004

about the pace at which slack would be worked
down, however, made longer-run prospects for infla­
tionary pressures difficult to gauge. Given the better
outlook for sustained economic growth, the possi­
bility of pernicious deflation associated with a pro­
nounced softening in real activity was seen as even
more remote than it had been earlier in the year. The
Committee indicated that keeping policy accommo­
dative for a considerable period was contingent on its
expectation that inflation would remain low and that
resource use would remain slack.
At its meeting on January 27-28, 2004, the Com­
mittee viewed a self-sustaining economic expansion
as even more likely. Members drew particular reas­
surance from reports of plans for stronger capital
spending and the widespread distribution of increased
activity across regions. Accommodative financial
market conditions, including higher equity prices,
narrower risk spreads on bonds, and eased standards
on business loans, also seemed supportive of eco­
nomic expansion. However, some risks remained in
light of continued lackluster hiring evidenced by the
surprisingly weak December payroll employment
report. With the likelihood for rapid productivity
growth seemingly more assured, Committee mem­
bers generally agreed that inflation pressures showed
no sign of increasing and that a bit more disinflation
was possible. Under these circumstances, the Com­
mittee concluded that current conditions allowed
monetary policy to remain patient. As to the degree
of policy accommodation, the Committee left its tar­
get for the federal funds rate unchanged. The Com­
mittee’s characterization that policy could be patient
instead of its use of the phrase “considerable period”
in its announcement prompted a rise in Treasury
yields across the yield curve and a fall in equity
prices.

Econom ic Projections fo r 2004
Federal Reserve policymakers expect that the eco­
nomic expansion will continue at a brisk pace in
2004. The central tendency of the forecasts of the
change in real gross domestic product made by the
members of the Board of Governors and the Federal
Reserve Bank presidents is 4V2 percent to 5 percent,
measured from the final quarter of 2003 to the final
quarter of 2004. The full range of these forecasts is
somewhat wider—from 4 percent to 5 V2 percent. The
FOMC participants anticipate that the projected
increase in real economic activity will be associated
with a further gradual decline in the unemployment
rate. They expect that the unemployment rate, which



Economic projections for 2004
Percent

Indicator

Memo:
2003 actual

Federal Reserve Governors
and
Reserve Bank presidents
Range

Central
tendency

5.9
4.3
1.4

5'/2-6'/2
4 -5'/2
1-1 */2

5>/2-6'/4
4'/2-5
1-1'/4

5.9

5>/4-5'/2

5'/4-5'/2

Change, fourth quarter
to fourth quarter1

Nominal G D P ......................
Real G D P .............................
PCE chain-type price index .
Average level, fourth quarter

Civilian unemployment rate .

1. Change from average for fourth quarter of previous year to average for
fourth quarter of year indicated.

has averaged 53 percent in recent months, will be
A
between 5 'A percent and 5 'A percent in the fourth
quarter of the year. With rapid increases in productiv­
ity likely to be sustained and inflation expectations
stable, Federal Reserve policymakers anticipate that
inflation will remain quite low this year. The central
tendency of their forecasts for the change in the
chain-type price index for personal consumption
expenditures (PCE) is 1 percent to VA percent; this
measure of inflation was 1.4 percent over the four
quarters of 2003.
ECONOM IC AND FINANCIAL DEVELOPMENTS
IN 2003 AND EARLY 2004

The pace of economic expansion strengthened con­
siderably in the second half of 2003 after almost two
years of uneven and, on balance, sluggish growth.
In early 2003, accommodative monetary policy and
stimulative fiscal policies were in place, but eco­
nomic activity still seemed to be weighed down by a
number of factors that had restrained the recovery
earlier: Geopolitical tensions were again heightened,
this time by the impending war in Iraq, businesses
remained unusually cautious about the strength of
the expansion, and economic activity abroad was
still weak. In June the continued lackluster economic
growth and a further downshift in inflation from an
already low level prompted a further reduction in
the federal funds rate. In addition, the tax cuts that
became effective at midyear provided a significant
boost to disposable income. In the succeeding
months, the macroeconomic stimulus began to show
through clearly in sales and production, and some of
the business caution seemed to recede. Real GDP
increased at an annual rate of 6 percent, on average,
in the third and fourth quarters of last year. In con­
trast, between late 2001 and mid-2003, real GDP had
risen at an annual rate of only 2 1 percent.
/2

Monetary Policy Report to the Congress

Change in real GDP

Note. Here and in subsequent charts, except as noted, change for a given
period is measured to its final quarter from the final quarter of the preceding
period.

During the period of recession and subpar eco­
nomic expansion, considerable slack developed in
labor and product markets. The firming of economic
activity in the second half of last year produced
modest increases in rates of resource utilization. Sus­
tained efforts by businesses to control costs led to
further rapid gains in productivity. As a result, unit
labor costs declined, and core rates of inflation con­
tinued to slow in 2003; excluding food and energy,
the PCE chain-type price index increased just 0.9 per­
cent last year. Measures of overall inflation, which
were boosted by movements in food and energy
prices, were higher than those for core inflation.
Domestic financial market conditions appeared to
become increasingly supportive of economic growth
last year. The economic expansion lowered investors’
perception of, and perhaps aversion to, risk, and
continued disinflation was interpreted as a sign that

129

monetary policy would remain on hold, even as the
economy picked up steam. Although yields on Trea­
sury coupon securities rose modestly on balance over
the year, risk spreads on corporate debt narrowed to
the point that yields on corporate issues declined. The
low-interest-rate environment spurred considerable
corporate bond issuance and generated a massive
wave of mortgage refinancing activity by households.
Equity markets began to rally when the uncertainty
over the timing of military intervention in Iraq was
resolved. The climb in stock prices continued for the
rest of the year, driven by improving corporate earn­
ings reports and growing optimism about the pros­
pects for the economy. At the same time, with eco­
nomic conditions abroad improving and with
concerns about the financing burden of the U.S. cur­
rent account deficit gaining increased attention in
financial markets, the dollar fell appreciably on a
trade-weighted basis.
The H ousehold Sector
Consumer Spending
Early in 2003, consumer spending was still rising at
about the same moderate pace as in 2001 and 2002.
In the late spring and in the summer, however, house­
holds stepped up their spending sharply. As a result,
in the second half of last year, real personal consump­
tion expenditures rose at an annual rate of 43 percent
A
after having increased at a rate of just under 3 percent
in the first half. Although wage and salary earnings
rose slowly during most of the year, the midyear
reductions in tax rates and the advance of rebates to
households eligible for child tax credits provided a
substantial boost to after-tax income. In 2003, real
disposable personal income increased 3lA percent,

Change in PCE chain-type price index
Change in real income and consumption
Percent, annual rate

□ Total
■ Excluding food and energy

n
■
—

II

1997

1999

2001

2003

N o t e . The data are for personal consumption expenditures (PCE).




Disposable personal income
Personal consumption expenditures

3

1997

1999

2001

2003

130

Federal Reserve Bulletin □ Spring 2004

Personal saving rate

declines appears to have been tempered in part by
their willingness to take advantage of the attractive
pricing and financing environment for consumer
goods.
Real consumer expenditures for durable goods
surged more than 11 percent in 2003. Sales of new
motor vehicles remained brisk as many consumers
responded to the low financing rates and various
incentive deals that manufacturers offered throughout
the year. Falling prices also made electronic equip­
ment attractive to consumers, and spending on home
furnishings likely received a boost from the strength
of home sales. Altogether, real outlays for furniture
and household equipment jumped 13 V2 percent in
2003.
In contrast, real consumer expenditures on non­
durable goods and on services continued to rise at a
moderate pace, on balance, last year. Outlays for food
and apparel increased a bit faster than in 2002, and
the steady uptrend in spending for medical services
was well maintained. However, consumers responded
to the higher cost of energy by cutting back their real
spending on gasoline, fuel oil, and natural gas and
electricity services.
Consumer confidence was shaken temporarily
early in 2003 by concerns about the consequences
of a war in Iraq, but it snapped back in the spring.
Toward year-end, sentiment appeared to brighten
more as households saw their current financial condi­
tions improve and gained confidence that business
conditions would be better during the year ahead.
Those positive views became more widely held in
January, and the index of consumer sentiment pre­
pared by the Michigan Survey Research Center
(SRC) reached its highest level in three years.

Percent

N o te .

The data are quarterly and extend through 2003 :Q4.

after having risen 3Vi percent in 2002. Low interest
rates provided additional impetus to household
spending by reducing borrowing costs for new pur­
chases of houses and durable goods; they also
indirectly stimulated spending by facilitating an enor­
mous amount of mortgage refinancing.
The personal saving rate has fluctuated within a
fairly narrow range around 2 percent over the past
three years. Although households continued to see
the value of their homes appreciate over this period,
they also were adjusting to the substantial drop in
equity wealth that occurred after the peak in the stock
market in 2000. By itself, a fall in the ratio of
household wealth to income of the magnitude that
households experienced between 2000 and 2002
might have triggered a noticeable increase in the
personal saving rate. However, in this case, the ten­
dency for households to save more as their wealth

Consumer sentiment

Wealth-to-income ratio

1985 = 100

Ratio

1 966=100

4

1 ................ I
1983

1987

I

I
1991

1
1995

I

I
1999

I

I

N o t e . The data are quarterly and extend through 2003:Q3. The wealthto-income ratio is the ratio of household net worth to disposable personal
income.




1

I

1

I

I I

1

I.

I

M

.

1.

2003
N o t e . The data are monthly and extend through January 2004.
S o u r c e . University of Michigan Survey Research Center and

ference Board.

The Con­

Monetary Policy Report to the Congress

Residential Investment
Housing activity was robust for a second consecutive
year in 2003. After having risen 7 percent in 2002,
real expenditures on residential construction jumped
more than 10 percent in 2003. These gains were
fueled importantly by the lowest levels of mortgage
interest rates in more than forty years, which, accord­
ing to the Michigan SRC’s survey of consumer senti­
ment, buoyed consumer attitudes toward homebuying
throughout the year. The average rate on thirty-year
fixed-rate mortgages dropped sharply during the first
half of 2003 and reached a low of 5 lA percent
in June. Although the thirty-year rate subsequently
firmed somewhat, it remained below 6 percent, on
average, in the second half of last year.
Construction of new single-family homes acceler­
ated during 2003, and for the year as a whole, starts
averaged 1.5 million units, an increase of 10 percent
compared with the level in 2002. Sales of both new
and existing single-family homes also picked up
sharply further last year. The brisk demand for homes
was accompanied by rapid increases in the average
price paid for them. The average price paid for new
homes rose 10 percent over the four quarters of 2003,
and the average price of existing homes was up
73 percent over the same period. However, house
/4
price inflation was lower after adjusting for shifts
in the composition of transactions toward more
expensive homes. The constant-quality price index
for new homes, which eliminates the influence of
changes in their amenities and their geographic distri­
bution, increased 43 percent over the four quarters
/4
of 2003—down from an increase of 6 percent during
2002. The year-over-year increase in Freddie Mac’s
index of the prices paid in repeat sales of existing
homes stood at 5 V2 percent as of the third quarter of

131

2003, compared with a rise of IV a percent as of the
third quarter of 2002.
Starts in the multifamily sector totaled 350,000
units in 2003, a pace little changed from that of the
past several years. Vacancy rates for these units rose
and rents fell during the year, but falling mortgage
rates apparently helped to maintain building activity.

Household Finance
Household debt increased 103 percent last year, in
/4
large part because of the surge in mortgage borrow­
ing induced by record-low mortgage interest rates.
Refinancing activity was torrid in the first half of the
year, as mortgage rates declined. Some of the equity
that households extracted from their homes during
refinancings was apparently used to fund home
improvements and to pay down higher-interest con­
sumer debt. When mortgage rates rebounded in the
second half of the year, mortgage borrowing slowed
from the extremely rapid clip of the first half, but
it remained brisk through year-end. Consumer
credit increased at a pace of 5'/* percent in 2003, a
little faster than a year earlier, as revolving credit
picked up somewhat from the slow rise recorded in
2002. Despite the pickup in household borrowing,
low interest rates kept the household debt-service
and financial-obligation ratios—which gauge pre­
committed expenditures relative to disposable
income—at roughly the levels posted in 2002. Most
measures of delinquencies on consumer loans and
home mortgages changed little on net last year, and
household bankruptcies held roughly steady near
their elevated level in 2002.
Mortgage rates

Private housing starts

Pr e t
ec n
Millions of units, annual rate

—

7

—

5

—

/ —

9

—

Fixed ra
te
----

3

1.6

Single-family
—

—

—

j

—

Multifamily

__

____ —

A
djustable rate^~—.

1.2

.8

4
1

i ............ ..............I .. .....................
2000

l

i
i
1991

1
1
1993

1
1
1995

1
1
1997

1
1
1999

1
1
2001

N o t e . The data are quarterly and extend through 2003:Q4.




1
I
2003

1

2001

1........................ 1 ,,
2002

i , , i ,, 11 . 1,, i,
2003

1

2004

Note. The data, which are monthly and extend through January 2004, are
contract rates on thirty-year mortgages.
Source. Federal Home Loan Mortgage Corporation.

132

Federal Reserve Bulletin □ Spring 2004

Delinquency rates on selected types of household loans

Change in real business fixed investment
Percent, annual rate

□ Structures
■ Equipment and software

20

10

rl J

I n

J

. ij
10
20

1991

1993

1995

1997

1999

2001

2003

Note. The d areq arterly The ra s for c d cardpools an m
ata
u
.
te
re it
d ortgages
ex dth u 2003:Q3; th ra for au lo s exten s th u 2003:Q4.
ten ro gh
e te
to an
d ro gh

D High-tech equipment and software
■ Other equipment excluding transportation

40

S o u r c e . For mortgages, the Mortgage Bankers Association; for auto loans,

the Big Three automakers; for credit cards, Moody’s Investors Service.

Even with the rapid expansion in debt, net worth of
the household sector increased as the value of house­
hold assets rose noticeably. Stock prices were boosted
by the rise in corporate earnings and the ebbing of
uncertainty about future economic growth. House­
holds directed substantial flows into stock mutual
funds in the third and fourth quarters despite highly
publicized scandals in the mutual fund industry.
Although the companies directly implicated in
wrongdoing experienced heavy outflows from their
funds, most of these withdrawals apparently were
transferred to other mutual funds with little effect on
the industry as a whole. A considerable rise in real
estate wealth further augmented household assets.
Although prices of existing homes climbed more
slowly than they had in the previous year, the rate of
increase remained sizable. Overall, the advance in the
value of household assets outstripped the accumula­
tion of household debt by enough to boost the ratio of
net worth to disposable income over the year.
The Business Sector
Fixed Investment
Business spending on equipment and software was
still sluggish at the beginning of 2003. However, it
accelerated noticeably over the course of the year as
profits and cash flow rebounded and as businesses
gained confidence in the strength of the economic
expansion and in the prospective payoffs from new
investment. At the same time, business financing
conditions were very favorable: Interest rates
remained low, equity values rallied, and the enhanced



1997

1998

1999

2000

2001

2002

2003___________

N o t e . High-tech equipment consists of computers and peripheral equip­

ment, software, and communications equipment.

partial-expensing tax provision gave a special incen­
tive for the purchase of new equipment and soft­
ware. After having changed little in the first quarter
of the year, real outlays for equipment and software
increased at an annual rate of 11% percent over the
remaining three quarters of the year.
Outlays for high-technology items—computers
and peripherals, software, and communications
equipment—which had risen a moderate 4 V2 percent
in 2002, posted a significantly more robust increase
of more than 20 percent in 2003. That gain contrib­
uted importantly to the pickup in overall business
outlays for equipment and software and pushed the
level of real high-tech outlays above the previous
peak at the end of 2000. The increase in spending last
year on computing equipment marked the sharpest
gain since 1998, and investment in communications
equipment, which had continued to contract in 2002
after having plummeted a year earlier, turned up
markedly.
In contrast, the recovery in spending on non-hightech equipment was, on balance, more muted, in part
because outlays for transportation equipment con­
tinued to fall. The prolonged slump in business pur­

Monetary Policy Report to the Congress

chases of new aircraft continued in 2003 as domestic
air carriers grappled with overcapacity and high fixed
costs. By the fourth quarter, real outlays for aircraft
had dropped to their lowest level in ten years. In the
market for heavy (class 8) trucks, sales were quite
slow in early 2003 when businesses were concerned
about the performance of models with engines that
met new emission standards. But as potential buyers
overcame those concerns, sales recovered. By the
fourth quarter of 2003, sales of medium and heavy
trucks had moved noticeably above the slow pace of
2001 and 2002. Apart from outlays for transportation
equipment, investment in other types of non-hightech equipment was, on balance, little changed during
the first half of the year. Demand was strong for
medical equipment, instruments, and mining and oil­
field machinery, but sales of industrial equipment and
farm and construction machinery were sluggish. In
the second half of the year, however, the firming in
business spending for non-high-tech items became
more broadly based.
The steep downturn in nonresidential construction
that began in 2001 moderated noticeably in 2003,
although market conditions generally remained weak.
After having contracted at an average annual rate of
13 V2 percent during 2001 and 2002, real expenditures
for nonresidential construction slipped just VA per­
cent, on balance, during 2003. Spending on office
buildings and manufacturing structures, which had
dropped sharply over the preceding two years, fell
again in 2003. The high office vacancy rates in many
areas and low rates of factory utilization implied little
need for new construction in these sectors even as
economic activity firmed. Investment in communica­
tions infrastructure, where a glut of long-haul fiber­
optic cable had developed earlier, also continued to
shrink. In contrast, outlays for retail facilities, such as
department stores and shopping malls, turned up last
year, and the retrenchment in construction of new
hotels and motels ended. In addition, investment
in drilling and mining structures, which is strongly
influenced by the price levels for crude oil and natu­
ral gas, increased noticeably in 2003.

Inventory Investment
During 2002, businesses appeared to have addressed
most of the inventory imbalances that had developed
a year earlier. But the moderate pace of final demand
during the first half of 2003 apparently restrained
firms from embarking on a new round of inventory
accumulation. Even though final sales picked up in
the second half of the year, the restraint seemed to



133

Change in real business inventories
Billions of chained (2000) dollars, annual rate

---- 50
—

1997

1999

2001

75

2003

recede only gradually. Over the first three quarters of
2003, nonfarm businesses trimmed their inventories
at an average annual rate of $2% billion in constantdollar terms, and the preliminary estimate for the
final quarter of the year indicated only modest
restocking. As a result, most firms appear to have
ended the year with their inventories quite lean rela­
tive to sales, even after taking into account the down­
ward trend in inventory-sales ratios that has accom­
panied the ongoing shift to improved inventory
management. Motor vehicle dealers were an excep­
tion; their days’ supply of new vehicles moved higher
on average for a second year in a row.

Corporate Profits and Business Finance
Higher profits allowed many firms to finance capital
spending with internal funds, and business debt rose
only slightly faster than the depressed rate in 2002.
Moreover, a paucity of cash-financed merger and
acquisition activity further limited the need to issue
debt. Gross equity issuance was extremely weak in
the first half of the year but perked up in the latter
half in response to the rally in equity prices. Never­
theless, for the year as a whole, firms extinguished
more equity than they issued.
The pace of gross corporate bond issuance was
moderate at the start of the year but shot up in late
spring as firms took advantage of low bond yields to
pay down short-term debt, to refund existing long­
term debt, and to raise cash in anticipation of future
spending. Bond issuance by investment-grade firms
slowed after midyear as firms accumulated a sub­
stantial cushion of liquid assets and as interest rates
on higher-quality debt backed up. However, issuance
by speculative-grade firms continued apace, with the

134

Federal Reserve Bulletin □ Spring 2004

Financing gap and net equity retirement
at nonfinancal corporations

Before-tax profits of nonfinancial corporations
as a percent of sector GDP

Billions of dollars

Percent

300
Net equity retirement

150

1991
N o t e . The data are quarterly and extend through 2003:Q3. Profits are from
domestic operations of nonfinancial corporations, with inventory valuation
and capital consumption adjustments.

yields on their debt continuing to decline dramati­
cally presumably because of investors’ increased
optimism about the economic outlook and greater
willingness to take on risk. The sum of bank loans
and commercial paper outstanding, which represent
the major components of short-term business debt,
contracted throughout the year. In large part, this
decline reflected ongoing substitution toward bond
financing, but it also was driven by the softness of
fixed investment early in the year and the liquidation
of inventories over much of the year.
Respondents to the Senior Loan Officer Opinion
Survey on Bank Lending Practices noted that terms
and standards on business loans were tightened dur­
ing the first half of the year but that both had been

1993

1995

1997

1999

2001

2003

N ote. The data are annual; 2003 is based on partially estimated data. The
financing gap is the difference between capital expenditures and internally
generated funds. Net equity retirement is the difference between equity
retired through share repurchases, domestic cash-financed mergers, or foreign
takeovers of U.S. firms and equity issued in public or private markets,
including funds invested by venture capital partnerships.

eased considerably by year-end. They also reported
that demand for business loans was quite weak for
much of the year. However, despite the fact that
outstanding levels of business loans continued to
decline, survey responses in the last quarter of the
year indicated that demand for loans had begun to
stabilize. Many banks cited customers’ increased
investment and inventory spending as factors helping
to generate the increase in loan demand toward the
end of the year. The apparent divergence between
survey responses and data on actual loan volumes
may suggest that demand for lines of credit has
increased but that these lines have not yet been

Corporate bond yields
Major components of net business financing
Percent
Billions of dollars

□ Commercial paper
□ Bonds
■ Bank loans

N o t e . The data are monthly averages and extend through January 2004.
The AA rate is calculated from bonds in the Merrill Lynch AA index with a
remaining maturity of seven to ten years. The high-yield rate is the yield on
the Merrill Lynch 175 high-yield index.




Sum of major
components

N o t e . Seasonally adjusted annual rate for nonfinancial corporate business.
The data for the sum of major components are quarterly. The data for
2003:Q4 are estimated.

Monetary Policy Report to the Congress

135

Ratings changes of nonfinancial corporate bonds

Spread of low-tier CP rates over high-tier CP rates

Percent

Basis points

Upgrades
----

150

1I I I I I I I I I I l l l I l l l I l I I I I 1 l I l I l I l I i
1997
1998
1999
2000
2001
2002
2003 2004

N ote. The data are daily and extend through February 4, 2004. The series
shown is the difference between the rate on A2/P2 nonfinancial commercial
paper and the AA rate.

drawn. In other short-term financing developments,
nonfinancial firms that issued commercial paper in
2003 found a very receptive market, in large part
because of the scarcity of outstanding issues. Many
of the riskiest borrowers had exited the market in
2002, and remaining issuers improved their attrac­
tiveness to investors by continuing to restructure their
balance sheets.
Gross equity issuance rose over the course of 2003
as the economic outlook strengthened and stock
prices moved higher. The market for initial public
offerings continued to languish in the first half of the
year but showed signs of life by the end of the
summer. The volume of seasoned offerings also
Default rate on outstanding bonds
Percent

1995

1996

1997

1998

1999

2000

2001

2002

2003

N ote. For a given year, the percentage is calculated as the par value of
bonds that were upgraded or downgraded in that year and outstanding in the
fourth quarter of the previous year divided by the par value of the outstanding
bonds of all nonfinancial corporations in that quarter.
Source. Moody’s Investors Service.

picked up in the second half of the year. On the other
side of the ledger, merger and acquisition activity
again extinguished shares in 2003, although only at a
subdued pace. In addition, firms continued to retire a
considerable volume of equity through share repur­
chases. For the year as a whole, net equity issuance
was negative.
Corporate credit quality improved, on balance,
over the year. Notably, the default rate on corporate
bonds declined sharply, delinquency rates on com­
mercial and industrial (C&I) loans at commercial
banks turned down, and the pace of bond-rating
downgrades slowed considerably. Low interest rates
and the resulting restructuring of debt obligations
toward longer terms also importantly contributed to
Net interest payments of nonfinancial corporations
as a percent of cash flow
Percent

N ote. The default rate is monthly and extends through December 2003.
The rate for a given month is the face value o f bonds that defaulted in the
twelve months ending in that month divided by the face value o f all bonds
outstanding at the end o f the calendar quarter immediately preceding the
twelve-month period.
Source. Moody’s Investors Service.




1979

1982

1985

1988

1991

1994

1997

2 000

N ote. The data are quarterly and extend through 2003:Q3.
S ource. Bureau o f Economic Analysis.

2003

136

Federal Reserve Bulletin □ Spring 2004

improved business credit quality. Bank loan officers
noted that the aggressive tightening of lending stan­
dards in earlier years was an important factor
accounting for the lower delinquency and charge-off
rates in recent quarters.
Commercial mortgage debt increased noticeably
during most of 2003 despite persistently high vacancy
rates, falling rents, and sluggish growth in construc­
tion expenditures. Low interest rates on this type of
collateralized debt may have induced some corporate
borrowers to tap the market to pay down more-costly
unsecured debt. Delinquency rates on commercial
mortgages generally remained low throughout 2003,
and risk spreads were relatively narrow. Loan perfor­
mance has held up well because of low carrying costs
for property owners and because the outstanding
loans generally had been structured to include a siz­
able equity contribution, which makes default less
attractive to borrowers.

The Government Sector
Federal Government
The federal budget deficit continued to widen in
fiscal year 2003 as a result of the slow increase in
nominal incomes, outlays associated with the war in
Iraq, and legislative actions that reduced taxes and
boosted spending. The deficit in the unified budget
totaled $375 billion, up substantially from the deficit
of $158 billion recorded in fiscal 2002. The Congres­
sional Budget Office is projecting that the unified
federal deficit will increase further in fiscal 2004, to
more than $475 billion.
Federal receipts have fallen in each of the past
three years; the drop of nearly 4 percent in fiscal
2003 brought the ratio of receipts to GDP to 16 Vi per­
cent, 2 percentage points below the average for
the past thirty years. About half of the decrease in
receipts last year was a consequence of legislation
that shifted due dates for corporate payments between
fiscal years. In addition, personal income tax collec­
tions dropped sharply because of the slow rise in
nominal wages and salaries, diminished capital gains
realizations in 2002, and the tax cuts enacted under
the Jobs and Growth Tax Relief Reconciliation Act of
2003. The act advanced refund checks to households
eligible for the 2003 increment to the child tax credit
and resulted in lower withholding schedules for indi­
vidual taxpayers. The act also expanded the partialexpensing incentive for businesses, but because cor­
porate profits accelerated sharply last year, corporate



Federal receipts and expenditures
Percent of nominal GDP

Note. The budget data are from the unified budget and are for fiscal years
(October through September); GDP is for the year ending in Q3.

tax receipts rose appreciably after adjusting for the
shifts in the timing of payments.
At the same time, federal outlays other than for
interest expense rose rapidly for the second consecu­
tive year in fiscal 2003; these outlays increased about
9 percent after having risen 11 percent in fiscal 2002.
Spurred by operations in Iraq, defense spending
soared again, and outlays for homeland security rose
further. Spending for income support, such as unem­
ployment insurance, food stamps, and child credits
under the earned income tax credit program, also
posted a sizable increase. The ongoing rise in the cost
and utilization of medical services continued to push
up spending for Medicare and Medicaid. Overall, real
federal consumption and investment (the measure
of federal spending that is included in real GDP)
increased 6 percent over the four quarters of 2003,
after having risen 10 percent a year earlier.
Change in real government expenditures
on consumption and investment

Monetary Policy Report to the Congress

137

Federal government debt held by the public

Net national saving

Percent of nominal GDP

Percent o f nominal GDP

Federal saving

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

1963

1973

1983

1993

2003

N ote . The data are quarterly and extend through 2003:Q3. Nonfederal
saving is the sum o f personal and net business saving and the net saving of
state and local governments.

N ote. Through 2002, the data for debt are year-end figures, and the
corresponding value for GDP is for Q4 at an annual rate; the final observation
is for 2003:Q3. Excludes securities held as investments of federal gov­
ernment accounts.

The federal government had contributed increas­
ingly to national saving in the late 1990s and 2000
as budget deficits gave way to accumulating sur­
pluses. However, with the swing back to large
deficits in recent years, the federal government has
again become a drain on national saving. Using the
accounting practices followed in the national income
and product accounts (NIPA), gross federal saving as
a percent of GDP dropped sharply in late 2001 and
has trended down since then; the drop contributed to
a decline in overall gross national saving as a percent
of GDP from 18 percent in calendar year 2000 to
13 percent, on average, in the first three quarters of
2003. Federal saving net of estimated depreciation
fell from its recent peak of 2Vi percent of GDP in
2000 to negative 4 percent of GDP, on average, in the
first three quarters of 2003. As a result, despite a
noticeable pickup in saving from domestic nonfed­
eral sources, overall net national saving, which is an
important determinant of private capital formation,
fell to less than IV2 percent of GDP, on average, in
the first three quarters of 2003, compared with a
recent high of 6 V2 percent of GDP in 1998.

became a constraint, but debt markets were not dis­
rupted noticeably. In May, the Congress raised the
debt ceiling from $6.4 trillion to $7.4 trillion. With
large deficits expected to persist, the Treasury made a
number of adjustments to its regular borrowing pro­
gram, including reintroducing the three-year note,
increasing to monthly the frequency of five-year note
auctions, reopening the ten-year note in the month
following each new quarterly offering, and adding
another auction of ten-year inflation-indexed debt. As
a result of these changes, the average maturity of
outstanding Treasury debt, which had reached its
lowest level in decades, began to rise in the latter half
of 2003.

Federal Borrowing
The Treasury ramped up borrowing in 2003 in
response to the sharply widening federal budget defi­
cit, and federal debt held by the public as a percent of
nominal GDP increased for a second year in a row
after having trended down over the previous decade.
As had been the case in 2002, the Treasury was
forced to resort temporarily to accounting devices in
the spring of 2003 when the statutory debt ceiling



State and Local Governments
State and local governments faced another difficult
year in 2003. Tax receipts on income and sales con­
tinued to be restrained by the subdued performance
of the economy. Despite further efforts to rein in
spending, the sector’s aggregate net saving, as mea­
sured in the NIPA, reached a low of negative $40 bil­
lion (at an annual rate), or negative 0.4 percent of
GDP, in the first quarter of the year. Most of these
jurisdictions are subject to balanced-budget require­
ments and other rules that require them to respond to
fiscal imbalances. Thus, in addition to reducing oper­
ating expenses, governments drew on reserves, issued
bonds, sold assets, and made various one-time adjust­
ments in the timing of payments to balance their
books. In recent years, many have also increased
taxes and fees, thereby reversing the trend toward
lower taxes that prevailed during the late 1990s.

138

Federal Reserve Bulletin □ Spring 2004

State and local government net saving

U.S. trade and current account balances
Percent o f GDP

Billions o f dollars, annual rate
+
0

Y /v :
v
V
S
I

\r \

1

— .
5

i

i i

i i

i

1983

t

1 I !

I I

1987

1 1 1 1 I I

1991

1995

1 1 1 1 1 1 I I

1999

1

2003

N ote. The data, which are quarterly, are on a national income and product
account basis and extend through 2003:Q3.

Recent indications are that the fiscal stress in this
sector is beginning to ease. The improvement reflects
a noticeable upturn in tax collections in recent quar­
ters while restraint on operating expenditures largely
remains in place. On a NIPA basis, real spending on
compensation and on goods and services purchased
by state and local governments was little changed in
the second half of 2003, as it was over the preceding
year. However, investment in infrastructure, most of
which is funded in the capital markets, accelerated in
the second half of 2003. As of the third quarter of
2003, state and local net saving had moved back into
positive territory.
State and Local Government Borrowing
Gross issuance of debt by state and local govern­
ments was quite robust last year. Weak tax receipts
from a sluggish economy, significant demands for
infrastructure spending, and low interest rates all
contributed to the heavy pace of borrowing. Borrow­
ing was strongest in the second quarter of the year, as
governments took advantage of the extraordinarily
low longer-term rates to fund capital expenditures
and to advance refund existing higher-cost debt.
Because of the financial stresses facing these govern­
ments, the credit ratings of several states, most nota­
bly California, were lowered last year. Although bond
downgrades outnumbered upgrades for the sector as a
whole, the imbalance between the two was smaller
than it was in 2002.

period in 2002, a move largely reflecting develop­
ments in the deficit on trade in goods and services.
Net investment income rose over the same period, as
receipts from abroad increased and payments to for­
eign investors in the United States declined.

International Trade
The trade deficit widened considerably in the first
half of 2003 but narrowed slightly in the third quar­
ter, as the value of exports rebounded in response
to strengthening foreign economic activity and the
depreciation of the dollar. Available trade data
through November suggest that the trade deficit nar­
rowed further in the fourth quarter, as an additional
strong increase in exports outweighed an increase in
imports.
Real exports of goods and services increased about
6 percent in 2003. Exports of services rose about
Change in real imports and exports of goods and services
Percent, annual rate

□
I

Imports
Exports

20

The External Sector
Over the first three quarters of 2003, the U.S. current
account deficit widened relative to the comparable



____ 1____ I ____ 1
_
_
_____ I ____ 1____ I ____ 1__ I
_
_
_
_
1997

1999

2001

2003

Monetary Policy Report to the Congress

5 percent. They were held down early in the year by
a drop in receipts from foreign travelers, owing to the
effects of the SARS (severe acute respiratory syn­
drome) epidemic and the war in Iraq; services exports
rebounded strongly later in the year as those concerns
receded. Exports of goods rose about 63 percent
/4
over the course of the year—considerably faster than
in 2002. Exports increased in all major end-use cate­
gories of trade, with particularly strong gains in capi­
tal goods and consumer goods. Reflecting the global
recovery in the high-tech sector, exports of comput­
ers and semiconductors picked up markedly in 2003,
particularly in the second half. By geographic area,
exports of goods increased to Western Europe,
Canada, and, particularly, to developing countries
in East Asia—a region where economic activity
expanded at a rapid pace last year. Prices of exported
goods rose in 2003, with prices of agricultural
exports recording particularly large increases. In
response to poor crops and strong demand, prices for
cotton and soybeans increased sharply. For beef,
disruptions in supply led to notably higher prices
through much of 2003. Beef prices, however, fell
back in late December after a case of mad cow
disease was discovered in the state of Washington
and most countries imposed bans on beef imports
from the United States.
Real imports of goods and services rose about
V h percent in 2003. Imports of services fell in the
first half of the year but bounced back in the second
half, as concerns about the SARS epidemic and the
war in Iraq came and went; for the year as a whole,
real imports of services were about unchanged from
the previous year. Real imports of goods expanded
about 4 percent in response to the strengthening of
U.S. demand, but the pattern was choppy, with large
gains in the second and fourth quarters partially offset
by declines in the first and third. Despite a surge
in the second quarter, the volume of oil imports
increased modestly, on balance, over the course of
the year. Real non-oil imports were up about 4!/2 per­
cent, with the largest increases in capital goods and
consumer goods. Imports of computers posted solid
gains, whereas imports of semiconductors were flat.
Despite a substantial decline in the value of the
dollar, the prices of imported non-oil goods rose only
moderately in 2003. By category, the prices of con­
sumer goods were unchanged last year, and prices
of capital goods excluding aircraft, computers, and
semiconductors increased only a little more than
1 percent. Price increases were larger for industrial
supplies. The price of imported natural gas spiked in
March and rose again late in the year; these fluctua­
tions were large enough to show through to the



139

Prices of oil and of nonfuel commodities
Dollars per barrel

J a n u a ry 2001 = 100

-----

Q rt

110 — _

\y " V

^

1 0 0 ---------V _

90 —

j

—

y

NonfuelX
V -'

/

40

—

3
0

—

20

—

120 -----

10

1 . 1 . . i , . ............... 1 ■ . t i i i , . i i • 1 , , ....................... 1 . . 1 , 1

2001

2002

2003

2004

Note. The data are monthly and extend through January 2004. The oil
price is the spot price of West Texas intermediate crude oil. The price of
nonfuel commodities is a weighted average of thirty-nine primary-commodity
prices from the International Monetary Fund.

overall price index for imported goods. At year-end,
prices of industrial metals rose sharply, with the spot
price of copper reaching the highest level in six and
one-half years. The strength in metals and other
commodity prices has been attributed, at least in part,
to depreciation of the dollar and strong global
demand, particularly from China.
In 2003, the spot price of West Texas intermediate
(WTI) crude oil averaged more than $31 per barrel—
the highest annual average since the early 1980s. The
spot price of oil began to rise at the end of 2002 when
ethnic unrest in Nigeria and a nationwide strike in
Venezuela sharply limited oil supplies from those
two countries. In the first quarter of 2003, geopoliti­
cal uncertainty in the period leading up to the war in
Iraq also added upward pressure on oil prices. On
March 12, the spot price of WTI closed at $37.83 per
barrel, the highest level since the Gulf War in 1990.
When the main Iraqi oil fields had been secured and
it became apparent that the risks to oil supplies had
subsided, the spot price of WTI fell sharply to a low
of $25.23 per barrel on April 29. However, oil prices
began rising again when, because of difficult security
conditions, the recovery of oil exports from Iraq was
slower than expected. Prices also were boosted in
September by the surprise reduction in OPEC’s pro­
duction target. In the fourth quarter of 2003 and early
2004, strengthening economic activity, falling oil
inventories, and the continued depreciation of the
dollar contributed to a further run-up in oil prices.
The Financial Account
The financing counterpart to the current account defi­
cit experienced a sizable shift in 2003, as net private

140

Federal Reserve Bulletin □ Spring 2004

U.S. net financial inflows
Billions of dollars

0 Official
■ Private

175
150
125

100
75
50
25
+
0

25

2001

2000

2002

2003

Source. Department of Commerce.

inflows fell while foreign official inflows increased.
Private foreign purchases of U.S. securities were at an
annual rate of about $350 billion through November,
about $50 billion lower than in the previous year.
Private foreign purchases of U.S. equities continued
to recede, and, although the level of bond purchases
was little changed in the aggregate, foreign purchases
U.S. net international securities transactions
Billions of dollars
— ------------------------

N et priva te fo re ig n purchases o f U.S. securities
□ Bonds
■ Equities

shifted somewhat away from agency bonds and
toward corporate bonds. Over the same period, pur­
chases by private U.S. investors of foreign securities
increased nearly $80 billion. Accordingly, net inflows
through private securities transactions decreased
markedly. In contrast, foreign official purchases of
U.S. assets surged to record levels in 2003, with the
accumulation of dollar reserves particularly high in
China and Japan.
Compared with the pace in 2002, foreign direct
investment in the United States increased, as merger
activity picked up and corporate profits improved.
U.S. direct investment abroad held relatively steady
at a high level that was largely the result of continued
retained earnings. On net, foreign direct investment
outflows fell about $50 billion through the first three
quarters of 2003.
The Labor M arket
Employment and Unemployment
With economic activity still sluggish during the first
half of 2003, the labor market continued to weaken.
Over the first eight months of the year, private non­
farm payroll employment fell, on average, more than
35,000 per month, extending the prolonged period of
cutbacks that began in early 2001. The civilian unem­
ployment rate, which had hovered around 5 3/ 4 percent
for much of 2002, moved up to 6Va percent by June.
However, by late in the summer, the labor market
began to recover slowly. Declines in private payrolls
gave way to moderate increases in employment; over
the five months ending in January, private nonfarm
establishments added, on average, about 85,000 jobs
per month. By January, the unemployment rate
moved back down to 5.6 percent.
Net change in payroll employment
Thousands o f jobs, monthly average

N et p rivate U.S. purchases o f foreign securities
—

□ Bonds
■ Equities

75

P rivate nonfarm
300

50

200

25

100

100
25

j __ i__ i__ I__ i__ i___i__ L
2001
2000

200
J ----- i-----1----L
2002
2003

_ u

Source. Department of Commerce and the Federal Reserve Board.




I

1992

1994

I

1996

I

1998

2 000

2002

2004

Monetary Policy Report to the Congress

141

weak. Manufacturers of nondurables, such as chemi­
cals, paper, apparel, and textiles, continued to cut
jobs. Employment in retail trade remained, on net,
little changed.
Productivity and Labor Costs

11 I I I I I I I 1 i 1 l 1 1 I I I I I l I I I I I I I I I 11 l t I 1 1
1
1974

1984

1994

2004

N ote. The data are monthly and extend through January 2004.

During the late summer and early fall, prospects
for business sales and production brightened, and
firms began to lay off fewer workers. Initial claims
for unemployment insurance dropped back, and the
monthly Current Population Survey (CPS) of house­
holds reported a decline in the number of workers
who had lost their last job. However, for many unem­
ployed workers, jobs continued to be difficult to find,
and the number of unemployed who had been out
of work for twenty-seven weeks or more remained
persistently high. The labor force participation rate,
which tends to be sensitive to workers’ perceptions of
the strength of labor demand, drifted lower. Although
the CPS indicated a somewhat greater improvement
in employment than the payroll report—even after
adjusting for conceptual differences between the two
measures—the increase in household employment
lagged the rise in the working-age population, and
the ratio of employment to population fell further
during 2003.
The modest upturn in private payroll employment
that began in September was marked by a step-up in
hiring at businesses supplying professional, business,
and education services, and medical services contin­
ued to add jobs. Employment in both the construction
industry and the real estate industry rose further,
although the number of jobs in related financial ser­
vices dropped back a bit as mortgage refinancing
activity slackened. At the same time, although manu­
facturers were still laying off workers, the monthly
declines in factory employment became smaller and
less widespread than earlier. Employment stabilized
in many industries that produce durable goods, such
as metals, furniture, and wood products, as well as in
a number of related industries that store and transport
goods. In several other areas, employment remained



Business efforts to increase efficiency and control
costs led to another impressive gain in labor produc­
tivity last year. Output per hour in the nonfarm busi­
ness sector surged 5lA percent in 2003 after having
risen a robust 4 percent in 2002 and 23 percent
A
in 2001. What is particularly remarkable about this
period is that productivity did not decelerate signifi­
cantly when output declined in 2001, and it posted
persistently strong gains while the recovery in aggre­
gate demand was sluggish. Typically, the outsized
increases in productivity that have occurred during
cyclical recoveries have followed a period of declines
or very weak increases in productivity during the
recession and have been associated with rebounds in
economic activity that were stronger than has been
the case, until recently, in this expansion.
On balance, since the business cycle peak in early
2001, output per hour has risen at an average annual
rate of 4 percent—noticeably above the average
increase of 2Vi percent that prevailed between 1996
and 2000. In the earlier period, an expansion of the
capital stock was an important element in boosting
the efficiency of workers and their firms; that impetus
to productivity has weakened in the recent period as a
result of the steep cutbacks in business investment in
2001 and 2002. Instead, the recent gains appear to be
grounded in organizational changes and innovations
in the use of existing resources—which are referred
to as multifactor productivity. The persistence of a
Change in output per hour

N o t e . Nonfarm business sector.

142

Federal Reserve Bulletin □ Spring 2004

Measures of change in hourly compensation
Percent

plans to cover the declines in the market value of
plan assets.
Prices

Nonfarm compensation per hour

\
—

—

\
—"

—

1

1

/

\

1

1

1

1995

f:

1997

1...

. 'l

1999

4

—

r

Employment
cost index

V

6

\J
1

2001

—

2

1

2003

N ote . The data are quarterly and extend through 2003 :Q4. For nonfarm

compensation, change is over four quarters; for the employment cost index
(ECI), change is over the twelve months ending in the last month of each
quarter. Nonfarm compensation is for the nonfarm business sector; the ECI is
for private industry excluding farm and household workers.

rapid rise in multifactor productivity in recent years,
along with signs of a pickup in capital spending,
suggests that part of the step-up in the rate of increase
of labor productivity may be sustained for some time.
In 2003, the employment cost index (ECI) for
private nonfarm businesses, which is based on a
survey conducted quarterly by the Bureau of Labor
Statistics, rose 4 percent—about 3 percentage point
/4
more than the increase in 2002. Compensation per
hour in the nonfarm business sector, which is based
on data constructed for the NIPA, is estimated to have
increased 3lA percent in 2003, up from V/i percent in
2002. In recent years, the NIPA-derived series has
shown much wider fluctuations in hourly compensa­
tion than the ECI, in part because it includes the
value of stock option exercises, which are excluded
from the ECI. The value of options exercised shot up
in 2000 and then dropped over the next two years.
Most of the acceleration in hourly compensation in
2003 was the result of larger increases in the costs of
employee benefits. The ECI for wages and salaries
rose 3 percent—up slightly from the pace in 2002 but
still well below the rates of increase in the preceding
six years. Wage gains last year likely were restrained
by persistent slack in the demand for labor as well as
by the pressure on employers to control overall labor
costs in the face of the rapidly rising cost of benefits.
A
Employer costs for benefits, which had risen 43 per­
cent in 2002, climbed another 6 V2 percent in 2003.
The cost of health insurance as measured by the ECI
has been moving up at close to a double-digit rate
for three consecutive years. In addition, in late 2002
and early 2003, employers needed to substantially
boost their contributions to defined-benefit retirement



Headline consumer price inflation in 2003 was main­
tained by an acceleration in food prices and another
sizable increase in energy prices, but core rates of
inflation fell for a second year. Although the strong
upturn in economic activity in the second half of last
year began to reduce unemployment and to boost
industrial utilization rates, considerable slack in labor
and product markets continued to restrain inflation
throughout the year. A further moderation in the costs
of production also helped to check inflation: As a
result of another rapid rise in productivity, businesses
saw their unit labor costs decline in 2003 for a second
consecutive year. In contrast, prices for imported
goods excluding petroleum, computers, and semicon­
ductors increased at about the same rate as prices
more generally; between 1996 and 2002, these import
prices fell relative to overall prices for personal con­
sumption expenditures (PCE). The chain-type price
index for PCE excluding food and energy rose just
under 1 percent in 2003, about 3 percentage point
/4
less than in 2002. A broader measure of inflation, the
chain-type price index for GDP, increased IV2 per­
cent in 2003, the same slow pace as in 2002. Both
measures of inflation were roughly a percentage point
lower than in 2001.
Consumer energy prices fluctuated widely over the
four quarters of 2003, and the PCE index for energy
was up 1 V4 percent over the period. In the first
quarter of the year, the combination of a further rise
in the cost of crude oil, increased wholesale margins
for gasoline, and unusually tight supplies of natural
Change in unit labor costs
—

-

Monetary Policy Report to the Congress

Change in consumer prices
Percent

Q Consumer price index
■ Chain-type price index for PCE
—

4

gas pushed up consumer energy prices sharply.
Although the prices of petroleum-based products
turned down when the price of crude oil fell back in
March, a number of supply disruptions in late sum­
mer resulted in another temporary run-up in the retail
price of gasoline. In the spring, the price of natural
gas began to ease as supplies improved, but it
remained high relative to the level in recent years.
Electricity prices also moved up during 2003, in part
because of the higher input costs of natural gas. In
January 2004, a cold wave in the Northeast, together
with the rise in the price of crude oil since early
December, once again led to spikes in the prices of
gasoline and natural gas.
The PCE price index for food and beverages
increased 23 percent in 2003 after having risen just
A
VA percent a year earlier. Much of the acceleration
can be traced to strong demand for farm products, but
prices paid by consumers for food away from home—
which depend much more heavily on the cost of labor
Change in consumer prices excluding food and energy

I 1
1993

I

I
1995

I __ I __ I __ I __ I __ I __ I __ I __ L_J
_ _ _ _ _ _ _ _
1997

1999

2001

2003

N ote. Change is over four quarters, and the data extend through 2003 :Q4.




143

than on prices of food products—were up 3 percent
in 2003, also somewhat more than overall consumer
price inflation. Poor harvests abroad, especially in
Europe, contributed importantly to the heightened
demand for U.S. farm products. Thus, despite a
bumper crop of corn and some other grains in the
United States, world stocks were tight and prices
remained high. In addition, the U.S. soybean crop
was crimped by late-season heat and dryness, which
further tightened world supplies. Concerns about
the cases of mad cow disease that were identified in
herds in Japan and Canada supported strong domestic
and export demand for U.S. beef for most of last year
while supplies edged down. But, at year-end, when a
case of mad cow disease was discovered in a domes­
tic herd, export demand for US. beef plunged and
drove the price of live cattle down sharply. A portion
of the drop in cattle prices likely will show through to
consumer prices for beef early this year.
The decline in core inflation in 2003 was broadly
based. Prices of core consumer goods fell somewhat
faster than a year earlier; the declines were led
by larger cuts in prices of apparel, motor vehicles,
electronic equipment, and a variety of other durable
goods. At the same time, prices of non-energy ser­
vices rose less rapidly. The deceleration in core con­
sumer prices measured by the CPI is somewhat
greater than that measured by the PCE index. In each
index, the costs of housing services to tenants and
owners rose less in 2003 than in 2002, but because
these costs receive a larger weight in the CPI, their
slowing contributed a greater amount to the CPI’s
deceleration. In addition, the different measurement
of the prices of medical services in the two series
contributed to the smaller deceleration in non-energy
services in the PCE. The medical services component
of the CPI, which measures out-of-pocket expenses
paid by consumers, increased 4 percent in 2003,
down from 5l/z percent a year earlier. Alternatively,
the PCE for medical services is a broader measure
that uses producer price indexes (PPI) to capture the
costs of services provided by hospitals and doctors; it
continued to increase more slowly than the CPI for
medical services last year, 3 lA percent, but it was up
slightly from its increase of 2 Vi percent in 2002.
Survey measures of expected inflation were little
changed, on balance, in 2003. According to the Fed­
eral Reserve Bank of Philadelphia’s survey of pro­
fessional forecasters, expectations for CPI inflation
/
ten years ahead remained at 2xi percent last year. As
measured by the Michigan Survey Research Center
survey of households, median five- to ten-year infla­
tion expectations, which averaged 3 percent in 2001,
were steady at 23 percent in 2003 for a second
A

144

Federal Reserve Bulletin □ Spring 2004

Alternative measures of price change
P rc n
e et
Price measure

2001

2002

2003

Chain-type
Gross domestic product ........................
Gross domestic purchases .....................
Personal consumption expenditures . . .
Excluding food and energy...............
Chained CPI ...........................................
Excluding food and energy...............

2.4
1.6
1.6
2.1
1.5
2.1

1.4
1.7
1.8
1.6
1.8
1.6

1.5
1.6
1.4
.9
1.4
.6

Fixed-weight
Consumer price in d ex............................
Excluding food and energy...............

1.8
2.7

2.2
2.1

1.9
1.2

Note. C an a based o q arterly av
h ges re
n u
erages an a m red to th
d re easu
e
fo rthq a rof th y in ic te fromth fo rthq a r of th p
u u rte
e ear d a d
e u u rte
e reced g y a
in e r.

consecutive year. Inflation compensation as measured
by the spread between the yield on nominal Treasury
securities and their indexed counterparts varied over
a wide range in 2003, settling at just under 2Vi per­
cent at year-end. Shorter-term inflation expectations
also posted some wide swings during 2003; yearahead expectations in the Michigan SRC survey
spiked early in the year with the sharp increase in
energy prices and dipped briefly to an unusually low
level at midyear as actual inflation eased in response
to lower energy prices. However, year-ahead inflation
expectations settled back to just over 2Vi percent at
the end of the year, about the same as at the end of

.

2002
The PPI for crude materials excluding food and
energy products, which had dropped 10 percent in
2001, rose 11% percent in 2002 and another \7Vi per­
cent in 2003. The upswing was driven by the pickup
in demand associated with the acceleration in both
domestic and worldwide industrial activity and by the
pass-through of higher energy costs. Such wide cycli­
cal swings in commodity prices have only a small
effect on movements in the prices of intermediate and
finished goods. At later stages of production and
distribution, commodity costs represent only a small
share of overall costs, and some portion of the change
in commodity prices tends to be absorbed in firms’
profit margins. Thus, the recent pickup in prices at
the intermediate stage of processing has been more
muted; after having fallen almost IV2 percent in
2001, the PPI for core intermediate materials rose
IV4 percent in 2002 and 2 percent in 2003.

U.S. Financial M arkets
On balance, financial market conditions became
increasingly supportive of growth over 2003 as inves­
tors became more assured that the economy was on
solid footing. Equity prices marched up after the first



quarter of the year in response to the initiation and
swift conclusion of major combat operations in Iraq,
positive earnings reports, and—in the second half of
the year—a stronger pace of economic growth. Risk
spreads on corporate debt declined, with the spreads
on the debt of both investment-grade firms and
speculative-grade firms ending 2003 at their lowest
levels since 1998. Thus, although Treasury coupon
yields ended the year 30-40 basis points higher,
yields on many corporate bonds ended the year
lower. Commercial banks appeared somewhat slower
than bond investors to lend at more favorable terms;
nevertheless, by late in the year, banks had eased both
standards and terms on C&I loans.
Demand for short-term debt, however, remained
very weak, and business loans and outstanding com­
mercial paper continued to run off. In response to a
widening budget deficit and a rapid expansion of
federal debt, the Treasury increased the frequency of
its debt auctions. Declines in mortgage interest rates
over the first half of the year led to an extraordinary
increase in mortgage debt, as originations for home
purchase and for refinancings both climbed to record
levels.

Interest Rates
Interest rates fell for most of the first half of 2003,
primarily in response to continuing weak economic
data and an associated marking down of expectations
for the federal funds rate. Global uncertainty ran
high, particularly surrounding the timing of military
intervention in Iraq, which elevated safe-haven
demands and depressed yields on Treasury securities.
Moreover, the weak March employment report and
other disappointing news about economic activity
seemed to cause a substantial shift in views about
monetary policy. Data from the federal funds futures
market suggested a significant probability of a further
easing of policy and did not imply any tightening
before early 2004. Even as geopolitical tensions
eased, weaker-than-expected economic data contin­
ued to hold down Treasury yields. The FOMC’s
statement following its May meeting that an “unwel­
come fall in inflation” remained a risk reinforced the
notion that monetary policy would stay accommo­
dative, and, indeed, judging from market quotes on
federal funds futures, market participants anticipated
further easing. Mortgage rates followed Treasury
yields lower, precipitating a huge surge of mortgage
refinancing. To offset the decline in the duration of
their portfolios stemming from the jump in prepay­
ments, mortgage investors reportedly bought large

Monetary Policy Report to the Congress

Interest rates on selected Treasury securities

145

Spreads of corporate bond yields over
the ten-year Treasury yield
Percent
Percentage points

l I■
I

N o t e . The data are daily and extend through February 4, 2004.

quantities of longer-dated Treasuries, amplifying the
fall in yields. Interest rates on corporate bonds also
declined in the first half of the year, prompting many
firms to issue long-term debt to pay down other, more
expensive forms of debt and build up cash assets.
Growing confidence that the frequency and severity
of corporate accounting scandals were waning likely
contributed to the narrowing in risk spreads. By the
end of spring, default rates on corporate bonds
had begun to decline, and corporate credit quality
appeared to stabilize.
By the time of the June FOMC meeting, federal
funds futures data implied that market participants
had generally come to expect an aggressive reduction
in the target federal funds rate, so the Committee’s
decision to lower the target rate by only 25 basis
points came as a surprise to some. In addition, some
investors were reportedly disappointed that the stateimplied volatility of short-term interest rates
Basis points

■I I ' I I I I I I

I

. I I I ..............

I

I I I I I I ...........

__________ 2001_____________2002____________ 2003

I

I I I I

l

2004

N o t e . The data are daily and extend through February 4, 2004. The
spreads compare the yields on the Merrill Lynch AA, BBB, and 175 highyield indexes with the yield on the ten-year off-the-run Treasury note.

ment following this meeting included no mention
of “unconventional” monetary policy actions that
would be aimed at lowering longer-term yields more
directly than through changes in the federal funds
rate target alone. As a result, market interest rates
backed up, with the move probably amplified by the
unwinding of mortgage-related hedging activity. The
Chairman’s monetary policy testimony in July, and
the FOMC’s statements at subsequent meetings that
noted that policy could remain accommodative for “a
considerable period,” apparently provided an anchor
for the front end of the yield curve. At the same time,
increasingly positive economic reports bolstered con­
fidence in the markets, and longer-dated Treasury
securities ended the year about 40 basis points above
their year-earlier levels. But, with the expansion evi­
dently gaining traction and investors becoming more
willing to take on risk, corporate risk spreads, particu­
larly those on speculative-grade issues, continued to
fall over the second half of the year. Treasury yields
fell early in 2004, largely in response to the weakerthan-expected December labor market report. After
the release of the Committee’s statement following
its January meeting, Treasury yields backed up a bit
as futures market prices implied an expectation of an
earlier onset of tightening than had been previously
anticipated.

Equity Markets

N o t e . The data are daily and extend through February 4, 2004. The series

shown is the implied volatility o f the three-month eurodollar rate over the
coming four months, as calculated from option prices.




Broad equity price indexes ended the year 25 percent
to 30 percent higher. Early in the year, stock prices
were buffeted by mixed news about the pace of

146

Federal Reserve Bulletin □ Spring 2004

Major stock price indexes

S&P 500 forward eamings-price ratio
and the real interest rate
January 2,2002 = 100

120
—

10

110
100
90
W ilsh ire 5000

80
70

L_l__ I I I I t
N ote. The data are daily and extend through February 4, 2004.

economic expansion and by heightened geopolitical
tensions. Rising oil prices boosted the shares of
energy companies very early in the year while,
by and large, stocks in other sectors were stumbling.
By spring, however, positive news on corporate
earnings—often exceeding expectations—and easing
of geopolitical tensions associated with the initiation
of military action in Iraq boosted equity prices sig­
nificantly. Subsequently, the swift end to major com­
bat operations in Iraq caused implied volatility on the
S&P 500 index to fall substantially. Over the rest
of the year, increasingly positive earnings results
contributed to a sustained rally in stock prices, and
implied volatility in equity markets fell further. Cor­
porate scandals—albeit on a smaller scale than in
previous years—continued to emerge in 2003, but
these revelations appeared to leave little lasting

1991

1993

I I I I I __ I _ I _ I _ L
_ _ _

1995

1997

1999

2001

2003

N ote. The data are monthly and extend through December 2003. The
forward eamings-price ratio is based on I/B/E/S consensus estimates of
earnings over the coming year. The real interest rate is estimated as the
difference between the ten-year Treasury rate and the expected ten-year
inflation rate reported in the survey by the Federal Reserve Bank of
Philadelphia.

imprint on broad measures of stock prices. For the
year as a whole, the Russell 2000 index of small-cap
stocks and the technology-laden Nasdaq composite
index, which rose 45 percent and 50 percent, respec­
tively, noticeably outpaced broader indexes. To date
in 2004, equity markets have continued to rally.
With the sustained rise in stock prices, the ratio of
expected year-ahead earnings to stock prices for
firms in the S&P 500 edged down over 2003. The
gap between this ratio and the real ten-year Treasury
yield—a crude measure of the equity risk premium—
narrowed a bit over the course of the year, though it
remains in the upper part of the range observed over
the past two decades.

Implied S&P 500 volatility

Debt and Financial Intermediation

N ote. The data are daily and extend through February 4, 2004. The series
shown is the implied volatility o f the S&P 500 stock price index as calculated
from the prices o f options that expire over the next several months.
Source . Chicago Board Options Exchange.




Aggregate debt of the domestic nonfinancial sectors
is estimated to have increased about 8 V4 percent in
2003, just over a percentage point faster than in 2002.
Federal debt accelerated sharply, rising 11 percent,
owing to the larger budget deficit. Household debt
rose almost as rapidly, and the increase in state and
local government debt also was substantial. In con­
trast, business borrowing remained subdued last year.
In the business sector, investment spending,
particularly in the beginning of the year, was mainly
financed with internal funds, limiting, though not
eliminating, businesses’ need to increase debt.
With long-term rates falling through midyear and
credit spreads—especially for riskier borrowers—
narrowing, corporate treasurers shifted their debt

Monetary Policy Report to the Congress

C h a n g e in d o m e s tic n o n fin a n c ia l d e b t
Percent

147

N e t p e rce n ta g e o f d o m e s tic b a n k s tig h te n in g
sta n d a rd s o n c o m m e rc ia l a n d in d u s tria l lo a n s
to la rg e a n d m e d iu m -s iz e d firm s
Percent

---- 10

J__i _i _l J
_ _
Percent

1990
—

1992

1994

1996

1998

2000

2002

2004

15
N o t e . The data are based on a survey generally conducted four times per

year; the last reading is from the January 2004 survey. Large and
medium-sized firms are those with annual sales of $50 million or more. Net
percentage is the percentage reporting a tightening less the percentage
reporting an easing.
S o u r c e . Federal Reserve Senior Loan Officer Opinion Survey on Bank
Lending Practices.

1989

1991

1993

1995

1997

1999

2001

2003

N ote. For 2003, change is from 2002:Q4 to 2003:Q3 at an annual rate. For
earlier years, the data are annual and are computed by dividing the annual
flow for a given year by the level at the end o f the preceding year. The total
consists of nonfederal debt and federal debt held by the public. Nonfederal
debt consists of the outstanding credit market debt of state and local gov­
ernments, households, nonprofit organizations, and nonfinancial businesses.
Federal debt held by the public excludes securities held as investments of
federal government accounts.

issuance toward bond financing and away from
shorter-term debt. Household borrowing also shifted
in response to lower longer-term rates. Mortgage
rates followed Treasury rates lower in the spring, and
mortgage originations for both home purchases and
refinancings surged. Refinancing activity appears to
have held down growth of consumer credit as house­
holds extracted equity from their homes and used the
proceeds, in part, to pay down higher-cost consumer
debt. Nevertheless, consumer credit posted a moder­
ate advance in 2003, buoyed by heavy spending on
autos and other durables. A substantial widening of
the federal deficit forced the Treasury to increase its
borrowing significantly. To facilitate the pickup in
borrowing, the Treasury altered its auction cycle to
increase the frequency of certain issues and reintro­
duced the three-year note.
Depository credit rose 6 percent in 2003 and was
driven by mortgage lending and the acquisition of



mortgage-backed securities by both banks and thrift
institutions. Consumer lending also was substantial,
as lower interest rates and auto incentives spurred
spending on durable goods. In contrast, business
loans fell 1 [ percent over 2003, a drop similar to the
A
runoff in 2002. Survey evidence suggests that the
decline in business lending at banks was primarily
the result of decreased demand for these loans, with
respondent banks often citing weak investment and
inventory spending. Moreover, the contraction was
concentrated at large banks, whose customers tend to
be larger corporations that have access to bond marD e lin q u e n c y ra tes o n se le c te d ty p e s o f lo a n s a t b a n k s
Percent

I 1_ I _ I _ I _ I _ I _ I _ I _ I _ I _ I _ i l l !
__ _ _ _ _ _ _ _ _ _ _
1991

1993

1995

1997

1999

2001

2003

N o t e . The data, from bank Call Reports, are quarterly, seasonally adjusted,

and extend through 2003 :Q4.

148

Federal Reserve Bulletin □ Spring 2004

kets, and the proceeds of bond issuance were appar­
ently used, in part, to pay down bank loans. The
January 2004 Senior Loan Officer Opinion Survey
reported a pickup in business loan demand arising
mainly from increased spending on plant and equip­
ment and on inventories. Supply conditions appar­
ently played a secondary role in the weakness in
business loans in 2003. Banks tightened standards
and terms on business loans somewhat in the first half
of the year, but by year-end they had begun to ease
terms and standards considerably, in part because of
reduced concern about the economic outlook.

M2 velocity and opportunity cost
Ratio, ratio scale

M2 increased 5 l percent in 2003, a pace somewhat
A
slower than in 2002 and a bit below the rate of
expansion of nominal income. The deceleration in
M2 largely reflected a considerable contraction in the
final quarter of the year after three quarters of rapid
growth. The robust growth in money around mid­
year was concentrated in liquid deposits and likely
resulted in large part from the wave of mortgage
refinancings, which tend to boost M2 as the pro­
ceeds are temporarily placed in non-interest-bearing
accounts pending disbursement to the holders of
mortgage-backed securities. Moreover, around the
middle of the year, the equity that was extracted from
home values during refinancings probably provided
an additional boost to deposits for a time, as house­
holds temporarily parked these funds in M2 accounts
before paying down other debt or spending them. In
the fourth quarter, M2 contracted at an annual rate of
2 percent, the largest quarterly decline since consis-

—

M2
opportunity
cost

2

—

2.0 —

4

—

M2 velocity

8

—

2.2 —

1

1.8 —

1

The M2 Monetary Aggregate

Percentage points, ratio scale

1

1
1
1994

1

I
i
1997

1

1
1
2000

1

1
1
2003

1

Note. The data are quarterly and extend through 2003:Q4. The velocity of
M2 is the ratio of nominal gross domestic product to the stock of M2. The
opportunity cost of holding M2 is a two-quarter moving average of the
difference between the three-month Treasury bill rate and the weighted
average return on assets included in M2.

Mortgage refinancing application index
M arch 16, 1990= 100

—

8,000

—

6,000

—

4,000

—

2,000

—

1994

1996

1998

2000

2002

+
0

2004

Note. The data are monthly and extend through January 2004.
Source. Mortgage Bankers Association.

M2 growth rate

—

10

tent data collection began in 1959. As mortgage rates
backed up and the pace of refinancing slowed, the
funds that had been swelling deposits flowed out,
depressing M2. The sustained rally in equity markets
after the first quarter of the year may also have
slowed M2 growth, as expectations of continued
higher returns led households to shift funds from M2
assets to equities, a view reinforced by the strong
flows into equity mutual funds.

International D evelopm ents
Note. M2 consists of currency, travelers checks, demand deposits, other
checkable deposits, savings deposits (including money market deposit
accounts), small-denomination time deposits, and balances in retail money
market funds.



Economic growth abroad rebounded in the second
half of last year as factors that weighed on the global
economy in the first half—including the SARS epi-

Monetary Policy Report to the Congress

demic and uncertainty surrounding the war in Iraq—
dissipated. Foreign growth also was boosted by the
strong rebound in the U.S. economy, the revival of
the global high-tech sector, and, in many countries,
ample policy stimulus.
Strong second-half growth in China stimulated
activity in other emerging Asian economies and
Japan by raising the demand for their exports. Growth
in Japan also was spurred by a recovery in private
spending there on capital goods. Economic activity in
Europe picked up in the second half, as export growth
resumed. Economic growth in Latin America has
been less robust; the Mexican economic upturn has
lagged that of the United States, and Brazil’s econ­
omy has only recently begun to recover from the
effects of its 2002 financial crisis.
Monetary authorities abroad generally eased their
policies during the first half of 2003 as economic
activity stagnated. In the second half, market par­
ticipants began to build in expectations of eventual
monetary tightening abroad, and official interest rates
were raised by year-end in the United Kingdom and
Australia. Canadian monetary policy followed a dif­
ferent pattern; the Bank of Canada raised official
interest rates in the spring as inflation moved well
above its 1 percent to 3 percent target range but cut
rates later in the year and again early this year as
slack emerged and inflation moderated. Similarly,
lower inflation in Mexico and Brazil allowed authori­
ties to ease monetary policy during 2003. The Bank
of Japan maintained official interest rates near zero
and continued to increase the monetary base.
In foreign financial markets, equity prices fell, on
average, until mid-March but since then have risen

149

Equity indexes in selected foreign industrial countries
Week ending January 5, 2001 = 100

—

—

60

—

w

—

80

—

Canada

—

100

40

Euro area
—

United Kingdom
f i l i i i i i i i i i i i l
2001

iii i i t i i i

2002

ii 1 t i i i

i i 1 ■■ ( ■ 1

.I

2003

2004

Note. The data are weekly. The last observations are the average of
trading days through February 4, 2004.

in reaction to indications of stronger-than-expected
global economic activity. Emerging-market equity
indexes outpaced those in the industrial countries in
2003, with markets in Latin America posting particu­
larly strong gains. Around midyear, long-term inter­
est rates declined to multiyear lows in many countries
as economic growth slowed and inflationary pres­
sures diminished, but those rates moved higher in
the second half as growth prospects improved. Bond
spreads came down substantially during the year,
both for industrial-country corporate debt and for
emerging-market sovereign debt; spreads of the J.P.
Morgan Emerging Market Bond Index (EMBI+) over
U.S. Treasury securities fell to their lowest levels
since before the Russian crisis of 1998. Gross capital
flows to emerging markets, however, remained well
below their 1997 peak.

Official interest rates in selected foreign industrial countries
Equity indexes in selected emerging markets
Percent

United Kingdom

Canada

Euro area

I, , t I
1

Note. The data are as o f month-end; the last observations are for Feb­
ruary 5, 2004, when the Bank o f England raised its official rate. The data
shown are the call money rate for Japan, the overnight rate for Canada, the
refinancing rate for the euro area, and the repurchase rate for the United
Kingdom.




.

2001

.

,1 , !
1

I

...I 1 I 1. 1 .I ,
. . .

2002

I

I I I I I I , , I , I

2003

I

, I I I

I
2004

Note. The data are weekly. The last observations are the average of
trading days through February 4, 2004. Asian emerging markets are China,
Hong Kong, India, Indonesia, Malaysia, Pakistan, the Philippines, Singapore,
South Korea, Taiwan, and Thailand.

150

Federal Reserve Bulletin □ Spring 2004

U.S. dollar nominal exchange rate, broad index
January 2000 = 1 0 0

cies but appreciated against the Mexican peso. On
balance, the dollar depreciated 9 percent during 2003
on a trade-weighted basis against the currencies of a
broad group of U.S. trading partners.

Industrial Economies

I l I I 1 I I I I 1 I 1 I I 1 I 1 I 1 1 1 I I I I I 1 I I I I L 1 1 I I 1 1 I I I 1 I I ! I I I 1 I 1 I J- 1
. -

2000

2001

2002

2003

2004

Note. The data are monthly and are in foreign currency units per dollar.
The last observation is the average of trading days through February 4, 2004.
The broad index is a weighted average o f the foreign exchange values of the
U.S. dollar against the currencies o f a large group of major U.S. trading
partners. The index weights, which change over time, are derived from U.S.
export shares and from U.S. and foreign import shares.

The foreign exchange value of the dollar continued
to decline last year as concerns over the financing of
the large and growing U.S. current account deficit
took on greater prominence. The dollar declined
18 percent against the Canadian dollar, 17 percent
against the euro, and 10 percent against the British
pound and the Japanese yen. In contrast, the value of
the dollar was little changed, on net, against the
currencies of our other important trading partners,
in part because officials of China and of some other
emerging Asian economies managed their exchange
rates so as to maintain stability in terms of the dollar.
Among Latin American currencies, the dollar
declined against the Brazilian and Argentine currenU.S. dollar exchange rate against
selected major currencies
Week ending January 5, 2001 = 100

Japanese yen

Canadian
dollar

Note. The data are weekly and are in foreign currency units per dollar.
Last observations are the average o f trading days through February 4, 2004.




The euro-area economy contracted in the first half of
2003, weighed down in part by geopolitical uncer­
tainty and higher oil prices. In the second half, eco­
nomic activity in the euro area began to grow as the
global pickup in activity spurred a recovery of euroarea exports despite the continued appreciation of the
euro. The monetary policy of the European Central
Bank (ECB) was supportive of growth, with the
policy interest rate lowered to 2 percent by midyear.
Consumer price inflation slowed to around 2 percent,
the upper limit of the ECB’s definition of price
stability. Despite increased economic slack, inflation
moved down only a little, partly because the summer
drought boosted food prices. For the second straight
year, the governments of Germany and France each
recorded budget deficits in excess of the 3 percent
deficit-to-GDP limit specified by the Stability and
Growth Pact. However, in light of economic condi­
tions, European Union finance ministers chose not to
impose sanctions.
After a sluggish first quarter, the U.K. economy
expanded at a solid pace for the remainder of 2003,
supported by robust consumption spending and
considerable government expenditure. The Bank of
England cut rates in the first half of the year but
reversed some of that easing later in the year and
early this year as the economy picked up and housing
prices continued to rise at a rapid, albeit slower, pace.
In June, the British government announced its assess­
ment that conditions still were not right for the United
Kingdom to adopt the euro. In December, the British
government changed the inflation measure to be tar­
geted by the Bank of England from the retail prices
index excluding mortgage interest (RPIX) to the con­
sumer prices index. U.K. inflation currently is well
below the objective of 2 percent on the new target
index.
The Canadian economy contracted in the second
quarter owing to the impact of the SARS outbreak in
Toronto on travel and tourism, but it rebounded in the
latter half of the year. Canadian economic growth
continued to be led by strong domestic demand;
consumption remained robust and investment spend­
ing accelerated, offsetting the negative effect of Cana­
dian dollar appreciation on both exports and importcompeting industries. Canadian consumer price

Monetary Policy Report to the Congress

inflation swung widely last year, rising to AV2 percent
on a twelve-month basis in February before falling
to IV2 percent in November and ending the year at
2 percent. The swing partly reflected movements in
energy prices, but changes in auto insurance premi­
ums and cigarette taxes also played an important role.
Japanese real GDP recorded significant growth in
2003 for the second straight year. Private investment
spending made the largest contribution to the expan­
sion. Consumer spending remained sluggish as labor
market conditions continued to be soft. However,
nominal wages stabilized following a sharp drop in
2002, and leading indicators of employment moved
higher. Despite an appreciation of the yen late in the
year, Japanese exports posted a strong increase in
2003 primarily because of gains in exports to China
and other emerging Asian economies. With consumer
prices continuing to decline, the Bank of Japan (BOJ)
maintained its policy interest rate near zero and
eased monetary policy several times during 2003
by increasing the target range for the outstanding
balance of reserve accounts held by private finan­
cial institutions at the BOJ. The BOJ also took other
initiatives last year to support the Japanese economy,
including launching a program to purchase securities
backed by the assets of small- and medium-sized
enterprises. Japanese banks continued to be weighed
down by large amounts of bad debt, but some
progress was made in resolving problems of insuffi­
cient bank capital and in reducing bad-debt levels
from their previous-year highs.

151

U.S. dollar exchange rates and bond spreads
for selected emerging markets
W eek ending Ja n u ary 5, 2001 = 100

Week ending January 5, 2001 = 100

Exchange rates

Argentine peso

200

Percentage points

Percentage points

Bond spreads
80 —

Brazil

Argentina

40

Note. The data are weekly averages. Last observations are the average of
trading days through February 4, 2004. Exchange rates (top panel) are in
foreign currency units per dollar. Bond spreads (bottom panel) are the spreads
of the J.P. Morgan Emerging Market Bond Index (EMBI+) over U.S.
Treasury securities.

Emerging-Market Economies
Growth in the Asian developing economies
rebounded sharply in the second half of 2003 after
having contracted in the first half. The outbreak of
SARS in China and its spread to other Asian econo­
mies was the primary factor depressing growth in the
first half, and the subsequent recovery of retail sales
and tourism after the epidemic was contained was
an important factor in the sharp rebound. The pattern
of Asian growth also reflected the sharp recovery of
the global high-tech sector in the second half after
a prolonged period of weakness. Exports continued
to be the main engine of growth for the region.
However, domestic demand contributed importantly
to growth in China, where state-sector investment
increased at a rapid clip and a boom in construction
activity continued. Supply problems caused food
prices and overall consumer prices in China to rise on
a twelve-month basis last year, following a period of
price deflation during the previous year. In addition,



concerns emerged that some sectors of the Chinese
economy, particularly the property markets in Beijing
and Shanghai, may be overheating.
Korean economic growth turned negative in the
first half, as the high level of household debt, labor
unrest, and concerns over North Korea’s nuclear
development depressed private-sector spending. A
sharp rise in exports spurred a revival of growth in
the second half even as domestic demand remained
subdued.
The Mexican economy remained sluggish through
much of the year but recently has shown some signs
of improvement. After lagging the rise in U.S. pro­
duction, Mexican industrial production posted strong
gains in October and November, although it remains
well below the peak it reached in 2000. Exports rose
late last year to almost the peak they had reached
in 2000. Consumer price inflation came down over
the course of 2003 to 4 percent, the upper bound of
the 2 percent to 4 percent target range. The Bank of

152

Federal Reserve Bulletin □ Spring 2004

Mexico has left policy unchanged since tightening
five times between September 2002 and March 2003,
but market interest rates have fallen owing to weak­
ness in economic activity.
The Brazilian economy contracted in the first half
of 2003 partly as a result of the 2002 financial crisis
and the consequent monetary policy tightening. It
then expanded moderately in the second half, boosted
by strong export growth and a recovery in investment
spending. Brazilian financial indicators improved
significantly in 2003, in part because the Brazilian
government began to run a substantial primary bud­
get surplus and to reform the public-sector pension
system. The Brazilian stock market soared nearly
100 percent last year, and Brazil’s EMBI+ bond
spread narrowed by nearly two-thirds. As the Bra­
zilian currency stabilized and began to appreciate,




Brazil’s inflation outlook improved, allowing the cen­
tral bank to reverse fully its earlier rate hikes and to
reduce the overnight interest rate to a multi-year low,
although real interest rates remained high.
The Argentine economy rebounded in 2003 from
the sharp contraction that occurred in the wake of its
financial crisis in 2001-02. Still, economic activity
remains far below pre-crisis levels, and many of
Argentina’s structural problems have not been
addressed. With the government still in default to its
bondholders, the country’s sovereign debt continued
to carry a very low credit rating, and its EMBI+
spread remained extremely high. Even so, the Argen­
tine peso appreciated on balance in 2003, and the
Merval stock index nearly doubled over the course of
the year.
□

153

Summary of Papers Presented at
the Second Conference of
the International Research Forum
on Monetary Policy
Gregg Forte, o f the Board’s Division o f Research and
Statistics, prepared this article.
The International Research Forum on Monetary
Policy held its second conference on November 14
and 15, 2003. The organization is sponsored by the
European Central Bank (ECB); the Board of Gov­
ernors of the Federal Reserve System (FRB); the
Center for German and European Studies (CGES), at
Georgetown University, in Washington, D.C.; and the
Center for Financial Studies (CFS), at the Goethe
University, in Frankfurt. It was formed to encourage
research on monetary policy issues that are relevant
from a global perspective, and it organizes confer­
ences that are held alternately in the euro area and the
United States.
The 2003 conference, held in Washington, D.C.,
featured ten papers.1 Among the topics examined
were the Great Inflation of the 1970s in the United
States and the influence of learning, or adjustment
of expectations, on policy outcomes; the tradeoffs
between rules-based and discretionary monetary pol­
icy; the 1999 formation of the European Economic
and Monetary Union and whether it altered the degree
of economic integration between the United States
and the euro area; the potential benefits of greater
competition in the euro area; and optimal monetary
policy in an international setting. This summary
discusses the papers in the order presented at the
conference.2
N o t e . The author o f this article thanks Dale Henderson and the
authors o f the conference papers for their assistance in its prepara­
tion and Christopher J. Erceg, Glenn Follette, Christopher J. Gust,
Daniel E. Sichel, and Robert J. Tetlow for helpful comments.
1. The organizers o f the forum’s 2003 conference were Ignazio
Angeloni (ECB), Matthew Canzoneri (CGES), Dale Henderson
(FRB), and Volker Wieland (CFS).
2. A list o f the papers appears at the end o f this article along with
an alphabetical list o f authors and their affiliations at the time of the
conference. For a limited period, the papers will be available at
www.federalreserve.gov/events/conferences/irfmp2003/default.htm.
In addition, a revised version of each conference paper will be
available in one o f the following series o f working papers: the




INFORMATION AND LEARNING

In the conference’s first session, “Information and
Learning,” two papers considered the conduct of
monetary policy during the high inflation and high
unemployment (stagflation) of the 1970s. In both
papers, the authors note the wide agreement today
that underlying productivity growth had fallen in the
early 1970s and that monetary policy was too accom­
modative given the resultant narrowing of the output
and unemployment gaps. Fabrice Collard and Harris
Dellas create a model that can explain the conduct of
monetary policy in the 1970s if the central bank is
fairly insensitive both to expectations of rising infla­
tion and to any perception of a wide output gap and is
also highly uncertain about potential output.
Athanasios Orphanides and John C. Williams trace
the high-inflation episode to monetary policy mis­
takes that had started earlier, in the mid-1960s. They
argue that, from the mid-1960s through the late
1970s, the Federal Reserve paid excessive attention
to stabilizing output and employment around levels
that later proved to have been too high. This policy
mistake loosened inflation expectations and gave
rise to the stagflation of the 1970s. The authors
believe that the recognition of this error at the end of
the decade led policymakers to place greater empha­
sis on the stabilization of prices and of inflation
expectations.

Collard and Dellas
In their paper, “The Great Inflation of the 1970s,”
Collard and Dellas evaluate three alternative expla­
nations of the loose policy of the 1970s:
Federal Reserve Board’s International Finance Discussion Papers
(www.federalreserve.gov/pubs/ifdp/2004/default.htm), the European
Central Bank’s Working Paper Series (www.ecb.int/pub/wp/wp.htm),
and the Center for Financial Research’s CFS Working Paper series
(www.ifk-cfs.de/English/homepages/h-cfsworkingpaper.htm).

154

Federal Reserve Bulletin □ Spring 2004

1. Policy was biased toward creating inflation sur­
prises as a means of lowering unemployment (or
“policy opportunism,” for short)
2. Policy reacted strongly to increases in expected
inflation but suffered from erroneous information
that hid the actual drop in underlying productiv­
ity growth and hence in potential output; thus,
policy was only inadvertently loose (“imperfect
information” )
3. Policy reacted weakly to increases in expected
inflation (“weak reaction to inflation” )
The authors employ a New Neoclassical Synthesis
model, specified to produce a unique equilibrium,
in which policymakers follow a standard HendersonMcKibbin-Taylor rule to set the policy rate. Finding
the conditions under which such a model will gen­
erate the 1970s volatility in inflation and in other
macroeconomic variables such as output and invest­
ment, the authors say, may indicate which of the
policy explanations is most relevant.
In the monetary policy rule, the policy variable set
by the authority in the present period is a function
of three other variables: the policy variable in the
preceding period, the inflation gap (the gap between
inflation expected in the next period and the steadystate rate), and the output gap (the gap between
current output and potential output). Potential output
is not observable, and the monetary authority learns
only gradually about shocks to it.
In looking for a specification of their model that
will reproduce the conditions of the 1970s, the
authors vary the shocks to, and the degree of uncer­
tainty about, potential output and the speed at which
the monetary authority responds to changes in the
inflation gap and the output gap. In the first (baseline)
trial, the authors assume a reaction speed about the
same as that commonly associated with the VolckerGreenspan era, that is, a coefficient of 1.5 on the
inflation gap and 0.5 on the output gap. (A value
of at least 1 for the coefficient on the inflation gap
is necessary for the model to avoid an indetermi­
nate equilibrium—that is, the possibility of reaching
various stable but undesirable economic outcomes.)
They select a supply shock—a reduction in produc­
tivity growth—sufficient to generate an increase of
5-6 percentage points in the inflation rate. They find
that with a supply shock of about 30 percent and a
high degree of uncertainty about the output gap, the
model produced the desired increase in inflation.
Moreover, this specification is quite successful in
predicting the volatility in variables such as invest­
ment, output, and inflation. Its main weakness is
in its exaggeration of the severity of the predicted



recession and in its requirement of a very large
shock.
The authors also examine the performance of the
model under perfect information and a specification
of the Henderson-McKibbin-Taylor rule that con­
tains a reaction to inflation that is too weak and thus
leads to indeterminate equilibriums. This specifica­
tion also performs quite well: It generates a large and
persistent increase in the inflation rate after a large
productivity slowdown (a supply shock of about
12 percent) and predicts an amount of macroeco­
nomic volatility comparable to that observed in the
real world. The main weakness of this specification
is, again, its exaggeration of the severity of the pre­
dicted recession.
The results from these two specifications suggest
that one need not appeal to the first explanation
(policy opportunism) to explain the inflation of the
1970s. The results also suggest that it may not be
possible to discriminate between the second expla­
nation (substantial imperfect information plus
strong reaction to expected inflation) and the third
(good information but weak reaction to expected
inflation)—the data lend considerable support to
both. The third explanation implies that economic
outcomes would have been much better had the
central bank’s reaction to inflation been stronger,
whereas the second explanation implies that, given
uncertainty about the true output gap, even a strong
reaction to inflation would not have sufficed to keep
inflation in check in the face of a very large, unob­
served productivity slowdown.

Orphanides and Williams
In “The Decline of Activist Stabilization Policy:
Natural Rate Misperceptions, Learning, and Expec­
tations,” Orphanides and Williams reexamine the
sources of U.S. stagflation in the 1970s and of
the subsequent improvement in macroeconomic
performance.
The authors trace the policy failure of the 1970s to
what they term the “activist” approach to macroeco­
nomic policy—the so-called New Economics, which
became popular during the 1960s. According to this
approach, the management of aggregate demand
could counteract any shortfalls or excesses relative to
the economy’s potential and thus attain the dual goals
of macroeconomic policy: sustained prosperity and
price stability. The enviable performance of the US.
economy in the first half of the 1960s appeared
to validate the promise of the New Economics. But
in the second half of the 1960s, the prosperity was

Second Conference of the International Research Forum on Monetary Policy

purchased at the cost of rising inflation; and by the
1970s, the economy had fallen into stagflation—high
unemployment accompanied by high inflation.
Orphanides and Williams argue that in the 1960s
and 1970s the Federal Reserve attempted a tight
stabilization of the unemployment rate near an esti­
mate of the natural rate that was far too low. The
resulting gradual rise of inflation adversely influ­
enced private agents’ expectations, which in turn put
further upward pressure on prices. This combination,
rather than only adverse supply shocks such as a drop
in productivity, explains much of the performance of
the U.S. economy in the 1970s. That is, the misper­
ception of the natural rate caused policymakers to
be far too optimistic about how low they could push
the unemployment rate without generating inflation
pressures. Policy, influenced by the New Economics,
remained excessively stimulative and contributed
to rising inflation. The rise in inflation expectations
amplified and propagated this initial policy error and
led to stagflation.
In the authors’ model, private agents have only
imperfect knowledge of the structure of the economy
and of policy, but in a process of perpetual “learn­
ing,” they continually update their beliefs. This learn­
ing process causes the direct effects of policy errors
to alter inflation expectations and thereby to further
influence the economy. According to the model, the
combination of stimulative monetary policy and ris­
ing inflation during the late 1960s and 1970s con­
tributed to public confusion regarding the Federal
Reserve’s objectives and the behavior of inflation.
Inflation expectations were initially well anchored
because of the price stability of the 1950s and early
1960s; but they changed during the late 1960s, when
policy errors and the resulting rise in inflation caused
them to drift upward. By the time that the supply
shocks of the 1970s hit, expectations of rising infla­
tion exacerbated the effects of the shocks and contrib­
uted to stagflation.
The authors point out that, although some observ­
ers suggest that monetary policy was inherently
destabilizing in the pre-1979 period, the results in
their paper do not rely on such a condition. They note
that their policy rule for the pre-1979 period, which
is based on real-time data and forecasts, features a
response of nominal rates to inflation that is greater
than one-for-one, a result consistent with stability in
the model economy.
Orphanides and Williams show that, had monetary
policy not reacted as aggressively to perceived unem­
ployment gaps as it did, inflation expectations would
have remained stable, and the stagflation of the 1970s
would have been avoided despite the dramatic



155

increases in oil prices and the productivity slowdown
during that period. According to the model, a less
aggressive reaction to the unemployment gap would
have done a better job of stabilizing inflation and
unemployment in the 1970s.
By end of the 1970s, according to the authors,
monetary policy makers appeared to recognize the
nature of the problem. Faced with high and rising
inflation, they changed course, turning away from
the fine-tuning of demand management advocated
by the New Economics and concentrating instead on
the goal of price stability. After the costly disinflation
of the early 1980s, the change in focus contributed
to a new era of relatively stable inflation and
unemployment.

MONETARY AND FISCAL POLICY
In the conference’s second session, “Monetary and
Fiscal Policy,” three papers addressed the design of
optimal policy. In the first paper, Pierpaolo Benigno
and Michael Woodford propose a model that can
address simultaneously the basic policy problems
(including sticky prices and incentives-distorting
taxes) of the monetary and fiscal authorities. In the
second paper, Susan Athey, Andrew Atkeson, and
Patrick J. Kehoe consider a compromise between the
desirability of allowing the central bank discretion
to act on private information and the desirability of
preventing the central bank from stimulating out­
put with unexpected inflation. And in the third,
Jordi Galf, J. David Lopez-Salido, and Javier Valles
attempt to reconcile the fact that a rise in government
spending leads to higher consumption with predic­
tions to the contrary from neoclassical theory and
real-business-cycle models.

Benigno and Woodford
In “Optimal Monetary and Fiscal Policy: A LinearQuadratic Approach,” Benigno and Woodford
observe that models of optimal policy for the two
types of stabilization are typically developed in
mutual isolation. Monetary policy models typically
ignore the consequences of monetary policy for the
government budget. This approach can be justified
under the assumption that nondistorting sources of
government revenue exist, but it is inappropriate if,
as emphasized in the literature on optimal tax policy,
all available sources of revenue create distortions.
Likewise, models of optimal fiscal policy at most
include elements of monetary policy only under the

156

Federal Reserve Bulletin □ Spring 2004

simplifying assumption that prices are flexible and
hence clear markets, so that tax rates affect output
without regard to aggregate demand. Investigations
of optimum monetary policy, however, confront the
excesses and deficiencies created by prices that do
not immediately adjust.
The authors propose to determine how the results
of these two types of model would need to be
modified if they are combined as two aspects of a
single general-equilibrium model and if each aspect
includes the more realistic concerns of the other. The
authors point out that they approach the task differ­
ently from some recent papers that have combined
optimal monetary and fiscal policy with sticky prices.
The differences are that the present paper (1) uses
staggered pricing of the sort appearing in models
with explicit microfoundations and in some empiri­
cal work on the monetary transmission mechanism,
(2) obtains analytical and not purely numerical results
by virtue of the linear-quadratic approach, (3) derives
optimal targeting rules for monetary and fiscal policy
that yield a single rational-expectations equilibrium
and optimal policy responses to any shock.
The authors find that, in their model, the volatility
of inflation and tax rates is highly sensitive to the
frequency with which prices change (the degree of
stickiness). In their baseline case, prices change at
just less than six-month intervals (a rate they say
is consistent with survey results). Under fully flexible
prices, the optimal response of inflation to a fiscal
shock is eighty times as large as in the baseline case,
and the long-run tax rate has no response. Even if
sticky p rices adjust as frequently as ev ery five w eeks,
the optimal response of inflation and of the long-run
tax rate are much closer to those in the baseline case
than those under fully flexible prices. Likewise, in
contrast to the monetary policy literature with lump­
sum taxes, the authors find that, in their model, a
government spending shock creating fiscal stress
affects the optimal path of inflation and the output
gapThe authors set up targeting rules for the monetary
and fiscal authorities in the form of commitments to
maximize social welfare by adjusting the short-term
interest rate and the tax rate, respectively. And each
authority simultaneously makes the projected paths
of inflation and the output gap (the target variables)
satisfy the attainment of a unique, nonexplosive,
rational-expectations equilibrium. Both monetary and
fiscal policy can be used to stabilize an output gap
that measures the perturbations from sticky prices
and from distortionary taxes (taxes that are scaled to
some payer variable such as income and that there­
fore influence, or distort, the payer’s economic deci­



sions); and fiscal policy can be used to address infla­
tion because distortionary taxes affect real marginal
costs and thus aggregate supply. Hence, monetary
policy should take account of the requirements for
government solvency, and fiscal policy should attend
to its influence on inflation.
Athey, Atkeson, and Kehoe
In “The Optimal Degree of Monetary Policy Discre­
tion,” Athey, Atkeson, and Kehoe note that, accord­
ing to most of the academic literature, there is no
justification for policy discretion unless the central
bank has important private information, information
not available to the private sector. Acting to maxi­
mize social welfare, the central bank achieves the
best outcomes when it follows a rule based on pub­
licly observable data. There is scope for debate about
the optimal degree of discretion if the central bank
does have information. The question is this: How
much risk of policy opportunism (boosting output
through inflation surprises) should be tolerated to
allow the central bank discretion to act on its private
information?
In the authors’ model, the central bank has private
information on the state of the economy that deter­
mines society’s preferred level of inflation. If this
state is low, society desires low inflation; if it is high,
society desires high inflation. In each period, private
agents set their nominal wages before the monetary
authority sets the inflation rate. This timing gives the
central bank an incentive to engineer surprise infla­
tio n to red u ce real w ag es an d th ereb y lo w e r u n e m ­

ployment toward its optimal level.
The optimal policy takes the form of an inflation
cap. The benefit of reducing the cap is a decrease
in the latitude for policy opportunism. The cost is
a decrease in the scope for the central bank to use
its private information to stabilize the economy. The
cap is chosen low enough so that the cost of any
further reduction just matches the benefit. One inter­
pretation of the cap is that it is the optimal inflation
target.
The main theoretical contribution of the paper is to
make clear what information is required to choose the
optimal (time-varying) inflation cap. It is remarkable
that under some common assumptions the level of the
cap depends only on the central bank’s report on the
current state of the economy. Otherwise it depends on
reports on both current and past states.
The main practical contribution is to forcefully
restate the argument that the case for central bank
discretion rests on the assumption that the central
bank has important private information.

Second Conference of the International Research Forum on Monetary Policy

Gall, Lopez-Salido, and Valles
In most macroeconomic models, say Gall, LopezSalido, and Valles in “Understanding the Effects
of Government Spending on Consumption,” a rise
in government purchases of goods and services will
tend to expand output. But the strength of that ten­
dency varies greatly across types of models. The
differences are rooted in alternative assumptions
about how consumers react to the rise in current
income attributable to the rise in government spend­
ing. In neoclassical (real-business-cycle, or RBC)
models, consumers are assumed to spend according
to a measure of their lifetime resources. A further
common assumption is that, when government spend­
ing rises, these consumers will look ahead, in
so-called Ricardian fashion, and anticipate that the
present value of their after-tax lifetime income will
fall because taxes will rise at some point to finance
the higher government spending. Their anticipation
of lower future income causes them to reduce their
consumption immediately. But the supply of labor
grows, real wages fall, and employment and output
grow.
In traditional Keynesian models, consumers are
not forward looking. They spend according to their
current disposable income rather than their estimate
of lifetime resources. Thus, an increase in govern­
ment spending can directly increase output because
higher demand from government need not be offset
by lower demand from consumers. If the higher
government spending is sufficiently financed by bor­
rowing, it raises consumer income and is thus aug­
mented by an increase in consumer demand. If the
money supply is fixed, interest rates rise and invest­
ment falls; in contrast, an accommodation of the
output expansion by the central bank will, depending
on the extent of the policy easing, moderate or elimi­
nate the investment decline.
In a review of the empirical evidence and through
an investigation of their own, the authors find that,
indeed, a rise in government spending leads to a
significant increase in consumption and to little
change, or a fall, in investment. They propose a
general equilibrium model in which Ricardian and
non-Ricardian consumers coexist and prices are
sticky. The authors argue that both price stickiness
and the existence of non-Ricardian consumers are
necessary for an increase in government spending to
raise consumption. Price stickiness lowers markups
and allows real wages to rise along with employment;
in turn, non-Ricardian consumers will respond to
their higher income by increasing their consumption.
The authors find that, for plausible settings for the



157

proportion of non-Ricardian consumers, the degree
of price stickiness, and the extent of debt financing,
their model’s results accord with empirical findings.
The model assumes that the taxes imposed to
finance the rise in government spending are lump­
sum, that is, they are the same dollar amount for each
taxpayer. The authors leave to future research the
question of how the model would respond if taxpayer
liability varied with income.

INTERNATIONAL LINKAGES

The conference’s third session, “International Link­
ages,” featured three papers on the consequences of
various economic policies and market structures in
open economies. Nicoletta Batini, Paul Levine, and
Joseph Pearlman look for the conditions under which
central banks in open economies could effectively set
policy according to a rule based on expected infla­
tion. Tamim Bayoumi, Douglas Laxton, and Paolo
Pesenti consider the efficiency gains in the industrial
countries that could be expected from an increase
in competition among businesses and workers in
the euro area. And Michael Ehrmann and Marcel
Fratzscher investigate whether the interdependence
of the U.S. and euro-area money markets has
increased since the advent of the European Economic
and Monetary Union in 1999.

Batini, Levine, and Pearlman
Much work has been devoted to modeling closed
economies in which the monetary authority changes
interest rates in response to changes in expected,
rather than current, inflation. Such policy behavior
matches that in the inflation-forecasting models
maintained at the central banks of Canada and
New Zealand and appears to be consistent with recent
monetary policy in the United States and the euro
area. A criticism of a rule that responds to expected
inflation is that of indeterminacy—it can lead to any
of several equilibriums, some of which have undesir­
able outcomes for household welfare. In “Indetermi­
nacy with Inflation-Forecast-Based Rules in a TwoBloc Model,” Batini, Levine, and Pearlman extend
existing work on indeterminacy under such rules to
the case in which economies are open.
Their study uses a New Keynesian (that is, sticky
nominal wages and prices) general equilibrium model
based on microeconomic foundations with two coun­
try blocs. In each bloc the monetary authority follows
the same inflation-forecast-based (IFB) rule. The

158

Federal Reserve Bulletin □ Spring 2004

model includes two features—habit persistence in
consumption and backward-looking wage and price
indexing—to improve its ability to mimic fluctua­
tions in output, prices, and nominal interest rates in
the euro area and the United States; and it includes
one feature—home bias in consumption patterns—
that improves its tracking of real exchange rate fluc­
tuations between the two blocs. The authors show
that if the monetary authorities respond to inflation
forecasts too far ahead, the IFB rule produces an
indeterminate equilibrium no matter how aggressive
the response is. They also find that indeterminacy
arises more readily in an open economy than in a
closed one. Finally, they find that indeterminacy in an
open economy is more likely if the monetary authori­
ties respond to expected consumer price inflation
rather than to expected producer price inflation.
The authors consider the results arising from alter­
native choices of inflation horizons and of inflation
indexes for use in the policy rule to be an important
warning for the central banks of the United States
and the euro area. The reason is that both authorities
seem to focus primarily on medium-term consumer
price inflation expectations, thereby compounding the
possibility of indeterminacy.

Bayoumi, Laxton, and Pesenti
Overregulation in Europe’s product and labor mar­
kets is currently a leading explanation for the euro
area’s lower income per capita relative to the United
States, and the reduction of such impediments has
become a major policy topic in Europe. Bayoumi,
Laxton, and Pesenti employ a version of the Global
Economy Model (GEM) of the International Mone­
tary Fund to examine the potential benefits from such
deregulation. GEM provides for imperfect compe­
tition through markups in prices and wages above
marginal costs and marginal output; the markups
decrease as the substitutability of goods and inputs
(that is, competition) increases. In the authors’ twobloc version of GEM, one bloc is calibrated with
euro-area data, and the other, which represents the
rest of the industrialized world, is calibrated with
U.S. data.
The resulting study, “When Leaner Isn’t Meaner:
Measuring Benefits and Spillovers of Greater Compe­
tition in Europe,” simulates greater competition in
the euro area by lowering euro-area markups in
the model to the level of those in United States.
With greater competition, businesses and workers
in the euro area are less able to restrict their respec­
tive supplies. Accordingly, output and consumption



increase strongly in the euro area; in the rest of the
industrialized world, output increases somewhat, and
consumption increases more than output because
of an improvement in the terms of trade. Moreover,
the authors show that, because greater competition
improves the flexibility of wages and prices in the
euro area, the central bank there faces an improved
tradeoff between inflation and the output gap.
The markups employed in the model are based on
empirically estimated data from both the United
States and Europe, and the simulation results cover
ten years. The authors emphasize that the quantitative
results represent only an initial estimate subject to
further refinements. These results show that, over the
ten-year period, euro-area output per capita rises
about XlVi percent above baseline (the level of out­
put per capita if markups are not changed), and
U.S.-calibrated output rises about 1 percent above
baseline. The combined result closes about one-half
of the per capita output gap between the two blocs.
Euro-area consumption per capita rises about 8 per­
cent above baseline. Accounting for the disutility
of the rise in labor effort, welfare increases about
2Vi percent. Consumption and welfare in the other
bloc rise about VA percent because of an improve­
ment in the terms of trade with the euro area. Finally,
the tradeoff facing the euro-area monetary authority
also improves because of a one-third reduction, rela­
tive to baseline, in the sacrifice ratio—the amount of
output lost by lowering inflation 1 percentage point.
Robustness checks indicate that the effect on the euro
area economy is relatively invariant to alternative
assumptions about key parameters but that the spill­
overs to the rest of the world are sensitive to these
assumptions.

Ehrmann and Fratzscher
An extensive literature has documented the influence
of domestic economic news on domestic interest
rates and asset prices. In “Equal Size, Equal Role?
Interest Rate Interdependence between the Euro Area
and the United States,” Ehrmann and Fratzscher
investigate the international extent of such influence
by looking at economic news and the behavior of
interest rates in Germany and the United States from
1993 through 1998 and in the euro area and the
United States from 1999 through February 2003. The
paper attempts to measure the degree to which
foreign news moves financial markets and whether
U.S. and European financial markets have become
more interdependent since the 1999 launch of the
European Economic and Monetary Union (EMU). By

Second Conference of the International Research Forum on Monetary Policy

examining the correlation of announcements of eco­
nomic fundamentals in the two regions, the authors
also assess whether greater financial interdependence
reflects a broader increase in economic interdepen­
dence between the two regions.
In studying daily money market rates for the 1993—
2003 period, the authors find that money market
linkages have strongly increased with the arrival of
the EMU. During trading hours, the changes in
money market rates in the euro area generally spill
over to the United States and vice versa. Although
developments in one market are not completely
reflected in the other market, the linkage is highly
significant in statistical tests. Moreover, the EMU has
changed this relationship between markets in two
dimensions. First, the systematic reaction of U.S.
markets to developments in Europe can be found
only with the start of the EMU. Through statistical
testing methods, this increased linkage can be dated
to June 1998, the time by which markets were certain
that the EMU would become a reality. Second, the
extent to which market movements in the United
States are reflected in the euro-area money market
has increased. This effect, too, is linked with the
formation of the EMU.
The authors go beyond the linkages that can be
observed each trading day to study the extent to
which markets react to the release of macroeconomic
news or monetary policy decisions in the other econ­
omy. European markets are found to react to cer­
tain macroeconomic news about the U.S. economy.
This phenomenon can be identified particularly for
releases of U.S. data on retail sales, consumer confi­
dence, industrial production, and the survey from the
National Association of Purchasing Management—
that is, mostly announcements that are known as
leading indicators for the U.S. economy. Importantly,
this reaction of euro-area money markets started only
with the advent of the EMU.
The results raise the question of why the U.S. and
euro-area money markets have become so much more
interdependent and, in particular, why some U.S.
news has become an important determinant of euroarea interest rates. This finding may reflect growing
real integration and interdependence between the two
economies. A second interpretation ties the result to
the timing of the news releases in each economy—
U.S. macroeconomic news is released significantly
ahead of the corresponding news in Germany and the
euro area. Testing for this hypothesis, the authors
show that U.S. announcements have, over time,
become strong leading indicators for the euro-area
economy. Accordingly, investors in recent years may
be paying increasing attention to U.S. news to learn



159

about the prospects of the euro-area economy. In
short, according to the authors, their findings suggest
that the U.S. and euro-area money markets have
become significantly more interdependent since the
start of the EMU, a development at least partly due to
an increase in the real integration of the U.S. and
euro-area economies in recent years.

O p t im a l M o n e t a r y P o l ic y
The fourth and final session of the conference, “Opti­
mal Monetary Policy,” featured two papers. In the
first paper, Robert G. King and Alexander L. Wolman
investigate the problem of multiple equilibriums un­
der a discretionary monetary policy. In the second,
Ester Faia and Tommaso Monacelli consider optimal
monetary policy in a world in which policymakers in
each country have an incentive to improve the wel­
fare of domestic residents by manipulating the terms
of trade in their own favor.

King and Wolman
Those who advocate policy rules criticize discre­
tionary monetary policy mainly because, through
attempts to stimulate output with surprise policy easings, it leads to higher average inflation than does a
policy rule. In neoclassical models, such attempts can
be futile because private-sector agents come to expect
the behavior; as a result, inflation is higher, but out­
put remains essentially unchanged. The inflationary
bias of discretionary monetary policy can also be
derived from New Keynesian models, in which out­
put is inefficiently low because of imperfect compe­
tition, prices are set for a fixed length of time, and
agents have differing repricing schedules (staggered
pricing).
In their paper, “Monetary Discretion, Pricing
Complementarity, and Dynamic Multiple Equilib­
ria,” King and Wolman demonstrate, in a New Key­
nesian setting, that besides producing high inflation,
discretion has a further adverse consequence. It can
produce multiple equilibriums that lead to excess
volatility in prices and output because of changing
beliefs of private agents. The volatility arises because
forward-looking price setting by firms interacts with
discretionary behavior by a monetary authority
attempting to maximize private welfare.
In the authors’ model, firms set prices for two
periods by applying a markup to their nominal mar­
ginal costs in the current period and their expected
nominal marginal costs in the next period. In each

160

Federal Reserve Bulletin □ Spring 2004

period, one-half of all firms set their prices, and the
other half hold them steady at the level set in the
preceding period. Optimal behavior on the part of the
discretionary monetary authority implies that it
chooses the size of the money stock in each period to
be proportional to prices set by firms in the previous
period.
If firms resetting prices in the current period expect
the money supply to be higher in the next period,
they will raise their prices because the increase in the
money stock in the next period will act to increase
their nominal marginal costs in the next period. The
expectation of a higher money stock can be selffulfilling because the monetary authority will increase
the stock in the next period precisely because prices
were raised in the current period. Hence, besides
discretionary policy’s having an inflationary bias, the
interaction of beliefs and discretionary policy sets off
inefficient fluctuations in economic activity.

Faia and M onacelli
In “Ramsey Monetary Policy and International Rela­
tive Prices,” Faia and Monacelli examine optimal
monetary policy in a two-country New Keynesian
model (sticky prices, imperfect competition). The
authors use a Ramsey framework, familiar from the
optimal-taxation literature, which, they note, is not
often deployed in analyses of monetary and exchange
rate policy in open economies. The Ramsey approach
allows the authors to consider a much more general
specification of household preferences than pre­
viously considered. Moreover, the authors incorpo­
rate a dynamic specification of price-setting that
affords them a more coherent framework for assess­
ing the benefits of policies that are set according to
rules rather than discretion.
In the authors’ model, policymakers maximize the
welfare of domestic residents subject to the con­
straints of the competitive economy. Because prices
are sticky, policymakers in each country have an
incentive to implement policies that manipulate the
terms of trade in their own country’s favor (that is,
improve the domestic tradeoff between consumption
and production by raising the price of home goods
relative to that of foreign goods).
The authors show that the equilibrium behavior
that emerges when domestic policymakers act in such
an uncoordinated manner is quite different from that
which would obtain if a single “world social plan­
ner” formulated policy for the two countries. In
particular, prices are much less stable than if there
were a world social planner. Moreover, only under



the coordinated policy would both countries target
the same allocation of resources that would occur
under flexible prices.
The authors indicate three restrictions of the model
that could be amended in future work to allow more
realistic adjustments in the current account: (1) The
law of one price holds continuously, (2) households
fully share risk via international financial markets,
and (3) households invest in only financial, not physi­
cal, assets.

C o n f e r e n c e Pa p e r s
Athey, Susan, Andrew Atkeson, and Patrick J. Kehoe.
“The Optimal Degree of Monetary Policy
Discretion.”
Batini, Nicoletta, Paul Levine, and Joseph Pearlman.
“Interdeterminacy with Inflation-Forecast-Based
Rules in a Two-Bloc Model.”
Bayoumi, Tamim, Douglas Laxton, and Paolo
Pesenti. “When Leaner Isn’t Meaner: Measuring
Benefits and Spillovers of Greater Competition in
Europe.”
Benigno, Pierpaolo, and Michael Woodford. “Opti­
mal Monetary and Fiscal Policy: A LinearQuadratic Approach.”
Collard, Fabrice, and Harris Dellas. “The Great Infla­
tion of the 1970s.”
Ehrmann, Michael, and Marcel Fratzscher. “Equal
Size, Equal Role? Interest Rate Interdependence
between the Euro Area and the United States.”
Faia, Ester, and Tommaso Monacelli. “Ramsey
Monetary Policy and International Relative
Prices.”
Galf, Jordi, J. David Lopez-Salido, and Javier Valles.
“Understanding the Effects of Government Spend­
ing on Consumption.”
King, Robert G., and Alexander L. Wolman. “Mone­
tary Discretion, Pricing Complementarity, and
Dynamic Multiple Equilibria.”
Orphanides, Athanasios, and John C. Williams. “The
Decline of Activist Stabilization Policy: Natural
Rate Misperceptions, Learning, and Expectations.”

Second Conference of the International Research Forum on Monetary Policy

161

A u tho rs
Affiliations are as of the time of the conference.
Susan Athey
Stanford University and National Bureau
o f Economic Research

Robert G. King
Boston University and National Bureau o f Economic
Research

Andrew Atkeson
University o f California-Los Angeles, Federal
Reserve Bank o f Minneapolis, and National Bureau
o f Economic Research

Douglas Laxton
International Monetary Fund

Nicoletta Batini
Bank o f England
Tamim Bayoumi
International Monetary Fund
Pierpaolo Benigno
New York University
Fabrice Collard
Groupe de Recherche en Economie Mathematique
et Quantitative (Universite de Toulouse and Centre
National de la Recherche Scientifique)
Harris Dellas
University o f Bern
Michael Ehrmann
European Central Bank
Ester Faia
Universitat Pompeu Fabra
Marcel Fratzscher
European Central Bank
Jordi Galf
Centre de Recerca en Economia Intemacional
and Universitat Pompeu Fabra
Patrick J. Kehoe
Federal Reserve Bank o f Minneapolis, University
o f Minnesota, and National Bureau o f Economic
Research




Paul Levine
University o f Surrey
J. David Lopez-Salido
Banco de Espana
Tommaso Monacelli
Innocenzo Gasparini Institute fo r Economic Research
(Universita Bocconi) and Centre fo r Economic Policy
Research
Athanasios Orphanides
Board o f Governors o f the Federal Reserve System
Joseph Pearlman
London Metropolitan University
Paolo Pesenti
Federal Reserve Bank o f New York and National
Bureau o f Economic Research
Javier Valles
Banco de Espana
John C. Williams
Federal Reserve Bank o f San Francisco
Alexander L. Wolman
Federal Reserve Bank o f Richmond
Michael Woodford
Princeton University

□

162

Profits and Balance Sheet Developments
at U.S. Commercial Banks in 2003
Mark Carlson and Roberto Perli, o f the Board’s
Division o f Monetary Affairs, prepared this article.
Thomas C. Allard assisted in developing the database
underlying much o f the analysis. Jason Grimm and
Steve Piraino provided research assistance.
The U.S. commercial banking industry remained
highly profitable in 2003. The return on assets at
banks surpassed the previous year’s record level, and
the return on equity approached the top of its recent
range (chart 1). Banks’ profits and balance sheets
were shaped in part by the financial and economic
conditions that prevailed during the year. Perhaps
most important, monetary policy remained highly
accommodative. The Federal Reserve reduced the
intended federal funds rate at midyear from an
already low level; and with short-term rates anchored
by policy, longer-term interest rates, although vola­
tile, generally remained low (chart 2). Home mort­
gage interest rates dropped to very low levels in the
first half of the year, and yields on many corporate
bonds, especially non-investment-grade bonds, fell
N o t e . Except where otherwise indicated, data in this article are
from the quarterly Reports o f Condition and Income (Call Reports) for
insured domestic commercial banks and nondeposit trust companies
(hereafter, banks). The data consolidate information from foreign and
domestic offices and have been adjusted to take account o f mergers.
For additional information on the adjustments to the data, see the
appendix in William B. English and William R. Nelson, “Profits and
Balance Sheet Developments at U.S. Commercial Banks in 1997,”
Federal Reserve Bulletin, vol. 84 (June 1998), p. 408. Size categories,
based on assets at the start of each quarter, are as follows: the ten
largest banks, large banks (those ranked 11 through 100), medium­
sized banks (those ranked 101 through 1,000), and small banks. At the
start o f the fourth quarter of 2003, the approximate asset sizes o f the
banks in those groups were as follows: the ten largest banks, more
than $92 billion; large banks, $7.2 billion to $92 billion; medium­
sized banks, $398 million to $7.1 billion; and small banks, less than
$398 million.
Many o f the data series reported here begin in 1985 because the
Call Reports were significantly revised in 1984. Data for 1984 and
earlier years are taken from the Federal Deposit Insurance Corpo­
ration, H istorical Statistics on Banking, 1999. The pre-1985 data
reported here are also available on the Internet at www2.fdic.gov/
hsob/index.asp.
Data shown in this article may not match data published in earlier
years because o f revisions and corrections. In the tables, components
may not sum to totals because of rounding. Appendix table A .l
reports income statement data for all banks. Appendix table A.2, A -E,
reports portfolio composition, income, and expense items, all as a
percentage o f overall net consolidated assets.




noticeably as risk spreads contracted to the lowest
levels in more than five years.
This supportive interest rate backdrop, coupled
with stimulative fiscal policy, helped broaden and
strengthen the economic expansion last year. House­
hold spending continued to be strong. Low residen­
tial mortgage rates spurred home sales to record
levels, and mortgage refinancing swelled. Low inter­
est rates, along with the attractive incentives for
automobile purchases, contributed to a pickup in
spending on consumer durables. Also, many corpo­
rations took advantage of attractive costs of funds to
strengthen their balance sheets, often by issuing long­
term debt and using the proceeds to pay down com­
mercial paper and bank loans. The pickup in aggre­
gate spending, together with continued favorable
productivity trends, boosted corporate profits. And
in the second half of the year, brighter business
prospects finally began to show through to equip­
ment spending, which had been anemic for several
quarters.
These economic developments left an imprint on
banks’ balance sheets. The strength of the housing
market and the record levels of refinancing activity
boosted the share of total bank assets accounted for
by residential mortgages and mortgage-backed secu­
rities to 28.5 percent by the end of 2003. Business
loans declined for the third consecutive year as busi­
nesses used the proceeds of bond issuance to pay
1.

Measures of bank profitability, 1985-2003

Percent

Percent

163

2.

Selected interest rates, 1999-2004:Q1
Percent

Ten-year Treasury security

Intended federal funds rate

High-yield bonds

M oody’s Baa corporate bond

Thirty-year fixed mortgage

_
_J_______ I ______ 1
S o u r c e . Data are monthly. For the intended federal funds rate, Federal
Reserve Board (www.federalreserve.gov/fomc/fundsrate.htm); for Treasury
security rates, mortgage rate, and Moody’s bond rates, Federal Reserve
Board,
Statistical
Release
H.15,
“Selected
Interest
Rates”
(www.federalreserve.gov/releases/hl5); for high-yield bond rates, Merrill
Lynch Master II index.

down short-term debt and financed many of their
investment outlays with internal funds. But the runoff
was slower in 2003 than in 2001 and 2002, and as
equipment spending recovered and inventories were
built up late in the year, demand for business loans
showed signs of turning around. Inflows of core
deposits remained strong, as deposit rates fell less
than market yields and households responded to the
low opportunity cost of holding liquid assets.
Economic developments also significantly affected
banks’ profitability. The wave of residential mortgage
refinancing led to a surge in income from fees associ­
ated with the origination, sale, and servicing of these
loans. An elevated level of corporate bond issuance
supported investment banking income. Debt refinanc­
ing led to a reduction in borrowers’ debt-service
burdens, which in turn lowered delinquency rates.
The decline in interest rates, especially during the
first half of the year, allowed banks to realize gains
by selling some of their investment securities; how­
ever, it also likely contributed to a further narrowing
of net interest margins.



With increasing business profitability and lower
business debt-service burdens, delinquency rates on
commercial and industrial loans, which had risen
in the previous three years, dropped back notably.
Because of lower residential mortgage interest rates
and increased house prices, households could extract
equity from their homes by taking out cash through
either refinancing or home equity loans; the proceeds
were used partly to pay down higher-rate debt. With
the credit quality of their loan portfolios improv­
ing considerably during the year, banks were able
to reduce loan-loss provisions; such reduction was
a substantial contributor to the increase in bank
profitability.
The number of commercial banks in the United
States moved down to 7,825 at the end of 2003 from
7,936 a year earlier—the smallest decrease in more
than a decade (chart 3).1 The decline occurred as the
number of mergers—which fell to 245, also the
smallest number in more than a decade—continued
to exceed the number of new bank charters, which
was slightly higher last year. According to the Fed­
eral Deposit Insurance Corporation, only three banks
failed in 2003. These banks held $1.1 billion in
assets at the time of failure, a tiny fraction of industry
assets and less than half the assets at failed banks
during 2002. The shares of industry assets held by
1.
This count of commercial banks may vary slightly from mea­
sures, such as those in the Federal Reserve’s Annual Report, that are
based on the definition of a bank given in the Bank Holding Company
Act and implemented in the Federal Reserve’s Regulation Y.

3.

Number of banks and share of assets
at the largest banks, 1985-2003

Number

—

—

Largest 100

16

60
40

Largest 10

20

I I 1 I I I I I I 1 I I I i I I I I I I
1985

1988

1991

1994

1997

2000

N o t e . For the definition of bank size, see the text note.

2003

164

Federal Reserve Bulletin □ Spring 2004

the 10 largest banks and 100 largest banks both edged
up 1 percentage point, to 44 percent and 75 percent
respectively.
Mergers were also restrained at the bank holding
company (BHC) level. Top-tier BHCs—that is, BHCs
that are not a subsidiary of another BHC—increased
by 17, to 5,152: The number of newly formed BHCs
slightly exceeded the number of mergers. The share
of assets held by the top fifty BHCs was about
73.7 percent. The number of domestic financial hold­
ing companies, a subset of BHCs with a greater scope
of allowed activities under the Gramm-Leach-Bliley
Act, ticked down to 601, and the share of BHC assets
held by these financial holding companies moved
down to 89.5 percent.2

BALANCE SHEET DEVELOPMENTS
Total bank assets grew 7.2 percent in 2003, about
1 percentage point less than the growth of total
domestic nonfinancial debt (table l).3 With low mort­
gage rates and a strong housing market, mortgagebacked securities and residential real estate loans
were among the major drivers supporting asset
growth. The advances in those components more
than compensated for the continued runoff in com­
mercial and industrial loans, which declined for the

2.
The Federal Reserve Board provides quarterly reports on the
condition o f the banking industry from the perspective of bank hold-

1.

ing companies that file report FR Y-9C/FR Y -9LR Publication o f
these reports started in the winter 2004 issue of the Federal Reserve
Bulletin.
3.
The adoption of FASB Interpretation No. 46, or FIN 46, boosted
asset growth last year, but the effect was likely less than 1 percentage
point (see box “The Effects of FASB FIN 46 on Banks’ Balance
Sheets” ).

Annual rates of growth of balance sheet items, 1994-2003
Percent

Memo:
Item

Assets ..............................................................
Interest-earning assets ..............................
Loans and leases (n e t)..........................
Commercial and industrial .............
Real estate .........................................
Booked in domestic offices.........
One- to four-family
residential ........................
Other .........................................
Booked in foreign offices ...........
Consumer...........................................
Other loans and leases .....................
Loan-loss reserves and
unearned incom e......................
Securities.................................................
Investment account ..........................
U.S. Treasury ................................
U.S. government agency and
corporation obligations........
Other ...............................................
Trading account ................................
Other ......................................................
Non-interest-earning assets......................

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Dec.
2003
(billions
of
dollars)

8.06
5.28
9.82
9.34
7.94
7.68

7.57
7.80
10.58
12.25
8.28
8.43

6.10
5.79
8.12
7.24
5.45
5.51

9.23
8.67
5.34
12.02
9.30
9.53

8.26
8.28
8.89
12.94
7.99
7.97

5.44
5.84
8.04
7.88
12.22
12.36

8.75
8.65
9.24
8.54
10.74
11.02

5.12
3.96
1.82
-6.73
7.94
8.02

7.20
7.54
5.90
-7.29
14.43
14.85

7.20
7.29
6.53
-4.56
9.77
9.68

7,456
6,432
4,259
863
2,249
2,214

10.14
4.38
18.35
15.89
5.29

10.01
6.21
2.81
9.86
14.22

4.66
6.75
3.18
4.90
22.28

9.67
9.32
.34
-2.19
-7.91

6.36
10.29
8.79
.99
13.95

9.70
16.06
6.28
-1.47
6.71

9.28
13.30
-1.62
8.05
6.99

5.70
10.96
3.97
4.17
-2.00

19.85
8.81
-7.41
6.58
-.26

10.04
9.21
15.52
9.33
8.35

1,267
946
36
710
513

-2.27
-4.14
-1.73
n.a.

.38
.56
-1.58
-19.21

-.06
.86
-1.10
-14.28

-.50
8.85
8.66
-8.85

3.47
8.40
12.06
-25.17

2.35
5.11
6.68
-1.89

7.97
6.33
2.82
-32.74

13.17
7.25
8.91
-40.25

5.74
16.20
13.54
41.92

-2.72
9.43
8.70
14.18

77
1,662
1,422
72

n.a.
n.a.
-20.46
3.30
31.62

6.42
4.19
18.51
8.61
6.05

3.63
1.83
14.44
1.04
8.28

14.18
11.20
10.00
38.55
13.03

17.00
26.99
-13.32
3.80
8.12

1.83
20.90
-6.93
-8.37
2.90

3.71
13.38
37.16
10.29
9.44

12.89
12.18
-3.72
13.00
12.81

18.10
2.72
36.02
-2.91
5.11

9.66
5.99
14.03
6.93
6.60

903
447
240
511
1,024

8.31
-.15
-.31
-.0 6
17.53

7.20
3.94
-3.11
8.35
10.56

5.96
4.13
-3.44
8.35
9.66

9.12
4.52
-4.55
9.04
13.84

8.14
7.04
-1.41
10.73
9.64

5.58
.23
-8.98
3.80
15.54

8.58
7.53
-1.31
10.54
8.77

4.46
10.55
10.20
10.66
-2.71

7.13
7.58
-5.12
11.42
5.36

7.25
7.12
2.19
8.39
7.24

6,781
3,666
716
2,949
2,605

Liabilities........................................................
Core deposits .............................................
Transaction deposits ............................
Savings and small time deposits.........
Managed liabilities' ..................................
Deposits booked in foreign
offices .............................................
Large tim e...............................................
Subordinated notes and
debentures .....................................
Other managed liabilities .....................
Other ............................................................

30.89
8.73

5.13
19.60

4.27
21.17

11.13
20.15

8.71
9.09

14.60
14.19

7.79
19.37

-10.92
-3.65

4.49
5.05

12.63
1.43

741
579

9.23
12.80
79.17

6.61
11.52
20.48

17.74
8.21
2.60

21.05
12.23
23.79

17.00
9.97
8.59

5.07
17.76
-6.37

13.98
3.89
15.39

9.56
2.48
3.11

-.59
6.59
13.55

5.84
7.15
8.30

100
1,186
511

Equity capital ................................................

5.23

12.04

7.74

10.45

9.58

3.92

10.65

12.32

7.84

6.63

674

Memo
Commercial real estate loans 2 .....................
Mortgage-backed securities ........................

4.02
n.a.

6.32
.66

7.67
2.06

10.13
14.16

11.37
22.12

15.42
-3.34

12.15
3.28

13.10
29.06

6.82
15.56

9.01
10.09

944
761

Note. Data are from year-end to year-end.
1. Measured as the sum of deposits in foreign offices, large time deposits in
domestic offices, federal funds purchased and securities sold under repurchase
agreements, demand notes issued to the U.S. Treasury, subordinated notes and
debentures, and other borrowed money.




2. Measured as the sum of construction and land development loans secured
by real estate; real estate loans secured by nonfarm nonresidential properties;
real estate loans secured by multifamily residential properties; and loans to
finance commercial real estate, construction, and land development activities
not secured by real estate.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

third straight year as nonfinancial firms relied heavily
on capital markets and internal funds to finance their
activities. Overall, total loans and leases increased
6.5 percent, and securities expanded 9.4 percent.
On the liability side of the balance sheet, banks
were again able to attract strong inflows of core
deposits, especially into savings and money market
deposit accounts, because banks reduced deposit rates
less than money market yields declined; conse­
quently, the opportunity costs for households of hold­
ing liquid deposits fell further. Nonetheless, banks
also had to increase their managed liabilities to
finance asset growth.
Banks continued to add to their capital in 2003,
and their overall capital positions remained robust.
While equity capital increased somewhat more
slowly than assets did, risk-based regulatory capital
ratios still edged up a bit, an uptick driven both by a
shift in asset composition toward assets with low risk
weights— such as government and agency-related
mortgage-backed securities and residential real estate
loans—and by the brisk expansion of tier 1 capital.

Loans to Businesses
Commercial and industrial (C&I) loans declined
4.6 percent in 2003, a fair bit less than in 2001 and
2002.4 Issuance of bonds, particularly those rated
below investment grade, was strong last year, as low
interest rates and declining risk spreads offered cor­
porations the opportunity to lock in low-cost long­
term financing. The proceeds were used, in part,
to pay down short-term obligations, including C&I
loans. Because the customers of large banks are more
likely to be large corporations with access to bond
markets, the erosion in C&I lending was concen­
trated at large banks (those ranked in the top 100 in
terms of assets, which account for about three-fourths
of total C&I loans). At smaller banks, on a mergeradjusted basis, commercial loan portfolios actually
expanded, although their growth was about flat before
adjustment.
The improved profitability of nonfinancial firms
also damped loan demand, as substantial gains in
profits outpaced the growth of firms’ capital expen­
ditures; consequently, the financing gap—the differ­
ence between investment outlays and internally
generated funds—fell and became negative in 2003
(chart 4). A boost in inventory spending by nonfinan4.
For a more detailed analysis of recent trends in C&I lending, see
William Bassett and Egon Zakrajsek, “Recent Developments in Busi­
ness Lending by Commercial Banks,” Federal Reserve Bulletin,
vol. 89 (December 2003), pp. A ll-9 2 .




4.

165

Financing gap at nonfarm nonfinancial corporations,
1991-2003
Billions o f dollars

N o t e . The data are four-quarter moving averages. The financing gap is the
difference between capital expenditures and internally generated funds.
S o u r c e . Federal Reserve Board, Statistical Release Z .l, “Flow of Funds
Accounts of the United States,” table F. 102 (www.federalreserve.gov/
releases/zl).

cial firms late last year, however, likely helped limit
the contraction in business loans.
Responses to the Senior Loan Officer Opinion Sur­
vey on Bank Lending Practices (BLPS) also suggest
that the drop in aggregate business loans resulted
primarily from decreased demand. Survey responses,
especially early in the year, often pointed to weak
investment and inventory spending by businesses
and to the shift to other forms of financing as factors
explaining the drop in C&I loans. However, the mar­
gin by which respondent banks reporting decreases
in demand exceeded those reporting increases in
demand diminished over 2003, and a small net frac­
tion reported stronger demand in the January 2004
BLPS (chart 5, top panel). According to respondent
banks, the strengthening of demand was spurred by
spending on plant and equipment and by increased
funding needs to finance accounts receivable and
inventories.
Supply conditions apparently played only a sec­
ondary role in the weakness of C&I loans. In the first
part of 2003, banks reported tightening both stan­
dards and terms somewhat; but by the end of the year,
a substantial net fraction of respondents had begun
easing terms, and in the January 2004 BLPS a signifi­
cant net fraction reported easier standards (chart 5,
bottom panel). The reasons cited most often for the
increased willingness to lend were more-aggressive
competition from other banks and nonbanks and an
improved economic outlook. According to the Sur­
vey of Terms of Business Lending (STBL), banks
also appeared to perceive a reduction in the risk of
their C&I borrowers for most of the year, a pos-

166

Federal Reserve Bulletin □ Spring 2004

5.

Supply and demand conditions for C&I loans at
selected banks, large and medium-sized borrowers,
1999:Q1-2004:Q1

6.

Supply and demand conditions for commercial
real estate loans at selected banks, 1999:Q1-2004:Q1
Percent

Percent

Net percentage o f banks reporting increases in demand

Net percentage o f banks reporting increases in demand

Net percentage o f banks that tightened standards
Net percentage o f banks that tightened standards
—

60

N o t e . Data are quarterly. Net percentage is the percentage of banks

reporting an increase in demand or a tightening o f standards less, in each
case, the percentage reporting the opposite. The definition for firm size
suggested for, and generally used by, survey respondents is that large and
medium-sized firms have sales greater than $50 million.
S o u r c e . Federal Reserve Board, “Senior Loan Officer Opinion Survey on
Bank Lending Practices.”

sible sign of banks’ increasingly positive assessment
of economic prospects. The shift may also have
reflected banks’ reduced willingness to lend to riskier
customers. Supporting this interpretation, the trend
toward lower loan risk ratings was partially reversed
in the February 2004 STBL as some banks were
easing lending standards.
Unlike C&I loans, commercial real estate (CRE)
loans continued to expand solidly in 2003. Growth in
loans secured by nonfarm nonresidential properties
was only slightly lower than in 2002. Despite
persistent high vacancy rates and declining rates in
the market for office rentals, growth of loans for
construction and land development nearly doubled
last year. Growth in the other components of CRE
lending—including loans secured by multifamily
properties and by farmland—remained brisk at about
the same pace as that of the previous year. As has
been the pattern for the past several years, CRE loans
grew much faster at smaller banks: At the top 100
banks, such loans grew only 2.6 percent; at banks
ranked outside the top 100, they expanded more than
16 percent. At the end of 2003, as a result, smaller
banks held more total CRE loans in aggregate than
did larger banks.
According to responses to the BLPS, which sur­
veys mainly large banks, changes in both the demand



N o t e . See notes to chart 5.
S o u r c e . Federal Reserve Board, “Senior Loan Officer Opinion Survey on

Bank Lending Practices.”

for and the supply of CRE loans improved in 2003. In
a pattern similar to that for C&I loans, the net per­
centages of banks reporting an increase in demand
and an easing of lending standards on CRE loans
turned positive in the January 2004 BLPS (chart 6).
Also, some banks—about 20 percent of the respon­
dents, on net—increased the maximum size of the
CRE loans that they were willing to extend during
2003, according to responses to a special question in
the January 2004 BLPS. A similar percentage indi­
cated that they became willing to provide CRE loans
with longer maturities. As was the case for C&I
loans, the most frequently cited reasons for easing
terms were more-aggressive competition from other
commercial banks or nonbank lenders and improved
conditions in, and outlook for, the commercial real
estate market.

Loans to Households
Lending to households grew rapidly in 2003; the
strong pace reflected robust consumer spending, the
high level of housing activity, and a surge of mort­
gage refinancing that occurred in the first half of
the year caused by a drop in long-term interest
rates. Indeed, the Mortgage Bankers Association’s
index of refinancing activity rose at midyear to levels
even higher than the peaks seen in 2001 and 2002
(chart 7). In this environment, banks continued to
briskly expand both their revolving home equity and

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

7.

Index of home mortgage refinancing activity, 1991-2003
Index: January 4, 1991 = 1

Note. Data are weekly.
Source. Mortgage Bankers Association.

their other one- to four-family mortgage lending in
the first two quarters of 2003.
As bond yields and mortgage rates rebounded
sharply starting in mid-June, however, the demand
for one- to four-family mortgages appeared to
decline, consistent with responses to the October
2003 and January 2004 BLPSs (chart 8). Given the
continued brisk pace of home sales, however, much
of the fall in reported demand presumably reflected
the drop-off in refinancing rather than a decline in
the demand for mortgages to purchase homes. But
because of the decline of mortgage originations from
their previous record pace and the resulting reduction
in mortgage loans temporarily held for later sale in
8.

167

the secondary market, residential mortgage loans
on banks’ balance sheets actually contracted in the
fourth quarter. Revolving home equity loans, how­
ever, continued to grow swiftly. One reason for their
rapid growth was the sustained increase in residential
real estate values. Another possible reason is that
most home equity loans carry variable interest rates—
tied to short-term rates—that remained very low last
year and even declined a bit in the second half after
the easing of monetary policy in June. On net, total
residential mortgage loans on banks’ books expanded
10 percent in 2003. As in 2002, the expansion was
accompanied by a reduction of close to 19 percent
in the volume of residential mortgages securitized or
sold, but for which banks retained servicing rights
or provided credit enhancements. Because banks do
not report securitized loans for which they provide
neither servicing rights nor credit enhancements, a
portion of the decline in reported securitizations may
simply reflect a relative increase in loans securitized
without recourse.
9.

Net percentage of selected banks tightening standards
for consumer lending, 1996:Q1-2004:Q1

Consumer loans other than credit cards

Net percentage of selected banks reporting
stronger demand for residential mortgages,
1990:Q4-2004:Q1
Percent

Credit card loans

1998

Note. Data are quarterly. Net percentage is the percentage of banks that
reported stronger demand less the percentage that reported weaker demand.
Source. Federal Reserve Board, “Senior Loan Officer Opinion Survey on
Bank Lending Practices.”



2002

2004

Note. Data are quarterly. Net percentage is the percentage of banks that
reported tighter standards less the percentage that reported easier standards.
Source. Federal Reserve Board, “Senior Loan Officer Opinion Survey on
Bank Lending Practices.”

168

Federal Reserve Bulletin □ Spring 2004

Many households that refinanced mortgages report­
edly cashed out some of the equity in their homes.
The proceeds were likely used, at least in part, to
pay down higher-cost consumer debt and to fund
purchases of durable goods. Consumer loans rose
9.3 percent for the year; however, that aggretate rate
was boosted significantly by a large bank’s purchase
of a sizable credit card portfolio from a nonbank
financial institution. Excluding that transaction, the
expansion in consumer loans on banks’ books, at
about 5 percent, was fairly modest given the robust
pace of consumer spending last year. Besides pay­
downs from cash-out refinancing, the brisk expan­
sion in consumer loans that were securitized—mostly
credit card receivables—and for which banks retained
servicing rights or provided credit enhancements may
have restrained the growth rate.
As with businesses, banks maintained a cau­
tious lending posture toward households in 2003.
Responses to the BLPS showed that the net percent­
age of banks that reported tightening standards for all

types of consumer loans was never negative during
the year (chart 9). This increased watchfulness likely
contributed to the restrained growth in consumer
loans last year and probably to the drop in consumer
loan delinquency rates. Although banks eased con­
sumer loan terms in the first part of the year, the
October 2003 and January 2004 BLPS indicated that
they subsequently tightened them.

Other Loans and Leases
Other loans and leases reported on banks’ balance
sheets grew 8.4 percent in 2003. Much of the
increase, however, was apparently attributable to the
new reporting requirements under FIN 46, as many
of the assets previously held off balance sheet in
variable-interest entities that were consolidated onto
banks balance sheets during 2003 were classified
in the “other loans” category (see box “The Effects
of FASB FIN 46 on Banks’ Balance Sheets” ).

The Effects of FASB FIN 46 on Banks’ Balance Sheets
In January 2003, the U.S. Financial Accounting Standards
Board (FASB) issued Interpretation No. 46, “Consolidation
of Variable Interest Entities,” or FIN 46. Under this inter­
pretation, business enterprises, including banks, must con­
solidate onto their balance sheets the assets and liabilities of
certain variable-interest entities (VIEs). VIEs are legal enti­
ties that are usually created for a specific purpose, such as
securitizing assets. For example, banks commonly sponsor
asset-backed commercial paper conduits, which purchase
assets from several corporations and then issue to investors
commercial paper backed by those assets.
Under the rules in effect before FIN 46, consolidation
was generally determined by majority voting control. It is
possible, however, for the sponsor to be exposed to the risk
and return associated with a VIE without having majority
voting control. In an effort to remedy the perceived defi­
ciency in reporting such exposures, FIN 46 requires a
company to consolidate the assets and liabilities of any VIE
of which it is deemed to be the “primary beneficiary.” The
primary beneficiary of a VIE is the one that absorbs a
majority of the entity’s expected losses, if they occur;
receives a majority of the expected residual returns, if they
occur; or both. The primary beneficiary need not have
majority voting control of the VIE. Also, a company
must disclose, although not consolidate, VIEs in which it
has a significant variable interest. For the purposes of
FIN 46, a variable interest is defined as an interest that is
subject to and fluctuates with the VIE’s net asset value.
Examples include equity as well as various types of deriva­
tives, senior beneficial interests, variable service contracts,
and leases.




When first released, FIN 46 was scheduled to take effect
for most US. companies no later than the beginning of the
first interim or annual reporting period that started after
June 15, 2003. The rule was later amended, and its required
adoption was pushed to the close of the first reporting
period ending after December 15, 2003.1 Most large U.S.
banks implemented the new rule by the end of 2003. Most
small banks are not affected because they do not commonly
have interests in VIEs.
The effects of FIN 46 on banks’ balance sheets can be
estimated from the weekly bank credit data collected by the
Federal Reserve and the remarks provided by individual
banks on unusual weekly changes in bank credit compo­
nents. These estimates suggest that, by year-end 2003, US.
banks had consolidated roughly $67 billion in assets— less
than 1 percent of total assets—that previously had not been
reported on balance sheet. The majority of that amount—
about $42 billion—was included in the “other loans” cate­
gory and provided a noticeable boost to that balance sheet
component. Another $17 billion was included in the “ secu­
rities” category, an amount that equaled about 1 percent of
investment and trading account securities on banks’ books.
Assets were also consolidated under the “C&I loans” cate­
gory (about $7 billion, less than 1 percent of total C&I
loans) and a small amount under “consumer loans.” On the
liability side, the vast majority of consolidation was in the
’’other borrowing” category.
1.
On December 23, 2003, FASB issued interpretation FIN 46-R, a
revision of FIN 46, that clarified some of its provisions, exempted certain
entities from its requirements, and reduced the value of VIE assets and
liabilities to be consolidated.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

While loans to other depository institutions and
to states and other political subdivisions increased,
lease financing receivables declined for the second
straight year. Since many leases are made to busi­
nesses, the weak performance was likely attributable,
in part, to some of the same factors that depressed
C&I loans.

Securities
Securities held on banks’ balance sheets expanded
strongly in 2003. At 9.4 percent, the growth rate
was less than the extraordinary 16.2 percent of 2002,
but it was still the second-highest in the past ten
years. Securities in both investment accounts and
trading accounts expanded briskly. As a share of
total bank assets, securities continued to increase; the
rise is an extension of a trend initiated in 2001
(chart 10).
Mortgage-backed securities (MBS) held in invest­
ment accounts posted a solid advance—in excess of
10 percent—for the third consecutive year, and Trea­
sury and non-mortgage-backed agency securities
grew even faster. Banks accumulated MBS at a
particularly rapid rate in the first half of the year,
as interest rates declined and refinancing picked up.
When long-term rates rose sharply in the summer,
however, and the pace of refinancing slowed, banks
responded by paring back their MBS positions con­
siderably, and securities reported on their balance
sheets actually contracted for the first time since the
first quarter of 2001. Growth in banks’ securities
holdings resumed, however, as rates stabilized in the
fall.

10.

Bank holdings of securities as a share of total bank
assets, 1991-2003

169

Liabilities
Core deposits increased 7.1 percent in 2003. Banks
reduced the rates they paid on savings and money
market deposit accounts by less than the decline
in money market yields. As a result, those liquid
deposits grew substantially, rising to more than
38 percent of total domestic liabilities by the end
of the year (chart 11). By contrast, yields on small
time deposits dropped more sharply than those on
liquid deposits last year, a possible factor in the
slight acceleration of their ongoing declining trend.
Moreover, with market interest rates already low
and the stock market recovering from its 2002
trough, some households may have chosen to invest
in long-term mutual funds, which experienced
strong net inflows last year, rather than locking in the
low rates offered by time deposits. Transaction
deposits grew a good bit in the first half of the year
but then fell in the third quarter as the flows asso­
ciated with mortgage refinancing slowed substan­
tially; on net, such deposits rose only a bit during the
year.
Even with the growth in core deposits, banks
expanded their managed liabilities 7.2 percent last
year. This increase was especially notable for banks
outside the top 100, which experienced stronger
growth in assets. Across all banks, deposits booked
in foreign offices rose 12.6 percent, while the growth
of subordinated notes and debentures, which had
been briefly interrupted by a slight contraction the
previous year, resumed. Large time deposits edged
higher.

11.

Selected domestic liabilities at banks as a share of their
total domestic liabilities, 1996-2003
Percent

—

/—

-____

—

__

Transaction deposits
1

1

1996
1993

1995

N o t e . Data are quarterly.




1997

1999

2001

1

1997

1

1998

1

1999

1

2000

1

1

2001

2002

20
15

—

^— V

—

25

—

Small time deposits

30

—

'

35

-----

Savings deposits

—

1991

-----

—

__

1

"

10

1

1

2003

2003

Note. Data are quarterly. Savings deposits include money market deposit
accounts.

170

Federal Reserve Bulletin □ Spring 2004

Capital
Banks’ capital positions strengthened further in 2003.
Equity capital increased 6.6 percent, slightly less than
assets. Paid-in capital rose a good bit, in part as a
result of mergers; retained earnings grew notably
faster in 2003 than in the previous year, a reflection
of banks’ higher profitability and relatively stable
dividend payout ratio. By contrast, accumulated other
comprehensive income slumped; the decrease was
due to the sharp decline in unrealized gains on
available-for-sale securities, which occurred in the
second half of the year and was likely induced by the
turnaround in long-term interest rates.
Tier 1 capital increased 7.6 percent for the year,
while tier 2 capital increased 2.8 percent. Riskweighted assets grew more slowly than total assets,
as the growth of assets with low risk weights, such as
agency-related MBS, Treasury securities, and resi­
dential mortgages, outpaced that of assets with higher
risk weights. The tier 1 ratio moved up to just above
10 percent, and the total ratio also rose a bit. The
leverage ratio changed little (chart 12).5 The share of
5.
Tier 1 and tier 2 capital are regulatory measures. Tier 1 capital
consists primarily o f common equity (excluding intangible assets such
as goodwill and excluding net unrealized gains on investment account
securities classified as available for sale) and certain perpetual pre­
ferred stock. Tier 2 capital consists primarily of subordinated debt,
preferred stock not included in tier 1 capital, and loan-loss reserves
up to a cap o f 1.25 percent of risk-weighted assets. Risk-weighted
assets are calculated by multiplying the amount of assets and the
credit-equivalent amount of off-balance-sheet items (an estimate of
the potential credit exposure posed by the items) by the risk weight for
each category. The risk weights rise from 0 to 1 as the credit risk of
the assets increases. The tier 1 ratio is the ratio of tier 1 capital to
risk-weighted assets; the total ratio is the ratio of the sum o f tier 1 and
tier 2 capital to risk-weighted assets. The leverage ratio is the ratio of
tier 1 capital to average tangible assets. Tangible assets are equal to
total assets less assets excluded from common equity in the calcula­
tion o f tier 1 capital.

12.

13.

Assets and regulatory capital at well-capitalized banks,
1991-2003
Percent

Share o f industry assets at well-capitalized banks

Percentage points

Average margin by which banks were w ell capitalized

Note. For th d itio s of “w cap
e efin n
ell italized an of th m
” d
e arginby w ich
h
ban s rem w cap
k
ain ell italized see te t n te 6
,
x o .

industry assets held by banks that were considered
well capitalized for regulatory purposes was about
unchanged and remained near its very high levels of
the previous several years. The average margin by
which banks were considered well capitalized was
substantial, although it edged down a bit from 2002
(chart 13).6

Derivatives
The notional principal amount of derivatives con­
tracts held by banks surged nearly 27 percent in
2003, to about $71 trillion. The market value of
a derivatives contract, however, is typically much

Regulatory capital ratios, 1991-2003




6.
Well-capitalized banks are those with a total risk-based capital
ratio o f 10 percent or greater, a tier 1 risk-based ratio o f 6 percent or
greater, and a leverage ratio of 5 percent or greater. In addition,
supervisors can, when appropriate based on safety and soundness
considerations, downgrade a bank’s capital category from well capital­
ized. To take account o f this possibility, we assume that wellcapitalized banks must have CAMELS ratings o f 1 or 2. Each letter
in CAMELS stands for a key element o f bank financial condition—
Capital adequacy, Asset quality, Management, Earnings, Liquidity,
and Sensitivity to market risks. The average margin by which banks
remained well capitalized was computed as follows. Among the
leverage, tier 1, and total capital ratios of each well-capitalized bank,
the institution’s tightest capital ratio is defined as the one closest to the
regulatory standard for being well capitalized. The bank’s margin is
then defined as the percentage point difference between its tightest
capital ratio and the corresponding regulatory standard. The average
margin among all well-capitalized banks— the measure referred to in
chart 13— is the weighted average of all the individual margins, with
the weights being each bank’s share of the total assets o f wellcapitalized banks.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

smaller than its notional value. Banks enter into
derivatives contracts both for their own account (to
manage their own market and credit risks) and in
their role as dealers. When acting in the second role,
banks often enter into at least partially offsetting
contracts with different counterparties. Such offset­
ting transactions appear to constitute a substantial
fraction of banks’ activities in derivatives. At the end
of 2003, the fair market value of contracts with
positive value was $1,173 trillion, about unchanged
from the previous year, and the fair market value of
contracts with negative market value was $1,150 tril­
lion, slightly more than in 2002. The net fair value
was thus $23 billion, down about $4 billion from the
year before. Consistent with previous years, large
banks held the bulk of derivatives contracts, with the
top ten banks by assets accounting for 96 percent of
the total.
Interest rate swaps—agreements in which two par­
ties agree to exchange a stream of floating-interestrate payments for a stream of fixed-interest-rate pay­
ments based on a notional principal amount—are the
most common derivatives held by banks. The share
of interest rate contracts in the total notional principal
amount of all bank derivatives contracts climbed to
59 percent in 2003, up more than 4 percentage points
from the previous year. Investors often use interest
rate swaps to hedge interest rate risk. The growing
presence of interest-sensitive assets, particularly
MBS and mortgages, in investors’ portfolios, along
with the volatility of long-term interest rates last
summer, may have boosted investor demand for inter­
est rate swaps last year, thereby increasing banks’
holdings of those contracts in their role as dealers
in that market. Interest rate futures, forwards, and
options; foreign exchange derivatives; and equity
derivatives accounted for almost 40 percent of the
total notional amount of banks’ derivatives contracts
at the end of 2003.
The remaining derivatives contracts that banks held
were credit derivatives—agreements in which the
risk of default of a certain reference entity is trans­
ferred from one party (the beneficiary) to another (the
guarantor). Use of credit derivatives has grown rap­
idly in recent years, and the notional amount held
by banks surged more than 56 percent in 2003, to
slightly more than $1 trillion. As is the case for other
derivatives, however, banks are both buyers and sell­
ers of these contracts. At the end of last year, the
notional quantity of banks’ positions as beneficiaries
amounted to about $530 billion, and their positions
as guarantors totaled about $471 billion. On net,
therefore, banks were recipients of credit protection,
as they have typically been in the past. Like other



171

derivatives, the market for credit derivatives is domi­
nated by the largest institutions, with the top ten
banks by assets holding almost 96 percent of the total
notional amount outstanding. However, the share held
by banks outside the top ten, while still quite small,
nearly doubled in 2003; on balance, those banks are
also net receivers of credit protection.

Tr e n d s

in

P r o f it a b il it y

The banking industry continued to be very profitable
in 2003. Bank’s return on assets rose to 1.40 percent,
surpassing last year’s record. Return on equity (ROE)
increased to 15.3 percent, up about 90 basis points
from the previous year. Profitability was especially
strong at the ten largest banks, where ROE jumped
2.8 percentage points, to 16 percent, the highest level
since 1993. While the largest banks stood out, banks
of all sizes posted high returns. The proportion of
banks with negative net income declined for the
second consecutive year, to 6 percent, and these
banks held only 0.7 percent of industry assets, the
lowest share since 1997.
The improvement in profitability last year reflected
a reduction in expenses and an increase in some
income items. Better credit quality—which was due
in part to low interest rates, the strengthening econ­
omy, and improved corporate profitability—allowed
banks to substantially reduce loss provisioning. The
reduction in loss provisioning was most pronounced
at the ten largest banks, where it had increased the
most in recent years, and contributed significantly to
their exceptional performance last year. Non-interest
expense grew at a moderate pace as banks held
down the growth of non-salary-related expenses.
Non-interest income rose at its fastest rate since 1999
because of increased earnings from the sale and secu­
ritization of loans as well as from fees for fiduciary
and investment banking services. Realized gains on
securities continued to boost income, particularly as
medium-term and long-term interest rates fell in
the first half of the year. Profitability was restrained,
however, by a further narrowing of net interest
margins.
Bank profitability was notably affected in 2003 by
the wave of debt refinancing by households and busi­
nesses that resulted from the decline in long-term
interest rates. Fees associated with the origination,
sale, and servicing of refinanced residential mort­
gages bolstered banks’ non-interest income. Under­
writing income increased as businesses issued bonds
to lock in long-term financing at favorable rates and
to pay down C&I loans and other short-term debt.

172

14.

Federal Reserve Bulletin □ Spring 2004

Indexes of bank stock prices and the S&P 500,
2001-March 2004
January 2003 = 100

With the strong profitability, bank holding company
stocks considerably outperformed the S&P 500 dur­
ing 2003 (chart 14). Subordinated debt spreads of the
largest banks, which had risen in 2002 because of
concerns about large banks’ exposure to major corpo­
rate bankruptcies, narrowed markedly in 2003 and
ended the year at quite low levels (chart 15).
Interest Incom e and Expense

Top 50
banks

Top 225 banks

2004

Note. Data are monthly. Banks are ranked by market value, and stock
prices are weighted by market value.
Source. Standard & Poor’s and American Banker.

The resultant strengthening of household and busi­
ness balance sheets contributed to marked declines in
delinquency and charge-off rates and loan-loss pro­
visioning. At the same time, however, the lowered
interest payments on residential mortgages and lost
earnings on paid-off C&I loans held down banks’
interest income and contributed to the narrowing of
net interest margins.
Robust earnings allowed dividend payments, made
primarily to parent holding companies, to grow at
double-digit rates for the second consecutive year
even as dividends were little changed as a share of
net income. As noted earlier, however, retained earn­
ings also grew rapidly and boosted equity capital.
15.

Average subordinated debt spread at selected
bank holding companies, 1999:Q1-2004:Q1
Basis points

The fall in the average rate earned on banks’ assets
exceeded the decline in the average rate paid on their
liabilities last year, and net interest margins narrowed
further. At about 3.8 percent, the industry net interest
margin—defined as net interest income as a percent­
age of interest-earning assets—reached its lowest
level in more than a decade (chart 16). However, the
downward slide in net interest margins, which began
in the first quarter of 2002, reversed a little during the
final quarter of 2003 with the rise in market interest
rates.
The declines in rates earned by banks were most
pronounced for household assets, a reflection of the
heightened pace of mortgage refinancing. Besides
depressing yields on residential mortgages and on
MBS, cash-out refinancing and home equity borrow­
ing enabled households to pay down some higheryielding consumer loans. Rates earned on credit card
loans moved down less than those on other consumer
loans, possibly as contractual interest-rate floors on
these loans became binding. As a result, banks that
specialized in credit card loans had smaller declines
in their net interest margins than did other banks
during 2003, and their profitability increased by more
than that of the industry as a whole. Credit card
16.

Net interest margin, for all banks, 1985-2003
Percent

Note. Data are quarterly. Spreads are for twelve large bank holding
companies and are weighted by 2003:Q4 assets. Spreads are over comparable
Treasury securities.
Source. Merrill Lynch bond data.




1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

Note. Net interest margin is net interest income divided by average
interest-earning assets.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

173

The Role of Non-Interest-Bearing Instruments in the Net Interest Margin
For most of the past fifteen years, the net interest margin
has moved fairly closely with the slope of the yield curve
(chart A), a relationship that reflects banks’ intermediation
across maturities. The recent decline in the net interest
margin while the yield curve has remained steep represents
a substantial divergence from this pattern.
To help understand this development, we decompose the
net interest margin into two parts (figure). One component
is the spread between the average return on bank assets and
the average rate paid on interest-bearing liabilities times the
share of interest-earning assets funded by these liabilities.
The second component is the average rate on assets times
the share of assets funded with non-interest-bearing liabili­
ties and capital (calculated as 1 minus the share of interestearning assets funded by interest-bearing liabilities). The
second component depends on the level of the return on
bank assets rather than the spread between the average rate
on assets and the average rate on liabilities since noninterest-bearing instruments, by definition, have no explicit
interest expense. Last year, about 15 percent of interestearning assets were funded with non-interest-bearing
instruments.1
The sharp decline in interest rates to historically low
levels over the past few years reduced the contribution of
the second component to the net interest margin (chart B).
This decrease accounted for slightly less than half of
the reduction in the net interest margin in 2003 and has
accounted for a somewhat larger fraction of the decline
since the end of 2001. Although the first component
decreased between 2002 and 2003, it remained above its
level in the late 1990s, when the yield curve was signifi­
cantly flatter. Thus, the recent decline in the net interest
margin reflected importantly the decline in the level of
interest rates, whereas the steep yield curve continued to
support the net interest margin.

A.

Net interest margin and the slope of the yield curve,
1989-2003

Percentage points

Perci

Note. Data are quarterly. The net interest margin is net interest income
as a share of average interest-earning assets. The slope of the yield curve is
the difference between the average ten-year Treasury yield and the
three-month bill yield. The slope of the yield curve is lagged one quarter.
S o u r c e . Call Report and Federal Reserve Board, Statistical Release
H.15, “Selected Interest Rates” (www.federalreserve.gov/releases/hl5).

B.

Components of net interest margin, 1997-2003

First component
Second component

1. While the separation of the net interest margin into these two compo­
nents provides some useful insights about the importance of the level of
interest rates and banks’ funding mix, it describes only one facet of a bank’s
overall interest rate sensitivity. Perhaps especially when interest rates are
very low, banks’ earnings can be affected by balance sheet shifts, including
shifts in the composition of funding.

1997

1998

1999

2000

2001




2003

Note. Data are annual. The sum of the two components is the net
interest margin.

Decomposition of the net interest margin
Net interest margin =

2002

net interest income
interest-earning assets

= (rate earned - rate paid) x

interest-bearing liabilities
interest-earning assets

First component

+ (rate earned) x

1-

interest-bearing liabilities
interest-earning assets

Second component

174

lending also played a role in raising net interest
margins for the industry during the fourth quarter.
Not only did the rate of return on these loans pick up,
but also the share of bank assets accounted for by
these loans rose, an increase that was due largely
to the purchase of a nonbank’s credit card portfolio.
Also helping to boost net interest margins during
the fourth quarter was some recovery in the yield on
MBS, which reflected the rise in mortgage rates and
the reduced pace of refinancing.7
Banks were asked on the August BLPS what poli­
cies with respect to their C&I loans they had adopted
in response to the pressure on their net interest mar­
gins. More than 60 percent of the survey panel indi­
cated that they had increased fees for these loans,
a factor that may have contributed to the rise in
non-interest income last year. Another 45 percent of
respondents indicated that they had made increased
use of interest rate floors, which would restrain the
decline in rates earned on variable rate loans. Never­
theless, the effect of such floors appears to have been
limited. About 90 percent of respondents indicated
that fewer than 15 percent of their C&I loans had
interest rate floors. Furthermore, almost 70 percent of
banks reported that, despite the low level of interest
rates, the floors were binding for less than 20 percent
of the loans having them.
The smaller reduction in average rates paid on
liabilities relative to the average rate earned on assets
last year reflected in part the sluggish adjustment of
rates paid on interest-bearing liquid deposits, which
includes interest-bearing checkable deposits, savings
deposits, and money market deposit accounts. With
rates on these deposits already quite low, banks may
have been hesitant to push them further toward
zero, especially at a time when assets were growing
briskly. Partly countering this tendency for average
deposit rates to decline slowly was a substitution of
liquid deposits, which expanded rapidly, for higherrate small time deposits, which ran off. Net interest
margins were also held down because low interest
rates reduced the funding advantage offered by noninterest-bearing funding instruments (See box “The
Role of Non-Interest-Bearing Instruments in Net
Interest Margins.” )

Non-interest Incom e and Expense
Non-interest income increased to a record 44 percent
of total revenue in 2003, up from 42 percent during
the preceding year (chart 17). Important contributors
were gains from the sales of loans, especially during
the third quarter, and a rise in securitization activity,
both of which were likely related to new residential
mortgages created by the surge in refinancing last
summer. Non-interest income also benefited from
investment banking activities as fees and commis­
sions from underwriting securities grew smartly in
2003, presumably in part because of strong corporate
bond issuance. Fiduciary income expanded during
the year, although not as fast as total revenue. Fidu­
ciary income advanced mainly during the second and
fourth quarters, periods coinciding with large gains in
equity prices that likely boosted the value of assets
held in bank trusts. Trading income also increased in
2003, a rise that probably reflected in part banks’
burgeoning derivatives activities. Deposit fee income
continued to grow in 2003, but the rate of expansion
was a bit slower than during previous years despite
the rapid growth of deposits. Indeed, the ratio of fees
to deposits, which had previously risen or held about
17.

Income items as a share of revenue, 1985-2003
Percent

Non-interest income
------45

—

40

—

35

—

30

—

25

Percent

Other non-interest income

7.
The increase in the rate o f return on MBS in the fourth quarter in
response to the rise in interest rates reflects in part the way in which
banks record income related to their securities. Banks are required
to amortize premiums paid for MBS over the expected life of the
securities and deduct this amount from interest income. The rise in
mortgage rates during the latter part o f the year increased the expected
life o f these securities, which lengthened the amortization period and
reduced the amount to be deducted.




Fiduciary income + trading income

Deposit fees

I I I I I 1 I 1 I I I I 1 I I I I I I I
1985 1987 1989 1991 1993 1995 1997 1999 2001 2003

175

18.

Ratio of deposit fee income to total domestic
deposits, 1985-2003
Percent

of bank employees rose at about the average rate of
the past five years. The ratio of expenses for banks’
premises to total revenue continued to be little
changed. Other components of non-interest expense
grew, but at a slower pace than total revenue.
Loan Perform ance and Loss Provisioning

steady in every year during the past two decades,
dropped back somewhat in 2003 (chart 18).
Non-interest expense grew moderately during 2003
and ticked up slightly relative to total revenue, a
partial reversal of the sharp decline of the previous
year (chart 19). The growth in non-interest expense
was due mainly to higher pay per employee, which
advanced at its fastest pace since 1996. The number
19.

Non-interest expense as a proportion of revenue,
1985-2003
Percent

Total

Components

(fifei■

With interest rates low and the economic expansion
gaining traction during the year, credit quality
improved considerably in 2003. Delinquency rates
for nearly all types of loans and leases fell, and by
year-end the delinquency rate for all loans and leases
was near the low levels of the late 1990s. C&I loans
showed the largest improvement, with much of the
deterioration posted in the previous few years being
reversed. Overall, charge-off rates also moved down
significantly but remained above the average level of
the middle and late 1990s.
C&I Loans
The delinquency rate on C&I loans fell 1 full percent­
age point during 2003, to 2.9 percent in the fourth
quarter, the lowest level since the first quarter of
2001 (chart 20). The improvement was particularly
notable at the largest 100 banks, where delinquency
rates had risen the most. Charge-off rates on these
loans also moved down sharply throughout the year.
Respondents to the April 2003 BLPS pointed to
lower debt-service burdens as the most important
reason for the stabilization in C&I loan quality.
Firms’ restructuring of balance sheets to take advan­
tage of low interest rates, as well as the rebound in
corporate profits, resulted in a notable decline in
business debt-service burdens (chart 21). Banks also
cited their own aggressive tightening of lending stan­
dards and terms during previous years as a reason for
a reduced incidence of problem loans. Indeed, banks
first reported tightening C&I loan standards in 1998,
before delinquency rates had begun to rise, and they
had tightened standards further, on net, until recently.
Sales by banks of their adversely rated loans to
nonbanks was also a likely factor holding down delin­
quency rates, but charge-offs may have been boosted
as banks booked losses on the loans being sold.8 Of
the largest banks that responded to the October 2003
BLPS, more than 90 percent stated that they had sold
at least some adversely rated credits in the secondary

Premises and fixed assets

1985 1987 1989 1991 1993 1995 1997 1999 2001 2003




8.
Adversely rated loans are loans rated as special mention or
classified as substandard, doubtful, or loss. When a bank sells a
problem asset, it must charge off the difference between the book
value and the selling price.

176

20.

Federal Reserve Bulletin □ Spring 2004

Delinquency and charge-off rates for loans to
businesses, by type of loan, 1991-2003

21.

Debt burdens and financial obligations for businesses
and households, 1985-2003

Percent

Delinquencies

Percent

—
-

Debt burden for nonfinancial corporations

— 22

Commercial real estate

I 1 I 1 I I I I 1 I I I I i 1 I 1 I I I I 1
Percent

Financial obligations ratio for households

N o t e . Data are quarterly and seasonally adjusted. Delinquent loans are
loans that are not accruing interest and those that are accruing interest but are
more than thirty days past due. The delinquency rate is the end-of-period
level of delinquent loans divided by the end-of-period level o f outstanding
loans. The net charge-off rate is the annualized amount o f charge-offs over
the period, net o f recoveries, divided by the average level of outstanding
loans over the period.

loan market during the previous two years, and
17 percent reported having sold at least 10 percent of
such loans. BLPS respondents reported that many of
these loans had been sold to investment banks and
other nonbank financial institutions. Consistent with
this report, the Shared National Credit Survey shows
a substantial increase in the share of adversely rated
loan commitments held by nonbank lenders in recent
years.

Commercial Real Estate Loans
Both delinquency and charge-off rates on commercial
real estate loans moved down during 2003, although
rents on office buildings declined further and vacancy
rates remained elevated. Banks reported on the April
2003 BLPS that the high credit quality of commercial
real estate loans reflected the reduction in borrowers’
debt-service burdens through refinancing and the



N o t e . Data are quarterly. The debt burden for nonfinancial corporations is
calculated as interest payments as a percentage of cash flow. The financial
obligations ratio for households is an estimate of the rate of debt payments
and recurring obligations of households to disposable personal income;
debt payments and recurring obligations consist of required payments on
outstanding mortgage and consumer debt, as well as rent, auto leases, and
property taxes.
S o u r c e . National income and product accounts and the Federal Reserve
System.

tightening of lending terms, including a lowering of
loan-to-value ratios. (See box “Quality of Com­
mercial Real Estate Loans” for a more detailed
discussion.)

Loans to Households
Household credit quality also improved last year
(chart 22). The delinquency rate on residential mort­
gage loans reached its lowest level of the past decade,
and the delinquency rates on banks’ credit card loans
and on other consumer loans both moved lower. The
improvement in the quality of credit card loans is
particularly noteworthy since the household bank­
ruptcy rate, which has generally been correlated with
the credit card loan delinquency rate, continued to
increase until the middle of 2003 (chart 23). (After

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

111

Quality of Commercial Real Estate Loans
Conditions in the commercial real estate market have dete­
riorated during the past few years. Vacancy rates for office
buildings began to increase in 2001 and remained near
historical highs in 2003 (chart A). Rents on office buildings
began to fall in 2001 and tumbled a total of 20 percent
through 2003, a larger decline than the one during the
downturn in the early 1990s (chart B). Rents on retail
properties also declined, though by considerably less.
Despite the deterioration in market conditions, the delin­
quency rate on commercial mortgages held by banks
dropped last year to about 1.5 percent. This rate is well
below the nearly 12 percent levels of the early 1990s and is
also below the levels of the mid-1990s, when vacancy rates
were low and rents were increasing.

The delinquency rate has remained low for two possible
reasons. First, many borrowers have been able to refinance
or roll over their previous mortgages at lower interest rates.
Yields on commercial mortgages, in general, have trended
down since early 2000 (chart C), so refinancing would have
helped borrowers meet their payment obligations. Although
still low, the delinquency rate on commercial real estate
loans used to back commercial-mortgage-backed securities
has risen since 2001. On the January 2004 BLPS, banks
reported that the greater difficulty in refinancing such loans,
which tend to feature larger prepayment penalties and other
prepayment restrictions, was an important reason for the
increase in the delinquency rate on securitized loans relative
to that on the loans held on banks’ books.

A.

B.

Vacancy rates on office real estate, 1987:Q4-2003:Q4

Change in rent for office and retail space, 1988-2003

Percent

1987

1989

1991

1993

1995

1997

1999

2001

2003

N o t e . Data are quarterly.
S o u r c e . Torto Wheaton Research.

six quarters of decline, the delinquency rate on credit
card loans held by banks rose in the fourth quarter
of last year, apparently the result of a large bank’s
acquisition from a nonbank finance company of a
sizable portfolio of credit card receivables with a
delinquency rate higher than that of the banking
system as a whole.) Household balance sheets
improved last year as homeowners refinanced their
mortgages at lower interest rates, with many extract­
ing equity from their homes through cash-out refi­
nancing or home equity loans and using part of those
funds to pay down other, more-expensive debt.

Loss Provisioning
With the improvement in overall credit quality, banks
cut back their loan-loss provisioning in 2003, both



Percent

1989

1991

1993

1995

1997

1999

2001

2003

N o t e . The data are four-quarter rates of change. Data before 1991 :Q2
are plotted at their available biannual frequency.
S o u r c e . National Real Estate Index: Market Monitor.

in dollar terms and in relation to total revenue
(chart 24). The decline was most pronounced at the
largest banks, where the ratio had been highest and
where credit quality was most improved last year. As
loans continued to expand, the ratio of provisioning
to loans also declined.
With provisioning just outpacing charge-offs,
loan-loss reserves grew 2 percent in 2003—the
slowest pace since 1997. The significant improve­
ment in credit quality, however, caused the ratio of
loan-loss reserves to delinquent loans to rise 6 per­
centage points, to 75 percent (chart 25). The ratio
of reserves to charge-offs also rose last year, but
it remained near the low end of its range over the
past decade. With bank balance sheets expanding
moderately, reserves as a proportion of total loans
slipped to 1.8 percent from 1.9 percent the previous
year.

178

Federal Reserve Bulletin □ Spring 2004

Quality of Commercial Real Estate Loans— Continued
The second possible reason for the generally low delin­
quency rate on commercial real estate loans held by banks
is tighter loan standards and terms. After the severe prob­
lems in the commercial real estate market during the early
1990s, market participants reportedly reformed industry
practices and tightened standards for commercial real estate
projects. Also, banks started tightening their lending stan­
dards on these loans in 1998, well before the decline in
rents and the increase in vacancy rates began. As a result,
banks may have avoided riskier projects. According to the
January 2002 BLPS and the April 2003 BLPS, banks also
tightened their lending terms for commercial real estate

loans. One way that banks did so was by limiting borrow­
ers’ leverage. Borrowers with more equity in their proper­
ties have a stronger incentive to keep loans current and have
a larger cushion if conditions deteriorate. These effects may
have been especially important in the recent period because
the price of office space has been fairly stable, on net, and
the price of retail space has trended higher, possibly because
of strong retail sales (chart D). By contrast, in the early
1990s the price of office space dropped markedly and the
price of retail space declined, factors that likely increased
pressure on borrowers.

C.

D.

Commercial mortgage yields, 1994-January 2004

Prices for commercial property, 1991 :Q2-2003:Q4

Percent

----

—

Dollars per square foot

10

Office

-

V

v

^

/

V

—

1 1
1
1994

1
1
1996

1
1
1998

1
1
2000

1 1
2002

150
100

s

—

5

1 1
2004

N o t e . Data are monthly.
S o u r c e . Barron’s/John B. Levy & Company.

INTERNATIONAL OPERATIONS OF
U.S. C o m m e r c ia l B a n k s
In 2003, after declining for five consecutive years,
the share of bank assets booked in foreign offices
moved up slightly, to 11 percent. Although they
moved down some relative to capital, exposures
(measured in dollars) to both Eastern Europe and
Asia increased (table 2). The increase in exposure to
Eastern Europe was entirely accounted for by opera­
tions in Russia, where economic growth was rela­
tively rapid. Exposure to selected Southeast Asian
countries expanded nearly 8 percent. Total exposure
to these countries is now higher than it has been
for five years, although exposure as a share of bank
capital has moved down a bit. Lending to India also
expanded rapidly. Operations in Latin America con­
tracted for the second consecutive year both in dollar
terms and as a share of capital. Lending to Argentina
drifted down and exposure to several other large
countries in the region diminished.



200

—

Retail

6

-

—

^

—

: :

—

_

—

—

1 !
I
1991

I
!
1993

1
1
1995

1
1
1997

1
1
1999

1
I
2001

1
1 1
2003

N o t e . Data are quarterly.
S o u r c e . National Real Estate Index: Market Monitor.

With the rise in the share of bank assets booked in
foreign offices, the share of bank income derived
from foreign operations moved up slightly in 2003,
to 7 percent, although it remained below the levels
posted in the mid-1990s. The growth in income
occurred during the first half of the year. Earnings
from foreign operations dropped off in the latter part
of the year, partly because of an increase in loss
provisioning for foreign loans.

Re c e n t Develo pm en ts
Information drawn from the Federal Reserve’s
weekly H.8 statistical release indicates that banks’
asset growth picked up in the first quarter of 2004.
Holdings of securities, especially mortgage-backed
securities, increased sharply. Although C&I loans
continued to decine, overall loan growth was strong
because of robost real estate and consumer lending.

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

22.

Delinquency and charge-off rates for loans
to households, by type of loan, 1991-2003

24.

179

Provisioning for loan and lease losses as a
percentage of total revenue, 1991-2003
Percent

—

—

—

\
\

—

1 1
1
1991

1
1
1993

1
1
1995

1
1
1997

1
1
1999

1
1
2001

15

10

—

—

20

5

1
1
2003

1

for further reductions in loss provisioning. Non­
interest income benefited from increased fees from
trust and investment services. With net interest mar­
gins still under pressure, growth in net interest
income remained sluggish. Stock prices of bank
holding companies generally moved with the
Wilshire 5000 during the first quarter before falling
25.

Reserves for loan and lease losses, 1985-2003
Percent

First-quarter earnings statements of several large
bank holding companies suggest that bank profitabil­
ity remained strong in early 2004. These institutions
indicated that the trends of the previous year con­
tinued. Improvements in credit quality allowed
23.

Credit card delinquency rate and household
bankruptcy filings, 1995-2003

Perccnt

Filings/100,000

5.5 —
Credit card delinquencies
---- 800

5.0 —
4.5 —

.V —

4.0 —

600

—

400

J

3.5 — /

f
Household bankruptcy filings

3.0 —
1

1

1995

1

1

1

1997

1

1999

1

1

2001

1

1

Note. Data are quarterly.
Source. Call Report and Visa Bankruptcy Notification Service.



1

1

2003

Note. For definitions of delinquencies and net charge-offs, see note to
chart 20.

180

2.

Federal Reserve Bulletin □ Spring 2004

Exposure of banks to selected economies at year-end relative to tier 1 capital, by bank size, 1998-2003
Percent
Eastern Europe

Selected
Asian
countries1

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

15.49
14.37
13.17
12.09
11.44
11.15

Money center and other large banks
1998 ...................................................................
1999 ...................................................................
2000 ...................................................................
2001 ...................................................................
2002 ...................................................................
2003 ...................................................................

Latin America

India

Bank and year

All
1998
1999
2000
2001
2002
2003

Total
All

Russia

2.35
2.39
2.63
2.55
2.74
3.86

3.49
2.85
4.35
4.29
5.53
5.44

.43
.37
.49
.60
1.06
1.48

24.02
20.73
19.98
17.88
16.96
16.98

4.19
3.56
4.14
3.86
4.18
5.93

5.61
4.25
6.83
6.47
8.17
8.41

banks
...................................................................
...................................................................
...................................................................
...................................................................
...................................................................
...................................................................

2.08
1.75
1.41
1.07
1.03
.90

.05
.07
.03
.06
.08
.24

exposure (billions of dollars)
........................................................................
........................................................................
........................................................................
.........................................................................
.........................................................................
.........................................................................

37.87
37.45
37.30
36.32
36.32
37.93

5.43
6.23
7.46
7.66
8.70
13.55

Other
1998
1999
2000
2001
2002
2003

All

Mexico

Argentina

Brazil

42.93
39.00
37.88
54.06
38.90
32.85

9.88
9.50
9.08
25.97
20.80
17.95

9.66
9.40
8.41
6.61
2.44
1.73

11.27
10.49
11.15
2.99
8.36
6.77

64.26
58.61
58.03
72.99
58.61
53.30

.68
.55
.77
.91
1.63
2.29

64.20
53.90
54.98
79.08
57.32
49.19

14.10
12.62
12.69
34.54
31.14
27.13

15.19
13.63
12.68
9.79
3.65
2.64

17.04
14.53
16.40
18.74
12.38
10.02

98.02
82.44
85.93
107.29
86.63
80.51

.16
.08
.08
.14
.65
.21

.00
.01
.00
.00
.00
.06

9.51
9.41
8.35
6.45
5.00
4.20

3.24
3.31
2.84
2.04
1.86
1.53

.97
1.01
1.04
.57
.02
.13

.00
2.47
2.08
2.05
.96
1.05

11.80
11.31
9.87
7.72
6.76
5.55

8.53
7.43
12.33
12.88
17.55
19.07

1.05
.95
1.39
1.80
3.37
5.20

104.69
101.63
107.31
162.39
123.53
115.23

24.15
24.77
25.71
78.00
66.15
62.98

23.62
24.51
23.82
19.87
7.75
6.07

27.55
27.34
31.59
39.01
26.55
23.74

156.52
152.74
164.40
219.25
186.10
185.78

Memo
Total
1998
1999
2000
2001
2002
2003

N o t e . For the definition of tier 1 capital, see text note 5. Exposures consist
of lending and derivatives exposures for cross-border and local-office opera­
tions. Respondents may file information on one bank or on the bank holding
company as a whole.
At year-end 2003, “all reporting” banks consisted of seventy-two institu­
tions with a total of $350.8 billion in tier 1 capital; of these institutions, ten were
“large” banks (five money center banks and five other large banks) with

$223.4 billion in tier 1 capital, and the remaining seventy-two were “other”
banks with $127.5 billion in tier 1 capital. The average “other” bank at yearend 2003 had $26 billion in assets.
1. Indonesia, Korea, Malaysia, Philippines, and Thailand.
S o u r c e . Federal Financial Institutions Examination Council Statistical
Release E.16, “Country Exposure Survey,” available at www.ffiec.gov/E16.htm.

in mid-April as market participants reportedly
became concerned about the possible effects of ris­
ing interest rates on bank profitability. With the

announcements of several large mergers in early
2004, industry consolidation, which had been rela­
tively subdued in 2003, appeared to be picking up. □




Appendix tables start on page 181

Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

A.I.

181

Report of income, all U.S. banks, 1994—
2003
Millions of dollars
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Gross interest income ....................................
Taxable equivalent..................................
Loans ............................................................
Securities......................................................
Gross federal funds sold and reverse
repurchase agreements.......................
Other ..............................................................

256,854
259.610
189,567
48,286

302,202
304,838
227,049
51,029

313,240
315,700
239,395
50,631

338,216
340,648
255,492
52,659

359,138
361,601
270,904
56,596

366,123
368,750
278,524
62,115

423,823
426,459
326.789
67,659

404,564
407,246
311,858
63,064

350,217
352,965
270,070
59,316

329,765
332,548
258,160
53,310

6,415
12,587

9,744
14,382

9,272
13,944

13,658
16,406

14,999
16,637

12,327
13,155

13,546
15,829

12,647
16,994

6,222
14,610

5,122
13,176

Gross interest expense ....................................
Deposits ........................................................
Gross federal funds purchased and
repurchase agreements......................
O ther..............................................................

110,785
79,086

147,909
105,326

150,097
107,512

164,511
117,350

178,021
125,217

174,939
119,665

222,146
151,138

188,793
132,368

118,915
81,894

94,419
62,705

12,474
19.224

18,424
24,158

16,780
25,806

20,439
26,721

22,182
30,620

21,130
34,143

26,859
44,151

19,583
36,841

9,919
27,101

7,590
24,125

Net interest incom e.........................................
Taxable equivalent..................................

146,069
148,825

154,293
156,929

163,143
165,603

173,705
176,137

181,117
183,580

191,184
193,811

201,677
204,313

215,771
218,453

231,302
234,050

235,346
238,129

Loss provisioning ...........................................

10,930

12,570

16,211

19,176

21,249

21,182

29,381

43,236

45,297

32,682

Non-interest income .......................................
Service charges on deposits .....................
Fiduciary activities.....................................
Trading revenue .........................................
Other ..............................................................

77,231
15,279
12,148
6,249
43,556

83,846
16,056
12,889
6,337
48,563

95,305
17,050
14,296
7,525
56,433

105,628
18,558
16,584
8,018
62,468

123,516
19,769
19,268
7,693
76,786

144,400
21,497
20,502
10,429
91,972

153,154
23,719
22,220
12,235
94,980

160,297
26,873
21,989
12,547
98,886

168,540
29,631
21,637
10,734
106,536

183,520
31,692
22,306
11,444
118,077

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

144,837
60,884
18,972
64,982

151,077
63,996
19,758
67,323

162,450
67,796
20,888
73,765

170,880
72,310
22,074
76,495

193,701
79,503
24,160
90,038

204,625
86,150
25,865
92,610

216,423
89,034
26,764
100,626

226,025
94,234
27,940
103,852

230,331
100,483
29,317
100,529

243,184
108,437
31,313
103,433

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

67,606

67,231

67,145

65,252

70,185

60,225

63,269

65,728

61,791

59,664

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

-573

481

1,123

1,825

3,090

250

-2,280

4,624

6,415

5,639

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

66,959
22,427
-1 7

74,974
26,221
28

80,907
28,448
88

91,101
31,973
56

92,774
31,872
506

110,028
39,202
169

106,746
37,250
-31

111,427
37,112
-324

130,502
42,973
-78

148,537
48,446
428

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

44,515

48,780

52,550

59,184

61,408

70,996

69,464

73,992

87,451

100,520

Cash dividends declared............................
Retained income .........................................

28,167
16,347

31,106
17,676

39,419
13,131

42,752
16,433

41,205
20,202

51,955
19,042

52,547
16,917

54,821
19,171

67,218
20,233

77,750
22,770




182

A.2.

Federal Reserve Bulletin □ Spring 2004

Portfolio composition, interest rates, and income and expense, all U.S. banks, 1994-2003
A. All banks
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Balance sheet items as a percentage of average net consolidated assets
Interest-earning assets ..................................................
Loans and leases, net ..............................................
Commercial and industrial .................................
U.S. addressees..................................................
Foreign addressees ...........................................
Consumer ...............................................................
Credit card..........................................................
Installment and other .......................................
Real estate .............................................................
In domestic offices ...........................................
Construction and land development .........
Farmland ........................................................
One- to four-family residential..................
Home equity .............................................
Other ..........................................................
Multifamily residential ...............................
Nonfarm nonresidential ..............................
In foreign offices ...............................................
To depository institutions and acceptances
of other banks ...............................................
Foreign governments ...........................................
Agricultural production .......................................
Other lo a n s.............................................................
Lease-financing receivables ...............................
Less: Unearned income on loans ......................
Less: Loss reserves1 ..........................
Securities.....................................................................
Investment account ..............................................
D e b t.....................................................................
U.S. Treasury ................................................
U.S. government agency and
corporation obligations ......................
Government-backed mortgage pools ...
Collateralized mortgage obligations_
_
Other ..........................................................
State and local government ........................
Private mortgage-backed securities...........
Other ...............................................................
Equity2 ...............................................................
Trading account ....................................................
Gross federal funds sold and reverse RPs ...........
Interest-bearing balances at depositories ...............
Non-interest-eaming a ssets...........................................
Revaluation gains held in trading accounts3 ........
Other............................................................................

87.10
56.05
14.52
12.36
2.16
11.40
4.19
7.22
24.44
23.81
1.65
.57
13.74
1.90
11.84
.79
7.07
.63

86.97
58.37
15.20
12.87
2.33
12.08
4.68
7.39
25.02
24.37
1.59
.56
14.42
1.88
12.54
.81
6.97
.65

87.38
59.89
15.60
13.07
2.53
12.21
4.87
7.34
25.06
24.43
1.63
.56
14.43
1.85
12.57
.85
6.96
.63

87.15
58.69
15.78
13.18
2.60
11.44
4.55
6.89
25.02
24.41
1.73
.55
14.42
1.94
12.48
.83
6.88
.61

86.76
58.31
16.37
13.62
2.75
10.36
3.96
6.39
24.86
24.29
1.86
.55
14.26
1.89
12.37
.82
6.81
.57

87.03
59.34
17.07
14.43
2.64
9.71
3.51
6.20
25.44
24.87
2.18
.56
14.10
1.76
12.34
.88
7.15
.57

87.13
60.48
17.16
14.67
2.49
9.38
3.52
5.87
27.04
26.49
2.51
.56
14.96
1.96
13.00
.99
7.48
.54

86.48
58.95
16.08
13.69
2.39
9.23
3.63
5.60
27.10
26.60
2.85
.55
14.67
2.18
12.49
.97
7.56
.50

86.42
57.83
14.08
12.04
2.04
9.35
3.78
5.57
28.39
27.91
2.98
.56
15.40
2.80
12.60
1.02
7.95
.48

86.06
56.87
12.20
10.49
1.70
9.06
3.55
5.51
29.91
29.46
2.99
.54
16.96
3.40
13.56
1.05
7.91
.46

1.47
.41
1.00
3.29
1.03
-.16
-1.35
24.32
21.61
21.22
6.72

1.92
.30
.96
3.11
1.19
-.1 4
-1.26
21.94
19.39
18.98
5.25

2.33
.26
.92
3.32
1.51
-.12
-1.21
21.01
18.20
17.75
4.20

1.93
.18
.90
2.80
1.87
-.09
-1.13
20.41
17.25
16.75
3.38

1.91
.15
.89
2.78
2.13
-.07
-1.07
20.38
17.49
16.94
2.71

1.96
.16
.83
2.75
2.52
-.06
-1.04
20.40
18.33
17.73
2.14

1.87
.12
.78
2.58
2.63
-.05
-1.02
20.01
17.59
16.93
1.66

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

1.87
.09
.70
2.06
2.44
-.05
-1.11
21.27
18.30
17.99
.78

1.97
.08
.63
1.98
2.12
-.0 4
-1.04
21.89
18.96
18.72
.90

10.26
4.70
3.19
2.36
2.01
.64
1.56
.39
2.71
3.83
2.90
12.90
2.95
9.95

9.81
4.47
2.67
2.68
1.80
.62
1.49
.41
2.55
3.93
2.73
13.03
2.90
10.12

9.75
4.80
2.11
2.83
1.68
.61
1.51
.45
2.81
3.82
2.66
12.62
2.25
10.38

9.74
4.94
1.94
2.86
1.59
.50
1.54
.50
3.16
5.18
2.86
12.85
2.59
10.26

10.28
5.17
2.12
2.99
1.57
.67
1.71
.55
2.90
5.37
2.69
13.24
2.95
10.29

10.85
5.24
2.15
3.46
1.62
.88
2.24
.61
2.06
4.61
2.68
12.97
2.57
10.40

10.31
4.75
1.92
3.63
1.52
.95
2.48
.66
2.43
4.12
2.52
12.87
2.28
10.58

10.08
5.13
1.95
2.99
1.49
1.09
2.98
.34
2.72
5.11
2.89
13.52
2.37
11.15

11.46
6.09
2.35
3.02
1.49
1.25
3.01
.31
2.97
4.81
2.51
13.58
2.42
11.16

12.26
6.75
2.34
3.17
1.48
1.30
2.78
.25
2.93
4.85
2.45
13.94
2.70
11.23

Liabilities .........................................................................
Interest-bearing liabilities.........................................
Deposits .................................................................
In foreign offices ...............................................
In domestic offices ...........................................
Other checkable deposits ............................
Savings (including MMDAs) ....................
Small-denomination time deposits ...........
Large-denomination time deposits ...........
Gross federal funds purchased and RPs ...........
Other .......................................................................
Non-interest-bearing liabilities ................................
Demand deposits in domestic offices.................
Revaluation losses held in trading accounts3 ..
Other .......................................................................

92.12
71.85
57.36
9.39
47.97
7.80
19.60
15.33
5.23
7.60
6.89
20.27
13.49
2.69
4.56

91.99
71.86
56.31
10.28
46.03
6.63
17.48
16.15
5.77
7.71
7.85
20.13
12.68
2.88
4.57

91.73
71.62
55.87
10.01
45.86
4.75
18.71
15.97
6.42
7.18
8.56
20.11
12.82
2.14
5.14

91.57
71.36
55.01
10.02
44.99
3.62
19.12
15.17
7.08
8.13
8.21
20.21
12.16
2.64
5.42

91.51
71.33
54.65
10.15
44.50
3.11
19.91
14.15
7.33
7.99
8.69
20.18
11.00
2.97
6.21

91.52
72.52
54.79
10.46
44.33
2.81
21.00
13.10
7.42
7.97
9.76
19.00
9.78
2.52
6.70

91.58
73.30
54.66
10.92
43.74
2.46
20.64
12.49
8.16
7.83
10.81
18.28
8.61
2.29
7.37

91.25
72.47
54.59
10.17
44.42
2.36
22.28
11.59
8.18
7.95
9.92
18.78
8.00
2.21
8.57

90.85
71.20
53.87
8.92
44.95
2.39
24.92
10.13
7.51
7.77
9.56
19.65
7.67
2.09
9.90

90.96
70.50
53.31
8.90
44.40
2.47
26.10
8.65
7.18
7.75
9.45
20.46
7.22
2.30
10.94

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

7.88

8.01

8.27

8.43

8.49

8.48

8.42

8.75

9.15

9.04

9.94
.36
29.60

9.83
.19
32.08

9.92
.14
32.73

9.99
.11
34.09

10.12
.08
34.94

10.87
.06
36.58

11.58
.05
38.83

12.09
.05
37.42

12.57
.06
35.05

12.48
.06
34.66

3,862

4,147

4,376

4,733

5,145

5,439

5,906

6,334

6,635

7,249

Memo
Commercial real estate lo a n s.......................................
Other real estate ow ned ................................................
Managed liabilities ........................................................
Average net consolidated assets
(billions of dollars) ...............................................




Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

183

A. 2.—Continued
A. All banks
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Effective interest rate (percent)4
Rates earned
Interest-earning assets .............................................
Taxable equivalent...........................................
Loans and leases, gross .....................................
Net of loss provisions ................................
Securities...............................................................
Taxable equivalent .....................................
Investment account .........................................
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ................................
Mortgage-backed securities ......................
Other .............................................................
Trading account ...............................................
Gross federal funds sold and reverse RPs ___
Interest-bearing balances at depositories.........

7.61
7.69
8.62
8.32
5.97
6.20
5.80

8.33
8.40
9.24
8.92
6.51
6.73
6.35

8.14
8.22
9.00
8.56
6.46
6.66
6.39

8.15
8.22
9.01
8.50
6.54
6.73
6.50

7.99
8.06
8.85
8.30
6.45
6.63
6.38

7.70
7.76
8.47
7.97
6.27
6.46
6.25

8.22
8.26
9.00
8.33
6.47
6.65
6.45

7.36
7.44
8.16
7.15
6.08
6.26
6.05

6.08
6.17
6.91
5.86
4.98
5.14
5.04

5.27
5.35
6.16
5.48
3.99
4.13
4.00

n.a.
n.a.
n.a.
7.41
4.26
5.71

n.a.
n.a.
n.a.
7.73
5.63
6.84

n.a.
n.a.
n.a.
6.86
5.21
6.20

n.a.
n.a.
n.a.
6.75
5.45
6.23

n.a.
n.a.
n.a.
6.85
5.29
6.32

n.a.
n.a.
n.a.
6.47
4.78
5.95

n.a.
n.a.
n.a.
6.63
5.56
6.48

5.76
6.45
5.60
6.34
3.86
4.01

4.42
5.44
4.74
4.59
1.93
2.79

3.29
4.24
4.08
3.94
1.43
2.09

Rates paid
Interest-bearing liabilities .......................................
Interest-bearing deposits.....................................
In foreign offices .............................................
In domestic offices...........................................
Other checkable deposits ..........................
Savings (including M M D A s).....................
Large time deposits5 ..................................
Other time deposits5 ..................................
Gross federal funds purchased and RPs .........
Other interest-bearing liabilities........................

4.01
3.53
5.59
3.14
1.85
2.58
4.09
4.17
4.18
7.25

4.99
4.47
6.12
4.11
2.06
3.19
5.47
5.44
5.65
7.46

4.82
4.34
5.54
4.07
2.04
3.00
5.39
5.40
5.12
6.93

4.92
4.39
5.44
4.16
2.25
2.93
5.45
5.54
5.17
6.94

4.88
4.31
5.66
4.01
2.29
2.79
5.22
5.48
5.19
6.89

4.47
3.87
4.91
3.63
2.08
2.49
4.92
5.09
4.73
6.48

5.17
4.45
5.61
4.17
2.34
2.86
5.78
5.69
5.77
6.97

4.15
3.61
3.94
3.54
1.96
2.19
5.04
5.43
3.83
5.92

2.54
2.12
2.38
2.07
1.06
1.13
3.38
3.73
1.88
4.32

1.87
1.48
1.64
1.45
.77
.74
2.58
2.91
1.30
3.57

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

6.65
6.72
4.91
1.25
.17
.33

7.29
7.35
5.47
1.23
.23
.35

7.16
7.21
5.47
1.16
.21
.32

7.15
7.20
5.40
1.11
.29
.35

6.98
7.03
5.27
1.10
.29
.32

6.73
6.78
5.12
1.14
.23
.24

7.18
7.22
5.53
1.15
.23
.27

6.39
6.43
4.92
1.00
.20
.24

5.28
5.32
4.07
.89
.09
.18

4.55
4.59
3.56
.74
.07
.15

Gross interest expense .............................................
Deposits .................................................................
Gross federal funds purchased and RPs .........
O ther.......................................................................

2.87
2.05
.32
.50

3.57
2.54
.44
.58

3.43
2.46
.38
.59

3.48
2.48
.43
.56

3.46
2.43
.43
.60

3.22
2.20
.39
.63

3.76
2.56
.45
.75

2.98
2.09
.31
.58

1.79
1.23
.15
.41

1.30
.86
.10
.33

Net interest incom e..................................................
Taxable equivalent...........................................

3.78
3.85

3.72
3.78

3.73
3.78

3.67
3.72

3.52
3.57

3.51
3.56

3.41
3.46

3.41
3.45

3.49
3.53

3.25
3.28

Loss provisioning6 ..................................................

.28

.30

.37

.41

.41

.39

.50

.68

.68

.45

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

2.00
.40
.31
.16
n.a.
n.a.
n.a.
1.13

2.02
.39
.31
.15
n.a.
n.a.
n.a.
1.17

2.18
.39
.33
.17
.09
.06
.02
1.29

2.23
.39
.35
.17
.08
.08
*
1.32

2.40
.38
.37
.15
.05
.09
.01
1.49

2.65
.40
.38
.19
.07
.09
.03
1.69

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

2.53
.42
.35
.20
.10
.07
.03
1.56

2.54
.45
.33
.16
.08
.07
.01
1.61

2.53
.44
.31
.16
.06
.07
.02
1.63

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

3.75
1.58
.49
1.68

3.64
1.54
.48
1.62

3.71
1.55
.48
1.69

3.61
1.53
.47
1.62

3.77
1.55
.47
1.75

3.76
1.58
.48
1.70

3.66
1.51
.45
1.70

3.57
1.49
.44
1.64

3.47
1.51
.44
1.52

3.35
1.50
.43
1.43

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

1.75

1.62

1.53

1.38

1.36

1.11

1.07

1.04

.93

.82

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

-.01

.01

.03

.04

.06

*

-.04

.07

.10

.08

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

1.73
.58
*

1.81
.63
*

1.85
.65
*

1.92
.68
*

1.80
.62
.01

2.02
.72
*

1.81
.63
*

1.76
.59
-.01

1.97
.65
*

2.05
.67
.01

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

1.15
.73
.42

1.18
.75
.43

1.20
.90
.30

1.25
.90
.35

1.19
.80
.39

1.31
.96
.35

1.18
.89
.29

1.17
.87
.30

1.32
1.01
.30

1.39
1.07
.31

Memo: Return on equity.........................................

14.63

14.69

14.53

14.84

14.05

15.39

13.97

13.35

14.41

15.34

* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
CD Certificate of deposit.
1. Includes allocated transfer risk reserves.
2. As in the Call Report, equity securities were combined with “other debt securities” before 1989.
3. Before 1994, the netted value of revaluation gains and losses appeared in “trading account securities”
if it was a gain and in “other non-interest-bearing liabilities” if it was a loss.
4. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Reports.
5. Before 1997, large time open accounts included in other time deposits.
6. Includes provisions for allocated transfer risk.




184

A.2.

Federal Reserve Bulletin □ Spring 2004

Portfolio composition, interest rates, and income and expense, all U.S. banks, 1994—
2003
B. Ten largest banks by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Balance sheet items as a percentage of average net consolidated assets
Interest-earning assets ..................................................
Loans and leases, net ..............................................
Commercial and industrial .................................
U.S. addressees..................................................
Foreign addressees ...........................................
Consumer ...............................................................
Credit card..........................................................
Installment and other .......................................
Real estate .............................................................
In domestic offices ...........................................
Construction and land development .........
Farmland ........................................................
One- to four-family residential..................
Home equity .............................................
Other ..........................................................
Multifamily residential ...............................
Nonfarm nonresidential ..............................
In foreign offices ..............................................
To depository institutions and acceptances
of other banks ...............................................
Foreign governments ...........................................
Agricultural production .......................................
Other loans.............................................................
Lease-financing receivables ...............................
Less: Unearned income on loans ......................
Less: Loss reserves1 .............................................
Securities.....................................................................
Investment account ..............................................
D e b t.....................................................................
U.S. Treasury ................................................
U.S. government agency and
corporation obligations ......................
Government-backed mortgage pools ...
Collateralized mortgage obligations___
Other ..........................................................
State and local government ........................
Private mortgage-backed securities...........
Other...............................................................
Equity2 ...............................................................
Trading account ....................................................
Gross federal funds sold and reverse RPs ...........
Interest-bearing balances at depositories ...............
Non-interest-earning assets...........................................
Revaluation gains held in trading accounts3 ........
Other............................................................................

77.26
49.91
16.43
9.16
7.27
6.59
2.28
4.31
16.21
13.80
.84
.06
9.69
1.40
8.29
.41
2.79
2.41

77.12
50.05
16.16
8.66
7.50
6.60
1.96
4.65
15.82
13.48
.58
.06
9.62
1.40
8.22
.38
2.83
2.35

80.12
53.51
17.17
9.59
7.59
6.22
1.23
4.99
16.53
14.44
.51
.06
10.43
1.53
8.90
.38
3.05
2.09

81.84
50.91
16.90
10.24
6.66
6.40
1.34
5.06
17.42
15.69
.68
.09
11.02
1.70
9.31
.39
3.52
1.73

81.25
50.76
18.07
11.76
6.31
6.04
1.30
4.74
16.51
15.08
.77
.09
10.33
1.72
8.61
.38
3.51
1.43

81.49
53.37
19.20
13.14
6.06
5.94
1.36
4.58
16.96
15.55
.90
.10
10.77
1.54
9.22
.43
3.35
1.41

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

81.74
53.86
18.82
13.42
5.41
6.17
1.64
4.53
19.23
18.05
1.27
.11
12.41
1.78
10.63
.51
3.76
1.18

81.68
53.60
16.16
11.69
4.47
7.82
2.90
4.92
20.78
19.70
1.42
.12
13.51
2.35
11.17
.55
4.09
1.08

81.35
52.17
13.01
9.43
3.59
7.96
2.81
5.15
22.68
21.74
1.36
.10
16.03
2.96
13.07
.47
3.78
.94

3.49
1.27
.25
6.32
1.14
-.16
-1.63
20.61
11.68
11.29
2.06

5.04
.90
.21
5.76
1.14
-.14
-1.45
19.53
10.65
10.27
2.03

6.14
.69
.23
6.34
1.59
-.11
-1.30
19.83
10.60
10.22
1.93

4.20
.45
.31
4.15
2.24
-.07
-1.08
20.00
10.97
10.55
1.56

4.05
.35
.28
3.74
2.81
-.06
-1.01
19.72
12.12
11.64
1.70

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

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

3.23
.20
.28
3.51
3.43
-.0 4
-.97
17.81
12.14
11.88
.68

3.20
.20
.23
2.94
3.44
-.08
-1.12
20.54
14.36
14.13
.59

3.51
.17
.19
2.84
2.87
-.0 6
-1.02
21.22
15.31
15.11
.82

5.08
2.79
2.22
.06
.61
.43
3.03
.39
8.93
2.68
4.05
22.74
11.23
11.51

4.46
2.89
1.50
.08
.49
.32
2.97
.38
8.88
3.20
4.34
22.88
10.77
12.11

4.59
3.58
.95
.06
.39
.30
3.01
.38
9.23
3.10
3.68
19.88
7.63
12.25

5.34
4.26
.93
.15
.51
.32
2.81
.42
9.03
7.56
3.37
18.16
7.36
10.80

6.31
5.13
.93
.26
.47
.60
2.57
.47
7.60
7.81
2.96
18.75
7.62
11.13

6.35
5.03
.79
.52
.45
.57
3.22
.51
5.25
6.64
3.14
18.51
6.66
11.85

6.59
4.88
.93
.78
.51
.51
3.47
.68
5.26
5.02
3.01
17.77
5.66
12.11

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

8.69
6.38
1.52
.79
.59
.92
3.34
.22
6.18
5.26
2.28
18.32
5.40
12.93

9.20
7.59
.91
.70
.59
1.10
3.40
.20
5.91
5.79
2.18
18.65
5.79
12.86

Liabilities........................................................................
Interest-bearing liabilities.........................................
Deposits .................................................................
In foreign offices ..............................................
In domestic offices ...........................................
Other checkable deposits ............................
Savings (including MMDAs) ....................
Small-denomination time deposits ...........
Large-denomination time deposits ...........
Gross federal funds purchased and RPs ...........
Other ......................................................................
Non-interest-bearing liabilities ...............................
Demand deposits in domestic offices.................
Revaluation losses held in trading accounts3 ..
Other ......................................................................

93.42
64.33
48.20
26.10
22.10
2.91
12.70
3.98
2.51
5.83
10.29
29.09
10.15
10.22
10.51

93.59
63.37
47.49
28.36
19.12
2.30
10.56
4.04
2.23
6.17
9.71
30.22
8.88
10.68
10.66

93.04
64.45
47.87
26.41
21.46
1.61
12.31
4.68
2.86
5.88
10.69
28.59
9.73
7.27
11.59

92.61
65.83
47.36
22.18
25.18
1.21
14.26
5.82
3.89
10.26
8.20
26.78
8.98
7.53
10.27

92.58
65.81
47.65
20.17
27.48
.99
15.83
6.03
4.62
9.78
8.37
26.77
8.46
7.67
10.65

92.28
66.87
48.79
21.04
27.76
.72
16.84
5.66
4.54
8.84
9.24
25.41
7.83
6.51
11.06

92.36
67.81
49.27
21.62
27.66
.74
16.73
5.38
4.80
8.89
9.65
24.56
7.28
5.69
11.59

92.14
66.76
49.09
19.22
29.88
.90
19.23
5.11
4.63
9.04
8.62
25.38
7.50
5.10
12.79

91.53
65.42
48.96
16.27
32.70
.95
22.81
4.71
4.22
8.83
7.64
26.10
7.40
4.63
14.07

91.94
65.55
49.01
15.68
33.34
1.01
24.22
3.67
4.43
8.60
7.93
26.40
6.64
4.88
14.87

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

6.58

6.41

6.96

7.39

7.42

7.72

7.64

7.86

8.47

8.06

4.65
.58
46.21

4.40
.27
47.94

4.65
.18
47.39

5.45
.13
46.02

5.61
.09
44.42

5.69
.06
45.49

5.87
.04
46.84

6.68
.04
43.41

6.92
.03
38.90

6.31
.03
38.69

949

1,051

1,189

1,514

1,820

1,935

2,234

2,527

2,785

3,148

Memo
Commercial real estate lo a n s.......................................
Other real estate ow ned................................................
Managed liabilities ........................................................
Average net consolidated assets
(billions of dollars) ..............................................




Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

185

A.2.—Continued
B. Ten largest banks by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Effective interest rate (percent)4
Rates earned
Interest-earning assets .............................................
Taxable equivalent...........................................
Loans and leases, gross .....................................
Net of loss provisions ................................
Securities...............................................................
Taxable equivalent .....................................
Investment account .........................................
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ................................
Mortgage-backed securities ......................
Other ..............................................................
Trading account ...............................................
Gross federal funds sold and reverse RPs —
Interest-bearing balances at depositories .........

8.15
8.18
8.89
8.66
7.09
7.19
6.57

8.20
8.22
8.84
8.88
7.40
7.47
7.04

7.72
7.74
8.32
8.31
6.80
6.85
6.70

7.55
7.60
8.25
8.10
6.78
6.85
6.76

7.54
7.57
8.21
7.77
6.83
6.89
6.78

7.35
7.39
7.99
7.65
6.58
6.65
6.59

7.77
7.78
8.46
7.92
6.48
6.55
6.40

6.82
6.89
7.52
6.56
6.36
6.44
6.23

5.81
5.89
6.54
5.32
5.14
5.21
5.30

5.00
5.06
5.78
5.21
4.23
4.29
4.26

n.a.
n.a.
n.a.
7.79
4.52
7.27

n.a.
n.a.
n.a.
7.83
5.20
7.15

n.a.
n.a.
n.a.
6.90
4.92
6.71

n.a.
n.a.
n.a.
6.81
5.45
6.91

n.a.
n.a.
n.a.
6.92
5.20
7.16

n.a.
n.a.
n.a.
6.56
4.52
7.22

n.a.
n.a.
n.a.
6.70
4.93
7.43

5.01
6.42
6.34
6.66
3.86
3.73

3.74
5.55
5.30
4.75
2.20
3.40

2.62
4.51
4.28
4.15
1.66
2.49

Rates paid
Interest-bearing liabilities .......................................
Interest-bearing deposits.....................................
In foreign offices .............................................
In domestic offices...........................................
Other checkable deposits ..........................
Savings (including M M D A s).....................
Large time deposits5 ..................................
Other time deposits5 ..................................
Gross federal funds purchased and RPs .........
Other interest-bearing liabilities........................

5.43
4.32
6.04
2.35
1.10
2.35
3.12
2.80
4.05
10.87

5.88
4.99
6.07
3.42
1.29
3.11
3.73
5.08
5.22
9.80

5.44
4.57
5.62
3.32
1.32
2.76
4.62
4.58
4.93
8.86

5.41
4.54
5.52
3.69
1.97
2.68
5.17
5.45
5.02
9.13

5.29
4.40
5.83
3.39
1.67
2.45
4.53
5.21
5.18
8.85

4.79
3.82
4.99
3.04
1.44
2.11
4.36
4.95
4.53
8.61

5.37
4.40
5.67
3.51
1.61
2.43
5.32
5.53
5.47
8.15

4.09
3.27
4.02
2.85
1.67
1.92
4.40
5.14
3.81
7.00

2.55
1.95
2.59
1.68
.93
1.02
3.26
3.55
2.02
5.39

1.86
1.36
1.76
1.20
.87
.73
2.36
2.86
1.39
4.20

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

6.37
6.40
4.49
.77
.15
.97

6.42
6.43
4.44
.75
.21
1.00

6.26
6.27
4.48
.71
.18
.88

6.31
6.33
4.31
.73
.45
.82

6.21
6.22
4.27
.81
.42
.70

6.01
6.03
4.35
.85
.30
.51

6.39
6.41
4.74
.88
.25
.51

5.56
5.58
4.14
.72
.25
.43

4.78
4.80
3.58
.73
.12
.34

4.06
4.08
3.05
.63
.10
.27

Gross interest expense .............................................
D eposits.................................................................
Gross federal funds purchased and RPs .........
O ther.......................................................................

3.52
2.15
.24
1.13

3.74
2.43
.35
.95

3.52
2.26
.31
.95

3.55
2.26
.54
.75

3.48
2.20
.54
.74

3.16
1.97
.40
.79

3.60
2.33
.49
.78

2.69
1.74
.35
.59

1.65
1.06
.18
.41

1.20
.75
.13
.33

Net interest incom e..................................................
Taxable equivalent...........................................

2.86
2.88

2.68
2.70

2.73
2.75

2.76
2.79

2.73
2.75

2.84
2.86

2.78
2.80

2.87
2.89

3.13
3.15

2.86
2.88

Loss provisioning6 ..................................................

.26

.11

.11

.16

.31

.26

.38

.59

.73

.35

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

2.33
.26
.36
.53
n.a.
n.a.
n.a.
1.18

2.16
.25
.30
.46
n.a.
n.a.
n.a.
1.15

2.34
.28
.31
.52
.30
.17
.05
1.23

2.12
.32
.34
.43
.23
.20
*
1.04

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

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

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

2.23
.44
.29
.43
.21
.14
.08
1.06

2.32
.48
.26
.32
.15
.14
.03
1.25

2.31
.46
.27
.30
.12
.14
.04
1.29

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

3.56
1.65
.55
1.36

3.32
1.58
.50
1.24

3.57
1.57
.50
1.50

3.24
1.45
.47
1.33

3.47
1.45
.47
1.54

3.45
1.57
.50
1.38

3.31
1.46
.47
1.39

3.13
1.38
.45
1.30

3.16
1.41
.46
1.28

3.02
1.39
.45
1.18

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

1.23

1.16

1.23

1.12

1.32

.90

.77

.90

.84

.71

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

.02

.03

.04

.08

.11

.03

-0.03

.08

.13

.11

Income before taxes and extraordinary ite m s_
_
Taxes .....................................................................
Extraordinary items, net of income taxes .......

1.39
.48
*

1.44
.55
*

1.44
.52
*

1.56
.58
*

1.22
.44
*

1.71
.66
*

1.60
.60
*

1.46
.48
-.01

1.69
.57
*

1.91
.62
*

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

.91
.58
.33

.88
.57
.31

.92
.70
.21

.98
.82
.15

.78
.53
.25

1.05
.79
.26

1.00
.86
.13

.97
.66
.31

1.12
1.05
.07

1.29
.99
.30

Memo: Return on equity.........................................

13.86

13.78

13.21

13.22

10.53

13.58

13.04

12.34

13.24

16.01

* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
CD Certificate of deposit.
1. Includes allocated transfer risk reserves.
2. As in the Call Report, equity securities were combined with “other debt securities” before 1989.
3. Before 1994, the netted value of revaluation gains and losses appeared in “trading account securities”
if it was a gain and in “other non-interest-bearing liabilities” if it was a loss.
4. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Reports.
5. Before 1997, large time open accounts included in other time deposits.
6. Includes provisions for allocated transfer risk.




186

A.2.

Federal Reserve Bulletin □ Spring 2004

Portfolio composition, interest rates, and income and expense, all U.S. banks, 1994-2003
C. Banks ranked 11 through 100 by assets
Item

1994

1995

1996

1997

Balance sheet items as
Interest-earning assets ..................................................
Loans and leases, net ...............................................
Commercial and industrial .................................
U.S. addressees..................................................
Foreign addressees ...........................................
Consumer ...............................................................
Credit card..........................................................
Installment and other .......................................
Real estate .............................................................
In domestic offices ...........................................
Construction and land development .........
Farmland ........................................................
One- to four-family residential...................
Home equity .............................................
Other ..........................................................
Multifamily residential ...............................
Nonfarm nonresidential ..............................
In foreign offices ...............................................
To depository institutions and acceptances
of other banks ...............................................
Foreign governments ...........................................
Agricultural production .......................................
Other lo a n s.............................................................
Lease-financing receivables ................................
Less: Unearned income on loans ......................
Less: Loss reserves1 .............................................
Securities.....................................................................
Investment account ...............................................
D e b t.....................................................................
U.S. Treasury ................................................
U.S. government agency and
corporation obligations ......................
Government-backed mortgage pools . ..
Collateralized mortgage obligations_
_
Other ..........................................................
State and local government ........................
Private mortgage-backed securities...........
O ther...............................................................
Equity2 ...............................................................
Trading account ....................................................
Gross federal funds sold and reverse RPs ...........
Interest-bearing balances at depositories ...............
Non-interest-earning assets...........................................
Revaluation gains held in trading accounts3..........
Other............................................................................

1998

1999

2000

2001

2002

2003

percentage of average net consolidated assets

88.58
58.56
18.04
16.99
1.04
12.62
5.99
6.63
22.26
22.17
1.63
.14
12.98
2.33
10.65
.71
6.72
.09

88.71
62.68
19.26
18.10
1.16
14.23
7.34
6.89
23.25
23.10
1.50
.13
14.16
2.19
11.97
.77
6.54
.15

88.26
64.24
18.95
17.71
1.24
15.67
8.26
7.40
23.26
23.10
1.55
.13
14.15
2.08
12.07
.89
6.37
.16

87.50
63.89
19.01
17.78
1.22
15.62
8.50
7.12
22.99
22.85
1.69
.14
13.88
2.22
11.65
.93
6.21
.15

87.87
64.38
18.92
17.59
1.33
14.52
7.67
6.86
24.59
24.42
2.03
.17
14.86
2.17
12.69
1.00
6.36
.18

88.41
64.23
19.40
18.18
1.22
13.57
6.78
6.79
24.80
24.62
2.43
.19
14.15
2.08
12.07
1.02
6.82
.19

88.67
64.88
18.19
17.64
.55
13.79
6.97
6.82
26.21
26.12
3.00
.22
14.51
2.49
12.02
1.11
7.28
.09

88.08
62.14
15.84
15.36
.48
13.20
6.97
6.23
27.29
27.21
3.31
.23
15.51
2.90
12.60
1.16
6.99
.09

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

88.10
59.48
11.96
11.66
.30
12.57
6.35
6.21
30.67
30.54
3.21
.20
18.79
4.74
14.04
1.33
7.01
.13

1.52
.28
.29
3.45
1.60
-.0 7
-1.41
21.19
19.81
19.49
6.86

1.61
.20
.26
3.29
1.96
-.07
-1.32
18.64
17.88
17.51
4.82

1.53
.20
.28
3.27
2.41
-.06
-1.27
16.87
16.06
15.62
3.34

1.30
.09
.29
3.18
2.70
-.05
-1.24
15.80
15.07
14.58
2.81

1.09
.06
.33
3.35
2.72
-.04
-1.16
16.66
16.13
15.58
2.25

.93
.06
.33
2.99
3.29
-.04
-1.11
17.79
17.28
16.64
1.70

1.05
.03
.37
2.57
3.82
-.03
-1.12
17.32
16.10
15.50
1.12

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

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

1.21
.02
.23
1.58
2.35
-.02
- 1 . 10
21.16
20.09
19.88
.95

9.37
5.40
3.04
.94
1.20
.95
1.22
.32
1.38
5.11
3.72
11.42
.60
10.81

9.40
5.06
2.82
1.51
1.11
1.02
1.16
.37
.76
4.52
2.87
11.29
.50
10.78

9.12
5.42
2.16
1.54
.99
.96
1.21
.44
.80
4.26
2.89
11.74
.51
11.23

8.98
5.17
2.13
1.68
.88
.73
1.18
.49
.73
4.38
3.43
12.50
.69
11.81

9.93
4.98
2.83
2.12
.92
.96
1.53
.55
.54
3.57
3.24
12.13
.75
11.38

10.57
5.12
2.89
2.56
.99
1.35
2.02
.65
.51
3.34
3.06
11.59
.56
11.03

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

10.09
5.19
2.42
2.48
.99
2.01
3.56
.39
1.29
4.06
2.88
11.92
.55
11.37

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

12.99
6.08
3.72
3.19
.95
2.14
2.85
.21
1.07
4.21
3.26
11.90
.60
11.30

Liabilities .........................................................................
Interest-bearing liabilities.........................................
Deposits .................................................................
In foreign offices ..............................................
In domestic offices ...........................................
Other checkable deposits ............................
Savings (including MMDAs) ....................
Small-denomination time deposits ...........
Large-denomination time deposits ...........
Gross federal funds purchased and RPs ...........
Other .......................................................................
Non-interest-bearing liabilities ................................
Demand deposits in domestic o ffices.................
Revaluation losses held in trading accounts3 ..
Other .......................................................................

92.47
72.85
53.03
8.05
44.98
6.91
20.13
13.26
4.68
11.49
8.34
19.62
15.28
.57
3.89

92.23
74.05
52.32
8.12
44.20
5.62
18.78
14.24
5.55
11.37
10.36
18.18
14.26
.49
3.43

92.02
73.14
51.81
7.52
44.30
3.06
20.76
14.09
6.39
10.00
11.32
18.89
14.47
.49
3.93

91.85
72.60
51.45
7.85
43.60
1.95
21.08
13.43
7.15
9.36
11.79
19.24
14.17
.68
4.39

91.63
73.40
51.50
8.15
43.35
1.75
21.40
12.84
7.36
9.48
12.43
18.23
12.39
.76
5.07

91.66
74.97
51.50
7.96
43.53
1.60
22.46
11.85
7.62
9.77
13.70
16.70
10.52
.58
5.59

91.57
76.46
51.57
7.34
44.23
1.32
22.34
11.80
8.77
9.28
15.61
15.12
8.61
.41
6.09

91.15
75.98
51.94
6.86
45.08
1.20
24.36
10.66
8.86
9.71
14.32
15.17
7.17
.52
7.49

90.79
74.70
50.48
6.09
44.39
1.17
26.45
8.78
7.98
9.66
14.55
16.09
6.32
.44
9.34

90.65
73.22
49.81
6.33
43.48
1.33
27.53
7.47
7.16
9.71
13.70
17.43
5.94
.56
10.93

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

7.53

7.77

7.98

8.15

8.37

8.34

8.43

8.85

9.21

9.35

9.69
.25
32.89

9.42
.13
35.68

9.38
.08
35.60

9.44
.06
36.60

10.11
.04
38.11

11.00
.03
39.83

12.06
.03
41.98

12.06
.04
40.81

12.24
.05
39.48

12.11
.06
38.15

1,204

1,338

1,450

1,604

1,745

1,881

2,031

2,130

2,124

2,287

M emo
Commercial real estate lo a n s.......................................
Other real estate ow ned................................................
Managed liabilities ........................................................
Average net consolidated assets
(billions of dollars) ...............................................




Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

187

A.2.—Continued
C. Banks ranked 11 through 100 by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Effective interest rate (percent)4
Rates earned
Interest-earning assets .............................................
Taxable equivalent...........................................
Loans and leases, gross .....................................
Net of loss provisions ................................
Securities...............................................................
Taxable equivalent .....................................
Investment account .........................................
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ................................
Mortgage-backed securities ......................
Other .............................................................
Trading account ...............................................
Gross federal funds sold and reverse RPs _
_
Interest-bearing balances at depositories .........

7.29
7.36
8.22
7.87
5.75
5.92
5.75

8.31
8.37
9.10
8.67
6.38
6.56
6.35

8.16
8.23
8.88
8.21
6.49
6.66
6.49

8.31
8.36
9.03
8.27
6.55
6.70
6.57

8.10
8.17
8.82
8.15
6.31
6.46
6.33

7.84
7.88
8.50
7.80
6.32
6.46
6.34

8.46
8.48
9.14
8.25
6.64
6.77
6.66

7.53
7.58
8.26
6.96
5.96
6.08
6.04

6.00
6.07
6.80
5.59
4.79
4.91
4.86

5.26
5.33
6.11
5.11
3.80
3.91
3.87

n.a.
n.a.
n.a.
5.75
4.31
4.69

n.a.
n.a.
n.a.
7.27
5.91
6.78

n.a.
n.a.
n.a.
6.53
5.31
5.82

n.a.
n.a.
n.a.
6.05
5.45
5.76

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

n.a.
n.a.
n.a.
5.58
5.12
4.81

n.a.
n.a.
n.a.
6.25
6.06
5.49

5.83
6.60
5.13
4.83
3.86
4.38

4.28
5.34
4.22
3.59
1.68
2.46

3.17
4.20
3.61
2.62
1.14
1.93

Rates paid
Interest-bearing liabilities .......................................
Interest-bearing deposits.....................................
In foreign offices .............................................
In domestic offices...........................................
Other checkable deposits ..........................
Savings (including M M D A s).....................
Large time deposits5 ..................................
Other time deposits5 ..................................
Gross federal funds purchased and RPs .........
Other interest-bearing liabilities........................

3.71
3.25
4.60
3.03
1.61
2.46
4.21
4.17
4.28
5.24

4.94
4.35
6.30
4.01
1.89
3.10
5.70
5.35
5.86
6.43

4.70
4.15
5.29
3.96
1.78
2.91
5.50
5.26
5.19
5.95

4.79
4.22
5.23
4.04
2.01
2.84
5.47
5.43
5.29
5.85

4.77
4.15
5.22
3.96
2.41
2.76
5.32
5.35
5.22
5.81

4.38
3.76
4.70
3.60
2.03
2.49
4.96
5.03
4.87
5.41

5.22
4.42
5.38
4.26
2.57
2.94
5.88
5.73
6.02
6.36

4.16
3.60
3.67
3.60
2.32
2.30
5.11
5.42
3.86
5.30

2.41
1.96
1.70
1.99
.94
1.08
3.36
3.68
1.73
3.54

1.79
1.35
1.22
1.37
.67
.66
2.70
2.95
1.20
3.01

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

6.46
6.51
4.91
1.13
.21
.21

7.40
7.45
5.79
1.13
.27
.21

7.24
7.28
5.80
1.03
.23
.18

7.26
7.30
5.87
.98
.22
.19

7.16
7.19
5.79
1.00
.19
.18

6.98
7.02
5.56
1.10
.18
.14

7.54
7.57
6.05
1.09
.22
.18

6.70
6.73
5.28
1.06
.15
.15

5.31
5.34
4.15
.90
.08
.11

4.67
4.70
3.72
.75
.04
.08

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

2.67
1.73
.51
.43

3.62
2.29
.67
.66

3.39
2.18
.55
.66

3.41
2.23
.51
.68

3.45
2.23
.51
.71

3.26
2.02
.51
.74

3.96
2.41
.56
.99

3.14
2.01
.38
.75

1.77
1.09
.17
.51

1.30
.77
.12
.41

Net interest incom e..................................................
Taxable equivalent...........................................

3.79
3.84

3.78
3.84

3.84
3.89

3.85
3.89

3.71
3.74

3.72
3.75

3.58
3.61

3.56
3.59

3.54
3.57

3.37
3.40

Loss provisioning6 ..................................................

.32

.39

.54

.60

.54

.55

.68

.91

.80

.67

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

2.25
.45
.39
.08
n.a.
n.a.
n.a.
1.33

2.38
.44
.40
.09
n.a.
n.a.
n.a.
1.45

2.61
.44
.43
.08
.03
.04
.01
1.67

2.76
.44
.44
.08
.02
.05
*
1.79

3.07
.42
.49
.09
.03
.06
*
2.07

3.36
.41
.48
.08
.02
.05
*
2.39

3.18
.42
.52
.07
.02
.04
*
2.18

3.36
.42
.42
.08
.04
.03
*
2.44

3.30
.42
.42
.08
.04
.04
*
2.37

3.28
.42
.37
.09
.04
.04
.01
2.40

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

3.86
1.50
.47
1.89

3.79
1.47
.47
1.85

3.85
1.51
.48
1.86

3.85
1.51
.46
1.88

4.03
1.53
.46
2.04

4.12
1.53
.45
2.14

4.00
1.44
.43
2.14

3.95
1.47
.42
2.07

3.73
1.49
.40
1.84

3.63
1.47
.41
1.76

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

1.61

1.41

1.24

1.10

.96

.76

.82

.59

.43

.35

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

-.01

.02

.02

.02

.03

-.01

-.05

.09

.10

.06

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

2.01
.70
*

2.09
.75
*

2.18
.77
*

2.24
.78
*

2.40
.86
*

2.02
.70
*

2.15
.74
*

2.41
.82
*

2.41
.82
*

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

1.85
.63
*
1.22
.86
.36

1.31
.85
.46

1.34
1.07
.26

1.42
.93
.48

1.45
.96
.50

1.54
1.16
.38

1.32
.94
.38

1.40
.96
.44

1.59
.99
.60

1.59
1.05
.54

Memo: Return on equity.........................................

16.27

16.84

16.78

17.36

17.38

18.46

15.72

15.79

17.26

17.01

* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
CD Certificate of deposit.
1. Includes allocated transfer risk reserves.
2. As in the Call Report, equity securities were combined with “other debt securities” before 1989.
3. Before 1994, the netted value of revaluation gains and losses appeared in “trading account securities”
if it was a gain and in “other non-interest-bearing liabilities” if it was a loss.
4. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Reports.
5. Before 1997, large time open accounts included in other time deposits.
6. Includes provisions for allocated transfer risk.




188

A.2.

Federal Reserve Bulletin □ Spring 2004

Portfolio composition, interest rates, and income and expense, all U.S. banks, 1994-2003
D. Banks ranked 101 through 1,000 by assets
Item

1994

1995

1996

1997

1998

1999

2000

2002

2001

2003

Balance sheet items as a percentage of average net consolidated assets
90.89
59.71
12.08
11.92
.16
15.75
5.95
9.80
29.45
29.43
2.08
.36
16.27
2.33
13.94
1.13
9.58
.03

90.97
62.18
12.70
12.54
.16
16.25
6.30
9.95
30.82
30.80
2.21
.40
17.50
2.37
15.14
1.21
9.48
.02

91.10
62.63
12.79
12.61
.18
15.88
6.66
9.22
31.37
31.34
2.38
.46
17.34
2.30
15.03
1.29
9.87
.02

91.32
62.22
12.43
12.19
.23
14.03
5.52
8.52
33.23
33.21
2.69
.53
18.14
2.30
15.84
1.29
10.56
.02

91.36
61.13
12.48
12.16
.32
12.28
4.48
7.80
33.94
33.92
2.88
.56
18.19
2.15
16.05
1.26
11.03
.02

91.68
61.49
12.64
12.32
.32
10.79
3.37
7.41
35.90
35.88
3.49
.58
18.26
1.99
16.27
1.44
12.12
.02

91.50
62.15
12.95
12.60
.35
10.19
3.27
6.92
36.94
36.91
4.15
.65
17.17
2.10
15.06
1.58
13.36
.02

91.16
62.46
13.03
12.65
.38
9.76
3.61
6.15
37.64
37.62
4.90
.66
16.18
2.21
13.97
1.69
14.18
.02

91.36
61.46
12.38
12.06
.31
8.13
2.64
5.50
38.92
38.90
5.40
.73
15.39
2.51
12.88
1.83
15.55
.03

91.34
61.33
11.52
11.21
.31
6.80
1.82
4.97
40.96
40.91
5.90
.80
15.71
2.92
12.79
2.00
16.51
.05

.42
.02
.62
1.98
.83
-.15
-1.30
25.74
25.43
24.99
8.18

.36
.02
.69
1.78
.90
-.12
-1.22
23.09
22.88
22.42
6.48

.50
.02
.71
1.68
1.01
-.10
-1.22
22.67
22.55
22.03
5.61

.59
.02
.74
1.47
.99
-.10
-1.18
23.45
23.35
22.74
4.96

.53
.03
.80
1.30
.99
-.09
-1.13
24.26
24.15
23.46
3.92

.46
.03
.78
1.25
.78
-.08
-1.06
25.17
25.09
24.33
2.53

.37
.03
.82
1.22
.75
-.08
-1.04
24.34
24.25
23.46
1.80

.38
.03
.85
1.22
.74
-.0 7
-1.12
22.81
22.70
22.27
1.32

.37
.02
.86
1.18
.76
-.06
-1.10
23.86
23.80
23.30
1.22

.37
.02
.83
1.22
.69
-.06
-1.02
24.36
24.22
23.79
1.00

12.77
5.64
4.34
2.79
2.30
.73
.99
.43
.31
3.64
1.79
9.11
.02
9.09

12.23
5.42
3.56
3.25
2.13
.68
.89
.47
.20
3.92
1.78
9.03
.05
8.99

12.66
5.69
3.12
3.85
2.24
.76
.76
.52
.12
3.87
1.93
8.90
.02
8.88

13.97
6.22
3.01
4.73
2.44
.59
.78
.61
.10
3.60
2.05
8.68
*
8.68

15.13
6.46
3.22
5.44
2.70
.65
1.06
.69
.11
4.17
1.80
8.64
*
8.63

16.29
6.72
3.52
6.05
2.91
1.00
1.60
.77
.08
3.35
1.68
8.32
.01
8.31

15.56
6.22
3.04
6.30
2.91
.99
2.19
.80
.09
3.40
1.60
8.50
.02
8.49

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

15.85
6.55
3.69
5.60
2.89
.99
2.34
.50
.06
4.15
1.89
8.64
.01
8.64

16.96
7.03
3.69
6.24
2.95
.87
2.01
.43
.14
3.85
1.81
8.66
*
8.65

Liabilities .........................................................................
Interest-bearing liabilities.........................................
Deposits .................................................................
In foreign offices ...............................................
In domestic offices ...........................................
Other checkable deposits ............................
Savings (including MMDAs) ....................
Small-denomination time deposits ...........
Large-denomination time deposits ...........
Gross federal funds purchased and RPs ...........
Other .......................................................................
Non-interest-bearing liabilities ................................
Demand deposits in domestic offices.................
Revaluation losses held in trading accounts 3 ..
Other ......................................................................

91.62
74.76
60.45
1.69
58.75
9.72
22.94
19.31
6.79
8.46
5.86
16.86
14.59
.02
2.26

91.36
75.00
59.68
1.71
57.97
8.54
20.75
21.12
7.56
8.31
7.00
16.36
14.07
.05
2.24

91.06
75.06
59.98
1.33
58.65
6.21
22.49
21.61
8.34
8.19
6.88
16.00
13.84
.02
2.14

90.78
75.19
61.47
1.23
60.25
4.96
23.59
22.03
9.66
7.09
6.62
15.60
13.15
.01
2.44

90.55
75.42
62.40
1.31
61.09
4.23
25.65
21.22
9.99
6.16
6.86
15.13
11.90
.01
3.22

90.90
76.76
61.94
1.20
60.74
3.75
27.35
19.61
10.03
6.90
7.92
14.15
10.19
.01
3.95

90.95
77.43
62.67
1.27
61.40
3.32
27.03
19.44
11.61
6.30
8.45
13.52
8.97
*
4.55

90.32
77.01
63.10
1.23
61.86
3.25
27.67
18.80
12.14
5.76
8.15
13.31
8.23
.01
5.08

89.93
76.35
62.83
.88
61.95
3.32
30.17
16.83
11.63
5.27
8.25
13.58
8.05
.01
5.52

89.69
75.79
61.95
.64
61.31
3.55
31.42
15.04
11.29
5.35
8.49
13.90
7.97
*
5.93

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

8.38

8.64

8.94

9.22

9.45

9.10

9.05

9.68

10.07

10.31

13.06
.28
22.83

13.19
.17
24.61

13.83
.13
24.78

14.77
.11
24.66

15.38
.09
24.46

17.28
.08
26.32

19.32
.07
28.01

21.03
.08
27.75

23.05
.10
26.57

24.62
.11
26.40

1,030

1,092

1,075

968

935

972

986

1,002

1,022

1,072

Interest-earning assets ..................................................
Loans and leases, net ...............................................
Commercial and industrial .................................
U.S. addressees..................................................
Foreign addressees ...........................................
Consumer ...............................................................
Credit card..........................................................
Installment and other .......................................
Real estate ..............................................................
In domestic offices ...........................................
Construction and land development .........
Farmland ........................................................
One- to four-family residential...................
Home equity .............................................
Other ..........................................................
Multifamily residential ................................
Nonfarm nonresidential ..............................
In foreign offices ..............................................
To depository institutions and acceptances
of other banks ...............................................
Foreign governments ...........................................
Agricultural production .......................................
Other lo a n s.............................................................
Lease-financing receivables ................................
Less: Unearned income on loans ......................
Less: Loss reserves1 .............................................
Securities.....................................................................
Investment account ..............................................
D e b t.....................................................................
U.S. Treasury ................................................
U.S. government agency and
corporation obligations ......................
Government-backed mortgage pools . ..
Collateralized mortgage obligations —
Other ..........................................................
State and local government ........................
Private mortgage-backed securities...........
Other...............................................................
Equity2 ...............................................................
Trading account ....................................................
Gross federal funds sold and reverse RPs ...........
Interest-bearing balances at depositories...............
Non-interest-earning assets...........................................
Revaluation gains held in trading accounts3 .......
O ther............................................................................

Memo
Commercial real estate lo a n s.......................................
Other real estate o w ned................................................
Managed liabilities ........................................................
Average net consolidated assets
(billions of dollars) ...............................................




Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

189

A.2.—Continued
D. Banks ranked 101 through 1,000 by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Effective interest rate (percent)4
Rates earned
Interest-earning assets .............................................
Taxable equivalent...........................................
Loans and leases, gross .....................................
Net of loss provisions ................................
Securities...............................................................
Taxable equivalent .....................................
Investment account .........................................
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ................................
Mortgage-backed securities ......................
Other ..............................................................
Trading account ...............................................
Gross federal funds sold and reverse RPs _
_
Interest-bearing balances at depositories.........

7.57
7.67
8.63
8.28
5.68
5.93
5.68

8.42
8.51
9.43
8.93
6.24
6.50
6.24

8.41
8.50
9.38
8.76
6.34
6.60
6.34

8.49
8.59
9.48
8.76
6.43
6.69
6.43

8.32
8.44
9.37
8.76
6.31
6.57
6.30

7.83
7.92
8.74
8.26
6.03
6.29
6.03

8.50
8.56
9.42
8.75
6.45
6.71
6.45

7.82
7.94
8.76
7.87
5.96
6.24
5.96

6.40
6.51
7.33
6.57
4.93
5.19
4.93

5.56
5.67
6.56
6.02
3.80
4.05
3.82

n.a.
n.a.
n.a.
5.29
4.05
4.28

n.a.
n.a.
n.a.
5.55
5.45
6.07

n.a.
n.a.
n.a.
5.94
5.29
5.69

n.a.
n.a.
n.a.
6.37
5.42
5.44

n.a.
n.a.
n.a.
6.84
5.31
5.76

n.a.
n.a.
n.a.
7.33
4.98
5.07

n.a.
n.a.
n.a.
9.30
6.15
5.76

5.85
6.33
5.40
6.60
3.91
3.93

4.54
5.38
4.51
3.82
1.73
1.79

3.42
3.95
4.07
1.67
1.27
1.27

Rates paid
Interest-bearing liabilities .......................................
Interest-bearing deposits.....................................
In foreign offices .............................................
In domestic offices...........................................
Other checkable deposits ..........................
Savings (including M M D A s)....................
Large time deposits5 .................................
Other time deposits5 .................................
Gross federal funds purchased and RPs .........
Other interest-bearing liabilities........................

3.57
3.31
4.31
3.28
1.87
2.64
4.23
4.40
4.12
4.92

4.64
4.26
5.94
4.21
2.02
3.24
5.62
5.53
5.61
6.28

4.58
4.27
5.72
4.23
1.96
3.11
5.48
5.57
5.16
5.90

4.66
4.34
5.42
4.32
2.16
3.08
5.56
5.57
5.21
6.09

4.60
4.28
5.55
4.25
2.15
2.97
5.51
5.64
5.14
6.00

4.19
3.84
5.07
3.82
1.99
2.65
5.17
5.11
4.83
5.36

4.93
4.46
6.12
4.43
2.27
3.07
6.00
5.74
5.95
6.45

4.11
3.81
4.27
3.81
1.81
2.22
5.27
5.51
3.82
5.41

2.54
2.28
2.14
2.28
1.06
1.17
3.34
3.77
1.83
4.17

1.88
1.60
1.43
1.61
.74
.75
2.57
2.86
1.29
3.59

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

6.89
6.98
5.25
1.45
.14
.06

7.68
7.76
5.98
1.43
.21
.07

7.68
7.75
5.99
1.42
.20
.06

7.75
7.83
6.00
1.50
.19
.06

7.63
7.71
5.85
1.50
.22
.06

7.19
7.27
5.47
1.51
.17
.04

7.79
7.86
5.96
1.57
.21
.04

7.16
7.24
5.59
1.33
.16
.04

5.85
5.93
4.58
1.15
.07
.02

5.07
5.15
4.07
.91
.05
.01

Gross interest expense .............................................
D eposits.................................................................
Gross federal funds purchased and RPs .........
O ther.......................................................................

2.65
2.01
.35
.29

3.46
2.56
.46
.44

3.40
2.57
.43
.40

3.47
2.70
.37
.40

3.44
2.71
.32
.41

3.20
2.44
.34
.42

3.79
2.87
.38
.54

3.14
2.48
.22
.44

1.92
1.49
.09
.34

1.41
1.04
.07
.30

Net interest incom e..................................................
Taxable equivalent...........................................

4.24
4.33

4.23
4.31

4.27
4.35

4.28
4.36

4.19
4.27

3.99
4.07

4.00
4.07

4.02
4.10

3.93
4.00

3.67
3.74

Loss provisioning6 ..................................................

.32

.43

.50

.56

.48

.39

.52

.65

.55

.40

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

1.86
.42
.28
.02
n.a.
n.a.
n.a.
1.14

1.84
.42
.27
.03
n.a.
n.a.
n.a.
1.12

1.88
.41
.29
.02
.01
.01
*
1.16

2.08
.40
.32
.01
.01
*
*
1.34

2.25
.39
.37
.02
.01
*
*
1.47

2.31
.38
.38
.02
.01
*
*
1.53

2.35
.36
.44
.01
.01
*
*
1.55

2.37
.39
.40
*
-.01
*
*
1.58

2.37
.41
.35
*
*
*
*
1.61

2.31
.41
.31
.01
.01
*
*
1.59

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

3.77
1.49
.46
1.83

3.68
1.44
.45
1.79

3.69
1.44
.45
1.80

3.73
1.50
.46
1.76

3.86
1.57
.47
1.83

3.70
1.56
.47
1.68

3.84
1.59
.47
1.78

3.88
1.61
.46
1.81

3.73
1.64
.45
1.64

3.59
1.64
.43
1.53
1.28

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

1.92

1.84

1.81

1.65

1.61

1.39

1.48

1.52

1.36

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

-.05

-.01

.02

.02

.04

-.01

-.04

.05

.04

.05

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

1.96
.67
*

1.96
.67
*

1.98
.69
*

2.10
.73
*

2.14
.73
.06

2.19
.74
.01

1.96
.67
*

1.90
.66
.01

2.06
.67
*

2.04
.66
.03

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

1.29
.81
.48

1.28
.87
.41

1.29
1.04
.25

1.37
1.09
.28

1.46
1.01
.45

1.46
1.06
.40

1.29
.92
.37

1.25
1.33
-.08

1.38
1.19
.19

1.40
1.64
-.24

Memo: Return on equity.........................................

15.42

14.82

14.45

14.90

15.49

16.11

14.22

12.95

13.74

13.62

* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
CD Certificate of deposit.
1. Includes allocated transfer risk reserves.
2. As in the Call Report, equity securities were combined with “other debt securities” before 1989.
3. Before 1994, the netted value of revaluation gains and losses appeared in “trading account securities”
if it was a gain and in “other non-interest-bearing liabilities” if it was a loss.
4. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Reports.
5. Before 1997, large time open accounts included in other time deposits.
6. Includes provisions for allocated transfer risk.




190

A.2.

Federal Reserve Bulletin □ Spring 2004

Portfolio composition, interest rates, and income and expense, all U.S. banks, 1994-2003
E. Banks not ranked among the 1,000 largest by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Balance sheet items as a percentage of average net consolidated assets
Interest-earning assets ..................................................
Loans and leases, net ...............................................
Commercial and industrial .................................
U.S. addressees ..................................................
Foreign addressees ...........................................
Consumer ...............................................................
Credit card..........................................................
Installment and other .......................................
Real estate .............................................................
In domestic offices ...........................................
Construction and land development .........
Farmland ........................................................
One- to four-family residential...................
Home equity .............................................
Other ..........................................................
Multifamily residential ...............................
Nonfarm nonresidential ..............................
In foreign offices ...............................................
To depository institutions and acceptances
of other banks ...............................................
Foreign governments ...........................................
Agricultural production .......................................
Other lo a n s.............................................................
Lease-financing receivables ...............................
Less: Unearned income on loans ......................
Less: Loss reserves1 .............................................
Securities.....................................................................
Investment account ...............................................
D e b t.....................................................................
U.S. Treasury ................................................
U.S. government agency and
corporation obligations ......................
Government-backed mortgage pools . ..
Collateralized mortgage obligations___
Other ..........................................................
State and local government ........................
Private mortgage-backed securities...........
Other...............................................................
Equity2 ...............................................................
Trading account ....................................................
Gross federal funds sold and reverse RPs ...........
Interest-bearing balances at depositories ...............
Non-interest-earning assets...........................................
Revaluation gains held in trading accounts3 ........
Other............................................................................

92.48
54.64
9.31
9.27
.05
9.38
.96
8.41
32.18
32.18
2.14
2.34
16.94
1.21
15.73
.93
9.83
*

92.48
56.61
9.65
9.59
.06
9.54
1.01
8.53
33.55
33.54
2.38
2.48
17.45
1.20
16.25
.95
10.28
*

92.45
57.38
9.98
9.90
.07
9.42
1.04
8.38
34.10
34.10
2.61
2.55
17.48
1.20
16.28
.92
10.54
*

92.44
58.75
10.16
10.08
.08
8.98
.85
8.14
35.55
35.54
2.82
2.69
18.16
1.24
16.92
.95
10.92
*

92.64
59.11
10.33
10.25
.08
8.46
.70
7.76
36.04
36.04
3.02
2.83
18.04
1.21
16.84
.93
11.21
*

92.55
59.75
10.64
10.55
.08
8.15
.68
7.47
36.84
36.84
3.28
2.95
17.66
1.17
16.49
.98
11.97
*

92.52
62.31
11.09
11.02
.07
7.97
.58
7.39
39.30
39.29
3.70
3.06
18.43
1.28
17.15
1.04
13.06
*

92.25
62.67
11.10
11.02
.08
7.42
.57
6.85
40.31
40.30
4.23
3.04
18.25
1.37
16.87
1.06
13.72
*

92.22
62.72
10.71
10.65
.06
6.76
.49
6.28
41.52
41.52
4.51
3.08
17.91
1.62
16.29
1.16
14.86
*

92.13
62.33
10.43
10.37
.05
6.16
.51
5.64
42.31
42.31
4.99
3.12
17.10
1.80
15.30
1.28
15.82
*

.17
.01
3.89
.77
.20
-.31
-.95
32.90
32.86
32.43
10.75

.19
*
3.95
.72
.22
-.30
-.93
30.51
30.48
30.03
9.19

.21
*
3.92
.69
.23
-.2 7
-.9 0
29.53
29.50
29.01
7.85

.20
*
4.05
.67
.25
-.24
-.87
28.25
28.21
27.69
6.70

.14
*
4.28
.67
.24
-.20
-.86
26.70
26.66
26.12
5.05

.14
.01
4.06
.67
.26
-.15
-.87
26.92
26.88
26.35
3.34

.12
.01
3.85
.69
.27
-.11
-.88
25.40
25.38
24.82
2.12

.12
*
3.76
.67
.27
-.09
-.88
22.81
22.80
22.49
1.33

.10
*
3.64
.65
.31
-.07
-.9 0
23.34
23.33
23.06
1.04

.09
*
3.39
.66
.26
-.06
-.92
23.46
23.42
23.11
.90

15.25
4.73
3.05
7.47
5.00
.26
.96
.43
.04
3.42
1.52
7.52
*
7.52

15.13
4.19
2.76
8.19
4.70
.20
.82
.45
.03
3.91
1.45
7.52
*
7.52

15.67
4.21
2.46
9.00
4.62
.18
.68
.49
.03
4.04
1.51
7.55
*
7.55

15.58
4.01
2.19
9.38
4.60
.19
.61
.52
.03
3.95
1.49
7.56
*
7.56

15.43
3.90
2.02
9.51
4.80
.16
.68
.54
.04
5.13
1.72
7.36
*
7.36

16.89
3.95
2.00
10.94
4.96
.26
.89
.53
.03
4.17
1.71
7.45
*
7.45

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

15.27
3.78
1.94
9.56
4.51
.27
1.11
.30
.01
5.00
1.77
7.75
*
7.75

16.07
4.54
2.30
9.23
4.56
.26
1.12
.27
.01
4.26
1.89
7.78
*
7.78

16.22
4.84
2.20
9.18
4.73
.21
1.05
.31
.03
4.27
2.08
7.87
*
7.87

Liabilities.........................................................................
Interest-bearing liabilities.........................................
Deposits .................................................................
In foreign offices ...............................................
In domestic offices ...........................................
Other checkable deposits ............................
Savings (including MMDAs) ....................
Small-denomination time deposits ...........
Large-denomination time deposits ...........
Gross federal funds purchased and RPs ...........
Other .......................................................................
Non-interest-bearing liabilities ................................
Demand deposits in domestic offices.................
Revaluation losses held in trading accounts3 ..
Other ......................................................................

90.43
76.18
73.14
.09
73.05
13.31
23.23
28.83
7.67
1.89
1.16
14.25
13.34
*
.90

90.04
75.74
72.70
.11
72.59
12.37
20.41
30.92
8.89
1.78
1.25
14.30
13.23
*
1.07

89.81
75.58
72.47
.10
72.37
11.75
19.58
31.28
9.76
1.71
1.41
14.23
13.12
*
1.10

89.63
75.47
72.05
.09
71.96
11.39
18.98
31.09
10.50
1.67
1.74
14.16
13.09
*
1.06

89.54
75.35
71.77
.07
71.70
11.18
19.01
30.42
11.10
1.49
2.09
14.19
13.08
*
1.10

89.75
75.90
71.41
.07
71.34
11.07
19.69
29.07
11.50
1.79
2.70
13.86
12.80
*
1.06

89.89
76.05
70.54
.05
70.48
10.57
19.03
28.42
12.47
2.06
3.45
13.84
12.64
*
1.20

89.60
76.00
70.94
.06
70.88
10.19
19.14
28.08
13.48
1.55
3.51
13.59
12.16
*
1.43

89.73
76.01
70.50
.06
70.45
10.42
20.99
25.91
13.13
1.51
4.00
13.71
12.24
*
1.47

89.58
75.47
69.82
.05
69.77
10.60
22.00
24.20
12.97
1.52
4.13
14.11
12.57
*
1.53

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

9.57

9.96

10.19

10.37

10.46

10.25

10.11

10.40

10.27

10.42

13.02
.35
10.83

13.72
.25
12.05

14.18
.20
12.99

14.80
.16
14.02

15.26
.13
14.76

16.33
.11
16.08

17.92
.11
18.08

19.15
.12
18.66

20.68
.14
18.79

22.23
.15
18.78

679

666

661

647

644

651

655

674

704

742

Memo
Commercial real estate lo a n s.......................................
Other real estate ow ned................................................
Managed liabilities ........................................................
Average net consolidated assets
(billions of dollars) ..............................................




Profits and Balance Sheet Developments at U.S. Commercial Banks in 2003

191

A.2.—Continued
E. Banks not ranked among the 1,000 largest by assets
Item

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

Effective interest rate (percent)4
Rates earned
Interest-earning assets .............................................
Taxable equivalent...........................................
Loans and leases, gross .....................................
Net of loss provisions ................................
Securities...............................................................
Taxable equivalent .....................................
Investment account .........................................
U.S. Treasury securities and U.S.
government agency obligations
(excluding MBS) ................................
Mortgage-backed securities ......................
Other ..............................................................
Trading account ...............................................
Gross federal funds sold and reverse RPs ___
Interest-bearing balances at depositories.........
Rates paid
Interest-bearing liabilities .......................................
Interest-bearing deposits.....................................
In foreign offices .............................................
In domestic offices...........................................
Other checkable deposits ..........................
Savings (including M M D A s).....................
Large time deposits5 ..................................
Other time deposits5 ..................................
Gross federal funds purchased and RPs .........
Other interest-bearing liabilities........................

7.58
7.72
S.81
5.61
5.99
5.61

8.38
8.53
9.80
9.54
6.10
6.49
6.10

8.36
8.50
9.75
9.47
6.14
6.52
6.14

8.49
8.63
9.80
9.49
6.26
6.65
6.26

8.33
8.48
9.69
9.34
6.04
6.46
6.04

8.05
8.18
9.28
8.89
5.88
6.29
5.89

8.46
8.56
9.51
9.14
6.15
6.54
6.15

7.91
8.05
9.03
8.59
5.86
6.28
5.86

6.80
6.93
7.87
7.42
5.02
5.43
5.02

5.92
6.06
7.10
6.75
3.86
4.26
3.87

n.a.
n.a.
n.a.
6.03
4.09
4.64

n.a.
n.a.
n.a.
6.12
5.95
5.88

n.a.
n.a.
n.a.
6.47
5.34
5.63

n.a.
n.a.
n.a.
6.33
5.51
5.62

n.a.
n.a.
n.a.
5.26
5.35
5.67

n.a.
n.a.
n.a.
3.60
4.96
5.69

n.a.
n.a.
n.a.
4.01
6.25
6.38

5.97
6.20
5.29
6.43
3.83
4.56

4.80
5.47
4.87
4.80
1.63
2.68

3.74
3.58
4.43
.66
1.08
1.96

3.49
3.44
3.92
3.44
2.30
2.83
4.12
4.28
4.11
5.02

4.46
4.39
5.73
4.39
2.50
3.32
5.55
5.51
5.60
6.45

4.49
4.44
5.34
4.44
2.41
3.26
5.48
5.61
5.12
5.77

4.60
4.53
4.77
4.53
2.46
3.36
5.53
5.66
5.23
6.31

4.60
4.53
5.08
4.53
2.45
3.39
5.53
5.63
4.99
6.45

4.28
4.22
4.34
4.22
2.28
3.21
5.22
5.25
4.73
5.63

4.80
4.67
5.13
4.67
2.47
3.56
5.89
5.70
5.69
6.22

4.40
4.32
4.04
4.32
1.97
2.81
5.53
5.60
3.92
5.74

2.92
2.78
1.67
2.79
1.16
1.72
3.61
3.88
1.84
5.31

2.13
2.02
.85
2.02
.78
1.13
2.78
2.96
1.31
4.06

901

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

7.02
7.16
4.99
1.84
.15
.04

7.78
7.91
5.63
1.86
.25
.04

7.77
7.89
5.68
1.80
.24
.04

7.90
8.02
5.86
1.76
.24
.04

7.75
7.87
5.80
1.59
.29
.06

7.48
7.60
5.62
1.58
.22
.06

7.83
7.95
5.99
1.57
.21
.05

7.35
7.45
5.75
1.32
.20
.05

6.33
6.43
5.03
1.16
.07
.03

5.48
5.58
4.49
.89
.05
.03

Gross interest expense .............................................
D eposits.................................................................
Gross federal funds purchased and RPs .........
Other.......................................................................

2.65
2.52
.07
.06

3.37
3.19
.10
.08

3.39
3.22
.08
.08

3.48
3.28
.08
.11

3.46
3.25
.07
.13

3.26
3.03
.08
.15

3.64
3.30
.12
.21

3.34
3.08
.06
.20

2.23
1.98
.03
.21

1.60
1.41
.02
.17

Net interest incom e..................................................
Taxable equivalent...........................................

4.36
4.50

4.41
4.54

4.38
4.50

4.42
4.54

4.28
4.41

4.22
4.35

4.20
4.31

4.01
4.12

4.10
4.21

3.88
3.98

Loss provisioning6 ..................................................

.19

.24

.25

.27

.29

.31

.31

.36

.35

.29

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

1.30
.44
.17
*
n.a.
n.a.
n.a.
.69

1.38
.44
.22
.01
n.a.
n.a.
n.a.
.71

1.42
.44
.19
*
*
*
*
.79

1.42
.44
.20
*
*
*
*
.77

1.52
.42
.23
*
*
*
*
.86

1.44
.42
.26
*
*
*
*
.75

1.32
.43
.21
.01
*
*
*
.67

1.31
.44
.25
*
*
*
*
.62

1.39
.45
.27
*
*
*
*
.67

1.46
.43
.28
*
*
*
*
.75

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

3.79
1.75
.49
1.55

3.80
1.79
.50
1.51

3.70
1.77
.49
1.44

3.69
1.80
.49
1.40

3.74
1.82
.49
1.43

3.73
1.82
.49
1.42

3.58
1.78
.47
1.32

3.55
1.79
.47
1.29

3.57
1.82
.46
1.28

3.55
1.82
.45
1.28
2.09

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

2.48

2.42

2.28

2.28

2.23

2.29

2.26

2.24

2.18

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

-.03

*

.01

.01

.02

*

-.01

.04

.05

.04

Income before taxes and extraordinary item s---Taxes .....................................................................
Extraordinary items, net o f income taxes ........

1.66
.51
*

1.75
.55
*

1.85
.59
*

1.89
.59
*

1.79
.53
*

1.62
.46
*

1.61
.45
*

1.45
.39
*

1.60
.41
-.01

1.53
.38
*

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

1.15
.57
.58

1.20
.62
.58

1.26
.64
.62

1.30
.74
.56

1.26
.82
.44

1.15
.68
.48

1.17
.79
.38

1.06
.64
.42

1.18
.68
.50

1.14
.67
.47

Memo: Return on equity.........................................

12.03

12.05

12.37

12.53

12.02

11.25

11.53

10.17

11.47

10.98

* In absolute value, less than 0.005 percent.
n.a. Not available.
MMDA Money market deposit account.
RP Repurchase agreement.
CD Certificate of deposit.
1. Includes allocated transfer risk reserves.
2. As in the Call Report, equity securities were combined with “other debt securities” before 1989.
3. Before 1994, the netted value of revaluation gains and losses appeared in “trading account securities”
if it was a gain and in “other non-interest-bearing liabilities” if it was a loss.
4. When possible, based on the average of quarterly balance sheet data reported on schedule RC-K of the quarterly Call Reports.
5. Before 1997, large time open accounts included in other time deposits.
6. Includes provisions for allocated transfer risk.




192

Report on the Condition of the U.S. Banking
Industry: Fourth Quarter, 2003
The assets of reporting bank holding companies
expanded roughly $130 billion, or 1.6 percent, in the
fourth quarter. Securities and money market assets
accounted for most of the increase, rising about
$120 billion after having declined in the third quarter.
Bank holding companies added to their holdings of
mortgage pass-through securities and direct obliga­
tions of U.S. government agencies. Loans grew
1.4 percent, a more modest pace than in recent
periods, tempered by continuing declines in commer­
cial and industrial lending and some shrinkage in the
stock of residential mortgage loans held for sale to
securitization vehicles (related to slower mortgage
originations). Deposits and borrowings increased
2.3 percent and 2.4 percent, respectively, in part
compensating for a decline in other liabilities.
Undrawn commitments to lend rose more than
$200 billion, or 5.4 percent, in the quarter and
reached the $4.0 trillion level for the first time. Most
of the increase was in the credit card category,
due in large part to the acquisition during the quarter
of large credit card portfolios from non-bankholding-company firms.
Asset quality showed further signs of improve­
ment. Nonperforming assets continued to decline—
both in absolute terms and as a share of loans—as
they have since late 2002. The net charge-off ratio
increased slightly in the fourth quarter, to 0.83 per­
cent of average loans, but remained well below yearearlier levels.




Net income rose overall to $28.3 billion for the
fourth quarter, bringing full-year profits to $100 bil­
lion for the first time. Net interest income accounted
for much of the quarterly improvement and was
fueled by healthy growth in securities holdings and a
rebound in yields on mortgage-backed securities—
the latter related to slower prepayments. Net interest
margins inched up to 3.46 percent of period-average
earning assets, representing at the least a pause in the
steady contraction that margins have sustained since
late 2001. Non-interest income recovered 4.5 percent
after a small third-quarter decline, supported by
higher fees from asset management, mortgage servic­
ing, and investment banking. Non-interest expense,
which often jumps in the final quarter of a year,
increased only modestly in this case and continued to
represent roughly 62 percent of pretax revenue.
All of the quarterly gain in aggregate earnings
occurred at the “fifty large” bank holding compa­
nies. For “all other” bank holding companies, aggre­
gate earnings declined slightly in the fourth quarter
as they had in the third quarter. Non-interest costs
at these smaller bank holding companies expanded
nearly 6 percent in the fourth quarter, while non­
interest income slipped slightly. The net charge-off
ratio rose significantly at smaller institutions in the
fourth quarter, although at 0.49 percent of average
loans it was still only half the level of the “fifty
large” bank holding companies.

Tables start on page 193.

193

1.

Financial characteristics of all reporting bank holding companies in the United States
M illio n s o f d o lla rs e x c e p t as n o ted , n o t se aso n a lly a d ju s te d
2002
Account or ratio1- 2

1999

2000

2001

2002

2003

2003
Q2

Q3

Q4

Ql

Q2

Q3

Q4

Balance sheet
6,205,131

6,682,719

7,439,323

7,930,057

8,819,467

7,623,734

7,776,519

7,930,057

8,165,955

8,661,400

8,683,368

8,819,467

Loans ............................................................ 3,381,377
Securities and money m a rk e t.................. 2,075,524
Allowance for loan losses ......................
-54,336
802,566
O t h e r ............................................................

3,693,963
2,177,628
-58,709
869,837

3,800,958
2,554,074
-66,705
1,150,997

4,041,220
2,846,398
-71,914
1,114,353

4,393,666
3,285,907
-72,206
1,212,100

3,828,026
2,761,576
-69,361
1,103,494

3,908,801
2,847,808
-70,264
1,090,174

4,041,220
2,846,398
-71,914
1,114,353

4,109,272
3,000,025
-71,668
1,128,327

4,261,680
3,207,814
-71,955
1,263,861

4,332,719
3,166,019
-71,369
1,255,999

4,393,666
3,285,907
-72,206
1,212,100

Total lia b ilities..........................................

6,172,225

6,858,551

7,295,544

8,123,613

7,012,587

7,156,132

7,295,544

7,517,055

7,988,409

8,003,351

8,123,613

4,674,108
2,610,429
839,076

4,050,023
2,176,850
785,714

4,157,546
2,260,137
738,450

4,326,602
2,223,501
745,441

4,420,283
2,311,491
785,282

4,565,704
2,504,626
918,082

4,570,537
2,549,138
883,677

4,674,108
2,610,429
839,076

Total a s s e ts ................................................

5,742,150

D eposits.......................................................
Borrowings ................................................
Other-1 .........................................................

3,500,632
1,762,964
478,555

3,748,468
1,964,922
458,835

4,001,377
2,057,607
799,568

4,326,602
2,223,501
745,441

Total equity ..............................................

462,981

510,494

580,773

634,513

695,854

611,147

620,387

634,513

648,900

672,991

680,017

695,854

Off-balance-sheet
Unused commitments to lend4 ................ 3,095,397
Securitizations outstanding5 ....................
n.a.
Derivatives (notional value, billions)6 . .
37,786

3,297,511
n.a.
43,483

3,481,744
276,717
48,261

3,650,669
295,001
57,734

4,097,594
298,348
72,870

3,547,956
282,556
52,614

3,610,928
287,846
55,464

3,650,669
295,001
57,734

3,714,160
284,429
63,993

3,756,486
285,286
68,222

3,887,356
290,328
69,411

4,097,594
298,348
72,870

76,649
187,103
20,067
173,041
224,044
3,114

72,055
195,079
26,864
195,995
253,165
-588

65,377
221,406
39,522
214,061
297,108
4,294

84,534
242,645
42,922
215,826
291,948
4,493

106,614
254,212
31,532
245,029
311,032
5,770

21,382
60,787
10,372
52,637
71,172
519

21,499
60,093
11,149
53,635
71,522
1,772

18,694
61,626
11,541
56,738
79,002
1,633

24,740
62,209
8.573
57.485
74.268
1.850

26,312
63,106
8,429
61,785
77,631
2,671

27,228
63,846
7,113
61,495
78,122
579

28,334
65,051
7,417
64,265
81,011
670

Income statement
Net incom e7 ..............................................
Net interest in co m e ...............................
Provisions for loan lo sse s....................
Non-interest income .............................
Non-interest expense ..........................
Security gains or losses ......................
Ratios (percent)
Return on average e q u ity ........................
Return on average assets ........................
Net interest m argin8 .................................
Efficiency ratio7 ........................................
Nonperforming assets to loans and
related assets .....................................
Net charge-offs to average loans ...........
Loans to deposits ......................................

17.50
1.30
3.72
60.87

15.15
1.12
3.57
62.57

11.79
.91
3.59
65.77

14.04
1.10
3.72
62.42

16.23
1.26
3.49
61.53

14.25
1.13
3.77
62.23

14.17
1.12
3.68
62.75

12.12
.94
3.63
65.67

15.64
1.22
3.58
62.05

16.12
1.25
3.50
62.64

16.41
1.25
3.43
62.25

16.71
1.30
3.46
62.32

.84
.54
96.59

1.07
.65
98.55

1.45
.89
94.99

1.46
1.02
93.40

1.16
.81
94.00

1.53
1.01
94.52

1.65
1.09
94.02

1.46
1.03
93.40

1.43
.84
92.96

1.34
.80
93.34

1.24
.75
94.80

1.16
.83
94.00

Regulatory capital ratios
Tier 1 risk-based........................................
Total risk-based..........................................
Leverage .....................................................

8.78
11.71
7.00

8.81
11.78
6.80

8.91
11.91
6.65

9.21
12.29
6.69

9.55
12.58
6.84

9.30
12.35
6.84

9.33
12.38
6.79

9.21
12.29
6.69

9.33
12.42
6.72

9.29
12.30
6.74

9.51
12.52
6.73

9.55
12.58
6.84

Number of reporting bank holding
companies ..........................................

1,647

1,727

1,842

1,979

2,133

1,907

1,946

1,979

2,036

2,064

2,120

2,133

Footnotes appear on p. 196.




194

2.

Federal Reserve Bulletin □ Spring 2004

Financial characteristics of fifty large bank holding companies in the United States
M illio n s o f d o lla rs e x c e p t as n o te d , n o t s e aso n a lly a d ju s te d
2002
Account or ratio- 9

1999

2000

2001

2002

2003

2003
Q2

Q3

Q4

Ql

Q2

Q3

Q4

Balance sheet
Total a s s e ts ................................................. 5,037,884

5,404,222

5,746,706

6,066,493

6,666,488

5,877,749

5,969,920

6,066,493

6,220,563

6,589,174

6,600,308

6,666,488

Loans ........................................................... 2,642,839
Securities and money m a rk e t.................. 1,739,572
Allowance for loan losses ......................
-44,054
O t h e r ............................................................
699,527

2,874,638
1,818,397
-47,171
758,358

2,878,573
2,009,620
-53,904
912,417

3,043,955
2,220,356
-57,642
859,824

3,249,806
2,553,531
-57,004
920,156

2,884,503
2,185,616
-55,914
863,544

2,937,799
2,242,632
-56,363
845,852

3,043,955
2,220,356
-57,642
859,824

3,076,486
2,331,105
-57,049
870,022

3,168,988
2,492,101
-56,938
985,023

3,222,116
2,460,249
-56,135
974,078

3,249,806
2,553,531
-57,004
920,156

Total lia b ilitie s ..........................................

4,674,181

5,004,053

5,311,719

5,596,714

6,159,340

5,421,428

5,510,255

5,596,714

5,742,702

6,096,082

6,101,096

6,159,340

D eposits....................................................... 2,635,845
Borrowings ................................................. 1,586,963
O ther3 .........................................................
451,373

2,795,936
1,777,262
430,855

2,966,151
1,821,140
524,428

3,191,827
1,960,517
444,370

3,427,923
2,242,425
488,992

2,978,617
1,937,932
504,880

3,049,718
2,013,970
446,568

3,191,827
1,960,517
444,370

3,247,738
2,023,682
471,283

3,360,549
2,161,088
574,446

3,353,428
2,204,271
543,398

3,427,923
2,242,425
488,992

363,703

400,169

434,987

469,778

507,148

456,321

459,665

469,778

477,861

493,092

499,212

507,148

Unused commitments to lend 4 ................ 2,870,114
Securitizations outstanding5 ....................
n.a.
Derivatives (notional value, billions)6 . .
37,746

3.065.766
n.a.
43,416

3,226,898
269,056
47,833

3,373,532
279,632
57,320

3,781,455
280,221
72,295

3,284,565
270,738
52,220

3,335,157
274,012
55,011

3,373,532
279,632
57,320

3,423,912
267,113
63,536

3,452,041
271,626
67,636

3,574,967
274,294
68,799

3,781,455
280,221
72,295

63,666
144,859
17,173
154,461
185,306
2,219

58,801
149,598
23,167
176,137
210,902
-585

50,202
160,597
34,434
167,136
216,214
4,099

65,442
176,014
36,981
164,079
206,447
4,474

82,953
182,758
26,799
185,195
218,514
5,104

16,621
44,051
9,041
40,345
50,241
552

16,513
42,896
9,660
41,043
50,420
1,651

13,949
45,009
9,839
42,058
55,787
1,672

19,319
44,896
7,438
43,737
52.153
1,775

20,423
45,179
7,198
46,952
54,456
2,353

20,829
45,978
5,871
46,020
55,419
450

22,382
46,704
6,292
48,485
56,485
525

18.68
1.33
3.59
60.45

15.82
1.13
3.42
62.48

12.01
.89
3.34
63.04

14.56
1.11
3.51
59.42

17.21
1.28
3.30
58.63

14.76
1.14
3.56
58.92

14.62
1.12
3.42
60.01

12.20
.92
3.46
62.81

16.55
1.24
3.38
59.17

17.08
1.28
3.29
59.58

17.11
1.26
3.25
60.16

18.03
1.35
3.28
58.92

.89
.61
100.27

1.16
.74
102.81

1.53
1.03
97.05

1.55
1.19
95.37

1.18
.95
94.80

1.64
1.20
96.84

1.80
1.29
96.33

1.55
1.18
95.37

1.52
1.02
94.73

1.43
.95
94.30

1.31
.87
96.08

1.18
.96
94.80

8.06
11.29
6.61

8.14
11.42
6.40

8.17
11.55
6.19

8.43
11.92
6.18

8.68
12.11
6.27

8.56
12.01
6.38

8.57
12.05
6.29

8.43
11.92
6.18

8.54
12.04
6.19

8.45
11.87
6.20

8.70
12.12
6.20

8.68
12.11
6.27

Total equity ..............................................

Off-balance-sheet

Income statement
Net incom e7 ..............................................
Net interest in co m e...............................
Provisions for loan lo ss e s ....................
Non-interest income .............................
Non-interest expense ...........................
Security gains or losses ......................

Ratios (percent)
Return on average e q u ity ........................
Return on average assets ........................
Net interest m argin8 .................................
Efficiency ratio7 ........................................
Nonperforming assets to loans and
related assets ......................................
Net charge-offs to average loans ...........
Loans to deposits .....................................

Regulatory capital ratios
Tier 1 risk-based........................................
Total risk-based ..........................................
Leverage .....................................................
Footnotes appear on p. 196.




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

3.

195

Financial characteristics of all other reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2002
Account1 1
- 0

1999

2000

2001

2002

2003

2003
Q2

Q3

Q4

Ql

Q2

Q3

Q4

Balance sheet
Total assets ................................................

1,129,948

1,235,593

1,342,167

1,473,670

1,627,879

1,387,618

1,438,498

1,473,670

1,524,324

1,573,027

1,583,049

1,627,879

Loans ...........................................................
Securities and money m a rk e t..................
Allowance for loan losses ......................
O t h e r ...........................................................

722,961
315,988
-10,085
101,084

801,474
336,212
-11,306
109,214

854,000
374,253
-12,350
126,264

922,055
426,523
-13,725
138,817

1,014,025
474,916
-14,706
153,644

877,180
395,588
-12,962
127,812

903.953
414,565
-13,433
133,414

922,055
426,523
-13,725
138,817

942,134
455,721
-14,133
140,602

970,419
469,932
-14,437
147,112

985,317
464,299
-14,697
148,130

1,014,025
474,916
-14,706
153,644

Total lia b ilities..........................................

1,033,372

1,128,098

1,221,663

1,337,591

1,478,068

1,258,648

1,304,740

1,337,591

1,383,242

1,427,605

1,438,006

1,478,068

D eposits.......................................................
Borrowings .................................................
O ther3 .........................................................

858,101
154,126
21,145

945,865
156,722
25,512

1,020,435
174,063
27,165

1,113,679
191,267
32,645

1,214,285
227,532
36,251

1,053,692
175,973
28,983

1,089,210
182,911
32,619

1,113,679
191,267
32,645

1,148,153
199,804
35,286

1,176,226
214,356
37,023

1,186,247
216,481
35,278

1,214,285
227,532
36,251

Total equity ..............................................

96,576

107,495

120,504

136,079

149,811

128,970

133,759

136,079

141,082

145,422

145,043

149,811

Off-balance-sheet
Unused commitments to lend4 ................
Securitizations outstanding5 ....................
Derivatives (notional value, billions)6 . .

213,740
n.a.
28

223,142
n.a.
54

243,485
4,567
92

264,028
4,942
92

295,535
4,893
99

250,464
4,350
94

262,323
4,178
111

264,028
4,942
92

275,666
4,994
103

285,583
5,205
110

291,655
5.116
104

295,535
4,893
99

Income statement
Net income7 ..............................................
Net interest in co m e ...............................
Provisions for loan lo ss e s ....................
Non-interest income .............................
Non-interest expense ...........................
Security gains or losses ......................

12,777
41,923
2,798
16,774
37,103
826

13,174
45,233
3,552
17,921
40,393
-1 0

14,448
47,754
4,599
23,142
45,582
796

17,463
52,925
5,246
25,412
48,296
729

18,887
55,173
4,451
28.772
52,893
1,073

4,313
13,291
1,194
6,005
11,982
164

4,546
13,601
1,394
6,425
12,083
263

4,270
13,331
1,486
6,820
12,719
185

4,688
13,580
1,051
6,876
12,689
301

4,915
13,774
1,137
7,559
13,326
431

4,798
13,700
1,098
7,230
13,072
132

4,486
14,118
1,166
7,107
13,807
209

Ratios (percent)
Return on average e q u ity ........................
Return on average assets ........................
Net interest m argin8 .................................
Efficiency ratio7 ........................................
Nonperforming assets to loans and
related assets ......................................
Net charge-offs to average l o a n s ...........
Loans to deposits ......................................

13.26
1.17
4.28
62.47

13.03
1.12
4.26
62.36

12.45
1.13
4.16
63.45

13.68
1.26
4.25
60.73

13.26
1.22
3.98
62.33

13.78
1.26
4.27
62.37

13.94
1.29
4.35
59.89

12.80
1.18
4.12
62.72

13.54
1.26
4.06
61.49

13.81
1.28
4.01
63.05

13.50
1.23
3.91
62.08

12.22
1.12
3.94
64.77

.68
.30
84.25

.76
.32
84.73

.96
.43
83.69

1.02
.46
82.79

,97
.38
83.51

.97
.42
83.25

1.02
.45
82.99

1.02
.53
82.79

1.13
.32
82.06

1.09
.37
82.50

1.03
.36
83.06

.97
.49
83.51

Regulatory capital ratios
Tier 1 risk-based........................................
Total risk-based..........................................
Leverage .....................................................

12.19
13.64
8.59

11.85
13.32
8.54

12.18
13.77
8.74

12.42
14.06
8.87

12.53
14.26
9.00

12.53
14.15
8.96

12.53
14.16
8.97

12.42
14.06
8.87

12.57
14.25
8.96

12.54
14.23
8.94

12.54
14.26
8.95

12.53
14.26
9.00

Number of other reporting bank holding
companies ..........................................

1,569

1,661

1,786

1,923

2,077

1,851

1,890

1,923

1,980

2,008

2,064

2,077

Footnotes appear on p. 196.




196

4.

Federal Reserve Bulletin □ Spring 2004

Nonfinancial characteristics of all reporting bank holding companies in the United States
Millions of dollars except as noted, not seasonally adjusted
2002
Account

1999

2000

2001

2002

2003

2003
Q2

Bank holding companies that qualify as
financial holding companies "■ 1
2
Domestic
Number ...................................................
Total assets ............................................
Foreign-owned 1
3
N u m b e r...................................................
Total assets ............................................

Q3

Q4

Ql

Q2

Q3

Q4

n.a.
n.a.

299
4,494,270

388
5,436,785

434
5,916,835

451
6,605,627

411
5,643,267

415
5,706,966

434
5,916,835

437
6,061,677

440
6,433,712

448
6,447,116

451
6,605,627

n.a.
n.a.

9
502,506

10
621,442

U
616,254

12
710,443

11
656,344

11
689,804

11
616,254

11
648,017

11
732,695

11
729,244

12
710,443

5,673,702

6,129,534

6,415,909

6,897,447

7,398,689

6,572,090

6,762,780

6,897,447

7,031,480

7,325,659

7,294,142

7,398,689

By ownership
Reporting bank holding companies . . 5,226,027
Other bank holding companies .........
226,916
Independent banks ...............................
220,759

5,657,210
229,274
243,050

5,942,575
230,464
242,870

6,429,738
227,017
240,692

6,941,741
219,402
237,546

6,107,717
226,558
237,815

6,296,385
226,602
239,793

6,429,738
227,017
240,692

6,578,067
222,670
230,743

6,863,642
222,997
239,020

6,842,982
217,038
234,122

6,941,741
219,402
237,546

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

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

350,633
630,851
107,422
145,344
561,712

411,927
636,854
133,057
170,600
705,949

386,590
695,814
53,938
149,674
466,371

338,384
703,738
56,063
144,814
493,780

350,633
630,851
107,422
145,344
561,712

359,968
709,839
126,375
154,812
524,697

384,000
656,919
124,640
160,515
740,215

398,379
667,455
143,578
162,789
755,056

411,927
636,854
133,057
170,600
705,949

n.a.
n.a.

143
n.a.

Total U.S. comm ercial bank
a sse ts14 ..............................................

Assets associated with nonbanking
activities l2- 1
5
Insurance .....................................................
Securities broker-dealers ........................
Thrift institutions ......................................
Foreign nonbank institutions ..................
Other nonbank in stitutions......................
Number o f bank holding companies
engaged in nonbanking activities 11 1
5
Insurance .....................................................
Securities broker-dealers ........................
Thrift institutions ......................................
Foreign nonbank institutions ..................
Other nonbank in stitutions......................

n.a.
n.a.
117,699
78,712
879,793

57
25
559

50
25
633

38
32
743

86
47
32
37
880

102
51
27
41
1,034

92
47
37
35
798

91
47
37
38
835

86
47
32
37
880

91
48
31
38
911

92
50
31
40
944

101
46
29
39
989

102
51
27
41
1,034

18
535,024

21
636,669

23
764,411

26
762,901

28
934,781

24
787,998

24
827,867

26
762,901

26
799,540

27
946,847

28
947,932

28
934,781

Employees of reporting bank holding
companies (full-time equivalent) . . 1,775,418

1,859,930

1,985,981

1,992,559

2,034,551

2,000,084

1,979,260

1,992,559

2,000,168

2,019,953

2,031,029

2,034,551

5,404,222
5,319,129

5,746,706
5,732,621

6,066,493
6,032,000

6,666,488
6,666,488

5,877,749
5,861,542

5,969,920
5,951,115

6,066,493
6,032,000

6,220,563
6,203,000

6,589,174
6,587,000

6,600,308
6,602,255

6,666,488
6,666,488

79.60

77.10

76.10

75.60

76.90

76.50

76.10

76.00

76.10

76.00

75.60

Foreign-owned bank holding
companies 1
3
N u m b e r.......................................................
Total assets ................................................

n.a.
n.a.

Assets o f fifty large bank holding
companies9- 1
1
Fixed panel (from table 2 ) ...................... 5,037,884
Fifty large as of reporting date ............. 4,809,785
Percent of all reporting
77.50
bank holding com panies..................

N ote . All data are as of the most recent period shown. The historical figures may not
match those in earlier versions of this table because of mergers, significant acquisitions or
divestitures, or revisions of bank holding company restatements to financial reports. Data for
the most recent period may not include all late-filing institutions.
1. Covers top-tier bank holding companies except (1) those with consolidated assets of less
than $150 million and with only one subsidiary bank and (2) multibank holding companies
with consolidated assets of less than $150 million, with no debt outstanding to the general
public and not engaged in certain nonbanking activities.
2. Data for all reporting bank holding companies and the fifty large bank holding com­
panies reflect merger adjustments to the fifty large bank holding companies. Merger adjust­
ments account for mergers, acquisitions, other business combinations and large divestitures
that occurred during the time period covered in the tables so that the historical information on
each of the fifty underlying institutions depicts, to the greatest extent possible, the institu­
tions as they exist in the most recent period. In general, adjustments for mergers among bank
holding companies reflect the combination of historical data from predecessor bank hold­
ing companies.
The data for the fifty large bank holding companies have also been adjusted as nec­
essary to match the historical figures in each company's most recently available financial
statement.
In general, the data are not adjusted for changes in generally accepted accounting
principles.
3. Includes minority interests in consolidated subsidiaries.
4. Includes credit card lines of credit as well as commercial lines of credit.
5. Includes loans sold to securitization vehicles in which bank holding companies retain
some interest, whether through recourse or seller-provided credit enhancements or by servic­
ing the underlying assets. Securitization data were first collected on the FR Y-9C report for
June 2001.
6. The notional value of a derivative is the reference amount of an asset on which an inter­
est rate or price differential is calculated. The total notional value of a bank holding
company’s derivatives holdings is the sum of the notional values of each derivative contract
regardless of whether the bank holding company is a payor or recipient of payments under the
contract. The actual cash flows and fair market values associated with these derivative
contracts are generally only a small fraction of the contract’s notional value.
7. Income statement subtotals for all reporting bank holding companies and the fifty large
bank holding companies exclude extraordinary items, the cumulative effects of changes in
accounting principles, and discontinued operations at the fifty large institutions and therefore
will not sum to Net income. The efficiency ratio is calculated excluding nonrecurring income
and expenses.
8. Calculated on a fully-taxable-equivalent basis.
9. In general, the fifty large bank holding companies are the fifty largest bank holding
companies as measured by total consolidated assets for the latest period shown. Excludes a
few large bank holding companies whose commercial banking operations account for only a
small portion of assets and earnings.




10. Excludes predecessor bank holding companies that were subsequently merged into
other bank holding companies in the panel of fifty large bank holding companies. Also
excludes those bank holding companies excluded from the panel of fifty large bank hold­
ing companies because commercial banking operations represent only a small part of their
consolidated operations.
11. E x clu d e q u a lify in g in stitu tio n s that are n o t reporting bank h o ld in g co m p a n ie s.

12. No data related to financial holding companies and only some data on nonbanking
activities were collected on the FR Y-9C report before implementation of the Gramm Leach-Bliley Act in 2000.
13. A bank holding company is considered “ foreign-owned” if it is majority-owned by a
foreign entity. Data for foreign-owned companies do not include data for branches and agen­
cies of foreign banks operating in the United States.
14. Total assets of insured commercial banks in the United States as reported in the com­
mercial bank Call Report (FFIEC 031 or 041, Reports of Condition and Income). Excludes
data for a small number of commercial banks owned by other commercial banks that file
separate call reports yet are also covered by the reports filed by their parent banks. Also
excludes data for mutual savings banks.
15. Data for thrift, foreign nonbank, and other nonbank institutions are total assets of each
type of subsidiary as reported in the FR Y-9LP report. Data cover those subsidiaries in which
the top-tier bank holding company directly or indirectly owns or controls more than
50 percent of the outstanding voting stock and that has been consolidated using generally
accepted accounting principles. Data for securities broker-dealers are net assets (that is, total
assets, excluding intercompany transactions) of broker-dealer subsidiaries engaged in activi­
ties pursuant to the Gramm -Leach-Bliley Act, as reported on schedule HC-M of the
FR Y-9C report. Data for insurance activities are all insurance-related assets held by the bank
holding company as reported on schedule HC-I of the FR Y-9C report.
Beginning in 2002:Q1, insurance totals exclude intercompany transactions and sub­
sidiaries engaged in credit-related insurance or those engaged principally in insurance agency
activities. Beginning in 2002:Q2, insurance totals include only newly authorized insurance
activities under the Gramm -Leach-Bliley Act.
16. Aggregate assets of thrift subsidiaries were affected significantly by the conversion of
Charter One’s thrift subsidiary (with assets of $37 billion) to a commercial bank in the second
quarter of 2002 and the acquisition by Citigroup of Golden State Bancorp (a thrift institu­
tion with assets of $55 billion) in the fourth quarter of 2002.
17. Changes over time in the total assets of the time-varying panel of fifty large bank hold­
ing companies are attributable to (1) changes in the companies that make up the panel and
(2) to a small extent, restatements of financial reports between periods.
n.a. Not available
S o u r c e . Federal Reserve Reports FRY-9C and FR Y-9LP, Federal Reserve National
Information Center, and published financial reports.

197

Announcements
F e d e r a l O p e n M a r k e t C o m m it t e e
Statem ents
The Federal Open Market Committee decided on
January 28, 2004, to keep its target for the federal
funds rate at 1 percent.
The Committee continues to believe that an accom­
modative stance of monetary policy, coupled with
robust underlying growth in productivity, is provid­
ing important ongoing support to economic activity.
The evidence accumulated over the intermeeting
period confirms that output is expanding briskly.
Although new hiring remains subdued, other indica­
tors suggest an improvement in the labor market.
Increases in core consumer prices are muted and
expected to remain low.
The Committee perceives that the upside and
downside risks to the attainment of sustainable
growth for the next few quarters are roughly equal.
The probability of an unwelcome fall in inflation has
diminished in recent months and now appears almost
equal to that of a rise in inflation. With inflation
quite low and resource use slack, the Committee
believes that it can be patient in removing its policy
accommodation.
Voting for the FOMC monetary policy action were
the following: Alan Greenspan, Chairman; Timo­
thy F. Geithner, Vice Chairman; Ben S. Bernanke;
Susan S. Bies; Roger W. Ferguson, Jr.; Edward M.
Gramlich; Thomas M. Hoenig; Donald L. Kohn;
Cathy E. Minehan; Mark W. Olson; Sandra Pianalto;
and William Poole.
The Federal Open Market Committee decided on
March 16, 2004, to keep its target for the federal
funds rate at 1 percent.
The Committee continues to believe that an accom­
modative stance of monetary policy, coupled with
robust underlying growth in productivity, is provid­
ing important ongoing support to economic activity.
The evidence accumulated over the intermeeting
period indicates that output is continuing to expand at
a solid pace. Although job losses have slowed, new
hiring has lagged. Increases in core consumer prices
are muted and expected to remain low.
The Committee perceives the upside and downside
risks to the attainment of sustainable growth for the



next few quarters are roughly equal. The probability
of an unwelcome fall in inflation has diminished
in recent months and now appears almost equal to
that of a rise in inflation. With inflation quite low and
resource use slack, the Committee believes that it can
be patient in removing its policy accommodation.
Voting for the FOMC monetary policy action were
Alan Greenspan, Chairman; Timothy F. Geithner,
Vice Chairman; Ben S. Bernanke; Susan S. Bies;
Roger W. Ferguson, Jr.; Edward M. Gramlich;
Thomas M. Hoenig; Donald L. Kohn; Cathy E.
Minehan; Mark W. Olson; Sandra Pianalto; and
William Poole.

B o ard A g r e e s to S e e k C o m m e n t
R e v is io n s to R e g u l a t io n BB

on

The Board of Governors of the Federal Reserve Sys­
tem agreed on January 21, 2004, to seek comment on
an interagency proposal to revise regulations (Regu­
lation BB, Community Reinvestment) that implement
the Community Reinvestment Act (CRA).
The Community Reinvestment Act is intended to
encourage depository institutions to help meet credit
needs in their communities, including low- and
moderate-income neighborhoods. The agencies pro­
posed limited amendments to the regulation in two
areas. First, the definition of small institution, a cate­
gory of institutions entitled to streamlined CRA
evaluations, would be amended to include banks
and thrift institutions with total assets of less than
$500 million (the threshold is now $250 million), and
eliminate consideration of an institution’s holding
company size (now, an institution is not small if its
holding company is larger than $1 billion).
Second, the proposal would specify when unlawful
discrimination, other illegal credit practices, or abu­
sive asset-based lending by a bank or its affiliate
might adversely affect the bank’s CRA rating.
The agencies also proposed enhancements to the
loan data they disclose in CRA public evaluations
and CRA disclosure statements.
A notice of the proposed rulemaking will be
published jointly after it has been acted upon by
all of the banking agencies with CRA supervisory
responsibilities.

198

Federal Reserve Bulletin □ Spring 2004

A g e n c ie s P u b l ish P r o p o s e d R u l e m a k in g
R e g a r d in g t h e C o m m u n it y r e in v e s t m e n t
A c t a n d r e g u l a t io n BB
The federal bank and thrift institution regulatory
agencies published in the Federal Register on Febru­
ary 6, 2004, a joint interagency notice of proposed
rulemaking (NPR) regarding the Community Rein­
vestment Act (CRA).
The CRA directs the agencies to assess an insured
depository institution’s record of meeting the credit
needs of its entire community, and to consider that
record when acting on certain applications for
branches, office relocations, mergers, consolidations,
and other corporate activities. The NPR is the prod­
uct of an interagency review of the CRA regulations
that fulfilled the commitment the agencies made
when they adopted the current CRA regulations in
1995 to review the regulations (Regulation BB, Com­
munity Reinvestment) to determine whether they
were producing objective, performance-based CRA
evaluations without imposing undue burden on
institutions.
The proposed rulemaking, which is being pub­
lished by the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Cor­
poration, the Office of the Comptroller of the Cur­
rency, and the Office of Thrift Supervision, under­
scores the agencies’ conclusion that the CRA
regulations are essentially sound, but need to be
updated to keep pace with changes in the financial
services industry.
This proposed rule was developed after the agen­
cies’ review of the CRA regulations, which included
an analysis of about four hundred comments received
on the Advance Notice of Proposed Rulemaking.
The agencies are proposing amendments to the
CRA regulations in two areas.
First, to reduce unwarranted burden consistent with
the agencies’ ongoing efforts to identify and reduce
regulatory burden, the agencies are proposing to
amend the definition of small institution to mean an
institution with total assets of less than $500 million,
without regard to any holding company assets.
This change would take into account substantial
institutional asset growth and consolidation in the
banking and thrift institution industries since the
definition was adopted. The proposal would increase
the number of institutions that are eligible for evalua­
tion under the small institution performance stan­
dards, while only slightly reducing the portion of the
nation’s bank and thrift institution assets that is sub­




ject to evaluation under the large retail institution
performance standards.
Second, to better address abusive lending practices
in CRA evaluations, the agencies proposed to amend
the regulations to provide explicitly that an institu­
tion’s CRA evaluation will be adversely affected by
evidence of specified discriminatory, illegal, or abu­
sive practices by the institution or by an affiliate
whose loans were considered in the evaluation as part
of the institution’s own CRA record.
In addition, the agencies also proposed several
enhancements to the loan data disclosed in CRA
public evaluations and CRA disclosure statements.

A p p r o v a l o f F in a l R u l e s to e s t a b l is h
E f f e c t iv e D a t e s f o r t h e FACT A c t
The Federal Reserve Board on February 5, 2004,
announced its approval of final rules to establish
effective dates for all provisions of the Fair and
Accurate Credit Transactions Act of 2003 (FACT
Act) that do not have a statutorily prescribed effective
date. These regulations are being issued jointly with
the Federal Trade Commission (FTC).
The recently enacted FACT Act amended the Fair
Credit Reporting Act (FCRA) and required the Board
and the FTC to adopt final rules establishing the
effective dates for certain provisions of the FACT
Act. In mid-December, the Board and the FTC jointly
adopted interim final rules that established Decem­
ber 31, 2003, as the effective date for the preemption
provisions of the FACT Act as well as provisions
authorizing the agencies to adopt rules or take other
actions to implement the FACT Act. The agencies
now have adopted final joint rules with the same
schedule of effective dates contained in the interim
rules.
Also in mid-December, the Board and the FTC
jointly issued for comment proposed joint rules
that would establish a schedule of effective dates for
other provisions of the FACT Act that do not contain
effective dates. After reviewing the comments on the
proposal, the agencies adopted joint final rules that
established March 31, 2004, as the effective date for
the provisions of the FACT Act that do not require
significant changes to business procedures. With
respect to other provisions that likely entail signifi­
cant changes to business procedures, the joint final
rules make these provisions effective on December 1,
2004, to allow industry a reasonable time to establish
systems to comply with the statute.

Announcements

A m endm ents

to

R e g u l a t io n CC

The Federal Reserve Board on March 2, 2004,
announced amendments to appendix A of Regula­
tion CC (Availability of Funds and Collection of
Checks), effective May 15, 2004, that reflect the
restructuring of the Federal Reserve’s check pro­
cessing operations in the Eleventh District. These
amendments are part of a series of amendments to
appendix A that will take place through the end
of 2004, associated with the previously announced
restructuring of the Reserve Banks’ check processing
operations.
Appendix A provides a routing number guide that
helps depository institutions determine the maximum
permissible hold periods for most deposited checks.
As of May 15, 2004, the El Paso office of the Federal
Reserve Bank of Dallas no longer processes checks,
and banks previously served by that office for check
processing purposes have been reassigned to the
Reserve Bank’s head office in Dallas. To reflect this
operational change, the final rule deletes the refer­
ence in appendix A to the El Paso office and reassigns
the routing numbers listed thereunder to the Reserve
Bank’s head office. As a result of this change, some
checks deposited in the affected regions that previ­
ously were nonlocal checks are now local checks that
are subject to shorter permissible hold periods.
The Federal Reserve Board on April 9, 2004,
announced amendments to appendix A of Regula­
tion CC, effective June 26, 2004, that reflect the
restructuring of the Federal Reserve’s check process­
ing operations in the Fourth and Fifth Districts. These
amendments are part of a series of amendments to
appendix A that will take place through the end of
2004, associated with the previously announced
restructuring of the Reserve Banks’ check processing
operations.
Appendix A provides a routing number guide that
helps depository institutions determine the maximum
permissible hold periods for most deposited checks.
As of June 26, 2004, the Charleston office of the
Federal Reserve Bank of Richmond no longer will
process checks, and banks currently served by that
office for check processing purposes will be reas­
signed to the Cincinnati office of the Federal Reserve
Bank of Cleveland. To reflect this operational change,
the final rule deletes the reference in appendix A to
the Charleston office and reassigns the routing num­
bers listed thereunder to the Cleveland Reserve
Bank’s Cincinnati office. As a result of this change,




199

some checks deposited in the affected regions that
currently are nonlocal checks will become local
checks that are subject to shorter permissible hold
periods.
C o m m e n t R e q u e st e d o n Pr o p o se d
Ch a n g e s to p u b l ic D is c l o s u r e Ta b l e s
The Federal Reserve Board on March 18, 2004,
requested public comment on proposed changes to
the public disclosure tables that are used to report
data collected by lenders under the Home Mortgage
Disclosure Act (HMDA).
The proposal would revise some of the existing
disclosure tables, delete one set of existing tables,
and add new tables.
Recent revisions to Regulation C (Home Mortgage
Disclosure), the Board regulation that implements
HMDA, require lending institutions to report
new data, including loan pricing information (the
rate spread between the annual percentage rate on
the loan and the yield on Treasury securities of
comparable maturity); whether the loan is subject
to the Home Ownership and Equity Protection
Act (HOEPA); whether manufactured housing is
involved; whether the loan is subject to a first or
subordinate lien on the property; and certain infor­
mation about requests for pre-approval. These data
items would be reflected on the proposed new tables.
The proposed revisions to the existing tables are
primarily to reflect the itemization of data on manu­
factured housing and changes to the race and ethnic­
ity categories adopted by the Board to conform to
standards established by the Office of Management
and Budget.
The first year for which the new data will be
reported is 2004. Data from institutions must be
submitted to the federal financial regulatory agencies
no later than March 1, 2005, and the data will be
reflected in the public disclosures scheduled to be
released in the summer of 2005.
R e v is io n s

to r e g u l a t io n z

The Federal Reserve Board on March 26, 2004,
issued revisions to Regulation Z (Truth in Lending),
which implements the Truth in Lending Act, and to
the official staff commentary that applies and inter­
prets the requirements of the regulation.
Regulation Z was revised to add an interpretative
rule of construction to clarify that where the word

200

Federal Reserve Bulletin □ Spring 2004

“amount” is used in the regulation to describe disclo­
sure requirements, it refers to a numerical amount.
In addition, revisions to the staff commentary provide
guidance on consumers’ exercise of rescission rights
for certain home-secured loans.
The Board also published several technical revi­
sions to the commentary. The revisions were effec­
tive April 1, 2004. The date for mandatory compli­
ance is October 1, 2004.
P r o p o se d A m e n d m e n t s

to

R e g u l a t io n V

The Federal Reserve Board on April 7, 2004, issued
proposed amendments to Regulation V (Fair Credit
Reporting), which implements the Fair Credit Report­
ing Act (FCRA). The amendments would add a
model form for financial institutions to use when they
furnish negative information to consumer reporting
agencies.
Under the Fair and Accurate Credit Transactions
Act (FACT Act) amendments to the FCRA, the Board
is required to publish, after notice and comment, a
concise model form (not to exceed thirty words in
length) that financial institutions may use to comply
with the notice requirement for furnishing negative
information to consumer reporting agencies. The
model form must be issued in final form by June 4,
2004.
The FACT Act provides that if any financial insti­
tution (1) extends credit regularly and in the ordinary
course of business furnishes information to a nation­
wide consumer reporting agency, and (2) furnishes
negative information to such an agency regarding
credit extended to a customer, the institution must
provide a clear and conspicuous notice about furnish­
ing negative information, in writing, to the customer.
“Negative information” means information concern­
ing a customer’s delinquencies, late payments, insol­
vency, or any form of default.
The FACT Act defines the term “financial institu­
tion” to have the same meaning as in the GrammLeach-Bliley Act, which generally is “any institution
the business of which is engaging in financial activi­
ties as described in section 4(k) of the Bank Holding
Company Act of 1956.”
The Board’s model form could be used by all
financial institutions, as defined by the act.
E s t a b l is h m e n t o f a Wo r k in g G r o u p
I m p l e m e n t a D o r m a n t Ba n k

to

The Federal Reserve Board announced on Janu­
ary 30, 2004, that it had established a private-sector



Working Group on NewBank Implementation to
further develop the concept of a dormant bank that
would be available for activation, if necessary, to
clear and settle U.S. government securities.
In a report released on January 7, 2004, a previous
private-sector panel, the Working Group on Govern­
ment Securities Clearance and Settlement, recom­
mended nine steps to mitigate risks to the financial
system from the interruption or termination of the
services of a clearing bank as the result of either
operational or non-operational problems.
All of the major participants in the U.S. govern­
ment securities markets depend on one of two com­
mercial banks to settle their trades and facilitate
financing of their positions. The September 11, 2001,
terrorist attacks demonstrated how operational dis­
ruptions to a clearing bank’s services could disrupt
the trading, clearance, and settlement of government
securities.
One of the first working group’s nine recommenda­
tions, which were endorsed by the Board, called for
the Board to establish a second panel focused on
developing NewBank, a limited-purpose, dormant
entity, ready for activation in the event that one of the
two major clearing banks permanently exited the
business, voluntarily or involuntarily, and no wellqualified bank stepped forward to purchase the exit­
ing bank’s clearing business.
The Board has asked the new working group to
flesh out the NewBank concept and address any
challenges to implementing it. Once those challenges
have been successfully addressed, those that have
agreed to own NewBank should take the neces­
sary steps to implement the concept, including
obtaining a limited-purpose bank charter. The Board
asked the working group to prepare a report by
late this year that summarizes its progress, identifies
the remaining challenges that need to be addressed
before a charter application can be submitted, and
sets out a timetable for meeting those remaining
challenges.
Michael Urkowitz, Senior Adviser to Deloitte Con­
sulting, the chairman of the previous working group,
has agreed to serve as chairman of the NewBank
panel. The NewBank Working Group will include
senior representatives of the two major clearing banks
(J.R Morgan Chase and The Bank of New York), the
Fixed Income Clearing Corporation, The Bond Mar­
ket Association, the Investment Company Institute,
Cantor Fitzgerald Securities, Federated Investors,
Fidelity Investments, Goldman Sachs & Co., Lehman
Brothers, Merrill Lynch, Morgan Stanley & Co.,
Salomon Smith Barney (Citigroup), State Street Bank
& Trust Co., and UBS Investment Bank.

Announcements

Staff members of the Federal Reserve, the Securi­
ties and Exchange Commission, the Department of
the Treasury, the Federal Deposit Insurance Corpora­
tion, and the New York State Banking Department
will participate as observers and technical advisers.

Ch a n g e s to P o l ic y S t a t e m e n t
Pa y m e n t s S y s t e m R is k

on

The Federal Reserve Board on February 5, 2004,
announced that it intends, beginning in July 2006, to
require Reserve Banks to release interest and redemp­
tion payments on securities issued by governmentsponsored enterprises and international organizations
only when the issuer’s Federal Reserve account con­
tains sufficient funds to cover these payments.
The Reserve Banks have been processing and post­
ing these payments to depository institutions’ Federal
Reserve accounts by 9:15 a.m. eastern time, the same
posting time as for U.S. Treasury securities’ interest
and redemption payments, even if the issuer has not
fully funded its payments.
However, the rising level of intraday credit in
recent years has prompted a reassessment of this
practice, which is inconsistent with that of private
issuing and paying agents for their customers’ securi­
ties. In general, these issuing and paying agents do
not allow payments to be made for a securities issuer
before the issuer has fully funded its payments.
The Board requested comment by April 16, 2004,
on how best to promote a smooth market adjustment
while implementing this change in its Policy State­
ment on Payments System Risk. The Board first
adopted the policy statement in 1985 and has modi­
fied and expanded it periodically. Its objectives are to
reduce risk and increase efficiency in the payments
system, including minimizing intraday float. To that
end, the Board introduced fees for daylight over­
drafts in 1994 but granted a temporary exemption to
government-sponsored enterprises until after market
participants adjusted to the introduction of fees for
depository institutions. The Board completed a broad
review of the policy statement on Payments System
Risk two years ago and found that market partici­
pants have adjusted to the fees, permitting reconsid­
eration of the temporary exemption.
Concurrent with the change for interest and re­
demption payments on the securities of governmentsponsored enterprises and international organizations,
the Board also plans to align its policy treatment
of the general corporate account activity of these
entities with the treatment of activity of other
account holders that do not have regular access to the



201

discount window. Such treatment would include
applying a penalty fee to daylight overdrafts result­
ing from these entities’ general corporate payment
activity.
By law, Reserve Banks act as fiscal agents for
these government-sponsored enterprises and interna­
tional organizations: the Federal National Mortgage
Association, the Federal Home Loan Mortgage Cor­
poration, entities of the Federal Home Loan Bank
System, the Farm Credit System, the Federal Agri­
cultural Mortgage Corporation, the Student Loan
Marketing Association, the International Bank for
Reconstruction and Development (World Bank),
the Inter-American Development Bank, the Asian
Development Bank, and the African Development
Bank.

REMOVAL OF ALL FIFTY-ONE STOCKS FROM
L is t o f f o r e ig n m a r g in S t o c k s
The Federal Reserve Board on March 3, 2004,
announced that it was removing all fifty-one stocks
from its current List of Foreign Margin Stocks
because they had not been recertified as required
under procedures approved by the Board in 1990.
The list is one of two methods for foreign securities
to qualify as margin securities under Regulation T
(Credit by Brokers and Dealers).
The list, which has been published twice each year
by the Board since 1999, is composed of certain
foreign equity securities that qualify as margin secu­
rities under Regulation T. Stocks on the list qualify
as margin securities by meeting certain financial
requirements specified in Regulation T.
In determining the qualification of particular for­
eign equity securities, the Board has relied on a list of
proposed margin stocks submitted by the New York
Stock Exchange (NYSE). The eligibility of the stocks
must be certified by at least two NYSE mem­
bers under procedures adopted by the NYSE and
approved by the Board in 1990.
Foreign securities may also qualify as margin secu­
rities if they are deemed by the Securities and
Exchange Commission (SEC) to have a “ready mar­
ket” under its net capital rule. This includes all
foreign stocks in the FTSE World Index Series.
The stocks being removed from the list are named
in the Federal Register, viewable on the Board’s
web site at www.federalreserve.gov/boarddocs/press/
bcreg/2004/20040303/attachment.pdf. The Board will
publish a new list of foreign margin stocks if eligible
securities are identified pursuant to the existing list­
ing procedures.

202

Federal Reserve Bulletin □ Spring 2004

P u b l ic m e e t in g h e l d o n p r o p o s e d
M e r g e r b e t w e e n J.P. M o r g a n C h a s e &
a n d Ba n k On e c o r p o r a t io n

Co.

The Federal Reserve Board on March 26, 2004,
announced that public meetings would be held in
April in New York and Chicago on the proposal by
J.R Morgan Chase & Co. to merge with Bank One
Corporation.
The purpose of these meetings is to collect infor­
mation relating to factors that the Board is required to
consider under the Bank Holding Company Act.
These factors are the effects of the proposal on the
financial and managerial resources and future pros­
pects of the companies and banks involved in the
proposal, competition in the relevant markets, and
the convenience and needs of the communities to
be served. Convenience and needs considerations
include the records of performance of J.P. Morgan
Chase and Bank One under the Community Reinvest­
ment Act.
The specific dates, times, and locations of the
meetings were the following:
• New York—Thursday, April 15, 2004, at
9:00 a.m. EDT at the Federal Reserve Bank of New
York, 33 Liberty Street, New York, New York 10045.
• Chicago—Friday, April 23, 2004, at 8:30 a.m.
CDT at the Federal Reserve Bank of Chicago, 230
South LaSalle Street, Chicago, Illinois 60604.
The Federal Reserve Board also announced that
the period for public comment of the proposal would
be extended through the close of business on Friday,
April 23, 2004.

A p p o i n t m e n t o f D r J a n e t L. Ye l l e n a s
P r e s id e n t , F e d e r a l R e s e r v e B a n k o f
Sa n F r a n c i s c o

Dr. Janet L. Yellen has been appointed President
and Chief Executive Officer of the Federal Reserve
Bank of San Francisco, according to an announce­
ment on April 12, 2004, by George M. Scalise,
Chairman of the San Francisco Federal Reserve
Bank’s Board of Directors. Dr. Yellen is the Eugene
E. and Catherine M. Trefethen Professor of Busi­
ness at the Haas School of Business and professor
of economics at the University of California—
Berkeley.
Dr. Yellen will assume her new position on
June 14, 2004, succeeding current President and




Chief Executive Officer Robert T. Parry, who last
September announced his intention to retire at mid­
year after serving for eighteen years. Scalise said the
appointment was made by the directors of the Federal
Reserve Bank of San Francisco, and approved by the
Board of Governors of the Federal Reserve System in
Washington, D.C.
“We conducted a nationwide search,” Scalise said,
“ and identified a slate of highly qualified candidates.
Dr. Yellen rose to the top as our pick because of her
extraordinary combination of monetary policy exper­
tise, experience as a Federal Reserve Board Governor
in Washington, fiscal policy experience at the White
House, and her extensive academic, international
trade, finance and economic experience, and research
background.”
“I’m honored to have been chosen for this key
position, and I look forward to meeting employees
and community leaders throughout the highly diverse
states that comprise the largest District in the Federal
Reserve System,” Yellen said. “It will be a pleasure
to return to Washington for monetary policy meetings
representing the critical economic forces embodied in
the Federal Reserve Bank of San Francisco’s Twelfth
District.”
Outgoing President and Chief Executive Officer
Robert T. Parry said, “I’ve known and worked
with Janet for a number of years. She is an out­
standing economist, and she made very signifi­
cant contributions to the monetary policy process
during her tenure as a Governor of the Federal
Reserve Board. I know that Janet will be a superb
President of the Federal Reserve Bank of
San Francisco.”
Federal Reserve Chairman Alan Greenspan said,
“I am pleased to welcome Dr. Yellen back to the
Federal Reserve System. She has distinguished her­
self through consistently incisive analysis, impressive
skill, and unwavering integrity. We benefited greatly
from her exceptional service as a Federal Reserve
Board Governor and I look forward to the many
contributions she will bring in her new role, to both
the San Francisco Bank and the Federal Open Market
Committee.”
Dr. Yellen, 57, holds a BA in economics from
Brown University, and a PhD in economics from
Yale University. She was awarded honorary doctor­
ates in humane letters and laws, by Bard College
and Brown University respectively. She has been
affiliated with the Haas School of Business at
the University of California—Berkeley since 1980.
In addition, she served as chair of the Presi­
dent’s Council of Economic Advisers from 1997 to

Announcements

1999, and was a member of the Federal Reserve
System’s Board of Governors from 1994 to 1997.
She has taught at Harvard and at the London
School of Economics and Political Science. Dr.
Yellen serves as president of the Western Eco­
nomics Association and vice president of the
American Economic Association. She is a fellow of
the Yale Corporation. She is also the recipient of
numerous honors and awards, and her research has
been widely published. She has collaborated profes­
sionally with her husband, George Akerlof, a Univer­
sity of California—Berkeley Nobel prize-winning
economist, on topics ranging from labor market,
income, wage, and employment issues to a variety of
socioeconomic issues.
More o f Dr. Yellen’s biography is also on
the Board’ web site at www.federalreserve.gov/
s
boarddocs/press/other/2004/20040412.

AGENCIES LAUNCH WEB SITE ON CALL
R e p o r t M o d e r n iz a t io n In it ia t iv e

The federal bank regulatory agencies on February 12,
2004, announced the availability of a web site that
provides information on the Federal Financial Institu­
tions Examination Council’s (FFIEC) Call Report
Modernization initiative. The FFIEC Call Report
agencies (the Federal Reserve Board, the Federal
Deposit Insurance Corporation, and the Office of the
Comptroller of the Currency) are building a central
data repository (CDR) to modernize and streamline
the way the agencies collect, process, and distribute
bank financial data.
The web site features a timeline, progress reports,
frequently asked questions and answers, and high­
lights of future process changes. It provides details
about project participants and ways that financial
institutions and software vendors can participate in
the initiative. The site also contains information out­
lining the technology supporting the new reporting
process.
The FIND (Financial INstitutions Data—Bank
Call Reports) web site provides details on the initia­
tive in the months leading up to the implemen­
tation of the CDR and will continue to provide
guidance after completion of the initiative. Imple­
mentation of the CDR is slated for the fall of
2004, and banks will first use the CDR to sub­
mit their September 30, 2004, Call Report data to
the agencies. The web site can be accessed at
www.FFIEC.gov/find.




203

INTERAGENCY GUIDANCE ISSUED ON UNFAIR
o r D e c e p t iv e A c t s o r P r a c t ic e s b y
S t a t e -C h a r t e r e d B a n k s

The Board of Governors of the Federal Reserve Sys­
tem and the Federal Deposit Insurance Corporation
on March 11, 2004, issued guidance outlining stan­
dards they will apply to determine when acts or
practices by state-chartered banks are unfair or decep­
tive. Such practices are illegal under section 5 of the
Federal Trade Commission (FTC) Act.
To respond to questions raised by institutions
under the agencies’ supervision, the statement also
provides guidance on steps that state-chartered banks
can take to avoid engaging in unfair or deceptive acts
or practices. The approach outlined in the statement
is based on long-established standards used by the
FTC to enforce section 5 of the FTC Act against
nonbank entities.
In 2002, the Board and the FDIC affirmed their
authority to apply the prohibition against unfair or
deceptive acts or practices to the activities of statechartered banks. At that time, the agencies also
announced their intention to issue further guid­
ance for state-chartered banks with respect to the
prohibition.

IMPROVEMENTS TO THE FEDERAL RESERVE
B o a r d ’s We b S i t e

The Federal Reserve Board on February 10, 2004,
announced a number of improvements to its web site,
including the capability to view and submit com­
ments on regulatory proposals.
In addition, the Board has expanded the offerings
on its Freedom of Information Act (FOIA) web
pages.
The Board also established two special sections on
its web site. One section contains Federal Reserve
documents relating to the proposed Basel II Capital
Accord under the heading Banking Information
and Regulation. Updates related to Basel II, as
well as historical documentation, can be found at
w w w.federalreserve.go v/generalinfo/basel2/
default.htm.
The second section is dedicated to the Federal
Reserve System’s financial education efforts and
contains educational tools on personal finance gath­
ered from across the Federal Reserve System. Users
have easy access to multiple resources, including
information on e-banking, shopping for a mort­
gage, preventing identity theft, consumer credit

204

Federal Reserve Bulletin □ Spring 2004

protections, and economic education. The site is at
www.federalreserveeducation.org/fined/index.cfm.

FEDERAL AGENCIES PUBLISH
S p a n i s h -L a n g u a g e v e r s i o n o f c o n s u m e r
b r o c h u r e o n p r e d a t o r y l e n d in g

The Federal Reserve Board announced on April 13,
2004, that the federal Interagency Task Force on Fair
Lending has published a Spanish-language version of
a brochure that alerts consumers to potential borrow­
ing pitfalls, including high-cost home loans, and pro­
vides tips for getting the best financing deal possible.
The brochure, Utilizar su hogar como garantfa para
un prestam o es arriesgado (Putting Your H om e on
the Loan Line Is R isky Business), warns that regard­

less of whether a home equity loan is for a home
repair, bill consolidation, or some other purpose, it’s
important to shop around.
Borrowing from an unscrupulous lender, especially
one that offers a high-cost loan using the home as
security, could result in the loss of the borrower’s
home and money. The brochure cautions that certain
lenders—often called predatory lenders —target
homeowners, including the elderly, with low incomes
or credit problems by deceiving them about loan
terms or giving them loans they cannot afford to
repay. Before signing the credit contract, consumers
are encouraged to do the following:
•
•
•
•

Think about their financing options
Do their homework
Think twice before they sign a loan contract
Know that they have rights under the law

The brochure notes that many consumers may have
other options for meeting their financial needs,
including housing counseling and social service
programs.
If consumers decide that a loan is right for them,
the brochure suggests talking with several lenders;
comparison shopping for interest rates, payments,
term of the loan, points and fees, and other costs of
the loan; and having a knowledgeable friend, attor­
ney, or housing counselor review the loan documents.
A shopping checklist is included with the brochure.
The publication also reminds consumers that if
they are refinancing or using their home as security
for a home equity loan (or for a second mortgage
loan or a line of credit), federal law gives them three
business days after signing the loan papers to cancel
the deal. The cancellation must be submitted in writ­



ing, after which the lender is required to return any
money the consumer has paid to date.
If the three-day period has already passed and
consumers believe they have been misled, the bro­
chure suggests that they contact a state or local bar
association, a local consumer protection agency, or a
local fair housing or housing counseling agency.
The members of the Interagency Task Force are the
Department of Housing and Urban Development, the
Department of Justice, the Federal Deposit Insurance
Corporation, the Federal Housing Finance Board, the
Federal Reserve Board, the Federal Trade Commis­
sion, the National Credit Union Administration, the
Office of the Comptroller of the Currency, the Office
of Federal Housing Enterprise Oversight, and the
Office of Thrift Supervision.
The brochure is available on the agencies’ web
sites listed below. A PDF (portable document format)
version is provided on the web site so that consumer
groups, financial institutions, agencies, and other or­
ganizations can download and print copies for distri­
bution to their clients and customers.
Single copies of the brochure in English or Span­
ish are available free of charge from the following
agencies:
Department of Housing and Urban Development:
The department’s web site at www.hud.gov or U.S.
Department of Housing and Urban Development,
451 Seventh Street, S.W., Washington, DC 20410;
Customer Service Center: (800) 767-7468.
Department of Justice: The department’s web site at
www.usdoj.gov/crt/housing/index_esp.html or con­
tact the U.S. Department of Justice, Civil Rights
Division, 950 Pennsylvania Ave., N.W., Housing and
Civil Enforcement Section, NWB, Washington, DC
20530; (202) 514-4713.
Federal Deposit Insurance Corporation: The FDIC’s
web site at www.fdic.gov or the FDIC’s Public Infor­
mation Center, 801 17th Street, N.W., Room 100,
Washington, DC 20434; (877) 275-3342 or (202)
416-6940.
Federal Housing Finance Board: The Board’s web
site at www.fhfb.gov and from the Federal Housing
Finance Board, 1777 F Street, N.W., Washington, DC
20006.
Federal Reserve Board: The Board’s web site at
www.federalreserve.gov/pubs/riskyhomeloans/
riskyspanish.htm and from Publications Fulfill­
ment, Stop 127, Federal Reserve Board, 20th &

Announcements

C Streets, N.W., Washington, DC 20551; (202) 4523245.
Federal Trade Commission: The FTC’s web site
at www.ftc.gov and from the FTC’s Consumer
Response Center, 600 Pennsylvania Avenue, N.W.,
Washington, DC 20580; toll free: 1-877-FTC-HELP
(1-877-382-4357); TTY for the hearing impaired
(866) 653-4261.
National Credit Union Administration: NCUA’s web
site at www.ncua.gov or contact Cliff Northup, Direc­
tor of Public and Congressional Affairs, National
Credit Union Administration, 1775 Duke Street,
Alexandria, VA. 22314; (703) 518-6330.
Office of Federal Housing Enterprise Oversight:
OFHEO’s web site at www.ofheo.gov/consInfo.asp.
E-mail requests for individual copies should be sent
to ofheoinquiriesofheo.gov or call (202) 414-6922.
Office of the Comptroller of the Currency: The
OCC’s web site at www.occ.treas.gov and from
Communications, Mail Stop 3-2, Office of the Comp­
troller of the Currency, 250 E Street, S.W., Washing­
ton, DC 20219; (202) 874-4700.
Office of Thrift Supervision: The OTS’s web site at
www.ots.treas.gov or contact Louise Batdorf, Office
of Thrift Supervision, 1700 G Street, N.W., Washing­
ton, DC 20552; (202) 906-7087.

RELEASE OF M INUTES TO DISCOUNT RATE
M EETINGS

205

The Council’s function is to advise the Board on
the exercise of its responsibilities under various con­
sumer financial services laws and on other matters on
which the Board seeks its advice.

En f o r c e m e n t A

c t io n s

The Federal Reserve Board on February 4, 2004,
announced the issuance of a consent order to cease
and desist against Dominique Bazy, a former execu­
tive with Credit Lyonnais, S.A., Paris, France.
Mr. Bazy, without admitting to any allegations,
consented to the issuance of the order based on his
alleged participation in alleged violations of the Bank
Holding Company Act and its regulations relating to
the “Executive Life” matter. In December 2003 and
January 2004, Credit Lyonnais consented to the issu­
ance of enforcement actions resolving allegations
relating to its participation in this matter.
In addition to the Board’s order, the U.S. attorney
in Los Angeles also announced on February 4, that
Mr. Bazy had agreed to plead guilty to a criminal
charge relating to this matter.
The Board’s order restricts Mr. Bazy’s participa­
tion in the conduct of the affairs of foreign banks
in the United States. The Board’s order supplements
automatic restrictions imposed upon Mr. Bazy upon
acceptance of his guilty plea to the criminal charge.
By law, Mr. Bazy will be prohibited from participat­
ing in the conduct of the affairs of domestic insured
depository institutions without the Federal Deposit
Insurance Corporation’s approval.

M EETING OF THE CONSUMER ADVISORY
C o u n c il

The Federal Reserve Board on February 9, 2004,
announced the issuance of a consent order of assess­
ment of a civil money penalty against Hocking
Valley Bank, Athens, Ohio, a state member bank.
Hocking Valley Bank, without admitting to any alle­
gations, consented to the issuance of the order in
connection with its alleged violations of the Board’s
Regulations implementing the National Flood Insur­
ance Act.
The order requires Hocking Valley Bank to pay a
civil money penalty of $9,500, which will be remitted
to the Federal Emergency Management Agency for
deposit into the National Flood Mitigation Fund.

The Federal Reserve Board announced on March 5,
2004, that the Consumer Advisory Council would
hold its next meeting on Thursday, March 25, 2004.
The meeting occurred in Dining Room E, Terrace
level, in the Board’s Martin Building. The session
began at 9:00 a.m. EST and was open to the public.

The Federal Reserve Board on March 4, 2004,
announced the issuance of a cease and desist order
against Cowboy State Bancorp, Inc., Ranchester,
Wyoming, a bank holding company, and its sub­
sidiary bank, the Cowboy State Bank, Ranchester,
Wyoming.

The Federal Reserve Board on February 5, 2004,
released the minutes of its discount rate meetings
from November 10, 2003, through December 8, 2003.
On March 25, 2004, the Federal Reserve Board,
released the minutes of its discount rate meetings
from December 15, 2003, through January 26, 2004.




206

Federal Reserve Bulletin □ Spring 2004

The consent cease and desist order was jointly
issued by the Federal Reserve Board and the Wyo­
ming State Banking Commissioner on February 24,
2004.

Company Act. The Board will remit this fine to the
U.S. Department of the Treasury.

Written Agreements
The Federal Reserve Board and the New York
State Banking Department announced on March 10,
2004, the issuance of a joint order to cease and desist
and an order of assessment of a civil money penalty
and monetary payment against Credit Agricole, S.A.,
Paris, France; and its affiliates in Paris, Credit Agri­
cole Indosuez and Credit Lyonnais, S.A.; and its
offices and affiliates in New York, the New York
branches of Credit Agricole Indosuez; and Credit
Lyonnais, S.A. The order assesses fines totaling
$13 million.
The order addresses deficiencies in the operational
controls, risk management, and compliance with laws
and regulations by the New York branch of Credit
Agricole Indosuez. The order resolves allegations
that Credit Agricole, S.A., Credit Agricole Indosuez,
and the New York branch of Credit Agricole
Indosuez failed to fully comply with a written agree­
ment entered into with the Federal Reserve and the
New York State Banking Department in Novem­
ber 2000; failed to maintain accurate and com­
plete books and records for the operations of the
New York branch of Credit Agricole Indosuez; and
violated New York State law relating to the banks’
obligation to maintain accurate books and records
and to submit reports to the New York State Banking
Department.
The joint order includes Credit Lyonnais, S.A. and
the New York branch of Credit Lyonnais, S.A.,
because Credit Agricole, S.A. plans to reorganize
its U.S. operations and consolidate certain business
operations of its affiliates’ New York branches
through the New York branch of Credit Lyonnais,
S.A. Credit Agricole, S.A., and its affiliates, without
admitting to any allegations, consented to the issu­
ance of the order.
Credit Agricole, S.A., Credit Agricole Indosuez,
and the New York branch of Credit Agricole
Indosuez were assessed $10 million in fines under the
joint order. They will pay $5 million to the U.S.
Department of the Treasury (through the Board of
Governors) and $5 million to the state of New York
under applicable federal and state laws.
Credit Agricole, S.A., also agreed to pay a $3 mil­
lion fine to the Board of Governors to resolve alle­
gations that Credit Agricole, S.A. acquired certain
shares of Credit Lyonnais, S.A. and Credit Lyonnais
Securities (USA), Inc., in 2002, without prior Federal
Reserve approval as required by the Bank Holding



The Federal Reserve Board on February 24, 2004,
announced the execution of a written agreement by
and among The Custar State Bank, Custar, Ohio; the
Ohio Division of Financial Institutions, Columbus,
Ohio; and the Federal Reserve Bank of Cleveland.
The Federal Reserve Board on March 24, 2004,
announced the execution of a written agreement by
and among Midwest Banc Holdings, Inc., Melrose
Park, Illinois; the Midwest Bank and Trust Company,
Elmwood Park, Illinois; the State of Illinois Office of
Banks and Real Estate, Springfield, Illinois; and the
Federal Reserve Bank of Chicago.
The Federal Reserve Board on March 24, 2004,
announced the execution of a written agreement by
and between the Planters Bank and Trust Company,
Staunton, Virginia, and the Federal Reserve Bank of
Richmond.
The Federal Reserve Board on March 24, 2004,
announced the execution of a written agreement by
and between the Virginia Heartland Bank, Freder­
icksburg, Virginia, and the Federal Reserve Bank of
Richmond.

Termination o f Enforcem ent Actions
The Federal Reserve Board on April 7, 2004,
announced the termination of the enforcement action
listed below. The Federal Reserve’s enforcement
actions web site, www.federalreserve.gov/boarddocs/
enforcement, reports the terminations as they occur.
• Fifth Third Bancorp and Fifth Third Bank, Cin­
cinnati, Ohio
Written agreement dated March 26, 2003
Terminated April 6, 2004
The Federal Reserve Board, on April 15, 2004,
announced the termination of the enforcement action
listed below.
• Community First Bank and Trust, Celina, Ohio
Written agreement dated July 25, 2002
Terminated February 4, 2004

Announcements

Ch a n g e s i n B o a r d S t a f f

Dolores S. Smith, Director of the Division of Con­
sumer and Community Affairs, retired on March 31,
2004, after more than twenty-eight years of service
with the Board.
The Board of Governors on March 18, 2004,
approved the promotion of Alice Patricia White to
deputy associate director and the appointment of
Michael Gibson to assistant director and chief of the
Trading Risk Analysis Section, in the Division of
Research and Statistics.
Pat White will take on broader responsibilities
for handling policy assignments for the Board.
Ms. White began her career in the Financial Structure
Section in the Division of Research and Statistics
in 1979. After a brief stint as special assistant to
Governor Wallich in 1982, she transferred to the
Capital Markets Section. The Trading Risk Analy­
sis Section was created in 1993 and Ms. White
was selected the first chief of that section. She was
made line officer of the Trading Risk Analysis Sec­
tion in 2000. Ms. White will continue to provide
support to the Board in its participation in the domes­
tic and international policy arena especially related
to derivatives, margin requirements, and securities
clearance and settlement arrangements. Ms. White
received her doctoral degree from Yale University in
1979.
Michael Gibson will have direct oversight respon­
sibility for the Trading Risk Analysis Section. This
section is responsible for analyzing the risks arising
in the trading and positioning of securities, commodi­
ties, and derivative instruments. Mr. Gibson began
his career at the Board in the International Banking
Section of the Division of International Finance in
1992, where he had principal responsibility for fol­
lowing the Japanese banking system. He subse­
quently spent two years as a visiting assistant pro­
fessor of business economics at the University of
Chicago Graduate School of Business. Mr. Gibson
moved to the Trading Risk Analysis Section in the
Division of Research and Statistics in 1999 and was
selected chief of that section in 2000. Mr. Gibson
received his doctoral degree from the Massachusetts
Institute of Technology in 1993.
The Board of Governors on March 19, 2004,
approved the appointment of Stacy Coleman as assis­
tant director for Operational and Information Tech­
nology (IT) Risk and Special Activities, Division of
Banking Supervision and Regulation; and a change
in officer responsibilities for Lisa Hoskins, Assistant



207

Director, Division of Reserve Bank Operations and
Payment Systems to assume oversight responsibili­
ties for the Payment System Risk program.
Stacy Coleman will oversee the Operational and IT
Risk and Special Activities areas, which provide the
focal point for the Federal Reserve’s supervision of
operational risk in banking organizations. These func­
tions support supervision by providing guidance and
technical assistance in areas involving business conti­
nuity, IT, fiduciary activities, and emerging activities
such as insurance.
Ms. Coleman joined the Federal Reserve Board in
1993 as a research assistant in the Flow of Funds
Section in the Division of Research and Statistics.
She returned to the Board in 1996 as a senior finan­
cial services analyst in the Division of Reserve Bank
Operations and Payment Systems. In 2001, she was
promoted to manager of the Payment System Risk
(PSR) program. Ms. Coleman holds a bachelor of arts
degree from Kalamazoo College and an MBA from
Johns Hopkins University.
Lisa Hoskins, Assistant Director, will assume over­
sight responsibilities for the Payment System Risk
(PSR) program in addition to her responsibilities for
division administration and Information Systems.
Ms. Hoskins joined the Federal Reserve System in
1985 as a management intern with the New Orleans
Branch of the Federal Reserve Bank of Atlanta. She
transferred to the Board in 1998 as a financial ser­
vices analyst in the Division of Bank Operations and
Payment Systems. Ms. Hoskins was appointed to the
official staff in 2003 and has served as co-secretariat
to the Committee on Employee Benefits. She
received her BBA and MBA degrees from Loyola
University.
The Federal Reserve Board on March 22, 2004,
announced the appointment of Sandra F. Braunstein
as director of the Division of Consumer and Commu­
nity Affairs, effective April 1, 2004.
Ms. Braunstein succeeds Dolores S. Smith, who
retired after twenty-eight years of service at the
Board, including six years as division director.
In 1998, Ms. Braunstein was appointed to the
Board’s official staff as assistant director and commu­
nity affairs officer. She was named senior associate
director of the Division of Consumer and Community
Affairs in 2003. She currently oversees the imple­
mentation of Federal Reserve System policies and
programs regarding community and economic devel­
opment. She also serves as the Board’s liaison to the
Consumer Advisory Council and provides leader­
ship to various consumer education and research
activities.

208

Federal Reserve Bulletin □ Spring 2004

Before joining the Federal Reserve Board in 1987,
Ms. Braunstein held positions in economic and com­
munity development for nonprofit, government, and
private sector organizations. She is a graduate of the
American University.
Richard D. Porter, Senior Adviser in the Division
of Monetary Affairs, retired from the Board on
April 30, 2004, after more than thirty years of ser­
vice. In May, Mr. Porter joins the Federal Reserve
Bank of Chicago as senior policy adviser.

REVISION TO THE M O N E Y STOCK DATA

Measures of the money stock and components were
revised in January 2004 to incorporate the results of
the annual seasonal factor review. Data in tables 1.10
and 1.21 in the Statistical Supplem ent to the Federal
1.

Reserve Bulletin reflect these changes beginning with

the February issue.
Seasonally adjusted measures of the monetary
stock and components incorporate revised seasonal
factors produced from not-seasonally-adjusted data
through December 2003. Monthly seasonal factors
were estimated using the X-12-ARIMA procedure.
The revisions to seasonal factors raised M2 and M3
growth rates in the first and fourth quarters of 2003,
although lowering them in the other quarters of the
year.
Historical data, updated each week, are avail­
able through the Federal Reserve’s web site
(www.federalreserve.gov/releases/) with the H.6 sta­
tistical release. Current and historical data are also on
the Economic Bulletin Board of the U.S. Department
of Commerce. For paid electronic access to the Eco­
nomic Bulletin Board, call STAT-USA at 1-800-7828872 or 202-482-1986.

Monthly seasonal factors used to construct M l, January 2003-March 2005
Year and month

Currency

Other checkable deposits1

Nonbank travelers
checks

Demand deposits
Total

At banks

2003—January ................................
February ..............................
March ..................................
A p ril.....................................
May .....................................
June .....................................
J u ly .......................................
August ..................................
September............................
October ................................
N ovem ber............................
December ............................

.9968
.9998
1.0014
1.0022
1.0031
1.0020
1.0011
.9994
.9950
.9960
.9984
1.0046

.9955
.9947
.9903
.9824
.9875
1.0160
1.0369
1.0243
1.0067
.9963
.9819
.9886

1.0020
.9720
.9920
1.0011
.9860
.9976
1.0034
1.0004
.9952
.9929
1.0058
1.0507

1.0110
.9832
1.0057
1.0282
.9952
.9999
.9959
.9919
.9915
.9892
.9895
1.0221

1.0386
.9913
1.0065
1.0256
.9866
.9928
.9898
.9803
.9863
.9892
.9786
1.0381

2004— January ................................
February ..............................
March .................................
A p ril.....................................
May .....................................
June .....................................
J u ly .......................................
August .................................
September............................
October ................................
N ovem ber............................
December ............................

.9967
1.0002
1.0011
1.0023
1.0031
1.0023
1.0018
.9980
.9950
.9970
.9972
1.0051

.9970
.9954
.9918
.9834
.9881
1.0135
1.0346
1.0245
1.0061
.9952
.9831
.9889

1.0018
.9737
.9884
.9991
.9916
.9962
1.0052
1.0027
.9920
.9963
1.0038
1.0470

1.0097
.9831
1.0050
1.0244
.9949
.9991
.9961
.9948
.9932
.9898
.9898
1.0219

1.0383
.9916
1.0071
1.0196
.9839
.9935
.9904
.9815
.9901
.9885
.9773
1.0400

2005—January ...............................
February ..............................
March .................................

.9964
.0000
1.0012

.9976
.9956
.9919

1.0053
.9724
.9853

1.0099
.9824
1.0040

1.0380
.9916
1.0077

1. Seasonally adjusted other checkable deposits at thrift institutions are derived as the difference between total other checkable
deposits, seasonally adjusted, and seasonally adjusted other checkable deposits at commercial banks.




Announcements

2.

Monthly seasonal factors used to construct M2 and M3, January 2003-March 2005
Savings and
MMDA
deposits1

Smalldenomination
time deposits1

Largedenomination
time deposits1

2003—January ................................
February ..............................
March .................................
A pril.....................................
May .....................................
June .....................................
J u ly .......................................
August ..................................
September............................
October ................................
Novem ber............................
December ............................

.9953
.9939
1.0002
1.0043
.9944
.9982
.9977
1.0026
1.0033
1.0010
1.0074
1.0041

1.0004

2004— January ................................
February ..............................
March ..................................
A p ril.....................................
May .....................................
June .....................................
J u ly .......................................
August ..................................
September............................
October ................................
N ovem ber............................
December ............................

.9957
.9932
.9977
1.0033
.9937
.9980
.9998
1.0014
1.0041
1.0033
1.0067
1.0045

2005—January ................................
February ..............................
March ..................................

.9953
.9927
.9964

Money market mutual funds

.9922
.9967
1.0006
1.0006
1.0096
1.0065

Year and month

1.0018

1.0262
1.0233
1.0112
.9872
.9848
.9928
.9882
.9884
.9817
.9874
1.0090
1.0238

.9943
1.0140
1.0162
1.0074
1.0269
1.0237
1.0014
.9927
.9744
.9753
.9856
.9875

1.0037
1.0136
1.0148
1.0142
1.0129
.9911
.9844
.9859
.9877
.9946
1.0039
1.0017

1.0041
1.0079
1.0140
1.0071
.9867
.9874
.9939
1.0019
.9973
1.0004
1.0006
1.0009

1.0238
1.0216
1.0097
.9867
.9836
.9921
.9896
.9899
.9850
.9896
1.0078
1.0219

.9925
1.0116
1.0170
1.0119
1.0282
1.0234
1.0004
.9916
.9745
.9767
.9867
.9860

1.0029
1.0102
1.0109
1.0101
1.0093
.9903
.9863
.9892

.9896
.9948
.9998

.9994
.9994
.9998
.9998
.9996
.9998
.9999
1.0002
1.0008

Eurodollars

.9996
1.0096
1.0058
1.0010
.9994
1.0017
1.0018
.9996
.9973

1.0001

RPs

1.0029
1.0069
1.0127

1.0229
1.0211
1.0088

.9907
1.0109
1.0178

1.0030
1.0076
1.0077

In M2
1.0061
1.0098
1.0166
1.0081
.9872
.9868
.9928
.9998
.9959
.9993

1.0011

.9987
1.0008
1.0005
.9982
.9973

1.0001
1.0001

1.0000

.9906
.9957

.9998
.9996

1.0001

1.0000

1.0004
1.0005

1.0000

.9997
.9996
.9998
1.0002
.9998

1.0000
.9997
.9998

In M3 only

.9985
1.0051
1.0031

1. Seasonal factors are applied to deposit data at both commercial banks and thrift institutions.

3.

209

Weekly seasonal factors used to construct M l, December 1, 2003-April 4, 2005
Week ending

Currency

Other checkable deposits1

Nonbank travelers
checks

Demand deposits
Total

At banks

2003— December

1
8
15
22
29

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

1.0012
1.0000
1.0016
1.0082
1.0113

.9785
.9824
.9863
.9902
.9942

1.0904
.9517
1.0068
1.0719
1.1455

1.0239
.9963
.9866
1.0301
1.0607

1.0145
.9816
.9940
1.0564
1.1047

2004— January

5
12
19
26

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

1.0050
.9950
.9960
.9945

.9981
.9975
.9970
.9964

1.0545
.9668
.9851
1.0041

1.0487
.9973
.9933
1.0073

1.0680
1.0296
1.0268
1.0382

February

2
9
16
23

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

.9960
1.0008
1.0022
.9994

.9959
.9956
.9954
.9952

1.0370
.9456
.9651
.9685

1.0189
.9804
.9641
.9788

1.0404
.9847
.9694
.9895

March

1
8
15
22
29

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

.9989
1.0029
1.0014
1.0011
.9998

.9950
.9937
.9925
.9913
.9900

1.0011
.9453
.9658
.9869
1.0404

1.0025
.9923
.9861
1.0043
1.0262

1.0134
.9905
.9790
1.0067
1.0400

April

5
12
19
26

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

1.0041
1.0042
1.0020
1.0001

.9888
.9860
.9832
.9804

.9892
.9561
1.0323
1.0259

1.0287
1.0058
1.0350
1.0328

1.0288
.9938
1.0341
1.0301

May

3
10
17
24
31

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

1.0013
1.0041
1.0022
1.0029
1.0024

.9777
.9823
.9869
.9916
.9962

1.0077
.9544
.9877
.9858
1.0341

1.0265
.9857
.9760
.9912
1.0136

1.0154
.9627
.9663
.9852
1.0115

June

7
14
21
28

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

1.0049
1.0037
1.0019
1.0006

1.0027
1.0092
1.0156
1.0221

.9406
.9674
1.0043
1.0589

.9976
.9801
.9930
1.0177

.9848
.9641
.9930
1.0217

July

5
12
19
26

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

1.0058
1.0028
1.0010
.9988

1.0286
1.0316
1.0346
1.0376

.9852
.9597
1.0038
1.0468

1.0059
.9782
.9859
1.0023

1.0024
.9642
.9780
1.0002




210

Federal Reserve Bulletin □ Spring 2004

3.— Continued
Week ending

Currency

Other checkable deposits1

Nonbank travelers
checks

Demand deposits
Total

At banks

2
9
16
23
30

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

.9986
1.0026
.9994
.9963
.9941

1.0406
1.0340
1.0273
1.0206
1.0140

1.0521
.9490
.9864
1.0076
1.0542

1.0223
.9915
.9759
.9914
1.0110

1.0254
.9749
.9560
.9785
1.0039

September 6
13
20
27

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

.9986
.9955
.9945
.9928

1.0073
1.0067
1.0060
1.0054

.9598
.9536
.9789
1.0606

.9969
.9808
.9935
1.0014

.9859
.9701
.9899
1.0068

October

4
11
18
25

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

.9956
1.0000
.9973
.9951

1.0047
1.0003
.9958
.9913

.9977
.9399
.9860
1.0212

.9922
.9722
.9785
.9947

.9973
.9663
.9772
.9943

November

1
8
15
22
29

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

.9936
.9979
.9963
.9955
.9999

.9869
.9854
.9839
.9824
.9808

1.0594
.9558
.9748
1.0033
1.0712

1.0199
.9760
.9677
.9863
1.0194

1.0209
.9573
.9468
.9767
1.0170

December

6
13
20
27

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

.9999
1.0018
1.0058
1.0130

.9793
.9844
.9895
.9946

.9829
.9865
1.0556
1.1255

1.0099
.9893
1.0213
1.0531

1.0058
.9860
1.0411
1.0961

3
10
17
24
31

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

1.0050
.9987
.9952
.9929
.9936

.9997
.9988
.9979
.9969
.9960

1.1079
.9748
.9789
.9963
1.0298

1.0471
1.0092
.9977
1.0049
1.0126

1.0835
1.0350
1.0255
1.0336
1.0425

February

7
14
21
28

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

.9994
1.0008
1.0012
.9986

.9958
.9957
.9955
.9954

.9573
.9616
.9658
1.0051

.9895
.9655
.9786
.9961

1.0039
.9667
.9858
1.0099

March

7
14
21
28

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

1.0027
1.0018
1.0016
1.0006

.9941
.9929
.9916
.9904

.9606
.9587
.9839
1.0123

.9977
.9841
1.0007
1.0188

.9940
.9767
1.0073
1.0352

4 .....................

1.0024

.9891

1.0050

1.0286

1.0317

August

2005—January

April

1.
Seasonally adjusted other checkable deposits at thrift institutions are derived as the difference between total other checkable
deposits, seasonally adjusted, and seasonally adjusted other checkable deposits at commercial banks.

4.

Weekly seasonal factors used to construct M2 and M3, December 1, 2003-April 4, 2005
Week ending

2003—December

2004— January

February

March

April

Savings and
MMDA
deposits1

1.0000

Smalldenomination
time deposits1

1.0011

Largedenomination
time deposits1

Money market mutual funds
RPs

Eurodollars

1.0182
1.0240
1.0379
1.0233
1.0182

.9810
.9873
.9897
.9860
.9936

1.0082
.9973
.9970
.9980
1.0109

In M2

In M3 only

.9933
.9965
1.0046
1.0008
.9946

1.0007
1.0035
1.0051
1.0022
.9987

1
8
15
22
29

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

1.0180
1.0161
.9989
.9851

1.0006
1.0002
.9997
.9998

5
12
19
26

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

1.0109
1.0112
.9980
.9767

1.0014
1.0007

1.0001

.9992

.9950
.9974
.9925
.9799

.9943
1.0035
1.0085
1.0074

.9971
1.0227
1.0320
1.0360

.9670
.9864
.9961
1.0016

1.0098
1.0052
1.0041
.9978

2
9
16
23

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

1.0011

.9787

.9994
.9868

.9993
.9997
.9999
.9998

.9915
.9976
1.0002
.9944

1.0041
1.0059
1.0070
1.0102

1.0259
1.0213
1.0222
1.0253

1.0094
1.0177
1.0162
1.0045

.9968
1.0009
1.0086
1.0186

1
8
15
22
29

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

.9884
1.0082
1.0073
.9951
.9832

.9998
.9997
.9997
.9996
.9993

1.0000

.9912
.9976

.9990
1.0034

1.0100
1.0129
1.0143
1.0159
1.0144

1.0131
1.0113
1.0136
1.0105
1.0018

1.0081
1.0187
1.0175
1.0204
1.0166

1.0165
1.0003
1.0080
1.0123
1.0213

5
12
19
26

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

1.0125
1.0179
1.0086
.9845

1.0056
.9998
.9960
.9959

1.0117
1.0162
1.0115
1.0014

.9848
.9959
.9831
.9787

1.0038
1.0077
1.0086
1.0184

1.0107
1.0030
1.0069
1.0150




1.0001

1.0004
.9999
.9995

Announcements

211

4.— Continued
Week ending

Savings and
MMDA
deposits1

Smalldenomination
time deposits1

Largedenomination
time deposits1

Money market mutual funds
RPs
In M2

Eurodollars

In M3 only

May

3
10
17
24
31

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

.9852
1.0044
.9989
.9838
.9844

1.0001
1.0003
1.0003
1.0005
1.0005

1.0041
1.0099
1.0111
1.0099
1.0101

.9878
.9870
.9853
.9874
.9868

.9733
.9784
.9831
.9885
.9832

1.0240
1.0258
1.0276
1.0264
1.0349

1.0177
1.0088
1.0047
1.0096
1.0102

June

7
14
21
28

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

1.0123
1.0104
.9967
.9784

1.0007
1.0007
1.0003
1.0002

1.0087
1.0025
1.0089
1.0049

.9885
.9896
.9875
.9852

.9836
.9904
.9842
.9869

1.0301
1.0311
1.0218
1.0164

1.0004
.9900
.9844
.9868

July

5
12
19
26

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

1.0089
1.0117
.9989
.9840

1.0005
1.0002
1.0000
.9997

.9996
1.0012
.9981
1.0014

.9836
.9933
.9951
.9977

.9806
.9946
.9926
.9934

1.0028
.9966
.9997
1.0011

.9889
.9863
.9843
.9870

August

2
9
16
23
30

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

.9917
1.0151
1.0108
.9925
.9867

.9996
.9998
.9998
.9997
.9996

1.0057
1.0092
.9997
.9937
.9932

.9979
1.0022
1.0033
1.0037
1.0002

.9844
.9910
.9973
.9997
.9958

1.0037
1.0080
.9965
.9795
.9807

.9861
.9838
.9824
.9915
1.0010

September 6
13
20
27

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

1.0186
1.0218
1.0054
.9819

.9999
.9998
.9993
.9992

1.0002
1.0051
.9999
.9989

.9976
1.0012
.9988
.9944

.9859
.9953
.9895
.9867

.9765
.9795
.9773
.9699

.9869
.9872
.9879
.9970

October

4
11
18
25

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

1.0067
1.0152
1.0072
.9881

.9999
1.0005
1.0000
.9995

1.0071
1.0102
1.0000
.9963

.9909
.9993
1.0040
1.0035

.9753
.9935
.9954
.9970

.9626
.9692
.9782
.9790

.9925
.9945
.9968
1.0028

November

1
8
15
22
29

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

.9890
1.0144
1.0186
1.0030
.9923

.9993
.9998
1.0003
1.0003
1.0005

.9972
1.0012
1.0030
.9995
.9956

1.0003
1.0001
.9995
1.0019
1.0006

.9940
.9972
1.0054
1.0143
1.0207

.9905
1.0003
.9863
.9796
.9797

1.0055
1.0016
1.0044
1.0066
1.0095

December

6
13
20
27

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

1.0154
1.0171
1.0048
.9887

1.0005
1.0000
.9994
.9992

.9967
1.0047
1.0002
.9929

1.0027
1.0050
1.0029
.9987

1.0214
1.0346
1.0236
1.0204

.9888
.9905
.9865
.9874

1.0038
.9993
1.0000
1.0046

3
10
17
24
31

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

.9983
1.0131
1.0035
.9850
.9713

1.0003
1.0008
1.0004
.9996
.9992

.9877
.9874
.9927
.9877
.9915

.9911
.9997
1.0056
1.0067
1.0046

.9961
1.0140
1.0280
1.0339
1.0286

.9701
.9780
.9893
.9962
1.0084

1.0104
1.0020
1.0046
1.0019
.9991

February

7
14
21
28

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

.9970
.9958
.9916
.9866

.9996
.9998
.9997
.9998

.9978
.9997
.9932
.9885

1.0049
1.0056
1.0083
1.0089

1.0193
1.0197
1.0225
1.0205

1.0113
1.0130
1.0069
1.0123

.9972
1.0057
1.0127
1.0138

March

7
14
21
28

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

1.0081
1.0060
.9983
.9843

.9997
.9998
.9998
.9998

.9934
.9998
.9999
1.0030

1.0112
1.0119
1.0142
1.0142

1.0124
1.0135
1.0081
1.0025

1.0179
1.0196
1.0177
1.0221

.9978
1.0026
1.0073
1.0209

4 .....................

1.0032

1.0004

1.0071

1.0117

.9865

1.0035

1.0108

2005—January

April

1. Seasonal factors are applied to deposit data at both commercial banks and thrift institutions.




212

Legal Developments

O r d e r s I s s u e d Un d e r B a n k h o l d i n g
Co m p an y A c t
O rders Issued U nder Section 4 of the B ank H olding
Com pany A ct

J.P. Morgan Chase & Co.
New York, New York
Order Approving Acquisition of a Savings Association
J.P. Morgan Chase & Co. ( “ Morgan Chase” ), a financial
holding company within the meaning of the Bank Holding
Company Act ( “ BHC A ct” ), has requested the Board’s
approval to acquire all the voting shares of Chase FSB,
Newark, Delaware, a de novo federal savings bank, pursu­
ant to section 4(c)(8) and 4(j) of the Bank Holding Com­
pany Act (12 U.S.C. § 1843(c)(8) and 1843(j)) (“ BHC
A ct” ) and section 225.24 of the Board’s Regulation Y
(12C.F.R. 225.24).1
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
( 6 8 Federal Register 68,925 (2003)), and the time for filing
comments has expired. The Board has considered the pro­
posal and all comments received in light of the factors set
forth in section 4 of the BHC Act.
M organ Chase, with total consolidated assets of
$771 billion, is the second largest banking organization in
the United States .2 M organ Chase controls $194.5 billion
in deposits in depository institutions nationwide, represent­
ing approximately 4 percent of the total deposits in insured
depository institutions in the United States .3 Morgan Chase
proposes to operate Chase FSB as a direct subsidiary that
will market and originate certain retail and consumer
finance products currently offered by other Morgan Chase
subsidiaries. M organ Chase has represented that it intends
for Chase FSB to principally serve the national market,
which Morgan Chase describes as the United States out­
side the tristate area of New York, New Jersey, and Con­
necticut. Morgan Chase would continue to serve its retail
1. Morgan Chase has previously received the required approvals to
establish Chase FSB from the Office of Thrift Supervision ( “OTS” )
on November 28, 2003, and from the Federal Deposit Insurance
Corporation on December 3, 2003.
2. Asset data for Morgan Chase are as of December 31, 2003, and
nationwide ranking data are as of September 30, 2003.
3. Deposit data are as of September 30, 2003. In this context,
depository institutions include commercial banks, savings banks, and
savings associations.




banking customers in the tri-state area principally through
JPMorgan Chase Bank, New York, New York ( “ JPM CB” ),
Morgan Chase’s lead subsidiary bank. Chase FSB ’s activi­
ties would initially focus on home mortgage lending,
marketing of credit cards, and automotive finance .4 To
facilitate these activities, 302 offices throughout the
United States of Chase Manhattan Mortgage Corporation,
Edison, New Jersey ( “ CM M C” ), which is Morgan Chase’s
principal mortgage lending subsidiary, would become
offices of Chase FSB .5
The Board previously has determined by regulation that
the operation of a savings association by a bank holding
company is closely related to banking for purposes of
section 4(c)(8) of the BHC A ct .6 The Board is required
to review each proposal by a bank holding company to
acquire a savings association . 7 In reviewing the proposal,
the Board is required by section 4(j)(2)(A) of the BHC Act
to determine that the acquisition of Chase FSB by M organ
Chase “ can reasonably be expected to produce benefits to
the public . . . that outweigh possible adverse effects, such
as undue concentration of resources, decreased or unfair
competition, conflicts of interests, or unsound banking
practices .” 8 As part of its evaluation of a proposal under
these public interest factors, the Board reviews the finan­
cial and managerial resources of the companies involved as
well as the effect of the proposal on competition in the
relevant markets .9 In acting on notices to acquire a savings
association, the Board also reviews the records of per­
formance of the relevant insured depository institutions
under the Community Reinvestment Act (12 U.S.C. §2901
et seq.) (“ CRA ” ) . 10

Competitive Considerations
As part of its consideration of the public interest factors
under section 4 of the BHC Act, the Board has considered
4. Chase FSB will market credit cards issued by Chase Manhattan
Bank USA, N.A., Newark, Delaware ( “Chase USA” ), which currently
issues all Morgan Chase credit cards. Chase USA’s automotive finance
business will be transferred to Chase FSB.
5. Of these 302 offices, 19 will be administrative offices not open
to the public. The remainder will be loan production offices of
Chase FSB.
6. 12 C.F.R. 225.28(b)(4)(ii).
7. 12 U.S.C. § 1843(j) and 1843(k)(6)(B).
8. 12 U.S.C. §1843(j)(2)(A ).
9. 12 C.F.R. 225.26.
10. See, e.g., Banc One Corporation, Inc., 83 Federal Reserve
Bulletin 602 (1997).

213

carefully the competitive effects of the proposal in the
relevant markets in light of all the facts of record. The
proposal involves the formation of a de novo savings
association that would operate nationwide.
Commencement of activities de novo is presumed under
Regulation Y to result in benefits to the public through
increased competition in the market for banking and simi­
lar services . 11 The proposed acquisition would have no
adverse effect on the concentration of banking resources
in any relevant banking market. Moreover, the Board has
received no objections to the proposal from the Depart­
ment of Justice or any federal banking agency. In light of
all the facts of record, the Board concludes that consum­
mation of the proposed transaction would not result in a
significantly adverse effect on competition or on the con­
centration of banking resources in any relevant banking
market, and that competitive factors are consistent with
approval.

Financial and Managerial Factors
In reviewing the proposal under section 4 of the BHC Act,
the Board also has carefully reviewed the financial and
managerial resources of Morgan Chase and Chase FSB.
The Board has reviewed these factors in light of all the
facts of record, including confidential reports of exami­
nation assessing the financial and managerial resources
of M organ Chase and its subsidiary banks, information
provided by M organ Chase, and public comments on
the proposal . 12 In addition, the Board has consulted with
the OTS, which will be the primary federal regulator of
Chase FSB. The Board notes that Morgan Chase and its
subsidiary depository institutions currently are well capital­
ized and are expected to remain so after consummation of
the proposal. Chase FSB also would be well capitalized at
consummation. Based on all the facts of record, the Board
concludes that the financial and managerial resources of
the institutions involved are consistent with approval of the
proposal . 13
11. See 12 C.F.R. 225.26(c).
12. A commenter opposing the proposal cited press reports of
Morgan Chase’s connection to investigations, lawsuits, and settle­
ments relating to Enron Corp. and asserted that these issues reflected
unfavorably on the managerial resources of JPMCB. The commenter
also provided press reports o f litigation involving the acquisition of a
small number of mortgage loans from a mortgage broker by CMMC
and asserted that Morgan Chase and CMMC lacked adequate policies
and procedures for monitoring the acquisition o f loans on the second­
ary market. The Board previously has considered these comments in
the context o f a recent application by JPMCB to acquire trust deposits
from subsidiary banks o f Bank One Corporation, Chicago, Illinois,
and hereby adopts the findings in that case. See JPMorgan Chase
Bank, 89 Federal Reserve Bulletin 511, 512 (2003) ( “JPMCB/Bank
One Order ” ).
In addition, the commenter raised concerns about an investigation
by the Oregon Department of Justice ( “Oregon DOJ” ) into the
alleged use by borrowers o f fraudulent Social Security numbers in
three mortgage loans underwritten by CMMC. By a letter dated
June 10, 2003, to CMMC, the Oregon DOJ closed its inquiry into this
matter due to “insufficient evidence.”
13. After consulting with the OTS and reviewing all the facts of
record, including in particular its approval of Morgan Chase’s applica-




Records o f Performance Under the Community
Reinvestment Act
As previously noted, the Board reviews the records of
performance under the CRA of the relevant insured deposi­
tory institutions when acting on a notice to acquire any
insured depository institution, including a savings associa­
tion. The CRA requires the Board to assess each insured
depository institution’s record of meeting the credit needs
of its entire community, including low- and moderateincome neighborhoods, consistent with the institution’s
safe and sound operation, and to take this record into
account in evaluating bank holding company notices . 14
The Board has carefully considered the CRA perfor­
mance records of each subsidiary insured depository insti­
tution of Morgan Chase in light of all the facts of record,
including public comments on the proposal. A commenter
opposing the proposal has alleged, based on data reported
under the Home Mortgage Disclosure Act ( “ HMDA” ), 15
that CMMC denied home mortgage loan applications from
minorities more frequently than it denied applications from
nonminorities in certain M etropolitan Statistical Areas
( “ M SAs ” ) . 16
A. CRA P erform ance E xam inations
An institution’s most recent CRA performance evaluation
is a particularly important consideration in the notice pro­
cess because it represents a detailed, on-site evaluation
of the institution’s overall record of performance under
the CRA by its appropriate supervisor . 17 JPMCB and
Chase USA have each received “ Outstanding” ratings
from their respective regulators at their most recent exami­
nations for CRA perform ance . 18 Examiners commended
the community development lending o f both JPMCB and
Chase USA. JPMCB was also found to have an excellent
level of qualified investments and to be a leader in pro­
viding community development services. Examiners also
tion to form Chase FSB (OTS Order No. 2003-60 (Nov. 28, 2003)),
the Board also has determined that, on consummation of the proposal,
Chase FSB would be well managed for purposes of section 4(1) of the
BHC Act (12 U.S.C. § 1843(0).
14. 12 U.S.C. §2903.
15. 12 U.S.C. §2801 et seq.
16. The commenter expressed concern that the formation of Chase
FSB would permit Morgan Chase to transfer its retail lending opera­
tions to an OTS-regulated institution with the result that consumer
protection laws of the individual states would be preempted. As noted
above, bank holding companies are permitted by law to own and
control federal savings associations. 12 C.F.R. 225.28(b)(4)(ii). The
applicability of state laws to federal savings associations is a matter
within the jurisdiction of the OTS to determine.
The commenter also alleged that CMMC’s purchase of certain
mortgage loans on the secondary market enabled predatory lending by
an unaffiliated consumer lender. The Board previously considered the
remedial steps taken by CMMC in this matter and hereby adopts its
conclusions in that case. See JPMCB/Bank One Order at 512.
17. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
18. Ratings as of November 12, 2001, by the New York State
Banking Department and March 3, 2003, by the Office of the Comp­
troller of the Currency, respectively.

214

Federal Reserve Bulletin □ Spring 2004

praised Chase USA’s flexible loan programs and found it to
be very responsive to the credit and community develop­
ment needs of its assessment area.
The record of M organ Chase in operating these insured
depository institutions indicates that it has the experience
and expertise to establish and implement appropriate CRA
policies and programs at Chase FSB. The OTS will evalu­
ate Chase FSB ’s record of CRA-related lending based on
its actual lending performance after Chase FSB opens for
business. Chase FSB intends to invest in funds that develop
low-income residential rental properties in states where it
is a major mortgage lender and to seek community devel­
opment service opportunities in its assessment area . 19
Chase FSB also intends to provide grants to community
development organizations in its assessment area and to
large regional and national organizations that are active in
Chase FSB’s top national markets.
B. H M D A D ata and Fair Lending R ecord
The Board has carefully considered the lending records
and HMDA data of JPMCB, CMMC, and Chase USA in
light of the comments received .20 Based on 2002 HMDA
data, the commenter alleged that CMMC disproportion­
ately excluded or denied African-American and Hispanic
applicants for home mortgage loans in various MSAs in
twelve states and the District of Columbia .21 The com­
menter asserted that CM M C’s denial rates for minority
applicants were higher than the rate for nonminority appli­
cants, and that CM M C’s denial disparity ratios compared
unfavorably with those ratios for the aggregate of lenders
in the M SAs .22 In the JPMCB/Bank One Order, the Board
considered substantially similar comments about Morgan
Chase’s HMDA data for MSAs in eight of these states and
the District of Columbia, and the Board’s analysis of
Morgan Chase’s HMDA data in that order is incorporated
by reference . 23

19. In approving Morgan Chase’s application to organize
Chase FSB, the OTS concluded that Chase FSB has satisfactorily
demonstrated that it will meet its CRA objectives. OTS Order
No. 2003-60 (Nov. 28, 2003).
20. The Board has reviewed HMDA data reported by JPMCB,
CMMC, and Chase USA in 2001 and 2002 in the markets of concern
to the commenter. The Board included data submitted by Chase USA
in its review because, as noted above, Chase USA was the parent of
CMMC until March 2002. CMMC is now a subsidiary of JPMCB.
21. In response, JPMCB noted that the commenter’s analysis was
based on data from only a few MSAs and included only conventional
home purchase loans originated by CMMC in 2002, and that the
sample, therefore, was too small to represent JPMCB’s overall mort­
gage lending performance.
22. The denial disparity ratio equals the denial rate for a particular
racial category (for example, African American) divided by the denial
rate for whites.
23. The MSAs reviewed by the Board in the JPMCB/Bank One
Order were Benton Harbor and Detroit, both in Michigan; Boston,
Massachusetts; Dallas, Texas; Memphis, Tennessee; Raleigh, North
Carolina; Richmond, Virginia; San Francisco, California; St. Louis,
Missouri; and Washington, DC. The new MSAs reviewed in connec­
tion with this order are Denver, Colorado; Jackson, Mississippi;
Portland, Oregon; and Seattle, Washington.




For the MSAs cited by the commenter in Colorado,
Mississippi, Oregon, and Washington, the denial disparity
ratios reflected in the 2002 HMDA data reported by
JPMCB, CMMC, and Chase USA generally were more
favorable than or comparable with the ratios reported by
the aggregate of lenders in three of the four markets
reviewed. The denial disparity ratio approximated, but was
somewhat less favorable than, the ratio for the aggregate in
the Portland MSA for African Americans.
The HMDA data do not indicate that JPMCB, CMMC,
or Chase USA has excluded any segment of the population
or any geographic area on a prohibited basis. The Board,
nevertheless, is concerned when the record of an institution
indicates disparities in lending and believes that all banks
are obligated to ensure that their lending practices are
based on criteria that ensure not only safe and sound
lending, but also equal access to credit by creditworthy
applicants regardless of race or income level. The Board
recognizes, however, that HMDA data alone provide an
incomplete measure of an institution’s lending in its com ­
munity because these data cover only a few categories of
housing-related lending. HMDA data, moreover, provide
only limited information about covered loans .24 HMDA
data, therefore, have limitations that make them an inad­
equate basis, absent other information, for concluding that
an institution has not assisted adequately in meeting its
com munity’s credit needs or has engaged in illegal lending
discrimination.
Because of the limitations of HMDA data, the Board has
considered these data carefully in light of other inform a­
tion, including examination reports that provide on-site
evaluations of compliance with fair lending laws by
JPMCB and its predecessor bank, Chase M anhattan Bank,
New York, New York .25 Examiners found no evidence of
prohibited discrimination or other illegal credit practices at
JPMCB, Chase Manhattan Bank, Chase USA, or CMMC.
As noted in the JPMCB/Bank One Order, JPMCB and
CMMC have taken several affirmative steps to ensure
compliance with fair lending laws. Management at JPMCB
and CMMC conduct comparative file reviews for most of
their loan products. JPMCB and CMMC have a secondary
review process that includes regression analysis of all
applications to identify possible instances or indications of
disparate treatment, and JPMCB indicated that it acts
promptly to correct inappropriate underwriting decisions
that are identified, including sending offers of credit to
individuals whose applications were denied in error. In
addition, an independent review team, under the direction
24. The data, for example, do not account for the possibility that an
institution’s outreach efforts may attract a larger proportion of margin­
ally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. Credit history prob­
lems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available from HMDA
data.
25. JPMCB was formed in the fourth quarter of 2001 by the merger
of Chase Manhattan Bank and Morgan Guaranty Trust Company. The
CRA performance of Chase Manhattan Bank was last evaluated by the
Federal Reserve Bank of New York as of July 9, 2001.

Legal Developments

o f the fair lending unit, reviews applications identified by
the regression analysis and reports its findings to the audit
department quarterly.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of JPMCB, Chase Manhattan Bank, and
Chase USA. The Board concludes that, in light of the
entire record, the HMDA data indicate that JPM CB’s
record of perform ance in helping to serve the credit
needs of its community is consistent with approval of the
proposal.
C. C onclusion on CR A Perform ance Records
The Board has carefully considered all the facts of record,
including reports of examination of CRA records of the
institutions involved, information provided by Morgan
Chase, all comments received and responses to the com­
ments, and confidential supervisory information. Based on
a review of the entire record, and for the reasons discussed
above, the Board concludes that the CRA performance
records of the institutions involved are consistent with
approval.

Other Considerations
As part of its evaluation of the public interest factors, the
Board also has carefully reviewed the public benefits and
possible adverse effects of the proposal. The record indi­
cates that consummation of the proposal would result in
benefits to consumers and businesses. The proposal would
enable Morgan Chase to streamline the way in which it
provides consumer finance products and services to cus­
tomers throughout the national market, by creating a single
institution through which customers can obtain home and
automobile financing and credit card products and services
now offered by different Morgan Chase affiliates. Morgan
Chase expects that additional retail products and services
will eventually also be offered in the national market
through Chase FSB. Based on all the facts of record, the
Board has determined that consummation of the proposal
can reasonably be expected to produce public benefits that
would outweigh any likely adverse effects under the stan­
dard of section 4(j)(2) of the BHC Act.

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the notice should be, and hereby
is, approved. The Board’s approval is specifically condi­
tioned on compliance by Morgan Chase with all the com­
mitments made in connection with the notice and all the
conditions in this order. The Board’s determination also is
subject to all the conditions set forth in Regulation Y,
including those in sections 225.7 and 225.25(c) (12 C.F.R.
225.7 and 225.25(c)), and to the Board’s authority to
require such modification or termination of the activities of
a bank holding company or any of its subsidiaries as the
Board finds necessary to ensure compliance with, and to




215

prevent evasion of, the provisions of the BHC Act and the
Board’s regulations and orders thereunder. For purposes of
this action, the commitments and conditions relied on by
the Board in reaching its decision are deemed to be condi­
tions imposed in writing by the Board in connection with
its findings and decision and, as such, may be enforced in
proceedings under applicable law.
The proposal may not be consummated later than three
months after the effective date of this order, unless such
period is extended for good cause by the Board or by the
Federal Reserve Bank of New York, acting pursuant to
delegated authority.
By order of the Board of Governors, effective Jan­
uary 30, 2004.
Voting for this action: Chairman Greenspan, Vice Chairman Fergu­
son, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.
R o b e r t d eV . F r ie r s o n

Deputy Secretary o f the Board
UBS AG
Zurich, Switzerland
Order Approving Notice to Engage in Activities
Complementary to a Financial Activity
UBS AG ( “U BS” ), a foreign bank that is treated as a
financial holding company ( “ FH C” ) for purposes of the
Bank Holding Company Act ( “ BHC A ct” ), has requested
the Board’s approval under section 4 of the BHC Act
(12 U.S.C. § 1843) and the Board’s Regulation Y (12 C.F.R.
Part 225) to retain all the voting shares of UBSW Energy
LLC, Stamford, Connecticut ( “ UBS Energy” ), and to con­
tinue to engage in physical commodity trading in the
United States. UBS currently conducts physical commod­
ity trading in the United States pursuant to temporary
grandfather authority provided by the BHC Act and Regu­
lation Y. 1
Regulation Y currently authorizes bank holding com pa­
nies ( “ BH Cs” ) to engage as principal in derivative con­
tracts based on financial and nonfinancial assets ( “ Com­
modity Derivatives” ). Under Regulation Y, a BHC may
conduct Commodity Derivatives activities subject to cer­
tain restrictions that are designed to limit the B H C’s activ­
ity to trading and investing in financial instruments rather
than dealing directly in physical nonfinancial commodities.
Under these restrictions, a BHC generally is not allowed to
take or make delivery of nonfinancial commodities under­
lying Commodity Derivatives. In addition, BHCs generally
are not permitted to purchase or sell nonfinancial commodi­
ties in the spot market.
The BHC Act, as amended by the G ram m -Leach-Bliley
Act (“ GLB A ct” ), permits a BHC to engage in activities
that the Board had determined were closely related to
banking, by regulation or order, prior to November 12,
1.
U B S ’s grandfather rights expire on February 8, 2004. UBS
conducts its U.S. energy trading business through UBSW Energy and
U B S’s London branch.

216

Federal Reserve Bulletin □ Spring 2004

1 9 9 9 2 The BHC Act permits a FHC to engage in a broad
range of activities that are defined in the statute to be
financial in nature .3 Moreover, the BHC Act allows FHCs
to engage in any activity that the Board determines, in
consultation with the Secretary of the Treasury, to be
financial in nature or incidental to a financial activity .4
In addition, the BHC Act permits FHCs to engage in any
activity that the Board (in its sole discretion) determines is
complementary to a financial activity and does not pose a
substantial risk to the safety or soundness of depository
institutions or the financial system generally .5 This author­
ity is intended to allow the Board to permit FHCs to
engage on a limited basis in an activity that appears to be
commercial rather than financial in nature, but that is
meaningfully connected to a financial activity such that it
complements the financial activity .6 The BHC Act provides
that any FHC seeking to engage in a complementary activ­
ity must obtain the Board’s prior approval under sec­
tion 4(j) of the BHC A ct .7
UBS has requested that the Board permit it to purchase
and sell physical commodities in the spot market and to
take and make delivery of physical commodities to settle
Commodity Derivatives ( “ Commodity Trading Activi­
ties” ). The Board previously has determined that Commod­
ity Trading Activities involving a particular commodity
complement the financial activity of engaging regularly as
principal in BHC-permissible Commodity Derivatives
based on that commodity .8 UBS regularly engages as prin­
cipal in BHC-permissible Commodity Derivatives based
on a variety of commodities, including natural gas and
electricity. Based on the foregoing and all other facts of
record, the Board believes that Commodity Trading Activi­
ties are complementary to the Commodity Derivatives
activities of UBS.
In order to authorize UBS to engage in Commodity
Trading Activities as a complementary activity under the
GLB Act, the Board also must determine that the activities
do not pose a substantial risk to the safety or soundness of
depository institutions or the U.S. financial system gener­
ally .9 In addition, the Board must determine that the perfor­
mance of Commodity Trading Activities by UBS “ can
reasonably be expected to produce benefits to the public,

2. 12 U.S.C. § 1843(c)(8).
3. The Board determined by regulation before November 12, 1999,
that engaging as principal in Commodity Derivatives, subject to
certain restrictions, was closely related to banking. Accordingly,
engaging as principal in BHC-permissible Commodity Derivatives
is a financial activity for purposes of the BHC Act. See 12 U.S.C.
§ 1843(k)(4)(F).
4. 12 U.S.C. §1843(k)(l)(A ).
5. 12 U.S.C. §1843(k)(l)(B ).
6. See 145 Cong. Rec. HI 1529 (daily ed. Nov. 4, 1999) (Statement
of Chairman Leach) ( “It is expected that complementary activities
would not be significant relative to the overall financial activities of
the organization.” ).
7. 12 U.S.C. §1843(j).
8. See Citigroup Inc., 89 Federal Reserve Bulletin 508 (2003). For
example, Commodity Trading Activities involving all types o f crude
oil would be complementary to engaging regularly as principal in
BHC-permissible Commodity Derivatives based on Brent crude oil.
9. 12 U.S.C. § 1843(k)(l)(B).




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 bank­
ing practices.” 10
Approval of the proposal likely would benefit U BS’s
customers by enhancing the ability of the bank to provide
efficiently a full range of commodity-related services.
Approving Commodity Trading Activities for UBS also
would enable the company to improve its understanding of
physical commodity and commodity derivatives markets
and its ability to serve as an effective competitor in physi­
cal commodity and commodity derivatives markets.
UBS has established and maintains policies for monitor­
ing, measuring, and controlling the credit, market, settle­
ment, reputational, legal, and operational risks involved in
its Commodity Trading Activities. These policies address
key areas such as counterparty credit risk, value-at-risk
methodology and internal limits with respect to commodity
trading, new business and new product approvals, and
identification of transactions that require higher levels of
internal approval. The policies also describe critical inter­
nal control elements, such as reporting lines, and the fre­
quency and scope of internal audit of Commodity Trading
Activities.
The Board believes that UBS has integrated the risk
management of Commodity Trading Activities into the
bank’s overall risk management framework. Based on the
above and all the facts of record, the Board believes that
UBS has the managerial expertise and internal control
framework to manage adequately the risks of taking and
making delivery of physical commodities as proposed.
In order to limit the potential safety and soundness risks
of Commodity Trading Activities, as a condition of this
order, the market value of commodities held by UBS as a
result of Commodity Trading Activities must not exceed
5 percent of U BS’s consolidated tier 1 capital (as calcu­
lated under its home country standard ) . 11 UBS also must
notify the Federal Reserve Bank of New York if the market
value of commodities held by UBS as a result of its
Commodity Trading Activities exceeds 4 percent of its
tier 1 capital.
In addition, UBS may take and make delivery only of
physical commodities for which derivative contracts have
been authorized for trading on a U.S. futures exchange by
the Commodity Futures Trading Commission ( “ CFTC” )
(unless specifically excluded by the Board) or which have
been specifically approved by the Board . 12 This require10. 12 U.S.C. § 1843(j).
11. UBS would be required to include in this 5 percent limit
the market value of any commodities held by UBS as a result of a
failure of its reasonable efforts to avoid taking delivery under
section 225.28(b)(8)(ii)(B) of Regulation Y.
12. The particular commodity derivative contract that UBS takes to
physical settlement need not be exchange-traded, but (in the absence
o f specific Board approval) futures or options on futures on the
commodity underlying the derivative contract must have been autho­
rized for exchange trading by the CFTC.
The CFTC publishes annually a list of the CFTC-authorized com ­
modity contracts. See Commodity Futures Trading Commission,

Legal Developments

ment is designed to prevent UBS from becoming involved
in dealing in finished goods and other items, such as real
estate, that lack the fungibility and liquidity of exchangetraded commodities.
To minimize the exposure of UBS to additional risks,
including storage risk, transportation risk, and legal and
environmental risks, UBS may not:
(i) own, operate, or invest in facilities for the extrac­
tion, transportation, storage, or distribution of com­
modities; or
(ii) process, refine, or otherwise alter commodities. In
conducting its Commodity Trading Activities, UBS
will be expected to use appropriate storage and
transportation facilities owned and operated by third
parties . 13
UBS and its Commodity Trading Activities also remain
subject to the general securities, commodities, and energy
laws and the rules and regulations (including the anti-fraud
and anti-manipulation rules and regulations) of the Securi­
ties and Exchange Commission, the CFTC, and the Federal
Energy Regulatory Commission.
Permitting UBS to engage in the limited amount and
types of Commodity Trading Activities described above,
on the terms described in this order, would not appear
to pose a substantial risk to UBS, depository institutions,
or the U.S. financial system generally. Through its existing
authority to engage in Commodity Derivatives, UBS
already may incur the price risk associated with commodi­
ties. Permitting UBS to buy and sell commodities in the
spot market or physically settle Commodity Derivatives
would not appear to increase significantly the organiza­
tion’s potential exposure to commodity price risk.
For these reasons, and based on UBS’s policies and
procedures for monitoring and controlling the risks of
Commodity Trading Activities, the Board concludes that
consummation of the proposal does not pose a substantial
risk to the safety and soundness of depository institutions
or the financial system generally and can reasonably be
expected to produce benefits to the public that outweigh
any potential adverse effects.
Based on all the facts of record, including the representa­
tions and commitments made by UBS in connection with
the notice, and subject to the terms and conditions set forth
in this order, the Board has determined that the notice
should be, and hereby is, approved. The Board’s determi­
nation is subject to all the conditions set forth in Regula­
tion Y, including those in section 225.7 (12 C.F.R. 225.7),
and to the Board’s authority to require modification or

FY 2002 Annual Report to Congress 124. With respect to granularity,
the Board intends this requirement to permit Commodity Trading
Activities involving all types of a listed commodity. For example,
Commodity Trading Activities involving any type of coal or coal
derivative contract would be permitted, even though the CFTC has
authorized only Central Appalachian coal.
13.
Approving Commodity Trading Activities as a complementary
activity, subject to limits and conditions, would not in any way restrict
the existing authority o f UBS to deal in foreign exchange, precious
metals, or any other bank-eligible commodity.




217

termination of the activities of a BHC or any of its subsidi­
aries as the Board finds necessary to ensure compliance
with, or to prevent evasion of, the provisions and purposes
of the BHC Act and the Board’s regulations and orders
issued thereunder. The Board’s decision is specifically
conditioned on compliance with all the commitments made
in connection with the notice, including the commitments
and conditions discussed in this order. The commitments
and conditions relied on in reaching this decision shall be
deemed to be conditions imposed in writing by the Board
in connection with its findings and decision and, as such,
may be enforced in proceedings under applicable law.
By order of the Board of Governors, effective Janu­
ary 27, 2004.
Voting for this action: Chairman Greenspan, Vice Chairman Fergu­
son, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.
R o b e r t d eV . F r ie r s o n

Deputy Secretary o f the Board
O rders Issued U nder Sections 3 and 4 o f the Bank
H olding Com pany A ct

Bank o f America Corporation
Charlotte, North Carolina
FleetBoston Financial Corporation
Boston, Massachusetts
Order Approving the Merger of Bank Holding
Companies
Bank of America Corporation, Charlotte, North Carolina
( “ Bank of America” ), a financial holding company within
the meaning of the Bank Holding Company Act ( “ BHC
A ct” ), has requested the Board’s approval under section 3
of the BHC Act (12 U.S.C. §1842) to merge with
FleetBoston Financial Corporation, Boston, Massachusetts
(“ FleetBoston” ), and to acquire FleetBoston’s subsidiary
banks, Fleet National Bank, Providence, Rhode Island
( “ Fleet Bank” ), and Fleet Maine, National Association,
South Portland, Maine ( “ Fleet M aine ” ) . 1 Bank of America
also has filed notices under section 4(c)(13) of the BHC
Act (12 U.S.C. § 1843(c)(13)), sections 25 and 25A of the
Federal Reserve Act (12 U.S.C. §§601 et seq. and 611
et seq.), and the Board’s Regulation K (12 C.F.R. 211) to
acquire certain foreign operations and the Edge Act subsid­
iaries of FleetBoston .2
1. Bank of America also proposes to acquire the nonbanking sub­
sidiaries of FleetBoston in accordance with section 4(k) of the BHC
Act (12 U.S.C. § 1843(k)), including Fleet Bank (RI), National A sso­
ciation, Providence, Rhode Island ( “Fleet Bank (RI)” ), a nationally
chartered credit card bank that is not considered a “bank” for pur­
poses of the BHC Act.
2. Bank of America and FleetBoston also have requested the
Board’s approval to hold and exercise an option that allows Bank of
America to purchase up to 19.9 percent of FleetBoston’s common
stock and FleetBoston to purchase up to 19.9 percent of Bank of
America’s common stock, if certain events occur. Both options would

218

Federal Reserve Bulletin □ Spring 2004

Bank of America, with total consolidated assets of
approximately $736.5 billion, is the third largest commer­
cial banking organization in the United States, controlling
approximately 7.4 percent of total assets of insured bank­
ing organizations in the United States . 3 Bank of America
operates subsidiary depository institutions in 2 2 states
and the District of Columbia, and it engages nationwide in
numerous permissible nonbanking activities.
FleetBoston, with total consolidated assets of approxi­
mately $201.5 billion, operates depository institutions in
Connecticut, Florida, Maine, Massachusetts, New Hamp­
shire, New Jersey, New York, Pennsylvania, and Rhode
Island. FleetBoston is the eighth largest commercial bank­
ing organization in the United States, controlling approxi­
mately 2 . 2 percent of total assets of insured banking orga­
nizations in the United States. It also engages in a broad
range of permissible nonbanking activities nationwide.
On consummation of the proposal, Bank of America
would become the second largest commercial banking
organization in the United States, with total consolidated
assets of approximately $938 billion. The combined orga­
nization would operate under the name of Bank of America
Corporation and control approximately 9.6 percent of
total assets of insured banking organizations in the United
States.

Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
( 6 8 Federal Register 65,070, 65,932, and 75,565 (2003)),

and the time for filing comments has expired. The Board
extended the initial period for public comment to accom­
modate the broad public interest in this proposal, providing
interested persons more than 60 days to submit written
comments.
Because of the extensive public interest in the proposal,
the Board held public meetings in Boston, Massachusetts,
and San Francisco, California, to provide interested per­
sons an opportunity to present oral testimony on the factors
that the Board must review under the BHC A ct .5 More
than 180 people testified at the public meetings, and many
of the commenters who testified also submitted written
comments.
In total, approximately 2200 individuals and organi­
zations submitted comments on the proposal through oral
testimony, written comments, or both .6 Comments were
submitted by organizations, individuals, and representa­
tives from several states where the companies operate.
Commenters included members of Congress, state and
local government officials, community groups, nonprofit
organizations, customers of Bank of America and Fleet­
Boston, and other interested organizations and individuals.
Commenters filed information and expressed views sup­
porting and opposing the merger.
A large number of commenters supported the proposal
and commended Bank of America and FleetBoston for
their commitment to local communities and for their lead­
ership in community development activities. These com ­
menters praised Bank of Am erica’s and FleetBoston’s
records of providing affordable mortgage loans, invest­
ments, grants and loans in support of economic and com ­
munity revitalization projects, and charitable contributions
in local communities. Some commenters also noted favor­
ably the small business activities of both organizations,
which included lending, educational seminars, and techni­
cal assistance. Many of the commenters also praised Bank
of America’s nationwide $750 billion, 10-year community
economic development plan ( “ Community Development
Initiative” ) and stated that the plan would increase the
availability of loans and investments to support community
development and affordable housing activities.
A large number of commenters opposed the proposal,
requested that the Board approve the proposal subject to
certain conditions, expressed concern about some aspect of
the CRA performance of Bank of America or FleetBoston,
or argued that the proposal might lead to a reduction in
banking services in particular communities or regions of
the country. Many of these commenters focused on Bank
of America’s and FleetBoston’s records of lending to small
businesses and minorities and in low- and moderateincome ( “LM I” ) and rural areas. A number of commenters
from New England and other states currently served

expire on consummation of the proposal by Bank of America to merge
with FleetBoston.
3. Asset data are as of December 31, 2003, and have been adjusted
to account for FleetBoston’s acquisition of Progress Financial Corp.,
Blue Bell, Pennsylvania ( “Progress” ), on February 1, 2004. National
ranking data are as o f September 30, 2003.
4. Pub. L. No. 103-328, 108 Stat. 2338 (1994).

5. The Boston public meeting was held on January 14, 2004, and
the San Francisco public meeting was held on January 16, 2004.
6. Comments included 1,400 identical e-mail messages from mem­
bers of an organization that expressed concerns about whether large
bank mergers were good for consumers, 300 identical letters about the
alleged involvement of a FleetBoston predecessor in the illegal slave
trade, and more than 500 other comments on the proposal.

Factors Governing Board Review o f the Transaction
The BHC Act enumerates the factors the Board must
consider when reviewing the merger of bank holding com­
panies or the acquisition of banks. These factors are the
competitive effects of the proposal in the relevant geo­
graphic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the transaction; the convenience and needs of the
communities to be served, including the records of perfor­
mance under the Community Reinvestment Act (12 U.S.C.
§2901 et seq.) ( “ CRA” ) of the insured depository insti­
tutions involved in the transaction; and the availability of
information needed to determine and enforce compliance
with the BHC Act. In cases involving interstate bank
acquisitions, the Board also must consider the concentra­
tion of deposits nationwide and in certain individual states,
as well as compliance with other provisions of the R iegleNeal Interstate Banking and Branching Efficiency Act of
1994 ( “ Riegle-N eal A ct ” ) . 4

Public Comment on the Proposal




Legal Developments

by FleetBoston expressed concern that Bank of America
might not serve the diverse credit needs of their local
communities as well or might terminate relationships or
programs that FleetBoston has developed to meet the credit
needs of its communities, such as FleetBoston’s First Com­
munity Bank and the FleetBoston Foundation. In addition,
many commenters criticized Bank of America’s Commu­
nity Development Initiative, stating that the initiative was
not enforceable and did not provide specific lending com­
mitments for individual states or regions or for particular
loan products or programs.
Some commenters believed that the merger would
reduce competition for banking services, substantially
increase concentration in the banking industry, result in the
loss of local control over lending and investment decisions,
or exceed the nationwide deposit cap in the BHC Act.
Other commenters expressed concern about Bank of
America’s investment in mortgage-backed securities pools
that include subprime loans, the potential adverse effects
that might result from branch closings, the loss of a major
financial institution headquartered in New England, or job
losses. Some commenters expressed concerns about Bank
of Am erica’s or FleetBoston’s managerial resources in
light of certain lawsuits and investigations involving one
or both companies and their securities and mutual fund
affiliates.
In evaluating the statutory factors under the BHC Act,
the Board carefully considered the information and views
presented by all commenters, including the testimony at
the public meetings and the information and views submit­
ted in writing. The Board also considered all the informa­
tion presented in the applications, notices, and supplemen­
tal filings by Bank of America and FleetBoston; various
reports filed by the relevant companies; publicly available
information; and other reports. In addition, the Board
reviewed confidential supervisory information, including
examination reports on the bank holding companies and
the depository institutions involved and information pro­
vided by other federal banking agencies, the Securities and
Exchange Commission ( “ SEC” ), and the Department of
Justice ( “ D O J” ). After a careful review of all the facts
of record, and for the reasons discussed in this order, the
Board has concluded that the statutory factors it is required
to consider under the BHC Act and other relevant banking
statutes are consistent with approval of the proposal.
Interstate Analysis
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the bank
holding com pany’s home state if certain conditions are
met. For purposes of the BHC Act, the home state of Bank
of America is North Carolina ,7 and FleetBoston’s sub7.
See 12 U.S.C. § 1842(d). A bank holding company’s home state
is the state in which the total deposits of all banking subsidiaries of
such company were the largest on July 1, 1966, or the date on which
the company became a bank holding company, whichever is later.




219

sidiary banks are located in Connecticut, Florida, Maine,
Massachusetts, New Hampshire, New Jersey, New York,
Pennsylvania, and Rhode Island .8
The Board may not approve an interstate proposal under
section 3(d) if the applicant controls, or upon consum­
mation of the proposed transaction would control, more
than 1 0 percent of the total amount of deposits of insured
depository institutions in the United States ( “ nationwide
deposit cap” ). The nationwide deposit cap was added to
section 3(d) when Congress broadly authorized interstate
acquisitions by bank holding companies and banks in the
Riegle-N eal Act. The intended purpose of the nationwide
deposit cap was to help guard against undue concentrations
of economic power .9 Although the nationwide deposit cap
prohibits interstate acquisitions by a company that controls
deposits in excess of the cap, it does not prevent a com ­
pany from exceeding the nationwide deposit cap through
internal growth and effective competition for deposits or
through acquisitions entirely within the home state of the
acquirer.
Several commenters questioned whether the proposed
acquisition would violate the nationwide deposit cap and
presented differing views on how the deposit cap should
be calculated. Some commenters challenged Bank of
America’s computation of its pro forma share of total
deposits in the United States provided in the application,
suggested that the Board rely on the Summary of Deposits
( “ SOD” ) data collected annually by the Federal Deposit
Insurance Corporation ( “ FD IC” ), or argued that certain
geographies or types of deposits or types of institutions
should be excluded from the calculations.
As required by section 3(d), the Board has carefully
considered whether Bank of America controls, or upon
consummation of the proposed transaction would control,
a total amount of deposits in excess of the nationwide
deposit cap. Not all of the terms used in defining the
nationwide deposit cap are specifically defined in the BHC
Act. The Federal Deposit Insurance Act ( “ FDI A ct” ) con­
tains an identical nationwide deposit cap applicable
to bank-to-bank mergers, and, consequently, many of the
terms used in the nationwide deposit cap in the BHC Act
refer to terms or definitions contained in the FDI Act.
In particular, the BHC Act adopts the definition of
“ insured depository institution” used in the FDI Act. The
FDI A ct’s definition includes all banks (whether or not the
institution is a bank for purposes of the BHC Act), savings
banks and savings associations that are insured by the
FDIC, and insured U.S. branches of foreign banks, as each
of those terms is defined in the FDI A ct . 10
8. For purposes o f the Riegle-N eal Act, the Board considers a bank
to be located in the states in which the bank is chartered or head­
quartered or operates a branch. See 12 U.S.C. §§ 1841(o)(4)-(7) and
1842(d)(1)(A) and (d)(2)(B).
9. See S. Rep. No. 102-167 at 72 (1991).
10. A number of commenters have asserted that deposits held by
insured depository institutions in Puerto Rico and the U.S. territories
should not be included in the deposit calculation because these areas
are not “States.” The terms “State” and “United States” are not
defined in the BHC Act. The Board believes that the term “United
States” include the States, the District of Columbia, Puerto Rico,

220

Federal Reserve Bulletin □ Spring 2004

Section 3(d) also specifically adopts the definition of
“ deposit” in the FDI A ct . 11 Each insured bank in the
United States must report its total deposits in accordance
with this definition on the institution’s Consolidated Report
of Condition and Income ( “ Call Report” ). Each insured
savings association must similarly report its total deposits
on the institution’s Thrift Financial Report ( “ T FR ” ).
Deposit data for FDIC-insured U.S. branches of foreign
banks and Federal branches of foreign banks are obtained
on the Report of Assets and Liabilities of U.S. Branches
and Agencies of Foreign Banks ( “ RAL” ). These data are
reported on a quarterly basis to the FDIC and are publicly
available.
The Call Report, TFR, and RAL reflect data based on
the FDI A ct’s definition of “ deposit” and represent the
best and most complete data reported by all insured deposi­
tory institutions in the United States. Consequently, the
Board has relied on the data collected in these reports to
calculate the total amount of deposits of insured depository
institutions in the United States and the total amount of
deposits held by Bank of America, both before and upon
consummation of the proposed transaction, for purposes of
applying the nationwide deposit cap in this case . 12 The

Guam, American Samoa, the Virgin Islands, the Northern Mariana
Islands, the islands formerly referred to as the Trust Territory of the
Pacific Islands, and any territory of the United States. This definition
o f “United States” is consistent with the purpose of the nationwide
deposit cap. All banks operating in these areas are eligible for FDIC
deposit insurance and are subject to the jurisdiction of the FDIC in
the same manner as other FDIC-insured banks. If these areas are
not included in the definition of “United States” for purposes of the
nationwide deposit cap, an institution such as Bank of America could
expand in these areas without limit, thereby increasing its control of
FDIC-insured deposits. This definition is also consistent with the
definition o f “United States” contained in the Board’s Regulation Y,
which governs applications under section 3 of the BHC Act.
11. 12 U.S.C. § 1842(d)(2)(E) (incorporating the definition of
“deposit” at 12 U.S.C. § 1813(/)).
12. Some commenters argued that the SOD collected by the FDIC
should be used for applying the deposit cap to the proposal. SOD data
disclose an institution’s deposits broken out by branch office. How­
ever, SOD data are not, and are not intended to be, an exact represen­
tation o f deposits as defined in the FDI Act. Rather, these data are
intended to provide a useful proxy for the size of each institution’s
presence in various banking markets primarily for the purpose of
conducting examinations and performing competitive analysis in local
banking markets. Consequently, SOD data require a variety of adjust­
ments, most o f which would be based on Call Report data, if SOD
data are to be used to better approximate total deposits as defined in
the FDI Act and the BHC Act. Moreover, SOD data are collected only
once each year at the end of the second quarter, which means that the
most recent SOD data provide an estimation of deposits held by
institutions more than eight months ago. Call Report data, on the other
hand, are collected each quarter, with the most recent data represent­
ing deposits as of December 31, 2003. Given the limitations of SOD
data, the Board believes that Call Report data, rather than SOD data,
provide a more complete and accurate representation of the amount of
deposits held by the institutions involved in this transaction and in all
insured depository institutions in the United States as of the date the
Board has considered the proposal.
A number o f commenters noted the Board’s past use of SOD data in
concluding a proposal was within the R iegle-Neal Act’s nationwide
deposit cap. See, e.g., Fleet Financial Corporation, 85 Federal
Reserve Bulletin 747 (1999); NationsBank, 84 Federal Reserve




items on the Call Report, TFR, and RAL used to calculate
the total amount of deposits of insured depository institu­
tions in the United States are enumerated in Appendix A.
These items, combined as explained in Appendix A, con­
form the data collected on the Call Reports and TFR as
closely as possible to the statutory definition of deposits in
the FDI Act and BHC Act. The Board has developed this
formulation in consultation with the staff of the FDIC,
which collects and uses these data for purposes of applying
the same definition of deposits for deposit insurance pur­
poses and the nationwide deposit cap in the FDI Act.
Based on the latest Call Report, TFR, and RAL data
available for all insured depository institutions, the total
amount of deposits of insured depository institutions in the
United States is approximately $5.33 trillion. Also based
on the latest Call Report, Bank of America (including all of
its insured depository institution affiliates) controls depos­
its of approximately $394.8 billion and FleetBoston
(including all of its insured depository institution affiliates)
controls deposits of approximately $133.5 billion . 13 Bank
of America, therefore, currently controls approximately
7.4 percent of total U.S. deposits. Upon consummation of
the proposed transaction, Bank of America would control
approximately 9.904 percent of the total amount of depos­
its of insured depository institutions in the United States.
Thus, the Board finds that Bank of America does not
now control, and upon consummation of the proposed
transaction would not control, an amount of deposits that
would exceed the nationwide deposit cap.
Section 3(d) also prohibits the Board from approving a
proposal if, on consummation of the proposal, the appli­
cant would control 30 percent or more of the total deposits
of insured depository institutions in any state in which both
the applicant and the organization to be acquired operate
an insured depository institution, or such higher or lower
percentage that is established by state law . 14 Bank of
America would control less than 30 percent, and less than
the appropriate percentage established by applicable state
law, of total deposits of insured depository institutions in
Florida and New York, the states in which Bank of
America currently operates a bank or branch and would
assume additional deposits on consummation o f the pro­
posal . 15 All other requirements of section 3(d) of the BHC
Act also would be met after consummation of the pro­

Bulletin 858, 860 (1998) ( “NationsBank” ). In these proposals, the
Board used information from the FDIC’s SOD reports as an approxi­
mation of nationwide deposits. To date, the largest concentration of
nationwide deposits was approximately 8.1 percent (see NationsBank)
and the use of SOD data was a sufficient first screen in light of these
proposals’ clear compliance with the nationwide deposit cap.
13. FleetBoston’ s deposits include approximately $770 million in
deposits held by Progress.
14. 12 U.S.C. § 1842(d)(2)(B)-(D).
15. On consummation, Bank of America would control less than
30 percent of total deposits in insured depository institutions in
Florida. See Fla. Stat. ch. 658.295(8)(b) (2003). New York does not
have a deposit cap applicable to this proposal, and Bank o f America
currently does not control an insured depository institution in Con­
necticut, Massachusetts, Maine, New Hampshire, New Jersey, Penn­
sylvania, or Rhode Island.

Legal Developments

posal . 16 In view of all the facts of record, the Board is
permitted to approve the proposal under section 3(d) of the
BHC Act.
Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approv­
ing a proposal that would result in a monopoly. It also
prohibits the Board from approving a proposal that would
substantially lessen competition in any relevant banking
market unless the anticompetitive effects of the proposal
are clearly outweighed in the public interest by the prob­
able effect of the proposal in meeting the convenience and
needs of the community to be served . 17 The Board has
carefully considered the competitive effects of the proposal
in light of all the facts of record, including public com­
ments on the proposal.
A number of commenters argued that the proposed
merger would have adverse competitive effects. Many of
these commenters expressed concern that large bank merg­
ers in general, or the proposed merger of Bank of America
and FleetBoston in particular, would have adverse effects
on competition nationwide. Some commenters also con­
tended that the proposed merger would result in higher fees
and costs.
To determine the effect of a proposed transaction on
competition, it is necessary to designate the area of effec­
tive competition between the parties, which the courts have
held is decided by reference to the relevant “ line of com­
merce” or product market and a geographic market. The
Board and the courts have consistently recognized that the
appropriate product market for analyzing the competitive
effects of bank mergers and acquisitions is the cluster of
products (various kinds of credit) and services (such as
checking accounts and trust administration) offered by
banking institutions . 18 Several studies support the conclu­
sion that businesses and households continue to seek this
cluster of services . 19 Consistent with these precedents and
16. Bank o f America is adequately capitalized and adequately
managed as defined in the R iegle-N eal Act. 12 U.S.C.
§ 1842(d)(1)(A). FleetBoston’s subsidiary banks have been in exist­
ence and operated for the minimum age requirements established by
applicable state law. See 12 U.S.C. § 1842(d)(1)(B). All other require­
ments under section 3(d) o f the BHC Act also would be met on
consummation of the proposal.
17. 12 U.S.C. § 1842(c)(1).
18. See Chemical Banking Corporation, 82 Federal Reserve Bulle­
tin 239 (1996) ( “Chemical” ) and the cases and studies cited therein.
The Supreme Court has emphasized that it is the cluster of products
and services that, as a matter of trade reality, makes banking a distinct
line o f commerce. See United States v. Philadelphia National Bank,
374 U.S. 321, 357 (1963) ( “Philadelphia National” ); accord United
States v. Connecticut National Bank, 418 U.S. 656 (1974); United
States v. Phillipsburg National Bank, 399 U.S. 350 (1969) ( “Phillipsburg National” ).
19. Cole and Wolken, Financial Services Used by Small Busi­
nesses: Evidence from the 1993 National Survey o f Small Business
Finance, 81 Federal Reserve Bulletin 629 (1995); Elliehausen and
Wolken, Banking Markets and the Use o f Financial Services by
Households, 78 Federal Reserve Bulletin 169 (1992); Elliehausen and
Wolken, Banking Markets and the Use o f Financial Services by




221

studies, and on the basis of the facts of record in this case,
the Board concludes that the cluster of banking products
and services represents the appropriate product market for
analyzing the competitive effects of this proposal.
In defining the relevant geographic market, the Board
and the courts have consistently held that the geographic
market for the cluster of banking products and services is
local in nature. The appropriate geographic markets for
considering the competitive effects of this proposal are the
four local banking markets in which the subsidiary banks
of Bank of America and FleetBoston compete directly .20
Bank of America and FleetBoston both operate in the
Metropolitan New York-New Jersey banking market, and
in the Florida banking markets of West Palm Beach, Fort
Pierce, and Sarasota .21
The Board has reviewed carefully the competitive effects
of the proposal in each of these banking markets in light of
all the facts of record. These considerations include the
number of competitors that would remain in the markets,
the relative share of total deposits in depository institutions
controlled by Bank of America and FleetBoston in the
markets ( “ market deposits ” ) , 22 the concentration level of
market deposits and the increase in this level as measured
by the Herfindahl-Hirschman Index ( “ H H I” ) under the
Department of Justice Merger Guidelines ( “ DOJ Guide­
lines ” ) , 23 and other characteristics of the markets.

Small- and Medium-Sized Businesses, 76 Federal Reserve Bulletin
726 (1990).
20. See Phillipsburg National; Philadelphia National, 374 U.S. at
357. See also, First Union Corporation, 84 Federal Reserve Bulletin
489 (1998); Chemical', and St. Joseph Valley Bank, 68 Federal Reserve
Bulletin 673 (1982) ( “St. Joseph” ). In delineating the relevant geo­
graphic market in which to assess the competitive effects o f a bank
merger or acquisition, the Board reviews population density; worker
commuting patterns; the usage and availability of banking products;
advertising patterns of financial institutions; the presence of shopping,
employment, and other necessities; and other indicia o f economic
integration and transmission of competitive forces among banks.
See Crestar Bank, 81 Federal Reserve Bulletin 200, 201, n.5 (1995);
Pennbancorp, 69 Federal Reserve Bulletin 548 (1983); and
St. Joseph.
21. These markets are described in Appendix B.
22. Deposit and market share data are based on SOD reports filed
as of June 30, 2003, and on calculations in which the deposits of thrift
institutions are included at 50 percent. The Board has indicated
previously that thrift institutions have become, or have the potential to
become, significant competitors of commercial banks. See, e.g., M id­
west Financial Group, 75 Federal Reserve Bulletin 386 (1989);
National City Corporation, 70 Federal Reserve Bulletin 743 (1984).
Thus, the Board regularly has included thrift deposits in the calcula­
tion of market share on a 50 percent weighted basis. See, e.g., First
Hawaiian, Inc., 77 Federal Reserve Bulletin 52 (1991).
23. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),
a market is considered unconcentrated if the post-merger HHI is under
1000 and moderately concentrated if the post-merger HHI is between
1000 and 1800. The DOJ has informed the Board that a bank merger
or acquisition generally will not be challenged (in the absence o f 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 DOJ has stated that the higher than normal HHI thresholds
for screening bank mergers for anticompetitive effects implicitly rec­
ognize the competitive effects of limited-purpose lenders and other
nondepository financial institutions.

222

Federal Reserve Bulletin □ Spring 2004

After consummation of the proposal, the Metropolitan
New York-New Jersey banking market would remain
unconcentrated, and the Fort Pierce, Sarasota, and West
Palm Beach banking markets would remain moderately
concentrated, as measured by the HHI . 24 Numerous com­
petitors would remain in each banking market.
Consummation of the proposal would be consistent with
Board precedent and the DOJ Guidelines in each of the
banking markets. In addition, no agency has indicated that
competitive issues are raised by the proposal. Based on
these and all other facts of record, the Board concludes that
consummation of the proposal is not likely to result in a
significantly adverse effect on competition or on the con­
centration of banking resources in the four banking mar­
kets noted above or in any other relevant banking market.
Accordingly, based on all the facts of record, the Board has
determined that the competitive effects are consistent with
approval of the proposal.

Financial, Managerial, and Other Supervisory Factors
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and banks involved in the proposal and
certain other supervisory factors. The Board has carefully
considered the financial and managerial resources and
future prospects of Bank of America, FleetBoston, and
their respective subsidiary banks in light of all the facts of
record. In reviewing the financial and managerial factors,
the Board has considered, among other things, confidential
reports of examination and other supervisory information
received from the primary federal supervisors of the orga­
nizations involved and the Federal Reserve System’s confi­
dential supervisory information. In addition, the Board has
consulted with the relevant supervisory agencies, including
the Office of the Comptroller of the Currency ( “ O CC” ),
which is the primary supervisor of Bank of America’s and
FleetBoston’s banks, and the SEC. The Board also has
considered publicly available financial and other informa­
tion on the organizations and their subsidiaries and all the
information on the proposal’s financial and managerial
aspects submitted by Bank of America and FleetBoston
during the application process.
The Board received several comments on the proposal
criticizing the financial and managerial resources of Bank
of America or FleetBoston and their respective subsidi­
aries .25 Some commenters questioned whether the Board
24. In the Metropolitan New York-New Jersey banking market,
the HHI would increase 9 points to 983. The HHI would increase
35 points to 1,349 in the West Palm Beach banking market; remain
unchanged at 1,259 in the Fort Pierce banking market; and increase
4 points to 1,252 in the Sarasota banking market. The effect of the
proposal on the concentration of banking resources in each market is
described in Appendix C.
25. More than 300 commenters expressed concern about accusa­
tions that a predecessor bank of FleetBoston financed slave trading
allegedly conducted by one of its founders, after Congress outlawed
the importation o f slaves. The Board has carefully reviewed its
authority under the federal banking laws and the extent that the
matters raised by commenters relate to the factors that the Board is




and other federal agencies would have the ability to super­
vise the combined organization, or whether the combined
organization would present special risks to the federal
deposit insurance funds or the financial system in general.
In addition, some commenters asserted that the Board
should postpone consideration of the proposal in light of
various investigations into certain investment banking,
investment advisory, and corporate finance practices of
Bank of America and its affiliates and should conduct its
own inquiry into these m atters .26
In evaluating financial factors in expansion proposals by
banking organizations, the Board consistently has consid­
ered capital adequacy to be an especially important fac­
tor .27 Bank of America and FleetBoston and their sub­
sidiary banks are well capitalized and would remain so on
consummation of the proposal. The Board has considered
that the proposed merger is structured as a share-for-share
transaction and would not increase the debt service require­
ments of the combined company. The Board also has
carefully reviewed other indicators of the financial strength
and resources of the companies involved, including the
earnings performance and asset quality of the institutions.
In addition, the Board has considered the managerial
resources of the entities involved and of the proposed
combined organization. Bank of America, FleetBoston,
and their subsidiary depository institutions are considered
well managed overall . 28 The Board has considered the

authorized to consider. The Board also notes that these concerns relate
to instances that occurred more than 125 years ago and that have been
the subject of substantial and repeated court proceedings. The Board
believes that the matter primarily involves subjects of public concern
that are not within the Board’s limited jurisdiction to adjudicate or do
not relate to the factors that the Board may consider when reviewing
an application or notice under the BHC Act. See Deutsche Bank AG,
85 Federal Reserve Bulletin 509 (1999); Union Bank o f Switzerland,
84 Federal Resei-ve Bulletin 684 (1998); Norwest Corporation,
82 Federal Reserve Bulletin 580 (1996). See also, Western Banc­
shares, Inc. v. Board o f Governors, 480 F.2d 749 (10th Cir. 1973).
26. Some commenters cited press reports about investigations into
the mutual fund industry generally, and Bank of America’s mutual
fund activities specifically, as well as structured financing transactions
and other securities-related matters. As noted below, the Board has
and will continue to consult with the SEC on these matters. The Board
also received comments asserting that Bank of America, N.A., Char­
lotte, North Carolina ( “BA Bank” ), and other subsidiaries of Bank of
America lack sufficient policies and procedures and other resources to
prevent money laundering. The Board has reviewed confidential
supervisory information on the policies, procedures, and practices
of Bank of America to comply with the Bank Secrecy Act and has
consulted with the OCC, the appropriate federal financial supervisory
agency of BA Bank. Three commenters alleged that a predecessor
institution of FleetBoston engaged in illegal tying in several loan
transactions, and they criticized the behavior of FleetBoston’s coun­
sel in the ensuing litigation. The dispute involves several individual
transactions that have been previously cited by the commenters. The
Board and the OCC have the matter under review, and together they
have sufficient supervisory authority to address any violation of law
that may be determined.
27. See, e.g., First Union Corporation, 87 Federal Reserve Bulle­
tin 663, 688 (2001).
28. Several commenters from Hawaii requested that the Board
postpone action on the proposal until Bank of America fulfills two
“commitments” it made to state and local governments and com ­
munity groups in 1994. See BankAmerica Corporation 80 Federal

Legal Developments

supervisory experience and assessments of management by
the various bank supervisory agencies and the organiza­
tions’ records of compliance with applicable banking law.
In addition, the Board has reviewed carefully the examina­
tion records of Bank of America and its subsidiary deposi­
tory institutions, including assessments of their risk man­
agement systems and other policies. Senior management
of the combined organization would draw from the senior
executives of Bank of America and FleetBoston based on
the individual management strengths of each company.
In this case, senior executives of the two companies have
formed a transition team to plan and manage the integra­
tion of the bank holding companies and their subsidiaries.
Bank of America and FleetBoston have had experience
with large mergers and have indicated that they are devot­
ing significant resources to address all aspects of the
merger process.
The Board is monitoring the various federal and state
investigations of Bank of America’s and FleetBoston’s
securities-related activities that are being conducted by
agencies and other authorities with jurisdiction over these
matters and is consulting with the SEC and other relevant
authorities. Bank of America has cooperated with all regu­
latory authorities and has conducted an internal investi­
gation into these matters. Importantly, Bank of America
has demonstrated a willingness and ability to take actions
to address concerns raised in these investigations, which
include enhancing corporate governance capabilities,
improving its monitoring of mutual fund operations, and
providing more stringent disclosure requirements for
structured-finance clients.
The Board has broad supervisory authority under the
banking laws to require Bank of America to take steps
necessary to address deficiencies identified in these investi­
gations and examinations of Bank of America’s and Fleet­
Boston’s securities-related and other activities after these
reviews have been completed. This authority is in addition
to authority vested in the SEC and other agencies to take
appropriate action to determine and address violations of
applicable securities and other laws.
The Board and other financial supervisory agencies have
extensive experience supervising Bank of America, Fleet­
Boston and their subsidiary depository institutions, as well
Reserve Bulletin 623, 628 (1994) ( “Liberty Bank” )', and NationsBank
at 876. A commenter also asserted that Bank of America’s alleged
failure to meet its Hawaii lending program “commitments” reflects
adversely on its managerial resources and that the Board should take
enforcement action. As also discussed below in considering the conve­
nience and needs factor, Bank of America’s public announcement of
its Hawaii lending programs and goal for mortgage lending to Native
Hawaiians on Hawaiian Home Lands was not a commitment to the
Board and it is not enforceable by the Board. Bank of America has
made progress toward meeting its announced lending goal and has
represented that its assumptions for achieving the goal within the
original time frame proved to be unrealistic because of unexpected
complexities in the lending process and competition with other lend­
ers. Bank o f America recently affirmed its intent to complete the goal
for mortgage lending on Hawaiian Home Lands and has announced
steps to enhance its ability to meet that goal, including actions that
have been coordinated with the State of Hawaii Department of
Hawaiian Home Lands.




223

as other banking organizations that operate across multiple
states or multiple regions. The Board has already instituted
an enhanced supervisory program that permits the Board
to monitor and supervise the combined organization effec­
tively on a consolidated basis. This program involves,
among other things, continuous holding company supervi­
sion, including both on- and off-site reviews, of the com ­
bined organization’s material risks on a consolidated basis
and across business lines; access to and analyses of the
combined organization’s internal reports for monitoring
and controlling risks on a consolidated basis; and frequent
contact with the combined organization’s senior manage­
ment. It also includes reviews of the policies and proce­
dures in place at the holding company for assuring compli­
ance with applicable banking, consumer, and other law s .29
Consistent with the provisions of section 5 of the BHC Act
as amended by the G ram m -Leach-Bliley Act, the Board
relies on the SEC and other appropriate functional regula­
tors to provide examination and other supervisory informa­
tion regarding functionally regulated subsidiaries in order
that the Board can fulfill its responsibilities as holding
company supervisor of the combined entity .30
Based on these and all the facts of record, including
review of all the comments received , 31 the Board con­
cludes that considerations relating to the financial and
managerial resources and future prospects of Bank of
America, FleetBoston, and their respective subsidiaries are
consistent with approval of the proposal. The Board also
finds that the other supervisory factors that the Board must
consider under section 3 of the BHC Act are consistent
with approval.
Convenience and Needs Considerations
As previously discussed, section 3 of the BHC Act requires
the Board to consider the effects of the proposal on the
29. Some commenters have questioned whether the securitization
activities of Bank of America promote the origination of predatory
loans. As described more fully below in footnote 35, the Board has
considered the policies and programs in place at Bank of America to
help ensure that the subprime loans it purchases and securitizes are in
compliance with applicable state and federal consumer protection
laws.
30. For additional information concerning the Board’s supervisory
program for large, complex banking organizations, such as Bank of
America, see Supervision o f Large Complex Banking Organizations,
87 Federal Reserve Bulletin 47 (2001).
31. Commenters also expressed concern about the following
matters:
(1) the number of minorities serving in Bank of America’s senior
management,
(2) whether Bank of America’s supplier diversity program is effec­
tively serving minority- and women-owned businesses,
(3) Bank of America’s financing of various activities and projects
worldwide that might damage the environment or cause other
social harm,
(4) Bank of America’s alleged opposition to legislation addressing
“predatory” lending, and
(5) interchange fees charged by Visa and Mastercard. These con­
tentions and concerns are outside the limited statutory factors
that the Board is authorized to consider when reviewing an
application under the BHC Act. See Western Bancshares.

224

Federal Reserve Bulletin □ Spring 2004

convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institutions under the CRA. The CRA requires
the federal financial supervisory agencies to encourage
financial institutions to help meet the credit needs of local
communities in which they operate, consistent with their
safe and sound operation, and it requires the appropriate
federal financial supervisory agency to take into account an
institution’s record of meeting the credit needs of its entire
community, including LMI neighborhoods, in evaluating
bank expansionary proposals. The Board has carefully
considered the convenience and needs factor and the CRA
performance records of the subsidiary depository institu­
tions of Bank of America and FleetBoston, including pub­
lic comments on the effect the proposal would have on the
communities to be served by the resulting organization.
A. Sum m ary o f Public Com m ents on C onvenience
and N eeds
In response to the B oard’s request for public comment on
this proposal, approximately 300 commenters submitted
comments or testified at the public meetings in support
of the proposal. These commenters generally commended
Bank of America or FleetBoston for the financial and
technical support provided to their community develop­
ment organizations or related their favorable experiences
with specific programs or services offered by Bank of
America. Many of these commenters also expressed their
support for Bank of A m erica’s Community Development
Initiative.
Approximately 190 commenters submitted comments
that expressed concern about the lending records of Bank
of America or FleetBoston, recommended approval only
if subject to conditions suggested by the commenter, or
expressed concern about large bank mergers in general .32
Other commenters alleged that lending, customer service,
and philanthropy have declined at Bank of America and
FleetBoston after their previous mergers. Some com­
menters neither supported nor opposed the proposal, but
provided information about Bank of A m erica’s and
FleetBoston’s performance in their communities.
Many of the commenters who opposed or expressed
concern about the proposal alleged that Bank of America’s
level of home mortgage lending to LMI or minority bor­
rowers or in LMI or predominantly minority communities
was low in various parts of the country, including Califor­
nia and North Carolina. In addition, several commenters
criticized FleetBoston’s home mortgage lending record.
Some commenters alleged that Bank of America’s small

32.
Several commenters contended that a greater risk exists that
larger banking organizations may improperly share customer informa­
tion among affiliates. One commenter questioned FleetBoston’s proce­
dures for safeguarding accounts from unauthorized access, based on
her experiences with the bank. This comment has been forwarded to
the OCC, which is the primary federal regulator for Fleet Bank. Bank
o f America has policies and procedures in place to address the sharing
and safeguarding o f customer information.




business lending in California or other markets was inad­
equate, particularly to businesses in LMI or predominantly
minority com munities . 33 Several commenters criticized
Bank of America’s general efforts toward small business
lending, especially its level of lending to m icro­
enterprises .34 Several commenters criticized Bank of
A merica’s due diligence with respect to its purchase and
securitization of subprime loans .35 Other commenters
expressed concern that Bank of Am erica’s corporate deci­
sions would not take into account the diversity and commu­
nity reinvestment needs of New England, California, or
North Carolina. Some commenters expressed doubts that
Bank of America would assign local representatives to its
community reinvestment and development programs . 36
In addition, some commenters expressed concern that
consummation of the proposal would result in branch
closures in LMI or predominantly minority communities,
or they criticized the percentage of Bank of America and
FleetBoston branches in LMI areas. Many commenters
asserted that Bank of America should augment the array
or adjust the pricing of banking services that it provides,
particularly to LMI individuals .37 Some commenters sug­

33. Some commenters also criticized FleetBoston’s level o f small
business lending for being too low.
34. These commenters defined a microenterprise as a business with
five or fewer employees and less than $35,000 in capital.
35. Several commenters maintained that Bank o f America pur­
chases subprime loans and securitizes them without performing
adequate due diligence to screen for “predatory” loans, and some
commenters urged Bank o f America to adopt particular factors or
methods for such screening. Several commenters also criticized Bank
of America for its recent investment in a subprime lending company,
Oakmont Mortgage Company, Woodland Hills, California ( “Oakmont”), after Bank of America had publicly announced that it would
not originate subprime mortgage loans. None of these commenters,
however, provided evidence that Bank of America had originated,
purchased, or securitized “predatory” loans or otherw ise engaged in

abusive lending practices. Bank of America provides warehouse lines
of credit to, and purchases subprime mortgage loans from, subprime
lenders through BA Bank, and securitizes pools of subprime mort­
gage loans. Bank of America has policies and procedures, including
sampling loans in the pool, to help ensure that the subprime loans it
purchases and securitizes are in compliance with applicable state and
Federal consumer protection laws. It also conducts a due diligence
review of firms from which it purchases subprime loans, and the loan
servicer firms selected for each securitization, to help prevent the
purchase and securitization o f loans that are not in compliance with
applicable state and Federal consumer protection laws. As the Board
previously has noted, subprime lending is a permissible activity and
provides needed credit to consumers who have difficulty meeting
conventional underwriting criteria. The Board continues to expect
all bank holding companies and their affiliates to conduct their
subprime-lending-related operations free of any abusive lending prac­
tices and in compliance with all applicable law, including fair lending
laws. See Royal Bank o f Canada, 88 Federal Reserve Bulletin 385,
388 n.18 (2002). The Board notes that the OCC has responsibility for
enforcing compliance with fair lending laws by national banks and
that the Federal Trade Commission, Department of Housing and
Urban Development ( “H U D ” ), and DOJ have responsibility for
enforcing such compliance by nondepository institutions.
36. Other commenters expressed concern that Bank of America’s
board of directors and senior management would not include local
representation.
37. One commenter contended that Bank of America and
FleetBoston have failed to serve the needs of LMI communities

Legal Developments

gested that Bank of America should provide more cultur­
ally sensitive retail banking services and hire more minori­
ties, including Native Americans.
Several commenters contended that data submitted
under the Home Mortgage Disclosure Act (12 U.S.C.
§ 2801 et seq.) ( “ HMDA” ) suggested that Bank of America
and FleetBoston engaged in disparate treatment of minority
individuals in home mortgage lending. Many commenters
in several states criticized the terms of Bank of America’s
recent Community Development Initiative. Other com­
menters criticized Bank of America’s performance under
its previous community reinvestment pledges or its refusal
to enter into or renew written agreements with their respec­
tive community groups. In addition, some commenters
expressed concern about the loss of FleetBoston as an
independent organization, which they contended had a
better overall CRA perform ance record than Bank of
America.
B. CR A P erform ance E valuations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the appropriate
federal supervisors’ examinations of the CRA performance
records of the relevant insured depository institutions. An
institution’s most recent CRA performance evaluation is a
particularly important consideration in the applications pro­
cess because it represents a detailed, on-site evaluation of
the institution’s overall record of performance under the
CRA by its appropriate federal supervisor .38
Bank of America’s lead bank, BA Bank, received an
“outstanding” rating at its most recent CRA performance
evaluation by the OCC, as of December 31, 2001. Fleet
Bank also received an “ outstanding” rating at its most
recent CRA performance evaluation by the OCC, as of
July 23, 2001. All other subsidiary banks of Bank of
America and FleetBoston received either “ outstanding” or
“ satisfactory” ratings at their most recent CRA perfor­
mance evaluations by the O CC .39
Bank of America stated that it would identify the best
products and services currently offered by either Bank of
America or FleetBoston and aim to make them available to
all customers and that it has no current plans to discontinue
any products or services of FleetBoston.

adequately under the CRA because they have discontinued the deposit
accounts o f check-cashing businesses. The Board previously
addressed this allegation in its order approving the merger of
FleetBoston and Summit Bancorp. FleetBoston Financial Corpora­
tion, 87 Federal Reserve Bulletin 252 (2001). Other commenters
criticized Bank of America for extending loans to payday lenders.
38. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
39. Bank o f America, National Association (USA), Phoenix, Ari­
zona, received a “satisfactory” rating, as of December 31, 2001; Fleet
Bank (RI) received an “outstanding” rating, as of February 3, 2003.
Fleet Maine is a limited-purpose bank that is not subject to the CRA.




225

C. CR A Perform ance o f BA Bank

Overview
As noted above, BA Bank received an overall “ outstand­
ing” rating for performance under the CRA .40 The bank
also received an “ outstanding” rating under the lending
test. Examiners commended BA Bank’s overall lending
performance, which they described as demonstrating excel­
lent or good lending test results in all its rating areas.
During the evaluation period, BA Bank originated more
than 828,200 HMDA-reportable home mortgage loans,
totaling more than $ 1 1 2 billion throughout its assessment
areas 41 Examiners reported that rating areas in which the
distribution of HMDA-reportable mortgage loans among
areas of different income levels was good.
In addition, examiners commended BA Bank for devel­
oping mortgage loan programs with flexible underwriting
standards, such as its Neighborhood Advantage programs,
and they reported that these programs assisted in meeting
the credit needs of its assessment areas. The Neighborhood
Advantage programs include the Neighborhood Advantage
Zero Down loan product, which is tailored for LMI appli­
cants who have good credit histories but are unable to
make a down payment. The Neighborhood Advantage
Credit Flex program is another affordable mortgage prod­
uct tailored for LM I borrowers, or borrowers who live in
low-income census tracts, who pay their bills on time but
who do not have established credit histories. Although this
product requires a 3 percent down payment, examiners
reported that the borrower is required to contribute only
one-third of the down payment and the remainder may be
provided from “ gifts or other sources.”
During the evaluation period, BA Bank originated more
than 142,480 small business and small farm loans, totaling
$12.4 billion, in its assessment areas 42 Examiners reported
40. At the time of the 2001 performance evaluation, BA Bank had
218 assessment areas, 34 of which received a fu ll-scop e review. The
overall rating for BA Bank is a composite o f its state/multistate
ratings. In the 2001 performance evaluation, examiners provided
detailed narratives with respect to BA Bank’s performance in certain
assessment areas examiners selected as “primary rating areas.” These
areas represented 69 percent o f the bank’s deposits during the review
period. Examiners determined that BA Bank’s primary rating areas
were California, the Charlotte-Gastonia-Rock Hill (NC-SC) Multi­
state Metropolitan Statistical Area ( “Charlotte MSA” ), Florida, and
Texas. The evaluation period was January 1, 2001, through Decem ­
ber 31, 2001.
41. In BA Bank’s 2001 performance evaluation, home mortgage
lending data included loans originated and purchased.
42. Commenters contended that BA Bank has a poor record of
lending to small businesses, especially small businesses owned by
women and minorities or operating in LMI areas. Commenters urged
Bank of America to increase its small business lending in these
communities. Bank o f America represented that, in 2002 and 2003,
it was ranked as the number-one Small Business Administration
( “SBA” ) lender in terms of the number of loans originated nation­
wide. Bank of America represented that BA Bank also is a SBA
“Preferred Lender” in every state where it has retail branches, which
helps to ensure an accelerated application process for small business
customers. According to the SBA, Bank of America’s average loan
size is approximately $37,000, which is smaller than the average SBA

226

Federal Reserve Bulletin □ Spring 2004

that the bank’s small business lending was excellent or
good in the majority of its rating areas. They also noted
that the distribution of small business loans among busi­
nesses of different sizes was good in several of BA Bank’s
assessment areas .43
Examiners noted that in many instances BA Bank origi­
nated community development loans in greater amounts
than expected to achieve excellent perform ance .44
BA Bank originated more than 970 community develop­
ment loans, totaling $2.3 billion, in its assessment areas
during the evaluation p erio d 45 Examiners reported that
letters of credit originated by the bank contributed sig­
nificantly to BA Bank’s community development goals
because these activities supported the creation of an addi­
tional 13,622 affordable homes.
BA Bank received an “ outstanding” rating overall under
the investment te s t 46 During the review period, the bank
made more than 3,500 investments totaling $1.3 billion in
the states in which it has a banking presence. Examiners
reported that BA Bank consistently demonstrated strong
investment test performance, noting that its performance
was excellent or good in the majority of its assessment
areas .47 Throughout its assessment areas, BA Bank funded

loan, and it provides needed loans to businesses that have a more
difficult time obtaining credit.
43. Florida was among BA Bank’s assessment areas cited by
examiners as demonstrating excellent performance in the distribution
o f small business and small farm loans among businesses and farms of
different revenue sizes.
44. Some commenters expressed concern about Bank of America’s
performance under its community development program for rural
communities and Native Americans. Bank of America established the
Rural 2000 Initiative in 1997 to increase its lending in rural LMI
areas and communities with large Native-American populations.
See NationsBank. Bank o f America represented that for the period
1999 through November 2003, it provided $28 billion for affordable
housing, $9.1 billion for small business/small farm lending, $3.4 bil­
lion for consumer lending, and $466 million in economic development
loans in these areas. Bank of America represented that between 2000
and 2003, it originated $120.8 million in loans to Indian Country
(census tracts with a Native-American population of 50 percent or
more) and it provided loans to improve the infrastructure on Native
American lands.
45. In June 2003, Bank of America began a new nationwide loan
program to support the construction of 15,000 new affordable housing
units in the next three years.
46. Several commenters maintained that Bank of America should
be required to donate a specified percentage of its pre-tax income to
charities. Bank o f America represented that it has a record of provid­
ing significant corporate philanthropic donations in all the communi­
ties that it serves. One commenter also asserted that Bank of America
allocates a disproportionate share of its charitable giving to health,
education, and the arts and that its contributions to community devel­
opment are insufficient. The Board notes that neither the CRA nor the
agencies’ implementing rules require that institutions engage in chari­
table giving.
47. One commenter asserted that Bank of America financially
rewards community groups that comment or testify in support of Bank
of America merger proposals and refuses to invest in or lend to
organizations that oppose its merger proposals. The CRA does not
authorize the Board to direct Bank of America’s community develop­
ment investment or lending activities to specific groups, individuals,
or projects.




more than 17,000 housing units for LMI families through
its community development investm ents 48 Examiners
commended BA Bank for taking a leadership role in devel­
oping and participating in complex investments that
involved multiple participants and both public and private
funding. In addition, examiners noted that BA Bank fre­
quently extended grants to assist organizations that are
incapable of supporting additional debt or providing a
sufficient investment return.
Overall, BA Bank received a “ high satisfactory” rating
under the service test .49 Examiners commended BA B ank’s
service performance throughout its assessment areas .50
They reported that the bank’s retail delivery systems were
generally good and that the bank’s distribution of branches
among geographies of different income levels was ade­
quate .51 Examiners also commended BA Bank for its com ­
munity development services, which typically responded
to the needs of the communities the bank served through­
out its assessment areas.

48. Bank of America also has provided grants to nonprofit organi­
zations, such as ACCION and the New M exico Community D evel­
opment Loan Fund, that originate microloans starting at $500 and
promote SBA programs.
49. Several commenters in California and other locations criticized
BA Bank for not providing low-cost money orders, and they criticized
its basic checking account as ill-suited for LMI customers. BA Bank
offers the “My A ccess” account, which features a low opening
deposit of $25 and free checking with direct deposit. Other comment­
ers urged Bank of America to offer specific services, such as Interest
on Lawyer Trust Accounts at certain rates. Bank of America stated
that no decisions have been made at this time about the products and
services to be offered after the merger. As previously noted, Bank o f
America has represented that it would identify the best products and
services offered by either organization and proposes to make them
available to customers throughout the franchise. Although the Board
has recognized that banks can help to serve the banking needs of
communities by making certain products or services available on
certain terms or at certain rates, the CRA neither requires an institu­
tion to provide any specific types of products or services nor pre­
scribes the costs charged for them.
50. Some commenters criticized Bank of America for charging
recipients of public assistance fees to access their electronic benefits at
Bank of America ATMs. Bank of America represented that it offers
Electronic Transfer Accounts ( “ETAs” ) through a program with the
Department of the Treasury and that it does not impose fees on its
ETA customers for accessing their benefits through that program at
Bank of America ATMs. In addition, Bank of America stated that it
offers electronic benefit transfer accounts ( “EBTAs” ) through pro­
grams with state and local governments. Under current Bank of
America policy, EBTA customers are assessed a standard ATM sur­
charge to access their cash benefits at Bank of America ATMs except
in Illinois. Bank of America is in the process of evaluating its current
practices as part of its review of products and services offered by both
organizations in light of the fact that FleetBoston does not impose
ATM access fees for participation in EBTAs. Although the Board has
recognized that banks help to serve the banking needs of their commu­
nities by making basic banking services available at a nominal or no
charge, the CRA does not require that banks limit the fees charged for
services.
51. Several commenters alleged that mergers have had a negative
impact on the retail banking services provided by Bank of America
and FleetBoston to minorities and LMI individuals in several
states, including California, New Jersey, New York, North Carolina,
Rhode Island, and Georgia.

Legal Developments

California
1. Lending Test. In California, BA Bank received an “ out­
standing” rating under the lending test .52 Examiners
described the bank’s lending in the full-scope California
assessment areas as reflecting excellent responsiveness to
the credit needs of these communities. During the evalua­
tion period, BA Bank originated more than 264,100
HMDA-reportable home mortgage loans totaling almost
$46 billion in the California assessment areas.
Examiners commended BA Bank for its distribution
of home mortgage loans among geographies of different
income levels and for offering bankwide flexible lend­
ing programs and innovative lending products during
the evaluation period. Examiners reported that, in the
Los A ngeles-Long Beach and San Francisco MSAs, the
proportion of BA Bank’s home purchase and refinance
loans originated to borrowers in LMI census tracts approxi­
mated or exceeded the percentage of owner-occupied units
in those areas, and the bank’s market share of such loans in
LMI census tracts approximated or exceeded the bank’s
overall market share of those types of loans in the MSAs.
In addition, examiners noted that its market share of home
purchase and refinance loans originated to LMI borrowers
generally exceeded the bank’s overall market share of
those types of loans in the Los Angeles-Long Beach MSA.
In the San Francisco MSA, the bank’s market share of
home purchase loans originated to LMI borrowers was less
than the bank’s overall market share of such loans within
the MSA, but its market share of refinance loans originated
to LMI borrowers approximated or exceeded its overall
market share of such loans in the MSA.
Since the 2001 performance evaluation, BA Bank has
maintained a substantial level of home mortgage lending. It
originated more than 220,890 HMDA-reportable home
mortgage loans in California, totaling almost $60 billion,
in 2 0 0 2 . 53
During the evaluation period, BA Bank originated
more than 51,300 small loans to businesses ,54 totaling
$3.5 billion, in its California assessment areas. In the
Los Angeles-Long Beach MSA, the percentage of BA
Bank loans to small businesses exceeded the percentage of
those businesses in the MSA. Examiners reported that the
bank’s geographic distribution of small loans to businesses
in the Los Angeles-Long Beach and San Francisco MSAs
was excellent. They noted that the number of BA Bank’s
small loans to businesses in LMI areas represented
32 percent of its total number of such loans in the
Los A ngeles-Long Beach MSA and more than 34 percent
52. Approximately 34 percent of BA Bank’s total bank deposits
were in California during the evaluation period. In evaluating BA
Bank’s California assessment areas, examiners conducted full-scope
reviews in the Los A ngeles-Long Beach and the San Francisco
MSAs. The bank’s other California assessment areas received limitedscope reviews.
53. BA Bank’s 2002 HMDA-reportable loan data are for origina­
tions and purchases in the MSA portions of its assessment areas only.
54. In this context, “small loans to businesses” are loans with
original amounts totaling $1 million or less, and “ small businesses”
are businesses with annual revenues of $1 million or less.




227

of its total number of such loans in the San Francisco
MSA. The majority of the bank’s small loans to businesses
in the Los Angeles-Long Beach and San Francisco MSAs
were originated to small businesses.
Since the 2001 performance evaluation, BA Bank has
continued to originate a significant number of small loans
to businesses. In 2002, it originated more than 9,300 small
loans to businesses in California, totaling more than
$1 billion. Bank of America noted that, in 2002 and 2003,
more than 30 percent of its total number of governmentguaranteed small loans to businesses were made in
California.
Examiners reported that BA Bank’s community devel­
opment lending had a positive impact on its lending per­
formance in the state. The bank originated more than
250 community development loans, totaling more than
$685 million, in its California assessment areas during the
evaluation period. Examiners also noted that BA Bank
originated 67 community development loans, totaling
almost $135 million, in the Los Angeles-Long Beach
M SA .55 These loans supported affordable housing projects
that created more than 1,000 LMI housing units. In the
San Francisco MSA, BA Bank originated 15 community
development loans, totaling $42.8 million, which provided
300 housing units for LMI households.
BA Bank has continued to originate a substantial amount
of community development loans in California since
the 2001 performance evaluation. Bank of America repre­
sented that BA Bank originated 150 community develop­
ment loans in California, totaling $588 million, as of the
third quarter of 2003. These community development loans
included a $ 1 0 . 2 million loan in 2 0 0 2 that funded the
construction of an affordable housing development in the
San Jose, California, MSA, and a $29 million loan in 2003
that funded the demolition of 8 6 units of public housing
and the construction of 180 new units of affordable apart­
ments for LMI families in the Oakland M SA .56
2. Investment Test. BA Bank received an “ outstanding”
rating under the investment test in the California assess­
ment areas. In the Los A ngeles-Long Beach and
San Francisco MSAs, BA Bank made more than 300
community development investments, totaling approxi­
mately $219 million, during the review period, the major­
ity of which supported the development o f affordable hous­
ing. The bank also invested $31.6 million in Qualified
Zone Academy Bonds ( “ QZABs” ), which are issued in
conjunction with a federal program designed to help
strengthen schools serving large concentrations of lowincome families.

55. Some commenters urged Bank of America to provide addi­
tional financing for the construction of multifamily homes in LMI
areas, particularly in California and Connecticut. These commenters
also encouraged Bank o f America to participate with more nonprofit
affordable housing developers.
56. Bank o f America represented that its affordable housing lend­
ing and investing also has increased from $9 billion in 1999 to
$26.4 billion in 2003.

228

Federal Reserve Bulletin □ Spring 2004

1. Lending Test. BA Bank originated more than 42,500
HMDA-reportable home mortgage loans in its North Caro­
lina assessment areas and the Charlotte MSA assessment
area (collectively, “ combined North Carolina assessment
areas” ), totaling more than $5 billion, during the review
period.
Examiners reported that BA Bank’s lending levels
reflected good responsiveness to the credit needs in the
Charlotte MSA and excellent responsiveness in the other
North Carolina assessment areas. They found that the

distribution of BA Bank’s loans among geographies was
good throughout its assessment areas. In particular, exam­
iners noted that the proportion of BA B ank’s home
purchase and refinance loans made to borrowers in lowincome geographies approximated or exceeded the percent­
age of owner-occupied units in those areas in the Charlotte
MSA, and that the bank’s market share of such loans in
low-income geographies generally exceeded the bank’s
overall market share of such loans in the MSA. In addition,
examiners found that the distribution of BA Bank’s loans
among borrowers of different income levels was good in
the Charlotte MSA and that such distribution was adequate
in the other North Carolina assessment areas. Examiners
noted, however, that the bank’s lending performance was
excellent in the Greensboro MSA, including good geo­
graphic and borrower distribution of home mortgage loans.
Examiners also particularly commended BA Bank’s perfor­
mance in the Asheville MSA as excellent and noted that it
exceeded the bank’s overall performance in North Carolina
because of a more favorable distribution of loans among
geographies of different income levels.
Since the 2001 performance evaluation, BA Bank has
maintained a significant level of home mortgage lending
in North Carolina, originating more than 20,000 HMDAreportable loans that totaled more than $3 billion in its
North Carolina assessment areas in 2002 .58 BA Bank origi­
nated more than 9,000 HMDA-reportable loans during
2002 in the Charlotte MSA, totaling $1.4 billion.
During the evaluation period, BA Bank originated more
than 4,840 small loans to businesses, totaling more than
$609 million, in its combined North Carolina assessment
areas. Almost 1,500 of these loans, totaling $196.3 million,
were originated to businesses in the Charlotte MSA. Exam­
iners noted that the borrower distribution of BA Bank’s
small loans to businesses in the Charlotte MSA and
Greensboro MSA was good during the evaluation period.
They reported that the number of small loans to businesses
in LMI areas in the Charlotte MSA represented more than
32 percent of the small loans to businesses originated in the
MSA.
Since the 2001 performance evaluation, BA Bank has
continued to provide substantial amounts of small loans to
businesses in North Carolina. In 2002, BA Bank originated
1,334 small loans to businesses, totaling more than
$288 million, in North Carolina .59 In addition, Bank of
America represented that BA Bank extended the largest
number of SBA loans in North Carolina for the fifth
consecutive year in 2003.
Examiners reported that BA Bank’s community devel­
opment lending had a significant positive impact on the
bank’s overall performance throughout the state. BA Bank
originated 25 community development loans, totaling more

57.
As previously noted, the examiners conducted a full-scope
review o f the Charlotte MSA, which includes a portion of South
Carolina. In the rest of North Carolina, examiners conducted a
fullscope review o f the Greensboro-Winston-Salem-High Point MSA
( “Greensboro MSA” ) and limitedscope reviews in the Asheville,
Fayetteville, Goldsboro, Greenville, Hickory-Morganton-Lenoir,
Jacksonville, Raleigh-Durham-Chapel Hill, and Wilmington MSAs.

58. These 2002 statewide data represent HMDA-reportable loans
originated and purchased by BA Bank in the MSA portions of its
assessment areas in North Carolina.
59. BA Bank’s small business lending data for 2002 represent
small business loans originated by BA Bank in its North Carolina
assessment areas, including the North Carolina portions of the Char­
lotte MSA.

Since the 2001 performance evaluation, BA Bank has
continued its strong community development investment
activity in California. Bank of America represented that
BA Bank made more than 160 qualified investments in
California totaling, $125 million in 2002, and more than
1 1 0 qualified investments totaling $170 million, as of the
third quarter of 2003. These investments in 2002 and 2003
included a $2.9 million investment in an affordable hous­
ing project in the Bakersfield, California, MSA and a
$17 million investment to complete an affordable housing
project providing 179 units for LMI families in the Oak­
land MSA.
3. Service Test. BA Bank received a “ high satisfactory”
rating under the service test in its California assessment
areas. BA Bank operated 950 branches and more than
3,600 ATMs in California during the evaluation period.
Examiners found that alternative delivery systems, such as
electronic banking and telephone, improved access to retail
banking services particularly by LMI individuals. In addi­
tion, examiners found that BA Bank’s distribution of
branches in LMI census tracts in the Los Angeles-Long
Beach and San Francisco MSAs was reasonable in light
of the percentage of the population residing in those geog­
raphies. Examiners also commended BA Bank for its
community development services in the Los A ngelesLong Beach MSA during the review period, noting that the
institution provided technical assistance to 57 organiza­
tions that pursued a variety of initiatives designed to assist
LMI individuals and communities.
North Carolina and Charlotte MSA
Bank of America and BA Bank are headquartered in the
Charlotte MSA. In evaluating BA Bank’s CRA perfor­
mance in North Carolina, the OCC reviewed and rated the
Charlotte MSA separately from the bank’s performance in
the rest of the state because it is a multistate M SA .57 Under
the lending test, BA Bank received an “ outstanding” rat­
ing in the Charlotte MSA and a “ high satisfactory” rating
in North Carolina.




Legal Developments

than $238 million, in its combined North Carolina assess­
ment areas during the review period .60 They noted that the
majority of the bank’s community development lending in
the Charlotte MSA supported affordable housing projects.
In addition, examiners reported that more than 1,000 hous­
ing units for LMI families were created as a result of
BA Bank’s community development lending activities in
the Charlotte MSA during the evaluation period.
Since the 2001 performance evaluation, BA Bank has
continued to engage in a substantial level of community
development lending in North Carolina. Bank of America
represented that BA Bank originated 46 community devel­
opment loans, totaling more than $480 million, from 2001
through the third quarter of 2003 in the combined North
Carolina assessment areas. These community development
loans in 2002 and 2003 included a $4.3 million loan in the
Greensboro MSA that provided 145 units of affordable
housing, a $2 million loan that provided 50 units of hous­
ing for LMI families in Havelock, North Carolina, and a
$37 million loan to finance a 336-unit affordable housing
project in the Charlotte MSA that replaced 229 public
housing units. In addition to providing 112 additional hous­
ing units for LMI families, this new housing development
in the Charlotte MSA would include space for after-school
childcare and computer classes.
2. Investment Test. BA Bank received an “ outstanding”
rating in its North Carolina assessment areas, but a “ low
satisfactory” rating in the Charlotte MSA, under the invest­
ment test. Examiners noted that the bank’s volume of
community development investments reflected an excellent
level of responsiveness to the needs of its North Carolina
assessment areas. BA Bank made more than 100 qualified
investments in its combined North Carolina assessment
areas, totaling more than $40 million, during the evalua­
tion period that provided more than 500 housing units
to LMI families. These community development invest­
ments included two Low-Income Housing Tax Credits
( “ LIHTCs” ), totaling $4.4 million, that provided more
than 85 units of housing for LMI families in the Greens­
boro MSA and more than $18 million in investments that
included projects creating more than 425 housing units for
LMI households in the Charlotte M SA .61 Examiners
reported that BA Bank’s other community development
investments included contributions to local or regional
organizations that provide community development, hous-

60. Two commenters asserted that Bank of America has only one
community development officer serving North Carolina and South
Carolina. Bank o f America represented that seven associates from its
Community Development Banking Group serve the needs of North
Carolina and South Carolina.
61. One commenter criticized Bank of America’s support of two
Hope IV housing projects in Charlotte. One project provided a mix of
public housing, low-income, and market-rate tenants and homeown­
ers. Bank o f America represented that its decisions regarding this
project were made in concert with the Charlotte Housing Authority
under HUD guidelines and that its involvement in the other project
was very limited. As noted above, examiners reported that BA Bank
engaged in numerous community development projects.




229

ing, and financial services to LMI areas and individuals or
funding for small business development.
BA Bank has continued its considerable level of com­
munity development investments in North Carolina since
the 2001 performance evaluation. Bank of America repre­
sented that BA Bank originated 62 community devel­
opment investments totaling $63 million, as of the third
quarter of 2003. BA Bank’s community development
investments made in 2002 and 2003 included an LIHTC to
complete an affordable housing project in an LMI neigh­
borhood in the Raleigh MSA.
3. Service Test. Under the service test, BA Bank received
an “ outstanding” rating in the Charlotte MSA and a “ high
satisfactory” rating in North Carolina. Examiners reported
that BA Bank operated 208 branches and 292 ATMs in
the combined North Carolina assessment areas during the
review period. In the Charlotte MSA, approximately 7 per­
cent of the bank’s branches were in low-income census
tracts, which exceeded the percentage of the population
living in such areas. In addition, more than 15 percent of
the bank’s branches were in moderate-income census tracts
in the Charlotte MSA, which almost equaled the percent­
age of the population living in those areas. Examiners also
reported that BA Bank’s branch accessibility to LMI geog­
raphies was excellent in the Greensboro MSA.
Examiners also commended BA Bank for its community
development services in the Charlotte MSA. These ser­
vices included technical assistance to organizations provid­
ing community development, housing, and financial ser­
vices to LMI individuals during the evaluation period.
D. CR A Perform ance o f Fleet Bank
1. Lending Test. As previously noted, Fleet Bank received
an overall “ outstanding” rating for CRA performance from
the OCC, as of July 23, 2001 .62 Fleet Bank also received
an “ outstanding” rating overall and under the lending test
in the Boston M A -N H Multistate MSA ( “ Boston MSA” ),
which represented the largest share of the bank’s deposits
during the evaluation period .63 During this period, Fleet
Bank originated more than 216,900 HM DA-reportable
62. The evaluation period was January 1, 1998, through Decem­
ber 31, 2000; community development loans and qualified invest­
ments were considered from January 1, 1998, through June 30, 2001.
In the 2001 performance evaluation, Fleet Bank’s home mortgage
lending data included loans originated and purchased. Fleet Bank
requested that the OCC consider the loans, investment, and services
originated or purchased by Fleet Mortgage Company, Fleet Develop­
ment Ventures, BankBoston Development Company, Fleet CDC, Fleet
Securities, and BankBoston Capital as part of the bank’s CRA-related
performance. Examiners noted that Fleet Bank merged with other
institutions, including BankBoston, during the evaluation period. They
also noted that, in connection with the merger with BankBoston in
1999, FleetBoston was required to divest 306 branches.
63. Fleet Bank also received “outstanding” overall ratings in New
York; the multistate MSAs o f Lawrence M A-NH ; New LondonNorwich CT-RI; and Providence-Fall River RI-M A ( “Providence
MSA” ). Fleet Bank received “ satisfactory” overall ratings in Con­
necticut, Florida, Maine, Massachusetts, New Hampshire, New Jersey,
and the Portsmouth-Rochester NH -M E Mulitistate MSA.

230

Federal Reserve Bulletin □ Spring 2004

loans in its assessment areas, totaling more than $ 2 2 bil­
lion. These loans included more than 28,500 HMDAreportable loans, totaling $3.5 billion, in the Boston MSA
and more than 10,690 home mortgage loans in the Provi­
dence MSA, totaling more than $950 million .64 In addition,
examiners reported that Fleet Bank originated 23,750 home
mortgage loans, totaling $2.5 billion, in Connecticut and
more than 66,840 home mortgage loans in New York,
totaling $6.5 billion. They commended Fleet Bank for the
excellent overall geographic and borrower distribution of
its home mortgage lending throughout its assessment areas.
In addition, examiners found that Fleet Bank’s home pur­
chase loans originated to LMI borrowers in LMI census
tracts generally exceeded the bank’s overall market share
of such loans. They also noted that the opportunities for
lending in LMI areas in several areas were limited because
of the low percentage of owner-occupied units in those
census tracts .65
Examiners commended Fleet Bank for developing flex­
ible lending products and programs such as LMI Equity
Loans, which are home equity products tailored for LMI
borrowers or borrowers living in LMI areas, and Fleet
Affordable Advantage, a program which offers home
mortgages that feature a low down payment, no mortgage
insurance, and no origination fee. In addition, they reported
that Fleet Bank participated in several governmentsponsored programs that offered flexible underwriting for
home mortgages through secondary market providers. In
partnership with four state mortgage financing agencies
(Rhode Island, New Hampshire, New York, and New Jer­
sey), Fleet Bank also originated loans through the Jumpstart program to cover down payment and closing costs at
the time the agencies originated the first mortgage loans.
Fleet Bank also offered flexible home mortgage loan prod­
ucts through the Massachusetts Soft Second Program,
which features a below-market interest rate, no points, and
no mortgage insurance .66
During the evaluation period, Fleet Bank originated
more than 49,290 small loans to businesses, totaling more
than $4 billion. Examiners reported that these loans
included more than 10,700 small loans to businesses in the
Boston MSA, totaling $811 million, and more than 4,000
small loans to businesses in the Providence MSA, totaling
almost $400 million .67 They also reported that Fleet Bank
originated more than 6,900 small loans to businesses in

64. Some commenters asserted that FleetBoston has neglected the
lending and community reinvestment needs of Rhode Island because
of its recent acquisitions and mergers.
65. These areas included the Boston, Albany-Schenectady, and
Nassau-Suffolk MSAs. Examiners also noted that in the New York
City MSA, housing affordability is a significant issue and housing is
not generally affordable without a subsidy, even for middle-income
borrowers.
66. Several commenters urged Bank of America to participate in
the Massachusetts Soft Second program after it acquires FleetBoston.
Other commenters suggested that Bank of America should continue
FleetBoston’s membership in the Federal Home Loan Bank of Boston
and establish a Massachusetts community advisory board.
67. Examiners noted that, based on its volume of lending, Fleet
Bank was recognized as the number-one SBA lender in 2000.




Connecticut, totaling more than $560 million, and more
than 12,640 small loans to businesses in New York, total­
ing more than $1.2 billion. Examiners noted, however, that
the bank’s market share of loans to small businesses was
less than its overall market share of small loans to busi­
nesses in the Boston MSA. Examiners commended the
bank for its excellent geographic distribution of loans to
small businesses in the Hartford MSA. They reported that
Fleet Bank also participated in government-sponsored pro­
grams offering flexible underwriting for small businesses
through the SBA.
Examiners particularly commended Fleet Bank for its
high level of community development lending throughout
its assessment areas. They described Fleet Bank’s com mu­
nity development lending as focused on assisting the devel­
opment of affordable housing and promoting economic
development to revitalize LMI areas in its assessment
areas. During the review period, Fleet Bank originated
more than 460 community development loans, totaling
more than $1 billion, in its assessment areas. Examiners
reported that Fleet Bank originated 76 community develop­
ment loans in the Boston MSA, totaling $602 million, and
30 loans in the Providence MSA, totaling almost $36 mil­
lion. They also reported that Fleet Bank originated almost
60 community development loans in Connecticut, totaling
more than $147 million, and more than 190 loans in the
State of New York, totaling more than $680 million.
These community development loans included a
$3.1 million commercial real estate loan to finance the
renovation of a building in an empowerment zone and
multiple lines of credit ranging from $15 million to
$44 million, which facilitated LIHTC activities by provid­
ing interim funding, in the Boston MSA. In the Providence
MSA, the bank made a $3.1 million loan to fund the
rehabilitation of an inactive factory building as part o f a
neighborhood revitalization plan in a low-income area.
Examiners also reported that Fleet Bank originated a
$14 million community development loan to finance the
comprehensive revitalization of a low-income area in
the Hartford MSA and a $25 million loan to finance the
rehabilitation of a major apartment, condominium, and
commercial complex in the Parkchester section of the
Bronx.
2. Investment Test. Fleet Bank received an “ outstanding”
rating under the investment test. During the evaluation
period, Fleet Bank made more than 2,400 community
development investments in its assessment areas, totaling
more than $870 million. Examiners reported that Fleet
Bank made more than 350 qualified investments, totaling
$22.4 million, in the Boston MSA and 115 investments in
the Providence MSA, totaling more than $28 million. They
also reported that the bank made more than 350 commu­
nity development investments in Connecticut, totaling
more than $42 million, and 887 investments in New York,
totaling more than $120 million. These community devel­
opment investments included a $ 2 million investment
to fund an affordable housing organization’s develop­
ment activities in the Boston MSA; an LIHTC in Bristol,

Legal Developments

Rhode Island, totaling almost $ 6 million; and five LIHTCs,
totaling $11 million, in the Hartford MSA. Examiners
reported that the bank’s community development invest­
ments have had a positive impact on the Boston MSA and
they commended the bank’s investment activities as dem­
onstrating complexity, leadership, flexibility, or creativ­
ity .68 In addition, examiners noted that the bank’s commu­
nity development investment activities were excellent
in the Providence MSA and good in Connecticut and
New York.
3. Service Test. Fleet Bank received an “ outstanding”
rating under the service test overall and in the Boston
MSA. Examiners reported that Fleet Bank offered a full
range of banking services at its branches and that its branch
offices and delivery systems provided access to financial
products and services for consumers of different income
levels . 69 They noted that Fleet Bank offered specific
products designed for LMI individuals and LMI areas .70
These products included a checking account, savings
account, and unsecured installment loan that feature low
monthly fees and no minimum balance. Fleet Bank also
offered an electronic transaction account to provide lower
cost banking options to individuals receiving federal bene­
fits and to those who have not historically had bank
accounts. Examiners commended Fleet Bank for being the
first major bank in the Northeast to offer the electronic
transaction account, which they described as supporting
the bank’s commitment to serve LMI individuals while
focusing on underserved customers. Fleet Bank also
offered the “ First Community Bank” line of products and
services designed for small businesses in LMI urban areas.
In addition, examiners noted that Fleet Bank’s community
development services included first-time homebuyer, small
business, money management, and basic banking seminars.
E. H M D A D ata and Fair Lending Record
The Board also has carefully considered the lending
records of Bank of America and FleetBoston in light of
comments on HMDA data reported by their subsidiaries .71
68. One commenter criticized FleetBoston’s loans to redevelop
certain areas in Rhode Island as detrimental to LMI communities.
These loans provided financing for market-rate housing to help revital­
ize and stabilize certain LMI communities in the state.
69. One commenter criticized FleetBoston for delaying the open­
ing o f a mortgage loan center in South Providence. FleetBoston has
opened the lending center to serve this area.
70. One organization expressed concerns about FleetBoston’s
branch distribution in LMI and predominantly minority areas in
Philadelphia, Pennsylvania. FleetBoston entered the Philadelphia area
in 2001 through its acquisition of Summit Bancorp, Princeton, New
Jersey. FleetBoston proposes to open one de novo branch in Philadel­
phia in 2004 in a predominantly minority census tract. Through its
recent acquisition of Progress, FleetBoston has acquired another
branch in a predominantly minority census tract in the Philadelphia
MSA. By the end o f 2004, FleetBoston had planned to increase its
branches in LMI areas in the Philadelphia MSA from 15 to 21.
71. The Board analyzed 2001 and 2002 HMDA data for BA Bank
and Fleet Bank. The Board reviewed HMDA-reportable loan origina­
tions for various MSAs individually, as well as for the metropolitan




231

The 2002 HMDA data indicate that Bank of Am erica’s
percentage of total HMDA-reportable loan originations to
borrowers in minority census tracts 72 generally was compa­
rable with or exceeded that of lenders in the aggregate in
the areas reviewed .73 Although Bank of A m erica’s denial
disparity ratios 74 for African-American applicants gener­
ally were comparable with those ratios for lenders in the
aggregate for total HMDA-reportable loans in the areas
reviewed, its denial disparity ratios for Hispanic applicants
generally were less favorable than those ratios for lenders
in the aggregate. However, the 2002 data indicate that, in
the majority Bank of A m erica’s statewide assessment
areas, the bank’s percentage of total HMDA-reportable
loans originated to Hispanic applicants exceeded the per­
centage for the aggregate of lenders. These data also indi­
cate that the bank’s percentage of total HMDA-reportable
loans originated to African Americans also exceeded or
was comparable with the percentage for the aggregate of
lenders in the majority of BA Bank’s statewide assessment
areas.
The 2002 HMDA data indicate that FleetBoston’s per­
centage of total HMDA-reportable loan originations to
borrowers in minority census tracts generally exceeded or
was comparable with the aggregate lenders’ percentage in
the states where the bank operated. In addition, the bank’s
denial disparity ratios for African-American and Hispanic
applicants generally were slightly higher than or compa­
rable with those ratios for lenders in the aggregate for
HMDA-reportable loans in the markets reviewed.
Although the HMDA data may reflect certain disparities
in the rates of loan applications, originations, and denials
among members of different racial groups and persons at
different income levels in certain local areas, the HMDA
data generally do not indicate that Bank of America or
FleetBoston is excluding any race or income segment of
the population or geographic areas on a prohibited basis.
The Board nevertheless is concerned when HMDA data for
an institution indicate disparities in lending and believes
that all banks are obligated to ensure that their lending
practices are based on criteria that ensure not only safe and
sound lending, but also equal access to credit by creditwor­
thy applicants regardless of their race or income level. The
Board recognizes, however, that HMDA data alone provide
an incomplete measure of an institution’s lending in its

portions of BA Bank’s and Fleet Bank’s assessment areas statewide.
Commenters alleged that 2002 HMDA data indicate that BA Bank
denied home mortgage loan applications from African Americans and
Hispanics more frequently than applications from whites in MSAs in
various states and the District of Columbia. Other commenters alleged
that Fleet Bank denied home mortgage loan applications from African
Americans and Hispanics more frequently than applications from
whites in certain markets.
72. For purposes of this HMDA analysis, minority census tract
means a census tract with a minority population of 80 percent or more.
73. The lending data of the lenders in the aggregate represent the
cumulative lending for all financial institutions that have reported
HMDA data in a particular area.
74. The denial disparity ratio equals the denial rate of a particular
racial category (e.g., African Americans) divided by the denial rate for
whites.

232

Federal Reserve Bulletin □ Spring 2004

community because these data cover only a few categories
of housing-related lending. HMDA data, moreover, pro­
vide only limited information about the covered loans .75
HMDA data, therefore, have limitations that make them an
inadequate basis, absent other information, for concluding
that an institution has not assisted adequately in meeting its
community’s credit needs or has engaged in illegal lending
discrimination.
Because of the limitations of HMDA data, the Board has
considered these data carefully in light of other informa­
tion, including examination reports that provide an onsite
evaluation of compliance by the subsidiary depository
institutions of Bank of America and FleetBoston with fair
lending laws. Examiners noted no fair lending issues or
concerns in the CRA performance evaluations of the
depository institutions controlled by Bank of America or
FleetBoston.
The record also indicates that Bank of America has
taken steps to ensure compliance with fair lending laws.
Bank of America has instituted corporate-wide policies and
procedures to help ensure compliance with all fair lending
and other consumer protection laws and regulations. Bank
of America’s compliance program includes compliance file
reviews, an anti-predatory-lending policy, fair lending pol­
icy and product guides, testing the integrity of HMDA
data, and quality assurance. In addition, Bank of America’s
consumer real estate associates receive compliance training
that includes courses in fair lending laws, ethics, privacy,
information security, and HMDA. Bank of America stated
that its compliance program would be implemented at
Fleet Bank after consummation of the proposal.
The Board also has considered the HMDA data in light
of the programs described above and the overall perfor­
mance records of Bank of America’s subsidiary banks
under the CRA. These established efforts demonstrate that
the banks are active in helping to meet the credit needs of
their entire com munities .76
F. Branch Closings
Several commenters expressed concerns about the propos­
al’s possible effect on branch closings .77 The Board has
75. The data, for example, do not account for the possibility that an
institution’s outreach efforts may attract a larger proportion of margin­
ally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. Credit history
problems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available from HMDA
data.
76. One commenter alleged that Bank of America has a substan­
tially higher rate o f home mortgage foreclosures in neighborhoods
with predominantly minority and LMI populations and, generally, that
these areas have the fewest Bank of America branches. Bank of
America represented that it has policies and procedures in place to
work with customers to minimize foreclosures. As previously noted,
the OCC did not find fair lending issues or concerns when it con­
ducted its fair lending law reviews during the CRA evaluations of the
subsidiary depository institutions of Bank of America.
77. Some commenters expressed concern that, if consummation of
the proposal caused Bank of America to control more than 10 percent




carefully considered these comments on potential branch
closings in light of all the facts of record. Bank of America
has represented that any merger-related branch closings,
relocations, or consolidations would be minimal because
there is little geographic overlap with FleetBoston .78 Bank
of America also represented that no decision had been
made on whether Bank of A m erica’s or FleetBoston’s
branch closure policy would be in effect after consumma­
tion of the proposed transaction. Under these policies,
Bank of America and FleetBoston must review a number
of factors before closing or consolidating a branch, includ­
ing an assessment of the branch, the marketplace dem o­
graphics, a profile of the community where the branch is
located, and the effect on customers. The most recent CRA
evaluations of BA Bank and Fleet Bank noted favorably
the banks’ records of opening and closing branches .79
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings . 80 Federal law requires an insured deposi­
tory institution to provide notice to the public and to the
appropriate federal supervisory agency before closing a
branch. In addition, the Board notes that the OCC, as the
appropriate federal supervisor of BA Bank, will continue to
review BA Bank’s branch closing record in the course of
conducting CRA performance evaluations.
G. O ther C oncerns
Some commenters urged the Board not to approve the
proposal until Bank of America meets certain “ com mit­
m ents” regarding its Hawaii lending programs and its goal
for mortgage lending to Native Hawaiians on Hawaiian
Home Lands that commenters alleged Bank of America
o f the deposits of insured depository institutions in the United States,
Bank of America would divest branches in LMI areas to comply with
section 3(d) of the BHC Act.
78. One commenter alleged that Bank of America has closed bank
branches in the absence of market overlap after previous bank merg­
ers. The commenter expressed concern that branches in LMI areas
would be closed after consummation o f this proposal.
79. Examiners stated that, in general, BA Bank’s record of opening
and closing branches did not adversely affect the accessibility o f
delivery systems, particularly in LMI geographies. BA Bank closed
three branches in middle-income geographies in the Los A ngelesLong Beach MSA during the evaluation period. Examiners reported,
however, that service delivery systems in the Los Angeles-Long
Beach MSA were accessible to geographies and individuals of all
income levels. Examiners stated that branch openings and closings in
the Charlotte MSA did not adversely affect the accessibility of the
bank’s delivery systems in general or in LMI areas. BA Bank closed
one branch in a low-income census tract in the Charlotte M SA during
the review period, but another BA Bank branch was located less than
one mile away. BA Bank also closed two branches in low-income
census tracts and one branch in a moderate-income census tract in the
Miami MSA.
80. Section 42 of the FDI Act (12 U.S.C. §1831r-l), as imple­
mented by the Joint Policy Statement Regarding Branch Closings
(64 Federal Register 34,844 (1999)), requires that a bank provide the
public with at least 30-days notice and the appropriate federal super­
visory agency with at least 90-days notice before the date of the
proposed branch closing. The bank also is required to provide reasons
and other supporting data for the closure, consistent with the institu­
tion’s written policy for branch closings.

Legal Developments

made in 1994 in connection with the acquisition of Liberty
Bank, Honolulu, Hawaii, by Bank of America, FSB, a
predecessor of BA Bank .81 Commenters alleged that the
“commitments” were reaffirmed in NationsBank, 82 and
that they were conditions to the B oard’s approval in both
orders.
In connection with the acquisition of Liberty Bank,
Bank of America publicly announced its plans to engage
in certain lending programs in Hawaii. Although Bank of
America styled these initiatives as “ commitments” in its
public statements, it did not make them as commitments
to the Board, and these plans were not conditions to the
Board’s approvals in Liberty Bank or NationsBank .83 The
Board views the enforceability of such third party pledges,
commitments, or agreements as matters outside the CRA.
As the Board explained in NationsBank, to gain approval
of a proposal to acquire an insured depository institution an
applicant must demonstrate a satisfactory record of perfor­
mance under the CRA without reliance on plans or com­
mitments for future action .84 Moreover, the Board has
consistently found that neither the CRA nor the federal
banking agencies’ CRA regulations require depository
institutions to make pledges or enter into commitments
or agreements with any organization .85 Accordingly, in
Liberty Bank and NationsBank and in this case as well, the
Board has focused on the applicant’s existing record of
helping to meet the credit needs of its CRA assessment
areas when reviewing a proposal under the convenience
and needs factor of the BHC A ct . 86
As previously noted, many commenters criticized the
terms of Bank of America’s recently announced Commu­
nity Development Initiative. Some criticized it for provid­
ing insufficient funding for loans, investments, or grants.
Others requested that the Board not approve the proposal
until Bank of America includes state-specific goals for
certain loan products and programs or enters into specific
81. See Liberty Bank at 628.
82. See NationsBank at 876.
83. Some commenters misconstrued the Board’s statements that
the Liberty Bank and NationsBank orders were “specifically con­
ditioned upon compliance with all of the commitments made by
BankAmerica [or NationsBank] in connection with this application”
as referencing commitments other than those that the applicants
expressly made directly to the Board.
84. See NationsBank at 876; see also Travelers Group Inc., 84 Fed­
eral Reserve Bulletin 985 (1998).
85. See, e.g., Citigroup Inc., 88 Federal Reserve Bulletin 485
(2002); Fifth Third Bancorp, 80 Federal Reserve Bulletin 838, 841
(1994).
86. The CRA performance records of Bank of America FSB,
which had branches in Hawaii at the time of the Liberty Bank order
and until eight months prior to the NationsBank order, were rated by
its primary federal supervisor, the Office of Thrift Supervision, as
“satisfactory” (Liberty Bank) and as “outstanding” overall and “sat­
isfactory” in Hawaii (NationsBank). Bank of America’s CRA assess­
ment areas have not included Hawaii since 1998, after it sold all its
branches in that state. Under the interagency CRA regulation, the
appropriate federal supervisor evaluates a bank’s CRA performance
record in its delineated assessment areas, which generally include the
census tracts where its main office, branches, and deposit-taking
ATMs are located, and the surrounding census tracts where the bank
has originated or purchased a substantial portion of its loans. See, e.g.,
12 C.F.R. 228.41.




233

agreements with certain states or community organiza­
tions. As discussed above, the Board views the enforceabil­
ity of such third-party pledges, initiatives, and agreements
as matters outside the CRA. Instead, the Board focuses on
the existing CRA performance record of an applicant and
the programs that the applicant has in place to serve the
credit needs of its CRA assessment areas at the time the
Board reviews a proposal under the convenience and needs
factor. The future activities of Bank of A m erica’s subsidi­
ary depository institutions will be reviewed by the appro­
priate federal supervisors of those institutions in future
CRA performance examinations, and the Board will con­
sider that actual CRA performance record in future appli­
cations by Bank of America to acquire a depository
institution.
H. Conclusion on C onvenience and N eeds
C onsiderations
The Board recognizes that this proposal represents a sig­
nificant expansion of Bank of America and its scope of
activities. Accordingly, an important component of the
Board’s review of the proposal has been its considera­
tion of the effects of the proposal on the convenience and
needs of all communities served by Bank of America and
FleetBoston.
In conducting its review, the Board has weighed the
concerns expressed by commenters in light of all the facts
of record, including the overall CRA records o f the deposi­
tory institutions of Bank of America and FleetBoston. A
significant number of commenters have expressed support
for the proposal based on the records of Bank of America
and FleetBoston in helping to serve the banking needs, and
in particular, the lending needs of their entire communities,
including LMI areas. Other commenters have expressed
concern about specific aspects of Bank of A m erica’s record
of performance under the CRA in its current service areas
and have expressed reservations about whether Bank of
America and FleetBoston have been, and would be, respon­
sive to the banking and credit needs of all their communi­
ties, especially in New England. The Board has carefully
considered these concerns and weighed them against the
overall CRA records o f Bank of America and FleetBoston,
reports of examinations o f CRA performance, and informa­
tion provided by Bank of America, including its responses
to comments. The Board also considered information sub­
mitted by Bank of America and information from the OCC
concerning BA Bank’s performance under the CRA and
compliance with fair lending laws since its last CRA
performance evaluation.
As discussed in this order, all the facts of record demon­
strate that the subsidiary depository institutions of Bank of
America and FleetBoston have a record of meeting the
credit needs of their communities. The Board expects
the resulting organization to continue to help serve the
banking needs of all its communities, including LMI
neighborhoods.
Based on all the facts of record, and for reasons dis­
cussed above, the Board concludes that considerations

234

Federal Reserve Bulletin □ Spring 2004

relating to the convenience and needs factor, including the
CRA performance records of the relevant depository insti­
tutions, are consistent with approval of the proposal.

meetings or hearings are not required and are not necessary
or warranted to clarify the factual record on the proposal . 88
Accordingly, the requests for additional public meetings or
hearings are hereby denied.

Foreign Activities
Conclusion
Bank of America also has requested the Board’s consent
under section 4(c)(13) of the BHC Act and section 211.9
o f the Board’s Regulation K (12 C.F.R. 211.9) to acquire
certain FleetBoston foreign operations. In addition, Bank
of America has provided notice under sections 25 and 25A
of the Federal Reserve Act and sections 211.5 and 211.9
of Regulation K (12 C.F.R. 211.5 and 211.9) to acquire
FleetBoston’s companies organized under sections 25 and
25A of the Federal Reserve Act. The Board concludes that
all the factors required to be considered under the Federal
Reserve Act, the BHC Act, and the Board’s Regulation K
are consistent with approval of the proposal.

Requests fo r Additional Public Meetings
As noted above, the Board held public meetings on the
proposal in Boston and San Francisco. A number of com­
menters requested that the Board hold additional public
meetings or hearings, including at locations in Connecti­
cut, Maine, New York, Pennsylvania, Rhode Island, and
Hawaii. The Board has carefully considered these requests
in light of the BHC Act, the Board’s Rules of Procedure,
and the substantial record developed in this case . 87
As previously discussed, more than 180 interested per­
sons appeared and provided oral testimony at the two
public meetings held by the Board. These attendees
included elected representatives, the attorney general of
Connecticut, members of community groups, and represen­
tatives of businesses and business groups from cities and
towns across the country. In addition, the Board provided
a period of more than 60 days for interested persons to
submit written comments on the proposal. More than 2000
interested persons who did not testify at the public meet­
ings provided written comments.
In the Board’s view, all interested persons had ample
opportunity to submit their views on this proposal. Numer­
ous commenters, in fact, submitted substantial materials
that have been carefully considered by the Board in acting
on the proposal. Commenters requesting additional public
meetings have failed to show why their written comments
do not adequately present their views, evidence, and allega­
tions. They also have not shown why the public meetings
in Boston and San Francisco and the more than 60-day
comment period did not provide an adequate opportunity
for all interested parties to present their views and con­
cerns. For these reasons, and based on all the facts of
record, the Board has determined that additional public
87.
Section 3(b) of the BHC Act does not require that the Board
hold a public hearing on an application unless the appropriate super­
visory authority for the bank to be acquired makes a timely written
recommendation o f denial of the application. 12 U.S.C. § 1842(b). In
this case, the Board has not received such a recommendation from any
state or federal supervisory authority.




Based on the foregoing, and in light of all the facts of
record, the Board has determined that the applications and
notices should be, and hereby are, approved. In reaching
this conclusion, the Board has carefully considered all oral
testimony and the written comments regarding the proposal
in light of the factors it is required to consider under the
BHC Act and other applicable statutes .89
88. A number of commenters requested that the Board delay action
on the proposal or extend the comment period until:
(i) Bank of America provides more detail about its Community
Development Initiative;
(ii) Bank of America enters into a written, detailed, and publicly
verifiable CRA agreement negotiated with community groups;
(iii) Bank of America fulfills certain commitments to third parties
other than the Board;
(iv) Bank of America enters into new CRA agreements with local
community groups;
(v) pending lawsuits or investigations involving Bank of America
and FleetBoston are resolved; or
(vi) alleged conflicts of interests are resolved.
The Board believes that the record in this case does not warrant
postponement of its consideration of the proposal. During the applica­
tion process, the Board has accumulated a significant record, includ­
ing reports of examination, supervisory information, public reports
and information, and considerable public comment. The Board
believes this record is sufficient to allow it to assess the factors it
is required to consider under the BHC Act. The BHC Act and the
Board’s rules establish time periods for consideration and action on
proposals such as the current proposal. Moreover, as discussed more
fully above, the CRA requires the Board to consider the existing
record of performance of an organization and does not require that the
organization enter into contracts or agreements with others to imple­
ment its CRA programs. For the reasons discussed above, the Board
believes that commenters have had ample opportunity to submit their
views and, in fact, they have provided substantial written submissions
and oral testimony that have been considered carefully by the Board in
acting on the proposal. Based on a review of all the facts of record, the
Board concludes that delaying consideration of the proposal, granting
another extension of the comment period, or denying the proposal on
the grounds discussed above, including for informational insuffi­
ciency, is not warranted.
89. One commenter requested that certain Federal Reserve System
staff and Board members recuse themselves from consideration of the
applications or, alternatively, that the applications be dismissed,
because of commenter’s allegations that conflicts of interests exist
between Federal Reserve System staff and Bank of America. The
commenter claimed that federal ethics laws and/or rules were violated
because an officer of the Federal Reserve Bank of Richmond or other
staff, including an unidentified Board member, have mortgages on
their residences from BA Bank. Federal law prohibits a bank examiner
from accepting a loan from a bank or other covered entity that he
or she examines. See 18 U.S.C. §213. In this case, the individual
in question has never examined a bank that is the subject of these
applications, and review of an application is not itself an examination
for purposes of 18 U.S.C. §213. Neither the ethics rules governing
Reserve Bank supervisory staff who participate in matters other than
examinations and inspections nor the Board’s ethics rules as promul­
gated by the Office of Government Ethics require an individual who
already has a loan from an institution to be recused from considering

Legal Developments

Approval of the applications and notices is specifically
conditioned on compliance by Bank of America with all
the commitments made to the Board in connection with the
proposal and with the conditions stated or referred to in
this order. For purposes of this transaction, these commit­
ments and conditions are deemed to be conditions imposed
in writing by the Board in connection with its findings and
decision and, as such, may be enforced in proceedings
under applicable law.
The acquisition of FleetBoston’s subsidiary banks shall
not be consummated before the fifteenth calendar day after
the effective date of this order, and no part of the proposal
shall be consummated later than three months after the
effective date of this order, unless such period is extended
for good cause by the Board or by the Federal Reserve
Bank of Richmond, acting pursuant to delegated authority.
By order of the Board of Governors, effective M arch 8 ,
2004.
Voting for this action: Chairman Greenspan and Governors Gramlich, Bies, Olson, Bernanke, and Kohn. Absent and not voting: Vice
Chairman Ferguson.
R o b e r t d eV . F r ie r s o n

Deputy Secretary o f the Board

Appendix A
Calculation of the Nationwide Deposit Cap
For purposes of applying the nationwide deposit cap, the
total amount of deposits held by insured banks in the
United States was computed by first calculating the sum of
total deposits in domestic offices as reported on Sched­
ule RC of the Call Report, interest accrued and unpaid on
deposits in domestic offices as reported on Schedule RC-G
of the Call Report, and adding the following items reported
on Schedule R C -0 of the Call Report: unposted credits,
uninvested trust funds, deposits in insured branches in
Puerto Rico and U.S. territories and possessions, unamor­
tized discounts on deposits, the amount by which demand
deposits would be increased if the reporting institution’s
reciprocal demand balances with foreign banks and foreign
offices of other U.S. banks that were reported on a net basis
had been reported on a gross basis, amount of assets netted
against demand deposits, amount of assets netted against
time and savings deposits, demand deposits of consoli­
dated subsidiaries, time and savings deposits of consoli­
dated subsidiaries and interest accrued and unpaid on
deposits of consolidated subsidiaries. Then, subtract the
amount of unpaid debits and unamortized premiums from
this sum.

an applications matter involving that institution or its affiliate. See,
e.g., 5 C.F.R. 6801.107-108. The Board has carefully considered this
request and concludes that no conflicts of interests exist that require
recusal or dismissal o f the applications.




235

The total amount of deposits held by insured U.S.
branches of foreign banks was computed by first calculat­
ing the sum of the following items reported on Schedule O
of the RAL: total demand deposits in the branch, total time
and savings deposits in the branch, interest accrued and
unpaid on deposits in the branch, unposted credits, demand
deposits of majority-owned depository subsidiaries and
wholly owned nondepository subsidiaries, time and sav­
ings deposits of majority-owned depository subsidiaries
and wholly owned nondepository subsidiaries, and interest
accrued and unpaid on deposits of majority-owned deposi­
tory subsidiaries and wholly owned nondepository subsidi­
aries, the amount by which demand deposits would be
increased if the reporting institution’s reciprocal demand
balances with foreign banks and foreign offices of other
U.S. banks that were reported on a net basis had been
reported on a gross basis, amount of assets netted against
demand deposits, amount of assets netted against time and
savings deposits, demand deposits of consolidated subsidi­
aries, time and savings deposits of consolidated subsidi­
aries. Then, subtract the amount of unpaid debits from this
sum.
The total amount of deposits held by insured savings
associations in the United States was computed by taking
the sum of total deposits in domestic offices as reported on
Schedule SC of the TFR, deposits held in escrow and
accrued interest payable-deposits, both as reported on
Schedule SC of the TFR, plus the following items reported
on Schedule SI of the TFR: time and savings deposits
of consolidated subsidiaries, outstanding checks drawn
against Federal Home Loan Banks and Federal Reserve
Banks, demand deposits of consolidated subsidiaries, assets
netted against demand deposits, and assets netted against
time and savings deposits.
Because insured banks and savings associations that are
subsidiaries of other insured banks and savings associa­
tions have been consolidated into their parent institution
for reporting purposes, the individual data for these institu­
tions have not been added in order to avoid double count­
ing deposits held by these subsidiary insured depository
institutions.

A ppendix B
Banking M arkets in which
FleetBoston Compete Directly
A.

Bank of America and

M etropolitan N ew York-New Jersey

Bronx, Dutchess, Kings, Nassau, New York, Orange,
Putnam, Queens, Richmond, Rockland, Suffolk, Sullivan,
Ulster, and Westchester Counties, all in New York; Bergen,
Essex, Hudson, Hunterdon, Middlesex, Monmouth, M or­
ris, Ocean, Passaic, Somerset, Sussex, Union, and Warren
Counties and the northern portions of M ercer County, all in
New Jersey; Pike County, Pennsylvania; Fairfield County
and portions of Litchfield and New Haven Counties, all in
Connecticut.

236

B.

Federal Reserve Bulletin □ Spring 2004

Fort Pierce, Florida

Sarasota

Manatee and Sarasota Counties, except the portion of
Sarasota County that is both east of the M yakka River and
south of Interstate 75 (currently the town of Northport); the
portion of Charlotte County that is west of both the harbor
and the Myakka River (currently the towns of Englewood,
Englewood Beach, New Point Comfort, Grove City,
Cape Haze, Rotonda, Rotonda West, and Placida); and
Gasparilla Island (the town of Boca Grande) in Lee County.

Bank of America operates the largest depository institution
in the market, controlling deposits o f approximately
$3.2 billion, representing approximately 26 percent of
market deposits. FleetBoston operates the 44th largest
depository institution in the market, controlling deposits
o f approximately $ 8 . 6 million, representing less than
1 percent of market deposits. On consummation, Bank of
America would continue to operate the largest depository
institution in the market, controlling deposits of $3.2 bil­
lion, representing approximately 26.1 percent of the market
deposits. Forty-seven depository institutions would remain
in the banking market. The HHI would increase 4 points to
1,252.

D.

West Palm Beach

St. Lucie and Martin Counties, except the towns of Indiantown and Hobe Sound in Martin County.

C.

Sarasota, Florida

West Palm Beach, Florida

Palm Beach County east of Loxahatchee and the towns of
Indiantown and Hobe Sound in Martin County.

A ppendix C
Market Data

Metropolitan New York-New Jersey
Bank of America operates the 27th largest depository insti­
tution in the market, controlling deposits of approximately
$2.9 billion, representing less than 1 percent of market
deposits. FleetBoston operates the third largest depository
institution in the market, controlling deposits of approxi­
mately $45.9 billion, representing approximately 8 percent
of market deposits. On consummation of the proposal,
Bank of America would operate the third largest deposi­
tory institution in the market, controlling deposits of
$48.9 billion, representing approximately 9 percent of mar­
ket deposits. Two hundred and seventy one institutions
would remain in the market. The HHI would increase
9 points to 983.

Florida
Fort Pierce
Bank of America operates the third largest depository
institution in the market, controlling deposits of approxi­
mately $611 million, representing less than 1 percent of
market deposits. FleetBoston opened a de novo branch
in the market in January 2004. Bank of America has
18 branches in this banking market. FDIC deposit data
reflecting the deposits of FleetBoston’s branch are not yet
available. The Board has considered Bank of Am erica’s
deposits in the Fort Pierce banking market, the number of
competing institutions, and the deposits controlled by those
institutions, and the recent entry of FleetBoston’s branch.
Based on these factors, the Board concludes that consum­
mation of the proposal would have a de minimis effect in
the Fort Pierce banking market. The HHI is 1,259.



Bank of America operates the second largest depository
institution in the market, controlling deposits of approxi­
mately $4 billion, representing approximately 20 percent
of market deposits. FleetBoston operates the 17th largest
depository institution in the market, controlling deposits of
approximately $166 million, representing less than 1 per­
cent of market deposits. On consummation of the pro­
posal, Bank of America would continue to operate the
second largest depository institution in the market, control­
ling deposits of approximately $4.1 billion, representing
approximately 21 percent of market deposits. Sixty deposi­
tory institutions would remain in market. The HHI would
increase 35 points to 1,349.

National City Corporation
Cleveland, Ohio
O rd e r A p p r o v in g th e A c q u is it io n o f a B a n k H o ld in g
C om pany
National City Corporation ( “National City” ), a financial
holding company within the meaning of the Bank Holding
Company Act ( “ BHC A ct” ), has requested the Board’s
approval under section 3 of the BHC Act (12 U.S.C.
§1842) to acquire Allegiant Bancorp, Inc. ( “Allegiant” )
and its subsidiary bank, Allegiant Bank ( “A llegiant
Bank” ), both in St. Louis, Missouri. National City also has
requested the Board’s approval under sections 4(c)(8) and
4(j) of the BHC Act (12 U.S.C. §§ 1843(c)(8) and 1843(j))
and sections 225.28(b)(2), (6 ) and (12) of the Board’s
Regulation Y (12 C.F.R. 225.28(b)(2), (6 ), and (12)) to
acquire certain nonbanking subsidiaries of Allegiant and
thereby engage in permissible activities related to extend­
ing credit, providing investment advice, and engaging in
community development.
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
( 6 8 Federal Register 68,626 (2003)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in sections 3 and 4 of the BHC Act.

Legal Developments

National City is the 13th largest commercial banking
organization in the United States with total consolidated
assets of $113.9 billion, representing approximately
1.4 percent of total assets of insured banking organizations
in the United States . 1 National City operates subsidiary
insured depository institutions in Illinois, Indiana, Ken­
tucky, Michigan, Ohio, and Pennsylvania. Allegiant, with
assets of approximately $2.3 billion, is the eighth largest
commercial banking organization in Missouri. On consum­
mation of this proposal, National City would remain the
13th largest commercial banking organization in the United
States with total consolidated assets of $116.2 billion,
representing approximately 1.4 percent of total assets of
insured banking organizations in the United States.

Interstate Analysis
Section 3(d) of the BHC Act allows the Board to approve
an application by a bank holding company to acquire
control of a bank located in a state other than the home
state of such bank holding company if certain conditions
are m et .2 For purposes of the BHC Act, the home state of
National City is Ohio, and Allegiant Bank is located in
Missouri. Based on a review of all the facts of record,
including relevant state statutes, the Board finds that all the
conditions for an interstate acquisition enumerated in sec­
tion 3(d) are met in this case .3

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approv­
ing a proposal that would result in a monopoly or would be
in furtherance of any attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a proposed bank acqui­
sition that would substantially lessen competition in any
relevant banking market, unless the Board finds that the
anticompetitive effects of the proposal clearly are out1. Asset data are as of December 31, 2003, and nationwide ranking
data are as of September 30, 2003.
2. A bank holding company’s home state is the state in which the
total deposits o f all subsidiary banks of the company were the largest
on the later of July 1, 1966, or the date on which the company became
a bank holding company. 12 U.S.C. § 1841(o)(4)(C). For purposes of
section 3(d) of the BHC Act, the Board considers a bank to be located
in the states in which the bank is chartered, headquartered, or operates
a branch.
3. See 12 U.S.C. §§ 1842(d)(1)(A) and (B), 1842(d)(2)(A) and (B).
National City is adequately capitalized and adequately managed, as
defined by applicable law. In addition, on consummation of the
proposal, National City would control less than 10 percent of the total
amount of deposits of insured depository institutions in the United
States. Missouri law prohibits a bank holding company from acquiring
an insured depository institution in Missouri if, as a result of the
acquisition, the bank holding company would control more than
13 percent o f state deposits. See Mo. Rev. Stat. §362.915. This
transaction would meet Missouri’s state deposit cap. Missouri law
prohibits the interstate acquisition of a Missouri bank that has existed
for fewer than 5 years. This transaction would meet Missouri’s
minimum age requirements. See id. at § 362.077. The other require­
ments o f section 3(d) also would be met on consummation of the
proposal.




237

weighed in the public interest by the probable effect of the
proposal in meeting the convenience and needs of the
community to be served .4 National City and Allegiant
do not compete directly in any relevant banking market.
Accordingly, the Board concludes, based on all the facts
of record, that consummation of the proposal would not
have a significantly adverse effect on competition or on the
concentration of banking resources in any relevant banking
market and that competitive considerations are consistent
with approval.

Financial and Managerial Considerations
Section 3 of the BHC Act requires the Board to consider
the financial and managerial resources and future prospects
of the companies and banks involved in the proposal and
certain other supervisory factors. The Board has carefully
considered these factors in light of all the facts of record,
including reports of examination, other confidential super­
visory information received from the primary federal bank­
ing agency that supervises each institution, information
provided by National City, and public comment on the
proposal.
National City is and will remain well capitalized on
consummation of the proposal. In addition, the Board has
consulted with the Office of the Comptroller of the Cur­
rency (“ O CC” ), the primary federal supervisor of National
City’s lead banks, concerning the proposal .5 The Board
also has considered the managerial resources and the ex­
amination records of National City and Allegiant and the
subsidiary depository institutions to be acquired, including
their risk management systems and other policies .6 Based
on all the facts of record, the Board has concluded that
considerations relating to the financial and managerial
resources and future prospects of National City, Allegiant,
and Allegiant Bank are consistent with approval, as are the
other supervisory factors under the BHC A ct .7

4. 12 U.S.C. § 1842(c)(1).
5. A commenter cited press reports about a class-action lawsuit and
other litigation concerning the consumer lending and trust activities of
three National City subsidiaries. The Board notes that the class-action
lawsuit was settled in 2002. In addition, National City has submitted
information on pending material litigation relating to the consumer
lending activities of National City and its affiliates. The Board has
considered this information in light of confidential supervisory infor­
mation and has consulted with the OCC.
6. The commenter also cited press reports noting that in 2003, the
Securities and Exchange Commission ( “SEC” ) directed National City
to provide certain information on its mutual fund activities as part of
an industry-wide review of practices. The Board notes that the SEC
has taken no action against National City on this matter.
7. The commenter also criticized National City for lobbying against
state and local efforts to enact and enforce anti-predatory lending laws
and ordinances. In addition, the commenter, citing press reports,
expressed concern that the proposal might result in a loss of jobs. The
Board notes that the commenter does not allege and has provided no
evidence that National City engaged in any illegal activity or other
action that has affected, or may reasonably be expected to affect, the
safety and soundness of the institutions involved in this proposal or
the competitive or other factors that the Board must consider under the
BHC Act.

238

Federal Reserve Bulletin □ Spring 2004

Convenience and Needs Considerations
In acting on a proposal under section 3 of the BHC Act, the
Board is required to consider the effects of the proposal on
the convenience and needs of the communities to be served
and to take into account the records of the relevant insured
depository institution under the Community Reinvestment
Act ( “ CRA ” ) . 8 The CRA requires the federal financial
supervisory agencies to encourage financial institutions to
help meet the credit needs of local communities in which
they operate, consistent with their safe and sound opera­
tion, and requires the appropriate federal financial super­
visory agency to take into account an institution’s record of
meeting the credit needs of its entire community, including
low- and moderate-income ( “ LM I” ) neighborhoods, in
evaluating bank expansionary proposals.
The Board has considered carefully the convenience and
needs factor and the CRA performance records of the
banks of National City and Allegiant in light of all the facts
of record, including public comment on the proposal. A
commenter opposing the proposal asserted, based on data
reported under the Home Mortgage Disclosure Act
( “ HMDA ” ) , 9 that National City engages in discriminatory
treatment of African-American and Hispanic individuals
in its home mortgage lending operations. In addition,
the commenter expressed concern about potential branch
closings.
A. CR A Perform ance Evaluations
As provided in the CRA, the Board has evaluated the
convenience and needs factor in light of the evaluations by
the appropriate federal supervisors of the CRA perfor­
mance records of the relevant insured depository institu­
tions. An institution’s most recent CRA performance
evaluation is a particularly important consideration in the
applications process because it represents a detailed, on­
site evaluation of the institution’s overall record of perfor­
mance under the CRA by its appropriate federal super­
visor. 10 At their most recent CRA evaluations by the OCC,
National City Bank, Cleveland ( “NC Bank” ), National
City’s largest bank as measured by total deposits, received
an “ outstanding” rating, and National City Bank of Indi­
ana, Indianapolis ( “NC Indiana” ), National C ity’s largest
bank as measured by total assets, received a “ satisfactory”
rating . 11 In addition, National City’s five other subsidiary
banks received either “ outstanding” or “ satisfactory” rat­
ings at their most recent CRA evaluations . 12
Allegiant Bank, A llegiant’s only subsidiary bank,
received a “ satisfactory” rating at its most recent CRA
performance evaluation by the Federal Deposit Insurance
Corporation ( “FDIC” ), as of March 1, 2002. National City
8. 12 U.S.C. §2901 et seq.
9. 12 U.S.C. §2801 et seq.
10. See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).
11. Both ratings are as of February 22, 2000.
12. The Appendix lists the most recent CRA ratings of the National
City subsidiary banks.




has indicated that on consummation of the proposal, A lle­
giant Bank would have access to National C ity’s CRA
program, would offer certain National City CRA-related
loan products, and would establish a CRA program com pa­
rable to those of National C ity’s subsidiary banks. National
City anticipates integrating A llegiant’s community devel­
opment activities with the National City Community
Development Corporation. In addition, Allegiant Bank
would be subject to National C ity’s corporate-wide compli­
ance program.
NC Bank’s most recent CRA evaluation characterized
its overall record of home mortgage and small business
lending as excellent , 13 noting specifically the bank’s excel­
lent loan penetration among borrowers of different income
levels, including LMI individuals. Examiners also praised
the bank’s level of community development lending and
noted favorably the use of several flexible lending products
designed to address affordable housing needs o f LMI indi­
viduals. Examiners commended the bank’s level of quali­
fied investments and reported that these investments were
highly responsive to the credit needs of its assessment area.
In addition, examiners reported that NC Bank’s commu­
nity development services were excellent and praised the
distribution of the bank’s branches.
At NC Indiana’s most recent CRA performance evalua­
tion, examiners commended the bank’s home lending
record among borrowers of different income levels. In
addition, examiners praised the bank’s record of commu­
nity development lending and its use of innovative loan
products. NC Indiana’s most recent evaluation also com ­
mended its strong level of qualified investments noting that
the bank created opportunities for and engaged in complex
and innovative investments in its assessment area. In addi­
tion, examiners characterized the distribution o f NC Indi­
ana’s branches throughout its assessment area, including
LMI geographies, as excellent.
Examiners at Allegiant Bank’s most recent CRA perfor­
mance evaluation concluded that the bank demonstrated a
good record of serving the credit needs of its entire com ­
munity, including the most economically disadvantaged
portions of its assessment area. Examiners commended
Allegiant Bank’s home mortgage lending record and noted
that in 2 0 0 0 , the percentage of loans extended by the bank
in LMI geographies exceeded the percentage extended by
the aggregate of lenders ( “ aggregate lenders ” ) . 14 Exam in­
ers also noted Allegiant Bank’s significant level of quali­
fied investments and reported that such investments sup­
ported a wide variety of programs to develop LMI housing.
13. In evaluating the records o f performance under the CRA o f NC
Bank and NC Indiana, examiners considered home mortgage loans by
certain affiliates in the banks’ assessment areas. The loans reviewed
by examiners included loans reported by National City Mortgage
Corporation, Miamisburg, Ohio ( “NC Mortgage” ) (a subsidiary o f
NC Indiana); National City Mortgage Services, Kalamazoo, Michigan
( “NC Mortgage Services” ) (a subsidiary of National City Bank of
Michigan/Illinois, Bannockburn, Illinois); and other bank and non­
bank affiliates o f NC Bank.
14. The lending data of the aggregate lenders represent the cumula­
tive lending for all financial institutions that have reported HMDA
data in a given area.

Legal Developments

B. H M D A and Fair L ending Record
The Board has carefully considered the lending records
of and HMDA data reported by National City in light
of public comment. Based exclusively on a review of 2002
HMDA data, the commenter alleged that National City
engages in discriminatory lending by directing minority
customers to First Franklin Financial Corporation,
San Jose, California ( “First Franklin” ), a subsidiary of
NC Indiana that originates home mortgage loans that
include subprime loans , 15 rather than to National C ity’s
subsidiary banks . 16 The commenter also alleged that the
denial disparity ratio s 17 of some of National C ity’s subsid­
iary banks in certain markets indicated that the banks
disproportionately denied African-American or Hispanic
applicants for home mortgage loans.
The Board reviewed HMDA data reported by all of
National City’s bank and nonbank lending subsidiaries in
the MSAs identified by the commenter, and focused its
analysis on the data in the MSAs that include six major
assessment areas of the banks. The Board compared the
HMDA data of First Franklin with aggregate data submit­
ted by the other subsidiaries of National City engaged in
home mortgage lending, including its subsidiary banks,
NC Mortgage, and NC Mortgage Services ( “ National City
Lenders” ).
The 2002 HMDA data indicate that, although the
National City Lenders extended a smaller percentage of
their total HMDA-reportable loans to African-American
borrowers than did First Franklin in the MSAs reviewed,
they extended a larger number of such loans to AfricanAmerican borrowers than did First Franklin in the majority
of the MSAs. The data also indicate that the percentages
of the National City Lenders’ HMDA-reportable loans to
Hispanics were comparable to or exceeded the percentages
for First Franklin in each of the MSAs reviewed, and that
they originated a larger number of HMDA-reportable loans
15. As the Board previously has noted, subprime lending is a
permissible activity that provides needed credit to consumers who
have difficulty meeting conventional underwriting criteria. The Board
continues to expect all bank holding companies and their affiliates to
conduct their subprime lending operations without any abusive lend­
ing practices. See Royal Bank of Canada, 88 Federal Reserve Bulle­
tin 385, 388 n.18 (2002). The Board also notes that the OCC has
responsibility for enforcing compliance with fair lending laws by
national banks and their subsidiaries.
16. Specifically, the commenter compared 2002 HMDA data
reported by First Franklin and a National City subsidiary bank in
the Metropolitan Statistical Areas ( “M SA s”) that include six of
the largest assessment areas of National City’s subsidiary banks (as
determined by total deposits). These areas include the Chicago, Cleve­
land, Detroit, Indianapolis, Louisville, and Pittsburgh MSAs. The
comparison did not include HMDA data reported by other National
City lending subsidiaries operating in these areas. The commenter
asserted that in 2002, First Franklin originated a higher volume and
larger percentage o f its HMDA-reportable loans to African-American
or Hispanic borrowers than the National City subsidiary bank in each
o f the areas. The commenter made similar allegations concerning two
MSAs outside the banks’ assessment areas.
17. The denial disparity ratio equals the denial rate for a particular
racial category (for example, African American) divided by the denial
rate for whites.




239

to Hispanic borrowers than did First Franklin in each of the
MSAs. In addition, the denial disparity ratios of the
National City Lenders for African-American and Hispanic
applicants for total HMDA-reportable loans approximated
or were lower than those of aggregate lenders in a majority
of the MSAs reviewed. Moreover, the National City Lend­
ers’ origination rates for total HMDA-reportable loans to
Hispanics and African Americans were comparable to or
exceeded the rates for aggregate lenders in each of the
MSAs reviewed . 18
The Board is concerned when the record of an institution
indicates disparities in lending and believes that all banks
are obligated to ensure that their lending practices are
based on criteria that ensure not only safe and sound
lending, but also equal access to credit by creditworthy
applicants regardless of race or income level. The Board
recognizes, however, that HMDA data alone provide an
incomplete measure of an institution’s lending in its com­
munity because these data cover only a few categories of
housing-related lending and provide only limited inform a­
tion about covered loans . 19 Moreover, HMDA data indicat­
ing that one affiliate is lending to minorities or LMI indi­
viduals more than another affiliate do not, without more
information, indicate that either affiliate has engaged in
illegal discriminatory lending activities.
Because of the limitations of HMDA data, the Board has
considered these data carefully in light of other inform a­
tion, including examination reports that provide on-site
evaluations of compliance with fair lending laws by
National C ity’s banks and their lending subsidiaries,
including First Franklin. Examiners found no evidence of
prohibited discrimination or other illegal credit practices at
any of National C ity’s subsidiary banks or the lending
subsidiaries of these banks at their most recent CRA per­
formance evaluations.
The record also indicates that National City has taken
several affirmative steps to ensure compliance with fair
lending laws. National City has a centralized compliance
function and has implemented corporate-wide compliance
policies and procedures to help ensure that all National
City business lines, including First Franklin’s, comply
with all fair lending and other consumer protection laws
and regulations. It employs compliance officers and staff
responsible for compliance training and monitoring and
conducts file reviews for compliance with federal and state
consumer protection rules and regulations for all product
lines and origination sources, including First Franklin.
National City also regularly performs self-assessments of

18. The origination rate equals the total number of loans originated
to applicants of a particular racial category divided by the total
number of applications received by members of that racial category.
19. The data, for example, do not account for the possibility that an
institution’s outreach efforts may attract a larger proportion of margin­
ally qualified applicants than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was in fact creditworthy. Credit history prob­
lems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available from HMDA
data.

240

Federal Reserve Bulletin □ Spring 2004

its fair lending law compliance and fair lending policy
training for its employees.
The Board also has considered the HMDA data in light
of other information, including the CRA performance
records of National C ity’s subsidiary banks. These records
demonstrate that National City is active in helping to meet
the credit needs of it entire community.
C. Branch C losings
The Board has considered the commenter’s concerns about
potential branch closings in light of all the facts of record.
National City has provided the Board with its branch
closing policy and has represented to the Board that it
intends to open thirteen new branches in the St. Louis
market over the next three years. The Board has considered
carefully National C ity’s branch closing policy and its
record of opening and closing branches. Examiners
reviewed National C ity’s branch closing policy as part
of the most recent CRA evaluations of each of National
City’s banks and found that it complied with federal law.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings .20 Federal law requires an insured deposi­
tory institution to provide notice to the public and to the
appropriate federal supervisory before closing a branch. In
addition, the Board notes that the FDIC, as the appropriate
federal supervisor of Allegiant Bank, will continue to
review its branch closing record in the course of conduct­
ing CRA performance evaluations.
D. C onclusion on C onvenience and N eeds Factor
The Board has carefully considered all the facts of record,
including reports of examination of the CRA records of the
institutions involved, information provided by National
City, public comment on the proposal, and confidential
supervisory information. Based on a review of the entire
record, and for the reasons discussed above, the Board
concludes that considerations relating to the convenience
and needs factor, including the CRA performance records
o f the relevant depository institutions, are consistent with
approval.
Nonbanking Activities
National City also has filed a notice under sections 4(c)(8)
and 4(j) of the BHC Act to acquire the nonbanking subsid­
iaries of Allegiant. The subsidiaries engage in activities
related to extending credit, providing investment advice,
20.
Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
§ 183 lr -1), as implemented by the Joint Policy Statement Regarding
Branch Closings (64 Federal Register 34,844 (1999)), requires that a
bank provide the public with at least 30 days’ notice and the appropri­
ate federal supervisory agency and customers of the branch with at
least 90 days’ notice before the date of the proposed branch closing.
The bank also is required to provide reasons and other supporting data
for the closure, consistent with the institution’s written policy for
branch closings.




and engaging in community development. The Board has
determined by regulation that these activities are perm is­
sible for bank holding companies under the Board’s Regu­
lation Y,21 and National City has committed to conduct
these activities in accordance with the Board’s regulations
and orders for bank holding companies engaged in these
activities.
To approve the notice, the Board must determine that the
acquisition of the nonbanking subsidiaries of Allegiant and
the performance of the proposed activities by National City
“ can reasonably be expected to produce benefits to the
public . . . that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair com­
petition, conflicts of interests, or unsound banking prac­
tices .” 22 As part of its evaluation of these factors, the
Board has considered the financial and managerial
resources of National City and its subsidiaries, and the
companies to be acquired, and the effect of the proposed
transaction on those resources. For the reasons noted
above, and based on all the facts o f record, the Board has
concluded that financial and managerial considerations are
consistent with approval of the notice.
The Board also has considered the competitive effects of
National C ity’s proposed acquisition of the nonbanking
subsidiaries of Allegiant in light of all the facts of record.
National City and Allegiant compete directly in activities
related to extending credit and providing investment
advice. The markets for these activities are regional or
national in scope and are unconcentrated .23 The record in
this case also indicates that there are numerous providers
of these services. Based on all the facts of record, the
Board concludes that consummation of the proposal would
have a de minimis effect on competition for the proposed
activities. Accordingly, the Board concludes that it is
unlikely that significantly adverse competitive effects
would result from the acquisition of Allegiant’s nonbank­
ing subsidiaries.
National City has indicated that the proposal would
provide customers of the two organizations with access
to services across a broader geographic area. National City
has also asserted that customers of Allegiant would gain
access to a broader variety of nonbanking services, such as
trust and securities broker-dealer services. National City
has represented that it intends to integrate A llegiant’s com­
munity development operations with National City’s com­
munity development subsidiary and expand such activities
in the communities served by Allegiant.
Based on all the facts of record, the Board has deter­
mined that consummation of the proposal can reasonably
be expected to produce public benefits that would out­
weigh any likely adverse effects under the standard of
section 4 of the BHC Act.

21. See 12 C.F.R. 225.28(b)(2), (6), and (12).
22. See 12 U.S.C. § 1843(j)(2)(A).
23. In addition, National City and Allegiant engage in community
development activities. The market for community development
activities is local, but National City and Allegiant do not compete
directly in any local market.

Legal Developments

Conclusion
Based on the foregoing and all the facts of record, the
Board has determined that the application and notice
should be, and hereby are, approved .24 In reaching its
conclusion, the Board has considered all the facts of record
in light of the factors that it is required to consider under
the BHC Act and other applicable statutes. The Board’s
approval is specifically conditioned on compliance by
National City with the conditions imposed in this order and
24.
A commenter requested that the Board hold a public meeting or
hearing on the proposal. Section 3(b) of the BHC Act does not require
the Board to hold a public hearing on an application unless the
appropriate supervisory authority for the bank to be acquired makes a
timely written recommendation of denial of the application. The
Board has not received such a recommendation from the appropriate
supervisory authorities. Under its regulations, the Board also may, in
its discretion, hold a public meeting or hearing on an application to
acquire a bank if a meeting or hearing is necessary or appropriate to
clarify factual issues related to the application and to provide an
opportunity for testimony. 12 C.F.R. 225.16(e). Section 4 of the BHC
Act and the Board’s regulations provide for a hearing on a notice to
acquire nonbanking companies if there are disputed issues of material
fact that cannot be resolved in some other matter. 12 C.F.R.
225.25(a)(2). The Board has considered carefully the commenter’s
request in light of all the facts of record. In the Board’s view, the
commenter has had ample opportunity to submit its views and has
submitted written comments that have been considered carefully by
the Board in acting on the proposal. The commenter’s request fails to
demonstrate why written comments do not present its evidence ade­
quately and fails to identify disputed issues of fact that are material to
the Board’s decision that would be clarified by a public meeting or
hearing. For these reasons, and based on all the facts of record, the
Board has determined that a public meeting or hearing is not required
or warranted in this case. Accordingly, the request for a public
meeting or hearing on the proposal is denied.

241

the commitments made to the Board in connection with the
application and notice, including compliance with state
law. The Board’s approval of the nonbanking aspects of
the proposal also is subject to all the conditions set forth
in Regulation Y, including those in sections 225.7 and
225.25(c) (12 C.F.R. 225.7 and 225.25(c)), and to the
Board’s authority to require such modification or termina­
tion of the activities of a bank holding company or any of
its subsidiaries as the Board finds necessary to ensure
compliance with and to prevent evasion of the provisions
o f the BHC Act and the Board’s regulations and orders
issued thereunder. The commitments made in the applica­
tion process are deemed to be conditions imposed in writ­
ing by the Board in connection with its findings and
decisions and, as such, may be enforced in proceedings
under applicable law.
The acquisition of Allegiant Bank may not be consum­
mated before the fifteenth calendar day after the effective
date of this order, and the proposal may not be consum­
mated 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 o f Cleveland, acting
pursuant to delegated authority.
By order of the Board of Governors, effective March 15,
2004.
Voting for this action: Chairman Greenspan, Vice Chairman Fergu­
son, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.
R o b e r t d eV . F r ie r s o n

Deputy Secretary o f the Board

Appendix
CRA Performance Evaluations of National City
Subsidiary Bank

CRA Rating

Date

Supervisor

1. National City Bank,
Cleveland, Ohio
2. National City Bank of Indiana,
Indianapolis, Indiana
3. The Madison Bank and Trust Company,
Madison, Indiana
4. National City Bank of Kentucky,
Louisville, Kentucky
5. National City Bank of Michigan/Illinois,
Bannockburn, Illinois
6 . National City Bank of Pennsylvania,
Pittsburgh, Pennsylvania
7. National City Bank of Southern Indiana,
New Albany, Indiana

Outstanding

February 2000

OCC

Satisfactory

February 2000

OCC

Outstanding

October 1999

FDIC

Satisfactory

February 2000

OCC

Outstanding

February 2000

OCC

Outstanding

February 2000

OCC

Satisfactory

February 2000

OCC




242

Federal Reserve Bulletin □ Spring 2004

NewAlliance Bancshares, Inc.
New Haven, Connecticut
Order Approving the Formation of a Bank Holding
Company and the Acquisition of a Bank Holding
Company and a Savings Association
NewAlliance Bancshares, Inc. (In Formation) ( “NewAlli­
ance” ) has requested the Board’s approval pursuant to
section 3 of the Bank Holding Company Act (12 U.S.C.
§ 1842) ( “BHC A ct” ) to become a bank holding company
by acquiring New Haven Savings Bank, New Haven,
Connecticut ( “ N H SB ” ), and Alliance Bancorp of
New England ( “Alliance” ) and Tolland Bank ( “ Tolland
Bank” ), both in Vernon, Connecticut. NewAlliance also
has requested the B oard’s approval pursuant to sec­
tion 4(c)(8) and 4(j) of the BHC Act (12 U.S.C. § 4(c)(8)
and 4(j)) and section 225.24 of the Board’s Regulation Y
(12 C.F.R. 225.24)1 to acquire Connecticut Bancshares,
Inc. and The Savings Bank of Manchester ( “ SBM ” ), both
in Manchester, Connecticut .2
Notice of the proposal, affording interested persons an
opportunity to submit comments, has been published
( 6 8 Federal Register 64,109 (2003)). The time for filing
comments has expired, and the Board has considered the
proposal and all comments received in light of the factors
set forth in the BHC Act.
NHSB is the eighth largest depository organization in
Connecticut and controls approximately $1.9 billion in
deposits, representing approximately 2.7 percent of total
deposits in depository institutions in the state ( “ state
deposits ” ) . 3 SBM is the 11th largest depository organiza­
tion in Connecticut, controlling approximately $1.7 billion
in deposits, representing approximately 2.4 percent of state
deposits. Tolland Bank is the 29th largest depository
organization in Connecticut, controlling approximately
$336 million in deposits, representing less than 1 percent
of state deposits. On consummation of the proposal,
NewAlliance would be the fifth largest depository organi­
zation in Connecticut, controlling approximately $3.9 bil­
lion in deposits, representing approximately 5.5 percent of
state deposits.

1. NHSB, Tolland Bank, and SBM are chartered as Connecticut
state savings banks. SBM does not meet the definition of “bank” for
purposes of the BHC Act, because it is deemed to be a savings
association under section 10(/) of the Home Owners’ Loan Act.
See 12 U.S.C. §§ 1467a(Z), 1841(c) and (j).
2. This proposal involves the conversion of NHSB from mutual to
stock form and the merger of SBM and Tolland Bank into NHSB
under the new name NewAlliance Bank. The Federal Deposit Insur­
ance Corporation ( “FDIC” ) has notified NHSB of its intention not to
object to the conversion of NHSB from mutual to stock form, and the
Connecticut Department of Banking has approved the conversion of
NHSB to stock form. NewAlliance has filed an application under the
Bank Merger Act (12 U.S.C. § 1828(c)) with the FDIC and an applica­
tion with the Connecticut Department of Banking to complete the
various mergers.
3. State deposits and ranking data are as of June 30, 2003. In this
context, depository institutions include commercial banks, savings
associations, and savings banks.




Factors Governing Board Review o f the Transaction
The BHC Act sets forth the factors that the Board must
consider when reviewing the formation of a bank hold­
ing company or the acquisition of banks. These factors are
the competitive effects of the proposal in the relevant
geographic markets; the financial and managerial resources
and future prospects of the companies and banks involved
in the proposal; the convenience and needs of the com mu­
nity to be served, including the records of performance of
insured depository institutions involved in the transaction
under the Community Reinvestment Act (12 U.S.C. §2901
et seq.) ( “ CRA” ); and the availability of information
needed to determine and enforce compliance with the BHC
Act and other applicable law .4
The Board previously has determined by regulation that
the operation of a savings association by a bank holding
company is closely related to banking for purposes of
section 4(c)(8) of the BHC A ct .5 In reviewing the proposal,
the Board is required by section 4(j)(2)(A ) of the BHC Act
to determine that the acquisition of SBM by NewAlliance
“ can reasonably be expected to produce benefits to the
public . . . that outweigh possible adverse effects, such as
undue concentration of resources, decreased or unfair com­
petition, conflicts of interests, or unsound banking prac­
tices .” 6 As part of its evaluation of a proposal under these
public interest factors, the Board reviews the financial and
managerial resources of the companies involved and the
effect of the proposal on competition in the relevant mar­
kets. In acting on notices to acquire a savings association,
the Board also reviews the records of performance of the
relevant insured depository institutions under the CRA.

Competitive Considerations
Section 3 of the BHC Act prohibits the Board from approv­
ing a proposal that would result in a monopoly or would be
in furtherance of any attempt to monopolize the business of
banking in any relevant banking market. The BHC Act also
prohibits the Board from approving a proposed bank acqui­
sition that would substantially lessen competition in any
relevant banking market unless the anticompetitive effects
of the proposal are clearly outweighed in the public interest
by the probable effect of the proposal in meeting the
convenience and needs of the community to be served .7
The Board also must consider the competitive effects o f the
proposal in the relevant markets under section 4 of the
BHC Act in light of all the facts of record.
NewAlliance proposes to acquire SBM and Tolland
Bank, which currently compete in the Hartford, Connecti­
cut, banking m arket . 8 Consummation of the proposal
would be consistent with the Department of Justice M erger

4. 12 U.S.C. § 1842(c).
5. 12 C.F.R. 225.28(b)(4)(ii).
6. 12 U.S.C. §1843(j)(2)(A ).
7. 12 U.S.C. § 1842(c)(1).
8. The Hartford banking market is defined as the Hartford-New
Britain Ranally Metropolitan Area.

Legal Developments

Guidelines ( “DOJ Guidelines” ) and Board precedent .9
Although the market would remain highly concentrated
after consummation, as measured by the HHI, the change
in market shares and market structure would be small and
numerous competitors would remain in the market . 10 The
Department of Justice has advised the Board that consum­
mation of the proposal is not likely to have a significantly
adverse effect on competition in any relevant banking
market.
Based on the facts of record, the Board concludes that
consummation of the proposal would not have a signifi­
cantly adverse effect on competition or on the concentra­
tion of banking resources in the Hartford banking market
or any other relevant banking market, and that competitive
considerations are consistent with approval.

Financial, Managerial, and Other Supervisory Factors
In applications and notices involving the acquisition of an
insured depository institution, the BHC Act requires the
Board to consider the financial and managerial resources
and future prospects of the companies and depository insti­
tutions involved in the proposal and certain other supervi­
sory factors. The Board has considered, among other
things, confidential reports of examination, other confiden­
tial supervisory information received from the primary
federal banking agency that supervises each institution,
and public comments . 11

9. Under the DOJ Guidelines, 49 Federal Register 26,823 (1984),
a market is considered highly concentrated if the post-merger
Herfindahl-Hirschman Index ( “HHI” ) is more than 1800. The Depart­
ment o f Justice has informed the Board that a bank merger or acqui­
sition 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 more than 200 points.
The Department o f Justice has stated that the higher than normal HHI
thresholds for screening bank mergers for anticompetitive effects
implicitly recognize the competitive effects of limited-purpose lenders
and other nondepository financial institutions.
10. On consummation o f the proposal, New Alliance would become
the fifth largest depository institution in the Hartford banking market,
controlling deposits o f $2 billion, which represents approximately
4.8 percent o f total deposits in insured depository institutions in the
market. The HHI would increase 5 points to 2355. These calculations
use deposit and market share data as of June 30, 2003, and weight the
deposits of thrift institutions, including Connecticut state savings
banks, at 50 percent. The Board previously has indicated that thrift
institutions have become, or have the potential to become, significant
competitors o f commercial banks. See M idwest Financial Group,
75 Federal Reserve Bulletin 386 (1989); National City Corporation,
70 Federal Reserve Bulletin 743 (1984); First Hawaiian, Inc., 77 Fed­
eral Reserve Bulletin 52 (1991). The proportion of commercial and
industrial lending engaged in by SBM, Tolland Bank, and two other
Connecticut state savings banks operating in the Hartford banking
market constitutes more than 10 percent of the total loan portfolio of
each institution and is comparable with the proportion of commercial
and industrial lending o f commercial banks operating in the market. If
these institutions were weighted at 100 percent while other thrifts
were weighted at 50 percent, the HHI would increase by 22 points to
2104.
11. A commenter suggested that the conversion of NHSB from
mutual to stock form would result in the sale of the institution to a




243

NHSB, SBM, and Tolland Bank are well capitalized and
New Alliance Bank would be well capitalized on consum­
mation o f the proposal. In addition, the Board has con­
sulted with the FDIC, the primary federal supervisor of
the relevant depository institutions, and the Connecticut
Department of Banking concerning the proposal. Based on
all the facts of record, the Board has concluded that consid­
erations relating to the financial and managerial resources
and future prospects of New Alliance and the institutions
involved in the proposal are consistent with approval, as
are the other supervisory factors under the BHC Act.

Convenience and Needs Considerations
In acting on proposals under section 3 of the BHC Act, the
Board is also required to consider the effects of the pro­
posal on the convenience and needs of the communities
to be served and to take into account the records o f the
relevant insured depository institutions under the CRA. In
addition, the Board reviews the records of performance
under the CRA of the relevant insured depository institu­
tions when acting on a notice under section 4 of the BHC
Act to acquire an insured savings association. 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 their safe and sound operation, and it
requires the appropriate supervisory agency to take into
account an institution’s record of meeting the credit needs
of its entire community, including low- and moderate income ( “LM I” ) neighborhoods, in evaluating depository
institution expansionary proposals.
The Board has considered carefully the convenience and
needs factor and the CRA performance records of NHSB,
SBM, and Tolland Bank in light of all the facts of record,
including public comments on the proposal. A commenter
opposing the proposal alleged, based on data reported
under the Home Mortgage Disclosure Act (12 U.S.C.
§2801 et seq.) ( “ HMDA” ), that NHSB, SBM, and Tolland
Bank disproportionately denied home mortgage credit
to minorities in certain M etropolitan Statistical Areas
( “M SAs” ). In addition, the commenter expressed concern
about possible branch closures and reductions in service
after consummation of the proposal . 12

larger banking organization. Any subsequent proposed acquisition of
New Alliance and NewAlliance Bank would be subject to approval by
the appropriate federal and state banking agencies at that time under
applicable law.
12.
Another commenter urged the Board to require as a condition
o f its approval that NewAlliance increase the amount of interest it
pays on certain client trust accounts maintained by attorneys for the
benefit of their clients. The Board notes that NewAlliance has repre­
sented that it would review the amount of interest NewAlliance Bank
would pay on those accounts after consummation of the proposal.
Moreover, although the Board has recognized that banks can help to
serve the banking needs of communities by making certain products
or services available at certain rates, the CRA does not require an
institution to provide any specific types of products or services or
prescribe the costs charged for them.

244

Federal Reserve Bulletin □ Spring 2004

A. C R A P erform ance Evaluation

B. H M D A and Fair L ending Record

As provided for in the CRA, the Board has evaluated the
convenience and needs factor in light of examinations by
the appropriate federal supervisors of the CRA perfor­
mance records of the relevant insured depository institu­
tions. An institution’s most recent CRA performance
evaluation is a particularly important consideration in the
applications process because it represents a detailed on-site
evaluation of the institution’s overall record of per­
formance under the CRA by its appropriate federal
supervisor . 13
NHSB received an “ outstanding” rating at its most
recent CRA performance evaluation by the FDIC, as of
July 8 , 2002. N H SB’s responsiveness to the credit needs of
its community was found to be good. Examiners com­
mended N H SB’s record of home mortgage lending to
borrowers of different income levels and its small business
lending record. In addition, examiners commended the
bank’s record of community development lending and its
level of qualified investments.
SBM received a “ satisfactory” rating at its most recent
CRA performance evaluation by the FDIC, as of May 12,
2003. Examiners determined that SBM ’s CRA-related
lending activities demonstrated a good responsiveness to
the credit needs of its community and noted that SBM ’s
home mortgage lending was particularly strong. In addi­
tion, examiners noted that SBM offered several flexible
and innovative loan programs for individuals and small
businesses. SBM also was found to have engaged in a
significant level of qualified investments that benefited
various programs, including affordable housing develop­
ments.
Tolland Bank received a “ satisfactory” rating at its
most recent CRA performance evaluation by the FDIC, as
of November 15, 2001. Examiners commended Tolland
Bank’s record of CRA-related lending among borrowers of
different income levels and business customers of different
sizes. In addition, examiners noted that the percentage of
home mortgage loans made by Tolland Bank to lowincome borrowers in 1999 and 2000, and the percentage of
such loans made by the bank in moderate-income commu­
nities in 2 0 0 0 , compared favorably with the percentages of
these types of loans made by the aggregate lenders in the
assessment area. Tolland Bank also was found to have
provided strong retail banking and community develop­
ment services.
New Alliance has represented that the CRA policy of
New Alliance Bank would be modeled on the CRA pol­
icy of NHSB. The CRA record of NHSB indicates that
New Alliance has the experience and expertise to establish
and implement appropriate CRA policies and programs
at NewAlliance Bank. As part of its CRA program,
New Alliance has recently announced a five-year, $27.5 mil­
lion initiative to expand and develop affordable housing
opportunities for LMI borrowers and in LMI communities.

The Board also has carefully considered the lending
records and HMDA data for NHSB, SBM, and Tolland
Bank in light of comments received . 14 One commenter
alleged that NHSB disproportionately denied AfricanAmerican and Hispanic applicants for home mortgage
loans in the Connecticut MSAs o f Bridgeport, New Haven,
and New London . 15 The commenter asserted that the
denial disparity ratios for minority applications at N H S B 16
were higher than for nonminority applicants in these
MSAs, and that those ratios compared unfavorably with
the denial disparity ratios for lenders in the aggregate
( “ aggregate lenders ” ) . 17 The commenter also made the
same allegations with regard to SBM ’s home purchase
lending and criticized Tolland Bank’s level of lending to
minorities in the Hartford, Connecticut, MSA.
The 2001 and 2002 HMDA data indicate that NHSB and
SBM had somewhat higher denial disparity ratios than
aggregate lenders for total home mortgage lending to m i­
nority individuals in the Bridgeport, Hartford, New Haven,
and New London MSAs. These data, however, indicate
that NHSB and SBM demonstrated higher loan origination
rates for mortgage loans to minority individuals in other
areas. For example, N H SB’s origination rate for HMDAreportable loans to African-American and Hispanic appli­
cants in New Haven exceeded the rate for aggregate lend­
ers . 18 In addition, the 2002 HMDA data indicate that
N H SB’s denial disparity ratio for Hispanic applicants for
refinance loans in New Haven was less than the ratio for
aggregate lenders. The 2002 HMDA data indicate that
SBM ’s denial disparity ratio for African-American appli­
cants for all HMDA-reportable loans in Hartford was
less than the ratio for aggregate lenders in 2002. The
HMDA data also indicate that SBM ’s denial disparity
ratios decreased between 2001 and 2002 in HMDAreportable lending to African-American and Hispanic
applicants when compared with those ratios for aggregate
lenders.
The 2001 and 2002 HMDA data indicate a low volume
of applications by minority individuals at Tolland Bank. As
previously noted, Tolland Bank would be merged into
NewAlliance Bank on consummation of the proposal.
NewAlliance has indicated that NewAlliance Bank would
implement N H SB’s current outreach program to minor­

13.
See Interagency Questions and Answers Regarding Community
Reinvestment, 66 Federal Register 36,620 and 36,639 (2001).




14. The Board has reviewed HMDA data reported by NHSB,
SBM, and Tolland Bank in 2001 and 2002 in the area cited by the
commenter.
15. The commenter also expressed concern that N H SB’s volume of
applications by minority individuals compares unfavorably with the
volume of these applications for aggregate lenders.
16. The denial disparity ratio equals the denial rate for a particular
racial category (for example, African-American) divided by the denial
rate for whites.
17. In this context, the lending data of the aggregate lenders
represent the cumulative lending for all financial institutions that have
reported HMDA data in a given area.
18. The origination rate equals the total number of loans originated
to applicants of a particular racial category divided by the number of
applications received by members of that racial category.

Legal Developments

ity individuals and would modify outreach efforts as
appropriate.
Although the HMDA data reflect certain disparities in
the rates of loan applications, originations, and denials
among members of different racial groups in some areas,
the data generally do not indicate that NHSB, SBM, or
Tolland Bank are excluding any race or income segment of
the population or geographic areas on a prohibited basis.
The Board nevertheless is concerned when the record of an
institution indicates disparities in lending and believes that
all banks are obligated to ensure that their lending practices
are based on criteria that ensure not only safe and sound
lending, but also equal access to credit by creditworthy
applicants regardless of their race, gender, or national
origin. The Board recognizes, however, that HMDA data
alone provide an incomplete measure of an institution’s
lending in its community because these data cover only a
few categories of housing-related lending. HMDA data,
moreover, provide only limited information about the cov­
ered loans . 19 HMDA data, therefore, have limitations that
make them an inadequate basis, absent other information,
for concluding that an institution has not assisted ade­
quately in meeting its com munity’s credit needs or has
engaged in illegal lending discrimination .20
Because of the limitations of HMDA data, the Board has
considered these data carefully in light of other informa­
tion, including examination reports that provide an on-site
evaluation of compliance with fair lending laws by NHSB,
SBM, and Tolland Bank. In the latest performance evalua­
tions, examiners found no evidence of prohibited discrimi­
nation or other illegal credit practices or any substantive
violations of fair lending laws at any of the institutions
involved in the proposal.
The record also indicates that NHSB has taken a number
of affirmative steps to ensure compliance with fair lending
laws and, as previously indicated, would implement
N H SB’s compliance program as a model for NewAlliance
Bank. NHSB has instituted compliance policies and proce­
dures to help ensure compliance with all fair lending and
other consumer protection laws and regulations, employed

19. The data, for example, do not account for the possibility that an
institution’s outreach efforts may attract a larger proportion of margin­
ally qualified applications than other institutions attract and do not
provide a basis for an independent assessment of whether an applicant
who was denied credit was, in fact, creditworthy. Credit history
problems and excessive debt levels relative to income (reasons most
frequently cited for a credit denial) are not available from HMDA
data.
20. A commenter asserted, based solely on HMDA data and
without providing any other supporting facts, that NHSB violated
the Equal Credit Opportunity Act (15 U.S.C. § 1691) ( “ECOA” ) and
HMDA. In evaluating the convenience and needs factors, the Board
has considered confidential supervisory information and detailed
information submitted by NewAlliance regarding N H SB’s fair lend­
ing policies and procedures and its plans to implement those policies
at the combined institution. In addition, ECOA and HMDA provide
that enforcement authority under those statutes is granted to the
primary federal supervisor o f the institution, which is the FDIC in this
case. The Board has forwarded the comments to the FDIC, and the
FDIC has ample authority to enforce these provisions if violations are
found.




245

officers and staff responsible for monitoring compliance,
and conducted regular audits and reviews of compliance.
As part of its compliance monitoring program, all denied
loan applications are subject to a second-review process. In
addition, NHSB has made efforts to increase its outreach to
minority individuals by placing advertisements in Spanishlanguage newspapers and other publications serving minor­
ity communities. NewAlliance has stated that it would
establish a self-assessment process for NewAlliance Bank,
which would be reviewed by the compliance department.
Moreover, NewAlliance’s compliance and internal audit
staff would conduct training programs and independent
compliance reviews of each NewAlliance Bank business
unit with respect to certain regulations, including consumer
compliance and fair lending laws and regulations.
The Board also has considered the HMDA data in light
of the overall lending and community development activi­
ties of NHSB, SBM, and Tolland Bank, which, as dis­
cussed above, show that all three institutions significantly
assist in helping to meet the credit needs of their entire
communities, including LMI areas. These established
efforts demonstrate that the banks actively help to meet the
credit needs of their entire communities.
C. Branch Closings
A commenter expressed concern about possible branch
closures after the consummation of the proposal and sub­
sequent merger of NHSB, SBM, and Tolland Bank.
NewAlliance has represented that it would adopt N H SB’s
branch closure policies on consummation of the proposal
and that any consolidations or branch closings would com­
ply with this policy and all applicable rules and regula­
tions. Moreover, NewAlliance has indicated that it would
remain in each market currently served by NHSB, SBM,
and Tolland Bank, and would not close any branches of
any bank as part of the proposal’s consummation. Examin­
ers at N H SB’s most recent CRA performance evaluation
reported that the bank’s branch network adequately served
the retail banking needs of its assessment area.
The Board also has considered the fact that federal
banking law provides a specific mechanism for addressing
branch closings .21 Federal law requires an insured deposi­
tory institution to provide notice to the public and to the
appropriate federal supervisor before closing a branch. In
addition, the Board notes that the FDIC, as the appropriate
federal supervisor of NHSB, will continue to review its
branch closing record in the course of conducting CRA
performance evaluations.

21.
Section 42 of the Federal Deposit Insurance Act (12 U.S.C.
§ 183 lr -1), as implemented by the Joint Policy Statement Regarding
Branch Closings (64 Federal Register 34,844 (1999)), requires that a
bank provide the public with at least 30 days’ notice and the appropri­
ate federal supervisory agency and customers of the branch with at
least 90 days’ notice before the date of the proposed branch closing.
The bank also is required to provide reasons and other supporting data
for the closure, consistent with the institution’s written policy for
branch closings.

246

Federal Reserve Bulletin □ Spring 2004

D. Conclusion on C onvenience and N eeds
C onsiderations
In reviewing the effect of the proposal on the convenience
and needs of the communities to be served, the Board has
carefully considered the entire record, including comments
received and responses to the comments; evaluations of the
performance of NHSB, SBM, and Tolland Bank under the
CRA; and confidential supervisory information. The Board
also considered information submitted by NewAlliance
concerning the performance of NHSB, SBM, and Tolland
Bank under the CRA since their last CRA performance
evaluations and the policies and procedures in place to
ensure compliance with fair lending laws, HMDA, and
other applicable laws.
Based on all the facts of record, and for reasons dis­
cussed above, the Board concludes that considerations
relating to the convenience and needs factor, including the
CRA performance records of the relevant depository insti­
tutions, are consistent with approval of the proposal.
Other Considerations
As part of its evaluation of the public interest factors under
section 4 of the BHC Act, the Board also has carefully
reviewed the public benefits and possible adverse effects of
the proposed acquisition of SBM. The record indicates that
consummation of the proposal would result in benefits to
SBM ’s consumer and business customers. The proposal
would allow NewAlliance to provide customers of SBM,
as well as those of Tolland Bank and NHSB, with access to
a broader array of commercial banking products and ser­
vices. Customers also would have access to expanded
branch and ATM networks. Based on all the facts of
record, the Board has determined that consummation of the
proposal can reasonably be expected to produce public
benefits that would outweigh any likely adverse effects
under the standard of section 4 of the BHC Act.

this conclusion, the Board has considered all the facts of
record in light of the factors that it is required to consider
under the BHC Act and other applicable statutes. The
Board’s approval is specifically conditioned on compliance
by NewAlliance with all the representations and commit­
ments made in connection with this Order and the receipt
of all other regulatory approvals. The B oard’s approval of
the nonbanking aspects o f the proposal also is subject to all
the conditions set forth in Regulation Y, including those
in sections 225.7 and 225.25(c) of Regulation Y (12 C.F.R.
225.7 and 225.25(c)), and to the Board’s authority to
require such modification or termination of the activities of
a bank holding company or any of its subsidiaries as the
Board finds necessary to ensure compliance with, and to
prevent evasion of, the provisions of the BHC Act and the
Board’s regulations and orders issued thereunder. For pur­
poses of this action the commitments and conditions are
deemed to be conditions imposed in writing by the Board
in connection with its findings and decision and, as such,
may be enforced in proceedings under applicable law.
The banking acquisition shall not be consummated
before the fifteenth calendar day after the effective date of
this order, and the proposal may not be consummated later
than three months after the effective date of this order,
unless such period is extended for good cause by the Board
or by the Federal Reserve Bank of Boston acting pursuant
to delegated authority.
By order of the Board of Governors, effective Febru­
ary 25, 2004.
Voting for this action: Chairman Greenspan, Vice Chairman Fergu­
son, and Governors Gramlich, Bies, Olson, Bernanke, and Kohn.
R o b e r t d eV . F r ie r s o n

Deputy Secretary o f the Board

O r d e r s I s s u e d u n d e r I n t e r n a t io n a l
A ct

b a n k in g

Conclusion
Based on the foregoing and in light of all the facts of
record, the Board has determined that the applications and
notice should be, and hereby are, approved . 22 In reaching
22.
A commenter requested that the Board hold a public hearing on
the proposal. Section 3 of the BHC Act does not require the Board to
hold a public hearing on an application unless the appropriate super­
visory authority for any of the banks to be acquired makes a timely
written recommendation of denial of the application. The Board has
not received such a recommendation from any appropriate super­
visory authority. Under its rules, the Board also may, in its discretion,
hold a public meeting or hearing on an application to acquire a bank
if a meeting or hearing is necessary or appropriate to clarify factual
issues related to the application and to provide an opportunity for
testimony. 12 C.F.R. 225.16(e). In addition, section 4 of the BHC Act
and the Board’s rules thereunder provide for a hearing on a notice to
acquire a nonbanking company if there are disputed issues of material
facts that cannot be resolved in some other manner. 12 C.F.R.
225.25(a)(2). The Board has considered carefully the commenter’s
request in light o f all the facts of record. In the Board’s view, the
public has had ample opportunity to submit comments on the pro-




Gjensidige NOR Sparebank ASA
Oslo, Norway
Order Approving Establishment of a Branch
Gjensidige NOR Sparebank ASA ( “Bank” ), Oslo, Nor­
way, a foreign bank within the meaning of the International
Banking Act ( “ IBA” ), has applied under section 7(d) of

posal, and in fact, the commenter has submitted written comments that
the Board has considered carefully in acting on the proposal. The
commenter’s request fails to identify disputed issues o f fact that are
material to the Board’s decisions that would be clarified by a public
hearing or meeting. Moreover, the commenter’s request fails to dem­
onstrate why its written comments do not present its views adequately
or why a meeting or hearing otherwise would be necessary or appro­
priate. For these reasons, and based on all the facts of record, the
Board has determined that a public hearing or meeting is not required
or warranted in this case. Accordingly, the request for a public hearing
or meeting on the proposal is denied.

Legal Developments

the IBA (12 U.S.C. § 3105(d)) to establish a branch in
New York, New York. The Foreign Bank Supervision
Enhancement Act of 1991, which amended the IBA, pro­
vides that a foreign bank must obtain the approval of the
Board to establish a branch in the United States.
Notice of the application, affording interested persons an
opportunity to comment, has been published in newspapers
of general circulation in New York, New York (New York
Post, July 18, 2003). The time for filing comments has
expired, and all comments have been considered.
Bank, with total assets of $37.3 billion, is the third
largest bank in Norway . 1 It is a wholly owned subsidiary
of DnB NOR ASA ( “ DnB N O R” ), which was formed as
a result of a merger in 2003 of Bank’s former parent,
Gjensidige NOR ASA, with DnB Holding ASA, all in
Oslo. DnB NOR is the holding company for Norw ay’s
largest financial services group. The government of Nor­
way controls approximately 31.3 percent of the shares
of DnB N O R .2 In addition, Stiftelsen Gjensidige NOR
Sparebank (a savings bank foundation) controls 10.3 per­
cent and Gjensidige NOR Forsikring (an insurance com­
pany) controls 5.4 percent of the shares of DnB NOR. No
other shareholder controls more than 5 percent of DnB
N O R’s voting shares. DnB NOR provides a wide variety of
financial services, including retail and corporate banking,
insurance, brokerage services, and asset management. Bank
is primarily engaged in retail and corporate banking and
real estate brokerage services. DnB NOR and Bank are
qualifying foreign banking organizations pursuant to Regu­
lation K.
Bank currently has no operations in the United States.
However, Den norske Bank ASA (“ Den norske Bank” ),
also in Oslo and a wholly owned subsidiary of DnB NOR,
operates a branch in New York. DnB NOR intends to
merge Den norske Bank into Bank, with Bank as the
surviving entity. Bank’s proposed New York branch would
assume the banking activities of Den norske Bank’s
New York branch, which include lending, letters of credit
and overdraft facilities, foreign exchange transactions, cash
management, and financial advisory services.
In order to approve an application by a foreign bank to
establish a branch in the United States, the IBA and Regu­
lation K require the Board to determine that the foreign
bank applicant engages directly in the business of banking
outside of the United States and has furnished to the Board
the information it needs to assess the application ade­
quately. The Board also shall take into account whether
the foreign bank and any foreign bank parent is subject
to comprehensive supervision or regulation on a consoli­
dated basis by its home country supervisor (12 U.S.C.
1. Asset data are as o f September 30, 2003.
2. In accordance with a decision by the Norwegian Parliament, the
government is expected to increase its ownership interest to 34 per­
cent by the end o f 2004. The government holds its interest through
a separate legal entity, the Government Bank Investment Fund
(“Fund” ). The Fund was established in 1991 as part of a package of
measures intended to resolve Norway’s banking crisis. The govern­
ment intends to dissolve the Fund in 2004, after which the govern­
ment’s interest in DnB NOR will be held by Norway’s Ministry of
Trade and Industry.




247

§ 3 105(d)(2); 12 C.F.R. 211.24).3 The Board may also take
into account additional standards as set forth in the IBA
and Regulation K (12 U.S.C. §3105(d)(3)-(4); 12 C.F.R.
211.24(c)(2)-(3)).
As noted above, Bank engages directly in the business of
banking outside the United States. Bank also has provided
the Board with information necessary to assess the applica­
tion through submissions that address the relevant issues.
W ith respect to supervision by home country authorities,
the Board has previously determined, in connection with
an election to be treated as a financial holding company,
that another bank in Norway was subject to home country
supervision on a consolidated basis .4 Bank is supervised by
N orway’s home country supervisor, Kredittilsynet, on sub­
stantially the same terms and conditions as that other bank.
Based on all the facts of record, it has been determined that
Bank is subject to comprehensive supervision on a consoli­
dated basis by its home country supervisor.
The Board has also taken into account the additional
standards set forth in section 7 of the IBA and Reg­
ulation K (see 12 U.S.C. §3105(d)(3)-(4); 12 C.F.R.
211.24(c)(2)-(3)). Kredittilsynet has no objection to the
establishment of the proposed branch.
N orw ay’s risk-based capital standards are consistent
with those established by the Basel Capital Accord. Bank’s
capital is in excess of the minimum levels that would
be required by the Basel Capital Accord and is consid­
ered equivalent to capital that would be required of a
U.S. banking organization. Managerial and other finan­
cial resources of Bank also are considered consistent with
approval, and Bank appears to have the experience
and capacity to support the proposed branch. In addition,
Bank has established controls and procedures for the pro­
posed branch to ensure compliance with U.S. law, as well
as controls and procedures for its worldwide operations
generally.
Norway is a member of the Financial Action Task Force
and subscribes to its recommendations on measures to
combat money laundering. In accordance with these rec­
ommendations, Norway has enacted laws and created legis­
lative and regulatory standards to deter money laundering.
3. In assessing this standard, the Board considers, among other
factors, the extent to which the home country supervisors:
(i) ensure that the bank has adequate procedures for monitoring
and controlling its activities worldwide;
(ii) obtain information on the condition of the bank and its subsid­
iaries and offices through regular examination reports, audit
reports, or otherwise;
(iii) obtain information on the dealings with and relationship
between the bank and its affiliates, both foreign and domestic;
(iv) receive from the bank financial reports that are consolidated on
a worldwide basis or comparable information that permits
analysis of the bank’s financial condition on a worldwide
consolidated basis;
(v) evaluate prudential standards, such as capital adequacy and
risk asset exposure, on a worldwide basis. These are indicia
of comprehensive, consolidated supervision. No single factor
is essential, and other elements may inform the Board’s
determination.
4. See Board Letter dated November 19, 2003, to Robert D.
Webster, Esq.

248

Federal Reserve Bulletin □ Spring 2004

Money laundering is a criminal offense in Norway, and
financial institutions are required to establish internal poli­
cies, procedures, and systems for the detection and preven­
tion of money laundering throughout their worldwide
operations. Bank has policies and procedures to comply
with these laws and regulations. Bank’s compliance with
applicable laws and regulations is monitored by Bank’s
auditors and Kredittilsynet.
With respect to access to information about Bank’s
operations, the Board has reviewed the restrictions on
disclosure in relevant jurisdictions in which Bank operates
and has communicated with relevant government authori­
ties regarding access to information. Bank and its ultimate
parent, DnB NOR, have committed to make available to
the Board such information on the operations of Bank and
any of its affiliates that the Board deems necessary to
determine and enforce compliance with the IB A, the Bank
Holding Company Act, and other applicable federal law.
To the extent that the provision of such information to the
Board may be prohibited by law or otherwise, Bank and
its ultimate parent have committed to cooperate with the
Board to obtain any necessary consents or waivers that
might be required from third parties for disclosure of such
information. In addition, subject to certain conditions,
Kredittilsynet may share information on Bank’s operations
with other supervisors, including the Board. In light of
these commitments and other facts of record, and subject to
the condition described below, it has been determined that
Bank has provided adequate assurances of access to any
necessary information that the Board may request.
On the basis o f all the facts of record, and subject to
the commitments made by Bank and its ultimate par­




ent, as well as the terms and conditions set forth in this
order, Bank’s application to establish a branch is hereby
approved .5 Should any restrictions on access to inform a­
tion on the operations or activities of Bank and its affiliates
subsequently interfere with the Board’s ability to obtain
information to determine and enforce compliance by Bank
or its affiliates with applicable federal statutes, the Board
may require termination o f any of Bank’s direct or indirect
activities in the United States. Approval of this application
also is specifically conditioned on compliance by Bank
with the commitments made in connection with this appli­
cation and with the conditions in this order .6 These commit­
ments and conditions are deemed to be conditions imposed
in writing by the Board in connection with this decision
and, as such, may be enforced in proceedings under appli­
cable law against Bank and its affiliates.
By order, approved pursuant to authority delegated by
the Board, effective January 16, 2004.
R o b e r t deV . F r ie r s o n

Deputy Secretary o f the Board

5. Approved by the Director of the Division of Banking Super­
vision and Regulation, with the concurrence of the General Counsel,
pursuant to authority delegated by the Board.
6. The Board’s authority to approve the establishment o f the
proposed branch parallels the continuing authority of the State of
New York to license offices of a foreign bank. The Board’s approval
of this application does not supplant the authority of the State of
New York to license the proposed office o f Bank in accordance with
any terms or conditions that it may impose.

249

Membership of the Board of Governors
of the Federal Reserve System, 1913-2003
A p p o in t e d M e m b e r s '
N

Federal Reserve
District

Charles S. Hamlin ........... ....Boston ..............

Date initially took
oath of office

Aug. 10, 1914

Paul M. Warburg ............. ... .New Y ork.......... ......Aug.
Frederic A. Delano .......... ....Chicago ............. ......Aug.
W.P.G. Harding ................ ....Atlanta .............. ......Aug.
Adolph C. Miller ............. ....San Francisco ...
Aug.

10,
10,
10,
10,

1914
1914
1914
1914

Albert Strauss .................. ... .New Y ork.......... ......Oct. 26, 1918
Henry A. Moehlenpah .... ....Chicago ............. ......Nov. 10, 1919
Edmund Platt ........................ . . . .New Y ork.......... ......June 8, 1920
David C. W ills................. ....C leveland.......... ......Sept. 2 9 , 1920
John R. Mitchell .............. ....Minneapolis ...... ........May 12, 1921
Milo D. Campbell ............... ....Chicago ................. ........Mar. 14, 1923
Daniel R. Crissinger ......... ....C leveland.......... ......May 1, 1923
George R. James ................. . . . .St. Louis ............... ......May 14, 1923
Edward H. Cunningham .. ....Chicago ............. ......May 14, 1923
Roy A. Y oung.................. ....Minneapolis ...... ......Oct. 4, 1927
Eugene Meyer ................. . . . .New Y ork ............. ........ Sept. 16, 1930
Wayland W. M agee ............. . . . .Kansas City ........ ........May 18, 1931
Eugene R. B lack ................... ....Atlanta ................... ........May 19, 1933
M.S. Szymczak .................... ....Chicago ............. ......June 14, 1933
J.J. T hom as....................... . . . .Kansas City ...... ......June 14, 1933
Marriner S. E ccles........... . . . .San Francisco . . .
Nov. 15, 1934
Joseph A. Broderick ........ . . . .New Y ork.......... ........Feb. 3, 1936
John K. McKee ..................... ....C leveland ............. ......Feb. 3, 1936
Ronald R ansom ..................... ....Atlanta .............. ......Feb. 3, 1936
Ralph W. M orrison...............Dallas ..................... ........Feb. 10, 1936
Chester C. Davis ................. ....Richmond ........... ........June 2 5 , 1936
Ernest G. Draper ................. . . . .New Y ork ............. ........Mar. 30, 1938
Rudolph M. Evans ............. . ...Richmond ........... ......Mar. 14, 1942
James K. Vardaman, Jr.
....St. Louis ........... ......Apr. 4, 1946
Lawrence C layton............. ...Boston .............. ......Feb. 14, 1947
Thomas B. M cC abe..............Philadelphia ...... ......Apr. 15, 1948
Edward L. Norton.............. ...Atlanta .............. ......Sept. 1, 1950
Oliver S. Powell ............... ...Minneapolis ...... ........Sept. 1, 1950
Wm. McC. Martin, Jr. ....... . . . .New Y ork.......... ......April 2, 1951
A.L. Mills, Jr. .................... ...San Francisco ... ......Feb. 18, 1952
J.L. Robertson .................. . . .Kansas City ...... ......Feb. 18, 1952
C. Canby Balderston........ ...Philadelphia ...... ......Aug. 12, 1954
Paul E. Miller .................... ...Minneapolis ...... ......Aug. 13, 1954
Chas. N. Shepardson........ ...Dallas ..................... ........Mar. 17, 1955
G.H. King, Jr....................... ...Atlanta .............. ......Mar. 25, 1959
George W. Mitchell .......... ...Chicago ....................Aug. 31, 1961
J. Dewey Daane ................ ...Richmond ..................Nov. 29, 1963
Sherman J. M aisel ................. .. .San Francisco . . . ........Apr. 3 0 , 1965
Andrew F. Brim m er ............. ...Philadelphia ........ ......Mar. 9, 1966
William W. Sherrill .......... ...D a lla s ...................... ........May 1, 1967
Arthur F. Burns ....................... .. .New Y ork.................Jan. 31, 1970
John E. Sheehan ................ .. .St. Louis ............ ......Jan. 4, 1972
Jeffrey M. Bucher ............. ...San Francisco ..........June 5, 1972
Robert C. H olland............. .. .Kansas City .............June 11, 1973
Henry C. Wallich .............. ...Boston .................... ....... Mar. 8, 1974




Other dates and information relating
to membership2

R e a p p o in te d in 1 91 6 a nd 1926. S e rv e d u n til
F eb. 3, 1 9 3 6 .3
T e rm e x p ire d A u g . 9 , 1918.
R e s ig n e d J u ly 2 1, 1918.
T e rm e x p ire d A u g . 9, 1922.
R e a p p o in te d in 1924. R e a p p o in te d in 1 93 4 fro m the
R ic h m o n d D is tric t. S e rve d u n til F e b. 3, 1 9 3 6 .3
R e s ig n e d M a r. 15, 1920.
T e rm e x p ire d A u g . 9 , 1920.
R e a p p o in te d in 1928. R e s ig n e d S ept. 14, 1930.
T e rm e x p ire d M a r. 4 , 1921.
R e s ig n e d M a y 12, 1923.
D ie d M a r. 2 2, 1923.
R e s ig n e d S ept. 15, 1927.
R e a p p o in te d in 1 93 1. S e rve d u n til F e b. 3, 1 9 3 6 .4
D ie d N o v . 2 8 , 1930.
R e s ig n e d A u g . 3 1 , 1930.
R e s ig n e d M a y 10, 1933.
T e rm e x p ire d Jan. 2 4, 1933.
R e s ig n e d A u g . 15, 1934.
R e a p p o in te d in 1936 a n d 1 94 8. R e s ig n e d M a y 3 1,
u n til F e b. 10, 1 9 3 6 .3
R e a p p o in te d in 193 6, 1940, a nd 194 4. R e s ig n e d
J u ly 14, 1951.
R e s ig n e d S ept. 3 0 , 1937.
S e rve d u n til A p r. 4 , 1 9 4 6 .3
R e a p p o in te d in 1 94 2. D ie d D e c . 2 , 194 7.
R e s ig n e d J u ly 9 , 1936.
R e a p p o in te d in 1940. R e s ig n e d A p r. 15, 1941.
S e rve d u n til S ept. 1, 1 9 5 0 .3
S e rve d u n til A u g . 13, 1 9 5 4 .3
R e s ig n e d N o v . 3 0 , 1958.
D ie d D e c . 4 , 1949.
R e s ig n e d M a r. 3 1, 1951.
R e s ig n e d Jan. 3 1 , 1952.
R e s ig n e d Ju ne 3 0 , 1952.
R e a p p o in te d in 1956. T e rm e x p ire d Jan. 3 1 , 1970.
R e a p p o in te d in 1958. R e s ig n e d F e b. 2 8 , 1965.
R e a p p o in te d in 1964. R e s ig n e d A p r. 3 0 , 1973.
S e rve d th ro u g h F e b. 2 8 , 1966.
D ie d O c t. 2 1 , 1954.
R e tire d A p r. 3 0, 1967.
R e a p p o in te d in 196 0. R e s ig n e d S ept. 18, 1963.
R e a p p o in te d in 1962. S e rv e d u n til F e b. 13, 1 9 7 6 .3
S e rve d u n til M a r. 8, 1 9 7 4 .3
S e rve d th ro u g h M a y 3 1 , 1972.
R e s ig n e d A u g . 3 1, 1974.
R e a p p o in te d in 1968. R e s ig n e d N o v . 15, 1971.
T e rm b e g a n F e b. 1, 1970. R e s ig n e d M a r. 3 1, 1978.
R e s ig n e d Ju ne 1, 1975.
R e s ig n e d Jan. 2, 1976.
R e s ig n e d M a y 15, 1976.
R e s ig n e d D e c . 15, 1986.

250

Federal Reserve Bulletin □ Spring 2004

Name

Federal Reserve
District

Philip E. Coldw ell.......... ......Dallas ................... ...Oct. 29, 1974
Philip C. Jackson, J r ..............Atlanta ................. ...July 14, 1975
J. Charles Partee ............. ......Richmond ............ ...Jan. 5, 1976
Stephen S. G ardner................Philadelphia ......... ...Feb. 13, 1976
David M. Lilly ................ ......Minneapolis ......... ...June 1, 1976
G. William Miller .......... ......San Francisco ...... ...Mar. 8, 1978
Nancy H. Teeters ........... ......Chicago ................ ...Sept. 18, 1978
Emmett J. Rice .............. ......New Y ork............. ...June 20, 1979
Frederick H. Schultz ...... ......Atlanta ................. ...July 27, 1979
Paul A. V olcker.............. ......Philadelphia ......... ...Aug. 6, 1979
Lyle E. Gramley ............. ......Kansas City ......... ...May 28, 1980
Preston Martin ................ ......San Francisco ...... ...Mar. 31, 1982
Martha R. Seger ............. ......Chicago ................ ...July 2, 1984
Wayne D. Angell ........... ......Kansas City ......... ...Feb. 7, 1986
Manuel H. Johnson ....... ......Richmond ............ ...Feb. 7, 1986
H. Robert H eller............. ......San Francisco ...... ...Aug. 19, 1986
Edward W. Kelley, Jr....... ......Dallas ................... ...May 26, 1987
Alan Greenspan ............. ......New Y ork............. ...Aug. 11, 1987
John P. LaWare .............. ......Boston ................. ...Aug. 15, 1988
David W. Mullins, Jr. .... ......St. Louis ............... ...May 21, 1990
Lawrence B. Lindsey
......Richmond ............ ...Nov. 26, 1991
Susan M. P hillips........... ......Chicago ................ ...Dec. 2, 1991
Alan S. Blinder .............. ......Philadelphia ......... ...June 27, 1994
Janet L. Yellen ................ ......San Francisco ...... ...Aug. 12, 1994
Laurence H. Meyer ....... ......St. Louis ............... ...June 24, 1996
Alice M. Rivlin .............. ......Philadelphia ......... ...June 25, 1996
Roger W. Ferguson, Jr. .. ......Boston ................. ...Nov. 5, 1997
Edward M. Gramlich .... ......Richmond ............ ...Nov. 5, 1997
Susan S. B ie s................... ......Chicago ................ ...Dec. 7, 2001
Mark W. Olson .............. ......Minneapolis ......... ...Dec. 7, 2001
Ben S. Bernanke............. ......Atlanta ................. ...Aug. 5, 2002
Donald L. Kohn ............. ......Kansas City ......... ...Aug. 5,2002
Chairmen ^
Charles S. Hamlin .............. Aug. 10, 1914-Aug. 9, 1916
W.RG. Harding ...................Aug. 10, 1916-Aug. 9, 1922
Daniel R. Crissinger ..........May 1, 1923-Sept. 15, 1927
Roy A. Y oung..................... Oct. 4, 1927-Aug. 31, 1930
Eugene Meyer ....................Sept. 16, 1930-May 10, 1933
Eugene R. B lack................. May 19, 1933-Aug. 15, 1934
Marriner S. E ccles.............. Nov. 15, 1934-Jan. 31, 19485
Thomas B. M cC abe........... Apr. 15, 1948-Mar. 31, 1951
Wm. McC. Martin, Jr. ....... Apr. 2, 1951-Jan. 31, 1970
Arthur F. Burns .................. Feb. 1, 1970-Jan. 31, 1978
G. William Miller .............. Mar. 8, 1978-Aug. 6, 1979
Paul A. V olcker.................. Aug. 6, 1979-Aug. 11, 1987
Alan Greenspan ................. Aug. 11, 1987—
6




Other dates and information relating
to membership 2

Date initially took
oath of office

Served through Feb. 29, 1980.
Resigned Nov. 17, 1978.
Served until Feb. 7, 1986.3
Died Nov. 19, 1978.
Resigned Feb. 24, 1978.
Resigned Aug. 6, 1979.
Served through June 27, 1984.
Resigned Dec. 31, 1986.
Served through Feb. 11, 1982.
Resigned August 11, 1987.
Resigned Sept. 1, 1985.
Resigned April 30, 1986.
Resigned March 11, 1991.
Served through Feb. 9, 1994.
Resigned August 3, 1990.
Resigned July 31, 1989.
Reappointed in 1990; resigned Dec. 31, 2001.
Reappointed in 1992.
Resigned April 30, 1995.
Resigned Feb. 14, 1994.
Resigned Feb. 5, 1997.
Served through June 30, 1998.
Term expired Jan. 31, 1996.
Resigned Feb. 17, 1997.
Term expired Jan. 31, 2002.
Resigned July 16, 1999.
Reappointed in 2001.

Reappointed in 2003.
Vice C h airm en 4

Frederic A. D elan o.............Aug. 10, 1914-Aug. 9, 1916
Paul M. Warburg ................Aug. 10, 1916-Aug. 9, 1918
Albert Strauss ..................... Oct. 26, 1918-Mar. 15, 1920
Edmund Platt ..................... July 23, 1920-Sept. 14, 1930
J.J. T hom as......................... Aug. 21, 1934-Feb. 10, 1936
Ronald R ansom .................. Aug. 6 , 1936-Dec. 2, 1947
C. Canby Balderston..........Mar. 11, 1955-Feb. 28, 1966
J.L. Robertson ....................Mar. 1, 1966-Apr. 30, 1973
George W. Mitchell ........... May 1, 1973-Feb. 13, 1976
Stephen S. G ardner.............Feb. 13, 1976-Nov. 19, 1978
Frederick H. Schultz .......... July 27, 1979-Feb. 11, 1982
Preston Martin .................... Mar. 31, 1982-Apr. 30, 1986
Manuel H. Johnson ........... Aug. 4, 1986-Aug. 3, 1990
David W. Mullins, Jr............July 24, 1991-Feb. 14, 1994
Alan S. Blinder ...................June 27, 1994-Jan. 31, 1996
Alice M. Rivlin ...................June 25, 1996-July 16, 1999
Roger W. Ferguson, Jr.........Oct. 5, 1999-

Notes and list o f ex officio members appear on page 251.

Membership of the Board of Governors of the Federal Reserve System, 1913-2003

E x -O

f f ic io

M

em bers

251

1

S e c re ta rie s o f the T reasury

C o m p tro lle rs o f the C u rren cy

W.G. McAdoo ....................Dec. 23, 1913-Dec. 15, 1918
Carter Glass ........................ Dec. 16, 1918-Feb. 1, 1920
David F. H ouston................Feb. 2, 1920-Mar. 3, 1921
Andrew W. M ellon .............Mar. 4, 1921-Feb. 12, 1932
Ogden L. Mills .................. Feb. 12, 1932-Mar. 4, 1933
William H. Woodin ........... Mar. 4, 1933-Dec. 31, 1933
Henry Morgenthau, Jr. ....... Jan. 1, 1934-Feb. 1, 1936

John Skelton W illiam s....... Feb. 2, 1914-Mar. 2, 1921
Daniel R. Crissinger ..........Mar. 17, 1921-Apr. 30, 1923
Henry M. Dawes ................May 1, 1923-Dec. 17, 1924
Joseph W. McIntosh ..........Dec. 20, 1924-Nov. 20, 1928
J.W. P o le ..............................Nov. 21, 1928-Sept. 20, 1932
J.F.T. O’C onnor.................. May 11, 1933-Feb. 1, 1936

1.
Under the provisions of the original Federal Reserve Act, the Federal
Reserve Board was composed of seven members, including five appointed
members, the Secretary of the Treasury, who was ex-officio chairman of the
Board, and the Comptroller of the Currency. The original term of office was ten
years, and the five original appointed members had terms of two, four, six,
eight, and ten years respectively. In 1922 the number of appointed members was
increased to six, and in 1933 the term of office was increased to twelve years. The
Banking Act of 1935, approved Aug. 23, 1935, changed the name of the Federal
Reserve Board to the Board of Governors of the Federal Reserve System and
provided that the Board should be composed of seven appointed mem­
bers; that the Secretary of the Treasury and the Comptroller of the Currency
should continue to serve as members until Feb. 1, 1936; that the appointed

members in office on the date of that act should continue to serve until Feb. 1,
1936, or until their successors were appointed and had qualified; and that
thereafter the terms of members should be fourteen years and that the designa­
tion of Chairman and Vice Chairman of the Board should be for a term of four
years.
2. Date following Resigned and Retired denotes final day of service.
3. Successor took office on this date.
4. Chairman and Vice Chairman were designated Governor and Vice Gover­
nor before Aug. 23, 1935.
5. Served as Chairman Pro Tempore from February 3, 1948, to April 15,
1948.
6. Served as Chairman Pro Tempore from March 3, 1996, to June 20, 1996.




252

Federal Reserve Bulletin □ Spring 2004

Federal Reserve Board of Governors
and Official Staff
A

G r een spa n,

lan

W.

R oger

O f f ic e

Chairman
Vice Chairman

F e r g u s o n , J r .,

of board m em bers

Edw ard

M.

G r a m l ic h

S u s a n S c h m id t B

ie s

D IV IS IO N O F IN T E R N A T IO N A L F IN A N C E

M

ic h e l l e

A . S m i t h , D ire cto r

K a r e n H . J o h n s o n , D irecto r

W

in t h r o p

P. H a m b l e y , A ssistan t to the B oard and

D a v id H . H o w a r d , D epu ty D irector

D irecto r f o r C on gression al Liaison
R o s a n n a P i a n a l t o - C a m e r o n , Special A ssistan t to the Board
D

a v id

W . S k i d m o r e , S pecial A ssistan t to the B oard

L a r ic k e D . B l a n c h a r d , S pecial A ssistant to the B oard

f o r C ongressional Liaison

T h o m a s A . C o n n o r s , A ssociate D irector
W

il l i a m

D

ale

L . H e l k i e , Senior A d viser

W . H e n d e r s o n , S en ior A d v iser

R i c h a r d T. F r e e m a n , D epu ty A sso cia te D irector
S t e v e n B . K a m i n , D epu ty A ssociate D irecto r
J o n W . F a u s t , A ssistan t D irector

Legal D

iv is io n

J. V i r g i l M a t t i n g l y , Jr., G en eral Counsel
S c o t t G . A l v a r e z , A sso cia te G eneral Counsel
R i c h a r d M . A s h t o n , A ssociate G eneral Counsel
S t e p h a n i e M a r t i n , A ssociate G eneral Counsel
K a t h l e e n M . O ’D a y , A sso cia te G eneral Counsel
A n n E . M is b a c k , A ssistan t G eneral Counsel
S t e p h e n L . S i c i l i a n o , A ssistan t G eneral Counsel
K a t h e r i n e H . W h e a t l e y , A ssistan t G eneral Counsel
C a r y K . W i l l i a m s , A ssista n t G eneral Counsel
O F F IC E O F TH E S E C R E T A R Y
J e n n i f e r J. J o h n s o n , Secretary
R obert
M

d e V.

argaret

F r i e r s o n , D epu ty Secretary

M . S h a n k s , A ssistan t Secretary

J o s e p h E . G a g n o n , A ssistan t D irecto r
W

il l e n e

A . J o h n s o n , A d v iser

M

ic h a e l

P. L e a h y , A ssistan t D irecto r

D. N

S h e e t s , A ssistan t D irecto r

athan

R a l p h W . T r y o n , A ssistan t D irecto r
d iv is io n o f

D

a v id

Research

and

S t a t is t ic s

J. S t o c k t o n , D irector

E d w a r d C . E t t i n , D epu ty D irecto r
D a v id W . W i l c o x , D epu ty D irector
M

yron

L . K w a s t , A ssociate D irector

S t e p h e n D . O l i n e r , A ssociate D irector
P a t r ic k M . P a r k i n s o n , A ssociate D irecto r
L a w r e n c e S l i f m a n , A sso cia te D irecto r
C h a r l e s S . S t r u c k m e y e r , A ssociate D irecto r
A l ic e P a t r ic i a W

h it e ,

D epu ty A ssociate D irecto r

D IV IS IO N O F B A N K IN G S U P E R V IS IO N
A N D R E G U L A T IO N

J o y c e K . Z i c k l e r , D epu ty A sso cia te D irecto r

R ic h a r d S p i l l e n k o t h e n , D irecto r
S t e p h e n M . H o f f m a n , J r ., D epu ty D irector

J. N e l l i e L i a n g , A ssistan t D irector

S en ior A sso cia te D irector
R o g e r T. C o l e , Senior A ssociate D irector
M i c h a e l G . M a r t i n s o n , S en ior A d viser
S t e p h e n C . S c h e m e r i n g , S en ior A dviser
D e b o r a h P. B a i l e y , A sso cia te D irector
N o r a h M . B a r g e r , A ssociate D irector
B e t s y C r o s s , A sso ciate D irector
G e r a l d A . E d w a r d s , J r ., A ssociate D irector
J a m e s V. H o u p t , A ssociate D irector
J a c k P. J e n n i n g s , A ssociate D irecto r
P e t e r J. P u r c e l l , A sso cia te D irector
M o l l y S . W a s s o m , A ssociate D irector
D a v id M . W r i g h t , A ssociate D irector
H o w a r d A . A m e r , D epu ty A sso cia te D irector
B a r b a r a J. B o u c h a r d , D epu ty A ssociate D irector
A n g e l a D e s m o n d , D epu ty A ssociate D irector
J a m e s A . E m b e r s i t , D epu ty A sso cia te D irecto r
C h a r l e s H . H o l m , D epu ty A ssociate D irector
W i l l i a m G . S p a n i e l , D epu ty A ssociate D irector
S t a c y C o l e m a n , A ssista n t D irecto r
J o n D . G r e e n l e e , A ssistan t D irecto r
W a l t H . M i l e s , A ssistan t D irecto r
W i l l i a m F. T r e a c y , A ssistan t D irector
W i l l i a m C . S c h n e i d e r , J r ., P ro ject Director,
N ation al Inform ation C enter

D

H erbert A . B

ie r n ,




M i c h a e l G i b s o n , A ssistan t D irector
S . W a y n e P a s s m o r e , A ssistan t D irector
a v id

L . R e i f s c h n e i d e r , A ssistan t D irecto r

Ja n ic e S h a c k - M
W

il l i a m

M

ary

arquez,

A ssistan t D irector

L . W a s c h e r H I, A ssistan t D irector

M. W

est,

A ssistan t D irector

G l e n n B . C a n n e r , S en ior A d v iser
D a v id S . J o n e s , Sen ior A d v iser
T h o m a s D . S i m p s o n , Senior A d viser

D IV IS IO N O F M O N E T A R Y A F F A IR S
V i n c e n t R . R e i n h a r t , D irector
B r i a n F. M

a d ig a n ,

D epu ty D irector

J a m e s A . C l o u s e , D epu ty A sso cia te D irecto r
W il l ia m C . W

h it e s e l l ,

D epu ty A ssociate D irecto r

C h e r y l L . E d w a r d s , A ssistan t D irector
W

il l i a m

B . E n g l i s h , A ssistan t D irector

R i c h a r d D . P o r t e r , Senior A dviser
A t h a n a s i o s O r p h a n i d e s , A d v iser
N o r m a n d R .V . B e r n a r d , Special A ssistan t to the B oard

253

M

W. O l s o n
S. B e r n a n k e

en

D

iv is io n o f

and

C

C

A

f f a ir s

onald

D

o n su m er

o m m u n it y

L.

D

ark

B

iv is io n o f

and

Paym

Kohn

Reserve

ent

ban k

O p e r a t io n s

S ystem s

S a n d r a F. B r a u n s t e i n , D irector

L o u i s e L . R o s e m a n , D irecto r

G l e n n E. L o n e y , D epu ty D irecto r

P a u l W . B e t t g e , A sso cia te D irector

A d r i e n n e D . H u r t , A sso ciate D irector

Je f f r e y C . M

A ssociate D irector
J a m e s A . M i c h a e l s , A ssistan t D irector
T o n d a E. P r i c e , A ssista n t D irector

K e n n e t h D . B u c k l e y , A ssistan t D irector

Ir e n e S h a w n M cN

ulty,

arquardt,

A ssociate D irector

Jo s e p h H . H a y e s , J r ., A ssistan t D irector
L is a H o s k i n s , A ssistan t D irecto r
D o r o t h y L a C h a p e l l e , A ssistan t D irector

O

E d g a r A. M

f f ic e o f

Staff D

ir e c t o r f o r

M

anagem ent

Managem

alph rus,

ent

D

O f f ic e

iv is io n

R . P a u l e y , A sso ciate D irector

B i l l y J. S a u l s , A ssista n t D irector
D o n a l d A . S p ic e r , A ssista n t D irector
iv is io n o f

M

a r ia n n e

M

aureen

In f o r m

a t io n

Te c h

nology

M . E m e r s o n , D irector
T. H a n n a n , D epu ty D irector

T i l l e n a G . C l a r k , A ssista n t D irector
G e a r y L. C u n n i n g h a m , A ssistan t D irector
W a y n e A . E d m o n d s o n , A ssistan t D irector
P o K y u n g K i m , A ssista n t D irector

A ssista n t D irector
A ssistan t D irecto r
R o m e r o , A ssista n t D irector

S u s a n F. M

arycz,

S h a r o n L. M
R aym ond

ow ry,




o f t h e in s p e c t o r

General

D o n a l d L . R o b i n s o n , D epu ty In spector G eneral

C h r i s t i n e M . F i e l d s , A ssistan t D irector

D

III, A ssistan t D irector

B a r r y R . S n y d e r , In spector G eneral

S t e p h e n J. C l a r k , A ssociate D irector
arrell

a r t in d a l e

W . R e i d h i l l , A ssistan t D irector

J a c k K . W a l t o n II, A ssistan t D irector

H . F ay P e t e r s , D irector
D

a r sh a

J e f f J. S t e h m , A ssistan t D irector

S taff D irector
S h e i l a C l a r k , EEO P rogram s D irector
L y n n S . F o x , Senior A d viser

S tephen R. M

M

254

Federal Reserve Bulletin □ Spring 2004

Federal Open Market Committee
and Advisory Councils
F e d e r a l O p e n M a r k e t C o m m it t e e
M em bers
A

lan

T i m o t h y F. G e i t h n e r , Vice Chairm an

G r e e n s p a n , Chairman
T h o m a s M . H o e n ig

M

S u s a n S c h m i d t B ie s

D

S a n d r a P ia n a l t o

R o g e r W . F e r g u s o n , J r.

C ath y E. M

B e n S. B

ernank e

L. Kohn

onald

ark

W . O lso n

W

il l ia m

A

in e h a n

nthony

P oole

E d w a r d M . G r a m l ic h

A ltern ate M em bers
C h r is t in e M . C u m m in g
R obert

D.

M

cT ee r ,

Jr .

M

ic h a e l

G ary

H.

H.

M o sk o w

M . S antom ero

Stern

Staff
V i n c e n t R . R e i n h a r t , S ecretary and Econom ist

J e f f r e y C . F u h r e r , A ssociate E conom ist

D epu ty Secretary
M i c h e l l e A. S m i t h , A ssistan t Secretary
J. V ir g il M a t t i n g l y , J r ., G en eral Counsel
T h o m a s C . B a x t e r , J r ., D epu ty G eneral Counsel
K a r e n H . J o h n s o n , E conom ist
D a v id J. S t o c k t o n , E conom ist
T h o m a s A. C o n n o r s , A sso cia te Econom ist

C r a ig S . H a k k i o , A ssociate E conom ist

N o r m a n d R .V . B

ernard,

D a v id H . H o w a r d , A ssociate E conom ist
B r i a n F. M

a d ig a n ,

A ssociate E conom ist

R o b e r t H . R a s c h e , A ssociate E conom ist
L a w r e n c e S l i f m a n , A ssociate E conom ist
M

ark

D

a v id

S . S n i d e r m a n , A ssociate E conom ist
W . W i l c o x , A ssociate E conom ist

D i n o K o s , M anager, System Open M arket A ccou nt

F e d e r a l A d v is o r y C o u n c il

D
D

First District
Second District
R u f u s A . F u l t o n , J r ., Third District
M a r t i n G . M c G u i n n , Fourth District
F r e d L. G r e e n III, Fifth District
C . D o w d R i t t e r , Sixth District

D a v id A . S p i n a ,

T h o m as A . R e n y i,




a v id

a v id

A . S p i n a , P residen t

W . K e m p e r , Vice P residen t

Seventh District
Eighth District
J e r r y A . G r u n d h o f e r , Ninth District
B y r o n G . T h o m p s o n , Tenth District
G a y l e M . E a r l s , Eleventh District
M i c h a e l E . O ’N e i l l , Twelfth District
Va c a n t ,

D

a v id

W. K em per,

J a m e s A n n a b l e , Secretary

255

C o n su m e r A d v is o r y

c o u n c il

Chairman
Vice Chairman

A g n e s B u n d y S c a n l a n , B o sto n , M a ssa c h u se tts,
M

P i n s k y , P h ila d e lp h ia , P e n n s y lv a n ia ,

ark

R u h i M a k e r , Rochester, N ew York
P a t r ic i a M cC oy, Cambridge, M assachusetts

D e n n i s L . A l g i e r e , W e s te r ly , R h o d e I s la n d
J a n i e B a r r e r a , S a n A n t o n io , T e x a s
Kenneth

Kyle, South Dakota
Roeland Park, Kansas
D e b r a S . R e y e s , Tampa, Florida
B e n s o n R o b e r t s , Washington, District of Columbia
B e n j a m i n R o b i n s o n III, Charlotte, North Carolina
M a r y J a n e S e e b a c h , Calabasas, California
P a u l J. S p r i n g m a n , Atlanta, Georgia
F o r r e s t F. S t a n l e y , Cleveland, Ohio
L o r i R . S w a n s o n , S t. Paul, Minnesota
D i a n e T h o m p s o n , East St. Louis, Illinois
H u b e r t V a n T o l , Sparta, Wisconsin
C l i n t W a l k e r , Wilmington, Delaware

P. B o r d e l o n , Baton R o u g e , Louisiana

E l sie M

S h e il a C a n a v a n ,

Berkeley, California

R o b i n C o f f e y , C h ic a g o , I llin o is
A

nne

D

an

D i e d r i c k , N e w Y o rk , N e w Y o rk

D i x o n , W a s h in g to n , D is t r ic t

of C o lu m b ia

H a t t i e B . D o r s e y , A tla n ta , G e o r g ia
T h o m a s F i t z g i b b o n , C h ic a g o , I llin o is
J a m e s G a r n e r , B a ltim o r e , M a r y la n d
R . C h a r l e s G a t s o n , K a n s a s C ity , M is s o u r i
L a r r y H a w k in s , H o u s to n , T e x a s
W . Ja m e s K in g ,

Cincinnati,

O h io

t h r if t I n s t it u t io n s

eek s,

B ruce B . M organ,

S u s a n B r e d e h o f t , C h e r r y H ill, N e w J e r se y

A d v is o r y C o u n c il
Defiance, Ohio, President
Brea, California, Vice President

W i l l i a m J. S m a l l ,

D.

H. B
M

rent

ic h a e l

R ic h a r d

B e e s l e y , S t. G e o r g e , U ta h

J. B r o w n , S r ., F t. P ie r c e , F lo r id a
J. D r i s c o l l , A r lin g to n , T e x a s

Ta d L o w r e y ,

D

a v id

H . H a n c o c k , G r a n d v ie w , M is s o u r i

O l a n O . J o n e s , J r ., K in g s p o r t, T e n n e s s e e
K ir k K o r d e l e s k i , B e t h p a g e , N e w Y o rk

D o u g l a s K . F r e e m a n , A lp h a r e tta , G e o r g ia

G e o r g e W . N i s e , P h ila d e lp h ia , P e n n s y lv a n ia

C u r t i s L . H a g e , S io u x F a lls , S o u th D a k o t a

Roy M . W




h it e h e a d ,

S e a t t le W a s h in g to n

256

Federal Reserve Bulletin □ Spring 2004

Federal Reserve Board Publications
PUBLICATIONS, MS-127, Board
of Governors of the Federal Reserve System, Washington, DC
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F o r ordering assistance, w rite

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The Payment System Handbook. $75.00 per year.
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nnual




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I n d u s t r i a l P r o d u c t i o n — 1986 E d i t i o n . December 1986.
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T he

F in a n c ia l

Futures

and

O p t io n s

in

the

U .S .

Econom y.

December 1986. 264 pp. $10.00 each.
R is k M e a s u r e m e n t a n d S y s t e m i c R i s k : P r o c e e d i n g s
J o i n t C e n t r a l B a n k R e s e a r c h C o n f e r e n c e . 1996.

of

a

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Short pam ph lets su itable f o r classroom use. M ultiple co p ies are
available w ithout charge.

Consumer Handbook on Adjustable Rate Mortgages (also avail­
able in Spanish)
Consumer Handbook to Credit Protection Laws
A Guide to Business Credit for Women, Minorities, and Small
Businesses
Series on the Structure o f the F ederal R eserve System

The Board of Governors of the Federal Reserve System
The Federal Open Market Committee
Federal Reserve Bank Board of Directors
Federal Reserve Banks
A Consumer’s Guide to Mortgage Lock-Ins
A Consumer’s Guide to Mortgage Settlement Costs
A Consumer’s Guide to Mortgage Refinancings
Home Mortgages: Understanding the Process and Your Right
to Fair Lending
How to File a Consumer Complaint about a Bank (also available
in Spanish)
In Plain English: Making Sense of the Federal Reserve
Making Sense of Savings
What You Should Know About Home Equity Lines of Credit
(also available in Spanish)
Keys to Vehicle Leasing (also available in Spanish)
Looking for the Best Mortgage (also available in Spanish)
Privacy Choices for Your Personal Financial Information
When Is Your Check Not a Check? (also available in Spanish)
Putting Your Home on the Loan Line Is Risky Business

257

167.

STAFF STUDIES: O nly Sum m aries P rin ted in the
BULLETIN
Studies and p a p ers on econom ic an d finan cial su bjects that are o f
gen eral interest. S ta ff Studies 1 -158, 161, 163, 165, 166, 168, an d
169 are out o f print, but p h o tocopies o f them are available. S taff
S tudies 1 6 5 -1 7 5 are ava ila b le online a t w w w .federalreserve.gov/
pu bs/staffstudies. R equests to obtain single copies o f any p a p e r o r
to be a d d ed to the m ailing list f o r the series m ay be sent to
Publications.

159.

N ew D

t h e P e r f o r m a n c e o f N o n b a n k S u b s id i­
B a n k H o l d i n g C o m p a n i e s , by N e l l i e Liang and

ata o n

a r ie s o f

Donald Savage. February 1990. 12 pp.
160.

B a n k in g
v ic e s

by

M a r k e t s a n d t h e U se o f F in a n c ia l S er ­
S m a l l a n d M e d i u m - S i z e d B u s i n e s s e s , by

Gregory E. Elliehausen and John D. Wolken. September
1990. 35 pp.
162.
164.

E v id e n c e o n t h e S iz e o f B a n k in g M a r k e t s
g a g e L o a n R a t e s i n T w e n t y C i t i e s , by

from

M

ort­

Stephen A.

Rhoades. February 1992. 11 pp.
T h e 1989-92 C r e d i t C r u n c h f o r R e a l E s t a t e , by
James T. Fergus and John L. Goodman, Jr. July 1993.
20 pp.




170.

A S u m m a r y o f M e r g e r P e r f o r m a n c e S t u d ie s in B a n k ­
i n g , 1980-93, a n d a n A s s e s s m e n t o f t h e “ O p e r a t i n g
P e r f o r m a n c e ” a n d “ E v e n t S t u d y ” M e t h o d o l o g ie s ,
by Stephen A . Rhoades. July 1994. 37 pp.
T h e C o st o f Im p l e m e n t in g C o n s u m e r F in a n c ia l R e g u ­
l a t io n s : A n A n a l y s is o f E x p e r ie n c e w it h t h e T r u t h

i n S a v i n g s A c t , by Gregory Elliehausen and Barbara R .
Lowrey. December 1997. 17 pp.
171. T h e C o s t o f B a n k R e g u l a t i o n : A R e v i e w o f t h e E v i ­
d e n c e , by Gregory Elliehausen. April 1998. 35 pp.
172. U s i n g S u b o r d i n a t e d D e b t a s a n I n s t r u m e n t o f M a r ­
k e t D i s c i p l i n e , by Study Group on Subordinated Notes
and Debentures, Federal Reserve System. December 1999.
69 pp.
173. I m p r o v i n g P u b l i c D i s c l o s u r e i n B a n k i n g , by Study
Group on Disclosure, Federal Reserve System. March 2000.
35 pp.
174. B a n k M e r g e r s a n d B a n k i n g S t r u c t u r e i n t h e U n i t e d
S t a t e s , 1980-98, by Stephen Rhoades. August 2000. 33 pp.
175. T h e F u t u r e o f R e t a i l E l e c t r o n i c P a y m e n t s S y s t e m s :
I n d u s t r y I n t e r v i e w s a n d A n a l y s i s , Federal Reserve
Staff, for the Payments System Development Committee,
Federal Reserve System. December 2002. 27 pp.

258

Federal Reserve Bulletin □ Spring 2004

A n t ic ip a t e d S c h e d u l e o f R e l e a s e D a t e s f o r P e r io d ic R e l e a s e s o f
t h e f e d e r a l R e s e r v e S y st e m (Pa y m e n t m u s t A c c o m p a n y R e q u e s t s )

Release number and title

Annual
mail
rate

Annual
fax
rate

Approximate
release
days1

the

B oard

of

Period or date to
which data refer

G overnors

Corresponding
Bulletin or
Statistical
Supplement
table numbers2

Weekly Releases
H.2.

Actions of the Board:
Applications and Reports
Received

$55.00

n.a.

Friday

Week ending
previous
Saturday

H.3.

Aggregate Reserves of
Depository Institutions and
the Monetary Base3

$20.00

n.a.

Thursday

Week ending
previous
Wednesday

1.20

H.4.1. Factors Affecting Reserve Balances
of Depository Institutions and
Condition Statement of
Federal Reserve Banks3

$20.00

n.a.

Thursday

Week ending
previous
Wednesday

1.11, 1.18

H.6.

Money Stock Measures3

$35.00

n.a.

Thursday

Week ending
Monday of
previous week

1.21

H.8.

Assets and Liabilities of
Commercial Banks in the
United States3

$30.00

n.a.

Friday

Week ending
previous
Wednesday

1.26A-F

H.10. Foreign Exchange Rates3

$20.00

$20.00

Monday

Week ending
previous
Friday

3.28

H.15. Selected Interest Rates3

$20.00

$20.00

Monday

Week ending
previous
Friday

1.35

$ 5.00

$ 5.00

First of month

Previous month

3.28

G.15. Research Library—
Recent Acquisitions

No charge

n.a.

First of month

Previous month

G.17. Industrial Production and
Capacity Utilization3

$15.00

n.a.

Midmonth

Previous month

2.12, 2.13

G.19. Consumer Credit 3

$ 5.00

$ 5.00

Fifth working day
of month

Second month
previous

1.55, 1.56

G.20. Finance Companies3

$ 5.00

n.a.

End of month

Second month
previous

1.51, 1.52

Monthly Releases
G.5.

Foreign Exchange Rates3




of

259

Release number and title

Annual
mail
rate

Annual
fax
rate

Approximate
release
days1

Period or date to
which data refer

Corresponding
Bulletin or
Statistical
Supplement
table numbers2

Quarterly Releases
$ 5.00

n.a.

Midmonth of
March, June,
September, and
December

February, May,
August, and
November

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

$ 5.00

n.a.

15th of March,
June,
September, and
December

Previous quarter

E. 16. Country Exposure Lending
Survey3

$ 5.00

n.a.

January, April,
July, and
October

Previous quarter

Z. 1.

$25.00

n.a.

Second week of
March, June,
September, and
December

Previous quarter

E.2.

Survey of Terms of Business
Lending3

Flow of Funds Accounts
of the United States:
Flows and Outstandings3

1. Please note that for some releases, there is normally a certain vari­
ability in the release date because o f reporting or processing procedures.
Moreover, for all series unusual circum stances may, from tim e to time,
result in a release date being later than anticipated.
2. B eginning with the W inter 2004 issue (vol. 90, no. 1) o f the B ulletin,
the corresponding table for the statistical release no longer appears in the




4.23

1.57, 1.58,
1.59, 1.60

B ulletin . Statistical tables are now published in the S ta tistica l Supplem ent
to the F ed era l R eserve Bulletin', the table numbers, however, remain the

same.
3. These releases are also available on the B oard’s web site,
www.federalreserve.gov/releases.
n.a. N ot available.

260

Federal Reserve Bulletin □ Spring 2004

Maps of the Federal Reserve System

\L A SK \
HAWAII

L egend

Both pages
■ Federal Reserve Bank city
□ Board of Governors of the Federal
Reserve System, Washington, D.C.
N

Facing page
•

Federal Reserve Branch city

— Branch boundary

ote

The Federal Reserve officially identifies Districts by num­
ber and Reserve Bank city (shown on both pages) and by
letter (shown on the facing page).
In the 12th District, the Seattle Branch serves Alaska,
and the San Francisco Bank serves Hawaii.
The System serves commonwealths and territories as
follows: the New York Bank serves the Commonwealth



of Puerto Rico and the U.S. Virgin Islands; the San Fran­
cisco Bank serves American Samoa, Guam, and the Com­
monwealth of the Northern M ariana Islands. The Board of
Governors revised the branch boundaries of the System
most recently in February 1996.

261

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4 - D

3 - C

5 - E

P it t s b u r g h

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262

Federal Reserve Bulletin □ Spring 2004

Federal Reserve Banks, Branches, and Offices
FEDERAL RESERVE BANK
branch, or facility
Zip
BOSTON* ............................. 02106

Chairman
Deputy Chairman
Samuel O. Thier
Blenda J. Wilson

NEW Y O R K *........................ 10045

John E. Sexton
Jerry I. Speyer
Buffalo ............................... 14240 Katherine E. Keough

PHILADELPHIA ................. 19105

Ronald J. Naples
Doris M. Damm

CLEVELAND* .....................44101

Robert W. Mahoney
Charles E. Bunch
Cincinnati ..........................45201 Dennis C. Cuneo
Pittsburgh .......................... 15230 Roy W. Haley

RICHMOND* ...................... 23219
Baltimore ........................... 21203
Charlotte............................. 28230
ATLANTA ............................. 30303
Birmingham ...................... 35242
Jacksonville ...................... 32231
Miami ................................ 33152
Nashville ........................... 37203
New Orleans .....................70161
CHICAGO* ........................... 60690
Detroit .................................48231

Barbara L. Walter1
Anthony M. Santomero
William H. Stone, Jr.
Sandra Pianalto
Robert Christy Moore
Barbara B. Henshaw
Robert B. Schaub

David M. Ratcliffe
V. Larkin Martin
Catherine Crenshaw
Julie Hilton
Rosa Sugranes
Rodney Lawler
Dave Dennis

Jack Guynn

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

Michael H. Moskow
Gordon R. G. Werkema

Linda Hall Whitman
Frank L. Sims
Dean Folkvord

KANSAS C IT Y .....................64198

Richard H. Bard
Robert A. Funk
D en v er................................ 80217 Thomas Williams
Oklahoma City ................. 73125 Patricia B. Fennell
O m aha................................ 68102 A.F. Raimondo

D A L L A S ................................ 75201

Ray L. Hunt
Patricia M. Patterson
El Paso ............................... 79999 Ron C. Helm
Houston ............................. 77252 Lupe Fraga
San Antonio ...................... 78295 Ron R. Harris

SAN FRANCISCO ..............94120

Timothy F. Geithner
Jamie B. Stewart, Jr.

J. Alfred Broaddus, Jr.
Walter A. Varvel

Walter L. Metcalfe, Jr.
Gayle P. W. Jackson
Little Rock ........................ 72203 Scott T. Ford
L o u isv ille........................... 40232 Cornelius A. Martin
Memphis ........................... 38101 Meredith B. Allen

Helena ................................ 59601

Vice President
in charge of branch

Cathy E. Minehan
Paul M. Connolly

Wesley S. Williams, Jr.
Thomas J. Mackell, Jr.
Owen E. Herrnstadt
Michael A. Almond

ST. LOUIS ............................. 63166

MINNEAPOLIS ................... 55480

President
First Vice President

George M. Scalise
Sheila D. Harris
Los Angeles ...................... 90051 William D. Jones
Portland ............................. 97208 Karla S. Chambers
Salt Lake City ................... 84125 H. Roger Boyer
Seattle ................................. 98124 Mic R. Dinsmore

William J. Tignanelli1
Jeffrey S. K ane1
Patrick K. BarronJames M. M cK ee1
Lee C. Jones
Christopher L. Oakley
James T. Curry III
Melvyn K. Purcell1
Robert J. M usso’

Glenn H ansen1
William Poole
W. LeGrande Rives
Robert A. Hopkins
Thomas A. Boone
Martha Perine Beard
Gary H. Stern
James M. Lyon
Samuel H. Gane
Thomas M. Hoenig
Richard K. Rasdall
Pamela L. Weinstein
Dwayne E. Boggs
Steven D. Evans
Robert D. McTeer, Jr.
Helen E. Holcomb
Robert W. Gilmer3
Robert Smith III1
James L. S tu ll1
Robert T. Parry
John F. Moore
Mark L. M ullinix2
Richard B. Hornsby
Andrea P. Wolcott
Mark Gould

*Additional offices of these Banks are located at Windsor Locks, Connecticut 06096; East Rutherford, New Jersey 07016; Utica at Oriskany, New York 13424;
Columbus, Ohio 43216; Columbia, South Carolina 29210; Charleston, West Virginia 25311; Des Moines, Iowa 50306; Indianapolis, Indiana 46204; Milwaukee,
Wisconsin 53202; and Peoria, Illinois 61607.
1. Senior vice president
2. Executive vice president
3. Acting




263

Publications of Interest
F e d e r a l R e s e r v e R e g u l a t o r y S e r v ic e
To promote public understanding of its regulatory func­
tions, the Board publishes the Federal Reserve Regu­
latory Service, a four-volume loose-leaf service con­
taining all Board regulations as well as related statutes,
interpretations, policy statements, rulings, and staff
opinions. For those with a more specialized interest in
the Board’s regulations, parts of this service are pub­
lished separately as handbooks pertaining to monetary
policy, securities credit, consumer affairs, and the pay­
ment system.
These publications are designed to help those who
must frequently refer to the Board’s regulatory materi­
als. They are updated monthly, and each contains cita­
tion indexes and a subject index.
The Monetary Policy and Reserve Requirements
Handbook contains Regulations A, D, and Q, plus
related materials.
The Securities Credit Transactions Handbook con­
tains Regulations T, U, and X, dealing with exten­
sions of credit for the purchase of securities, together
with related statutes, Board interpretations, rulings,
and staff opinions. Also included is the Board’s list of
foreign margin stocks.
The Consumer and Community Affairs Handbook
contains Regulations B, C, E, G, M, P, Z, AA, BB, and
DD, and associated materials.

G u id e

to t h e f l o w o f

F unds A cco u nts

A new edition of Guide to the Flow of Funds Accounts
is now available from the Board of Governors. The new
edition incorporates changes to the accounts since the
initial edition was published in 1993. Like the earlier
publication, it explains the principles underlying the
flow of funds accounts and describes how the accounts
are constructed. It lists each flow series in the Board’s
flow of funds publication, “Flow of Funds Accounts of
the United States” (the Z.l quarterly statistical release),




The Payment System Handbook deals with expedited
funds availability, check collection, wire transfers, and
risk-reduction policy. It includes Regulations CC, J, and
EE, related statutes and commentaries, and policy
statements on risk reduction in the payment system.
For domestic subscribers, the annual rate is $200 for
the Federal Reserve Regulatory Service and $75 for
each handbook. For subscribers outside the United
States, the price including additional air mail costs is
$250 for the service and $90 for each handbook.
The Federal Reserve Regulatory Service is also avail­
able on CD-ROM for use on personal computers. For a
standalone PC, the annual subscription fee is $300. For
network subscriptions, the annual fee is $300 for 1 con­
current user, $750 for a maximum of 10 concurrent
users, $2,000 for a maximum of 50 concurrent users,
and $3,000 for a maximum of 100 concurrent users.
Subscribers outside the United States should add $50
to cover additional airmail costs. For further informa­
tion, call (202) 452-3244.
All subscription requests must be accompanied by a
check or money order payable to the Board of Gover­
nors of the Federal Reserve System. Orders should be
addressed to Publications, mail stop 127, Board of Gov­
ernors of the Federal Reserve System, Washington, DC
20551.

and describes how the series is derived from source
data. The Guide also explains the relationship between
the flow of funds accounts and the national income and
product accounts and discusses the analytical uses of
flow of funds data. The publication can be purchased,
for $20.00, from Publications, Mail Stop 127, Board
of Governors of the Federal Reserve System, Washing­
ton, DC 20551.

264

Federal Reserve Bulletin □ Spring 2004

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

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

Reference
Number

Statistical release

Frequency o f release

H.3

Aggregate Reserves

Weekly/Thursday

H.4.1

Factors Affecting Reserve Balances

Weekly/Thursday

H.6

Money Stock

Weekly/Thursday

H.8

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

Weekly/Monday

H.10

Foreign Exchange Rates

Weekly/Monday

H.15

Selected Interest Rates

Weekly/Monday

G.5

Foreign Exchange Rates

Monthly/end of month

G.17

Industrial Production and Capacity Utilization

Monthly/midmonth

G.19

Consumer Installment Credit

Monthly/fifth business day

Z.l

Flow of Funds

Quarterly




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